-----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, MEnBHIt2YIJOhHHh3X6T10EHK9qoemAK52gmJQEXL+70QgnhgU5GX4fet7OEJNDP OSiDGUIa+t5UiukZeKhSiA== 0000899243-99-000546.txt : 19990329 0000899243-99-000546.hdr.sgml : 19990329 ACCESSION NUMBER: 0000899243-99-000546 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL CHEMICAL CO CENTRAL INDEX KEY: 0000842635 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 954160558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10145 FILM NUMBER: 99574092 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 FORMER COMPANY: FORMER CONFORMED NAME: LYONDELL PETROCHEMICAL CO DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ---------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10145 LYONDELL CHEMICAL COMPANY (Exact name of Registrant as specified in its charter) Delaware 95-4160558 (State or other jurisdiction of (I.R.S. Employee Identification No.) incorporation or organization) 1221 McKinney Street, Suite 700, Houston, Texas 77010 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-7200 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of Each Class on which registered ------------------- ----------------------- Common Stock ($1.00 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] ---------------- There were 77,021,797 shares of the registrant's common stock outstanding on December 31, 1998. The aggregate market value of the voting stock held by non- affiliates of the registrant on March 1, 1999 based on the closing price on the New York Stock Exchange composite tape on that date, was $1,023,630,895. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998 (incorporated by reference under Part III). - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I..................................................................... 1 Items 1 and 2. Business and Properties.................................... 1 THE COMPANY'S BUSINESS.................................................... 1 Development of Business.................................................. 1 Summary Description of Business Segments................................. 3 INTERMEDIATE CHEMICALS AND DERIVATIVES.................................... 5 Overview................................................................. 5 Raw Materials............................................................ 7 Marketing and Sales...................................................... 7 Joint Ventures and Other Agreements...................................... 8 Competition and Industry Conditions...................................... 8 Properties............................................................... 9 Research and Technology; Patents and Trademarks.......................... 10 Employee Relations....................................................... 10 EQUISTAR CHEMICALS, LP.................................................... 11 Management of Equistar................................................... 11 Agreements between Lyondell and Equistar................................. 11 EQUISTAR PETROCHEMICALS................................................... 13 Overview................................................................. 13 Raw Materials............................................................ 15 Marketing and Sales...................................................... 15 Competition and Industry Conditions...................................... 16 EQUISTAR POLYMERS......................................................... 17 Overview................................................................. 17 Raw Materials............................................................ 19 Marketing and Sales...................................................... 19 Competition and Industry Conditions...................................... 19 EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS................................ 20 EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS.................. 21 LYONDELL-CITGO REFINING LP................................................ 22 Overview................................................................. 22 Management of LCR........................................................ 23 Agreements between Lyondell or CITGO and LCR............................. 23 Agreements between Equistar and LCR...................................... 24 Raw Materials............................................................ 24 Marketing and Sales...................................................... 25 Competition and Industry Conditions...................................... 25 Properties............................................................... 26 Employee Relations....................................................... 26 LYONDELL METHANOL COMPANY, L.P............................................ 26 Overview................................................................. 26 Management of Lyondell Methanol.......................................... 26 Agreements between Equistar and Lyondell Methanol........................ 27 Raw Materials............................................................ 27 Marketing and Sales...................................................... 27 Competition and Industry Conditions...................................... 27 Properties............................................................... 27 Employee Relations....................................................... 27 PROPERTIES AND EMPLOYEE RELATIONS......................................... 27
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Page ---- INTEGRATION OF RECENTLY ACQUIRED AND COMBINED OPERATIONS................. 28 SHARED CONTROL OF JOINT VENTURES......................................... 28 OPERATING HAZARDS........................................................ 28 ENVIRONMENTAL MATTERS.................................................... 29 Item 3. Legal Proceedings................................................ 30 Litigation Matters...................................................... 30 Environmental Matters................................................... 30 EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 32 Item 4. Submission of Matters to a Vote of Security Holders.............. 34 PART II................................................................... 35 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................................. 35 Item 6. Selected Financial Data.......................................... 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 36 Item 7a. Disclosure of Market Risk....................................... 51 Item 8. Financial Statements and Supplementary Data...................... 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 122 PART III.................................................................. 122 Item 10. Directors and Executive Officers of the Registrant.............. 122 Item 11. Executive Compensation.......................................... 122 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 122 Item 13. Certain Relationships and Related Transactions.................. 122 PART IV................................................................... 123 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- K....................................................................... 123 Consolidated Financial Statements and Financial Statement Schedules...... 126 Reports on Form 8-K...................................................... 126
ii PART I Items 1 and 2. Business and Properties THE COMPANY'S BUSINESS Lyondell Chemical Company ("Lyondell" or the "Company"), formerly Lyondell Petrochemical Company, is a global chemical company with leading market positions in all of its major products and low cost operations. Lyondell is vertically integrated into its key raw materials through its equity ownership in Equistar Chemicals, LP, LYONDELL-CITGO Refining LP and Lyondell Methanol Company, L.P. The operations acquired when the Company purchased ARCO Chemical Company ("ARCO Chemical") in July 1998 comprise the Company's intermediate chemicals and derivatives business. Lyondell manufactures and markets a variety of intermediate and performance chemicals, including propylene oxide ("PO"), polyether polyols, propylene glycol ("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA") and its derivative, methyl tertiary butyl ether ("MTBE"). The Company owns 41 percent of Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), which operates petrochemicals and polymers businesses. Equistar's petrochemicals business manufactures and markets olefins, oxygenated chemicals, aromatics and specialty chemicals. Equistar's olefins are ethylene, propylene and butadiene and its oxygenated chemicals include ethylene oxide ("EO"), ethylene glycol ("EG"), ethanol and MTBE. Equistar's aromatics are benzene and toluene. Equistar's polymers business manufactures and markets polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density polyethylene ("LLDPE"), polypropylene and performance polymers. Equistar's performance polymers include enhanced grades of polyethylene such as wire and cable resins, concentrates and compounds, and polymeric powders. The Company also owns 58.75 percent of LYONDELL-CITGO Refining LP, a Delaware limited partnership ("LCR"), which produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils"). LCR sells its principal refined products primarily to CITGO Petroleum Corporation ("CITGO"). In addition, the Company owns 75 percent of Lyondell Methanol Company, L.P., a Texas limited partnership ("Lyondell Methanol"), which produces methanol. Development of Business From its formation in 1985 through January 1989, Lyondell operated first as a division and later as a wholly owned subsidiary of Atlantic Richfield Company ("ARCO"). In January 1989, ARCO completed an initial public offering of approximately 50.1 percent of Lyondell's Common Stock. In September 1997, ARCO divested substantially all of its remaining holdings of the Company's Common Stock pursuant to the terms of notes issued by ARCO in August 1994, which were satisfied at maturity by the delivery of shares of Lyondell Common Stock held by ARCO. Lyondell has been a leader in the ongoing restructuring of the chemical industry, taking a series of steps to reposition its business portfolio over the past several years. In July 1993, pursuant to agreements between the Company and CITGO (and its affiliates), the Company contributed its refining business, including its Houston, Texas refinery (the "Refinery"), its lube oil blending and packaging plant in Birmingport, Alabama and refining working capital to LCR. The Company retained an approximately 90 percent interest in LCR, while CITGO held the remaining approximately 10 percent interest. 1 Following completion of a major upgrade project at the Refinery in the first quarter of 1997, the Company's interest in LCR was reduced to 58.75 percent. On December 31, 1998, LCR converted from a Texas limited liability company to a Delaware limited partnership. In May 1995, the Company acquired Occidental Chemical Corporation's ("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this acquisition included resin production facilities in Matagorda and Victoria, Texas, related research and development activities and the rights to the ALATHON(R) trademark. In December 1996, the Company formed Lyondell Methanol with MCN Investment Corporation ("MCNIC"), a division of MCN Corporation, to own the Company's 248 million gallons per year methanol plant. Under the terms of the agreement, MCNIC purchased a 25 percent interest in the methanol plant. Lyondell retained a 75 percent interest and serves as managing partner. Since December 1997, Equistar has served as the operator of Lyondell Methanol. In December 1997, following approval by the stockholders of each company, Lyondell and Millennium Chemicals Inc. ("Millennium") combined most of their petrochemicals and polymers businesses to form Equistar. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, as well as a $345 million note, in exchange for a 57 percent interest in Equistar. Equistar also assumed $745 million of Lyondell's debt. Millennium contributed substantially all of the assets comprising its olefins, ethyl alcohol, polyethylene, polypropylene and performance polymers businesses, which had been held in Millennium Petrochemicals Inc. ("Millennium Petrochemicals"), a wholly owned subsidiary of Millennium. In exchange, Millennium received a 43 percent interest in Equistar, Equistar repaid $750 million of debt due to Millennium from its contributed businesses and Millennium retained $250 million of its accounts receivable. On May 15, 1998, Lyondell and Millennium expanded Equistar with the addition of the ethylene, propylene, EO, EG and other EO derivatives businesses (the "Occidental Contributed Business") of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition included two olefins plants, a plant that produces EO and EO derivatives, including EG, and Occidental's 50 percent interest in a joint venture with E.I. DuPont de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental also contributed more than 950 miles of owned and leased pipelines located on the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana olefins plant. Equistar assumed approximately $205 million of Occidental's debt. Equistar and Occidental also entered into a long-term agreement for Equistar to supply the ethylene requirements for Occidental's chlorovinyls business. In June 1998, Equistar borrowed approximately $500 million of additional debt and distributed cash of approximately $420 million to Occidental and $75 million to Millennium. Following the transaction, Lyondell owns 41 percent of Equistar, and Millenium and Occidental each own 29.5 percent. On July 28, 1998, Lyondell completed the acquisition (the "Acquisition") of all the outstanding shares of ARCO Chemical, the world's largest producer of PO and a leading worldwide producer of polyether polyols, PG, PGE, TDI, SM, MTBE and BDO. The Acquisition was financed through a bank credit agreement providing for aggregate borrowings of up to $7 billion (the "Credit Facility"). ARCO Chemical was renamed Lyondell Chemical Worldwide, Inc. subsequent to the Acquisition. The acquired business is referred to from time to time hereafter as "ARCO Chemical" for actions or events prior to the Acquisition and as the "Acquired Business" for actions or events from and after the Acquisition. Actions or events relating to the Acquired Business may also be covered by the more general terms Lyondell or the Company. The Company's principal executive offices are located at 1221 McKinney Street, Houston, Texas 77010 (Telephone: (713) 652-7200). 2 Summary Description of Business Segments Through the year ended December 31, 1996, the Company reported its results of operations in two segments, petrochemicals and refining. In 1997, the Company reported the results of its polymers operations as a separate segment. Following the Acquisition in July 1998, the Company added intermediate chemicals and derivatives as a reportable segment. The operations of the Acquired Business form the Company's intermediate chemicals and derivatives segment. The Company's petrochemicals and polymers segments are operated through Equistar. The Company's refining segment is conducted through LCR. The methanol business conducted through Lyondell Methanol is not a reportable segment for financial disclosure purposes. 3 The following chart shows the organization of Lyondell, as well as 1998 sales revenues for Lyondell and each of its joint ventures, of which Lyondell owns the specified percentage. Sales revenue for Lyondell and its subsidiaries represent the pro forma sales revenue of the Acquired Business for 1998 (as if the acquisition had occurred on January 1, 1998). [Chart Appears Here showing: 1998 consolidated pro forma sales revenue (excluding revenues of Equistar, LCR and Lyondell Methanol) of $3.6 billion for Lyondell and Subsidiaries and the primary products of Lyondell's Intermediate Chemicals and Derivatives Business; Lyondell's equity investments in each of Equistar (41 percent), LCR (58.75 percent) and Lyondell Methanol (75 percent); the 1998 sales revenues of each of Equistar, LCR and Lyondell Methanol, which were $4.4 billion, $2.1 billion and $104 million, respectively; and the primary products of each of the petrochemicals, polymers, refining and methanol businesses] Sales revenues above include sales to affiliates. For additional segment information for each of the years in the three-year period ended December 31, 1998, see Notes 4, 5, 6 and 22 of Notes to Consolidated Financial Statements. 4 INTERMEDIATE CHEMICALS AND DERIVATIVES Overview Through the Acquired Business, Lyondell is a leading global manufacturer and marketer of intermediate chemicals and performance chemical products used in a broad range of consumer goods. The segment's core product is PO, which is produced through two distinct technologies based on indirect oxidation processes that yield co-products. One process yields TBA as the co-product; the other yields SM as the co-product. The two technologies are mutually exclusive such that either a dedicated PO/TBA or a dedicated PO/SM plant must be built. The intermediate chemicals and derivatives segment also manufactures numerous derivatives of PO and TBA. Among these are polyols and PG, derivatives of PO, and MTBE, a principal derivative of TBA. This segment also manufactures and markets TDI. In North America, the Company produces PO, TBA, PG and PGE at its Bayport, Texas plant; PO, SM, MTBE, polyols and BDO at its Channelview, Texas plant; polyols at its South Charleston and Institute, West Virginia plants; and isocyanates at its Lake Charles, Louisiana plant. In Europe, the Company produces PO, TBA, PG and MTBE at plants in Rotterdam, The Netherlands, and Fos-sur-Mer, France; PGE at its Rotterdam plant; and polyols at the Fos-sur- Mer plant and at a plant in Rieme, Belgium. In the Asia Pacific region, the Company has a 50 percent interest in the joint venture Nihon Oxirane Co., Ltd. ("Nihon Oxirane"), which operates a PO/SM plant in Chiba, Japan. The Company produces polyols at majority-owned plants in Kaohsiung, Taiwan and Anyer, West Java, Indonesia. The Company estimates, based in part on published data, that worldwide demand for PO was approximately 8.7 billion pounds in 1998. Approximately 90 percent of that volume was consumed in the manufacture of three families of PO derivative products: polyols, PG and PGE. The remainder is consumed in the manufacture of a growing segment of performance-based products, as well as BDO and its derivatives. The Company consumes approximately 60 percent of its PO for the production of derivatives. Polyols and TDI are combined in the production of urethanes for products such as automotive seating and home furnishings, as well as coatings, adhesives, sealants and elastomers. PG is principally used as an intermediate chemical to produce unsaturated polyester resins. PG has low toxicity and is also used in certain food, cosmetic, and pharmaceutical applications and in automotive coolants and aircraft deicers. PGE comprises low toxicity, high performance solvents. BDO and its derivatives are utilized in the production of engineering plastics, pharmaceuticals, personal care products, fibers and high performance coatings. Lyondell reacts most of its TBA with methanol to make MTBE, a gasoline blending component that increases octane and reduces emissions. The Company also has the capability to produce ethyl tertiary butyl ether ("ETBE"), an alternate gasoline blending component. ETBE is manufactured from TBA and ethanol and has a lower vapor pressure than MTBE or ethanol. Worldwide demand for MTBE in 1998 was approximately 428,000 barrels per day, based on published data. This demand has increased over the past several years as a result of the Clean Air Act Amendments of 1990 (the "Clean Air Act Amendments"), state and local regulations and the need for incremental octane in gasoline in the United States and other countries. In the United States, the Clean Air Act Amendments set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The EPA has proposed a reduction in permissible ozone levels in the United States, which, if adopted, may create additional demand for MTBE. However, pending or future legislative initiatives or litigation may materially adversely affect the Company's MTBE sales or subject the Company to product liability. Studies by federal and state agencies and other organizations have shown that MTBE is safe for use in gasoline and is effective in reducing automotive emissions. Nevertheless, the presence of MTBE in some water 5 supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern that MTBE may contaminate drinking water supplies, and thereby result in a possible health risk. The Governor of California has announced an intention to eliminate MTBE from gasoline sold in California by December 31, 2002. There have been claims that MTBE travels more rapidly through soil, and is more soluble in water, than most other gasoline components, and is more difficult and more costly to remediate. Heightened public awareness about MTBE has resulted in certain state and federal legislative initiatives that have sought either to rescind the oxygenate requirement for reformulated gasoline sold in California and other states or restrict the use of MTBE. There is ongoing review of this issue and the ultimate resolution of the appropriateness of using MTBE could result in a significant reduction in the Company's MTBE sales. In addition, the Company has a take-or-pay MTBE sales contract with ARCO, which contributes significant pre-tax margin. If such legislative initiatives were enacted, ARCO has indicated that it might attempt to invoke a force majeure provision in the ARCO contract in order to reduce the quantities of MTBE it purchases under, or to terminate, the contract. The Company would vigorously dispute such action. The contract has an initial term expiring December 31, 2002 and provides for formula-based prices that are currently significantly above spot market prices for MTBE. A significant reduction in the Company's sales under the ARCO contract could have a negative impact on the Company's results of operations. SM is a commodity chemical produced and traded worldwide for commodity and specialty polymer applications, such as polystyrene and polyester resins, as well as various uses in the rubber industry. Based on published data, worldwide demand in 1998 was approximately 40 billion pounds. In late 1997, ARCO Chemical initiated a restructuring program designed to simplify the organization, streamline operations and reduce costs. Lyondell is on target to achieve most of these cost savings by the end of 1999. Lyondell believes that it will be able to realize additional cost savings primarily through overhead consolidation, manufacturing and purchasing efficiencies, reduced transportation costs and raw material integration with Equistar. As contemplated at the time of the Acquisition, the Company has delayed the construction of a PO/SM plant in Rotterdam ("PO-11") that ARCO Chemical had scheduled for startup in late 2000. The following table outlines the intermediate chemicals and derivatives segment's primary products, annual capacity and the primary uses for such products.
Product Rated Capacity(a) Primary Uses ------- ----------------- ------------ Propylene Oxide (PO) 3.85 billion pounds PO is a key component of polyols, PG, PGE and BDO. Polyols 1.47 billion pounds Polyols are used to produce flexible foam for automotive seating and home furnishings, coatings, adhesives, sealants and elastomers. Toluene Diisocyanate 250 million pounds(b) TDI is combined with polyols to produce (TDI) flexible foam for automotive seating and home furnishings, coatings, adhesives, sealants and elastomers. Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for bathroom fixtures and boat hulls; lower toxicity antifreeze, coolants and aircraft deicers; and cosmetics and cleaners. Propylene Glycol Ethers 300 million pounds PGE are used as lower toxicity solvents for (PGE) paints, coatings and cleaners. Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins, films, personal care products, pharmaceuticals, coatings, solvents and adhesives.
6
Product Rated Capacity(a) Primary Uses ------- ----------------- ------------ Tertiary Butyl Alcohol 58,500 barrels/day TBA is a key component of MTBE. MTBE is a (TBA)--fuel oxygenates: gasoline component for reducing emissions in Methyl Tertiary Butyl reformulated gasolines and enhancing octane Ether (MTBE) value. Styrene Monomer (SM) 3.65 billion pounds SM is used to produce plastics, such as expandable polystyrene for packaging, foam cups and containers, insulation products and durables and engineering resins.
- -------- (a) Unless otherwise specified, represents rated capacity as of January 1, 1999. The term "rated capacity," as used in this table, is calculated by estimating the number of days in a typical year a production unit of a plant is expected to operate after allowing downtime for regular maintenance and multiplying that number by an amount equal to the unit's optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, actual production volumes may be more or less than rated capacity. Capacities shown include 100 percent of the capacity of joint venture facilities. (b) Does not include 264 million pounds of supply reserved under long-term TDI supply agreements with Rhone-Poulenc, pursuant to which Lyondell is entitled to all of the TDI output of Rhone-Poulenc's two plants in France. Raw Materials The principal hydrocarbon raw materials purchased by the intermediate chemicals and derivatives segment are propylene, butanes, ethylene, benzene and methanol. The market prices of these raw materials historically have been related to the price of crude oil and its principal refinery derivatives and natural gas liquids. These materials are available in bulk quantities via pipeline or marine vessels. The segment's raw materials requirements are purchased from numerous suppliers in the United States and Europe, with which the Company has established contractual relationships, as well as in the spot market. The segment receives a portion of its methanol requirements under a cost-based supply arrangement with a third party. The Company's raw material suppliers include Equistar, which is a leading producer of propylene, ethylene and benzene. See Note 4 of Notes to Consolidated Financial Statements. The intermediate chemicals and derivatives segment is a large volume consumer of isobutane for chemical production. The Company has invested in facilities, or entered into processing agreements with unrelated third parties, to convert the widely available commodity normal butane to isobutane. The Company is also a large consumer of oxygen for its PO/TBA plants at Bayport, Texas, Rotterdam, The Netherlands, and Fos-sur-Mer, France. In order to assure adequate and reliable sources of supply at competitive prices and rates, the Company is a party to long-term agreements and other arrangements with suppliers of raw materials, products, industrial gas and other utilities. Marketing and Sales In 1998, most of the segment's revenues were derived from sales to, or processing agreements with, unrelated third parties. Over the past three years, no single unrelated third party customer, nor any related party customer, accounted for more than 10 percent of total revenues in any one year. The intermediate chemicals and derivatives segment delivers products through sales agreements, processing agreements and spot sales as well as product swaps. It purchases limited amounts of MTBE and SM for resale to the extent that customer demand for these co-products exceeds its production. Production levels for co-products are based upon the demand for PO and the market economics of the co-products. The segment has a number of multi-year PO processing or sales agreements. This reflects an effort to mitigate the adverse impact of competitive factors and economic business cycles on demand for the segment's PO. The segment is also a party to a number of multi-year SM sales and processing agreements and MTBE sales agreements. 7 Lyondell sells most of its SM production into the United States merchant market and to selected export markets through sales or tolling agreements. The SM processing agreements also include long-term processing agreements providing for the delivery of fixed annual quantities of SM. See "--Joint Ventures and Other Agreements." As of December 31, 1998, the Company had over 1.1 billion pounds of SM capacity, or 30 percent of its worldwide capacity, covered by long-term processing arrangements. In addition to the ARCO contract, the Company also sells its MTBE production under market-based sales agreements and in the spot market. The segment's sales are made through Company marketing and sales personnel and through distributors and independent agents located in the Americas, Europe and the Asia Pacific region. As part of the restructuring and cost- reduction program announced in 1997, the segment has centralized certain sales and order fulfillment functions in regional customer service centers located in Channelview, Texas, Rotterdam, The Netherlands and Singapore. This will permit the Company to reduce its sales office infrastructure for this segment around the world, while maintaining service to its worldwide customer base. For data relating to foreign operations and export sales, see Note 22 of Notes to Consolidated Financial Statements. Joint Ventures and Other Agreements The PO/SM plant at the Channelview, Texas complex that was completed in 1992 (PO/SM II) is owned by the Company together with third-party equity investors. The Acquired Business sold additional interests to the investors in 1994, 1996 and 1997. In addition, portions of a 1998 PO/SM II expansion ( see "-- Properties" for additional discussion) were funded through third-party investment. The Company retains a majority interest in the PO/SM II plant and is the operator of the plant. A portion of the SM output of the PO/SM II plant is committed to the third-party investors under long-term processing agreements. As of December 31, 1998, 1.1 billion pounds per year of the PO/SM II plant's existing SM capacity was committed under such arrangements. The Company, through a subsidiary, has a 50 percent equity interest in Nihon Oxirane, a joint venture with Sumitomo Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. In January 1995, ARCO Chemical entered into long-term TDI supply agreements with Rhone-Poulenc entitling the Acquired Business to the entire TDI output of Rhone-Poulenc's two plants in France, which have a combined annual capacity of approximately 264 million pounds, and providing the Acquired Business an option to acquire one of the plants from Rhone-Poulenc at the end of the supply term. This TDI is marketed principally in Europe, the Middle East, Africa and Asia. Competition and Industry Conditions Competition within the intermediate chemicals and derivatives segment of the chemical industry is significant and is affected by a variety of factors, including quality, product price, reliability of supply, technical support, customer service and potential substitute materials. Profitability in this segment is affected by the worldwide level of demand along with vigorous price competition which may intensify due to, among other things, new domestic and foreign industry capacity. In general, weak economic conditions either in the United States or in the world tend to reduce demand and put pressure on margins. It is not possible to predict accurately the changes in feedstock costs, market conditions and other factors that will affect industry margins in the future. Capacity share figures for the segment and its competitors, discussed below, are based on completed production facilities and, where appropriate, include the full capacity of joint-venture facilities and certain long-term supply agreements. The Company's major worldwide PO competitors are Dow Chemical Company ("Dow") and Shell. Dow's operations are based on chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based on published data relating to the PO market, the Company believes it has 35 percent, Dow has 32 percent and Shell has over 5 percent of the total worldwide capacity for PO. 8 The expansion of the PO/SM II plant in Channelview, Texas in early 1998 added annual PO and SM capacity of 110 million and 248 million pounds, respectively. As contemplated at the time of the Acquisition, the Company has delayed the construction of PO-11 in Rotterdam, The Netherlands, which ARCO Chemical had scheduled for startup in late 2000. Shell and BASF AG ("BASF") have formed a joint venture to construct a PO/SM plant in Europe, using Shell technology, with a target completion date in the 1999 time frame. Shell has also announced plans to construct a PO/SM plant in Singapore, with BASF as a 50 percent partner and with a target completion date of late 2001. In addition, Repsol Quimica, S.A. has announced plans to build a PO/SM plant with an early 2000 startup date in Tarragona, Spain, using technology for the production of PO and SM originally licensed from ARCO Chemical. The Company competes with many polyols producers worldwide, including Dow, Bayer AG ("Bayer") and BASF. Based on published data, Dow is believed to have 26 percent of worldwide polyols capacity while the Company is believed to have 16 percent. The Company both manufactures and has long-term supply agreements for TDI, an isocyanate, which is reacted with polyols to produce flexible foams. The Company competes with many TDI producers worldwide, including Bayer and BASF. Based on published data, Bayer is believed to have 24 percent of worldwide TDI capacity while the Company is believed to have 17 percent. The Company competes with many MTBE producers worldwide, the most significant of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data, SABIC is believed to have 11 percent of the total worldwide capacity for MTBE. The Company believes it has 10 percent through the Acquired Business. In addition, the Company believes that Equistar's MTBE capacity comprises an additional 3 percent of worldwide MTBE capacity. MTBE also faces competition from substitute products such as ethanol as well as other octane components. The Company competes with several SM producers worldwide; among them are Shell, Dow and BASF. Based on published data, Shell is believed to have 9 percent and the Company is believed to have 8 percent of the total worldwide SM capacity. Properties As part of the Acquisition, Lyondell acquired ARCO Chemical's headquarters office and research facility in Newtown Square, Pennsylvania, which is leased from ARCO. The Acquired Business' European headquarters are located in leased facilities in Maidenhead, England, and the Acquired Business' Asia Pacific headquarters are located in leased facilities in Hong Kong. As part of its restructuring program, the Acquired Business reduced or relocated staff from the European and Asia Pacific headquarters with appropriate reductions in the size of the leased headquarters facilities and established regional service centers at leased facilities in Rotterdam, The Netherlands and Singapore. The Company owns the regional service center in Channelview, Texas. Depending on location and market needs, the Company's production facilities can receive primary raw materials by pipeline, railcar, truck, barge or ship and can deliver finished products in drums or by pipeline, railcar, truck, barge, isotank or ship. The Company charters ships, owns and charters barges and leases isotanks and railcars for the dedicated movement of products between plants, products to customers or terminals, or raw materials to plants, as necessary. The Company leases liquid and bulk storage and warehouse facilities at terminals in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer harbor area, the Company operates an on-site butane storage tank, propylene spheres, pipeline connections and a jetty that accommodates deep-draft vessels. 9 The principal manufacturing facilities of the segment are set forth below. All of these facilities are wholly-owned by Lyondell unless otherwise noted.
Location Principal Products -------- -------------------------- Bayport (Pasadena), Texas.................... PO, PG, PGE, TBA Channelview, Texas(1)........................ PO, polyols, BDO, SM, MTBE Lake Charles, Louisiana...................... TDI Institute and South Charleston, West Virginia(2)................................. polyols Rieme, Belgium............................... polyols Fos-sur-Mer, France.......................... PO, PG, polyols, TBA, MTBE Botlek, Rotterdam, The Netherlands........... PO, PG, PGE, TBA, MTBE Anyer, West Java, Indonesia(3)............... polyols Chiba, Japan(4).............................. PO, SM Kaohsiung, Taiwan(5)......................... polyols
- -------- (1) Third-party investors hold a minority ownership interest in the PO/SM II plant at the Channelview facility. (2) The Company's plants in South Charleston and Institute, West Virginia are situated on leased land. (3) The Anyer plant is owned by P.T. Lyondell Indonesia, an Indonesian joint venture with P.T. Gema Supra Abadi. The Company, through a subsidiary, has a majority interest in the joint venture. (4) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint venture in which the Company holds a 50 percent interest through a subsidiary. (5) The Taiwan plant is owned by Lyondell Taiwan Co., Ltd., a Taiwan company in which the Company, through a subsidiary, has a majority interest. Research and Technology; Patents and Trademarks The Acquired Business has been granted 66 patents and has over 34 patents pending for the Impact(TM) process technology. The Impact(TM) technology, first introduced in 1995, offers significant cost savings in the production of conventional polyols products. The Company possesses a body of patented and unpatented technology and trade secrets relating to its products, processes and the design and operation of its plants, all of which are valuable to the segment. The Company does not believe that the loss of any individual patent or trade secret would have a material adverse effect on its intermediate chemicals and derivatives business. The basic patents relating to the Company's PO/SM and PO/TBA technologies have expired. The principal research and development facility for the segment is located in Newtown Square, Pennsylvania, with technical centers in South Charleston, West Virginia, Villers Saint Paul, France, and Singapore. Employee Relations On December 31, 1998, the Acquired Business employed approximately 4,200 employees. Approximately 23 percent of the Acquired Business's domestic employees are represented by labor unions. The Company believes its relations with its employees are good. 10 EQUISTAR CHEMICALS, LP Management of Equistar Equistar is a limited partnership organized under the laws of the State of Delaware. Lyondell owns its interest in Equistar through two wholly owned subsidiaries, one of which serves as a general partner of Equistar and one of which serves as a limited partner. Similarly, Millennium owns its interest in Equistar through two wholly owned subsidiaries, one a general partner and one a limited partner. Occidental owns its interest in Equistar through three wholly owned subsidiaries, one a general partner and two limited partners. Lyondell holds a 41 percent interest and Millennium and Occidental each hold a 29.5 percent interest in Equistar. The Amended and Restated Partnership Agreement of Equistar (the "Equistar Partnership Agreement") governs, among other things, ownership, cash distributions, capital contributions and management of Equistar. The Equistar Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee, consisting of nine representatives, three appointed by each general partner. Matters requiring agreement by the representatives of Lyondell, Millennium and Occidental include changes in the scope of Equistar's business, the five year strategic plan (and annual updates thereof), the sale or purchase of assets or capital expenditures of more than $30 million not contemplated by the strategic plan, investments by Equistar's partners over certain amounts, merging or combining with another business and certain other matters. All decisions of the Partnership Governance Committee that do not require unanimity between Lyondell, Millennium and Occidental may be made by Lyondell's representatives alone. The day-to-day operations of Equistar are managed by the executive officers of Equistar. Dan Smith, the Chief Executive Officer of Lyondell, also serves as Chief Executive Officer of Equistar. Agreements between Lyondell and Equistar Lyondell and Equistar entered into an agreement on December 1, 1997, providing for the transfer of assets to Equistar. Among other things, such agreement sets forth representations and warranties by Lyondell with respect to the transferred assets and requires indemnification by Lyondell with respect thereto. Such agreement also provides for the assumption by Equistar of, among other things, third party claims that are related to certain pre- closing contingent liabilities that are asserted prior to December 1, 2004, to the extent the aggregate thereof does not exceed $7 million, third party claims related to pre-closing contingent liabilities that are asserted for the first time after December 1, 2004, certain obligations for indebtedness, liabilities for products sold after December 1, 1997, regardless of when manufactured, and certain long term liabilities. Millennium Petrochemicals and affiliates of Occidental (the "Occidental Subsidiaries") entered into similar agreements with Equistar with respect to the transfer of their respective assets and Equistar's assumption of liabilities. Also in connection with the formation of Equistar, Lyondell contributed a promissory note for $345 million payable to Equistar, which Lyondell repaid with proceeds of the Credit Facility. If Lyondell, Millennium or Occidental or any of their affiliates desire to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a business or activity or operation within the scope of the business of Equistar, such opportunity must first be offered to Equistar. Equistar has certain options to participate in such opportunity but if it determines not to participate, the party offering the opportunity is free to pursue it on its own. If the opportunity within Equistar's scope of business constitutes less than 25 percent of an acquisition that is otherwise not within the scope of the business of Equistar, Lyondell, Millennium or Occidental, as the case may be, may make such acquisition provided that after such acquisition, the portion within the scope of the business of Equistar is offered to Equistar pursuant to the foregoing provisions. Lyondell has agreed to provide certain administrative services to Equistar, including certain legal, risk management, treasury services, tax services and employee benefit plan administration. Equistar has also agreed to provide certain services to Lyondell, such as health, safety and environmental services, human resource 11 services, information services and legal services. As a consequence of services being provided by Equistar to Lyondell and by Lyondell to Equistar, a monthly net payment is made by Equistar to Lyondell with respect thereto. See Note 4 of Notes to Consolidated Financial Statements. Equistar and Millennium Petrochemicals are also parties to a number of agreements for the provision of services, utilities and materials from one party to the other at common locations, principally LaPorte and Cincinnati. An affiliate of Occidental provides services to Equistar, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others, pursuant to a Transition Services Agreement, which will terminate on June 1, 1999. Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each entered into a Master Intellectual Property Agreement with Equistar. The Master Intellectual Property Agreements provide for (i) the transfer of certain intellectual property of Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries related to the businesses each contributed to Equistar, (ii) certain rights and licenses to Equistar with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or the Occidental Subsidiaries that was not solely related to the business of Equistar but is useful in such business and (iii) certain rights and licenses from Equistar to Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries, respectively, with respect to intellectual property transferred to Equistar that Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries may use with respect to their other businesses. Lyondell, Millennium, Occidental and certain of its affiliates and Equistar are parties to an Amended and Restated Parent Agreement dated as of May 15, 1998, which provides that, among other things, each of Lyondell, Millennium and an Occidental affiliate guarantees the performance by their respective subsidiaries under various agreements entered into in connection with the formation of Equistar, including the Equistar Partnership Agreement and the asset transfer agreements providing for the transfer of assets by Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries, respectively, to Equistar. 12 EQUISTAR PETROCHEMICALS Overview Equistar produces a variety of petrochemicals, including olefins, oxygenated chemicals, aromatics and specialty chemicals, at twelve facilities located in six states. Olefins include ethylene, propylene and butadiene. Oxygenated chemicals include EO, EG, ethanol and MTBE. Aromatics produced are benzene and toluene. Equistar's petrochemical products are used to manufacture polymers and intermediate chemicals, which are used in a variety of consumer and industrial products. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics. The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use petroleum liquid feedstocks, including naphtha, condensates and gas oils (collectively "Petroleum Liquids"), to produce ethylene. The cost of ethylene production from Petroleum Liquids feedstocks historically has been less than the cost of producing ethylene from natural gas liquids feedstocks, including ethane, propane and butane (collectively, "NGLs"). The use of Petroleum Liquids results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty chemicals, such as dicyclopentadiene ("DCPD"), isoprene, resin oil, piperylenes, hydrogen and alkylate. Based upon independent third-party surveys, management believes that its Channelview facility is the lowest production cost olefins facility in North America. Equistar's Morris, Illinois, Clinton, Iowa, Lake Charles, Louisiana and LaPorte, Texas plants are designed to use primarily NGLs which produce primarily ethylene with some co- products such as propylene. In addition, Equistar currently is modifying the LaPorte plant to run certain Petroleum Liquids feedstocks. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Feedstocks are sourced both internationally and domestically and are shipped via vessel and pipeline. Equistar produces EO and its primary derivative, EG, at facilities located at Pasadena, Texas and through a 50/50 joint venture with DuPont in Beaumont, Texas. The Pasadena facility also produces other derivatives of EO, principally ethers and ethanolamine. EG is used in antifreeze and in polyester fibers, resins and films. The other EO derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane foams for seating and bedding. Equistar produces synthetic ethyl alcohol at its Tuscola, Illinois plant by a direct hydration process that combines water and ethylene. Equistar also owns and operates facilities in Newark, New Jersey and Anaheim, California for denaturing ethyl alcohol by the addition of certain chemicals. In addition, it produces small volumes of diethyl ether, a by-product of its ethyl alcohol production, at Tuscola. These ethyl alcohol products are ingredients in various consumer and industrial products as described more fully in the table below. 13 The following table outlines Equistar's primary petrochemical products, annual rated capacity and the primary uses for such products.
Product Rated Capacity(a) Primary Uses ------- ----------------- ------------ OLEFINS: Ethylene 11.5 billion pounds Ethylene is used as a feedstock to manufacture polyethylene, EO, ethylene dichloride and ethylbenzene. Propylene 5.0 billion pounds(b) Propylene is used to produce polypropylene, acrylonitrile and propylene oxide. Butadiene 1.2 billion pounds Butadiene is used to manufacture styrene butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets and engineered plastics. OXYGENATED PRODUCTS: Ethylene Oxide (EO) and 1.1 billion pounds EOE; EO is used to produce surfactants, industrial Equivalents (EOE) 400 million pounds as pure EO cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol (polyester fibers and film, polyethylene terephthalate ("PET") resin and antifreeze). Ethylene Glycol(EG) 1 billion pounds EG is used to produce polyester fibers and film, PET resin, heat transfer fluids, paint and automobile antifreeze. Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and Derivatives coatings, polishes, solvents and chemical intermediates. MTBE 284 million gallons MTBE is an octane enhancer and clean fuel (18,500 barrels/day)(c) additive in reformulated gasoline. AROMATICS: Benzene 301 million gallons Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, rubber and polystyrene. Polystyrene is used in insulation, packaging and drink cups. Toluene 66 million gallons Toluene is used as an octane enhancer in gasoline, as a chemical feedstock for benzene production, and a core ingredient in TDI, a compound in urethane production. SPECIALTY CHEMICALS: Dicyclopentadiene (DCPD) 80 million pounds DCPD is a component of inks, adhesives and polyester resins for molded parts such as tub and shower stalls and boat hulls. Isoprene 105 million pounds Isoprene is a component of premium tires, adhesive sealants and other rubber products. Resin Oil 120 million pounds Resin oil is used in the production of hot- melt-adhesives, inks, sealants, paints and varnishes. Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and sealants. Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas in heavy crude oil. Alkylate 337 million gallons(d) Alkylate is a premium blending component used by refiners to meet Clean Air Act standards for reformulated gasoline. Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production of solvents as well as household, medicinal and personal care products. Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and diesel engine starting fluid, liniments, analgesics and smokeless gun powder.
14 - -------- (a) Unless otherwise specified, represents rated capacity at January 1, 1999. The term "rated capacity," as used in this table, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than the rated capacity. Capacities shown include 100 percent of the capacity of Equistar, of which the Company owns 41 percent. (b) Does not include refinery grade material or production from the product flexibility unit at Equistar's Channelview facility, which can convert ethylene and other light petrochemicals into propylene and has a current rated capacity of one billion pounds per year of propylene. (c) Includes up to 44 million gallons/year of capacity which is operated for the benefit of LCR. (d) Includes up to 172 million gallons/year of capacity which is operated for the benefit of LCR. Raw Materials Olefins feedstock cost is generally the largest component of total cost for the petrochemicals business. Olefins plants with the flexibility to consume a wide range of feedstocks are able to maintain higher profitability during periods of changing energy and petrochemicals prices than olefins plants that are restricted in their feedstock processing capability. The primary feedstocks used in the production of olefins are Petroleum Liquids (also referred to as "heavy feedstocks") and NGLs (also referred to as "light feedstocks"). As of January 1, 1999, approximately 44 percent of domestic ethylene capacity was limited to NGL feedstocks and approximately 56 percent of domestic capacity processed to some extent both NGLs and Petroleum Liquids. Petroleum Liquids have had a historical variable margin advantage over NGLs such as ethane and propane. For example, using Petroleum Liquid feedstocks typically generates between one and four cents additional margin per pound of ethylene produced compared to using ethane. Equistar has the capability to realize this margin advantage at the Channelview, Corpus Christi and Chocolate Bayou facilities. This variable margin advantage is expected to continue due to the significantly higher capital cost for plants with the capability to process both heavy feedstocks (Petroleum Liquids) and the co-products which result from processing Petroleum Liquid feedstocks in contrast to processing light feedstocks (NGLs). The Channelview facility is unusually flexible in that it can process 100 percent Petroleum Liquids or up to 80 percent NGL feedstocks. The Corpus Christi plant can process up to 70 percent Petroleum Liquids or up to 70 percent NGLs. The Chocolate Bayou facility processes 100 percent Petroleum Liquids. Equistar's four other olefins facilities currently process only NGLs. Equistar, however, is in the process of upgrading the LaPorte facility to integrate the operations of the LaPorte and Channelview facilities to permit the LaPorte facility to process 25 percent to 30 percent Petroleum Liquids and the Channelview facility to process the co-products resulting from the processing of Petroleum Liquids at LaPorte. The majority of Equistar's Petroleum Liquids requirements are obtained under contracts or on the spot market from a variety of third-party domestic and foreign sources. Equistar also purchases NGLs from a wide variety of domestic sources. Equistar obtains a portion of its olefins feedstock requirements from LCR at market-based prices. In addition to producing its own ethylene, Equistar assumed certain agreements of an affiliate of Millennium for the purchase of ethylene from Gulf Coast producers at market prices. Ethylene purchase obligations under the assumed contracts will decline to zero at the end of 2000. Marketing and Sales Ethylene produced by the LaPorte, Morris and Clinton facilities is generally consumed as feedstock by the polymers operations at those sites. Ethylene and propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake Charles olefins plants are generally distributed by pipeline or via exchange 15 agreements to Equistar's Gulf Coast polymer and EO facilities as well as to other third parties. As of December 31, 1998, approximately 75 percent of the ethylene produced by Equistar was consumed internally or sold to Equistar's affiliates based on current market prices. With respect to sales to third parties, Equistar sells a majority of its olefins products to customers with whom Lyondell and Occidental have had long- standing relationships. Over the past three years, no single unrelated third party customer accounted for more than 10% of total segment revenues in any one year. Sales to third parties generally are made pursuant to written agreements which typically provide for monthly negotiation of price. The contracts typically require the customer to purchase a specified minimum quantity. Contract terms are typically three to six years with automatic one or two year term extension provisions. Some contracts are subject to early termination if deliveries have been suspended for several months. EO and EG are sold under long-term contracts of three to five years' duration to third-party customers, with pricing negotiated on a quarterly basis to reflect market conditions. Glycol ethers are sold primarily into the solvent and distributor markets under one-year contracts at market prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to third-party customers under one-year contracts at market prices. Equistar licenses MTBE technology under a license entered into with ARCO Chemical and sells a significant portion of MTBE produced at one of its two Channelview units to Lyondell at market-related prices. The production from the second unit is consumed by LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold to third parties at market-related prices. Equistar sells most of its aromatics production under contracts that have initial terms ranging from two to three years and that typically contain automatic one-year term extension provisions. These contracts generally provide for monthly or quarterly price adjustments based upon current market prices. Aromatics produced by LCR, with the exception of benzene, are marketed by Equistar for LCR under contracts with similar terms to Equistar's own. Benzene produced by LCR is sold directly to Equistar at market-related prices. Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, some of which is owned and some of which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition, exchange agreements with other olefins producers allow access to customers who are not directly connected to Equistar's pipeline system. Some propylene is shipped by ocean-going vessel. Ethylene oxide and its derivatives are shipped by railcar. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel. Competition and Industry Conditions The basis for competition in Equistar's petrochemicals products is price, product quality, product deliverability and customer service. Equistar competes with other large domestic producers of petrochemicals, including Amoco Chemical Company, Chevron Chemical Company, Dow Chemical Company, Exxon Chemical Company, Huntsman Chemical Company, Mobil Chemical Company, Phillips Petroleum Company, Shell Chemical Company and Union Carbide Corporation. The combined rated capacity of Equistar's olefins units at January 1, 1999 was approximately 11.5 billion pounds of ethylene per year or approximately 18 percent of total North American production capacity. Based on published rated production capacities, Equistar believes it is the largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 1999 was approximately 62 billion pounds per year. Of the total ethylene production capacity in the United States, approximately 95 percent is located along the Gulf Coast, and approximately 80 percent is owned by nine manufacturers. 16 Petrochemicals profitability is affected by the level of demand for petrochemicals and derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, weak economic conditions either in the United States or in the world and higher feedstock costs tend to reduce demand and/or put pressure on margins. Capacity additions in excess of annual growth also put pressure on margins. In addition, in recent years, industry consolidation has occurred, a trend the Company expects will continue. It is not possible to predict accurately the changes in feedstock costs, market conditions and other factors that will affect petrochemical industry margins in the future. The petrochemicals industry historically has experienced significant volatility in capacity utilization and profitability. Producers of olefins primarily for merchant supply to unaffiliated customers typically experience greater variations in their sales volumes and profitability when industry supply and demand relationships are at extremes in comparison to more integrated competitors, i.e., those with a higher proportion of captive demand for olefins derivatives production. Equistar currently consumes or sells to its partners' downstream derivatives facilities approximately 75 percent of its ethylene production, which has the effect of reducing volatility. Equistar's other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of ethylene. EQUISTAR POLYMERS Overview Through twelve facilities located in four states, Equistar's polymers segment manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various performance polymers. Equistar currently manufactures polyethylene using a variety of technologies at six facilities in Texas and at its Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities are the only polyethylene facilities located in the Midwest and enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the Midwest and on the East Coast of the United States. Polyethylene is used in a wide variety of consumer products, packaging materials and industrial applications. Equistar's Morris, Illinois and Pasadena, Texas facilities manufacture polypropylene using propylene produced as a co-product of Equistar's ethylene production as well as propylene purchased from third parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. Equistar also produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. The Company believes that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polyethylenes. Equistar produces concentrates and compounds at its facilities in Crockett, Texas and Heath, Ohio. Concentrates and compounds are polyethylene compounds impregnated with additives and/or pigments and sold to converters who mix the compounds with larger volumes of polymers, including polyethylene, to produce various products. Equistar produces wire and cable resins and compounds at Morris, Illinois, LaPorte, Texas, Tuscola, Illinois, Crockett, Texas and Fairport Harbor, Ohio. Wire and cable resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. 17 The following table outlines Equistar's polymers and performance polymers products, annual rated capacity, and the primary uses for such products:
Product Rated Capacity(a) Primary Uses ------- ----------------- ------------ High density 3.4 billion pounds(b) HDPE is used to manufacture grocery, polyethylene (HDPE) merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays and pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household/industrial chemicals and motor oil; milk/water/juice bottles; and large (rotomolded) tanks for storing liquids like agricultural and lawn care chemicals. Low density polyethylene 1.7 billion pounds LDPE is used to manufacture food packaging (LDPE) films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in- bag bags; coatings on flexible packaging products; and coatings on paper board such as milk cartons. Specialized forms of LDPE are Ethyl Methyl Acrylate ("EMA"), which provides adhesion in a variety of applications, and Ethylene Vinyl Acetate ("EVA"), which is used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders. Linear low density 1.1 billion pounds LLDPE is used to manufacture garbage and polyethylene (LLDPE) lawn-leaf bags; housewares; lids for coffee cans and margarine tubs; and large (rotomolded) toys like outdoor gym sets. Polypropylene 680 million pounds Polypropylene is used to manufacture fibers for carpets, rugs and upholstery; housewares; automotive battery cases; automotive fascia, running boards and bumpers; grid-type flooring for sports facilities; fishing tackle boxes; and bottle caps and closures. Wire and Cable (c) Wire and cable resins and compounds are Resins and Compounds used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Polymeric Powders (c) Polymeric powders are component products in structural and bulk molding compounds, parting agents and filters for appliance, automotive and plastics processing industries. Concentrates and 150 million pounds Concentrates and compounds provide color in Compounds film, bottles and foam sheets; the "slip" that keeps film from sticking together; flame retardancy; resistance to UV radiation; and the "gas bubbles" to make foamed plastic products. Polymers for Adhesives, (c) Polymers are components in hot-metal- Sealants and Coatings adhesive formulations for case, carton and beverage package sealing, glue sticks, automotive sealants, carpet backing and adhesive labels. Reactive Polyolefins (c) Reactive polyolefins are functionalized polymers used to bond non-polar and polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications. Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel additive to inhibit freezing.
- ------- (a) Unless otherwise specified, represents rated capacity at January 1, 1999. The term "rated capacity," as used in this table, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an 18 amount equal to the unit's optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than the rated capacity. Capacities shown include 100 percent of the capacity of Equistar, of which the Company owns 41 percent. (b) Equistar increased its HDPE capacity by approximately 125 million pounds in 1998. The idling of a portion of the Port Arthur facility effective March 31, 1999 will result in a decrease in the stated capacity by 300 million pounds at the end of the first quarter of 1999. A 480 million pound HDPE resin expansion project at the Matagorda facility has a targeted start-up in the third quarter of 1999. (c) These are enhanced grades of polyethylene and are included in the capacity figures for HDPE, LDPE and LLDPE above, as appropriate. Raw Materials With the exception of the Chocolate Bayou polyethylene plant, Equistar's polyethylene and polypropylene production facilities can receive their ethylene and propylene directly from Equistar's petrochemical facilities via Equistar's olefins pipeline system or Equistar's own production at the site. The polyethylene plants at Chocolate Bayou, LaPorte, Port Arthur and Pasadena, Texas are pipeline-connected to third parties and can receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois also receives propylene from a third party. Marketing and Sales Equistar's polymers products are primarily sold to an extensive base of established customers, many under term contracts, typically having a duration of one to three years. The remainder is generally sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between Equistar and the customer. Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 10,000 railcars for use in its polymers business. Equistar sells its polymers products in the United States primarily through its own sales organization. It generally engages sales agents to market its products in the rest of the world. Competition and Industry Conditions The basis for competition in Equistar's polymers products is product performance, product quality, product deliverability, customer service and price. Equistar competes with other large producers of polymers, including Chevron Chemical Corporation, Dow Chemical Company, Eastman Chemical Company, Exxon Chemical Company, Formosa Plastics, Huntsman Chemical Company, NOVA Corporation, Phillips Petroleum Company, Solvay Polymers, Total Fina, Union Carbide Corporation and Westlake Polymers. Polymers profitability is affected by the worldwide level of demand for polymers, along with vigorous price competition which may intensify due to, among other things, new domestic and foreign industry capacity. Margins for polymers tend to follow the trend of the margins of their raw materials with a six to nine months' lag. In general, weak economic conditions either in the United States or elsewhere in the world tend to reduce demand and put pressure on margins. It is not possible to predict accurately the changes in feedstock costs, market conditions and other factors which will affect polymers industry margins in the future. Based on published rated industry capacities, Equistar is the largest producer of polyethylene in North America and is a leading domestic producer of polyolefins powders, compounds, wire and cable resins, and polymers for adhesives. The combined rated capacity of Equistar's polyethylene units as of January 1, 1999 was approximately 6.2 billion pounds per year or approximately 18 percent of total industry capacity in North America. There are 19 other North American producers of polyethylene, including Chevron Chemical Company, Dow Chemical Company, Exxon Chemical Company, Phillips Petroleum Company, Solvay Polymers and Union Carbide Corporation. Equistar's polypropylene capacity, 680 million pounds per year as of January 1, 1999, represents just under 5 percent of the total North American polypropylene capacity. There are 14 other North American competitors in the polypropylene business, including Amoco Chemical Company, Exxon Chemical Company, Montell Polyolefins, BV and Total Fina. 19 EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS Equistar's principal manufacturing facilities and principal products are set forth below. All of these facilities are wholly owned by Equistar unless otherwise noted.
Location Principal Products -------- ------------------ Beaumont, Texas(a)...... EG Channelview, Texas(b)... Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE Corpus Christi, Texas... Ethylene, Propylene, Butadiene and Benzene Chocolate Bayou, Texas(c)............... HDPE Chocolate Bayou, Texas(c)(d)............ Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil and MTBE Crockett, Texas......... Wire and Cable Resins and Compounds and Concentrates and Compounds LaPorte, Texas.......... Ethylene, Propylene, LDPE, LLDPE, HDPE and Liquid Polyolefins Matagorda, Texas........ HDPE Pasadena, Texas(e)...... EO, EG and Other EO Derivatives Pasadena, Texas(e)...... Polypropylene and LDPE Port Arthur, Texas(f)... LDPE and HDPE Victoria, Texas(d)...... HDPE Lake Charles, Louisiana(g)........... Ethylene, and Propylene Morris, Illinois........ Ethylene, LDPE, LLDPE and Polypropylene Tuscola, Illinois....... Ethyl Alcohol, Diethyl Ether, Wire and Cable Resins and Compounds and Polymeric Powders Clinton, Iowa........... Ethylene, LDPE and HDPE Fairport Harbor, Wire and Cable Resins and Compounds, Ohio(g)................ Concentrates and Compounds Heath, Ohio............. Wire and Cable Resins and Compounds, Concentrates and Compounds Anaheim, California..... Denatured Alcohol Newark, New Jersey...... Denatured Alcohol
- -------- (a) The Beaumont facility is owned by PD Glycol, a partnership owned 50 percent by Equistar and 50 percent by DuPont. (b) The Channelview facility has two ethylene processing units. Lyondell Methanol owns a methanol plant located within the Channelview facility on property Lyondell Methanol leases from Equistar. A third party owns and operates a facility on land leased from Equistar that is used to purify hydrogen from Lyondell Methanol's methanol plant. Equistar also operates a styrene maleic anhydride unit and a polybutadiene unit which are owned by a third party and are located on property leased from Equistar within the Channelview facility. (c) Millennium and Occidental each contributed a facility located in Chocolate Bayou. These facilities are not on contiguous property. (d) The land is leased, and the facility is owned. (e) Occidental and Lyondell each contributed facilities located in Pasadena. These facilities are primarily on contiguous property, and Equistar plans to operate them as one site to the extent practicable. These facilities are operated in conjunction with the LaPorte facility. (f) A portion of the HDPE capacity of the Port Arthur facility will be idled on March 31, 1999 (resulting in a decrease of 300 million pounds of capacity), and could be restarted when market conditions warrant. (g) The facilities and land are leased. 20 Equistar also owns a storage facility, a brine pond and a tract of vacant land in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview facility. Storage capacity for up to approximately 13 million barrels of NGL feedstocks, ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage operated by Equistar on leased property in Markham, Texas. Equistar owns an extensive olefins pipeline system which extends from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. Equistar owns other pipelines in connection with its Morris, Clinton, Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus Christi and LaPorte facilities. Equistar owns and leases several pipelines connecting the Channelview facility, the Refinery and the Mont Belvieu storage facility; these pipelines are used to transport feedstocks, butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also owns a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading feedstocks and products. Equistar owns or leases pursuant to long-term lease arrangements approximately 10,000 railcars for use in its business. Equistar sub-leases its executive offices and corporate headquarters from Lyondell in downtown Houston. In addition, Equistar owns facilities which house the Morris and Cincinnati research operations. Equistar also leases sales facilities and leases storage facilities, primarily in the Gulf Coast area, from various third parties for the handling of products. As of December 31, 1998, Equistar employed approximately 5,000 full-time employees. Equistar also uses the services of independent contractors in the routine conduct of its business. Approximately 365 hourly workers are covered by collective bargaining agreements. Equistar believes that its relations with its employees are good. EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS Equistar maintains a significant research and development facility in Cincinnati, Ohio. Equistar has additional research facilities in Morris, Illinois, Matagorda, Texas and Plano, Texas. The Channelview facility employs proprietary technology owned by Lyondell to convert ethylene and other light petrochemical streams into propylene. Equistar is conducting a research project to investigate alternative feedstocks for use at the Channelview, Chocolate Bayou and/or Corpus Christi facilities. These alternative feedstocks could significantly lower costs and provide an additional competitive advantage at these facilities. Recent polymers industry announcements relate to the development of single- site catalysts. Successful development and commercialization of these catalysts are expected to result in enhanced polymer properties. Equistar is conducting a broad search to evaluate outside technology and is concentrating in-house research in an effort to identify and develop single-site catalysts for use in the production of polyolefins resins. Equistar holds several United States patents and the rights to certain patents pending in connection with research and development efforts in this area. Equistar is not dependent upon obtaining or retaining any particular patent, and it believes the failure to receive or retain any individual patent would not have a material adverse effect on its operations. Equistar uses numerous technologies in its operations, many of which are licensed from third parties. Significant licenses held by Equistar include the BP Chemicals fluid bed polyethylene process for the production of both LLDPE and HDPE, the Unipol process for the production of LLDPE, and certain other licenses for the production of polyethylene and polypropylene. Equistar is not dependent on the retention of any particular license, and it believes that the loss of any individual license would not have a material adverse effect on its operations. Equistar acquired rights to numerous recognized brand names from Lyondell and Millennium Petrochemicals in connection with its formation, including ALATHON(R), KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and Microthene(R). Equistar's rights to use these trademarks are perpetual as long as Equistar actively uses the trademarks. Equistar is not dependent upon any particular trademark, and it believes the loss of any individual trademark would not have a material adverse effect on its operations. 21 LYONDELL-CITGO REFINING LP Overview Lyondell participates in petroleum refining through an equity interest in LCR. Lyondell holds a 58.75 percent interest and CITGO holds a 41.25 percent interest in LCR. LCR owns and operates the Refinery which is located on the Houston Ship Channel in Houston, Texas. The Refinery is a full conversion refinery designed to run extra heavy (17 degree API), high sulfur crude oil which is less expensive than other crudes. Processing extra heavy, high sulfur crude oil in significant quantities requires a refinery with extensive coking, catalytic cracking, hydrotreating and desulfurization capabilities, i.e., a "complex refinery." The Refinery's complexity enables it to operate in full conversion mode producing a slate of products that is approximately 95 percent high value, clean products (most refineries produce 70 percent or less of high value, clean products such as gasoline and diesel). In addition, the Refinery's complexity allows it to produce most of these clean products as premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and aromatics chemicals. The Refinery's products include conventional and reformulated gasoline, low sulfur diesel, jet fuel, aromatics, lubricants (industrial lubricants, motor oils, white oils and process oils), carbon black oil, sulfur, residual fuel and petroleum coke. The aromatics chemicals produced by the Refinery are benzene, toluene, orthoxylene and paraxylene. These products are sold to intermediate chemicals and polyester intermediate manufacturers and are ultimately used in clothing, soft drink bottles and drink cups, audio and video tapes, and resins. LCR was formed in 1993 to upgrade the Refinery's ability to process substantial additional volumes of lower cost, extra heavy, higher margin crude oil. An upgrade project completed in 1997 (the "Upgrade Project") increased the extra heavy crude oil processing capability of the Refinery from 130,000 barrels per day of 22 degree API gravity crude oil to approximately 260,000 barrels per day of 17 degree API gravity crude oil. The 17 degree API gravity crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of sulfur and heavy metals, making it more difficult to refine into gasoline and other high value fuel products but less costly to purchase. The Upgrade Project also included expansion of the Refinery's reformulated gasoline and low sulfur diesel production capability. The Upgrade Project, which cost approximately $1.1 billion, was funded through a combination of approximately $485 million in capital contributions to LCR by CITGO (including cash contributions for financing costs and reinvestment of operating cash distributions), a $450 million construction loan credit facility (the "Construction Facility") provided by a group of banks, and $166 million and $16 million in subordinated loans to LCR from Lyondell and CITGO, respectively. In exchange for CITGO's Upgrade Project capital contributions, together with an additional $130 million in equity contributions CITGO had previously made to LCR, CITGO's participation interest in LCR increased effective April 1, 1997, and is currently 41.25 percent. CITGO has a one-time option expiring in the year 2000 to increase its participation interest in LCR up to 50 percent by making an additional equity contribution. 22 The following table outlines LCR's primary products, annual rated capacity and the primary uses for such products:
Product Rated Capacity(a) Primary Uses ------- ----------------- ------------ Gasoline(b)............. 120,000 barrels per day Automotive fuel Diesel (#2 Distillate)(b)......... 75,000 barrels per day Fuel for diesel cars and trucks Jet Fuel(b)............. 22,000 barrels per day Aviation fuel Benzene(c).............. 50 million gallons per year Nylon for clothing and consumer items; polystyrene for insulation, packaging and drink cups Toluene(d).............. 37 million gallons per year Gasoline component and chemical feedstock for producing benzene Paraxylene(d)........... 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink bottles and films for audio and video tapes Orthoxylene(d).......... 270 million pounds per year Plasticizer in products such as rainwear, shower curtains, toys and auto upholstery and an intermediate in paints and fiberglass Lube Oils(e)............ 4,000 barrels per day Automotive and industrial engine and lube oils, railroad engine additives and white oils for food-grade applications
- -------- (a) Unless otherwise specified, represents rated capacity at January 1, 1999. The term "rated capacity," as used in this table, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit's optimal daily output based on the design feedstock mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than the rated capacity. Capacities shown include 100 percent of the capacity of LCR, of which the Company owns 58.75 percent. (b) Produced by LCR and sold to CITGO. (c) Produced by LCR and sold to Equistar. (d) Produced by LCR and marketed for LCR by Equistar. (e) Effective January 1999, all lubricant products produced by LCR are sold to CITGO. Management of LCR LCR is a limited partnership organized under the laws of the state of Delaware, following its conversion from a Texas limited liability company effective December 31, 1998. Lyondell owns its interest in LCR through two wholly owned subsidiaries, one of which serves as a general partner and one of which serves as a limited partner. Similarly, CITGO owns its interest in LCR through two wholly owned subsidiaries, a general partner and a limited partner. LCR is governed by a Limited Partnership Agreement (the "LCR Partnership Agreement"), which provides for, among other things, the ownership and cash distribution rights of the partners. The LCR Partnership Agreement also provides that LCR is managed by a Partnership Governance Committee, which is composed of six representatives, three appointed by each general partner. Actions requiring unanimous consent of the representatives include, without limitation, amendment of the LCR Partnership Agreement, borrowing money, delegations of authority to committees, certain purchase commitments and capital expenditures. The day-to-day operations of the Refinery are managed by the executive officers of LCR as appointed by the Partnership Governance Committee. Agreements between Lyondell or CITGO and LCR LCR is a party to a number of agreements with Lyondell and CITGO. Lyondell currently performs administrative services for LCR pursuant to an Administrative Services Agreement, which is renegotiated annually. Under the terms of certain long-term agreements, CITGO will purchase all of the lubricant products manufactured by LCR. In conjunction therewith, CITGO will operate LCR's Birmingport, Alabama lubricants plant. 23 In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases from LCR substantially all of the refined products produced at the Refinery. Agreements between Equistar and LCR Prior to the formation of Equistar, Lyondell was a party with LCR to multiple agreements designed to preserve much of the synergy between the Refinery and the Channelview facility. Such agreements were assumed by Equistar from Lyondell effective December 1, 1997. Economic evaluations at the Channelview facility and the Refinery are based on sending products to the highest-value disposition, which may be local use, use at the other site, or third party sales. Certain Refinery products (propane, butane, low-octane naphthas, heating oils, and gas oils) can be used as feedstocks for olefins production, and certain Channelview facility olefins by-products can be processed by the Refinery into gasoline. Butylenes from the Refinery are tolled through the Channelview facility for the production of alkylate and MTBE for gasoline blending. Hydrogen from the Channelview facility is used at the Refinery for sulfur removal and product stabilization. In accordance with a marketing services agreement, Equistar currently serves as LCR's sole agent to market aromatics products produced by LCR. In addition, under a long-term agreement, Equistar and LCR perform certain manufacturing services for one another. Raw Materials In connection with its formation, LCR entered into a long-term crude supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by LCR as a feedstock for the Refinery is purchased under the Crude Supply Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the Republic of Venezuela. The Crude Supply Agreement pricing structure is designed to reduce the volatility of cash flow due to market fluctuations in the prices of crude oil or refined products. Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, up to 230,000 barrels per day of heavy crude oil, which constitutes approximately 88 percent of the Refinery's refining capacity of 260,000 barrels per day of crude oil. PDVSA Oil has a right of first refusal in certain circumstances to supply incremental amounts of crude oil above LCR's 230,000 barrel per day contractual obligation. As a result of the OPEC-mandated supply limitations discussed below, PDVSA's deliveries have been less than 230,000 barrels per day since August 1998 and are currently at 195,000 barrels per day. OPEC recently announced an agreement to further reduce OPEC oil production, which could result in some additional reductions in the volume of PDVSA's deliveries. The Crude Supply Agreement provides that Lyondell controls all of the Partnership's decisions and enforcement rights in connection with the Crude Supply Agreement so long as PDVSA has a direct or indirect ownership interest in LCR. The Crude Supply Agreement expires on December 31, 2017. The Crude Supply Agreement incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation and energy costs; (ii) certain actual costs; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed margins and deemed costs are adjusted periodically. These adjustments are based on inflation rates and energy costs. Adjustments to margins track, but are less than, inflation rates. Because deemed operating costs and the slate of refined products deemed to be produced from a given barrel of crude oil or other feedstocks do not necessarily reflect the actual costs and yields in any period and also because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Agreement varies depending on, among other things, the efficiency with which LCR conducts its operations from time to time. Although the Company believes that the Crude Supply Agreement reduces the volatility of LCR's earnings and cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher margins during periods when the market price of crude oil 24 is low relative to then current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR's costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. There are risks associated with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-United States affiliates of a sovereign nation. Specifically, it is impossible to predict how governmental policies may change under the current or any subsequent Venezuelan government. In addition, there are risks associated with enforcing judgments of United States courts against entities whose assets are located outside of the United States and whose management does not reside in the United States. Although the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including Venezuelan governmental or other actions restricting or otherwise limiting PDVSA Oil's ability to perform its obligations, any such alternative arrangements may not be as beneficial as the Crude Supply Agreement. In late April 1998, LCR received notification from PDVSA Oil of reduced delivery of crude oil related to announced OPEC production cuts. LCR began receiving the reduced allocation of crude oil from PDVSA Oil in August 1998. As noted above, OPEC has recently announced an agreement for additional production cuts, which could result in some further reductions in LCR's allocations. All of the crude oil supplied by PDVSA under the Crude Supply Agreement is produced in Venezuela, which has experienced economic difficulties and attendant social and political unrest in recent years. If the Crude Supply Agreement is modified or terminated or this source of crude is otherwise interrupted due to production difficulties, political or economic events in Venezuela or other factors, LCR could experience significantly greater volatility in its earnings and cash flows. The parties each have the right to transfer their interests in LCR to unaffiliated third parties in certain circumstances, subject to reciprocal rights of first refusal. In the event that CITGO were to transfer its interest in LCR to an unaffiliated third party, PDVSA Oil would have an option to terminate the Crude Supply Agreement. Depending on then current market conditions, any breach or termination of the Crude Supply Agreement could adversely affect LCR, since LCR would have to purchase all of its crude oil feedstocks in the merchant market, which could subject LCR to significant price fluctuations. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. However, the Company believes that this transaction holds substantial economic and other incentives for all parties to perform their obligations. Lyondell believes PDVSA's strategic interest in expanding its crude oil refining operations in the United States in order to increase the markets for its extra heavy crude oil and continued financial commitments of CITGO should provide a long-term economic incentive for all PDVSA affiliates to perform their obligations under the various agreements. Marketing and Sales The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics, lubricants and certain industrial products. On a weekly basis, LCR evaluates and determines the optimal product output mix for the Refinery, based on spot market prices and conditions. Under the Products Agreement, CITGO is obligated to purchase and LCR is required to sell 100 percent of the gasoline, jet fuel, heating oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases these products at prices based on industry benchmark indexes. For example, the price for gasoline is based on prices published by Platts Oilgram, an industry trade publication. The Products Agreement provides that Lyondell controls all of LCR's material decisions and enforcement rights in connection with the Products Agreement so long as CITGO has a direct or indirect ownership interest in LCR. The Products Agreement expires on December 31, 2017. Competition and Industry Conditions All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to CITGO. The refining business tends to be volatile as well as cyclical. Crude oil prices, which are impacted by worldwide political events and the economics of exploration and production in addition to refined products demand, are the largest source of this volatility. Demand for refined products is influenced by seasonal and short- 25 term factors such as weather and driving patterns, as well as by longer term issues such as energy conservation and alternative fuels. Industry refined products supply is also dependent on industry operating capabilities and on long-term refining capacity trends. However, management believes that the combination of the Crude Supply Agreement and the Products Agreement has the effect of stabilizing earnings and cash flows and substantially reducing the market-driven aspects of such volatility. With a capacity of approximately 260,000 barrels per day, the Company believes that the Refinery is North America's largest coking (i.e., non- asphalt producing) refinery capable of processing 100 percent 17 API crude oil. Among LCR's refining competitors are major integrated petroleum companies and domestic refiners that are owned by or affiliated with major integrated oil companies. Based on published industry data, as of January 1, 1999, there were 163 crude oil refineries in operation in the United States, and total domestic refinery capacity was approximately 16 million barrels per day. During 1998, LCR processed an average of 260,000 barrels per day of crude oil or over 1 percent of domestic capacity. Properties LCR owns the real property, plant and equipment which comprise the Refinery, located on approximately 700 acres in Houston, Texas. Units include a fluid catalytic cracking unit, cokers, reformers, crude distillation units, sulfur recovery plants and hydrodesulfurization units, as well as a lube oil manufacturing and packaging plant and an aromatics recovery unit. LCR also owns the real property, plant and equipment which comprise a lube oil blending and packaging plant in Birmingport, Alabama. LCR owns a pipeline used to transport gasoline, kerosene and heating oil from the Refinery to the GATX Terminal located in Pasadena, Texas to interconnect with common carrier pipelines. Employee Relations At December 31, 1998, LCR employed approximately 1,200 full-time employees. LCR also uses the services of independent contractors in the routine conduct of its business. Approximately 800 hourly workers are covered by a collective bargaining agreement between LCR and the Oil, Chemical and Atomic Workers Union that was recently renegotiated and expires in January 2002. LYONDELL METHANOL COMPANY, L.P. Overview Lyondell produces methanol through its 75 percent interest in Lyondell Methanol, of which Lyondell serves as the managing partner. The remaining 25 percent interest in Lyondell Methanol is held by MCNIC. Effective December 1, 1997, Equistar began serving as the operator of Lyondell Methanol pursuant to an operating agreement with Lyondell Methanol. Lyondell Methanol owns a methanol plant located within the Channelview facility. The methanol plant is a heat-integrated plant, which includes extraction capabilities for co- products such as hydrogen and fuel oil. Methanol is used to produce MTBE and a variety of chemical intermediates, including formaldehyde, acetic acid and methyl methacrylate. These intermediates are used to produce bonding adhesives for plywood as well as polyester fibers and plastics. Other end uses include solvents and antifreeze applications. Lyondell Methanol is advantageously located near the Gulf Coast customer base. Management of Lyondell Methanol Lyondell Methanol is a limited partnership organized under the laws of the State of Texas. Lyondell owns its interest in Lyondell Methanol through two wholly owned subsidiaries, one of which serves as a general partner and the managing partner of Lyondell Methanol and one of which serves as a limited partner. Similarly, 26 MCNIC owns its interest in Lyondell Methanol through two wholly owned subsidiaries, one a general partner and one a limited partner. Agreements between Equistar and Lyondell Methanol Certain agreements entered into by Lyondell and Lyondell Methanol were assigned to Equistar effective December 1, 1997. Equistar acts as operator of Lyondell Methanol pursuant to an operating agreement with Lyondell Methanol. In addition, Equistar sells natural gas to Lyondell Methanol and markets Lyondell Methanol's product pursuant to agreements with Lyondell Methanol. Lyondell Methanol also leases from Equistar the real property on which its methanol plant is located. Raw Materials Lyondell Methanol's plant processes natural gas feedstocks. Equistar is connected to a diverse natural gas supply network, and it purchases natural gas for use as fuel at its Channelview facility and sells natural gas to Lyondell Methanol as a feedstock for the methanol plant. Marketing and Sales Substantially all of the methanol output from Lyondell Methanol is sold to Equistar, which then sells it to third parties. The agreement between Lyondell Methanol and Equistar concerning such sales generally provides that Lyondell Methanol bears the market risk associated with such sales. Equistar's agreements with third parties for the sale of the methanol have initial terms ranging from two to three years and typically contain automatic one year term extension provisions. These contracts generally provide for monthly price adjustments based upon current market prices. Methanol is distributed by pipeline, railcar, truck, barge or ocean-going vessel. Competition and Industry Conditions The basis for competition in the methanol business is product deliverability, product quality and price. Lyondell Methanol competes with other large producers of methanol, including Methanex, Borden Chemicals and Plastics and Terra Industries. The rated capacity of Lyondell Methanol's processing unit at January 1, 1999 was 248 million gallons. Based on published rated production capacities, the Company believes that Lyondell Methanol is the third largest methanol producer in the United States. Methanol profitability is affected by the level of demand for products in which methanol is used, including MTBE and plywood (the production of which involves the use of formaldehyde), demand for which in turn is driven by the gasoline and housing markets, respectively. Methanol profitability is also affected by the price of its feedstock, natural gas. Properties Lyondell Methanol's only property is the methanol plant it owns, which is located within Equistar's Channelview complex on property leased from Equistar. Employee Relations Lyondell Methanol has no employees. Equistar serves as its operator and marketing agent. PROPERTIES AND EMPLOYEE RELATIONS Generally the Company's operations are conducted through the Acquired Business, Equistar, LCR and Lyondell Methanol. As of December 31, 1998, Lyondell, excluding the Acquired Business, Equistar, LCR and Lyondell Methanol, employed approximately 50 full-time employees. Lyondell's only facility, excluding the properties owned or leased by the Acquired Business and the joint ventures, is its leased corporate offices located in Houston, Texas. 27 INTEGRATION OF RECENTLY ACQUIRED AND COMBINED OPERATIONS The Company completed the acquisition of the Acquired Business in July 1998. The Company combined its petrochemicals and polymers business with that of Millennium to form Equistar in December 1997. Equistar was expanded by the addition of certain businesses previously held by Occidental in May 1998. The process of integrating the operations of the Acquired Business with the Company has only recently begun, and the process of integrating the operations of Equistar is not complete. As is the case with any integration of major businesses that previously operated independently, the integration processes for the Acquired Business and for Equistar will require the dedication of significant management and operational resources. The difficulties of combining operations may be exacerbated by the necessity of coordinating geographically separate organizations, integrating personnel with disparate business backgrounds, combining different transaction processing and financial reporting systems and processes and combining corporate cultures. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the combined enterprise's business. In addition, the Company may suffer a loss of key employees, customers or suppliers, loss of revenues, increases in costs or other difficulties, some of which may not have been foreseen. There can be no assurance that the Company will be able to realize the operating efficiencies, cost savings and other benefits that are sought from such transactions. Difficulties encountered in the integration processes could have a material adverse effect on the business and operations of the Company. SHARED CONTROL OF JOINT VENTURES All of the operations of the Company, other than those of the Acquired Business, are conducted through the Company's joint ventures. The Company shares control of these joint ventures with unaffiliated third parties. The Company's forecasts and plans with respect to these joint ventures assume that its joint venture partners will observe their obligations with respect to the joint ventures. In the event that any of the Company's joint venture partners do not observe their commitments, it is possible that the affected joint venture would not be able to operate in accordance with its business plans or that the Company would be required to increase its level of commitment in order to give effect to such plans. As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn the business and operations of the Company. OPERATING HAZARDS The occurrence of material operating problems, including, but not limited to, the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on the Company as a whole, during and after the period of such operational difficulties. The Company's revenues are dependent on the continued operation of its various production facilities (including the ability to complete construction projects on schedule). The Company's operations are subject to the usual hazards associated with chemical manufacturing and refining and the related storage and transportation of feedstocks, products and wastes, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, remediation complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Furthermore, the Company is also subject to present and future claims with respect to workplace exposure, workers' compensation and other matters. The Company maintains property, business interruption and casualty insurance which it believes is in accordance with customary industry practices, but it is not fully insured against all potential hazards incident to its business. 28 ENVIRONMENTAL MATTERS The production facilities of Lyondell, Equistar, LCR and Lyondell Methanol are generally required to have permits and licenses regulating air emissions, discharges to water and generation, storage, treatment and disposal of hazardous wastes. Companies such as Lyondell, its subsidiaries and its joint ventures that are permitted to treat, store or dispose of hazardous waste and maintain underground storage tanks pursuant to the Resource Conservation and Recovery Act ("RCRA") also are required to meet certain financial responsibility requirements. The Company believes that its subsidiaries and its joint ventures have all permits and licenses generally necessary to conduct its business or, where necessary, are applying for additional, amended or modified permits and that it meets applicable financial responsibility requirements. The policy of each of Lyondell, Equistar, LCR and Lyondell Methanol is to be in compliance with all applicable environmental laws. Lyondell and Equistar also are each committed to Responsible Care(R), a chemical industry initiative to enhance the industry's responsible management of chemicals. The Company's subsidiaries and joint ventures (together with the industries in which they operate) are subject to extensive federal, state, local and foreign environmental laws and regulations concerning emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, and inspection and enforcement policies and compliance costs therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Some risk of environmental costs and liabilities is inherent in particular operations and products of the Company, its subsidiaries and its joint ventures, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the capital expenditures and risks described above, the Company does not expect that it, its subsidiaries or its joint ventures will be affected differentially from the rest of the petrochemicals and refining industry. Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of feedstocks and finished products and the costs of the storage and disposal of water. Also, "Superfund" statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including the Company) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposed site. In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. In the years ended December 31, 1998 and 1997, the Company, its subsidiaries and its joint ventures spent, in the aggregate, approximately $22 million and $13 million, respectively, for environmentally related capital expenditures at existing facilities. The 1998 amount includes the full twelve-months' spending of the acquired ARCO Chemical business. In 1999, the Company currently estimates that environmentally related capital expenditures at existing subsidiary and joint venture facilities will be approximately $27 million. The Company does not anticipate that environmentally related capital expenditures at subsidiary and joint venture facilities in 2000 will be materially different than in 1999. The timing and amount of these expenditures are subject to regulatory and other uncertainties described above as well as obtaining the necessary permits and approvals. For periods beyond 2000, additional environmentally related capital expenditures will be required, although the Company cannot accurately predict the levels of such expenditures at this time. The Refinery contains on-site solid-waste landfills which were used in the past to dispose of waste generated at this facility. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to this facility. The Company is also subject to certain assessment and remedial actions at the Refinery under RCRA. In addition, the Company negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination 29 at the Refinery. The Company is also responsible for a portion of the remediation of certain off-site waste disposal facilities. The Company's policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the responsible parties under applicable statutes. The Company, its subsidiaries and its joint ventures, to the extent appropriate, have reserved amounts (without regard to potential insurance recoveries or other third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures at manufacturing facilities and off-site waste disposal facilities based upon their interpretation of current environmental standards. In the opinion of management, there is no material range of loss in excess of the amount recorded. Based on the establishment of such reserves, and the status of discussions with regulatory agencies described in this paragraph, the Company does not anticipate any material adverse effect upon its financial statements or competitive position as a result of compliance with the laws and regulations described in this or the preceding paragraphs. See also Item 3-- Legal Proceedings and Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Legal Proceedings Litigation Matters The Company, its subsidiaries and its joint ventures are, from time to time, defendants in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, the Company does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on the business or financial condition of the Company. See Note 18 of Notes to Consolidated Financial Statements. Although Lyondell, its subsidiaries and its joint ventures are involved in numerous and varied legal proceedings, a significant portion of its outstanding litigation arose in three contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by the respective entities; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; and (3) claims for personal injury and/or property damage and air, noise and water pollution allegedly arising out of operations. Environmental Matters From time to time the Company receives notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although the Company has not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs). In connection with the transfer of assets and liabilities from ARCO to the Company in 1988, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement, updated in 1997 (the "Revised Cross-Indemnity Agreement"), whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities that may arise out of pending and future lawsuits. For current and future cases related to Company products and Company operations, ARCO and the Company bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based on years of ownership during the relevant time period. The party with the most significant potential liability exposure is responsible for case 30 management and associated costs while allowing the non-case-managing party to protect its interests. Under the Revised Cross-Indemnity Agreement, the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to the Revised Cross-Indemnity Agreement will not have a material adverse effect upon the Consolidated Financial Statements of the Company. Pursuant to the terms of the Revised 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. As of December 31, 1998, the Company has accrued $9 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs associated with the above-mentioned sites. The costs 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 reserve has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure to environmental matters. In connection with its acquisition of ARCO Chemical, the Company is successor 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 oxygenates and polystyrenics businesses of ARCO Chemical (the "Former ARCO Businesses"), including liabilities under laws relating to the protection of the environment and the workplace and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the Former ARCO Businesses. ARCO also indemnified ARCO Chemical for certain federal, foreign, state and local taxes that might be assessed upon audit of the operations of the Former ARCO Businesses for periods prior to July 1, 1987. The Acquired Business' environmental liability totaled $39 million at December 31, 1998 based on the Company's latest assessment of potential future remediation costs. A portion of the liability is related to the Beaver Valley plant site, located in Monaca, Pennsylvania. ARCO Chemical sold the Beaver Valley plant assets to NOVA Chemicals Inc. ("NOVA") on September 30, 1996, but retained responsibility for remediation of the land. Final approval of the remediation methods has been granted by the Pennsylvania Department of Environmental Protection ("PADEP") based upon risk assessment studies submitted by the Company. The Company succeeded to an agreement with Beazer East, Inc. ("Beazer") whereby Beazer has agreed to pay for approximately 50 percent of the Beaver Valley plant site remediation costs. The Company has also succeeded to an agreement with Beazer and the U.S. government whereby the government will pay 28.5 percent of the costs incurred by the Company and Beazer for remediation of substantial portions of the Beaver Valley site. The remainder of the liability is related to four other plant facilities, including the Channelview facility, and one federal Superfund site for amounts ranging from $2 million to $18 million per site. ARCO Chemical was involved in administrative proceedings or lawsuits relating to a minimal number of other Superfund sites. However, the Company estimates, based on currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts accrued are expected to be paid out over the next five to ten years. The Company has relied upon remedial investigation/feasibility studies ("RI/FS") at each site of the Acquired Business as a basis for estimating remediation costs at the site. RI/FS or preliminary assessments have been completed at most of the sites. However, selection of the remediation method and the cleanup standard to be applied are, in most cases, subject to approval by the appropriate government authority. Accordingly, the Company may have possible loss contingencies in excess of the amounts reserved to the extent the scope of remediation required, the final remediation method selected and the cleanup standard applied vary from the assumptions used in estimating the liability. The Company estimates that the upper range of these possible loss contingencies should not exceed the amount accrued by more than $65 million. 31 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of Registrant as of February 1, 1999.*
Name, Age and Present Business Experience During Past Position with Lyondell Five Years and Period Served as Officer(s) ---------------------- ------------------------------------------ Dan F. Smith, 52.............. Mr. Smith was named Chief Executive Officer and Director, President and President in December 1996. Mr. Smith has been a Chief Executive Officer Director since 1988. Mr. Smith served as President and Chief Operating Officer of the Company from 1994 to December 1996. Prior to 1994, Mr. Smith held various positions including Executive Vice President, Chief Financial Officer of the Company, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for the Company and the Lyondell Division of ARCO. Mr. Smith is a Director of Cooper Industries and ChemFirst, Inc. Van Billet, 44................ Mr. Billet was appointed Vice President and Vice President and Controller Controller in July 1998. Mr. Billet previously served as Vice President and Controller of ARCO Chemical since March 1997. He served as Corporate Controller of ARCO Chemical from July 1993 to January 1995, and Manager of Planning and Analysis for Performance Chemicals and Business Development from January 1995 to March 1997. T. Kevin DeNicola, 44......... Mr. DeNicola has been Vice President Corporate Vice President, Corporate Development since April 1998, overseeing Development strategic planning and investor relations. From 1996 until April 1998, Mr. DeNicola was Director of Investor Relations of Lyondell. Mr. DeNicola served as Ethylene Products Manager of Lyondell from 1993 until 1996. Mr. DeNicola also serves as a member of the owners committees of both Equistar and LCR. Edward J. Dineen, 44.......... Mr. Dineen was appointed Senior Vice President, Senior Vice President, Urethanes and Performance Chemicals in July Urethanes and 1998. Prior to this position, he served as Vice Performance Chemicals President, Performance Products and Development for ARCO Chemical beginning in June 1997. He served as Vice President, Planning and Control for ARCO Chemical European Operations from 1993 until his appointment as Vice President, Worldwide CoProducts and Raw Materials in 1995. Morris Gelb, 52............... Mr. Gelb was appointed to his current position Executive Vice President and in December 1998. Previous to this appointment, Chief Operating Officer he served as Senior Vice President, Manufacturing, Process Development and Engineering of Lyondell from July 1998. He was named Vice President for Research and Engineering of ARCO Chemical in 1986 and Senior Vice President of ARCO Chemical in July 1997.
32
Name, Age and Present Business Experience During Past Position with Lyondell Five Years and Period Served as Officer(s) ---------------------- ------------------------------------------ John Hollinshead, 49.......... Mr. Hollinshead was appointed to his current Vice President, Human position in July 1998. Previous to this Resources appointment, he was Director, Human Resources, Manufacturing and Engineering for Equistar from 1997. Mr. Hollinshead served as Manager, Human Resources with Lyondell from 1985 to 1997. Allen C. Holmes, 51........... Before appointment to his current position in Vice President, Corporate July 1998, Mr. Holmes served as Vice President, Services Tax and Business Systems, with the responsibility for tax planning and compliance, business systems and administrative services for Lyondell. Prior to joining Lyondell, Mr. Holmes served as Vice President and General Tax Officer of ARCO from 1991 until May 1998. Alan D. Kornfeld, 56.......... Mr. Kornfeld was appointed to his current Vice President, Strategic position in July 1998. From 1992 until 1994, he Ventures served as Vice President, Styrenics of ARCO and Latin America Chemical, from 1995 to 1996 he was Vice President, Plastics for ARCO Chemical, and from 1996 to 1997 he was Vice President, Isocyanates. Most recently he served as Vice President, Basic Chemicals for ARCO Chemical. Daniel A. Mariano, 55......... Mr. Mariano was appointed to his current Vice President, Supply Chain position in July 1998. From 1991 to 1995 he served as Director, Worldwide Business Management of ARCO Chemical, and from 1996 to 1997 he was Director of Worldwide Raw Materials for ARCO Chemical. Most recently, Mr. Mariano was Vice President, Supply Chain for ARCO Chemical. Robert J. Millstone, 55....... Before appointment to his current position in Vice President and General July 1998, Mr. Millstone served as Vice Counsel President and General Counsel of ARCO Chemical since 1995. He was Associate General Counsel of ARCO Chemical from January 1989 to December 1994, and Secretary of ARCO Chemical from 1990 to 1998. Jeffrey R. Pendergraft, 50.... Mr. Pendergraft was named Executive Vice Executive Vice President and President and Chief Administrative Officer in Chief Administrative Officer July 1998. Prior to this appointment, he served as Senior Vice President of the Company since May 1993 and as Vice President, General Counsel and Secretary of the Company beginning in 1988. Joseph M. Putz, 57............ Mr. Putz was appointed to his current position Senior Vice President, in July 1998. Mr. Putz served as Vice President, Special Assignments Control and Administration of Lyondell (at that time a division of ARCO) beginning in 1987 until December 1997, when he was named Senior Vice President, Finance and Administration of Equistar. Edward W. Rich, 48............ Mr. Rich was named Vice President, Finance and Vice President, Finance and Treasurer in January 1998. Previously, Mr. Rich Treasurer served as Treasurer of Dow Corning Corporation from February 1993 to January 1998. Prior to February 1993, Mr. Rich held various financial and legal positions with The Dow Chemical Company.
33
Name, Age and Present Business Experience During Past Position with Lyondell Five Years and Period Served as Officer(s) ---------------------- ------------------------------------------ Lyndon Stanton, 55............ Prior to appointment to his current position Vice President and President with the Company in July 1998, Mr. Stanton of served in various managerial positions with ARCO Lyondell European Operations Chemical Europe since 1979. He was President, European Operations from 1994 until 1997, and Vice President, Business Management from 1991 until 1994. Debra L. Starnes, 46.......... Ms. Starnes has served in various engineering Senior Vice President, and managerial positions with the Company since Intermediate Chemicals 1975. Before her most recent appointment in July 1998, she served as Senior Vice President, Polymers for Equistar since December 1997. Ms. Starnes served as Lyondell's Vice President, Petrochemical Business Management and Marketing from 1992 to 1994, Senior Vice President of the Company from 1994 to 1995, and Senior Vice President, Polymers from 1995 until 1997. Robert E. Tolbert, 56......... Mr. Tolbert was appointed to his current Vice President, Information position in July 1998. He served as General Services Auditor for ARCO from 1991 until 1995, when he was named Vice President, Information Services for ARCO Chemical. Edward V. Zenzola, 55......... Mr. Zenzola joined ARCO Chemical in 1969 and Vice President and President held various financial positions in its United of States operations. He assumed responsibility for Lyondell Asia Pacific ARCO Chemical's Japan operation upon appointment as President, ARCO Chemical Japan in 1993. Before appointment to his current position in July 1998, Mr. Zenzola served as President, ARCO Chemical Asia Pacific since 1996.
- -------- * The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors. Item 4. Submission of Matters to a Vote of Security Holders None. 34 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Common Stock is listed on the New York Stock Exchange. The reported high and low sale prices of the Common Stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from January 1, 1997 through December 31, 1998, inclusive, were as set forth below.
Period High Low ------ ---- --- 1997: First Quarter......................................... 25 1/2 21 5/8 Second Quarter........................................ 23 5/8 18 3/8 Third Quarter......................................... 27 3/8 21 7/8 Fourth Quarter........................................ 27 1/4 23 15/16 1998: First Quarter......................................... 36 1/8 23 1/4 Second Quarter........................................ 38 1/8 26 1/2 Third Quarter......................................... 30 15/16 19 1/2 Fourth Quarter........................................ 22 7/16 15
On March 1, 1999, the closing price of the Common Stock was $13 3/8, and there were approximately 1,860 holders of record of the Common Stock. During the last two years, Lyondell has declared $.225 per share quarterly cash dividends (which were paid in the subsequent quarter). The declaration and payment of dividends is at the discretion of the Board of Directors. The future declaration and payout of dividends and the amount thereof will be dependent upon the Company's results of operations, financial condition, cash position and requirements, investment opportunities, future prospects and other factors deemed relevant by the Board of Directors. Subject to these considerations and to the legal considerations discussed in the following paragraph, the Company currently intends to distribute to its Stockholders cash dividends on its Common Stock at a quarterly rate of $.225 per share. During 1998, the Company paid $70 million in dividends. Certain debt instruments which were assumed by Equistar, but as to which Lyondell remains an obligor provide that the holders of such debt may, under certain limited circumstances, require the obligor to repurchase the debt ("Put Rights"). Among other things, the Put Rights may be triggered by the making by either of Lyondell or Equistar of certain unearned distributions to stockholders or partners, respectively, other than regular dividends, which are followed by a specified decline in public ratings on such debt. Regular dividends are those quarterly cash dividends determined in good faith by the Board of Directors (whose determination is conclusive) to be appropriate in light of the Company's results of operations and capable of being sustained. Lyondell's credit facilities also could limit the Company's ability to pay dividends under certain circumstances. See Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations. The operation of certain of the Company's employee benefit plans may result in the issuance of Common Stock upon the exercise of options granted to employees of the Company, including its officers. Although the terms of these plans provide that additional shares may be issued to satisfy the Company's obligations under the options, the Company generally intends to cause Common Stock to be repurchased in the market or to be issued out of treasury in order to satisfy these obligations. 35 Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31 ------------------------------------ Millions of dollars, except per share data 1998(a) 1997(b) 1996 1995 1994 - ------------------------------------------ ------- ------- ------ ------ ------ Results of Operations Data: Sales and other operating revenues...... $1,447 $2,878 $5,052 $4,936 $3,857 Income from equity investments.......... 256 132 -- -- -- Net income.............................. 52 286 126 389 223 Basic and diluted earnings per share.... .67 3.58 1.58 4.86 2.78 Dividends per share..................... .90 .90 .90 .90 .90 Balance Sheet Data: Total assets............................ 9,225 1,559 3,276 2,606 1,663 Long-term debt, less current maturities............................. 5,391 345 1,194 807 707
- -------- (a) The financial information for 1998 includes five months of operating results for ARCO Chemical Company (acquired as of July 28, 1998 and accounted for using the purchase method of accounting). It also includes twelve months of Equistar Chemicals, LP, LYONDELL-CITGO Refining LP and Lyondell Methanol Company, L.P., each accounted for as an equity investment. (b) The financial information for 1997 includes twelve months of operating results for Lyondell and Lyondell Methanol Company, L.P. It also includes twelve months of LYONDELL-CITGO Refining LP and one month of Equistar Chemicals, LP, each accounted for as an equity investment. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the notes thereto. GENERAL Lyondell took major strategic actions during 1997 and 1998 to strengthen the Company's position in the chemicals industry. In December 1997, Equistar was formed by combining the olefins and polymers businesses of Lyondell and Millennium. In May 1998, Equistar was expanded with the addition of the olefins and oxygenated chemicals businesses of Occidental Chemical. During the third quarter 1998, Lyondell acquired ARCO Chemical, the world's largest producer of PO and a leading worldwide producer and marketer of polyether polyols, PG, PGE, TDI, SM and MTBE. The operations of the Acquired Business form the Company's intermediate chemicals and derivatives business segment. Lyondell's petrochemicals, polymers and refining segments are conducted through its interests in Equistar and LCR. The methanol business conducted through Lyondell Methanol is not a reportable segment for financial disclosure purposes. Lyondell accounts for its investments in Equistar, LCR and Lyondell Methanol using the equity method of accounting. In addition to the discussion of Lyondell's actual results, a discussion of the unaudited pro forma combined historical results of Lyondell and ARCO Chemical (see Note 3 of Notes to Consolidated Financial Statements) is presented in order to facilitate the understanding of operating results. Also, actual 1998 Equistar operating results are compared to the combined operating results of the businesses contributed to Equistar by Lyondell and Millennium for the first eleven months of 1997, together with Equistar's December 1997 operating results. 36 RESULTS OF OPERATIONS Lyondell Chemical Company Overview Net income for 1998 was $52 million compared with $286 million in 1997 and $126 million in 1996. Earnings for 1998 included unusual charges of $48 million after tax, related to the acquisition of ARCO Chemical, the renegotiated labor agreement at LCR and the formation of Equistar, compared to unusual charges of approximately $25 million after tax in 1997 related to the formation of Equistar. Excluding the unusual charges, the decline in net income of $211 million for 1998 versus 1997 was primarily due to lower prices and margins in the petrochemicals and polymers segments of Equistar. Increases in operating income from the Acquired Business and the refining segment of LCR were more than offset by higher interest expense as a result of entering into the Credit Facility. The earnings increase in 1997 versus 1996 was primarily due to higher sales margins and volumes for petrochemicals and methanol and a higher 1997 LCR profit contribution as increased volumes of higher-margin heavy crude oil were processed as a result of the completion of the Upgrade Project. Earnings for 1996 also included an approximate $20 million after-tax gain from the sale of an undivided interest in the methanol facility. For the fourth quarter 1998, Lyondell reported a loss of $27 million compared to a third quarter 1998 loss of $15 million. The fourth quarter 1998 loss included unusual after-tax charges of $6 million primarily related to a new agreement with the labor union at LCR and formation costs at Equistar. The new labor agreement at LCR is expected to result in future cost savings. The third quarter 1998 loss included unusual after-tax charges of $38 million related to the Acquisition and the formation of Equistar. The fourth quarter loss of $21 million, before unusual charges, compared to third quarter income of $23 million before unusual charges, primarily reflected lower operating income and higher interest expense versus the third quarter. Before unusual charges, operating income was $119 million in the fourth quarter 1998 compared to $148 million in the third quarter 1998. The intermediate chemicals and derivatives segment showed improvement due to inclusion of a full three months of operations in the fourth quarter versus only two months in the third quarter. On a comparable three-month basis, the intermediate chemicals and derivatives segment showed a decline as lower MTBE margins and seasonally lower MTBE volumes more than offset the benefits from higher sales volumes of core products, defined as PO and derivatives and TDI. Results for the petrochemicals and polymers businesses of Equistar reflected lower prices and margins as well as the effects of the acceleration of a scheduled plant turnaround. The timing of this turnaround was accelerated in light of the current down cycle in those segments. LCR operating results were negatively affected by a fire at a unit and a full quarter of cutbacks of Venezuelan crude oil supplies. Higher interest expense reflects a full three months of charges in the fourth quarter under the Credit Facility. Revenues, Operating Costs and Expenses--The operating results for 1998 include the Company's income from equity investments in Equistar, LCR and Lyondell Methanol and five months of operating results of the Acquired Business. The Acquisition was accounted for as a purchase and the operating results reflect the depreciation and amortization of the estimated fair value of the assets, including the amortization of $1.4 billion of goodwill over its estimated forty-year life. The Company's operating results for 1997 include: eleven months of operating results of the Company's petrochemicals and polymers segments, which were contributed to Equistar on December 1, 1997; one month of income from its equity investment in Equistar; the Company's income from its equity investment in LCR; and the operating results of Lyondell Methanol. For 1996, each of the segments was fully consolidated as part of Lyondell. Unusual Charges--Unusual charges of $82 million in 1998 increased versus $40 million in 1997 primarily due to the write-off of $57 million of costs assigned to in-process research and development in connection with the acquisition of ARCO Chemical. The Company's pro rata share of costs of a new labor agreement at LCR was more than offset by a decrease in the Company's pro rata share of Equistar formation costs. 37 INTEREST EXPENSE--Interest expense was $287 million in 1998, $75 million in 1997 and $81 million in 1996. Interest expense in 1998 increased versus 1997 primarily due to interest on the $6.5 billion of debt drawn under the Credit Facility on July 28, 1998. The decrease in 1997 versus 1996 is primarily due to the assumption by Equistar of Lyondell indebtedness as of December 1, 1997. INCOME TAX--The effective tax rate for 1998 was 41.5 percent compared to 37.3 percent in 1997 and 35.7 percent in 1996. The effective tax rate increased in 1998 versus 1997 due to the Company's current inability to claim foreign tax credits and limitations on the use of net operating losses for state tax purposes. The effective income tax rate increased in 1997 versus 1996 due to the non-deductibility of certain executive compensation. PRO FORMA RESULTS OF THE COMPANY AND ARCO CHEMICAL The following is a discussion of the operating results for 1998 and 1997 included in the unaudited pro forma combined historical results of the Company and ARCO Chemical (see Note 3 of Notes to Consolidated Financial Statements). The unaudited pro forma combined historical results give effect to the Acquisition, the Credit Facility drawdown in connection with the Acquisition, the formation of Equistar and the deconsolidation of Lyondell Methanol as of the beginning of 1998 and 1997, respectively. The following table sets forth sales volumes for this segment on a pro forma basis:
FOR THE YEAR ENDED FOURTH THIRD DECEMBER 31 QUARTER QUARTER ----------- IN MILLIONS 1998 1998 1998 1997 ----------- ------- ------- ----- ----- VOLUMES (A): Core products (pounds)........................ 1,077 971 4,159 4,135 Co-products: SM (pounds)................................. 819 698 2,912 2,577 TBA and derivatives (gallons)............... 245 256 995 1,054
- -------- (a)Volumes are actual for the fourth quarter 1998 and pro forma for the third quarter 1998 and for the years ended December 31, 1998 and 1997. Core products include PO, PO derivatives and TDI. REVENUES--Pro forma revenues of $3.6 billion for 1998 decreased 11 percent compared to pro forma revenues of $4.0 billion for 1997. The decrease was primarily due to lower average sales prices in 1998, reflecting a combination of downward pressure from lower feedstock costs, ongoing competition in PO derivatives and TDI markets, the negative effects of a stronger U.S. dollar on foreign sales, and the effects of weaker Asian markets. Core product volumes were essentially flat versus 1997 as stronger demand for certain PO derivatives in the U. S. and Europe was offset by lower volumes in Asian markets. Increased SM volumes in 1998 primarily reflect higher contractual offtake under long-term SM processing arrangements. TBA and derivatives volumes decreased in 1998 by six percent, mainly due to lower MTBE demand. INCOME FROM EQUITY INVESTMENTS--Pro forma income for 1998 was $256 million compared to pro forma income of $526 million for 1997. The decrease of $270 million was primarily due to lower margins for petrochemicals and polymers as a result of declining prices, partially offset by higher earnings from LCR as greater volumes of extra heavy crude oil were processed in 1998. OPERATING INCOME--Pro forma operating income of $631 million in 1998 decreased $32 million compared to $663 million in 1997. The 1998 period included unusual charges of $62 million, primarily related to the write-off of in-process research and development projects of the Acquired Business and Equistar formation costs. The 1997 period included unusual charges of $215 million, primarily related to restructuring and other costs of ARCO Chemical and Equistar formation costs. Excluding these items, operating income decreased $185 million. The lower income from equity investments was only partly offset by higher operating income of ARCO Chemical. The improved income of ARCO Chemical and the Acquired Business in 1998 was primarily due to higher core product margins and lower fixed costs. Core product margins improved as feedstock costs decreased more than sales prices. The fixed cost decrease reflected the benefits of the cost reduction program and lower maintenance expense due to fewer scheduled plant turnarounds. 38 Net income--Pro forma net income for 1998 was $42 million compared with $27 million for 1997. Excluding the effects of the unusual charges, pro forma net income decreased by $84 million in 1998 as lower equity income more than offset improved operating results and lower foreign exchange losses of the Acquired Business. Intermediate Chemicals and Derivatives Segment Comparing the fourth quarter 1998 to the full pro forma third quarter 1998 of the Acquired Business, the benefit from an increase in sales volumes for core products was more than offset by lower MTBE margins and volumes. Core product volumes were 11 percent higher due to increased demand for urethane products, including polyols and TDI, in the automotive and housing markets. All three regions, the U.S., Europe and Asia, showed volume improvement, particularly the Asia region, which showed nearly a 50 percent increase. MTBE margins declined 15 cents per gallon for the fourth quarter 1998 versus the third quarter primarily due to lower worldwide gasoline prices, which pushed down MTBE prices, as well as higher raw material costs in Europe. Equistar Chemicals, LP Selected Pricing Information--The following graphs present selected 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 December 1998. Chart indicates 1996 prices increased steadily, with an annual average of the month-end prices of 23.33 cents per pound. 1997 prices were relatively flat, although slightly decreasing, with an annual average of the month-end prices of 27.42 cents per pound. 1998 prices declined steadily with an annual average of the month-end prices of 21.17 cents per pound. Selected month-end average prices are as follows: January 1996--19.75 cents per pound, December 1996--26.25 cents per pound, December 1997--26.25 cents per pound, December 1998--19.00 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 December 1998. Chart indicates volatile, but increasing prices in 1996 with the chart's peak occurring at $24.32 per barrel in December 1996. Annual average month-end prices were $21.35 per barrel in 1996. Prices decreased in 1997 with an annual average of the month-end prices of $19.35 per barrel. Prices declined steadily in 1998 with a low point of $10.02 per barrel in December 1998 and an annual average of the month-end prices of $12.94 per barrel. Selected month-end average prices are as follows: January 1996--$18.39 per barrel, December 1996-- $24.32 per barrel, December 1997--$17.13 per barrel, December 1998--$10.02 per barrel. Actual 1998 versus Combined 1997 Results; Actual 1997 versus Actual 1996 Results Due to the formation of Equistar, Lyondell's change to the equity method of accounting for its investment in Equistar in December 1997, and the resulting difficulty in comparing historically reported financial data, the following review of the petrochemicals and polymers segments is provided on a dual basis. The actual 1998 twelve months operating results reported by Equistar, including the Occidental Contributed Business from May 15, 1998, are compared to the combined 1997 historical results of the businesses contributed to Equistar by Lyondell and Millennium for the eleven months ended November 30, 1997 and for the one month ended December 31, 1997 of Equistar. The actual 1997 operating results reported by the petrochemicals and polymers segments of Lyondell for eleven months and by Equistar for one month are then compared to the actual 1996 operating results of the petrochemicals and polymers segments of Lyondell. The combined results for 1997 are not intended to and do not represent pro forma results of Equistar. In addition, they may not be indicative of results that will be obtained in the future. 39 The following tables for the petrochemicals and polymers segments set forth: sales volumes for major products; revenues, including intersegment sales; and operating income of these segments as reported by Equistar for 1998 and, previously, by Lyondell for 1997 and 1996; as well as Lyondell's income from its equity investment in Equistar, before unusual charges, for the twelve months ended December 31, 1998, and the one month ended December 31, 1997: Petrochemicals Segment
For the year ended December For the year ended 31 December 31 --------------- ------------------ Combined In millions 1998 1997 1997 1996 ----------- ------ -------- --------- --------- Volumes: Selected petrochemicals products: Olefins (pounds) Equistar........................... 16,716 9,429 737 -- Lyondell........................... -- -- 8,084 7,973 Aromatics (gallons) Equistar........................... 271 193 17 -- Lyondell........................... -- -- 176 188 Revenues: Equistar........................... $3,463 $3,866 $ 284 $ -- Lyondell........................... -- -- 2,532 2,293 Operating income: Equistar operating income.......... $ 319 $ 684 $ 47 $ -- ====== ====== ========= ========= Lyondell equity income (a)......... $ 159 $ 28 $ -- Lyondell operating income.......... -- 444 240 ------ --------- --------- Segment total.................... $ 159 $ 472 $ 240 ====== ========= =========
- -------- (a) Lyondell contributed its petrochemicals business to Equistar and began to account for this investment using the equity method of accounting on December 1, 1997. Revenues--Revenues for 1998 declined versus combined 1997 revenues, primarily due to lower industry sales prices for ethylene, propylene and co- products, partially offset by increased sales volumes as a result of the addition of the Occidental Contributed Business in May 1998. The decrease in sales prices is primarily attributable to increased industry capacity and downward pressure on sales prices as a result of lower feedstock costs. The sales price decreases began in the fourth quarter of 1997 and continued their downward trend through most of 1998. Revenues, as reported by Lyondell, increased in 1997 versus 1996 due primarily to increases in industry sales prices for ethylene and co-products. Sales prices in 1997 showed significant increases over 1996 as strong demand from the polyolefins markets resulted in a tighter balance of supply and demand for olefins. The 1997 increase in sales prices also reflected cost increases for olefins feedstocks over the course of 1996. In addition, olefins sales volumes increased due to strong demand in the downstream markets as well as from planned and unscheduled industry turnarounds. Operating Income--Operating income decreased in 1998 versus combined 1997 primarily due to lower product margins as sales prices declined more than feedstock costs and, to a lesser extent, slightly higher fixed costs. The lower margins were partially offset by the addition of the Occidental Contributed Business in May 1998. Operating income, as reported by Lyondell, increased significantly in 1997 versus 1996 due to higher sales margins and volumes. Sales margins improved due to higher sales prices, resulting from stronger demand in the downstream polyolefins markets, and lower petrochemical feedstock costs. Stronger demand also resulted in increased sales volumes. 40 Polymers Segment
For the year ended December For the year ended 31 December 31 --------------- ------------------- Combined In millions 1998 1997 1997 1996 ----------- ------ -------- --------- --------- Volumes: Polymers products (pounds) Equistar........................... 6,488 6,132 167 -- Lyondell........................... -- -- 1,985 2,136 Revenues: Equistar........................... $2,058 $2,513 $ 186 $ -- Lyondell........................... -- -- 770 783 Operating income: Equistar operating income.......... $ 177 $ 233 $ 22 $ -- ====== ====== ========= ========= Lyondell equity income (a)......... $ 89 $ 13 $ -- Lyondell operating income.......... -- 82 97 ------ --------- --------- Segment total.................... $ 89 $ 95 $ 97 ====== ========= =========
- -------- (a) Lyondell contributed its polymers business to Equistar and began to account for this investment using the equity method of accounting on December 1, 1997. Revenues--Revenues decreased in 1998 versus combined 1997 as a result of decreases in industry sales prices. These sales price decreases were a result of excess industry supply and lower feedstock costs. The excess industry supply started during the fourth quarter of 1997 and continued in a downward trend through 1998. Revenues, as reported by Lyondell, increased in 1997 versus 1996 as higher industry sales prices for polyethylene were only partially offset by lower industry sales prices for polypropylene. Operating Income--Operating income for 1998 decreased versus combined 1997 primarily due to decreases in polymers sales prices, which more than offset decreases in polymers feedstock costs. Operating income, as reported by Lyondell, in 1997 was comparable to 1996. Unallocated Items Equistar's unusual charges, which are not allocated to either the petrochemicals or polymers segments, were $35 million and $42 million in 1998 and 1997, respectively. Both years included costs associated with the formation of Equistar and the consolidation of certain operations. These costs were paid by Equistar and allocated to the Partners in accordance with their ownership percentages. Fourth Quarter 1998 versus Third Quarter 1998 Equistar reported a pretax loss of $51 million for the fourth quarter 1998 compared to pretax income of $29 million in the third quarter 1998. The decrease was attributable to earnings declines in both the petrochemicals and polymers segments. In petrochemicals, decreased ethylene and co-product sales prices were only partially offset by lower feedstock prices. Also contributing to the petrochemicals earnings decrease in the fourth quarter was the turnaround of the LaPorte facility. Due to current market conditions, Equistar elected to both accelerate the timing and extend the length of the turnaround. The turnaround started in mid-November 1998 and continued through mid-February 1999, rather than as previously scheduled for the third quarter 1999. In polymers, earnings also decreased primarily as a result of sales price declines, which exceeded the price decrease of the ethylene feedstock. In addition, the scheduled turnaround and expansion of the Victoria facility had a negative impact on fourth quarter polymers earnings. This project was completed during the fourth quarter 1998 and increased the plant's annual HDPE capacity by approximately 125 million pounds. Earnings were also negatively impacted by the reduction of inventories. As a result of these actions, earnings were unfavorably affected by over $20 million. However Equistar reduced total working capital during the fourth quarter by approximately $207 million. In addition, Equistar realized a reduction of working capital of approximately $130 million from the sale of receivables in December 1998 under a three-year revolving securitization agreement. 41 LYONDELL-CITGO Refining LP Refining Segment Lyondell's refining segment consists of the results of operations of LCR. Effective January 1, 1997, Lyondell began to account for its investment in LCR using the equity method of accounting. Lyondell's share of LCR's earnings before unusual charges for 1998 was $116 million compared to $102 million for 1997. LCR's results of operations were consolidated in 1996. The Company would have recorded $2 million in equity income had the Company followed the equity method of accounting for its investment in LCR during 1996. The narrative discussion that follows compares LCR's 1998 operating results to the information for 1997 and 1996. The following table sets forth sales volumes for LCR's refined products:
For the year ended December 31 -------------- Thousand barrels per day 1998 1997 1996 ------------------------ ---- ---- ---- Refined products: Gasoline................................................. 121 111 101 Diesel and heating oil................................... 79 68 47 Jet fuel................................................. 17 17 24 Aromatics................................................ 10 11 9 Other refined products................................... 103 93 82 --- --- --- Total refined products volumes......................... 330 300 263 === === ===
The following table sets forth processing rates at the Refinery for the periods indicated. Refinery runs for 1996 are primarily heavy crude oil, whereas the 1997 and 1998 refinery runs reflect higher volumes of extra heavy crude oil processed.
For the year ended December 31 -------------- Thousand barrels per day 1998 1997 1996 ------------------------ ---- ---- ---- Crude processing rates: Crude Supply Agreement--coked............................ 223 203 122 Other heavy crude oil--coked............................. 19 7 -- Other crude oil.......................................... 18 14 96 --- --- --- Total crude oil........................................ 260 224 218 === === ===
Revenues--Revenues for LCR, including intersegment sales, were $2.1 billion in 1998, $2.7 billion in 1997 and $2.8 billion in 1996. The decrease in 1998 versus 1997 primarily resulted from lower refined products prices, which declined as a result of lower industry crude prices. These decreases were partially offset by higher sales volumes as production levels increased, reflecting a full year's benefit from the Upgrade Project. The slight decrease in 1997 compared to 1996 primarily resulted from lower crude oil resales, lower refined products prices, and lower aromatics prices, particularly paraxylene. These decreases were partially offset by higher sales volumes as production levels increased after completion of the Upgrade Project in the first quarter 1997. Operating Income--LCR's operating income was $213 million in 1998, $181 million in 1997 and $4 million in 1996. The increase in 1998 versus 1997 reflected the benefits of the Upgrade Project, which resulted in higher average margins as higher volumes of extra heavy crude oil were processed in the coking mode. The Upgrade Project was completed in the first quarter 1997 and, initially, higher costs were incurred due to normal operational start-up activities, during which the Refinery did not operate at peak rates. Cost savings resulting from improved operational efficiency in 1998 were partly offset by higher depreciation expense attributable to the Upgrade Project. LCR's operating income improved in 1997 compared to 1996 due to improved margins 42 caused primarily by higher volumes of extra heavy crude oil processed in the coking mode under the Crude Supply Agreement. These improved margins were offset partially by higher production costs, primarily depreciation expense, and lower paraxylene margins. Interest Expense--LCR's net interest expense was $43 million in 1998, $35 million in 1997 and none in 1996. Interest expense on debt related to construction of the Upgrade Project was capitalized through its completion, including the first quarter of 1997 and the full year 1996. Fourth Quarter 1998 versus Third Quarter 1998 LCR had pretax income of $32 million in the fourth quarter 1998 compared to $54 million in the third quarter 1998. The decline in earnings was due to an unusual charge related to a new agreement with the labor union, a fire in a hydrotreater unit, and the full quarter impact of lower Venezuelan crude oil allocations. Beginning in August, LCR began receiving reduced allocations of crude oil from PDVSA due to announced cutbacks in crude oil production in Venezuela. While LCR was able to obtain alternate supplies of crude oil, the margin for these crude oils was lower than for the extra heavy Venezuelan crude oil purchased under the Crude Supply Agreement. Total crude oil processing rates averaged 273,000 barrels per day in the fourth quarter 1998 compared to 267,000 barrels per day in the third quarter 1998. The new labor agreement is expected to result in efficiency gains and cost savings over the next few years. Lyondell Methanol Company, L.P. Lyondell's share of Lyondell Methanol's earnings for 1998 was $6 million. The Company would have recorded approximately $43 million in income from its equity investment in Lyondell Methanol had the Company followed the equity method of accounting for its investment in Lyondell Methanol during 1997. The decrease in equity income in 1998 versus 1997 was due to significant declines in the sales prices of methanol beginning in the first quarter 1998. Increased supply due to new capacity, as well as weaker demand from the Far East, caused worldwide methanol price declines. FINANCIAL CONDITION Operating Activities--Lyondell's cash provided by operating activities totaled $263 million in 1998 compared to $269 million in 1997. Cash provided by operating activities in 1998 included $160 million of proceeds from the sale of domestic receivables in December 1998 under a three year revolving securitization agreement. Cash provided by operations in 1998 was negatively affected by the payment of liabilities associated with the Acquisition and the payment of accounts payable retained by Lyondell in the formation of Equistar in December 1997. Investing Activities--As of July 28, 1998, Lyondell completed the Acquisition for a total cost of approximately $5.9 billion, excluding assumed debt. The Company made capital expenditures of $64 million in 1998, primarily related to the Acquired Business. During August 1998, Lyondell announced the delay of construction of a propylene oxide plant ("PO-11") previously announced by ARCO Chemical. The previous plan called for the plant to start-up in late 2000. The Company currently anticipates that the additional capacity will be available in late 2002 or early 2003. Equistar's 1998 capital expenditures totaled $200 million, of which $88 million was Lyondell's pro rata share. LCR made 1998 capital expenditures of $61 million, of which Lyondell funded $35 million through loans to LCR. The Company's 1999 capital budget is $273 million, including its $123 million pro rata share of the joint ventures' capital budgets. Pursuant to its plans to divest certain assets, Lyondell announced, on February 25, 1999, the signing of a letter of intent for the sale of its aliphatic diisocyanates (ADI) business. On March 1, 1999, Equistar announced the signing of a letter of intent to sell its compounds and concentrates business. Neither sale is expected to have a material effect on Lyondell's consolidated financial statements. 43 Distributions in excess of earnings for 1998 were $403 million by Equistar, $20 million by LCR, and $12 million by Lyondell Methanol. The $403 million distribution from Equistar includes $197 million resulting from the Company's repayment of the $345 million note payable to Equistar. Financing Activities--During the third quarter 1998, the Company obtained a $7.0 billion Credit Facility of which $6.5 billion was drawn down in connection with the financing of the Acquisition. As part of the acquisition, Lyondell assumed approximately $870 million of ARCO Chemical debt. Borrowing under the Credit Facility of $6.5 billion was used for the purchase of all outstanding shares of ARCO Chemical stock; repayment of debt, including the $345 million note payable to Equistar, short-term borrowing of Lyondell and ARCO Chemical, and other long-term borrowing of ARCO Chemical; and payment of certain debt issuance costs. Cash used in other financing activities in 1998 consisted primarily of $59 million used to repurchase Common Stock. From time to time the Company purchases its shares in the market to issue under the Company's employee compensation and benefits plans, including stock option and restricted stock plans. In addition, the Company completed the stock buyback program authorized in September 1997 by the Board of Directors in the second quarter of 1998. A total of 2,567,051 shares were purchased under the stock buyback program for $75 million. The Company paid regular quarterly dividends of $.225 per share of common stock in 1998. In February 1999, Equistar completed an offering of senior unsecured notes in the principal amount of $900 million. The proceeds were primarily used to refinance existing indebtedness of Equistar. In late 1998, LCR postponed a planned debt refinancing. The postponement was due to bond market conditions and political change in Venezuela associated with the recent presidential elections. The proceeds of such refinancing would have been used to repay third party construction loans and subordinated loans made to LCR by Lyondell and CITGO with any remaining cash distributed to the partners. LCR intends to pursue the refinancing as soon as practical. Liquidity--As of December 31, 1998, the Company had outstanding consolidated debt of $7.0 billion and equity of $0.6 billion. Substantially all of the debt was incurred in July 1998 under the Credit Facility for the purpose of acquiring ARCO Chemical or was assumed as part of the Acquisition. The Credit Facility requires the Company to retire $1.25 billion of the debt by June 30, 1999 and to issue $1.25 billion of equity securities, as defined, by July 23, 1999. At the time the Credit Facility was arranged in July 1998, the Company intended to promptly issue $1.25 billion or more of equity securities to satisfy both these requirements. An additional $2 billion of debt under the Credit Facility matures on June 30, 2000. The Company anticipated that a combination of forecasted operating cash flows and proceeds to the Company from the then-planned LCR refinancing together with a planned offering of debt securities would be used to repay or refinance the debt due in June 2000. However, the Company postponed its plans for a fall 1998 securities offering as a result of adverse changes in capital market conditions that began in August 1998. In addition, the cyclical downturn in commodity chemicals adversely affected both the Company's operating results and the market valuation of its common stock. In late 1998, LCR's refinancing plans were postponed for the reasons discussed above. The postponement of the $1.25 billion equity offering and related debt paydown, combined with the decline in recent and projected operating results, could make it more difficult for the Company to remain in compliance with certain financial ratio requirements contained in the Credit Facility as those ratios become more restrictive under the existing terms. As a result of all the foregoing, the Company has proposed an amendment to the Credit Facility that would, among other things, substantially reduce the requirements for sale of equity and ease the financial ratio 44 requirements. The amendment requires approval by lenders holding a majority of the commitments. The Company intends to complete the amendment of the Credit Facility and to effect debt and equity offerings in the second quarter of 1999, using the proceeds to meet the June 1999 debt maturity. At the same time, the Company is actively exploring other available alternative means of retiring or refinancing debt, including other financing sources, enhancement of operating cash flows through cost reductions, management of working capital levels and sales of assets. The Company continues to believe that repositioning its balance sheet to achieve an investment grade rating over time is an important objective. The ability of the Company to meet its debt obligations, finance its capital expenditure needs, maintain its dividend rate and comply with the covenants and financial requirements in the Credit Facility will generally depend on the future performance of the Company, the outcome of the Credit Facility amendment process, and the availability and terms of additional financing or alternative means to repay and refinance bank debt. These factors, in turn, are affected by relevant prevailing economic, competitive and market conditions and other factors beyond the Company's control. The breach of any of the covenants or financial requirements in the Credit Facility could result in a default thereunder, which would permit the lenders to declare the loans immediately payable and to terminate future lending commitments. Based on discussions to date with its agent banks and prospective underwriters and on current market conditions, the Company is optimistic that it will be able to amend the terms of the Credit Facility and to complete debt and equity offerings on satisfactory terms. Accordingly, the Company believes conditions will be such that cash balances, cash generated from operating activities, and funds from anticipated financing activities and lines of credit will be adequate to meet anticipated future cash requirements for scheduled debt repayments, necessary capital expenditures and dividends. In addition, as of December 31, 1998, Equistar, LCR and Lyondell Methanol had, in the aggregate, outstanding debt of approximately $2.9 billion and equity of approximately $4.6 billion. The ability of the joint ventures to distribute cash to the Company is reduced by their respective debt service obligations. Furthermore, a default under certain joint venture debt agreements would constitute a cross-default under the Company's Credit Facility. The Company also remains liable on approximately $713 million of debt for which primary responsibility was assumed by Equistar in connection with its formation. CURRENT BUSINESS OUTLOOK Beginning August 1, 1998, Lyondell's operating results include the Acquired Business, which is reported as the intermediate chemicals and derivatives segment. Management expects continued stable growth for the core products in this segment in 1999, although prices and margins may be adversely affected in the latter part of the year by the start up of new industry PO capacity in Europe. The Company has delayed the PO-11 project by two years with a view to mitigating potential oversupply of PO as well as SM. However, co-products SM and MTBE are expected to continue to be affected by weak market conditions. Furthermore, environmental concerns in California and other states, principally over groundwater contamination due to leaking underground storage tanks, could lead to legislation that might negatively affect the demand for MTBE over the long term. The petrochemicals and polymers segments continue to be affected by overcapacity, resulting in weak pricing. However, spot prices for ethylene have improved and industry inventory levels of ethylene have declined well below benchmark levels that usually indicate a balanced market. Demand for polymers continues to grow overall. However, this growth has been overshadowed by new capacity that has put downward pressure on polymers prices. Polymers prices have approached historical trough levels. The impact of low prices for petrochemicals and polymers products is mitigated to the extent that the low prices increase demand for these products versus substitute materials. Additionally, the low sales prices are partly offset by lower feedstock costs as a result of low current crude oil and energy costs. Equistar has taken aggressive actions to buffer the cyclical downturn, including accelerations of the LaPorte plant turnaround from the third quarter 1999 to mid-November 1998, the announced idling of a substantial 45 portion of HDPE capacity at the Port Arthur plant scheduled for March 31, 1999, reductions in working capital, and cost reductions through the achievement of synergies. Equistar continues to focus on cost reduction and synergies. Many of the cost-reduction programs have required time and capital to achieve with the benefits just now beginning to be realized. For example, in November, Equistar began implementation of the SAP information system on a company-wide basis. Completion of implementation in 1999 will eliminate the extra expense and inefficiency of running and coordinating multiple systems. Additionally, the LaPorte plant turnaround included changes that enable the plant to run heavier, cheaper feedstocks, thereby reducing ethylene production costs. LCR's financial results will continue to be impacted by the reduction in PDVSA crude oil allocations which took effect in August 1998. In addition, in March 1999 OPEC announced an agreement to further limit OPEC oil production, which could result in some additional decreases in the allocation of crude oil supplied to LCR by PDVSA. Decreased allocations of PDVSA crude oil tend to reduce LCR's pretax income and accordingly Lyondell's pro rata share of LCR's income. LCR is moving forward with a multi-year program to reduce operating costs; the new labor agreement is part of that program. The methanol market continues to be weak due to considerable excess capacity. Methanol margins are expected to continue at current low levels, as prices remain flat. Improvement is not anticipated in the near term. Lyondell Methanol took advantage of the current low-margin environment, implementing a turnaround in February 1999 that will include process enhancements designed to reduce methanol production costs. YEAR 2000 Lyondell, Equistar and LCR use many business information (information technology or "IT") systems as well as non-IT systems such as manufacturing support and other systems that could be affected by the "Year 2000 problem." The Year 2000 problem arises from computer programs and computer and other equipment with embedded chips or processors that use two digits rather than four to designate the year. Date-sensitive computer operations may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failures or miscalculations, which may cause operational disruptions. Lyondell and Equistar have replaced many of their business information computer systems (including systems operated by Equistar for Lyondell Methanol). LCR is also in the process of replacing many of its business information systems. The new systems, based on enterprise software from SAP America, Inc. ("SAP"), will replace older business systems and allow employees at different locations to share financial and operating information more effectively. The first major use of the software commenced in May 1997 for the majority of the operations contributed to Equistar by Lyondell. Equistar's second major SAP implementation phase was successfully completed in November 1998, while additional SAP work will be completed in the first half of 1999. LCR will complete implementation of its SAP project at the beginning of 1999. The new systems and software are Year 2000 compliant, thus addressing the majority of the Company's Year 2000 business system requirements. Lyondell has elected to continue with the repair and remediation for the majority of systems of the Acquired Business. The Company has a Year 2000 Executive Sponsor Team with representatives of Lyondell, Equistar and LCR. The Year 2000 Executive Sponsor Team is providing oversight to individual Year 2000 Steering Committees within each organization. Each Steering Committee is in the process of completing an assessment of the state of readiness of the IT and non-IT systems of the Company and its joint ventures. These assessments cover manufacturing systems, including laboratory information systems and field instrumentation, and significant third party vendor and supplier systems, including employee compensation and benefit plan maintenance systems. The steering committees are also in the process of assessing the readiness of significant customers and suppliers. 46 The Year 2000 assessment process for each organization consists of an inventory of Year 2000 sensitive equipment, an assessment of the impact of possible failures, determination of the required remediation actions, and testing and implementation of solutions. The inventory, assessment and remediation phases should be completed in the first quarter of 1999, with the remainder of the testing and final implementation taking place in 1999. The progress of these phases as of December 31, 1998 is summarized as follows: Lyondell Enterprise Year 2000 Readiness As of December 31, 1998 Graph showing the percentage of completion of the inventory, assessment, remediation, testing and implementation phases of the Year 2000 assessment process for each of Lyondell, Equistar and LCR. The percentage of completion is indicated in the table below: Lyondell Enterprise Year 2000 Readiness As of December 31, 1998 Inventory Assessment Remediation Testing Implementation --------- ---------- ----------- ------- -------------- Lyondell 99% 85% 65% 35% 20% Equistar 99% 98% 89% 39% 28% LCR 96% 96% 62% 25% 25% As of December 31, 1998, Year 2000 spending by the Company, Equistar and LCR for the replacement of both IT and non-IT systems is summarized as follows:
Millions of dollars Lyondell Equistar LCR ------------------- -------- -------- --- Spending through December 31, 1998.................. $ 5 $ 1 $ 1 Estimated additional spending....................... 7 12 3 --- --- --- Total estimated spending.......................... $12 $13 $ 4 === === === Lyondell share of estimated spending................ $12 $ 5 $ 2 === === ===
The total estimated spending of $29 million for all three organizations represents a midpoint of an estimated range between $23 million and $35 million, of which the Company's share would be $15 million to $24 million. The estimated amount does not include costs incurred in connection with the implementation of SAP-related software. These spending estimates will be refined as phases of the assessment are completed. Spending is funded by cash generated from operations. Preliminary estimates indicate that approximately 10 to 15 percent of the estimated spending could qualify for capitalization. Management believes that all significant systems controlled by the Company will be Year 2000 ready in the last half of 1999. The Company's operations are dependent on a continuous supply of key services from raw material suppliers and utility and transportation providers. While the Steering Committees are assessing the readiness of third party customers and suppliers, there can be no assurance that third parties with a significant business relationship will successfully test, reprogram, and replace all of their IT and non-IT systems on a timely basis. The Company is developing contingency plans with the assistance of an outside consultant. The final plans, when implemented, are intended to avoid material interruption of core business operations through the year 2000 and beyond, while ensuring safe operations and responsible financial performance. The contingency planning will involve an analysis of critical business processes and an identification of the most likely threats to these 47 processes. Solutions and alternatives will be developed for these internal or external threats. The enterprise expects to complete its analysis and plan development by mid-year 1999 with implementation to be completed in the last half of the year. There is inherent uncertainty in the Year 2000 problem due to the possibility of unanticipated failures by third party customers and suppliers. Accordingly, the Company is unable, at this time, to assess the extent and resulting materiality of the impact of possible Year 2000 failures on its operations, liquidity or financial position. In a worst case scenario, controlled plant shutdowns using the Company's standard shutdown procedures might be necessitated by failures of utility providers or suppliers or by internal conditions affecting plant operability. Such events could have a material adverse effect on the Company's operations, liquidity or financial position. The Year 2000 assessment process is expected to provide information that will significantly reduce the level of uncertainty regarding the Year 2000 impact. Management believes that the completion of the assessment as scheduled will help minimize the possibility of any significant disruptions of Company operations. EUROPEAN MONETARY UNION On January 1, 1999, the euro became the official currency for the eleven member countries of the European Union (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain) that are participating in monetary union. On that date, the national currencies of the participating countries ceased to exist as independent currencies and continued only as denominations of the euro. The euro conversion rates for each of the former national currencies were irrevocably fixed on January 1, 1999. Euro banknotes and coins will be introduced on January 1, 2002 and the former national currency banknotes and coins will be withdrawn by July 1, 2002 at the latest. The Company has substantially completed a review of its principal European markets and does not expect European monetary union to have a material effect on the conduct of its business. Specifically, there are no major competitive implications for product pricing, and most significant contracts are expected to remain in force with no renegotiation expected. Similarly, there is no impact on the Company's foreign currency swap and forward contracts, which hedge risks between the U.S. dollar and these currencies. (See Note 17 of Notes to Consolidated Financial Statements.) The European-based revenues of the Acquired Business are approximately $1.0 billion on an annual basis. While the Company has converted its systems to invoice customers in euros beginning January 1, 1999, the conversion of other business and financial systems is still in the planning and implementation stages. Due to Year 2000 priorities, it is anticipated that the conversion of most business systems to the euro will not begin until the fourth quarter of 1999 with a target completion date of January 1, 2001. The deadline for conversion of systems is January 1, 2002. Based upon the assessments completed to date, the Company does not expect the onset of European monetary union to have a material impact on the Company's consolidated financial statements. ENVIRONMENTAL MATTERS Various environmental laws and regulations impose substantial requirements upon the operations of the Company. The Company's policy is to be in compliance with such laws and regulations, which include, among others, CERCLA, as amended, RCRA and the Clean Air Act Amendments. In connection with the transfer of assets and liabilities from Atlantic Richfield Company ("ARCO") to the Company at the time the Company was formed, effective July 1, 1988, the Company and ARCO entered into an agreement (the "Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities that ARCO might incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities that may arise out of pending and future lawsuits. ARCO, along with many other companies, has been named a potentially responsible party (PRP) under CERCLA in connection with the past disposal of waste at third party waste sites. Pursuant to the Cross-Indemnity Agreement, the Company is 48 currently contributing funds for one site pursuant to its obligation to reimburse ARCO for a portion of its uninsured remediation costs. Under the Revised Cross-Indemnity Agreement, both ARCO and the Company waive any claim for reimbursement under the existing Cross-Indemnity Agreement for any prior defense and settlement costs associated with waste site matters, and the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. The obligation described above will continue under the Revised Cross-Indemnity Agreement. Lyondell, Millennium and Occidental have similar indemnifications with Equistar related to the petrochemicals and polymers businesses contributed by the companies. Equistar has agreed to indemnify and defend Lyondell, Millennium and Occidental, individually, up to $7 million each, against certain uninsured claims and liabilities asserted within the first seven years after the respective asset contributions that Equistar may incur relating to the operation of the contributed businesses prior to their contribution to Equistar, subject to certain terms of the Asset Contribution Agreements. The Company accrues for contingencies, including those based upon unasserted claims that are probable and reasonably estimable. In connection with environmental matters, the Company establishes accruals based upon known facts and circumstances. Based on current environmental laws and regulations, the Company believes it has adequately accrued for the matters described herein. Lyondell's accrued environmental liability at December 31, 1998 was $48 million, including $39 million related to the Acquired Business' environmental liability. The environmental liability of the Acquired Business reflected the Company's latest assessment of potential future remediation costs associated with currently known sites. The liability is related to four current plant sites, one former plant site and one federal Superfund site for amounts ranging from $2 million to $18 million per site. The Acquired Business is involved in administrative proceedings or lawsuits relating to a minimal number of other Superfund sites. However, the Company estimates, based on currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts accrued are expected to be paid out over the next five to ten years. The Company has relied upon RI/FS at each of the Acquired Business' sites as a basis for estimating remediation costs at the site. RI/FS or preliminary assessments have been completed at most of the sites. However, selection of the remediation method and the cleanup standard to be applied are, in most cases, subject to approval by the appropriate government authority. Accordingly, the Company may have possible loss contingencies in excess of the amounts reserved to the extent the scope of remediation required, the final remediation method selected and the cleanup standard applied vary from the assumptions used in estimating the liability. The Company estimates that the upper range of these possible loss contingencies should not exceed the $39 million amount accrued by more than $65 million. The extent of loss related to environmental matters ultimately depends upon a number of factors, including technological developments, changes in environmental laws, the number and ability to pay of other parties involved at a particular site and the Company's potential involvement in additional environmental assessments and cleanups. Based upon currently known facts, management believes that any remediation costs the Company may incur in excess of the amounts accrued or disclosed above would not have a material adverse impact on the Company's consolidated financial statements. However, the resolution of one or more of these matters in any reporting period could have a material impact on the Company's results of operations for that period. The Company spent $8 million, $1 million and $2 million in 1998, 1997 and 1996, respectively, relating to environmental remediation matters. The Company estimates that expenditures will total approximately $11 million in 1999. The Company, its subsidiaries and its joint ventures also make capital expenditures to comply with environmental regulations. Such capital expenditures totaled, in the aggregate, approximately $22 million, $13 million and $28 million for 1998, 1997 and 1996, respectively. The Company estimates that such capital expenditures will total approximately $27 million in 1999 and will not be materially different in 2000. The 1998 amounts reported above include the full twelve-months' spending of the acquired ARCO Chemical business. 49 INDUSTRY CYCLICALITY AND OVERCAPACITY The Company's historical operating results reflect the cyclical and volatile nature of both the chemical and refining industries. Both industries are mature and capital intensive, and industry margins are sensitive to supply and demand balances, which have historically been cyclical. The chemical industry historically has experienced alternating periods of tight supply, causing prices and profit margins to increase, followed by periods of substantial capacity additions, resulting in oversupply and declining prices and profit margins. Due to the commodity nature of most of the Company's products, the Company is not necessarily able to protect its market position by product differentiation or to pass on cost increases to its customers. Accordingly, increases in raw material and other costs do not necessarily correlate with changes in product prices, either in the direction of the price change or in absolute magnitude. Moreover, a number of participants in various segments of the chemical industry have announced plans for expansion of plant capacity. There can be no assurance that future growth in product demand will be sufficient to utilize this additional, or even current, capacity. Excess industry capacity, to the extent it occurs, may depress the Company's volumes and margins. As a result, the Company's earnings may be subject to significant fluctuations. External factors beyond the Company's control, such as general economic conditions, competitor action, international events and circumstances and governmental regulation in the United States and abroad, can cause volatility in feedstock prices, as well as fluctuations in demand for the Company's products, product prices, volumes and margins, and can magnify the impact of economic cycles on the Company's business. A number of the Company's products are highly dependent on durable goods markets, such as housing and automotive, that are particularly cyclical. With respect to the Company's refining business, however, management believes that the combination of the Crude Supply Agreement and the Products Agreement tends to stabilize earnings and to substantially reduce the market driven aspects of volatility. FOREIGN OPERATIONS AND COUNTRY RISKS International operations and exports to foreign markets are subject to a number of risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks and risks of increases in duties and taxes, as well as changes in laws and policies governing operations of foreign-based companies. In addition, earnings of foreign subsidiaries and intercompany payments may be subject to foreign income tax rules that may reduce cash flow available to meet required debt service and other obligations of the Company. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for the Company's calendar year 2000; however, early adoption is 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. The Company is currently evaluating SFAS No. 133 and whether it will adopt this pronouncement prior to the effective date. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report, including those set forth in this Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations as well as those set forth in Item 7a-- Disclosure of Market Risk, are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such 50 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 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, the Company'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-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. Item 7a. Disclosure of Market Risk COMMODITY PRICE RISK A substantial portion of the Company's products and feedstocks, as well as those of Equistar, LCR and Lyondell Methanol, are commodities whose prices fluctuate as market supply/demand fundamentals change. Accordingly, product margins and the level of the Company's profitability tend to fluctuate with changes in the business cycle. The Company tries to protect against such instability through various business strategies. These include increasing the olefins plants' feedstock flexibility, entering into multi-year processing and sales agreements, moving downstream into derivatives products whose pricing is more stable, and the use of the "deemed margin" contract at LCR. The Company has not used derivative instruments for commodity hedging purposes. FOREIGN EXCHANGE RISK Foreign exchange exposures result from cash flows between U.S. and foreign operations and transactions denominated in currencies other than the local currency of a foreign operating entity. The Company uses foreign currency swap and forward contracts to minimize the exposure related to net monetary exposures on the balance sheet and anticipatory cash flows. Although the Company uses these types of contracts to reduce foreign exchange exposures with respect to revenues, capital commitments and other expenses denominated in foreign currencies, there can be no assurance that such hedging techniques will protect the Company's reported results against exchange rate fluctuations or that the Company will not incur material losses on such contracts. At December 31, 1998, the Company had foreign currency contracts outstanding in the notional amount of $205 million, principally swap contracts hedging the Dutch guilder. Using sensitivity analysis, the hypothetical increase in foreign exchange loss due to these derivative instruments from an assumed 10 percent unfavorable change in year-end exchange rates was not material. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions. INTEREST RATE RISK The Company is exposed to interest rate risk with respect to certain financial instruments and derivative instruments. These include variable-rate Term Loans outstanding of $6.5 billion and Treasury Lock transactions in the notional amount of $1 billion at December 31, 1998. The Treasury Locks are based on U.S. Treasury rates and are being used to hedge anticipated Company debt offerings. Assuming a hypothetical 10 percent increase in interest rates, the increase in annual interest expense on the variable-rate Term Loans would be $35 million. The hypothetical increase in interest rates would result in a potential change in the fair value of Treasury Locks from a $53 million obligation at December 31, 1998 to a $20 million obligation, which would be amortized over the term of the anticipated debt offering. Sensitivity analysis was used for the purpose of this analysis. 51 Item 8. Financial Statements and Supplementary Data Index to Financial Statements
Page ---- LYONDELL CHEMICAL COMPANY Report of Independent Accountants.......................................... 53 Consolidated Financial Statements: Consolidated Statements of Income........................................ 54 Consolidated Balance Sheets.............................................. 55 Consolidated Statements of Cash Flows.................................... 56 Consolidated Statements of Stockholders' Equity.......................... 57 Notes to Consolidated Financial Statements............................... 58 EQUISTAR CHEMICALS, LP Report of Independent Accountants.......................................... 84 Financial Statements: Statements of Income..................................................... 85 Balance Sheets........................................................... 86 Statements of Cash Flows................................................. 87 Statements of Partners' Capital.......................................... 88 Notes to Financial Statements............................................ 89 LYONDELL-CITGO REFINING LP Independent Auditors' Report............................................... 106 Report of Independent Accountants.......................................... 107 Financial Statements: Statements of Income..................................................... 108 Balance Sheets........................................................... 109 Statements of Cash Flows................................................. 110 Statements of Partners' Capital.......................................... 111 Notes to Financial Statements............................................ 112
52 LYONDELL CHEMICAL COMPANY REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Lyondell Chemical Company In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Lyondell Chemical Company (formerly Lyondell Petrochemical Company) and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 26, 1999 53 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31 ---------------------- Millions of dollars, except per share data 1998 1997 1996 - ------------------------------------------ ------ ------ ------ Sales and other operating revenues: Unrelated parties...................................... $1,447 $2,346 $4,734 Related parties........................................ -- 532 318 ------ ------ ------ 1,447 2,878 5,052 ------ ------ ------ Income from equity investments (before unusual charges): Equistar Chemicals, LP................................. 134 30 -- LYONDELL-CITGO Refining LP............................. 116 102 -- Lyondell Methanol Company, L.P......................... 6 -- -- ------ ------ ------ 256 132 -- ------ ------ ------ Gain on sale of assets................................... -- -- 30 ------ ------ ------ Operating costs and expenses: Cost of sales: Unrelated parties.................................... 1,089 1,827 4,320 Related parties...................................... -- 423 250 Selling, general and administrative expenses........... 126 186 234 Research and development expense....................... 26 -- -- Amortization of goodwill and other intangible assets... 41 -- -- Unusual charges........................................ 82 40 -- ------ ------ ------ 1,364 2,476 4,804 ------ ------ ------ Operating income....................................... 339 534 278 Interest expense......................................... (287) (75) (81) Interest income.......................................... 25 14 3 Other income (expense), net.............................. 12 (17) (4) ------ ------ ------ Income before income taxes............................... 89 456 196 Provision for income taxes............................... 37 170 70 ------ ------ ------ Net income............................................... $ 52 $ 286 $ 126 ====== ====== ====== Basic and diluted earnings per share..................... $ .67 $ 3.58 $ 1.58 ====== ====== ======
See Notes to Consolidated Financial Statements. 54 LYONDELL CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
December 31 -------------- Millions of dollars 1998 1997 - ------------------- ------ ------ ASSETS Current assets: Cash and cash equivalents.................................... $ 233 $ 86 Accounts receivable: Trade, net................................................. 473 1 Related parties............................................ 6 4 Inventories.................................................. 550 -- Prepaid expenses and other current assets.................... 64 12 ------ ------ Total current assets..................................... 1,326 103 ------ ------ Property, plant and equipment, net............................. 4,511 46 Investment in affiliates: Equistar Chemicals, LP....................................... 660 1,063 LYONDELL-CITGO Refining LP................................... 84 104 Lyondell Methanol Company, L.P............................... 50 -- Receivable from LYONDELL-CITGO Refining LP..................... 231 196 Other investments and long-term receivables.................... 53 -- Goodwill, net.................................................. 1,430 -- Deferred charges and other assets.............................. 880 47 ------ ------ Total assets................................................... $9,225 $1,559 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade...................................................... $ 252 $ 87 Related parties............................................ 1 97 Notes payable................................................ -- 100 Current maturities of long-term debt......................... 1,603 -- Other accrued liabilities.................................... 481 24 ------ ------ Total current liabilities................................ 2,337 308 ------ ------ Long-term debt, less current maturities........................ 5,391 345 Other liabilities and deferred credits......................... 294 73 Deferred income taxes.......................................... 413 209 Commitments and contingencies Minority interest.............................................. 216 5 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, 80,000,000 issued........................................... 80 80 Additional paid-in capital................................... 158 158 Retained earnings............................................ 387 407 Accumulated other comprehensive income....................... 32 -- Treasury stock, at cost, 2,978,203 and 1,015,512 shares, respectively................................................ (83) (26) ------ ------ Total stockholders' equity............................... 574 619 ------ ------ Total liabilities and stockholders' equity..................... $9,225 $1,559 ====== ======
See Notes to Consolidated Financial Statements. 55 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31 --------------------- Millions of dollars 1998 1997 1996 - ------------------- ------- ----- ----- Cash flows from operating activities: Net income............................................. $ 52 $ 286 $ 126 Adjustments to reconcile net income to net cash provided by operating activities, net of the effects of purchase accounting and deconsolidation of affiliates: Depreciation and amortization......................... 138 84 110 Unusual charges....................................... 57 -- -- Deferred income taxes................................. 76 43 50 Minority interest..................................... 6 17 4 Gain on sale of assets................................ -- -- (30) Decrease (increase) in accounts receivable............ 93 (64) (94) Increase in inventories............................... (15) (37) (29) (Decrease) increase in accounts payable............... (160) (44) 160 Net change in other working capital accounts.......... 36 (2) 6 Other................................................. (20) (14) (71) ------- ----- ----- Net cash provided by operating activities........... 263 269 232 ------- ----- ----- Cash flows from investing activities: Acquisition of ARCO Chemical Company, net of cash acquired.............................................. (5,869) -- -- Expenditures for property, plant and equipment......... (64) (49) (609) Proceeds from sales of assets.......................... -- -- 55 Contributions and advances to affiliates............... (35) (86) -- Distributions from affiliates in excess of earnings.... 435 72 -- Deconsolidation of affiliates.......................... (11) (12) -- ------- ----- ----- Net cash used in investing activities............... (5,544) (75) (554) ------- ----- ----- Cash flows from financing activities: Proceeds from issuance of long-term debt............... 6,500 -- 502 Payment of debt issuance costs......................... (130) -- (3) Net (decrease) increase in short-term debt............. (100) 50 (43) Repayments of long-term debt........................... (715) (112) (150) Minority owners (distributions) contributions.......... -- (16) 146 Repurchase of common stock............................. (59) (26) -- Dividends paid......................................... (70) (72) (72) ------- ----- ----- Net cash provided by (used in) financing activities......................................... 5,426 (176) 380 ------- ----- ----- Effect of exchange rate changes on cash................. 2 -- -- ------- ----- ----- Increase in cash and cash equivalents................... 147 18 58 Cash and cash equivalents at beginning of period........ 86 68 10 ------- ----- ----- Cash and cash equivalents at end of period.............. $ 233 $ 86 $ 68 ======= ===== =====
See Notes to Consolidated Financial Statements. 56 LYONDELL CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Additional Other Millions of dollars, --------------- Paid-In Retained Comprehensive Comprehensive except per share data Issued Treasury Capital Earnings Income Income - --------------------- ------ -------- ---------- -------- ------------- ------------- Balance, January 1, 1996 (80,000,000 shares issued)................ $80 $ -- $158 $142 $-- $ -- Net income............ -- -- -- 126 -- 126 Cash dividends ($.90 per share)........... -- -- -- (72) -- -- Other................. -- -- -- (3) -- -- --- ---- ---- ---- --- ---- $126 ==== Balance, December 31, 1996 (80,000,000 shares issued)................ 80 -- 158 193 -- $ -- Net income............ -- -- -- 286 -- 286 Cash dividends ($.90 per share)........... -- -- -- (72) -- -- Purchase of 1,015,512 treasury shares...... -- (26) -- -- -- -- --- ---- ---- ---- --- ---- $286 ==== Balance, December 31, 1997 (80,000,000 shares issued; 1,015,512 treasury shares)....... 80 (26) 158 407 -- $ -- Net income............ -- -- -- 52 -- 52 Cash dividends ($.90 per share)........... -- -- -- (70) -- -- Purchase of 2,051,539 treasury shares...... -- (59) -- -- -- -- Reissuance of 88,848 treasury shares under restricted stock plan................. -- 2 -- -- -- -- Foreign currency translation, net of tax of $25........... -- -- -- -- 32 32 Other................. -- -- -- (2) -- -- --- ---- ---- ---- --- ---- $ 84 ==== Balance, December 31, 1998 (80,000,000 shares issued; 2,978,203 treasury shares)....... $80 $(83) $158 $387 $32 === ==== ==== ==== ===
See Notes to Consolidated Financial Statements. 57 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Company and Operations Lyondell Chemical Company ("Company" or "Lyondell"), formerly Lyondell Petrochemical Company, operates in the (i) intermediate chemicals and derivatives, (ii) petrochemicals, (iii) polymers, (iv) refining and (v) methanol businesses through its wholly owned subsidiary, ARCO Chemical Company ("ARCO Chemical" or "Acquired Business"), acquired by the Company as of July 28, 1998 (see Note 3), and through the Company's joint venture ownership interests in Equistar Chemicals, LP ("Equistar"), LYONDELL-CITGO Refining LP ("LCR"), formerly LYONDELL-CITGO Refining Company Ltd., and Lyondell Methanol Company, L.P. ("Lyondell Methanol"). The Acquired Business, now named Lyondell Chemical Worldwide, Inc., is the world's largest producer of propylene oxide ("PO") and a leading worldwide producer and marketer of polyether polyols, propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE"). The Acquired Business is reported as the intermediate chemicals and derivatives segment. The Company's operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar (see Note 4). The Company accounts for its investment in Equistar using the equity method of accounting. Prior to the formation of Equistar on December 1, 1997, the Company's assets and operations of the petrochemicals and polymers businesses were fully consolidated in the consolidated financial statements of the Company. Equistar's petrochemicals division consists of: olefins, including ethylene, propylene, butadiene, butylenes and specialty products; aromatics, including benzene and toluene; oxygenated chemicals, including ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals, including refinery blending stocks. Equistar's polymers division consists of: polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear-low density polyethylene ("LLDPE") and polypropylene; and performance polymers products, including color concentrates and compounds, wire and cable resins and compounds, adhesive resins, and fine powders. The Company's operations in the refining segment are conducted through its joint venture ownership interest in LCR (see Note 5). This segment consists of: refined petroleum products, including conventional and reformulated gasoline, low sulfur diesel and jet fuel; aromatics produced at LCR's full- conversion Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils, process oils and base oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR sells its principal refined products to the Company's joint venture partner in LCR, CITGO Petroleum Corporation ("CITGO"). The Company has additional operations conducted through its joint venture ownership interest in Lyondell Methanol (see Note 6). These operations consist of methanol and other petrochemical products produced by its methanol facility. Effective January 1, 1998, Lyondell began to account for its investment in Lyondell Methanol using the equity method of accounting. Prior to 1998, Lyondell Methanol's assets and operations were fully consolidated in the consolidated financial statements. From its formation in 1985 through June 1988, the Company operated as a division of Atlantic Richfield Company ("ARCO"). In July 1988, ARCO transferred the division's assets and liabilities along with additional pipeline assets, to its wholly owned subsidiary, Lyondell Petrochemical Company, a Delaware corporation. In January 1989, ARCO completed an initial public offering of approximately 50.1 percent of the Company's common stock. In August 1994, ARCO issued three-year debt securities ("Exchangeable Notes") which were 58 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) exchangeable upon maturity on September 15, 1997 into Lyondell common stock or an equivalent cash value, at ARCO's option. On September 15, 1997, ARCO delivered shares of Lyondell common stock to the holders of the Exchangeable Notes. The Company purchased the remaining 383,312 shares of common stock held by ARCO after the conversion. As of December 31, 1998 and 1997, ARCO owned no shares of Lyondell common stock. 2. Summary of Significant Accounting Policies Basis of Presentation--The 1998 Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including the results of operations of the Acquired Business for the five months ended December 31, 1998. The Company's joint venture ownership interests in Equistar for 1998 and December 1997, in LCR for 1998 and 1997, and in Lyondell Methanol for 1998, are reported as equity investments and are not consolidated into the Company's financial statements. Lyondell Methanol is fully consolidated into the Company's financial statements for 1997 and 1996, and LCR is fully consolidated only for 1996. Additionally, the Company has an investment in a 50 percent owned affiliate that is accounted for using the equity method of accounting. All significant transactions between the entities of the Company have been eliminated from the Consolidated Financial Statements. Revenue Recognition--Revenue from product sales is generally recognized upon delivery of products to the customer. Equity Method of Accounting--Investments in joint ventures ("JVs") where the Company exerts a certain minimum level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method of accounting. Under those circumstances, this accounting treatment is used even though the Company's ownership percentage may exceed 50 percent. Under this method, the operations of the JVs are not consolidated line by line with those of the Company. Instead, the Company's portion of the JVs' net income is included in the Consolidated Statements of Income as "Income from equity investments" and the Company's portion of the JVs' net assets appears in the Consolidated Balance Sheets as "Investment in affiliates." Cash advances to, and distributions in excess of earnings from the JVs, are reflected as individual line items in the Consolidated Statements of Cash Flows. Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of these financial institutions, which are considered in the Company's investment strategy. The Company has no requirements for compensating balances in a specific amount at a specific point in time. The Company does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at the Company's discretion. As a result, none of the Company's cash is restricted. Accounts Receivable--The Company sells its products primarily to other industrial concerns in the petrochemicals and refining industries. The Company performs ongoing credit evaluations of its customers' financial condition, and, in certain circumstances, requires letters of credit from them. The Company's allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $11 million at December 31, 1998. The Company had no significant allowance for doubtful accounts recorded at December 31, 1997. 59 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Depreciation of manufacturing facilities and equipment is computed using the straight-line method over the estimated useful lives of the related assets ranging from 5 to 30 years. Upon retirement or sale, the Company removes the cost of the asset and the related accumulated depreciation from the accounts and reflects any resulting gain or loss in the Consolidated Statements of Income. The Company's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Turnaround Maintenance and Repair Expenses--Cost of repairs and maintenance incurred in connection with turnarounds of major units at the Company's manufacturing facilities exceeding $5 million are deferred and amortized using the straight-line method, until the next planned turnaround, generally four to six years. Goodwill--Goodwill represents the excess of purchase price paid over the value assigned to the net tangible assets of a business acquired. This intangible asset is amortized over 40 years, the estimated useful life, using the straight-line method. See Long-Lived Asset Impairment below. Deferred Charges--Deferred charges are carried at cost and consist primarily of the value assigned to patents and licensed technology, capacity reservation fees and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter. Environmental Remediation Costs--Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. Pension and Other Postretirement Benefit Plans--During 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 132, Employers' Disclosures about Pensions and Other Retirement Benefits. The provisions of SFAS No. 132 revise employer disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. SFAS No. 132 standardizes the disclosure requirements for these plans, to the extent practicable. Minority Interest--Minority interest in 1998 primarily represents the interest of third-party investors in a partnership that owns one of the Company's two domestic PO/SM plants. The Company retains a majority interest in the partnership. The minority interest share of the partnership's income and loss is reported in "Other income (expense), net" in the Consolidated Statements of Income. Exchanges--Crude oil and finished product exchange transactions, which involve homogeneous commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Income Taxes--Deferred income taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and are calculated based upon cumulative book and tax differences in the Consolidated Balance Sheets in accordance with SFAS No. 109, Accounting for Income Taxes. Valuation allowances are provided against deferred tax assets which are not likely to be realized in full. Foreign Currency Translation--Where the local currency is the functional currency, the financial statements of international operations are translated into U.S. dollars using the exchange rate at each balance sheet date for 60 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) assets and liabilities and the average exchange rate for each period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of "Accumulated other comprehensive income" in the stockholders' equity section of the Consolidated Balance Sheets. Where the U.S. dollar is the functional currency, remeasurement adjustments are recorded as foreign exchange gains and losses in the Consolidated Statements of Income. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Asset Impairment--In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company reviews its long-lived assets, including goodwill, for impairment on an exception basis whenever events or changes in circumstances indicate a potential loss in utility. Impairment losses are recognized in the Consolidated Statements of Income. Segment and Related Information--In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the management approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the results of operations or the financial position of the Company (see Note 22). Reclassifications--Certain previously reported amounts have been restated to conform to classifications adopted in 1998. 3. Purchase of ARCO Chemical Company As of July 28, 1998, the Company completed its acquisition of ARCO Chemical ("Acquisition"). The transaction was financed through a $7.0 billion Credit Facility (see Note 16). This Acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of the Acquired Business are included in the Company's Consolidated Statements of Income prospectively from August 1, 1998. The acquisition cost of approximately $5.9 billion has been allocated to the assets acquired and liabilities assumed based upon the estimated fair value of such assets and liabilities at the date of acquisition. The Company is awaiting additional information related to the fair value of certain assets acquired and liabilities assumed. Management does not expect the finalization of these matters to have a material effect on the purchase price allocation. In connection with the acquisition, the Company 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 the Company's Houston headquarters. The liability totaled $255 million at the date of acquisition. Through December 31, 1998, the Company had paid and charged approximately $132 million against the liability. Approximately $57 million, or less than one percent of the purchase price, was allocated to purchased in-process research and development. This included three projects valued at $29 million, $18 million and $10 million, respectively, representing two new product applications and one new process technology. The activities represented by these projects will be continued by the Company and the values assigned represent intangibles with no alternative future use. Accordingly, the Company wrote off the in-process research and development, 61 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recording a nonrecurring charge of $57 million in the third quarter 1998 (see Note 7). The excess of purchase price paid over the estimated fair value of net assets acquired was allocated to goodwill. The amount allocated to goodwill was approximately $1.4 billion and is being amortized, using the straight-line method, over 40 years, the estimated useful life. The fair value of the assets acquired and liabilities assumed, net of cash acquired, was as follows:
Millions of dollars ------------------- Current assets, net of cash acquired.............................. $1,133 Property, plant and equipment..................................... 4,454 Purchased in-process research and development..................... 57 Goodwill.......................................................... 1,445 Deferred charges and other assets................................. 1,124 Current liabilities............................................... (599) Long-term debt.................................................... (952) Other liabilities and deferred credits............................ (793) ------ Purchase price, net of cash acquired.............................. $5,869 ======
The unaudited pro forma combined historical results of the Company and ARCO Chemical, giving effect to the Acquisition, the Credit Facility drawdown, the formation of Equistar, and the deconsolidation of Lyondell Methanol as of the beginning of 1998 and 1997, respectively, are as follows:
For the year ended December 31 ------------- Millions of dollars, except per share data 1998 1997 ----------------------------------------------------------- ------ ------ Sales and other operating revenues......................... $3,553 $3,995 Income from equity investments............................. 256 526 Unusual charges............................................ 62 215 Operating income........................................... 631 663 Net income................................................. 42 27 Basic and diluted earnings per share....................... .54 .34
The unaudited pro forma data presented above are not necessarily indicative of the results of operations of the Company that would have occurred had such transactions actually been consummated as of the beginning of 1998 and 1997, respectively, nor are they necessarily indicative of future results. 4. Equity Interest in Equistar Chemicals, LP Equistar was formed on December 1, 1997 as a joint venture between the Company and Millennium Chemicals Inc. ("Millennium"), to own and operate the businesses contributed by the partners. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, while Millennium contributed substantially all of the assets comprising its polyethylene and related products, performance polymers and ethyl alcohol businesses, which had been held in Millennium Petrochemicals Inc., a wholly- owned subsidiary of Millennium. On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation ("Occidental"), were contributed to Equistar ("Occidental Contributed Business"). Equistar is operated as a Delaware limited partnership owned by subsidiaries of the Company, Millennium and Occidental ("Partners"). 62 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Lyondell currently has a 41.0 percent joint venture ownership interest, while Millennium and Occidental each have 29.5 percent. Prior to the addition of Occidental as a partner on May 15, 1998, the Company had a 57.0 percent joint venture ownership interest, while Millennium had 43.0 percent. 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 is as follows:
December 31 ------------------------- Millions of dollars 1998 1997 ------------------- ------------ ------------ BALANCE SHEETS Total current assets.......................... $1,130 $1,192 Property, plant and equipment, net............ 4,075 2,118 Goodwill, net................................. 1,151 1,139 Deferred charges and other assets............. 312 151 ------ ------ Total assets.................................. $6,668 $4,600 ====== ====== Current maturities of long-term debt.......... $ 150 $ 36 Other current liabilities..................... 488 300 Long-term debt, less current maturities....... 1,865 1,512 Capital lease obligations..................... 205 -- Other liabilities and deferred credits........ 75 34 Partners' capital............................. 3,885 3,063 Note receivable from Lyondell................. -- (345) ------ ------ Total liabilities and partners' capital....... $6,668 $4,600 ====== ====== For the year For the one ended month ended December 31, December 31, 1998 1997 ------------ ------------ STATEMENTS OF INCOME Sales and other operating revenues............ $4,363 $ 365 Cost of sales................................. 3,773 287 Selling, general and administrative expenses.. 273 21 Unusual charges............................... 35 42 ------ ------ Operating income.............................. 282 15 Interest expense, net......................... 139 8 ------ ------ Net income.................................... $ 143 $ 7 ====== ====== SELECTED CASH FLOW INFORMATION Depreciation and amortization................. $ 268 $ 19 Expenditures for property, plant and equipment.................................... 200 12
The Company's $134 million and $30 million share of Equistar's income before unusual charges for the one year and for the one month ended December 31, 1998 and 1997, respectively, are presented as "Income from equity investments" in Equistar in the Consolidated Statements of Income. The Company's $15 million and $24 million share of Equistar's unusual charges for the year ended December 31, 1998 and the one month 63 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ended December 31, 1997, respectively, are included in the "Unusual charges" line in the Consolidated Statements of Income (see Note 7). At the formation of Equistar and adjusted for the addition of the Occidental Contributed Business on May 15, 1998, the difference between the Company's investment in Equistar and its underlying equity in Equistar's net assets was approximately $900 million. This difference is being accreted into income of the Company over 25 years using the straight-line method. This accretion is included in "Income from equity investments" in Equistar in the Consolidated Statements of Income. Included in "Sales and other operating revenues" above are $97 million in sales to Lyondell for the five months ended December 31, 1998. Sales to LCR included above were $236 million for the year ended December 31, 1998 and $27 million for the month of December 1997. In addition, Equistar purchased $2 million from Lyondell for the five months ended December 31, 1998, which is included in Equistar's "Cost of sales" above. Purchases from LCR during the year ended December 31, 1998 and for the month of December 1997, included in Equistar's "Cost of sales" totaled $131 million and $10 million, respectively. The Company has various service and cost sharing arrangements with Equistar. Billings to Equistar were approximately $3 million for the year ended December 31, 1998. Billings from Equistar were approximately $1 million for the year ended December 31, 1998. 5. Equity Interest in LYONDELL-CITGO Refining LP In July 1993, LCR was formed to own and operate the Company's refining business. LCR is structured as a Delaware limited partnership (formerly a Texas limited liability company) owned by subsidiaries of the Company and CITGO. LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997, which enabled the facility to process substantial additional volumes of extra heavy crude oil. As a result of the completion of the Upgrade Project, effective April 1, 1997, the participation interests changed to reflect CITGO's equity contribution to the Upgrade Project. The participation interests changed from approximately 86 percent and 14 percent for the Company and CITGO, respectively, and are currently 58.75 percent and 41.25 percent for the Company and CITGO, respectively. Net income before depreciation expense for the period is allocated to LCR's owners based upon participation interests. Depreciation expense is allocated to the owners based upon 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 the Company, changed to unanimous vote, resulting in joint control of LCR by Lyondell and CITGO. Consequently, effective January 1, 1997, the Company began to account for its investment in LCR using the equity method of accounting. 64 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summarized financial information for LCR is as follows. The results below include a restatement for a pricing adjustment between LCR and Lyondell recorded in 1996 and retroactive to 1993.
December 31 ------------- Millions of dollars 1998 1997 ------------------- ------ ------ BALANCE SHEETS Total current assets....................................... $ 197 $ 243 Property, plant and equipment, net......................... 1,370 1,391 Deferred charges and other assets.......................... 70 47 ------ ------ Total assets............................................... $1,637 $1,681 ====== ====== Total current liabilities.................................. $ 203 $ 293 Long-term debt............................................. 717 663 Other liabilities and deferred credits..................... 68 52 Partners' capital.......................................... 649 673 ------ ------ Total liabilities and partners' capital.................... $1,637 $1,681 ====== ======
For the year ended December 31 -------------------- 1998 1997 1996 ------ ------ ------ STATEMENTS OF INCOME Sales and other operating revenues.................. $2,055 $2,695 $2,816 Cost of sales....................................... 1,754 2,442 2,750 Selling, general and administrative expenses........ 78 72 62 Unusual charges..................................... 10 -- -- ------ ------ ------ Operating income.................................... 213 181 4 Interest expense, net............................... 43 35 -- State income taxes.................................. 1 1 -- ------ ------ ------ Net income.......................................... $ 169 $ 145 $ 4 ====== ====== ====== SELECTED CASH FLOW INFORMATION Depreciation and amortization....................... $ 100 $ 91 $ 35 Expenditures for property, plant and equipment...... 61 85 529
Included in sales and other operating revenues above are $181 million and $175 million in sales to Lyondell for the eleven months ended November 30, 1997 and the year ended December 31, 1996, respectively. Sales to Equistar included above were $131 million for the year ended December 31, 1998 and $10 million for the month of December 1997. In addition, LCR purchased $325 million and $234 million, primarily product purchases, from Lyondell for the eleven months ended November 30, 1997 and the year ended December 31, 1996, respectively, which are included in LCR's cost of sales. Purchases from Equistar during the year ended December 31, 1998 and for the month of December 1997, included in LCR's cost of sales, totaled $236 million and $27 million, respectively. The Company has various service and cost sharing arrangements with LCR. Billings to LCR were approximately $4 million, $7 million, and $11 million for the years ended December 31, 1998, 1997 and 1996, respectively. Billings from LCR were approximately $4 million, $5 million, and $3 million for the years ended December 31, 1998, 1997 and 1996, respectively. 65 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, during 1998 and 1997, the Company received interest payments of approximately $9 million and $13 million respectively, for interest on loans related to funding a portion of the Upgrade Project and certain other capital expenditures at the Refinery. LCR has a long-term crude supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. Under the Crude Supply Agreement, LCR is required to purchase, and PDVSA Oil is required to sell, up to 230,000 barrels per day of extra heavy Venezuelan crude oil. PDVSA Oil has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. The Crude Supply Agreement incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation and energy costs; (ii) certain actual costs; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed margins and deemed costs are adjusted periodically. These adjustments are based upon inflation rates and energy costs, however, deemed margin adjustments can be less than the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and also because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Agreement will vary depending upon, among other things, the efficiency with which LCR conducts its operations during such period. Despite the limitations discussed above, the Crude Supply Agreement reduces the volatility of earnings and cash flow of the refining operations of LCR irrespective of market fluctuations of either crude oil or refined products. Specifically, if the market value of refined products deemed to be produced from the Venezuelan crude oil increases, the deemed cost of crude oil to LCR will also increase. Alternatively, if the market value of refined products deemed to be produced from the Venezuelan crude oil decreases, the deemed cost of crude oil to LCR will also decrease. This results in relatively stable deemed margins, regardless of refined products market volatility. If the actual yields, costs or volumes, differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially different than anticipated. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the Refinery. Both PDVSA Oil and CITGO are direct or indirect, wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of the Republic of Venezuela. Under the terms of the Limited Partnership Agreement of LYONDELL-CITGO Refining LP, CITGO has a one-time option to increase its participation interest in LCR up to 50 percent by making an additional equity contribution after January 1, 2000, but not later than September 30, 2000. 6. Equity Interest in Lyondell Methanol Company, L.P. Lyondell Methanol was formed in December 1996 by the Company and MCN Investment Corporation ("MCNIC") to own and operate the methanol facility at the Company's Channelview, Texas facility. At formation, the Company sold an undivided 25 percent interest in the facility to MCNIC, creating Lyondell Methanol, a Texas limited partnership owned by subsidiaries of the Company and MCNIC. The Company owns the remaining 75 percent interest and serves as managing partner. Since December 1, 1997, Equistar has served as operator of the methanol facility. Lyondell Methanol sells all of its products to Equistar. 66 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In accordance with the guidance in Emerging Issues Task Force Issue No. 96- 16 issued in May 1997, the Company began to account for its investment in Lyondell Methanol using the equity method of accounting, effective January 1, 1998. During 1998 and 1997, Lyondell Methanol revenues were $104 million and $165 million and net income was $8 million and $58 million, respectively. 7. Unusual Charges During 1998, the Company wrote off $57 million of costs assigned to purchased in-process research and development in connection with the Acquired Business. The Company's pro rata share of Equistar's unusual charges for 1998 and 1997 was $15 million and $24 million, respectively, and consisted primarily of costs associated with the consolidation of certain operations. These costs were paid by Equistar and allocated to the Partners in accordance with their ownership percentages. Lyondell's pro rata share of LCR's unusual charges related to a new agreement with LCR's labor union. Additionally, related to the formation of Equistar, Lyondell incurred unusual charges in 1998 and 1997 related to the early termination of incentive compensation plans and executive severance. The unusual charges consisted of the following items for the years ended December 31:
Millions of dollars 1998 1997 ------------------- ---- ---- Purchased in-process research and development................... $57 $-- Lyondell's pro rata share of Equistar unusual charges........... 15 24 Lyondell's pro rata share of LCR unusual charges................ 6 -- Lyondell incentive compensation and executive severance......... 4 16 --- --- Total unusual charges......................................... $82 $40 === ===
8. Income Taxes The significant components of the provision for income taxes were as follows for the years ended December 31:
Millions of dollars 1998 1997 1996 ------------------- ---- ---- ---- Current Federal............................................... $(44) $114 $ 19 Foreign............................................... 6 -- -- State................................................. (1) 13 1 ---- ---- ---- Total current....................................... (39) 127 20 ---- ---- ---- Deferred Federal............................................... 69 43 48 Foreign............................................... (1) -- -- State................................................. 8 -- 2 ---- ---- ---- Total deferred...................................... 76 43 50 ---- ---- ---- Total provision for income taxes.................... $ 37 $170 $ 70 ==== ==== ====
67 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets were as follows as of December 31:
Millions of dollars 1998 1997 ------------------- ---- ---- Deferred tax liabilities: Tax over book depreciation and amortization................ $452 $ -- Investments in partnerships................................ 251 230 Other...................................................... 30 -- ---- ---- Total deferred tax liabilities........................... 733 230 ---- ---- Deferred tax assets: Provisions for benefit plans and estimated expenses........ 236 25 Federal benefit attributable to foreign taxes.............. 100 -- Federal tax credit carryforwards........................... 57 -- Other...................................................... 30 2 ---- ---- Total deferred tax assets................................ 423 27 Deferred tax asset valuation allowance..................... (27) -- ---- ---- Net deferred tax assets.................................. 396 27 ---- ---- Net deferred tax liabilities................................. 337 203 Less current portion of deferred tax liability (asset)....... -- (6) ---- ---- Long-term deferred income taxes............................ $337 $209 ==== ====
At December 31, 1998, net deferred tax assets of $76 million were classified as "Deferred charges and other assets" on the Consolidated Balance Sheets. Under Internal Revenue Code Sections 338 (g) and (h) (10), Lyondell and ARCO agreed to elect to step up the U.S. tax basis of the Acquired Company's net assets. This will result in significantly increased depreciation and amortization deductions for U.S. tax purposes. The reconciliation of income tax computed at the U.S. federal statutory tax rate to the Company's effective tax rate follows:
Description 1998 1997 1996 ----------- ---- ---- ---- U.S. statutory income tax rate........................ 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Foreign and U.S. tax effects of foreign operations....................................... 6.9 -- -- State income taxes, net of federal................ 4.9 1.8 1.2 Settlement of tax issues.......................... (5.1) -- -- Officer compensation.............................. -- .9 -- Other, net........................................ (.2) (.4) (.5) ---- ---- ---- Effective income tax rate............................. 41.5% 37.3% 35.7% ==== ==== ====
68 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Related Party Transactions Atlantic Richfield Company--Sales to ARCO, excluding sales to ARCO Chemical Company, were $31 million in 1996. Cost of sales and selling expenses include charges from ARCO, excluding costs to ARCO Chemical Company, of $23 million in 1996. The Company purchased 383,312 shares of its common stock held by ARCO after the conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66 per share. After that transaction, ARCO ceased to be a related party. Sales by Lyondell to ARCO Chemical, an ARCO affiliate and therefore a related party until September 1997, consisting of propylene, MTBE, benzene, ethylene, methanol and other products and services, were $206 million and $287 million during 1997 and 1996, respectively. In July 1996, a fire occurred at the ARCO PipeLine Company meter station located within the Channelview Facility. The fire forced the shutdown of the entire Channelview Facility for several days and more than two weeks for some units. The Company recovered lost profits from ARCO PipeLine Company for this shutdown. The recovery was included in 1996 reported results. 10. Accounts Receivable In December 1998, the Company entered into a three-year receivables purchase agreement with an independent issuer of receivables-backed commercial paper. Under the terms of the agreement, the Company agreed to sell on an ongoing basis and without recourse, designated accounts receivable. To maintain the balance of the accounts receivable sold, the Company is obligated to sell new receivables as existing receivables are collected. The agreement permits the sale of up to $175 million of accounts receivable through December 2001. At December 31, 1998, the Company's gross accounts receivable that had been sold to the purchasers aggregated $160 million. This amount has been reported as operating cash flows in the Consolidated Statements of Cash Flows. Costs related to the sale are included in "Other income (expense), net" in the Consolidated Statements of Income. 11. Inventories Inventories are stated at the lower of cost or market. In 1998, approximately 94 percent of inventories, excluding materials and supplies, were determined by the last-in, first-out ("LIFO") method. Materials and supplies and other non-LIFO inventories are valued using either the first-in, first-out ("FIFO") or the average cost methods. Inventories at December 31, 1998 were comprised of the following:
Millions of dollars ------------------- Finished goods....................................................... $459 Work-in-process...................................................... 18 Raw materials........................................................ 34 Materials and supplies............................................... 39 ---- Total inventories.................................................. $550 ====
As of December 31, 1997, all of Lyondell's inventories had been contributed to Equistar. 69 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Property, Plant and Equipment, Net The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:
Millions of dollars 1998 1997 ------------------- ------ ---- Land......................................................... $ 19 $ -- Manufacturing facilities and equipment....................... 4,470 138 Construction in progress..................................... 98 -- ------ ---- Total property, plant and equipment........................ 4,587 138 Less accumulated depreciation................................ 76 92 ------ ---- Property, plant and equipment, net......................... $4,511 $ 46 ====== ====
Depreciation expense for 1998, 1997 and 1996 was $75 million, $71 million and $89 million, respectively. Approximately $32 million of interest cost during 1996 was capitalized as property, plant and equipment. No interest was capitalized during 1998 and 1997. At December 31, 1997, the Company's manufacturing facilities and equipment consisted of the assets owned by Lyondell Methanol. 13. Deferred Charges and Other Assets Deferred charges and other assets, net of accumulated amortization, were as follows at December 31:
Millions of dollars 1998 1997 ------------------- ---- ---- Patents and licensed technology................................ $236 $ -- Company owned life insurance................................... 184 43 Contractual rights............................................. 138 -- Debt issue costs, net.......................................... 109 -- Other.......................................................... 213 4 ---- ---- Total deferred charges and other assets...................... $880 $ 47 ==== ====
The increase in deferred charges and other assets in 1998 is primarily due to the purchase of the Acquired Business. 14. Other Accrued Liabilities Other accrued liabilities were as follows at December 31:
Millions of dollars 1998 1997 ------------------- ---- ---- Accrued payroll and benefits................................... $148 $ 6 Accrued contractual obligations................................ 139 -- Accrued interest............................................... 55 2 Accrued taxes other than income................................ 49 11 Other.......................................................... 90 5 ---- ---- Total other accrued liabilities.............................. $481 $ 24 ==== ====
70 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Pension and Other Postretirement Benefits The Company provides defined pension and postretirement benefit plans to employees. The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:
Other Pension Postretirement Benefits Benefits ---------- ---------------- Millions of dollars 1998 1997 1998 1997 - ------------------- ---- ---- ------- ------- Change in benefit obligation: Benefit obligation, January 1.................. $136 $118 $ 5 $ 25 Service cost................................... 7 6 1 3 Interest cost.................................. 18 10 2 2 Plan amendments................................ -- -- -- (18) Actuarial loss................................. 42 21 5 5 Effect of settlement........................... 10 (9) -- -- Acquisition of ARCO Chemical................... 303 -- 61 -- Transfer to Equistar........................... -- -- -- (12) Benefits paid.................................. (29) (10) (1) -- ---- ---- ------- ------- Benefit obligation, December 31................ 487 136 73 5 ---- ---- ------- ------- Change in plan assets: Fair value of plan assets, January 1........... 103 90 -- -- Actual return of plan assets................... 11 14 -- -- Company contributions.......................... 12 9 1 -- Acquisition of ARCO Chemical................... 351 -- -- -- Benefits paid.................................. (29) (10) (1) -- ---- ---- ------- ------- Fair value of plan assets, December 31......... 448 103 -- -- ---- ---- ------- ------- Funded status.................................. (39) (33) (73) (5) Unrecognized actuarial loss.................... 70 21 8 4 Unrecognized prior service cost................ 6 3 (18) (20) Unrecognized transition obligation (asset)..... 5 (2) -- -- ---- ---- ------- ------- Net amount recognized.......................... $ 42 $(11) $ (83) $ (21) ==== ==== ======= ======= Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid benefit cost........................... $ 54 $ -- $ -- $ -- Accrued benefit liability...................... (12) (11) (83) (21) ---- ---- ------- ------- Net amount recognized.......................... $ 42 $(11) $ (83) $ (21) ==== ==== ======= =======
The above table for pension benefits includes foreign pension plans of ARCO Chemical. These plans constituted approximately 20 percent of the benefit obligation and 23 percent of the plan assets at December 31, 1998. The assumptions used in determining the net periodic pension cost and pension obligation for foreign pension plans were based on the economic environment of each applicable country. The benefit obligation and accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of plan assets were $19 million and $11 million, respectively, as of December 31, 1998 and $11 million and $7 million, respectively, as of December 31, 1997. These plans are not funded and consisted primarily of supplementary benefit plans for executives and expatriates. In connection with the formation of Equistar, pension obligations and assets were not contributed by Lyondell to Equistar. The employees transferred to Equistar became fully vested in the Lyondell pension plan effective December 1, 1997 and no longer accrue pension service with Lyondell. However, an accrued 71 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) postretirement benefit obligation of $12 million associated with Lyondell employees transferred to Equistar was contributed to Equistar by Lyondell. Net periodic pension and other postretirement benefit costs included the following components:
Other Pension Postretirement Millions of dollars Benefits Benefits - ------------------------------------------------ ---------------- --------------- 1998 1997 1996 1998 1997 1996 Components of net periodic benefit cost: ---- ---- ---- ---- ---- ---- Service cost................................... $ 7 $ 6 $ 10 $ 1 $ 3 $ 4 Interest cost.................................. 19 10 12 2 2 4 Expected return of plan assets................. (24) (8) (10) -- -- -- Prior service cost amortization................ -- -- -- (1) -- -- Actuarial loss amortization.................... 1 1 1 -- -- -- Transition obligation amortization............. -- -- 1 -- -- -- ---- --- ---- --- --- --- Net periodic benefit cost before settlement.... 3 9 14 2 5 8 Effect of settlement........................... 2 -- -- -- -- -- ---- --- ---- --- --- --- Net periodic benefit cost after settlement..... $ 5 $ 9 $ 14 $ 2 $ 5 $ 8 ==== === ==== === === ===
The above net periodic benefit costs included eleven months of 1997 and the full-year 1996 costs of the business contributed to Equistar on December 1, 1997, as well as the 1996 net periodic benefit costs of LCR.
Other Pension Postretirement Benefits Benefits ---------------- ---------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- -- Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1998 was 7.0 percent for 1999-2001 and 5.0 percent thereafter. A one-percentage-point increase in assumed health care cost trend rates would increase the postretirement benefit obligation by $10 million, while a one-percentage-point decrease would reduce the obligation by $8 million. The effect of a one- percentage-point change would be less than $1 million on the total of the service and interest cost components. 16. Long-Term Debt and Financing Arrangements In connection with its purchase of the Acquired Business, the Company executed a bank credit agreement providing for aggregate borrowings of up to $7.0 billion ("Credit Facility"). As part of the acquisition, the Company assumed approximately $870 million of ARCO Chemical debt. Borrowings under the Credit Facility of $6.5 billion were used for: (i) the purchase of approximately 97.4 million shares of ARCO Chemical common stock; (ii) repayment of debt, including the $345 million term note payable to Equistar, short-term borrowings of Lyondell and ARCO Chemical and other long-term borrowings of ARCO Chemical; and (iii) payment of certain debt issuance costs. The Credit Facility comprises: (i) a five-year revolving credit facility of up to $500 million to be used for general corporate purposes ("Revolving Credit Facility"); and (ii) four separate term loans ("Term Loans") in the amounts of: (a) $2.0 billion ("Term Loan A") to be amortized over five years; (b) $1.25 billion ("Term Loan B") to be amortized over seven years; (c) $1.25 billion with principal maturing on June 30, 1999 ("Term Loan C"); and (d) $2.0 billion with principal maturing on June 30, 2000 ("Term Loan D"). All of the Term Loans were funded on July 28, 1998. No amounts have been funded to date under the Revolving Credit Facility. 72 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Credit Facility is collateralized by cash flow streams from the Company's three joint ventures and the Company's common stock ownership in its subsidiaries. The Term Loans bear interest at the following rates: (i) Term Loan A--LIBOR plus 2.0 percent; (ii) Term Loan B--LIBOR plus 2.5 percent; (iii) Term Loan C--LIBOR plus 2.0 percent; and (iv) Term Loan D--LIBOR plus 2.0 percent. Mandatory prepayments from certain sources of funds are required with respect to the Term Loans until such time as: (i) Term Loans C and D are repaid in full, including accrued interest and fees thereon; and (ii) Lyondell has achieved investment grade ratings of at least BBB- and Baa3 from Standard & Poor's Ratings Services and Moody's Investors Service, Inc., respectively. The sources of funds for mandatory prepayments include: (i) cash proceeds received from or as a result of: (a) certain equity or debt issuances; (b) the recapitalization of LCR; and (c) asset sales, as defined; and (ii) 50 percent of annual excess cash flow, as defined, less the aggregate principal amount prepaid under the Term Loans. Under the covenant provisions of the Credit Facility, the Company has agreed to, among other things: (i) maintain certain specified financial ratios and consolidated net worth (as defined in the Credit Facility); (ii) refrain from making certain distributions with respect to Lyondell's common stock; (iii) refrain from making certain investments, as defined; (iv) refrain from allowing its subsidiaries to incur certain types and amounts of debt; and (v) use its best efforts to maintain certain ownership interests in its joint ventures and to ensure that the joint ventures maintain certain capital expenditure, debt level and cash distribution policies. The Credit Facility requires the Company, among other things, to issue $1.25 billion of equity, as defined, by July 23, 1999. The breach of any of the covenants or financial requirements in the Credit Facility could result in a default thereunder, which would permit the lenders to declare the loans immediately payable and to terminate future lending commitments. The Company intends to seek an amendment to the Credit Facility that would, among other things, substantially reduce the requirements for the sale of equity and ease the financial ratio requirements. The amendment requires approval by lenders holding a majority of the commitments. Subject to the foregoing, the Company intends to complete an amendment of the Credit Facility and to effect debt and equity offerings in the second quarter of 1999, using the proceeds to meet the June 1999 debt maturity. In addition, the Company is actively exploring alternative means of retiring or refinancing debt, including other financing sources, enhancement of operating cash flows through cost reductions, management of working capital levels and sales of assets. Accordingly, the Company believes that it will be able to satisfy its obligations through the actions discussed above. Long-term debt at December 31, 1998 and 1997 consisted of the following:
Millions of dollars 1998 1997 ------------------- ------ ------ Term Loan A................................................ $1,852 $ -- Term Loan B................................................ 1,248 -- Term Loan C................................................ 1,250 -- Term Loan D................................................ 2,000 -- Debentures due 2000, 9.9%.................................. 200 -- Debentures due 2005, 9.375%................................ 100 -- Debentures due 2010, 10.25%................................ 100 -- Debentures due 2020, 9.8%.................................. 224 -- Other...................................................... 20 -- Term note to Equistar...................................... -- 345 ------ ------ Total long-term debt..................................... 6,994 345 Less current maturities.................................... 1,603 -- ------ ------ Long-term debt, net...................................... $5,391 $ 345 ====== ======
Lyondell transferred $744 million of long-term debt to Equistar on December 1, 1997 of which $713 million was outstanding at December 31, 1998. Lyondell remains an obligor on the debt. Under certain limited circumstances the debt holders have the right to require repurchase of up to $313 million of the debt. 73 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Aggregate maturities of all long-term debt during the next five years are $1.6 billion in 1999, $2.6 billion in 2000, $445 million in 2001, $445 million in 2002, $446 million in 2003, and $1.4 billion thereafter. 17. Financial Instruments The Company does not buy or sell, or hold or issue financial instruments for speculative trading purposes. Foreign currency swap and forward contracts are used to minimize foreign exchange exposures. Foreign exchange exposures result from cash flows between U.S. and international operations and transactions denominated in currencies other than the local currency of an operating entity. Swap contracts and forward contracts are used to hedge foreign exchange exposures The notional amounts of foreign currency contracts outstanding, principally involving the Netherlands guilder, were $205 million at December 31, 1998 with various maturity dates in 1999. Gains and losses, realized and unrealized, on foreign currency forward and swap contracts as well as realized and unrealized gains and losses on the underlying exposures are recognized currently in "Other income (expense), net" in the Consolidated Statements of Income. During 1998, to mitigate interest rate exposure on its anticipated future public debt issuance, the Company entered into treasury-rate lock transactions ("Treasury Locks") in the notional amount of $1 billion. The Treasury Locks, which are based on U.S. Treasury rates have an average interest rate of 5.52 percent with a determination date of August 5, 1999. The Company's accounting policy is to defer any gains and losses on the Treasury Locks, and recognize them as an adjustment to interest expense over the term of the debt issued. The fair value of the Treasury Locks at December 31, 1998 was an obligation of approximately $53 million, resulting from a decline in the relevant U.S. Treasury rates. Had the Company issued the anticipated fixed-rate debt as of December 31, 1998, it would have benefited from a lower interest rate on the debt issued, resulting in lower interest expense over the life of the debt, that would have been an offset to the potential settlement of the Treasury Locks. The carrying value and the estimated fair value of the Company's financial instruments as of December 31, 1998 are shown as assets (liabilities) in the table below.
1998 --------------- Carrying Fair Millions of dollars Value Value ------------------- -------- ------ Nonderivatives: Investments and long-term receivables.................. $1,078 $1,078 Long-term debt (including current maturities).......... 6,994 7,027 Derivatives: Treasury locks......................................... -- (53) Foreign currency swaps................................. (10) (11) Foreign currency forwards.............................. (1) (1)
All derivative instruments are off-balance-sheet instruments, however net receivable or payable positions related to derivative instruments are carried on the balance sheet. The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Investments and long-term receivables, which consist primarily of equity investments in affiliated companies, were valued using current financial and other available information. Based upon the borrowing rates currently available to the Company for debt with terms and average maturities similar to the Company's debt portfolio, the fair value of the Company's long-term debt, including amounts due within one year, was $7.0 billion at December 31, 1998. The fair value of derivative financial instruments represents the amount to be exchanged if the existing contracts were settled at December 31, 1998 and are based on market quotes. 74 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. The Company does not generally require collateral or other security to support these financial instruments. The counterparties to these transactions are major institutions deemed creditworthy by the Company. The Company does not anticipate nonperformance by the counterparties. For the year ended December 31, 1998, the results of foreign exchange transactions, including foreign currency derivative instruments, were not significant. 18. Commitments and Contingencies The Company has commitments, including those related to capital expenditures, all made in the normal course of business. During August 1998, as contemplated at the time of the Acquisition, Lyondell announced the delay of construction of a PO plant, known as PO-11, that ARCO Chemical had previously scheduled for startup in late 2001. As part of the delay, the Company is negotiating the cancellation of the related lump-sum contract for the engineering, procurement and construction of the PO-11 plant. The Company recorded estimated liabilities for penalties and cancellation charges related to the cancellation of the lump-sum contract and related commitments at the time of the acquisition of ARCO Chemical (see Note 3). The Acquired Business is party to a long-term supply arrangement for toluene diisocyanate ("TDI"). Under the arrangement, the Company 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 Company is required to purchase a minimum of 216 million pounds of TDI per year for up to 15 years, beginning January 1, 1995. The aggregate purchase price is a combination of plant cost and market price. The Company is further obligated to pay additional capacity reservation fees based upon plant output factors. Prior to the formation of Equistar on December 1, 1997, the Company was party to various unconditional purchase obligation contracts as a purchaser of product and services. The Company's total purchases under those agreements, including LCR for 1996, were $27 million and $47 million in 1997 and 1996, respectively. Crude Supply Agreement--Depending upon market conditions, breach or termination of LCR's Crude Supply Agreement could adversely affect LCR, and therefore, the Company. Although the parties have negotiated alternate arrangements in the event of a force majeure, which may arise from, among other things, governmental or other actions restricting or otherwise limiting PDVSA Oil's ability to perform its obligations, any such alternative arrangements may not be as beneficial as the Crude Supply Agreement. 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 Agreement would require LCR to return to the practice of purchasing all or a portion of its crude oil feedstocks in the merchant market and would again subject LCR to significant volatility and price fluctuations. In late April 1998, LCR received notification from PDVSA Oil of reduced delivery of crude oil related to announced OPEC production cuts. LCR began receiving the reduced allocation of crude oil from PDVSA Oil in August 1998. Cross Indemnity Agreement--In connection with the transfer of assets and liabilities from ARCO to the Company in 1988, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemicals and refining business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement, updated in 1997 ("Revised Cross-Indemnity Agreement"), whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. For current and future cases related to Company products and Company operations, ARCO and the Company bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based upon years of ownership during the relevant time period. The party with the more significant potential liability 75 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) exposure is responsible for case management and associated costs while allowing the non-case managing party to protect its interests. Under the Revised Cross-Indemnity Agreement, the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to the Revised Cross-Indemnity Agreement will not have a material adverse effect upon the Consolidated Financial Statements of the Company. In connection with the Acquisition, the Company succeeded, indirectly, to a cross indemnity agreement with ARCO whereby ARCO Chemical indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the businesses of ARCO Chemical ("Former ARCO Businesses"), including liabilities under laws relating to the protection of the environment and the workplace, and liabilities arising out of certain litigation. As part of the agreement, ARCO indemnified ARCO Chemical with respect to claims or liabilities and other matters of litigation not related to the Former ARCO Businesses. ARCO also indemnified ARCO Chemical for certain federal, foreign, state, and local taxes that might be assessed upon audit of the operations of the Former ARCO Businesses for periods prior to July 1, 1987. 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 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. During the thirteen months ended December 31, 1998, approximately $1 million had been expensed by Equistar under the $7 million indemnification basket with respect to the business contributed by Lyondell. Environmental--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 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. Pursuant to the terms of the Revised Cross-Indemnity Agreement, the Company is currently contributing funds to the clean up 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. As of December 31, 1998, the Company has accrued $9 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs associated with the above mentioned sites. The costs 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 reserve has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure related to environmental matters. 76 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As part of the Acquisition (see Note 3), the Company assumed ARCO Chemical's environmental liability, which totaled $39 million at December 31, 1998 and reflects the Company's latest assessment of potential future remediation costs associated with known ARCO Chemical sites. The liability is related to four current plant sites, one former plant site and one federal Superfund site for amounts ranging from $2 million to $18 million per site. Further, the Acquired Business is involved in administrative proceedings or lawsuits relating to a minimal number of other Superfund sites. The Company estimates however, based upon currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts accrued are expected to be paid out over the next five to ten years. The Company has relied upon remedial investigation/feasibility studies ("RI/FS") at each site of the Acquired Business as a basis for estimating remediation costs at the site. RI/FS or preliminary assessments have been completed at most of the sites. However, selection of the remediation method and the cleanup standard to be applied are, in most cases, subject to approval by the appropriate government authority. Accordingly, the Company may have possible loss contingencies in excess of the amounts accrued to the extent the scope of remediation required, the final remediation method selected and/or the cleanup standard applied, vary from the assumptions used in estimating the liability. The Company estimates that the upper range of these possible loss contingencies should not exceed the amount accrued by more than $65 million. 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. The Company has been informed that this matter is considered closed by the EPA and no further enforcement action is anticipated. The extent of loss related to environmental matters ultimately depends upon a number of factors, including technological developments, changes in environmental laws, the number and ability to pay of other parties involved at a particular site and the Company's potential involvement in additional environmental assessments and cleanups. Based upon currently known facts, management believes that any remediation costs the Company may incur in excess of the amounts accrued or disclosed above would not have a material adverse impact on the Company's Consolidated Financial Statements. MTBE--Certain federal and state legislative initiatives have sought to either rescind the oxygenate requirement for reformulated gasoline sold in California and other states or restrict the use of MTBE. There is ongoing review of this issue and the ultimate resolution of the appropriateness of using MTBE could result in a significant reduction in the Company's MTBE sales. In addition, the Company has a take-or-pay contract with ARCO, which contributes significant pretax margin. If such legislative initiatives were enacted, 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. The Company would vigorously dispute such action. General--The Company 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 Consolidated Financial Statements of the Company. 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 of the Company. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Company's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 77 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. Lease Commitments The Company leases various facilities and equipment under noncancelable lease arrangements for varying periods. As of December 31, 1998, future minimum lease payments for years ending December 31, relating to all noncancelable operating leases with lease terms in excess of one year were as follows:
Millions of dollars ------------------- 1999................................................................ $ 52 2000................................................................ 42 2001................................................................ 38 2002................................................................ 33 2003................................................................ 26 Thereafter.......................................................... 310 ---- Total minimum lease payments...................................... $501 ====
Operating lease net rental expenses for 1998, 1997 and 1996, including Lyondell Methanol for 1997 and LCR for 1996, were $39 million, $43 million and $66 million, respectively. 20. Stockholders' Equity Dividends--During 1998, 1997 and 1996, the Company paid regular quarterly dividends of $.225 per share on common stock outstanding. Basic and Diluted Earnings per Share--Basic earnings per share for all periods presented are computed based upon the weighted average number of shares outstanding for the periods. Diluted earnings per share include the effect of outstanding stock options issued under the Executive Long-Term Incentive Plan and the Incentive Stock Option Plan. The following earnings per share ("EPS") data is presented for the years ended December 31:
1998 1997 1996 ----------- ------------ ------------ Thousands of shares Shares EPS Shares EPS Shares EPS - ------------------- ------ ---- ------ ----- ------ ----- Basic.................................... 77,669 $.67 79,796 $3.58 80,000 $1.58 Dilutive effect of options............... 30 -- 17 -- 45 -- ------ ---- ------ ----- ------ ----- Diluted.................................. 77,699 $.67 79,813 $3.58 80,045 $1.58 ====== ==== ====== ===== ====== =====
Treasury Stock--From time to time the Company purchases its shares in the open market to be used for issuances under the Company's employee compensation and benefits plans, including stock option and restricted stock plans. During 1998, the Company purchased 500,000 shares for approximately $10 million to be used for such plans. The Company reissued, under the Restricted Stock Plan, 88,848 shares previously purchased. Earlier in 1998, the Company completed the stock repurchase program authorized by the Company's Board of Directors in September 1997. A total of 2,567,051 shares were purchased for $75 million under this stock repurchase program. Restricted Stock Plan--During 1998 the Company granted and issued 88,848 shares of restricted stock to employees of the Acquired Business. The shares vest on various dates through December 15, 2000, depending upon the terms of the individual grants. Employees are entitled to receive dividends on the restricted shares. Rights to Purchase Common Stock--On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right ("Right") for each outstanding share of the Company's common stock to stockholders of record on December 20, 1995. The Rights become exercisable upon the earlier of: (i) ten days following a public 78 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) announcement by another entity that it has acquired beneficial ownership of 15 percent or more of the outstanding shares of common stock; or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15 percent or more of the outstanding shares of common stock, except under certain circumstances. The Rights expire at the close of business on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or exchanged by the Company as described in the Rights Agreement dated as of December 8, 1995. Preferred Stock--The Company has authorized 80,000,000 shares of preferred stock, $.01 par value, of which none were issued or outstanding at December 31, 1998. Stock Options--The Company's Executive Long-Term Incentive Plan ("LTI Plan") became effective in November 1988. The last stock options granted under the LTI Plan were granted in March 1994. No additional stock option grants will be made under this plan. The LTI Plan provided, among other compensation awards, for the granting to officers and other key management employees of non- qualified stock options for the purchase of up to 1,295,000 shares of the Company's common stock. The number of options exercisable each year is equal to 25 percent of the number granted after each year of continuous service starting one year from the date of grant. The LTI Plan provided that the option price per share was not less than 100 percent of the fair market value of the stock on the effective date of the grant. As of December 31, 1998, options covering 621,835 shares were outstanding under the LTI Plan with a weighted average remaining life of 4 years, all of which were exercisable at prices ranging from $18.25 to $30.00 per share. The following summarizes stock option activity for the LTI Plan:
Number Average of Option Price Shares Per Share -------- ------------ Balance, January 1, 1996................................. 948,256 $23.26 Exercised.............................................. (204,454) 22.64 -------- Balance, December 31, 1996............................... 743,802 23.43 Exercised.............................................. (11,642) 19.15 -------- Balance, December 31, 1997............................... 732,160 23.50 Exercised.............................................. (110,325) 22.84 -------- Balance, December 31, 1998............................... 621,835 23.62 ========
79 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's Incentive Stock Option Plan ("ISO Plan"), a tax qualified plan, became effective in January 1989. The last stock options granted under the ISO Plan were granted in March 1993. No additional grants will be made under the ISO Plan. All employees of the Company who were not on the executive payroll were eligible to participate in the ISO Plan, subject to certain restrictions. Various restrictions apply as to when and to the number of stock options that may be exercised during any year. As of December 31, 1998, options covering 145,191 shares were outstanding at $30.00 per share. These options were held by 641 eligible employees and expired in January 1999. At December 31, 1998, no stock options were exercisable. The following summarizes stock option activity for the ISO Plan:
Number Average of Option Price Shares Per Share ------- ------------ Balance, January 1, 1996.................................. 189,553 $29.64 Canceled/forfeited...................................... (10,303) 28.51 Exercised............................................... (3,446) 19.44 ------- Balance, December 31, 1996................................ 175,804 29.91 Canceled/forfeited...................................... (18,250) 29.68 Exercised............................................... (803) 19.44 ------- Balance, December 31, 1997................................ 156,751 29.99 Canceled/forfeited...................................... (11,408) 30.00 Exercised............................................... (152) 19.44 ------- Balance, December 31, 1998................................ 145,191 30.00 =======
Employee stock options are accounted for under the intrinsic value based method prescribed by the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized in connection with stock option grants under the plans. There were no grants in any of the years ended December 31, 1998, 1997 and 1996. 21. Supplemental Cash Flow Information Supplemental cash flow information is summarized as follows for the years ended December 31:
Millions of dollars 1998 1997 1996 ------------------- ---- ---- ---- Cash paid during the year for: Interest: Paid.................................................... $230 $ 66 $103 Less amount capitalized................................. -- -- 32 ---- ---- ---- Net.................................................... $230 $ 66 $ 71 ==== ==== ==== Income taxes............................................. $ 63 $125 $ 42 ==== ==== ====
The petrochemicals and polymers businesses contributed by the Company to Equistar on December 1, 1997 included non-cash net assets with a net book value of $762 million, including $381 million of accounts receivable, $233 million of inventory, $826 million of net property, plant and equipment and $745 million of long-term debt, including the current maturities. In addition, the Company contributed a $345 million term note payable to Equistar, which was repaid in July 1998. 80 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 22. Segment and Related Information Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has identified four reportable segments in which it operates. The reportable segments are: (i) intermediate chemicals and derivatives; (ii) petrochemicals; (iii) polymers; and (iv) refining. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). The methanol segment is not a reportable segment. The reportable segments are described further below: Intermediate Chemicals and Derivatives--This segment consists of the production and marketing of propylene oxide ("PO"), polyether polyols, propylene glycol, propylene glycol ethers, toluene diisocyanate ("TDI"), styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE"). Petrochemicals--This segment consists of operations in: olefins, including ethylene, propylene, butadiene, butylenes and specialty products; aromatics, including benzene and toluene; methanol; oxygenated chemicals, including ethylene oxide and derivatives, MTBE, ethyl alcohol and diethyl ether; and specialty chemicals, including refinery blending stocks. The petrochemicals business of Equistar for 1998 and December 1997 is included in this segment. Polymers--This segment consists of operations in: polyolefins, including high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear low density polyethylene ("LLDPE") and polypropylene; and performance polymers products, including color concentrates and compounds, wire and cable resins and compounds, adhesive resins, and fine powders. The polymers business of Equistar for 1998 and December 1997 is included in this segment. Refining--This segment, which is comprised of LCR operations, consists of: refined petroleum products, including conventional and reformulated gasoline, low sulfur diesel and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils, process oils and base oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. No customer accounted for 10 percent or more of consolidated sales during 1998, 1997 or 1996, other than CITGO during 1996, which purchased substantially all of the refined products produced at the LCR Refinery under the Products Agreement (see Note 5). Under the terms of that agreement, CITGO continues to purchase a substantial portion of the output of the Refining segment. 81 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Summarized financial information concerning the Company's reportable segments is shown in the following table. The table includes certain reclassifications for an intersegment pricing adjustment recorded in 1996. Intersegment sales from the petrochemicals segment to the polymers segment in 1997 and 1996 include ethylene and propylene produced at Equistar's Channelview facility. Intersegment sales between the petrochemicals and refining segments in 1997 and 1996 include olefins feedstocks and benzene produced at the Refinery, and gasoline blending stocks and hydrogen produced at Equistar's Channelview facility. Intersegment sales were made at prices based upon current market values.
INTERMEDIATE CHEMICALS AND MILLIONS OF DOLLARS DERIVATIVES PETROCHEMICALS POLYMERS REFINING OTHER TOTAL - ------------------- ------------ -------------- -------- -------- ----- ------ 1998 Sales and other operating revenues..... $1,447 $1,447 Income from equity investments before unusual charges........ -- $ 159 $ 89 $ 116 $(108) 256 Unusual charges......... 57 -- -- 6 19 82 Operating income........ 108 159 89 110 (127) 339 Total assets............ 8,200 297 201 315 212 9,225 Capital expenditures.... 64 -- -- -- -- 64 Depreciation and amortization expense... 138 -- -- -- -- 138 1997 Sales and other operating revenues: Customers............. $2,108 $770 $2,878 Intersegment.......... 424 -- $(424) -- Income from equity investments before unusual charges........ 28 13 $ 102 (11) 132 Unusual charges......... -- -- -- 40 40 Operating income........ 472 95 102 (135) 534 Total assets............ 447 349 300 463 1,559 Capital expenditures.... 27 13 -- 9 49 Depreciation and amortization expense... 50 29 -- 5 84 1996 Sales and other operating revenues: Customers............. $1,628 $783 $2,641 $5,052 Intersegment.......... 665 -- 171 $(836) -- Operating income........ 240 97 1 (60) 278 Total assets............ 870 624 1,706 76 3,276 Capital expenditures.... 57 20 529 3 609 Depreciation and amortization expense... 44 29 34 3 110
82 LYONDELL CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the details of "Other" operating income as presented above for the years ended December 31:
Millions of dollars 1998 1997 1996 ------------------- ----- ----- ----- Expenses, principally Equistar selling, general and administrative, not allocated to petrochemicals and polymers segments..................................... $(114) $ (95) $ (60) Income from equity investment in Lyondell Methanol Company, L.P.......................................... 6 -- -- Unallocated unusual charges............................ (19) (40) -- ----- ----- ----- Total................................................ $(127) $(135) $ (60) ===== ===== =====
The following "Sales and other operating revenues" by country data are based upon the location of the use of the product. Long-lived assets by country data are based upon the location of the assets. The data are for the five months ended and as of December 31, 1998, respectively:
Sales and Other Operating Long-Lived Millions of dollars Revenues Assets ------------------- --------- ---------- United States........................................ $ 724 $3,046 Foreign.............................................. 723 1,465 ------ ------ Total.............................................. $1,447 $4,511 ====== ======
Foreign long-lived assets primarily consist of the net property, plant and equipment of two plants, located in Rotterdam, The Netherlands, and Fos-sur- Mer, France, both of which are part of the intermediate chemicals and derivatives segment. Prior to the purchase of the Acquired Business as of July 28, 1998, the Company did not have operations outside the United States and export sales were not significant. 23. Unaudited Quarterly Results
For the quarter ended ----------------------------- March June September December Millions of dollars, except per share data 31 30 30 31 - ------------------------------------------ ----- ---- --------- -------- 1998 Sales and other operating revenues............... $ -- $ -- $566 $881 Income from equity investments................... 120 53 61 22 Operating income................................. 107 45 87 100 Income (loss) before income taxes................ 104 47 (24) (38) Net income (loss)................................ 65 29 (15) (27) Basic and diluted earnings (loss) per share...... .82 .38 (.20) (.35) 1997 Sales and other operating revenues............... $755 $789 $799 $535 Income from equity investments................... 6 21 29 76 Operating income................................. 85 167 182 100 Income before income taxes....................... 63 146 162 85 Net income....................................... 40 93 102 51 Basic and diluted earnings per share............. .50 1.17 1.27 .64
- -------- Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earnings per share). The sum of the quarters may not necessarily be equal to the full year earnings per share amount. 83 REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of Equistar Chemicals, LP In our opinion, the accompanying balance sheets and the related statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the "Partnership") at December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 26, 1999 84 EQUISTAR CHEMICALS, LP STATEMENTS OF INCOME
For the period from December 1, 1997 For the year (inception) ended to December 31, December 31, Millions of dollars 1998 1997 - ------------------- ------------ ------------ Sales and other operating revenues: Unrelated parties................................... $3,818 $338 Related parties..................................... 545 27 ------ ---- 4,363 365 ------ ---- Operating costs and expenses: Cost of sales: Unrelated parties................................. 3,313 261 Related parties................................... 460 26 Selling, general and administrative expenses........ 273 21 Unusual charges..................................... 35 42 ------ ---- 4,081 350 ------ ---- Operating income.................................... 282 15 Interest expense...................................... (156) (10) Interest income....................................... 17 2 ------ ---- Net income............................................ $ 143 $ 7 ====== ====
See Notes to Financial Statements. 85 EQUISTAR CHEMICALS, LP BALANCE SHEETS
December 31 ---------------- Millions of dollars 1998 1997 - ------------------- ------- ------- ASSETS Current assets: Cash and cash equivalents................................... $ 66 $ 41 Accounts receivable: Trade, net................................................ 376 428 Related parties........................................... 111 36 Receivables from partners................................... 3 150 Inventories................................................. 549 513 Prepaid expenses and other current assets................... 25 24 ------- ------- Total current assets.................................... 1,130 1,192 ------- ------- Property, plant and equipment................................. 5,847 3,690 Less accumulated depreciation and amortization................ (1,772) (1,572) ------- ------- 4,075 2,118 Investment in PD Glycol....................................... 55 -- Goodwill, net................................................. 1,151 1,139 Deferred charges and other assets............................. 257 151 ------- ------- Total assets.................................................. $ 6,668 $ 4,600 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade..................................................... $ 264 $ 154 Related parties........................................... 15 18 Payables to partners........................................ 9 63 Current maturities of long-term debt........................ 150 36 Other accrued liabilities................................... 200 65 ------- ------- Total current liabilities............................... 638 336 ------- ------- Obligations under capital leases.............................. 205 -- Long-term debt................................................ 1,865 1,512 Other liabilities and deferred credits........................ 75 34 Commitments and contingencies Partners' capital: Partners' capital........................................... 3,885 3,063 Note receivable from Lyondell LP............................ -- (345) ------- ------- Total partners' capital................................. 3,885 2,718 ------- ------- Total liabilities and partners' capital....................... $ 6,668 $ 4,600 ======= =======
See Notes to Financial Statements. 86 EQUISTAR CHEMICALS, LP STATEMENTS OF CASH FLOWS
For the period from December 1, 1997 For the year (inception) ended to December 31, December 31, Millions of dollars 1998 1997 - ------------------- ------------ ------------ Cash flows from operating activities: Net income.......................................... $ 143 $ 7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 268 19 Loss on disposition of property, plant and equipment........................................ 8 -- Equity in losses of investment in PD Glycol....... 3 -- Changes in assets and liabilities, net of the effects of assets contributed: Decrease (increase) in accounts receivable....... 105 (100) Decrease (increase) in receivables from partners........................................ 147 (101) Decrease (increase) in inventories............... 133 (5) Increase in accounts payable..................... 40 188 (Decrease) increase in payables to partners...... (63) 54 Increase in other accrued liabilities............ 122 48 Net change in other working capital accounts..... 2 (15) Other............................................ (62) 7 ------- ----- Net cash provided by operating activities........ 846 102 ------- ----- Cash flows from investing activities: Additions to property, plant and equipment......... (200) (12) Proceeds from disposition of property, plant and equipment......................................... 3 -- Contributions and advances to affiliates........... (15) -- ------- ----- Net cash used in investing activities............ (212) (12) ------- ----- Cash flows from financing activities: Borrowings of long-term debt....................... 757 50 Repayments of long-term debt....................... (290) -- Proceeds from payment of note receivable by Lyondell.......................................... 345 -- Cash contributions from partners................... -- 1 Distributions to partners.......................... (1,421) (100) ------- ----- Net cash used in financing activities............ (609) (49) ------- ----- Increase in cash and cash equivalents................ 25 41 Cash and cash equivalents at beginning of period..... 41 -- ------- ----- Cash and cash equivalents at end of period........... $ 66 $ 41 ======= =====
See Notes to Financial Statements. 87 EQUISTAR CHEMICALS, LP STATEMENTS OF PARTNERS' CAPITAL
Millions of dollars Lyondell Millennium Occidental Total - ------------------- -------- ---------- ---------- ------ Balance, December 1, 1997 (inception)... $ -- $ -- $ -- $ -- Capital contributions at inception: Net assets.......................... 763 2,048 -- 2,811 Note receivable from Lyondell LP.... 345 -- -- 345 Net income............................ 4 3 -- 7 Distributions to partners............. (57) (43) -- (100) ----- ------ ------ ------ Balance, December 31, 1997.............. 1,055 2,008 -- 3,063 Capital contributions: Net assets.......................... -- -- 2,097 2,097 Other............................... (14) 9 8 3 Net income (loss)..................... 84 64 (5) 143 Distributions to partners............. (512) (460) (449) (1,421) ----- ------ ------ ------ Balance, December 31, 1998.............. $ 613 $1,621 $1,651 $3,885 ===== ====== ====== ======
See Notes to Financial Statements. 88 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS 1. Formation of the Company and Operations Pursuant to a partnership agreement ("Partnership Agreement") Lyondell Chemical Company ("Lyondell") and Millennium Chemicals, Inc. ("Millennium") formed Equistar Chemicals, LP ("Equistar" or "Partnership"), a Delaware limited partnership, which commenced operations on December 1, 1997. From December 1, 1997 to May 15, 1998, the Partnership was owned 57 percent by Lyondell and 43 percent by Millennium. Lyondell owns its interest in the Partnership through two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP"). Millennium also owns its interest in the Partnership through two wholly-owned subsidiaries, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC ("Millennium LP"). On May 15, 1998, the Partnership was expanded with the contribution of certain assets from Occidental Petroleum Corporation ("Occidental") (see Note 3). These assets include the ethylene, propylene and ethylene oxide ("EO") and EO derivatives businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ("Oxy Petrochemicals"), a 50 percent interest in a joint venture between PDG Chemical Inc. ("PDG Chemical") and E.I. DuPont de Nemours and Company ("PD Glycol"), and a lease to the Partnership of the Lake Charles, Louisiana olefins plant and related pipelines held by Occidental Chemical Corporation ("Occidental Chemical") (collectively, "Occidental Contributed Business"). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas, Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene pipelines, and the lease to the Partnership of the Lake Charles, Louisiana olefins plant and related pipelines. In exchange for the Occidental Contributed Business, two subsidiaries of Occidental were admitted as limited partners and a third subsidiary was admitted as a general partner in the Partnership for an aggregate partnership interest of 29.5 percent. In addition, the Partnership assumed approximately $205 million of Occidental indebtedness and the Partnership issued a promissory note to an Occidental subsidiary in the amount of $419.7 million, which was subsequently paid in cash in June 1998. In connection with the contribution of the Occidental Contributed Business and the reduction of Millennium's and Lyondell's ownership interests in the Partnership, the Partnership also issued a promissory note to Millennium LP in the amount of $75 million, which was subsequently paid in June 1998. These payments are included in "Distributions to partners" in the accompanying Statements of Partners' Capital and of Cash Flows. The consideration paid for the Occidental Contributed Business was determined based upon arms-length negotiations between Lyondell, Millennium and Occidental. In connection with the transaction, the Partnership and Occidental also entered into a long-term agreement for the Partnership to supply the ethylene requirements for Occidental Chemical's U.S. manufacturing plants. After completion of this transaction, the Partnership is owned 41 percent by Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc. ("Occidental GP"), Occidental Petrochem Partner 1, Inc. ("Occidental LP1") and Occidental Petrochem Partner 2, Inc. ("Occidental LP2"). The Partnership owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium and Occidental ("Contributed Businesses") which consist of 20 manufacturing facilities on the U.S. Gulf Coast and in the U.S. Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene ("HDPE"), low- 89 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) density polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene, and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable resins, concentrates and compounds, and polymeric powders. The Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee consisting of nine representatives, three appointed by each partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership's Strategic Plan and annual updates thereof. Pursuant to the Partnership Agreement, net income is allocated among the partners on a pro rata basis based on their percentage ownership of the Partnership. Distributions are made to the partners based on their percentage ownership of the Partnership. Additional cash contributions required by the Partnership will also be based on the partners' percentage ownership of the Partnership. 2. Summary of Significant Accounting Policies Revenue Recognition--Revenue from product sales is generally recognized upon delivery of products to the customer. Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Partnership's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Partnership performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Partnership's investment strategy. The Partnership has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at the Partnership's discretion. As a result, none of the Partnership's cash is restricted. Accounts Receivable--The Partnership sells its products primarily to companies in the petrochemicals and polymers industries. The Partnership performs ongoing credit evaluations of its customers' financial condition and, in certain circumstances, requires letters of credit from them. The Partnership's allowance for doubtful accounts, which is reflected in the accompanying Balance Sheet as a reduction of accounts receivable, totaled $3 million at December 31, 1998. The Partnership had no allowance for doubtful accounts recorded at December 31, 1997. Inventories--Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis except for materials and supplies, which are valued at average cost. Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 5 to 30 years. Upon retirement or sale, the Partnership removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Statement of Income. The Partnership's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. 90 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Turnaround Maintenance and Repair Expenses--Cost of major repairs and maintenance incurred in connection with turnarounds of units at the Partnership's manufacturing facilities are deferred and amortized on a straight-line basis until the next planned turnaround, generally five to seven years. Deferred Software Costs--Costs to purchase and develop software for internal use are deferred and amortized on a straight-line basis over 10 years. The Partnership amortized $6 million and less than $1 million of deferred software costs for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Goodwill--Goodwill includes goodwill contributed by Millennium and goodwill recorded in connection with the contribution of Occidental's assets. Goodwill is being amortized using the straight-line method over forty years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to the related operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill, and if necessary other related assets, is adjusted. Management believes that no impairment exists at December 31, 1998. The Partnership amortized $31 million and $3 million of goodwill for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Accumulated amortization of goodwill was $166 million and $135 million at December 31, 1998 and 1997, respectively. Investment in PD Glycol--Equistar holds a 50 percent interest in a joint venture with E.I. DuPont de Nemours and Company that owns an ethylene glycol facility in Beaumont, Texas. This investment was contributed by Occidental in 1998. The investment in PD Glycol is accounted for using the equity method of accounting. Environmental Remediation Costs--Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. Pension and Other Postretirement Benefit Plans--During 1998, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 132, Employers' Disclosures about Pensions and Other Retirement Benefits. The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. SFAS No. 132 standardizes the disclosure requirements for these plans, to the extent practicable. Exchanges--Finished product exchange transactions, which involve homogeneous commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes--The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 91 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Segment and Related Information--In 1998, the Partnership adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Partnership's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the results of operations or the financial position of the Partnership (see Note 18). Reclassifications--Certain 1997 amounts have been restated to conform to classifications adopted in 1998. 3. Addition of Occidental Contributed Business On May 15, 1998, the Partnership was expanded with the contribution of certain assets from Occidental. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations for these assets are included in the accompanying Statement of Income prospectively from May 15, 1998. The consideration paid for the Occidental Contributed Business was approximately $2.1 billion and was allocated to the assets contributed and liabilities assumed based on the estimated fair values of such assets and liabilities at the date of the contribution. The fair value of the assets contributed and liabilities assumed by the Partnership on May 15, 1998 was as follows:
Millions of dollars ------------------- Total current assets......................................... $ 281 Property, plant and equipment................................ 1,964 Investment in PD Glycol...................................... 58 Goodwill..................................................... 43 Deferred charges and other assets............................ 49 ------ Total assets............................................... $2,395 ====== Other current liabilities.................................... $ 79 Long-term debt............................................... 205 Other liabilities and deferred credits....................... 14 Partners' capital............................................ 2,097 ------ Total liabilities and partners' capital.................... $2,395 ====== The unaudited pro forma combined historical results of the Partnership as if the Occidental Contributed Business had been contributed on January 1, 1998 is as follows: For the year ended December 31, Millions of dollars 1998 ------------------- ------------ Sales and other operating revenues........................... $4,869 Unusual charges.............................................. 35 Operating income............................................. 320 Net income................................................... 154
The unaudited pro forma data presented above is not necessarily indicative of the results of operations of the Partnership that would have occurred had such transaction actually been consummated as of January 1, 1998, nor are they necessarily indicative of future results. 92 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) 4. Supplemental Cash Flow Information
Millions of dollars 1998 1997 ------------------- ---- ---- Cash paid for interest.......................................... $154 $-- ==== === Noncash investing and financing activities: Noncash adjustments to contributed capital.................... $ 3 $-- Inventory transfer from PD Glycol............................. 15 -- ==== ===
Historical cost of assets contributed and liabilities assumed by the Partnership in December 1997 (inception): Total current assets............................................ $ 948 Property, plant and equipment, net.............................. 2,121 Goodwill, net................................................... 1,142 Deferred charges and other assets............................... 158 ------ Total assets.................................................. $4,369 ====== Current maturities of long-term debt............................ $ 36 Other current liabilities....................................... 17 Long-term debt.................................................. 1,462 Other liabilities and deferred credits.......................... 43 Partners' capital............................................... 3,156 Note receivable from Lyondell LP................................ (345) ------ Total liabilities and partners' capital....................... $4,369 ======
5. Financial Instruments The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to the Partnership for debt with terms and average maturities similar to the Partnership's debt portfolio, the fair value of the Partnership's long-term debt, including amounts due within one year, was approximately $2.3 billion and $1.5 billion at December 31, 1998 and 1997, respectively. The Partnership had issued letters of credit totaling $2.6 million and $4 million at December 31, 1998 and 1997, respectively. 6. Related Party Transactions Loans to Millennium and Occidental--In connection with Occidental's entry into Equistar in May 1998, Equistar executed promissory notes to Millennium and Occidental in the principal amounts of $75.0 million and $419.7 million, respectively. Each of the notes provides for the annual accrual of interest (based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR plus 0.6 percent. These notes were paid in full in June 1998. Interest expense incurred on these notes during 1998 was $3 million. Note Receivable from Lyondell LP--Upon formation of the Partnership, Lyondell LP contributed capital to the Partnership in the form of a $345 million promissory note ("Lyondell Note"). The Lyondell Note bears interest at LIBOR plus a market spread. The note was repaid in full by Lyondell in July 1998. Interest income accrued on the Lyondell Note totaled $12.8 million and $1.75 million during 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. 93 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Shared Services Agreement with Lyondell--Lyondell provides certain corporate, general and administrative services to the Partnership, including legal, tax, treasury, risk management and other services pursuant to a shared services agreement. During the year ended December 31, 1998, Lyondell charged the Partnership $3 million for these services. During the period December 1, 1997 (inception) to December 31, 1997, charges from Lyondell were less than $1 million. As part of the shared services agreement, the Partnership provides certain general and administrative services to Lyondell, such as health, safety and environmental services, human resource services, information services and legal services. During the year ended December 31, 1998 and during the period December 1, 1997 (inception) to December 31, 1997, the Partnership charged Lyondell less than $1 million for these services. Shared Services and Shared-Site Agreements with Millennium--The Partnership and Millennium have entered into a variety of operating, manufacturing and technical service agreements related to the business of Equistar and the vinyl acetate monomers, acetic acid, synthesis gas and methanol businesses retained by Millennium Petrochemicals. These agreements include the provision by the Partnership to Millennium Petrochemicals of materials management, certain utilities, administrative office space, health, safety and environmental services and computer services. During the year ended December 31, 1998, the Partnership charged Millennium Petrochemicals $5 million for these services. During the period from December 1, 1997 (inception) to December 31, 1997, charges to Millennium Petrochemicals were less than $1 million. These agreements also include the provision by Millennium Petrochemicals to the Partnership of certain operational services, including waste water treatment and barge dock access. During the year ended December 31, 1998 and during the period December 1, 1997 (inception) to December 31, 1997, Millennium Petrochemicals charged the Partnership less than $1 million for these services. Operating Agreement with Occidental Chemical Corporation--On May 15, 1998, Occidental Chemical and the Partnership entered into an Operating Agreement ("Operating Agreement") whereby Occidental Chemical agreed to operate and maintain the Occidental Contributed Business and to cause third-parties to continue to provide equipment, products and commodities to those businesses upon substantially the same terms and conditions as provided prior to the transfer. Under the terms of the Operating Agreement, the Partnership agreed to reimburse Occidental Chemical for its cost in connection with the services provided to the Partnership, and the Partnership agreed to pay Occidental Chemical an administrative fee. The Operating Agreement terminated in accordance with its terms on June 1, 1998. During the term of the Operating Agreement, the Partnership paid Occidental Chemical an administrative fee of $1 million. Transition Services Agreement with Occidental Chemical--On June 1, 1998, Occidental Chemical and the Partnership entered into a Transition Services Agreement ("TSA"). Under the terms of the TSA, Occidental Chemical agreed to provide the Partnership certain services in connection with the Occidental Contributed Business, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others. Between June 1, 1998 and December 31, 1998, the Partnership expensed $6 million in connection with services provided pursuant to the TSA. The TSA expires by its terms on June 1, 1999. Occidental Chemical Ethylene Sales Agreement--The Partnership and Occidental Chemical entered into a Sales Agreement, dated May 15, 1998 ("Ethylene Sales Agreement"). Under the terms of the Ethylene Sales Agreement, Occidental Chemical has agreed to purchase an annual minimum amount of ethylene from the Partnership equal to 100 percent of the ethylene feedstock requirements of Occidental Chemical's United States plants (estimated to be 2 billion pounds per year at the time of the signing of the agreement) less any quantities up to 250 million pounds tolled in accordance with the provisions of such agreement. The Partnership's maximum supply obligation in any calendar year under the Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from either party to the other, the Partnership's maximum supply obligation in any 94 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) calendar year under the Ethylene Sales Agreement may be "phased down" as set forth in the agreement, provided that no phase down may occur prior to January 1, 2009. In accordance with the phase down provisions of the agreement, the annual minimum requirements set forth in the agreement must be phased down over at least a five year period so that the annual required minimum cannot decline to zero prior to December 31, 2013 unless certain specified force majeure events occur. The Ethylene Sales Agreement provides for an ethylene sales price that is generally reflective of market prices and will be determined pursuant to a formula using the Partnership's sales price to third parties and several published market price indices. During the period from May 15, 1998 to December 31, 1998, the Partnership charged Occidental Chemical $171 million under the Ethylene Sales Agreement. Product Sales to Millennium--The Partnership sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100 percent of its ethylene requirements for its LaPorte, Texas facility (estimated to be 300 million pounds per year), up to a maximum of 330 million pounds per year. Millennium has the option to increase the amount purchased to up to 400 million pounds per year beginning January 1, 2001. The initial term of the contract expires December 1, 2000 and thereafter, the contract automatically renews annually. Either party may terminate on one year's notice, except that if Millennium elects to increase its purchases under the contract, a party must provide two year's notice of termination. The pricing terms of this agreement are similar to the Ethylene Sales Agreement with Occidental Chemical. The Partnership charged Millennium $41 million and $4 million for ethylene for 1998 and December 1997, respectively. Product Sales to Lyondell--Lyondell acquired its intermediate chemicals and derivatives business through the acquisition of ARCO Chemical Company effective August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE, benzene and alkylate, totaled $97 million for the period from August 1, 1998 to December 31, 1998, and were based on price terms generally reflective of market. Transactions with LCR--Lyondell's rights and obligations under the terms of its product sales and feedstock purchase agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment of Lyondell, were assigned to the Partnership. Accordingly, certain refinery products are sold to the Partnership as feedstocks, and certain olefins by-products are sold to LCR for processing into gasoline. Sales to LCR were $236 million and $27 million and purchases from LCR were $131 million and $10 million for the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, respectively. The Partnership also assumed certain tolling arrangements as well as terminalling and storage obligations between Lyondell and LCR and performs certain marketing services for LCR. Aggregate charges under these various service agreements of $15 million were made to LCR by the Partnership with respect to 1998. No charges were made during December 1997. All of the agreements between LCR and the Partnership are on terms generally representative of prevailing market prices. The Partnership also has a shared services agreement with LCR to provide LCR with information services, including mainframe processing and maintenance. Net charges to LCR by the Partnership for the shared services agreement were less than $1 million during 1998. No charges were made during December 1997. Transactions with Lyondell Methanol--The Partnership provides operating and other services for Lyondell Methanol Company, L.P. ("Lyondell Methanol") under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to Lyondell Methanol by the Partnership of the real property on which its methanol plant is located. Pursuant to the terms of those agreements, Lyondell Methanol pays the Partnership a management fee and will reimburse certain expenses of the Partnership at cost. Management fees charged by the Partnership to Lyondell Methanol totaled $6 million for the year ending December 31, 1998 and less than $1 million during the period from December 1, 1997 (inception) to December 31, 1997. The Partnership sells natural gas to Lyondell Methanol at prices generally representative of its cost. Purchases by Lyondell 95 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Methanol of natural gas feedstock from the Partnership totaled $44 million and $4 million for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Lyondell Methanol sells all of its products to Equistar. For the year ending December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, purchases from Lyondell Methanol were $103 million and $15 million, respectively. Related Party Leases--As part of their shared services agreement with the Partnership, Millennium subleases from the Partnership certain administrative office space at a monthly rent of $42,000. 7. Accounts Receivable In December 1998, the Partnership entered into a purchase agreement with an independent issuer of receivables-backed commercial paper. Under the terms of the agreement, the Partnership agreed to sell on an ongoing basis and without recourse, designated accounts receivable. To maintain the balance of the accounts receivable sold, the Partnership is obligated to sell new receivables as existing receivables are collected. The agreement expires in December 1999. At December 31, 1998, the Partnership's gross accounts receivable that had been sold to the purchasers aggregated $130 million. This amount has been reported as operating cash flows in the Statements of Cash Flows. Costs related to the sale are included in "Selling, general and administrative expenses" in the Statements of Income. 8. Inventories Inventories at December 31, 1998 and 1997 consisted of the following:
Millions of dollars 1998 1997 ------------------- ---- ---- Raw materials................................................... $149 $160 Work-in-process................................................. 11 5 Finished goods.................................................. 301 282 Materials and supplies.......................................... 88 66 ---- ---- Total inventories............................................. $549 $513 ==== ====
For the year ending December 31, 1998, cost of sales increased by less than $1 million associated with the reduction of LIFO inventories. For the period from December 1, 1997 (inception) to December 31, 1997, cost of sales increased by approximately $1 million associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $103 million at December 31, 1997. 9. Property, Plant and Equipment, Net The components of property, plant and equipment, at cost, and the related accumulated depreciation at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997 ------------------- ------ ------ Manufacturing facilities and equipment..................... $5,344 $3,489 Manufacturing equipment acquired under capital leases...... 236 -- Construction projects in progress.......................... 189 127 Land....................................................... 78 74 ------ ------ Total property, plant and equipment...................... 5,847 3,690 Less accumulated depreciation.............................. 1,772 1,572 ------ ------ Property, plant and equipment, net....................... $4,075 $2,118 ====== ======
96 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Depreciation expense for the year ending December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997 was $200 million and $15 million, respectively. At December 31, 1998, $10 million of the accumulated depreciation reported in the accompanying Balance Sheet related to the manufacturing equipment acquired under capital leases that was contributed by Occidental in 1998. In July 1998, the depreciable lives of certain assets were increased from a range of 5 to 25 years to a range of 5 to 30 years. This change was accounted for as a change in accounting estimate and resulted in a $33 million decrease in depreciation expense for 1998. 10. Deferred Charges and Other Assets Deferred charges and other assets at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997 ------------------- ---- ---- Deferred turnaround costs, net................................. $ 84 $ 66 Deferred software costs, net................................... 70 44 Deferred pension asset......................................... 30 23 Other.......................................................... 73 18 ---- ---- Total deferred charges and other assets...................... $257 $151 ==== ====
11. Other Accrued Liabilities Other accrued liabilities at December 31, 1998 and 1997 were as follows:
Millions of dollars 1998 1997 ------------------- ---- ---- Accrued property taxes.......................................... $ 76 $ 4 Accrued freight................................................. 22 8 Accrued payroll costs........................................... 44 19 Accrued interest................................................ 18 -- Accrued severance and other costs related to formation of the Partnership................................................ 3 27 Other........................................................... 37 7 ---- ---- Total other accrued liabilities............................... $200 $ 65 ==== ====
97 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) 12. Long-Term Debt and Financing Arrangements Long-term debt at December 31, 1998 and 1997 was comprised of the following:
Millions of dollars 1998 1997 ------------------- ------ ------ Bank credit facilities: 5-year term credit facility.............................. $1,150 $ 800 $500 million credit agreement............................ 152 -- Other debt obligations: Medium-term notes (2000-2005)............................ 163 194 10.00% Notes due in 1999................................. 150 150 9.125% Notes due in 2002................................. 100 100 6.50% Notes due in 2006.................................. 150 150 7.55% Debentures due in 2026............................. 150 150 Other.................................................... -- 4 ------ ------ Total long-term debt................................... 2,015 1,548 Less current maturities.................................... 150 36 ------ ------ Long-term debt, net.................................... 1,865 1,512 Capital lease obligations (5.89% due in 2000).............. 205 -- ------ ------ Total long-term debt and lease obligations............. $2,070 $1,512 ====== ======
Aggregate maturities of long-term debt during the five years subsequent to December 31, 1998 are as follows: 1999-$302 million; 2000-$247 million; 2001- $90 million; 2002-$1.251 billion; 2003-$29 million. All of the above debt is guaranteed by the partners. The medium-term notes mature at various dates from 2000 to 2005 and have a weighted average interest rate of 9.87 percent and 9.83 percent at December 31, 1998 and 1997, respectively. The Partnership has a five-year, $1.25 billion credit facility ("Facility") with a group of banks expiring November 2002. Borrowings under the Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR plus 1/2 of 1 percent, a fixed rate offered by one of the sponsoring banks or interest rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, depending on the type of borrowing made under the Facility. Borrowings under the Facility had a weighted average interest rate of 5.8 percent and 5.7 percent at December 31, 1998 and 1997, respectively. On June 12, 1998, the Partnership entered into a $500 million credit agreement consisting of a $250 million revolving credit facility and a $250 million one-year term facility. Borrowings under the $500 million credit agreement bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR plus 0.625 percent, a fixed rate offered by one of the sponsoring banks or interest rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks. At December 31, 1998, the weighted average interest rate for borrowings under the $500 million credit agreement was 6.1 percent. The Facility and the $500 million credit agreement ("Bank Credit Facilities") are available for working capital and general purposes as needed and contain covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, sales of assets and mergers and consolidations. In February 1999, the Partnership issued $900 million of debt securities. The debt securities include $300 million of 8.50 percent notes, which will mature on February 15, 2004, and $600 million of 8.75 percent notes, which will mature on February 15, 2009. The Partnership intends to use the net proceeds from this offering (i) to 98 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) repay the $205 million outstanding under a capitalized lease obligation relating to the Partnership's Corpus Christi facility, (ii) to repay the outstanding balance under the $500 million credit agreement, after which the $500 million credit agreement will be terminated, (iii) to repay the outstanding $150 million, 10.00 percent Notes due in June 1999, upon maturity and (iv) to the extent of the remaining net proceeds, reduce outstanding borrowings under the Facility and for Partnership working capital. Outstanding borrowings under the Partnership's $500 million credit agreement that are payable in 1999 are included as long-term obligations of the Partnership in the accompanying Balance Sheet at December 31, 1998 based on the expectation that these borrowings will be refinanced as described above. 13. Unusual Charges In December 1997, the Partnership recorded $42 million of unusual charges related to the formation of the Partnership. These charges included severance and other costs related to a workforce reduction (approximately 430 employees) that resulted from the consolidation of the businesses contributed to the Partnership ($30 million), various closing costs ($6 million), and various other charges ($6 million). Approximately $15 million of these charges were paid in 1997 and $27 million were included in other accrued liabilities at December 31, 1997. During the year ended December 31, 1998, approximately $24 million of these charges were paid and $3 million were included in other accrued liabilities at December 31, 1998. During 1998, the Partnership recorded and paid $35 million of unusual charges related to its initial formation and the addition of Occidental to the Partnership. These charges included transition personnel costs ($14 million), costs associated with the consolidation of certain operations and facilities ($11 million), operating and transition services provided by Occidental Chemical ($7 million), various closing costs ($2 million), and other miscellaneous charges ($1 million). 14. Leases At December 31, 1998, future minimum lease payments for capital and operating leases with noncancelable lease terms in excess of one year were as follows:
Millions of dollars Capital Operating ------------------- ------- --------- 1999.................................................... $ 13 $101 2000.................................................... 208 74 2001.................................................... -- 58 2002.................................................... -- 44 2003.................................................... -- 38 Thereafter.............................................. -- 336 ---- ---- Total minimum lease payments.......................... 221 $651 ==== Imputed interest........................................ (16) ---- Present value of minimum lease payments............... $205 ====
Operating lease net rental expense was $110 million for the year ending December 31, 1998 and $11 million for the period from December 1, 1997 (inception) to December 31, 1997. 99 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) The Partnership is party to various unconditional purchase obligation contracts as a purchaser for product and services. At December 31, 1998, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:
Millions of dollars ------------------- 1999................................................................ $ 29 2000................................................................ 28 2001................................................................ 24 2002................................................................ 23 2003................................................................ 23 Thereafter.......................................................... 142 ---- Total minimum contract payments................................... $269 ====
The Partnership's total purchases under these agreements were $33 million for the year ending December 31, 1998 and $3 million during the period from December 1, 1997 (inception) to December 31, 1997. 15. Retirement Plans All full-time regular employees of the Partnership are covered by defined benefit pension plans sponsored by the Partnership. The plans became effective on January 1, 1998, except for union represented employees formerly employed by Millennium, whose plans were contributed to the Partnership on December 1, 1997, and union represented employees formerly employed by Occidental, whose plans were contributed to the Partnership on May 15, 1998. In connection with the formation of the Partnership, there were no pension assets or obligations contributed to the Partnership, except for the union represented plans described above. Retirement benefits are based on years of service and the employee's highest three consecutive years of compensation during the last ten years of service. The funding policy for these plans is to make periodic contributions as required by applicable law. The Partnership accrues pension costs based on an actuarial valuation and funds the plans through contributions to pension trust funds. The Partnership also has unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits. 100 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) The following table provides a reconciliation of benefit obligations, plan assets and funded status of the retirement plans at December 31, 1998 and 1997:
Millions of dollars 1998 1997 - ------------------- ---- ---- Change in benefit obligation: Benefit obligation, January 1.................................... $ 21 $ -- Benefit obligation contributed at inception of Partnership....... -- 21 Benefit obligation contributed by Occidental..................... 46 -- Service cost..................................................... 16 -- Interest cost.................................................... 5 -- Actuarial loss................................................... 5 -- Benefits paid.................................................... (5) -- ---- ---- Benefit obligation, December 31.................................. $ 88 $ 21 ==== ==== Change in plan assets: Fair value of plan assets, January 1............................. $ 40 $ -- Fair value of plan assets contributed at inception of Partnership..................................................... -- 40 Fair value of plan assets contributed by Occidental.............. 51 -- Actual return of plan assets..................................... 1 -- Partnership contributions........................................ 1 -- Benefits paid.................................................... (5) -- ---- ---- Fair value of plan assets, December 31........................... $ 88 $ 40 ==== ==== Funded status...................................................... $ -- $ 19 Unrecognized actuarial loss........................................ 13 4 ---- ---- Net amount recognized.............................................. $ 13 $ 23 ==== ==== Amounts recognized in the Balance Sheets consist of: Prepaid benefit cost............................................. $ 30 $ 23 Accrued benefit liability........................................ (17) -- ---- ---- Net amount recognized............................................ $ 13 $ 23 ==== ==== Weighted-average assumptions as of December 31: Discount rate.................................................... 6.75% 7.25% Expected return on plan assets................................... 9.50% 9.00% Rate of compensation increase.................................... 4.75% 4.75%
As of December 31, 1998, Equistar had defined benefit pension plans where the accumulated benefit obligation exceeded the fair value of plan assets. The accumulated benefit obligation exceeded the fair value of plan assets by $19 million for these plans as of December 31, 1998. As of December 31, 1998 and 1997, Equistar had defined benefit pension plans where the fair value of plan assets exceeded the accumulated benefit obligation. The fair value of plan assets exceeded the accumulated benefit obligation by $19 million for these plans as of December 31, 1998 and 1997. The Partnership's net periodic pension cost for 1998 included the following components:
Millions of dollars ------------------- Components of net periodic benefit cost: Service cost....................................................... $16 Interest cost...................................................... 5 Expected return on plan assets..................................... (6) --- Net periodic benefit cost.......................................... $15 ===
101 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) As the non-union plans became effective on January 1, 1998, the Partnership did not recognize any net periodic pension cost during the period from December 1, 1997 (inception) to December 31, 1997. Effective January 1, 1998, the Partnership also maintains voluntary defined contribution savings plans for eligible employees. Under provisions of the plans, the Partnership contributes an amount equal to 160 percent of employee contributions up to a maximum matching contribution of eight percent of the employee's base salary. Contributions to the plans by the Partnership were $7 million and less than $1 million for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. 16. Postretirement Benefits Other Than Pensions The Partnership sponsors unfunded postretirement benefit plans other than pensions ("OPEB") for both salaried and non-salaried employees, which provide medical and life insurance benefits. The postretirement health care plans are contributory while the life insurance plans are non-contributory. Currently, the Partnership pays approximately 80 percent of the cost of the health care plans, but reserves the right to modify the cost-sharing provisions at any time. In connection with the formation of the Partnership on December 1, 1997, Lyondell and Millennium contributed $31 million of accrued postretirement benefit liabilities for employees that transferred to the Partnership. Upon joining the Partnership in May 1998, Occidental contributed $14 million of accrued postretirement benefit liabilities for employees that transferred to the Partnership. The following table provides a reconciliation of benefit obligations and funded status of the OPEB plans at December 31, 1998 and 1997:
Millions of dollars 1998 1997 - ------------------- ---- ---- Change in benefit obligation: Benefit obligation, January 1.................................... $ 50 $ -- Benefit obligation contributed at inception of Partnership....... -- 50 Benefit obligation contributed by Occidental..................... 14 -- Service cost..................................................... 3 -- Interest cost.................................................... 4 -- Actuarial gain................................................... (2) -- ---- ---- Benefit obligation, December 31.................................. $ 69 $ 50 ==== ==== Funded status...................................................... $(69) $(50) Unrecognized actuarial loss........................................ 16 19 ---- ---- Net amount recognized.............................................. $(53) $(31) ==== ==== Amounts recognized in the Balance Sheets consist of: Prepaid benefit cost............................................. $ -- $ -- Accrued benefit liability........................................ (53) (31) ---- ---- Net amount recognized............................................ $(53) $(31) ==== ==== Weighted-average assumptions as of December 31: Discount rate.................................................... 6.75% 7.25% Rate of compensation increase.................................... 4.75% 4.75%
Because the OPEB plans are unfunded, there was no change in the plan assets during the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997. 102 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) The Partnership's postretirement benefit costs for 1998 included the following components:
Millions of dollars ------------------- Components of net periodic benefit cost: Service cost........................................................ $ 3 Interest cost....................................................... 4 --- Net periodic benefit cost........................................... $ 7 ===
The accrued postretirement benefit liabilities at December 31, 1997 were calculated and contributed as of December 31, 1997; therefore, there was no net periodic postretirement benefit costs for the period from December 1, 1997 (inception) to December 31, 1997. For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1998 was 7.0 percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit liability as of December 31, 1998 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit liability as of December 31, 1998 by $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. 17. Commitments and Contingencies The Partnership has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. The Partnership is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the financial statements or liquidity of the Partnership. Equistar has agreed to indemnify and defend Lyondell and Millennium, individually, against certain uninsured claims and liabilities which Equistar may incur relating to the operation of the Contributed Business prior to December 1, 1997 up to $7 million each within the first seven years of the Partnership, subject to certain terms of the Asset Contribution Agreements. Equistar has also agreed to indemnify Occidental up to $7 million on a similar basis relating to the operation of the Occidental Contributed Business prior to May 15, 1998. During the year ended December 31, 1998, the Partnership incurred $5 million in expenses for these uninsured claims and liabilities. No expenses were incurred for these uninsured claims and liabilities during the period December 1, 1997 (inception) to December 31, 1997. The Partnership's policy is to be in compliance with all applicable environmental laws. The Partnership is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Partnership cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. 103 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) In the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the financial statements or liquidity of the Partnership. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Partnership's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 18. Segment Information Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Partnership has identified two segments in which it operates. The reportable segments are petrochemicals and polymers. The petrochemicals segment includes olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and the oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE. The petrochemicals segment also includes the production and sale of aromatics including benzene and toluene. The polymers segment consists of polyolefins including high-density polyethylene, low- density polyethylene, linear low-density polyethylene, polypropylene, and performance polymers. The performance polymers include enhanced grades of polyethylene, including wire and cable resins, concentrates and compounds, and polymeric powders. No customer accounted for 10 percent or more of sales. The accounting policies of the segments are the same as those described in Summary of Significant Accounting Policies (see Note 2). 104 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS--(Continued) Summarized financial information concerning the Partnership's reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were made at prices based on current market values.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Consolidated - ------------------- -------------- -------- ----------- ------------ ------------ For the year ended December 31, 1998: Sales and other operating revenues: Customers............. $2,351 $2,012 $ -- $ -- $4,363 Intersegment.......... 1,112 46 -- (1,158) -- ------ ------ ------ ------- ------ $3,463 $2,058 $ -- $(1,158) $4,363 ====== ====== ====== ======= ====== Unusual charges......... $ -- $ -- $ 35 $ -- $ 35 ====== ====== ====== ======= ====== Operating income........ $ 319 $ 177 $ (214) $ -- $ 282 ====== ====== ====== ======= ====== Depreciation and amortization expense... $ 152 $ 65 $ 51 $ -- $ 268 ====== ====== ====== ======= ====== Capital expenditures.... $ 71 $ 116 $ 13 $ -- $ 200 ====== ====== ====== ======= ====== Total assets............ $2,997 $2,035 $1,636 $ -- $6,668 ====== ====== ====== ======= ====== For the period from December 1, 1997 (inception) to December 31, 1997: Sales and other operating revenues: Customers............. $ 179 $ 186 $ -- $ -- $ 365 Intersegment.......... 105 -- -- (105) -- ------ ------ ------ ------- ------ $ 284 $ 186 $ -- $ (105) $ 365 ====== ====== ====== ======= ====== Unusual charges......... $ -- $ -- $ 42 $ -- $ 42 ====== ====== ====== ======= ====== Operating income........ $ 47 $ 22 $ (54) $ -- $ 15 ====== ====== ====== ======= ====== Depreciation and amortization expense... $ 7 $ 7 $ 5 $ -- $ 19 ====== ====== ====== ======= ====== Capital expenditures.... $ 7 $ 4 $ 1 $ -- $ 12 ====== ====== ====== ======= ====== Total assets............ $1,668 $1,504 $1,428 $ -- $4,600 ====== ====== ====== ======= ======
19. Subsequent Event In January 1999, the Partnership announced that it was going to shut down and "mothball" its gas phase HDPE reactor at Port Arthur, Texas, on March 31, 1999, as part of its long-term strategy to maximize value. The shutdown will reduce the Partnership's HDPE capacity by 300 million pounds per year and reduce employment at the unit from 200 to approximately 125. Customers for products from the mothballed unit will be supplied with comparable products produced at the Partnership's Matagorda, Victoria, and LaPorte, Texas, facilities. 105 LYONDELL-CITGO REFINING LP INDEPENDENT AUDITORS' REPORT To the Partnership Governance Committee of LYONDELL-CITGO Refining LP We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP (a Limited Partnership) as of December 31, 1998 and the related statements of income, partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of LYONDELL-CITGO Refining LP as of December 31, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 11, 1999 106 LYONDELL-CITGO REFINING LP REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of LYONDELL-CITGO Refining LP We have audited the accompanying balance sheet of LYONDELL-CITGO Refining LP (formerly LYONDELL-CITGO Refining Company Ltd.) as of December 31, 1997 and the related statements of income, partners' capital, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LYONDELL-CITGO Refining LP as of December 31, 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Houston, Texas February 6, 1998 107 LYONDELL-CITGO REFINING LP STATEMENTS OF INCOME
For the year ended December 31 ---------------------- Millions of dollars 1998 1997 1996 - ------------------- ------ ------ ------ Sales and other operating revenues...................... $2,055 $2,697 $2,823 Operating costs and expenses: Cost of sales: Crude oil and feedstock............................. 1,264 1,960 2,367 Operating and other expenses........................ 490 482 386 Selling, general and administrative expenses.......... 78 72 59 Unusual charges....................................... 10 -- -- ------ ------ ------ 1,842 2,514 2,812 ------ ------ ------ Operating income...................................... 213 183 11 Interest expense........................................ (44) (37) (2) Interest income......................................... 1 2 2 ------ ------ ------ Income before state income taxes........................ 170 148 11 Provision for state income taxes........................ 1 1 -- ------ ------ ------ Net income.............................................. $ 169 $ 147 $ 11 ====== ====== ======
See Notes to Financial Statements. 108 LYONDELL-CITGO REFINING LP BALANCE SHEETS
December 31 -------------- Millions of dollars 1998 1997 - ------------------- ------ ------ ASSETS Current assets: Cash and cash equivalents..................................... $ 24 $ 65 Accounts receivable: Trade, net.................................................. 39 37 Related parties and affiliates.............................. 26 42 Inventories................................................... 106 98 Prepaid expenses and other current assets..................... 2 1 ------ ------ Total current assets...................................... 197 243 ------ ------ Property, plant and equipment................................... 2,234 2,228 Construction projects in progress............................... 80 52 Accumulated depreciation and amortization....................... (944) (889) ------ ------ 1,370 1,391 Deferred charges and other assets............................... 70 47 ------ ------ Total assets.................................................... $1,637 $1,681 ====== ====== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade....................................................... $ 71 $ 72 Related parties and affiliates.............................. 42 125 Distribution payable to Lyondell Partners..................... 19 36 Distribution payable to CITGO Partners........................ 13 25 Loan payable to bank.......................................... 20 -- Taxes, payroll and other liabilities.......................... 38 35 ------ ------ Total current liabilities................................. 203 293 ------ ------ Commitments and contingencies Loan payable to bank............................................ 450 450 Loans payable to Lyondell Partners.............................. 231 196 Loans payable to CITGO Partners................................. 36 17 Pension, postretirement benefit and other liabilities........... 68 52 ------ ------ Total long-term liabilities............................... 785 715 ------ ------ Partners' capital............................................... 649 673 ------ ------ Total liabilities and partners' capital......................... $1,637 $1,681 ====== ======
See Notes to Financial Statements. 109 LYONDELL-CITGO REFINING LP STATEMENTS OF CASH FLOWS
For the year ended December 31 ---------------- Millions of dollars 1998 1997 1996 - ------------------- ---- ---- ---- Cash flows from operating activities: Net income.................................................. $169 $147 $ 11 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................... 75 75 25 Amortization............................................... 25 16 10 (Increase) decrease in accounts receivable--trade.......... (2) 72 (1) (Increase) decrease in accounts receivable--related parties................................................... 16 9 (20) (Increase) decrease in inventories......................... (9) -- 9 (Increase) decrease in prepaid expenses and other current assets.................................................... (1) (1) 6 Increase (decrease) in accounts payable--trade............. 4 (89) 51 Increase (decrease) in accounts payable--related parties... (83) (27) 43 Increase (decrease) in taxes, payroll and other liabilities............................................... 3 5 (4) (Increase) in deferred charges and other assets and change in pension, postretirement benefit and other liabilities.. (28) 5 (28) ---- ---- ---- Net cash provided by operating activities................. 169 212 102 ---- ---- ---- Cash flows from investing activities: Additions to property, plant and equipment: Maintenance capital expenditures........................... (19) (12) (10) Environmental capital expenditures......................... (12) (11) (28) Capital enhancement expenditures........................... (27) (17) (18) Refinery upgrade expenditures.............................. (3) (45) (473) ---- ---- ---- Total capital expenditures................................ (61) (85) (529) Other....................................................... (1) (1) (1) ---- ---- ---- Net cash used in investing activities..................... (62) (86) (530) ---- ---- ---- Cash flows from financing activities: Proceeds from (repayments of) bank loan..................... 20 (10) 10 Proceeds from bank loan for costs incurred on refinery upgrade.................................................... -- -- 199 Proceeds from Lyondell GP loans for costs incurred on refinery upgrade........................................... -- 18 123 Contributions from Lyondell GP for working capital facility paydown.................................................... -- 65 -- Proceeds from Lyondell GP loans for costs to be incurred on capital projects........................................... -- 2 29 Contributions from Lyondell GP for costs to be incurred on capital projects........................................... -- 1 8 Proceeds from Lyondell GP loans for environmental projects.. 8 -- -- Proceeds from Lyondell GP loans for capital enhancement projects................................................... 16 -- -- Proceeds from Lyondell GP loans for maintenance projects.... 11 -- -- Distributions to Lyondell Partners.......................... (130) (147) (84) Distributions to CITGO Partners............................. (92) (91) (13) Reimbursements from Lyondell for capital expenditures....... -- -- 4 Reimbursements from CITGO LP for costs incurred on refinery upgrade.................................................... -- 2 123 Reimbursements from CITGO LP for loan costs incurred on refinery upgrade........................................... -- 8 21 Contributions from CITGO LP for working capital facility paydown.................................................... -- 28 -- Proceeds from CITGO LP loans for costs incurred on refinery upgrade.................................................... -- 16 -- Contributions from CITGO LP for costs to be incurred on capital projects........................................... -- 35 13 Proceeds from CITGO LP loans for environmental projects..... 4 -- -- Proceeds from CITGO LP loans for capital enhancement projects................................................... 9 -- -- Proceeds from CITGO LP loans for maintenance projects....... 6 -- -- ---- ---- ---- Net cash provided by (used in) financing activities....... (148) (73) 433 ---- ---- ---- Increase (decrease) in cash and cash equivalents............. (41) 53 5 Cash and cash equivalents at beginning of period............. 65 12 7 ---- ---- ---- Cash and cash equivalents at end of period................... $ 24 $ 65 $ 12 ==== ==== ====
See Notes to Financial Statements. 110 LYONDELL-CITGO REFINING LP STATEMENTS OF PARTNERS' CAPITAL
Lyondell CITGO Millions of dollars Partners Partners Total - ------------------- -------- -------- ----- Balance, January 1, 1996............................... $ 130 $ 459 $ 589 Cash contributions................................... 8 157 165 Other contributions.................................. -- 1 1 Distributions........................................ (91) (12) (103) Net income........................................... 10 1 11 ----- ----- ----- Balance, December 31, 1996............................. 57 606 663 Cash distributions................................... 66 73 139 Distributions........................................ (158) (118) (276) Net income........................................... 103 44 147 ----- ----- ----- Balance, December 31, 1997............................. 68 605 673 Distributions........................................ (113) (80) (193) Net income........................................... 110 59 169 ----- ----- ----- Balance, December 31, 1998............................. $ 65 $ 584 $ 649 ===== ===== =====
See Notes to Financial Statements. 111 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS 1. The Partnership On July 1, 1993, Lyondell Chemical Company (formerly Lyondell Petrochemical Company) ("Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO Refining LP ("LCR" or "Partnership") (formerly LYONDELL-CITGO Refining Company Ltd.), a new entity formed and owned by subsidiaries of Lyondell and CITGO in order to own and operate a refinery ("Refinery") located adjacent to the Houston Ship Channel in Houston, Texas and a lube oil blending and packaging plant in Birmingport, Alabama. Lyondell owns its interest in the Partnership through wholly-owned subsidiaries, Lyondell Refining LP, LLC ("Lyondell LP") and Lyondell Refining Company ("Lyondell GP") (formerly LOwner). These two subsidiaries are known as Lyondell Partners. CITGO holds its interest through CITGO Refining Investment Company ("CITGO LP") (formerly COwner) and CITGO Gulf Coast Refining, Inc. ("CITGO GP"), both wholly-owned subsidiaries of CITGO. These two subsidiaries are known as CITGO Partners. Lyondell Partners and CITGO Partners together are known as the Partners. During 1998 LCR converted from a Texas limited liability company to a Delaware limited partnership. Accordingly, the name was changed from LYONDELL- CITGO Refining Company Ltd. to LYONDELL-CITGO Refining LP. LCR will continue in existence until it is dissolved under the terms of the Limited Partnership Agreement ("Agreement"). The Partners have agreed to allocate net income and cash provided by operating activities based on certain contributions and other factors instead of allocating such amounts based on their capital account balances. Based upon these contributions and other factors, Lyondell Partners and CITGO Partners had ownership interests of approximately 59 percent and 41 percent, respectively, as of December 31, 1998. CITGO Partners have a one-time option, that will expire in the year 2000, to make an additional capital contribution sufficient to increase its participation interest in LCR to 50 percent. At December 31, 1998, the Partnership employed approximately 1,200 full-time employees. Of these, approximately 800 were covered by collective bargaining agreements between LCR and the Oil, Chemical and Atomic Workers Union. LCR also uses the services of independent contractors in the routine conduct of its business. 2. Summary of Significant Accounting Policies Revenue Recognition--Revenue from product sales is generally recognized upon delivery of products to the customer. Cash and Cash Equivalents--Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Partnership's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Partnership performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Partnership's investment strategy. Accounts Receivable--The Partnership sells its products primarily to companies in the petrochemical and refining industries. The Partnership performs ongoing credit evaluations of its customers' financial condition and in certain circumstances, requires letters of credit from them. The Partnership's allowance for doubtful accounts receivable, which is reflected in the Balance Sheets as a reduction in accounts receivable, was approximately $179,000 at December 31, 1998 and 1997. 112 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) Inventories--Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis except for materials and supplies, which are valued at average cost. Property, Plant and Equipment--Property, plant and equipment are recorded at cost. The primary components of property, plant and equipment were manufacturing facilities and equipment. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the related assets, which range from five to thirty years. Upon retirement or sale, the Partnership removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in income. Interest costs incurred on debt during the construction of major projects are capitalized. During 1998, the depreciable life of assets related to an upgrade project completed in February 1997 was increased from twenty to twenty-four years. These changes were accounted for as a change in accounting estimate. The gross value of these assets when the depreciable life changed was approximately $1 billion, with accumulated depreciation of approximately $52 million. The increase in the depreciable life of these assets decreased depreciation expense by approximately $9 million for the year ended December 31, 1998. Refinery Maintenance--Turnaround costs are repair and maintenance costs incurred while performing an overhaul of a manufacturing unit. Significant turnaround costs are deferred and amortized on a straight-line basis over the estimated period until the next planned turnaround, generally four to six years. Amortization of deferred turnaround costs for 1998, 1997 and 1996 was approximately $12 million, $10 million and $5 million, respectively. Other turnaround costs and ordinary repair and maintenance costs are expensed as incurred. Environmental Remediation Costs--Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. Exchanges--Crude oil and finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes--Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and are calculated based upon cumulative book and tax differences in the balance sheet in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications--Certain prior period amounts have been reclassified to conform to the current year presentation. 113 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) Long-Lived Assets Impairment--In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, LCR periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the separately identifiable anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long- lived asset. Fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal costs. Comprehensive Income--Effective January 1, 1998, LCR adopted SFAS No. 130, Reporting Comprehensive Income. LCR had no items of other comprehensive income during the three years ended December 31, 1998. Pensions and Other Postretirement Benefits--During 1998, LCR adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. SFAS No. 132 standardizes the disclosure requirements for these plans, to the extent practicable (see Note 9). Derivatives--In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives, at fair value, as either assets or liabilities in the statement of financial position with an offset either to partners' capital and comprehensive income or income, depending upon the classification of the derivative. LCR has not determined the impact on its financial statements that may result from adoption of SFAS No. 133, which is required no later than January 1, 2000. 3. Related Party Transactions On July 1, 1993, LCR entered into a long-term crude oil supply agreement ("Crude Supply Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas, S.A. ("PDVSA Oil"), an affiliate of CITGO. Pursuant to this agreement, the Partnership will purchase a substantial majority of its crude oil supply at market-based prices, adjusted for certain indexed items (see Note 11). In addition, under the terms of a long-term product sales agreement, CITGO purchases all of the gasoline, low sulfur diesel and jet fuel produced at the Refinery at market-based prices. Both PDVSA Oil and CITGO are subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the Republic of Venezuela. Also effective July 1, 1993, LCR and Lyondell entered into a number of feedstock and product sales agreements; a tolling agreement, pursuant to which alkylate and methyl tertiary butyl ether will be produced at Lyondell's Channelview, Texas petrochemical complex for the Partnership; and various administrative services agreements. On December 1, 1997, Lyondell contributed its Channelview, Texas petrochemical complex, including its rights and obligations under the related party agreements with LCR, to a joint venture named Equistar Chemicals, LP ("Equistar"). At December 31, 1998, Lyondell had a 41 percent interest in Equistar. 114 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) Related party transactions are summarized as follows:
For the year ended December 31 -------------------- Millions of dollars 1998 1997 1996 ------------------- ------ ------ ------ Costs: Crude oil purchases................................... $ 555 $ 977 $1,046 Product purchases..................................... 262 435 246 Transportation fees................................... 10 13 27 ------ ------ ------ $ 827 $1,425 $1,319 ====== ====== ====== Sales of products....................................... $1,555 $1,987 $1,835 ====== ====== ======
LCR billed Lyondell and Equistar approximately $4 million, $5 million and $3 million and Lyondell and Equistar billed LCR approximately $4 million, $7 million and $11 million pursuant to various service and cost sharing arrangements during the years ended December 31, 1998, 1997 and 1996, respectively. In addition, LCR paid Lyondell and Equistar approximately $34 million, $40 million and $6 million during 1998, 1997 and 1996, respectively, pursuant to hydrogen supply agreements. In September 1997, Atlantic Richfield Company ("ARCO") eliminated its ownership interest in Lyondell by delivering its shares of Lyondell common stock to the holders of certain ARCO notes and by Lyondell repurchasing the remaining shares owned by ARCO. For the nine months ended September 30, 1997, the Partnership paid ARCO PipeLine Company, an affiliate of ARCO, approximately $4 million pursuant to throughput agreements. During 1996, LCR paid ARCO PipeLine Company approximately $5 million pursuant to throughput agreements. LCR recognized revenue from Lyondell of approximately $11 million in 1996 for a pricing adjustment retroactive to 1993. During 1998, 1997 and 1996, LCR paid Lyondell GP approximately $9 million, $13 million and $4 million, respectively, for interest on loans related to funding a portion of the upgrade project at the Refinery and other capital expenditures. During 1998 and 1997, LCR paid CITGO LP approximately $2 million and $1 million, respectively, for interest on loans related to funding a portion of the upgrade project at the Refinery and other capital expenditures. During 1997 and 1996, LCR billed CITGO LP approximately $7 million and $22 million, respectively, and CITGO LP paid LCR approximately $8 million and $21 million, respectively, for financing costs incurred in connection with the bank loan being used to partially fund the upgrade project at the Refinery. 4. Supplemental Cash Flow Information At December 31, 1998, 1997 and 1996, property, plant and equipment included approximately $9 million, $13 million and $9 million, respectively, of non- cash additions which related to accounts payable accruals. During 1998, 1997 and 1996, LCR paid approximately $43 million, $42 million and $27 million, respectively, for interest and approximately $1 million, $1 million and $4 million, respectively, for state income and franchise taxes. Of the interest paid during 1997 and 1996, approximately $9 million and $25 million, respectively, was capitalized. No interest costs were capitalized during 1998. 115 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) 5. Financial Instruments The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. The fair value of long-term loans payable approximated their carrying value because they are variable interest rate loans. At December 31, 1998, LCR had issued letters of credit totaling approximately $9 million. The Partnership is party to take-or-pay contracts for hydrogen and electricity. At December 31, 1998, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:
Millions of dollars ------------------- 1999................................................................ $ 39 2000................................................................ 39 2001................................................................ 39 2002................................................................ 29 2003................................................................ 29 Thereafter.......................................................... 379 ---- Total minimum payments............................................ $554 ====
Total LCR purchases under these agreements were approximately $81 million, $90 million and $35 million during 1998, 1997 and 1996, respectively. 6. Inventories Inventories were as follows at December 31:
Millions of dollars 1998 1997 ------------------- ---- ---- Crude oil....................................................... $ 47 $ 47 Refined products................................................ 45 35 Materials and supplies.......................................... 14 16 ---- ---- Total inventories............................................. $106 $ 98 ==== ====
The excess of the current cost of inventories over book value was approximately $40 million and $73 million at December 31, 1998 and 1997, respectively. 7. Financing Arrangements In May 1995, LCR entered into two credit facilities totaling $520 million with a group of banks. The first facility, a $70 million, 364-day revolving working capital facility, was most recently renewed in May 1998, and is being utilized for general business purposes and for letters of credit. At December 31, 1998, $20 million was outstanding under this credit facility with a weighted average interest rate of 5.3 percent. At December 31, 1997, no amounts were outstanding under this credit facility. Interest for this credit facility is based on either prime, eurodollar rates or based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the participating banks, all at LCR's option. The second facility is a $450 million, five-year term credit facility that was used to partially fund an upgrade project at the Refinery which was completed in February 1997. At both December 31, 1998 and 1997, $450 million was outstanding under this 116 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) credit facility with a weighted average interest rate of 6.2 percent and 6.5 percent, respectively. Interest for this facility is based on prime or eurodollar rates at the Partnership's option. This second facility is due in May, 2000. Both facilities contain covenants that required LCR to maintain a minimum net worth which increased each year until 1998 and maintenance of certain financial ratios defined in the agreements. The facilities also contain other customary covenants which limit the Partnership's ability to modify certain significant contracts, incur additional debt or liens, dispose of assets, make restricted payments as defined in the agreements or merge or consolidate with other entities. In October 1995, LCR began borrowing funds from Lyondell GP in connection with the upgrade project at the Refinery and other capital expenditures. These loans are due on July 1, 2003 and are subordinate to the two bank credit facilities. At December 31, 1998 and 1997, these subordinated loans totaled approximately $231 million and $196 million, respectively, and had a weighted average interest rate of 5.8 percent and 6.2 percent, respectively. Interest on these loans is based on eurodollar rates and is payable at the end of each calendar quarter. In January 1997, LCR began borrowing funds from CITGO LP in connection with the upgrade project at the Refinery and other capital expenditures. These loans are due on July 1, 2003 and are subordinate to the two bank facilities. At December 31, 1998 and 1997, these subordinated loans totaled approximately $36 million and $17 million, respectively, and had a weighted average interest rate of 5.8 percent and 6.2 percent, respectively. Interest on these loans is based on eurodollar rates and is payable at the end of each calendar quarter. During 1998, 1997 and 1996, LCR incurred approximately $44 million, $45 million and $30 million of interest cost, respectively. Of the interest cost incurred in 1997 and 1996, the Partnership capitalized approximately $9 million and $27 million, respectively. No interest costs were capitalized in 1998. 8. Leases LCR leases crude oil storage facilities, a fleet of railroad tank cars, computers, office equipment and other items. At December 31, 1998, future minimum rental payments for operating leases with noncancelable lease terms in excess of one year were as follows:
Millions of dollars ------------------- 1999................................................................. $22 2000................................................................. 22 2001................................................................. 6 2002................................................................. 9 2003................................................................. 1 Thereafter........................................................... 7 --- Total minimum lease payments....................................... $67 ===
Operating lease net rental expenses for the years ended December 31, 1998, 1997 and 1996 were approximately $26 million, $22 million and $22 million, respectively. 9. Employee Benefit Plans Employee Savings--LCR sponsors qualified defined contribution retirement and savings plans covering substantially all eligible salaried and hourly employees. Participants make voluntary contributions to the plans and the Partnership makes contributions, including matching employee contributions, based on plan provisions. LCR expensed $5 million, $5 million and $4 million related to its contributions to this plan for the years 1998, 1997 and 1996, respectively. 117 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) Pension Benefits--LCR sponsors one qualified noncontributory defined benefit pension plan covering eligible hourly employees and one covering eligible salaried employees. The Partnership also sponsors one nonqualified defined benefit plan for certain eligible employees. The qualified plans' assets include primarily stocks and bonds. The nonqualified plan is not funded. LCR's policy is to fund the qualified pension plans in accordance with applicable laws and regulations and not to exceed the tax deductible limits. The nonqualified plans are funded as necessary to pay retiree benefits. The plan benefits for each of the qualified pension plans are primarily based on an employee's years of plan service and compensation as defined by each plan. Postretirement Benefits Other Than Pensions--In addition to pension benefits, the Partnership also provides certain health care and life insurance benefits for eligible salaried and hourly employees at retirement. These benefits are subject to deductibles, copayment provisions and other limitations and are primarily funded on a pay as you go basis. The Partnership reserves the right to change or to terminate the benefits at any time. The following table sets forth the changes in benefit obligations and plan assets for the pension and postretirement plans for the years ended December 31, 1998 and 1997 and the funded status of such plans reconciled with amounts reported in the Partnership's Balance Sheets.
Other Pension Postretirement Benefits Benefits ---------- ----------------- Millions of dollars 1998 1997 1998 1997 - ------------------- ---- ---- ------- ------- Change in benefit obligation: Benefit obligation, January 1.................. $64 $48 $ 42 $ 31 Service cost................................... 5 4 2 2 Interest cost.................................. 5 4 2 3 Actuarial loss (gain).......................... 9 8 (2) 6 Liability transfer............................. -- 1 2 -- Special termination benefits................... 7 -- -- -- Benefits paid.................................. (2) (1) -- -- --- --- ------- ------- Benefit obligation, December 31................ 88 64 46 42 --- --- ------- ------- Change in plan assets: Fair value of plan assets, January 1........... 37 30 -- -- Actual return on plan assets................... 3 5 -- -- Partnership contributions...................... 5 3 -- -- Benefits paid.................................. (2) (1) -- -- --- --- ------- ------- Fair value of plan assets, December 31......... 43 37 -- -- --- --- ------- -------
Funded status........................................ (45) (27) (46) (42) Unrecognized actuarial loss.......................... 18 9 6 9 Unrecognized prior service cost...................... 2 2 (2) (3) Unrecognized transition asset........................ (1) (1) -- -- ---- ---- ==== ---- Accrued benefit cost................................. $(26) $(17) $(42) $(36) ==== ==== ==== ==== Accumulated benefit obligation....................... $ 53 $ 31 -- -- ==== ====
118 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Pension Postretirement Benefits Benefits ---------------- ---------------- Millions of dollars 1998 1997 1996 1998 1997 1996 - ------------------- ---- ---- ---- ---- ---- ---- Components of net periodic benefit cost: Service cost............................. $ 5 $ 4 $ 4 $ 2 $ 2 $ 2 Interest cost............................ 5 5 3 2 3 2 Expected return on plan assets........... (3) (3) (2) -- -- -- ---- ---- ---- ---- ---- ---- Net periodic benefit cost before FAS 88 cost.................................... 7 6 5 4 5 4 Effect of curtailment.................... -- -- -- 2 -- -- ---- ---- ---- ---- ---- ---- Net periodic benefit cost................ $ 7 $ 6 $ 5 $ 6 $ 5 $ 4 ==== ==== ==== ==== ==== ==== Special termination benefit charge....... $ 7 $ -- $ -- $ -- $ -- $ -- ==== ==== ==== ==== ==== ==== Weighted-average assumptions as of December 31: Discount rate............................ 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Expected return on plan assets........... 9.50% 9.50% 9.50% -- -- -- Rate of compensation increase............ 4.75% 4.75% 5.00% 4.75% 4.75% 5.00%
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1998 was 7.0 percent for 1999-2001 and 5.0 percent thereafter. The benefit obligation, accumulated benefit obligation and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $73 million, $53 million and $33 million, respectively, as of December 31, 1998 and $53 million, $31 million and $29 million, respectively, as of December 31, 1997. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Millions of dollars Point Increase Point Decrease ------------------- -------------- -------------- Effect on total of service and interest cost components.......................... $ 1 $(1) Effect on postretirement benefit obligation............................... 8 (6)
During 1998, the management of LCR implemented a Reduction In Force ("RIF") program, which will result in certain personnel reductions. LCR expensed approximately $10 million in 1998 relating to the first phase of the RIF, which is reflected as "Unusual charges" on the Statement of Income. In this phase, approximately 80 employees in 1998 made an irrevocable voluntary election to terminate employment and retire. As a result, they will receive certain special termination benefits in the form of enhanced retirement benefits. LCR expects additional amounts for phase two of the RIF to be expensed in 1999. 10. Income Taxes LCR is treated as a partnership for federal income tax purposes; consequently, no provision for federal income taxes is required. LCR was however, subject to state income taxes, and therefore a provision for state income taxes has been recorded. Pretax income was taxed by domestic jurisdictions only. The current provision for state income tax was $1 million in both 1998 and 1997. There was no current provision for state income tax in 1996. In addition, there was no deferred provision for state income tax in 1998, 1997 and 1996. 119 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) 11. Commitments and Contingencies LCR is subject to various lawsuits and proceedings. With respect to liabilities associated with LCR, Lyondell generally has retained liability for events that occurred prior to July 1, 1993 and certain on-going environmental projects at the Refinery. LCR generally is responsible for liabilities associated with events occurring after June 30, 1993 and on- going environmental compliance inherent to the operation of the Refinery. LCR's policy is to be in compliance with all applicable environmental laws. LCR is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Partnership cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. LCR estimates that it has a liability of approximately $8 million at December 31, 1998 related to future Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), Resource Conservation and Recovery Act ("RCRA"), and the Texas Natural Resource Conservation Commission ("TNRCC") assessment and remediation costs. Lyondell has a contractual obligation to reimburse LCR for a portion of this liability which is currently estimated to be approximately $7 million. LCR has accrued a current liability of approximately $1 million related to this liability for which Lyondell does not have any obligation to reimburse LCR. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. However, it is possible that new information about the sites associated with this liability, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law investigations, could require LCR to reassess its potential exposure related to environmental matters. Depending on then current market conditions, reduced deliveries under the Crude Supply Agreement could adversely affect LCR. In the event of certain force majeure conditions, including governmental or other actions restricting or otherwise limiting PDVSA Oil's ability to perform its obligations, LCR would seek alternative crude supply arrangements. Any such alternative arrangements may not be as beneficial as the Crude Supply Agreement. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. In April 1998, LCR received notification from PDVSA Oil of intentions to exercise a force majeure clause related to the announced OPEC production cuts. As a result of this force majeure clause being exercised, LCR began receiving reduced allocations of crude oil in August 1998. This condition required LCR to make alternative arrangements for its additional crude oil requirements and such action resulted in lower operating margins. LCR has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. In the opinion of management, any liability arising from the matters discussed in this Note will not have a material adverse effect on the financial position of LCR. However, the adverse resolution in any reporting period of one or more of the matters discussed in this Note could have a material impact on LCR's results of operations for that period. 120 LYONDELL-CITGO REFINING LP NOTES TO FINANCIAL STATEMENTS--(Continued) 12. Subsequent Event Effective January 1, 1999, the Partnership entered into a lubricant facility operating agreement and lubricant sales agreements with CITGO. The lubricant facility operating agreement is for the lubricant facility in Birmingport, Alabama that will allow CITGO to operate the facility while the Partnership retains ownership. The lubricant sales agreements state the provisions for the Partnership to sell and CITGO to buy paraffinic lubricants base oil, naphthenic lubricants, white mineral oils and specialty oils. 121 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None except as set forth in the Company's Current Report on Form 8-K filed pursuant to the Securities Exchange Act of 1934, as amended, on March 12, 1998. PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 6, 1999, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998, and which is incorporated herein by reference. 122 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1 and 2--Consolidated Financial Statements: these documents are listed in the Index to Financial Statements.
Exhibits -------- 3.1 --Amended and Restated Certificate of Incorporation of the Registrant(15) 3.2 --Amended and Restated By-Laws of the Registrant(16) 4.1 --Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank National Association, as Trustee(2) 4.1(a) --Second Supplemental Indenture between the Registrant, Equistar and Texas Commerce Bank National Association(19) 4.2 --Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Continental Bank, National Association, as Trustee(4) 4.2(a) --Second Supplemental Indenture between the Registrant, Equistar and First Trust National Association(19) 4.3 --Indenture, as supplemented by a First Supplemental Indenture, between the Registrant and Texas Commerce Bank, as Trustee(12) 4.3(a) --Second Supplemental Indenture between the Registrant, Equistar and Texas Commerce Bank National Association(19) 4.4 --Specimen certificate(1) 4.5 --LCR $70,000,000 Credit Agreement(8) 4.5(a) --Amendment No. 1 to the LCR $70,000,000 Credit Agreement(13) 4.5(b) --Amendment No. 2 to the LCR $70,000,000 Credit Agreement(14) 4.5(c) --Amendment No. 3 to the LCR $70,000,000 Credit Agreement 4.5(d) --Amendment No. 4 to the LCR $70,000,000 Credit Agreement 4.6 --LCR $450,000,000 Credit Agreement(8) 4.6(a) --Amendment No. 1 to the LCR $450,000,000 Credit Agreement(13) 4.6(b) --Amendment No. 2 to the LCR $450,000,000 Credit Agreement(14) 4.6(c) --Amendment No. 3 to the LCR $450,000,000 Credit Agreement 4.6(d) --Amendment No. 4 to the LCR $450,000,000 Credit Agreement 4.7 --Registrant's $225,000,000 Amended and Restated Credit Agreement(19) 4.8 --Rights Agreement between the Registrant and the Bank of New York, as Rights Agent(11) 4.9 --Credit Agreement dated as of November 25, 1997 among Equistar as Borrower, Millennium America Inc., as Guarantor, and the lenders party thereto 4.9(a) --Amendment to the Credit Agreement dated as of November 25, 1997 among Equistar as Borrower, Millennium America Inc., as Guarantor, and the lenders party thereto 4.10 --Lyondell Petrochemical Company $7,000,000,000 Credit Agreement dated as of July 23, 1998(22) 4.11 --Indenture dated as of January 15, 1999, as supplemented by a First Supplemental Indenture between Equistar and The Bank of New York 4.12 --Indenture, dated as of June 15, 1998, between ARCO Chemical Company a Bank of New York as Trustee 4.13 --Form of 9 3/8% Debenture Due 2005 issuable under the Indenture referred to in Exhibit 4.12 4.14 --Form of 9.80% Debenture Due 2020 issuable under the Indenture referred to in Exhibit 4.12 4.15 --Form of 9.90% Debenture Due 2000 issuable under the Indenture referred to in Exhibit 4.12 4.16 --Form of 10.25% Debenture Due 2010 issuable under the Indenture referred to in Exhibit 4.12
The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request. 123 EXECUTIVE COMPENSATION: 10.1 --Amended and Restated Executive Supplementary Savings Plan(15) 10.2 --Amended and Restated Executive Long-Term Incentive Plan(3) 10.3 --Amended and Restated Supplementary Executive Retirement Plan(19) 10.3(a) --Amendment to the Amended and Restated Supplementary Executive Retirement Plan(19) 10.4 --Executive Medical Plan(15) 10.4(a) --Amendment No. 1 to the Executive Medical Plan(15) 10.4(b) --Amendment No. 2 to the Executive Medical Plan(15) 10.5 --Amended and Restated Executive Deferral Plan(19) 10.6 --Executive Long-Term Disability Plan(4) 10.6(a) --Amendment No. 1 to the Executive Long-Term Disability Plan(15) 10.7 --Executive Life Insurance Plan(4) 10.8 --Amended and Restated Supplemental Executive Benefit Plans Trust Agreement(19) 10.8(a) --Amendment to the Amended and Restated Supplemental Executive Benefit Plans Trust Agreement(19) 10.9 --Restricted Stock Plan(7) 10.9(a) --Amendment No. 1 to the Restricted Stock Plan(10) 10.9(b) --Amendment No. 2 to the Restricted Stock Plan(19) 10.10 --Form of Registrant's Indemnity Agreement with Officers and Directors(1) 10.11 --Amended and Restated Elective Deferral Plan for Non-Employee Directors(15) 10.11(a) --Amendment No. 1 to the Amended and Restated Elective Deferral Plan for Non-Employee Directors(15) 10.11(b) --Amendment No. 2 to the Amended and Restated Elective Deferral Plan for Non-Employee Directors(19) 10.12 --Amended and Restated Retirement Plan for Non-Employee Directors(19) 10.12(a) --Amendment to the Amended and Restated Retirement Plan for Non- Employee Directors(19) 10.13 --Restricted Stock Plan for Non-Employee Directors(13) 10.13(a) --Amendment to the Restricted Stock Plan for Non-Employee Directors(19) 10.14 --Non-Employee Directors Benefit Plans Trust Agreement(19) 10.14(a) --Amendment to the Non-Employee Directors Benefit Plans Trust Agreement(19) 10.15 --1999 Long-Term Incentive Plan 10.16 --Lyondell Chemical Company Executive Severance Pay Plan 10.17 --ARCO Chemical Company Change of Control Plan 10.18 --Executive Severance Agreement between the Registrant and Joseph M. Putz 10.19 --Description of 1998 Executive Incentive Plan
OTHER MATERIAL CONTRACTS: 10.20 --Conveyance (conformed without exhibits) between the Registrant and ARCO(1) 10.21 --Asset Purchase Agreement (conformed without exhibits) between the Registrant and Rexene Products Company(2) 10.22 --Limited Partnership Agreement of LCR 10.23 --Contribution Agreement between the Registrant and LYONDELL-CITGO Refining Company Ltd.(5) 10.24 --Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company Ltd. and Lagoven, S.A.(5) 10.25 --Asset Purchase Agreement between the Registrant and Occidental Chemical Company(9) 10.26 --Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP(20) 10.26(a) --First Amendment to Amended and Restated Limited Partnership Agreement of Equistar 10.27 --Asset Contribution Agreement among the Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP(18)
124 10.27(a) --First Amendment to Asset Contribution Agreement among the Registrant, Lyondell Petrochemical LP and Equistar Chemicals, LP 10.28 --Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP(18) 10.28(a) --First Amendment to Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP 10.29 --Amended and Restated Parent Agreement dated May 15, 1998 among Occidental Chemical, Oxy CH Corporation, Occidental, the Registrant, Millennium and the Partnership(20) 10.29(a) --First Amendment to the Amended and Restated Parent Agreement 10.29(b) --Assignment and Assumption Agreement with Respect to the Amended and Restated Parent Agreement 10.30 --Agreement and Plan of Merger and Asset Contribution dated May 15, 1998 among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals, PDG Chemical and the Partnership(20) 10.31 --Agreement and Plan of Merger, dated June 18, 1998 among the Registrant, Lyondell Acquisition Corporation and ARCO Chemical Company(21) 10.32 --Tax Agreement, dated June 18, 1998 among the Atlantic Richfield Company, ARCO Chemical Company and the Registrant(21) 10.33 --Tender and Voting Agreement dated June 18, 1998 among the Registrant, Lyondell Acquisition Corporation and Atlantic Richfield Company(21) 12 --Statement Setting Forth Detail for Computation of Ratio of Earnings to Fixed Charges 21 --Subsidiaries of the Registrant 23.1 --Consent of PricewaterhouseCoopers LLP 23.2 --Consent of Deloitte & Touche LLP 24 --Powers of Attorney 27 --Financial Data Schedule
- -------- (1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No. 33-25407) and incorporated herein by reference. (2) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1989 and incorporated herein by reference. (3) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1990 and incorporated herein by reference. (4) Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1992 and incorporated herein by reference. (5) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of July 1, 1993 and incorporated herein by reference. (6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. (9) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of May 1, 1995 and incorporated herein by reference. (10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. (11) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated December 8, 1995 and incorporated herein by reference. (12) Filed as an exhibit to Registrant's Registration Statement on Form S-3 dated as of January 31, 1996 and incorporated herein by reference. 125 (13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996 and incorporated herein by reference. (14) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996 and incorporated herein by reference. (15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (16) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 and incorporated herein by reference. (17) Filed as an exhibit to Registrant's Interim Report on From 8-K dated as of July 25, 1997 and incorporated herein by reference. (18) Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of October 17, 1997 and incorporated herein by reference. (19) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (20) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated as of May 15, 1998 and incorporated herein by reference. (21) Filed as an exhibit to the Registrant's Interim Report on Form 8-K dated as of June 18, 1998 and incorporated herein by reference. (22) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. (b) Consolidated Financial Statements and Financial Statement Schedules (1) Consolidated Financial Statements Consolidated Financial Statements filed as part of this Annual Report on Form 10-K are listed in the Index to Financial Statements on page 52. (2) Financial Statement Schedules Financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Secretary. (c) Reports on Form 8-K: The following Current Reports on Form 8-K or amendments thereto were filed during the quarter ended December 31, 1998.
Item Date of Report No. Financial Statements -------------- ---- -------------------- 10/2/98 7 Financial Statements of ARCO Chemical Company
126 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LYONDELL CHEMICAL COMPANY /s/ Dan F. Smith* By:__________________________________ Dan F. Smith President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ William T. Butler* Chairman of the March 25, 1999 - ----------------------------------- Board (William T. Butler) /s/ Dan F. Smith* President, Chief March 25, 1999 - ----------------------------------- Executive Officer (Dan F. Smith, Principal Executive and Director Officer) /s/ Carol A. Anderson* Director March 25, 1999 - ----------------------------------- (Carol A. Anderson) /s/ Travis Engen* Director March 25, 1999 - ----------------------------------- (Travis Engen) /s/ Stephen F. Hinchliffe, Jr.* Director March 25, 1999 - ----------------------------------- (Stephen F. Hinchliffe, Jr.) /s/ Dudley C. Mecum II* Director March 25, 1999 - ----------------------------------- (Dudley C. Mecum II) /s/ Frank Savage* Director March 25, 1999 - ----------------------------------- (Frank Savage) /s/ Paul R. Staley* Director March 25, 1999 - ----------------------------------- (Paul R. Staley) /s/ Van Billet Vice President and March 25, 1999 - ----------------------------------- Controller (Van Billet, Principal Accounting Officer) /s/ Edward W. Rich Vice President and March 25, 1999 - ----------------------------------- Treasurer (Edward W. Rich, Principal Financial Officer) *By:/s/ Jeffrey R. Pendergraft March 25, 1999 - ----------------------------------- (Jeffrey R. Pendergraft, as Attorney-in-fact) 127 EX-4.5(C) 2 AMENDMENT #3 TO THE LCR $70,000,000 CREDIT AGMT. EXHIBIT 4.5(c) CONSENT AND THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT dated as of January 27, 1997 LYONDELL-CITGO REFINING COMPANY LTD., a Texas limited liability company (the "Borrower"), the LENDERS listed on the signature pages hereof and any Lender hereafter becoming a party to the below-mentioned Agreement in accordance with the provisions thereof, ABN AMRO BANK N.V., THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS, THE FIRST NATIONAL BANK OF CHICAGO and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents, and THE BANK OF NEW YORK, as Agent and as Issuer, agree to this Consent and Third Amendment (this "Amendment"), dated as of January 27, 1997 (the "Amendment Date"), to the Revolving Credit Agreement, dated as of May 5, 1995, among the Borrower, the Lenders parties thereto, such Co-Agents and such Agent and Issuer, as previously amended (the "Agreement"; capitalized terms used but not otherwise defined herein having the meanings assigned to them in the Agreement, and references herein to Sections being references to Sections of the Agreement unless indicated otherwise), as follows: Section 1. Consent. Section 6.3 of the Regulations may be amended substantially as set forth in Exhibit A attached hereto by appropriate Owners Committee Action, subject to the Consent and Third Amendment to Credit Agreement of even date herewith, which amends the Term Credit Agreement, becoming effective in accordance with the terms thereof. Pursuant to Section 6.01(d)(iv)(A), the Borrower will furnish to the Agent a copy of that amendment to Section 6.3 of the Regulations within five Business Days after the effective date thereof. Section 2. Amendments. Subject to the terms and provisions herein set forth, effective as of the Amendment Date, the Agreement hereby is amended in the following respects: (a) Section 7.06(d)(i) of the Agreement is hereby amended in its entirety, as follows: (i) if such Indebtedness is owing to LRC pursuant to Section 6.4.(D) of the Regulations or to CRIC pursuant to Section 6.3 of the Regulations, the Borrower may make scheduled payments of interest thereon so long as no Event of Default exists or would exist after giving effect to any such payment; (b) Section 7.06(d)(ii) of the Agreement is hereby amended in its entirety, as follows: (ii) if such Indebtedness is Affiliate Indebtedness of the Borrower not owing to LRC pursuant to Section 6.4.(D) of the Regulations or to CRIC pursuant to Section 6.3 of the Regulations, the Borrower may make scheduled payments of interest thereon when due in accordance with its terms (including terms of subordination); and 1 Section 3. Fees and Expenses. The Borrower agrees to pay to the Agent for the account of counsel to the Agent all reasonable fees and expenses of such counsel in connection with this Amendment. Section 4. Effect of Consent and Amendments. Except for the consent and amendments evidenced hereby, the Agreement and other Loan Documents remain in full force and effect, and the Agreement, as amended hereby, and the other Loan Documents are hereby ratified and confirmed by the Borrower. The consent evidenced hereby is limited to the matter specifically addressed herein and is not effective for any other purpose. The execution and delivery of this Amendment shall not, except as specifically set forth herein, operate as an amendment or waiver of compliance by the Borrower with respect to any other provision or condition of the Agreement, as amended hereby, or any other Loan Document, or of any right, power or remedy of the Agent, any Co-Agent, any Lender or the Issuer under the Agreement, as amended hereby, or any other Loan Document, or prejudice any right or remedy that the Agent, any Co-Agent, any Lender or the Issuer may now have or may have in the future with respect to any Default, or otherwise, under or in connection with the Agreement, as amended hereby, or any other Loan Document. Section 5. Conditions to Effectiveness. The effectiveness of the consent and amendments made by this Amendment to the Agreement is subject to its execution by the Agent and the Agent's receipt of (a) counterparts of this Amendment signed by the Borrower and the Required Lenders and (b) each of the following, in form and substance reasonably satisfactory to the Agent: (i) a copy, certified by the Secretary of the Borrower under date of the Amendment Date, of the resolutions adopted by Owners Committee Action taken by the Owners Committee in accordance with the applicable requirements of the Regulations to authorize the execution and delivery of this Amendment; (ii) a certificate of a Responsible Officer, dated the Amendment Date, to the effect that on and as of the Amendment Date, after giving effect to this Amendment, (A) the representations and warranties set forth in Article V of the Agreement (other than in Section 5.06(a)(ii)) are true and correct in all material respects (unless made as of a specific date as set forth in that Article) and (B) no Default exists; and (iii) an opinion of the general counsel of the Borrower, dated the Amendment Date, to the effect that this Amendment has been duly authorized by Owners Committee Action and validly executed and delivered by the Borrower. Notwithstanding the foregoing, this Amendment will be nullified and of no further force or effect if the Owners Commitee fails to take Owners Committee Action amending Section 6.3 of the Regulations consistent with the consent granted hereby on or before February 7, 1997. Section 6. Miscellaneous. This Amendment is governed by the terms and other provisions of Sections 1.02, 1.03, 10.05, 10.07, 10.10 (the first sentence thereof) and 10.12 as if this Amendment were the Agreement. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers all as of the Amendment Date. LYONDELL-CITGO REFINING COMPANY LTD. By: /s/ D. LYNDON JAMES ---------------------------------------------- Name: D. Lyndon James Title: Vice President and Controller THE BANK OF NEW YORK, As Agent, as Issuer and as a Lender By: /s/ RAYMOND J. PALMER ---------------------------------------------- Name: Raymond J. Palmer Title: Vice President OTHER LENDERS: ABN AMRO BANK N.V. HOUSTON AGENCY By: /s/ ROBERT CUNNINGHAM ---------------------------------------------- Name: Robert Cunningham Title: Vice President and Director By: /s/ H. GENE SHIERS ---------------------------------------------- Name: H. Gene Shiers Title: Vice President and Director 3 THE BANK OF NOVA SCOTIA By: /s/ F.C.H. ASHBY ---------------------------------------------- Name: F.C.H. Ashby Title: Senior Manager Loan Operations BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: /s/ JOHN L. STACY ---------------------------------------------- Name: John L. Stacy Title: Vice President CAISSE NATIONALE DE CREDIT AGRICOLE By: /s/ DAVID BOUHL ---------------------------------------------- Name: David Bouhl, F.V.P Title: Head of Corporate Banking Chicago CREDIT LYONNAIS CAYMAN ISLAND BRANCH By: /s/ PASCAL POUPELLE ---------------------------------------------- Name: Pascal Poupelle Title: Authorized Signature 4 THE FIRST NATIONAL BANK OF CHICAGO By: /s/ LEO LOUGHEAD ---------------------------------------------- Name: Leo Loughead Title: Corporate Banking Officer THE INDUSTRIAL BANK OF JAPAN, LTD. By: /s/ KAZUTOSHI KUWAHARA ---------------------------------------------- Name: Kazutoshi Kuwahara Title: Executive Vice President, Houston Office NATIONSBANK OF TEXAS, N.A. By: /s/ KEITH BUCHANAN ---------------------------------------------- Name: Keith Buchanan Title: V.P. THE NIPPON CREDIT BANK, LTD. NEW YORK BRANCH By: /s/ YOSHIHIDE WATANABE ---------------------------------------------- Name: Yoshihide Watanabe Title: Vice President & Manager 5 PNC BANK, NATIONAL ASSOCIATION By: /s/ THOMAS K. GRUNDMAN ---------------------------------------------- Name: Thomas K. Grundman Title: Senior Vice President ROYAL BANK OF CANADA By: /s/ J.D. FROST ---------------------------------------------- Name: J.D. Frost Title: Senior Manager THE SANWA BANK LIMITED DALLAS AGENCY By: /s/ TOMOYUKI TAKADA ---------------------------------------------- Name: Tomoyuki Takada Title: Deputy General Manager SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ ELIZABETH W. HUNTER ---------------------------------------------- Name: Elizabeth W. Hunter Title: Vice President 6 THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By: /s/ TAKASHI MIKUMO ---------------------------------------------- Name: Takashi Mikumo Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ RICHARD R. NEWMAN ---------------------------------------------- Name: Richard R. Newman Title: Vice President By: /s/ THOMAS LEE ---------------------------------------------- Name: Thomas Lee Title: Associate THE YASUDA TRUST AND BANKING COMPANY, LTD. NEW YORK BRANCH By: /s/ MAKOTO TAGAWA ---------------------------------------------- Name: Makoto Tagawa Title: Deputy General Manager 7 EXHIBIT A AMENDMENT NO. 3 TO AMENDED AND RESTATED LIMITED LIABILITY COMPANY REGULATIONS OF LYONDELL-CITGO REFINING COMPANY LTD Amendment No. 3 (the "Amendment") to the Amended and Restated Limited Liability Company Regulations (the "Regulations") of LYONDELL-CITGO Refining Company Ltd. (the "Company") is effective, by unanimous written consent of the Representatives of the Owners Committee in accordance with Section 3.4.(E) of the Regulations, as of January __, 1997. All terms defined in the Regulations are used herein with the meanings provided in the Regulations. 1. Section 6.3. of the Regulations is hereby amended to read hereafter in its entirety as follows: 6.3. Additional Refinery Expansion Project Funding. In the event that additional funds are required under Section 10 for the Refinery Expansion Project, then in any such event such funds shall be provided equally by the Owners unless otherwise mutually agreed. Except as provided hereinbelow, the amounts to be funded by COwner shall be funded with capital contributions and the amounts to be funded by LOwner shall be funded by LOwner loans, as provided in Section 6.4.(D). The amounts in excess of the Cost Ceiling to be funded by COwner shall be funded (i) with capital contributions up to $25,000,000 and (ii) for any amounts required beyond $25,000,000, at COwner's option, either capital contributions or COwner loans (the terms of which shall be, subject to Section 13.11, as set forth on Exhibit 6.4.(D). 2. Except as set forth above, the Regulations remain unmodified, and as amended above, the Regulations remain in full force and effect. A-1 EX-4.5(D) 3 AMENDMENT #4 TO THE LCR $70,000,000 CREDIT AGMT. EXHIBIT 4.5(d) CONSENT AND FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT dated as of December 31, 1998 LYONDELL-CITGO REFINING COMPANY LTD., a Texas limited liability company (the "Borrower"), the LENDERS listed on the signature pages hereof and any Lender hereafter becoming a party to the below-mentioned Agreement in accordance with the provisions thereof, ABN AMRO BANK N.V., THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS, THE FIRST NATIONAL BANK OF CHICAGO and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents, and THE BANK OF NEW YORK, as Agent and as Issuer, agree to this Consent and Fourth Amendment (this "Amendment"), dated as of December 31, 1998, to the Revolving Credit Agreement, dated as of May 5, 1995, among the Borrower, the Lenders parties thereto, such Co-Agents and such Agent and Issuer, as previously amended (the "Agreement"; capitalized terms used but not otherwise defined herein having the meanings assigned to them in the Agreement, and references herein to Sections being references to Sections of the Agreement unless indicated otherwise), as follows: Section 1. Consent. The Lenders hereby consent to the conversion of the Borrower from a Texas limited liability company to a Delaware limited partnership and the replacement of the Regulations with a Limited Partnership Agreement substantially in the form attached hereto as Exhibit A, subject to the Consent and Fourth Amendment to Credit Agreement of even date herewith, which amends the Credit Agreement, being signed and delivered by the "Required Lenders" thereunder. Pursuant to Section 6.01(d)(iv)(A), the Borrower will furnish to the Agent a copy of all the Borrower's Charter Documents, including a copy of the Limited Partnership Agreement of LYONDELL-CITGO Refining LP, within 5 Business Days after the Amendment Date (as such term is hereinafter defined). Section 2. Amendments. Subject to the terms and provisions herein set forth, effective as of the Amendment Date, the Agreement hereby is amended in the following respects: (a) The opening recital to the Agreement is hereby amended to reflect the new name and business structure of the Borrower as follows: LYONDELL-CITGO Refining LP, a Delaware limited partnership (b) Certain definitions set forth in Section 1.01 are changed or deleted in their entirety, and additional terms are defined, in Section 1.01, as follows: 1 (i) The last sentence of the definition of "Affiliate" is changed to read in its entirety as follows: For purposes of this Agreement, each of the Partners is an Affiliate of the Borrower. (ii) In the definition of "Applicable Margin" column "B" is deleted in its entirety and clause (b) is changed to read in its entirety as follows: (b) for any subsequent period from and including any Determination Date, beginning with the first Determination Date after the date of this Agreement, to the next Determination Date to occur, if the Applicable Debt Percentage Ratio on the first day of such period is within a range set forth in column A below the per annum percentage equal to the percentage set forth for that range in column C below: (iii) The definition of "Borrower" is changed to read in its entirety as follows: "Borrower" means LYONDELL-CITGO Refining LP, a Delaware limited partnership. (iv) The definition of "Change of Control" is changed to read in its entirety as follows: "Change of Control" means the failure of CITGO or Lyondell, individually or collectively, to own, legally and beneficially, directly or indirectly, at least 35% of the outstanding ownership and voting interest in the Borrower. (v) Clause (a) of the definition of "Charter Documents" is changed to read in its entirety as follows: (a) the Borrower, (i) its Certificate of Limited Partnership, (ii) the Partnership Agreement, (iii) its Certificate of Conversion, and (vi) The definition of "Custodian" is changed to read in its entirety as follows: 2 "Custodian" means any custodian, receiver, sequestrator, trustee or similar official (a) under Bankruptcy Law, (b) under any business corporation statute in the case or assets of any corporation or (c) under or pursuant to any limited liability company or limited partnership statute in the case of assets of any limited liability company or limited partnership. (vii) The definition of "Distribution Debt" is changed to read in its entirety as follows: "Distribution Debt" means obligations of the Borrower created under Section 7.3.(C) of the Partnership Agreement in respect of distributions required to be made pursuant to Section 7.4 of the Partnership Agreement. (viii) The definition of "Lyondell" is changed to read in its entirety as follows: "Lyondell" means Lyondell Chemical Company, a Delaware corporation formally known as Lyondell Petrochemical Company. (ix) The definition of "Owners" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partners" means Lyondell LP, CRIC, LRC and CITGO GP and any of their respective successors and assigns under the Partnership Agreement. All uses of the terms "Owners" and "Owner" elsewhere in the Agreement are changed to the terms "Partners" and "Partner", respectively. (x) "Owners Committee" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partnership Governance Committee" means the committee of representatives of the General Partners through which the General Partners manage the Borrower in accordance with Article 3 of the Partnership Agreement. All uses of the term "Owners Committee" elsewhere in the Agreement are changed to the term "Partnership Governance Committee". 3 (xi) "Owners Committee Action" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partnership Governance Committee Action" has the meaning specified in Section 3.06.(A) of the Partnership Agreement. All uses of the term "Owners Committee Action" elsewhere in Agreement are changed to the term "Partnership Governance Committee Action". (xii) In clause (c) of the definition of "Permitted Investments" references to "Section 7.6" are changed to "Section 7.5". (xiii) Clause (a)(i) of the definition of "Qualified Subordinated Debt" is changed in its entirety to read as follows: (a)(i) to any Partner or any Affiliate of any Partner having, at the option of the Borrower, (A) subordination terms substantially identical to those set forth in Exhibit 1.01-A to the Agreement or (B) such other terms of subordination as are satisfactory to the Required Lenders or Exhibit 1.01-A referred to above is attached to this Amendment as Exhibit B. (xiv) "Regulations" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partnership Agreement" means the Limited Partnership Agreement of the Borrower dated as of December 31, 1998, as amended, modified and supplemented from time to time to the extent no Event of Default occurs under Section 8.01(i)(iii) as a result of such amendment, modification or supplement. All uses of the term "Regulations" elsewhere in the Agreement are changed to the term "Partnership Agreement". (xv) The last sentence of the definition of "Restricted Payment" is changed to read in its entirety as follows: 4 Without limiting the generality of the foregoing, a "Restricted Payment" by the Borrower or any Subsidiary includes any distribution made by the Borrower, or any Subsidiary for the account of the Borrower, to a Partner pursuant to the Partnership Agreement, including, without limitation, Sections 7.2, 7.4 and 7.5 thereof. (xvi) The definition of "TLLCA" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "DRULPA" means the Delaware Revised Uniform Limited Partnership Act. All uses of the term "TLLCA" elsewhere in the Agreement are changed to the term "DRULPA". (xvii) The definitions of "In-Service Date", "Mechanical Completion", "Post-Completion Period", "Pre-Completion Period", "Recommended Design", and "Refinery Expansion Budget" are deleted in their entirety. (xviii) The following definitions are added to Section 1.01 in the proper alphabetical order: "CITGO GP" means CITGO Gulf Coast Refining, Inc., a Delaware corporation that is a Wholly Owned Subsidiary of CITGO and a general partner in the Borrower. "General Partners" means LRC and CITGO GP. "Limited Partners" means Lyondell LP and CRIC. "Lyondell LP" means "Lyondell Refining LP, LLC, a Delaware limited liability company that is a Wholly- Owned Subsidiary of Lyondell and a limited partner in the Borrower. (c) Section 4.01(l) is deleted in its entirety. (d) The first three sentences of Section 5.01 are changed to read in their entirety as follows: The Borrower (a) is a limited partnership duly organized, validly existing and in good standing under the DRULPA and (b) has all the requisite power and 5 authority under the DRULPA and its Charter Documents to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. The Borrower is, and each Subsidiary is, duly registered, qualified or licensed and in good standing as a foreign limited liability company, a foreign limited partnership or a foreign corporation, as the case may be, in good standing, when applicable, in each jurisdiction in which it owns or leases property or proposes to own or lease property or in which the carrying on of its business as now conducted or as proposed to be conducted so requires, except to the extent that failures to be so registered, qualified or licensed individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (e) The first sentence of Section 5.13 is changed to read in its entirety as follows: The Borrower will use (a) the proceeds of the Loans for working capital and general business purposes and (b) request the issuance of Letters of Credit consistent with such purposes. (f) In Section 6.01(b)(ii) "Coopers & Lybrand" is changed to "PriceWaterhouseCoopers". (g) Section 6.01(c) is deleted in its entirety. (h) The first sentence of Section 7.01(a) is changed to read in its entirety as follows: The Borrower shall remain a limited partnership. The Borrower shall cause each Subsidiary that is a limited liability company or a limited partnership when it becomes a Subsidiary to maintain its existence as a limited liability company or limited partnership, as the case may be, under the appropriate act under which it was originally formed. (i) Section 7.06 is changed as follows: (i) The reference to Section 7.6 is deleted from the third line of Section 7.06. (ii) Clause (a) is changed in its entirety to read as follows: (a) so long as no Event of Default exists or would exist after giving effect thereto, the Borrower may make distributions to the Partners pursuant to and in accordance with Sections 7.2, 7.4 and 7.5 of the Partnership Agreement, including, without limitation, 6 distributions in satisfaction of Distribution Debt and advances pursuant to Section 7.5 of the Partnership Agreement; (iii) Clause (d) is changed in its entirety to read as follows: (d) with respect to Qualified Subordinated Debt that is not Permitted Replacement Debt: (i) if such Indebtedness is Affiliate Indebtedness of the Borrower, the Borrower may make scheduled payments of interest thereon when due in accordance with its terms (including terms of subordination); and (ii) if such Indebtedness is not Affiliate Indebtedness of the Borrower, the Borrower may make scheduled payments of principal, interest, fees and other charges to the holders of such Qualified Subordinated Debt when due in accordance with its terms (including terms of subordination); Notwithstanding the foregoing amendment to clause (d) of Section 7.06, so long as no Event of Default exists or would exist after giving effect thereto, the Borrower may make scheduled payments of interest on Affiliated Indebtedness incurred prior to the Amendment Date pursuant to Section 6.4 (D) or 6.3 of the Regulations. (iv) Clause (f) is deleted in its entirety. (j) In Section 7.10 the reference to "Sections 5.3 and 5.4" is changed to "Sections 5.6 and 5.7". (k) In Section 7.17(b) the term "Articles of Organization" is changed to "Certificate of Limited Partnership". (l) In Section 8.01(e)(i)(C) the words "limited liability company" are changed to "limited partnership". (m) Clause (iii) of Section 8.01(e) is changed in its entirety to read as follows: (iii) any Partner applies to any court of competent jurisdiction for the dissolution of the Borrower or an event of dissolution (within the meaning of Section 11 of the Partnership Agreement or the DRULPA) occurs and the business of the Borrower is not continued pursuant to the vote of the requisite Partners within 90 days after such event of dissolution or the Borrower is not 7 otherwise reconstituted in accordance with Section 11.10 of the Partnership Agreement within 90 days after such event of dissolution. (n) Section 8.01(i) is changed as follows: (i) Clause (iii) is changed in its entirety to read as follows: any of Sections 3.1.(B), 5.6, 5.7, 6.2, 6.5, 6.6, 6.7, 7.2, 7.3, 7.4 and 7.5 of the Partnership Agreement is amended, modified or supplemented (directly or indirectly by means of an amendment to the Borrower's Partnership Agreement or Certificate of Limited Partnership) (it being understood that if any term defined elsewhere in the Partnership Agreement or the Exhibits to the Partnership Agreement and used (directly or by inclusion in such a defined term) in any of such enumerated Sections is amended, modified or supplemented in a manner materially detrimental to the Lenders with respect to any of such Sections, such amendment, modification or supplement will be deemed an amendment or modification of or supplement to each of the enumerated Sections in which it is used) without the prior written consent of the Required Lenders (which consent shall not be unreasonably withheld) or (B) any other term or condition of the Partnership Agreement is amended, modified or supplemented (directly or indirectly as aforesaid) in such a manner that the effect thereof, together with the effect of all previous amendments and modifications of and supplements to such other term or conditions, could reasonably be expected to have a Material Adverse Effect; (ii) The references in clauses (iv) and (v) to "CRIC or LRC" are changed to "any Partner". (iii) The reference in clause (v) to "Section 12.2(A)(2)" is changed to Section "11.2". (o) Section 8.01(l) is changed to read in its entirety as follows: (i) Either LRC or Lyondell LP shall transfer its interest as a Partner of the Borrower in accordance with the terms of the Partnership Agreement to a Person other than an "Affiliate" (as defined in the Crude Supply Agreement) of Lyondell or (ii) neither CITGO nor any of its "Affiliates" (as defined in the Crude Supply Agreement) is a Partner of the Borrower. 8 Section 3. Other Loan Documents. If any term defined in Section 1.10 of the Agreement is used in any other Loan Document and that term is amended by this Amendment or is replaced by another term, that Loan Document is also amended hereby to reflect the amendment or replacement, as the case may be, of that term. Section 4. Fees and Expenses. The Borrower agrees to pay to the Agent for the account of counsel to the Agent all reasonable fees and expenses of such counsel in connection with this Amendment. Section 5. Effect of Consent and Amendments. Except for the consent and amendments evidenced hereby, the Agreement and other Loan Documents remain in full force and effect, and the Agreement and the other Loan Documents, each as amended hereby, are hereby ratified and confirmed by the Borrower. The consent evidenced hereby is limited to the matter specifically addressed herein and is not effective for any other purpose. The execution and delivery of this Amendment shall not, except as specifically set forth herein, operate as an amendment or waiver of compliance by the Borrower with respect to any other provision or condition of the Agreement or any other Loan Document, each as amended hereby, or of any right, power or remedy of the Agent, any Co-Agent, any Lender or the Issuer under the Agreement or any other Loan Document, each as amended hereby, or prejudice any right or remedy that the Agent, any Co-Agent, any Lender or the Issuer has under or in connection with the Agreement, or any other Loan Document, each as amended hereby. Section 6. Conditions to Effectiveness. This Amendment will be effective December 31, 1998 (the "Amendment Date") subject to (a) its execution by the Agent and the Agent's receipt of (i) counterparts of this Amendment signed by the Borrower and the Required Lenders and (ii) each of the following, in form and substance reasonably satisfactory to the Agent: (A) a copy, certified by the Secretary of the Borrower dated the Amendment Date, of the resolutions adopted by Owners Committee Action taken by the Owners Committee in accordance with the applicable requirements of the Regulations to authorize the execution and delivery of this Amendment; (B) a certificate of a Responsible Officer, dated the Amendment Date, to the effect that on and as of the Amendment Date, after giving effect to this Amendment, (1) the representations and warranties set forth in Article V of the Agreement (other than in Section 5.06(a)(ii)) are true and correct in all material respects (unless made as of a specific date as set forth in that Article) and (2) no Default exists; and (C) an opinion of counsel to the Borrower, dated the Amendment Date, to the effect that this Amendment has been duly authorized by Owners Committee Action and validly executed and delivered by the Borrower and (b) the filing by the Borrower of the Certificate of Limited Partnership and the Certificate of Conversion with the Secretary of State of Delaware and the filing of the Articles of Conversion with the Secretary of State of Texas. Section 7. Miscellaneous. This Amendment is governed by the terms and other provisions of Sections 1.02, 1.03, 10.05, 10.07, 10.10 (the first sentence thereof) and 10.12 as if this Amendment were the Agreement. 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers all as of the Amendment Date. LYONDELL-CITGO REFINING COMPANY LTD. a Texas limited liability company By: /s/ Jose L. Rodriguez ------------------------------ Name: Jose L. Rodriguez Title: Vice President THE BANK OF NEW YORK, As Agent, as Issuer and as a Lender By: /s/ Raymond J. Palmer ------------------------------ Name: Raymond J. Palmer Title: Vice President 10 OTHER LENDERS: ABN AMRO BANK N.V. HOUSTON AGENCY By: ABN AMRO North America, Inc., as agent By: /s/ Michael W. Nepveux ------------------------------ Name: Michael W. Nepveux Title: Group Vice President By: /s/ Rodney D. Kubicek ------------------------------ Name: Rodney D. Kubicek Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ------------------------------ Name: F.C.H. Ashby Title: Senior Manager Loan Operations BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: /s/ Warren Ross ------------------------------ Name: Warren Ross Title: Assistant Vice President 11 CREDIT AGRICOLE INDOSUEZ By: /s/ Katherine L. Abbott ------------------------------ Name: Katherine L. Abbott Title: First Vice President By: /s/ David Bouhl, F.V.P. ------------------------------ Name: David Bouhl, F.V.P. Title: Head of Corporate Banking Chicago CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Phillippe Soustra ------------------------------ Name: Phillippe Soustra Title: Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Helen A. Carr ------------------------------ Name: Helen A. Carr Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LTD. NEW YORK BRANCH By: /s/ Mike Oakes ------------------------------ Name: Mike Oakes Title: Senior Vice President, Houston Office 12 LEHMAN COMMERCIAL PAPER INC. & SYND. FUNDING TRUST By: /s/ Michele Swanson ------------------------------ Name: Michele Swanson Title: Authorized Signatory NATIONSBANK, N.A. By: /s/ Mary Louise Allen ------------------------------ Name: Mary Louise Allen Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ John R. Way ------------------------------ Name: John R. Way Title: Assistant Vice President ROYAL BANK OF CANADA By: /s/ J.D. Frost ------------------------------ Name: J.D. Frost Title: Senior Manager 13 SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Elizabeth W. Hunter ------------------------------ Name: Elizabeth W. Hunter Title: Director THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By: /s/ K. Yamauchi ------------------------------ Name: K. Yamauchi Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Duncan M. Robertson ------------------------------ Name: Duncan M. Robertson Title: Vice President By: /s/ Felicia La Forgia ------------------------------ Name: Felicia La Forgia Title: Vice President 14 EXHIBIT A Draft: 12/19/98 CONFIDENTIAL LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP - -------------------------------------------------------------------------------- UNDER THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT - -------------------------------------------------------------------------------- DATED DECEMBER 31, 1998 TABLE OF CONTENTS 1. DEFINITIONS............................................................ 1 2. ORGANIZATION MATTERS................................................... 1 2.1. Name....................................................... 1 2.2. Conversion to Partnership and Partners..................... 1 2.3. Purpose and Business....................................... 2 2.4. Principal Office........................................... 3 2.5. Term....................................................... 3 2.6. Filings.................................................... 3 2.7. Power of Attorney.......................................... 3 3. MANAGEMENT............................................................. 4 3.1. Partnership Governance Committee.......................... 4 3.2. Partnership Governance Committee Composition.............. 4 3.3. Partnership Governance Committee: Duties, Powers and Authority................................................. 6 3.4. Partnership Governance Committee: Meetings............... 6 3.5. Compensation of Representatives........................... 8 3.6. Partnership Governance Committee Action................... 8 3.7. Partnership Governance Committee: Quorum and Voting...... 8 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary............................... 9 3.9. Majority Approval......................................... 11 3.10. Auxiliary Committees...................................... 11 4. OFFICERS AND EMPLOYEES................................................. 12 4.1. Partnership Officers...................................... 12 4.2. Selection; Term; Qualification............................ 12 4.3. Removal and Vacancies..................................... 12 4.4. Duties.................................................... 13 4.5. CEO....................................................... 14 4.6. Vice Presidents........................................... 14 4.7. Secretary................................................. 14 4.8. Assistant Officers........................................ 14 4.9. Other Officers............................................ 15 4.10. Salaries.................................................. 15 4.11. Bonds of Officers......................................... 15 4.12. Delegation................................................ 15 4.13. Loaned Employees.......................................... 15 4.14. Employee Transfers........................................ 16 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS............................... 16 5.1. Delegation................................................ 16 5.2. General Authority......................................... 16 (ii) 5.3. Nature of Partner Obligations.............................. 17 5.4. Limited Partners........................................... 17 5.5. Partner Not Agent of Other Partners........................ 17 5.6. Transactions with the Partnership.......................... 17 5.7. Control of Certain Claims and Certain Transactions......... 18 5.8. Partnership Interest....................................... 19 5.9. Access to and Copies of Records and Documents.............. 19 5.10. Partner Covenants.......................................... 19 5.11. Indemnification............................................ 20 6. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE..................... 22 6.1. Prior Capital Contributions................................ 22 6.2. Capital Contributions...................................... 22 6.3. Partner Loans.............................................. 23 6.4. Participation Percentages.................................. 23 6.5. Capital Expenditure Funding................................ 24 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage................................... 24 6.7. Return of Capital Contributions............................ 26 6.8. Administration and Investment of Funds..................... 26 7. ALLOCATIONS AND DISTRIBUTIONS.......................................... 26 7.1. Capital Accounts........................................... 26 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances................................ 27 7.3. Distributable Cash......................................... 28 7.4. Distributions.............................................. 29 7.5. Interim Loans.............................................. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes.......................................... 30 7.7. Tax Allocations............................................ 31 7.8. Transfers of Interest...................................... 33 8. BOOKS OF ACCOUNT AND TAX MATTERS....................................... 33 8.1. Books of Account........................................... 33 8.2. Tax Treatment.............................................. 34 8.3. Tax Returns................................................ 34 8.4. Tax Controversies.......................................... 35 8.5. Tax Rulings................................................ 36 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS.................... 36 9.1. Fiscal Year................................................ 36 9.2. Annual Budgets............................................. 36 9.3. Approval of Budgets........................................ 37 9.4. Funding of Budgets......................................... 37 (iii) 9.5. Implementation of Budgets and Discretionary Expenditures by CEO.................................................... 37 9.6. Five Year Plan............................................. 38 9.7. Commercial Loans........................................... 38 9.8. Insurance and Risk Management.............................. 38 10. TRANSFERS AND PLEDGES................................................. 38 10.1. Prohibition of Transfer.................................... 38 10.2. Transfers Prior to the Option Date......................... 39 10.3. Transfers After the Option Date............................ 39 10.4. Transferees................................................ 41 10.5. Pledge of Interest......................................... 41 11. REMEDIES AND DISSOLUTION.............................................. 42 11.1. Security for Performance.................................. 42 11.2. Default................................................... 43 11.3. Remedies for Default...................................... 45 11.4. Consequences of Default................................... 46 11.5. Purchase of Defaulting Partners' Interest................. 46 11.6. Liquidation............................................... 47 11.7. Closing of Purchase Rights................................ 47 11.8. Recision.................................................. 47 11.9. Dissolution............................................... 48 11.10. Reconstitution of Partnership............................. 48 11.11. Liquidation; Winding Up and Distributions upon Dissolution.............................................. 48 11.12. Enforcement............................................... 49 12. MISCELLANEOUS......................................................... 49 12.1. Confidentiality and Use of Information.................... 49 12.2. Auditors.................................................. 50 12.3. Indemnification of Officers............................... 50 12.4. Waivers, Modifications and Amendments..................... 52 12.5. Further Assurances........................................ 52 12.6. Successors and Assigns.................................... 52 12.7. Benefits of Agreement Restricted to the Parties........... 52 12.8. Expenses.................................................. 52 12.9. Currency Conversions...................................... 52 12.10. Payment Terms and Interest Calculations................... 52 12.11. Usury Savings Clause...................................... 53 12.12. Notices................................................... 53 12.13. Waiver of Immunity........................................ 54 12.14. Governing Law............................................. 55 12.15. Jurisdiction; Consent to Service of Process; Waiver....... 55 12.16. Entire Agreement.......................................... 56 12.17. Severability.............................................. 56 12.18. Construction.............................................. 56 12.19. Counterparts.............................................. 57 (iv) EXHIBITS. Exhibit 1 Definition of Terms in Agreement Exhibit 1A Related Agreements Exhibit 6.1(B) Working Capital Valuation Exhibit 6.4 Qualified Capital Contributions; Participation Percentages Exhibit 6.6(E) Form of Note for Portion of Option Date Payment (v) LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP (THE "PARTNERSHIP") 1. DEFINITIONS The definitions of the capitalized defined terms used in this Limited Partnership Agreement (the "Agreement"), including the Exhibits hereto other than Exhibit 1, and not elsewhere defined herein or therein, as well as cross- references to all capitalized defined terms, are set forth in Exhibit 1 to this Agreement. 2. ORGANIZATION MATTERS 2.1. Name. The name of the limited partnership is "LYONDELL-CITGO Refining LP" (the "Partnership"). The Partnership Business may be conducted under such name or any other name or names deemed advisable by the Partnership Governance Committee. The General Partners will comply or cause the Partnership to comply with all applicable laws and other requirements relating to fictitious or assumed names. 2.2. Conversion to Partnership and Partners. The Partnership converted from LYONDELL-CITGO Refining Company Ltd., a limited liability company formed under the laws of the State of Texas (the "Company"), effective as of the date of this Agreement (the "Conversion Date"), pursuant to Articles of Conversion filed pursuant to the Texas Limited Liability Company Act, and a Certificate of Conversion and a Certificate of Limited Partnership, each filed pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Act"). In connection with such conversion, the Amended and Restated Regulations of the Company dated July 1, 1993 (the "Closing Date"), as amended (the "Regulations"), were superseded by this Agreement. On the Conversion Date, the limited liability company interests in the Company were converted into partnership interests in the Partnership held by (i) Lyondell Refining LP, LLC, a Delaware limited liability company ("Lyondell LP"), a Wholly Owned Subsidiary of Lyondell Chemical Company (formerly known as Lyondell Petrochemical Company), a Delaware corporation ("LParent"), (ii) CITGO Refining Investment Company, an Oklahoma corporation ("CITGO LP"), a Wholly Owned Subsidiary of CITGO Petroleum Corporation, a Delaware corporation ("CParent"), (iii) Lyondell Refining Company, a Delaware corporation ("Lyondell GP"), a Wholly Owned Subsidiary of LParent, and (iv) CITGO Gulf Coast Refining, Inc., a Delaware corporation ("CITGO GP"), a Wholly Owned Subsidiary of CParent. Upon the Conversion Date, the percentage ownership of the Partnership was as follows: Lyondell GP 10.10% CITGO GP 1.00% Lyondell LP 48.65% CITGO LP 40.25% 1 Upon the Conversion Date, Lyondell GP's 10.10% interest consists of a 1.00% general partnership interest and a 9.10% limited partnership interest; provided, however, that for all other purposes under this Agreement, Lyondell GP shall be considered only a General Partner (as defined herein) and not a Limited Partner (as defined herein). Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. Without the need for the consent of any other Person, upon the execution of this Agreement: (i) each of Lyondell GP and CITGO GP is hereby admitted to the Partnership as a general partner of the Partnership (together, the "General Partners"), and (ii) each of Lyondell LP and CITGO LP is hereby admitted to the Partnership as a limited partner of the Partnership (together, the "Limited Partners"). Subject to the restrictions set forth in this Agreement, the Partnership shall have the power to exercise all the powers and privileges granted by this Agreement and by the Act, together with any powers incidental thereto, so far as such powers and privileges are necessary, appropriate, convenient or incidental for the conduct, promotion or attainment of the purposes of the Partnership. As of the Conversion Date, the Regulations (i) are superseded by this Agreement except to the extent of their ongoing relevance in governing matters relating to the Company and (ii) shall no longer have any force or effect except to the extent of their ongoing relevance in governing matters relating to the Company, provided, however, that all prior acts of Lyondell Refining Company, a Delaware corporation, and CITGO Refining Investment Company, an Oklahoma corporation, as members, or acts of or on behalf of the Company, under the Regulations shall remain in effect until modified or rescinded by Partnership Governance Committee Action. 2.3. Purpose and Business. The business of the Partnership (the "Partnership Business") shall be as follows: (i) to own and operate the Refinery Business, (ii) to carry out any Capital Enhancement Projects, (iii) to purchase, sell, exchange and refine crude oil and other feedstocks, (iv) to market the products produced by the Partnership, (v) to engage in the refining business generally, and (vi) to do all things necessary or incidental in connection with the foregoing as are permitted under the Act, all such business being managed, subject to then existing contractual obligations, with the objectives of (a) operating the Refinery, as modified by any Capital Enhancement Projects, and any other refinery or refining business owned or operated by the Partnership so as to maximize long-term Partnership value as measured by cash flow and earnings and (b) achieving the highest levels of efficiency, productivity and profitability consistent with good safety and environmental practices and performance. The Partnership shall be strictly limited to the Partnership Business, and the Partnership Business shall not be extended by implication or otherwise, except by express written amendment to this Agreement or by Unanimous Partnership Governance Committee Action pursuant to Section 3.8.(A). 2 2.4. Principal Office. The principal business office of the Partnership shall be at 12000 Lawndale, Houston, Texas 77017 or such other place as may be designated from time to time by the Partnership Governance Committee. The registered agent of the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. 2.5. Term. The Partnership shall continue until dissolved as described in Section 11.9. 2.6. Filings. The General Partners shall, or shall cause the Partnership to, execute, swear to, acknowledge, deliver, file or record in public offices and publish all such certificates, notices, statements or other instruments, and take all such other actions, as may be required by law for the formation, reformation, qualification, registration, operation or continuation of the Partnership in any jurisdiction, to maintain the limited liability of the Limited Partners, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law. Upon request of the General Partners, the Limited Partners shall execute all such certificates and other documents as may be necessary, in the sole judgment of the General Partners, in order for the General Partners to accomplish all such executions, swearings, acknowledgments, deliveries, filings, recordings in public offices, publishings and other acts. Each General Partner hereby agrees and covenants that it will execute any appropriate amendment to the Certificate of Limited Partnership of the Partnership pursuant to Section 17-204 of the Act to reflect any admission of a Substitute General Partner in accordance with this Agreement. 2.7. Power of Attorney. Each Limited Partner hereby irrevocably makes, constitutes and appoints its Affiliated General Partner and any successor thereto permitted as provided herein, with full power of substitution and resubstitution, as the true and lawful agent and attorney-in-fact of such Limited Partner, with full power and authority in the name, place and stead of such Limited Partner to execute, swear, acknowledge, deliver, file or record in public offices and publish: (i) all certificates and other instruments (including counterparts thereof) which such General Partner deems appropriate to reflect any amendment, change or modification of or supplement to this Agreement in accordance with and as permitted by the terms of this Agreement; (ii) all certificates and other instruments and all amendments thereto which such General Partner deems appropriate or necessary to form, qualify or continue the Partnership in any jurisdiction, to maintain the limited liability of such Limited Partner, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law; and (iii) all conveyances and other instruments or documents which such General Partner deems appropriate or necessary to reflect the transfers or assignments of interests in, to or under this Agreement, including the Interests, the dissolution, liquidation and termination of the Partnership, and the distribution of assets of the Partnership in connection therewith, in accordance with and as permitted by the terms of this Agreement. Each Limited Partner hereby agrees to execute and deliver to its Affiliated General Partner within five (5) Business Days after receipt of a written request therefor such other further statements of interest and holdings, designations, 3 powers of attorney and other instruments as such General Partner deems necessary. The power of attorney granted herein is hereby declared irrevocable and a power coupled with an interest, shall survive the bankruptcy, dissolution or termination of such Limited Partner and shall extend to and be binding upon such Limited Partner's successors and permitted assigns. Each Limited Partner hereby (i) agrees to be bound by any representations made by the agent and attorney-in-fact acting in good faith pursuant to such power of attorney; and (ii) waives any and all defenses which may be available to contest, negate, or disaffirm any action of the agent and attorney-in-fact taken in accordance with such power of attorney. 3. MANAGEMENT. 3.1. Partnership Governance Committee. (A) To facilitate the management of the Partnership by the General Partners, the General Partners hereby establish a committee (the "Partnership Governance Committee") to manage and control the business, property and affairs of the Partnership, including the determination and implementation of the Partnership's strategic direction. Except to the extent expressly set forth in this Agreement, each General Partner agrees to exercise its authority to manage the affairs of the Partnership only through Partnership Governance Committee Action. Further, each General Partner agrees not to exercise, or purport or attempt to exercise, its authority (notwithstanding that each General Partner may have such authority pursuant to the Act) (i) to act for or incur, create or assume any obligation, liability or responsibility on behalf of the Partnership or any other General Partner, or (ii) to execute any documents on behalf of, or otherwise bind, or purport or attempt to bind, the Partnership, or (iii) to otherwise transact any business in the Partnership's name, in each case except pursuant to Partnership Governance Committee Action or except as provided in Section 5.7. (B) Except as expressly set forth in this Agreement, no Person or Persons other than (i) the General Partners, acting through the Partnership Governance Committee, and (ii) the officers of the Partnership appointed in accordance with this Agreement and acting as agents or employees, as applicable, of the Partnership in conformity with this Agreement and any applicable Partnership Governance Committee Action, shall be authorized (a) to exercise the powers of the Partnership, (b) to manage the business, property and affairs of the Partnership or (c) to contract for, or incur on behalf of, the Partnership any debts, liabilities or other obligations. 3.2. Partnership Governance Committee Composition. (A) The Partnership Governance Committee shall consist of six representatives (each a "Representative") and each General Partner shall designate three Representatives. All the Representatives of both 4 General Partners shall together constitute the Partnership Governance Committee. Representatives shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., a Representative may also serve as a member of an Auxiliary Committee. (B) Each General Partner may designate one or more individuals (each an "Alternate") who (i) shall be authorized, in the event a Representative is absent from any meeting of the Partnership Governance Committee (and in the order of succession designated by the General Partner so designating the Alternates), to attend such meeting in the place of, and as substitute for, such Representative and (ii) shall be vested with all the powers to cast votes on behalf of such General Partner which the absent Representative could have exercised at such meeting. Alternates shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., an Alternate may also serve as a member of an Auxiliary Committee. The term "Representative," when used herein with reference to any Representative who is absent from a meeting of the Partnership Governance Committee, shall mean and refer to any Alternate attending such meeting in place of such absent Representative. (C) Each General Partner may, by written notice delivered to the other General Partner and the CEO, at any time or from time to time, remove or replace one or more of its Representatives or Auxiliary Committee members or change one or more of its Alternates. If a Representative, Auxiliary Committee member or Alternate dies, resigns, or becomes disabled or incapacitated, the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be, shall promptly designate a replacement. Each Representative, each Auxiliary Committee member and each Alternate shall serve until replaced by the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be. The Owners Committee Representatives, the Auxiliary Committee members and the Alternates representing Lyondell GP and CITGO LP, respectively (in their capacities as members of the Company), who are serving in such capacities in respect of the Company as of the Conversion Date will continue to hold such positions representing Lyondell GP and CITGO GP, respectively (in their capacities as General Partners), following the Conversion Date until removed or replaced in accordance with the terms of this Section 3.2.(C). (D) Copies of all written notices designating Representatives, Auxiliary Committee members and Alternates shall be delivered to the Secretary and shall be placed in the Partnership minute books, but the failure to deliver a copy of any such notice to the Secretary shall not affect the validity or effectiveness of such notice or the designation described therein. 5 (E) Each Representative, in his capacity as such, shall be the agent of the General Partner that designated such Representative. Accordingly, (i) each Representative, as such, shall act (or refrain from acting) with respect to the business, property and affairs of the Partnership solely in accordance with the wishes of the General Partner that designated such Representative and (ii) no Representative, as such, shall owe (or be deemed to owe) any duty (fiduciary or otherwise) to the Partnership, to any General Partner (other than the General Partner that designated such Representative), or to any Limited Partner; provided, however, that nothing in this Agreement is intended to or shall relieve or discharge any Representative or General Partner from liability to the Partnership or the Partners on account of any fraudulent or intentional misconduct of such Representative; and provided further, that each Representative shall not disclose any material information regarding the business of the Partnership and shall not use any such information, in either case, in any manner not related to the Partnership Business. 3.3. Partnership Governance Committee: Duties, Powers and Authority. (A) Except as otherwise provided by this Agreement, the Partnership Governance Committee (on behalf of the General Partners) shall have (i) the full authority of the General Partners to exercise all of the powers of the Partnership and (ii) full control (on behalf of the General Partners) over the business, property and affairs of the Partnership. (B) The Partnership Governance Committee shall adopt policies and procedures, not inconsistent with this Agreement (including Section 3.8.) or the Act, governing financial controls and legal compliance, including delegations of authority (and limitations thereon) to the officers of the Partnership as described in Section 4. Such policies and procedures may be revised or revoked (in a manner consistent with this Agreement and the Act) from time to time as determined by the Partnership Governance Committee. Without limiting the generality of the foregoing, the General Partners intend that the Partnership's policies and procedures will address such matters as conflicts of interest, political contributions, illegal or unethical business practices, antitrust compliance, anti-boycott compliance, Foreign Corrupt Practices Act compliance, employee practices, agreements with employees relating to inventions, contractual obligations, purchasing and advertising. To the extent any authority is not delegated to officers of the Partnership in this Agreement or in accordance with Partnership Governance Committee Action, it shall remain with the Partnership Governance Committee. 3.4. Partnership Governance Committee: Meetings. (A) Regular meetings of the Partnership Governance Committee shall be held at such times (no less frequently than quarterly) and at such places (within the States of Texas or Oklahoma or any other state designated 6 by the Partnership Governance Committee) as shall from time to time be determined by the Partnership Governance Committee. The first regular meeting of the Partnership Governance Committee during each fiscal year of the Partnership shall be deemed to be the "Annual Meeting." No notice need be given with respect to any regular meeting of the Partnership Governance Committee; however, the Secretary following receipt of comments thereto from each General Partner shall deliver, by messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), an agenda for such meeting to each of the Representatives at least five (5) Business Days prior to such meeting. At any regular meeting of the Partnership Governance Committee at which a quorum is present, any and all business of the Partnership may be transacted. (B) Special meetings of the Partnership Governance Committee may be called by any Representative or the CEO by delivering, via messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), written notice to each of the other Representatives, or, in the case of a meeting called by the CEO, each of the Representatives, at least three (3) Business Days before such meeting. Each notice of a special meeting shall specify, to a reasonable degree, the business to be transacted at, or the purpose of, such meeting; provided, however, that additional business may be transacted at any special meeting as agreed by all the Representatives present at such meeting. Special meetings of the Partnership Governance Committee shall be held at such times and at such places within the State of Texas or Oklahoma as may be stated in the notice of such meeting or in a duly executed waiver of notice thereof. Any Representative may waive notice of any special meeting (whether before or after the time of such meeting) but only if the waiver is in writing. Attendance of any Representative at any special meeting shall constitute a waiver of notice of such meeting by such Representative, unless the Representative states at the beginning of the meeting his objection to the transaction of business because the meeting was not lawfully called or convened. (C) One Representative shall serve as chair of each meeting (regular or special) of the Partnership Governance Committee. The right to designate the chair of meetings of the Partnership Governance Committee shall rotate between the respective General Partners every calendar year. The Representative who on the Conversion Date is serving as chair of the meetings shall continue to so serve until December 31, 1998, which is the next rotation date. (D) Following each meeting of the Partnership Governance Committee, the Secretary shall promptly draft and distribute minutes of such meeting to the Representatives for approval at the next meeting, and after such approval shall retain the minutes in the Partnership minute books. 7 (E) Representatives may participate in or hold regular or special meetings of the Partnership Governance Committee by means of a telephone conference or any comparable device or technology by which all individuals participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting. (F) Any action required or permitted to be taken at a meeting of the Partnership Governance Committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by at least two (2) Representatives (or their Alternates) of each General Partner, and such consent shall have the same force and effect as a duly conducted vote of the Partnership Governance Committee. A counterpart of each such consent to action shall be delivered to the Secretary for placement in the minute books of the Partnership, but the failure to deliver a counterpart of any such consent to action to the Secretary shall not affect the validity or effectiveness of such consent to action. 3.5. Compensation of Representatives. Representatives shall not receive from the Partnership any compensation for their service or any reimbursement for attendance at meetings of the Partnership Governance Committee. 3.6. Partnership Governance Committee Action. (A) The Partnership Governance Committee shall act exclusively by means of Partnership Governance Committee Action. As used in this Agreement, "Partnership Governance Committee Action" means any action which the Partnership Governance Committee is authorized and empowered to take in accordance with this Agreement and the Act and which is taken by the Partnership Governance Committee either (i) by votes cast at a meeting of the Partnership Governance Committee duly called and held in accordance with this Agreement or (ii) by a formal written consent complying with the requirements of Section 3.4.(F). In no event shall the Partnership Governance Committee be authorized to act other than by Partnership Governance Committee Action, and any action or purported action by the Partnership Governance Committee (including any authorization, consent, approval, waiver, decision or vote) not constituting a Partnership Governance Committee Action shall be null and void and of no force and effect. (B) Each Partnership Governance Committee Action shall be binding on the Partnership. 3.7. Partnership Governance Committee: Quorum and Voting. (A) The presence of one Representative (including any duly present Alternates) from each General Partner shall constitute a quorum of the Partnership Governance Committee for the transaction of business and 8 the taking of any Partnership Governance Committee Action at any meeting, except that no quorum of the Partnership Governance Committee will be deemed to exist (i) with respect to any regular meeting of the Partnership Governance Committee unless an agenda for such meeting is delivered in accordance with Section 3.4.(A) or (ii) with respect to any special meeting of the Partnership Governance Committee unless a notice of such meeting is given or waived in accordance with Section 3.4.(B). No Partnership Governance Committee Action may be taken at any meeting at which a quorum is not present. (B) All actions of the Partnership Governance Committee shall be determined by vote of the Representatives. Collectively, the Representatives shall have 100 votes. The Representatives of a General Partner shall have, in the aggregate, such number of votes as is equal to the product of 100 and the sum of the Participation Percentages of such General Partner and its Affiliated Limited Partner. The Representatives of each General Partner present at the meeting shall together and by joint action cast all of the votes held by all of the Representatives of such General Partner. 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary. Subject to Section 5.7., Section 11.4. and Section 11.11.(A), no Partnership Governance Committee Action will be deemed for any purpose to have been taken at any Partnership Governance Committee meeting unless and until 100 votes (constituting all the outstanding votes) are duly cast at such meeting in favor of such Partnership Governance Committee Action which would cause or permit the Partnership (or any Person acting in the name or on behalf of the Partnership), directly or indirectly, to take (or commit to take) any of the actions (each a "Unanimous Partnership Governance Committee Action") described below in this Section 3.8. (whether in a single transaction or series of related transactions): (A) to engage, participate or invest in any business outside the scope of the Partnership Business; (B) to make any acquisition or divestiture of any other entity or of any material line of business or business unit, or to merge or consolidate the Partnership with any other entity; (C) to amend or alter this Agreement or the Certificate of Limited Partnership; (D) to issue, redeem or acquire any Interests (or rights to acquire, or any securities convertible into, Interests) in the Partnership; (E) to borrow money or to engage in other financing activities, including the grant or use of credit and the pledge of any assets or the granting of a security interest in any asset; 9 (F) to file a petition in bankruptcy or seeking any reorganization, liquidation or similar relief on behalf of the Partnership; or to consent to the filing of a petition in bankruptcy against the Partnership; or to consent to the appointment of a receiver, custodian, liquidator or trustee for the Partnership or for all or any substantial portion of its property; (G) to approve the entry into of, amendments to, or termination or modification of, any material permit, government approval or other right; (H) to approve any Capital Enhancement Project or any expenditures pursuant to a Capital Budget pursuant to Section 9.2.(B), or to increase the amount below which a capital expenditure would not require Partnership Governance Committee Action regarding an "authority for commitment" as contemplated by Section 9.5.(A); (I) to make distributions other than those expressly provided for in Section 7.; (J) to enter into, amend, terminate or modify any product sales agreement or any raw materials purchase agreement pursuant to which the Partnership's commitments can reasonably be expected to exceed $50 million annually or that is for a term in excess of 18 months; (K) to enter into, amend, terminate or modify any agreement other than as described in Section 3.8.(J) pursuant to which the Partnership's commitments can reasonably be expected to exceed $25 million; (L) to commence or settle any litigation or arbitration proceeding by or on behalf of, or in the name or right of, the Partnership involving any claims or payments in excess of $1 million; (M) to make determinations with respect to the Partnership's commercial insurance program in accordance with Section 9.8.; (N) to designate or disband Auxiliary Committees and to establish the purposes thereof in all cases as described in Section 3.10.; (O) to delegate to any Auxiliary Committee powers or authority to take any action that would otherwise require unanimous approval by the Partnership Governance Committee, or to delegate to any officer powers or authority to take any action that would otherwise require approval by the Partnership Governance Committee; (P) to adopt or amend, as the Partnership Governance Committee, the policies and procedures referred to in Section 3.3.(B); (Q) to enter into, materially amend or terminate any employee benefit plan; 10 (R) to fix the salary and other compensation of Executive Officers in accordance with Section 4.10.; (S) to consent to the loan of an employee to the Partnership by a Partner as provided in Section 4.13. or to consent to the hiring of employees of the Partnership by a General Partner (or a General Partner's Affiliate) as anticipated by Section 4.14.; (T) to make any determinations concerning indemnification of officers pursuant to Section 1.23.; (U) to adopt or effect any change in the Partnership's accounting policies or practices in regards to Maintenance Capital; (V) to approve, amend or supplement either annual budget referred to in Section 9.2., including any Financing Plan thereunder; (W) to change at any time the Cash Balance Amount as provided for in Section 7.5; (X) to appoint the CEO or to designate an officer as an Executive Officer; or (Y) to change the Partnership's method of accounting for inventory as provided in Section 8.2.(C). 3.9. Majority Approval. Except as otherwise expressly provided in this Agreement, the approval of Representatives representing a majority of the total 100 votes will be sufficient for the Partnership Governance Committee to take any Partnership Governance Committee Action. 3.10. Auxiliary Committees. (A) The Partnership Governance Committee shall, by Partnership Governance Committee Action, designate an (i) Operating Committee, (ii) a Finance and Control Committee and (iii) a Compensation Committee. Each such committee shall be a standing committee. (B) From time to time, the Partnership Governance Committee may, by resolution adopted by the Partnership Governance Committee, designate one or more additional committees or disband any committee. (C) Each committee designated by the Partnership Governance Committee pursuant to this Section 3.10. (each an "Auxiliary Committee") shall (i) operate under the auspices of the Partnership Governance Committee for the purpose of assisting the Partnership Governance Committee in managing (on behalf of the General Partners) the 11 business and affairs of the Partnership and (ii) report to the Partnership Governance Committee. (D) Each Auxiliary Committee shall consist of two or more members and each General Partner shall have the right to appoint one member. The remaining members, if any, of each Auxiliary Committee shall be appointed by the Partnership Governance Committee. (E) Auxiliary Committee members may (but need not) be members of the Partnership Governance Committee or employees of the Partnership. No Auxiliary Committee member shall be compensated by the Partnership for service as a member of such Auxiliary Committee. (F) Each resolution adopted by the Partnership Governance Committee for the purpose of designating an Auxiliary Committee shall set forth (i) the size, name and rotation and designation of a chairman of such Auxiliary Committee and (ii) in such detail as the Partnership Governance Committee deems appropriate, the purposes, powers and authorities of such Auxiliary Committee; provided, however, that in no event shall any Auxiliary Committee have any powers or authority not permitted by this Agreement or the Act. 4. OFFICERS AND EMPLOYEES 4.1. Partnership Officers. The officers of the Partnership shall consist of a President and Chief Executive Officer ("CEO"), one or more Vice Presidents, a Secretary and such other officers and assistant officers and agents as may be deemed necessary or desirable by the Partnership Governance Committee. Officers shall be elected or appointed pursuant to Partnership Governance Committee Action (subject to Section 3.8.(X)) and shall have such authority and shall perform such duties in the management of the Partnership as may be provided in this Agreement or as may be determined by resolution of the Partnership Governance Committee (consistent with Section 3.8.(O)). In its discretion, the Partnership Governance Committee may leave unfilled any office or offices, except those of CEO and Secretary. Two or more offices may be held by the same person. The officers of the Company on the Conversion Date shall remain in office until such officers are changed by Partnership Governance Committee Action. 4.2. Selection; Term; Qualification. All officers shall be chosen by the Partnership Governance Committee annually at the Annual Meeting of the Partnership Governance Committee. Prior to each Annual Meeting the CEO shall present the Partnership Governance Committee with a list of nominees, but the Partnership Governance Committee shall not be bound to select officers solely from such list. The CEO and each other officer shall hold office until a successor has been chosen and qualified, or until the officer's death, resignation, or removal. 4.3. Removal and Vacancies. Any officer or agent may be removed by Partnership Governance Committee Action, with or without cause, whenever in the judgment of the Partnership Governance Committee the best interests of the Partnership 12 would be served thereby. Any vacancy in any office may be filled by the Partnership Governance Committee at any time. The CEO may, at any time, recommend to the Partnership Governance Committee the appointment or removal of any officer. 4.4. Duties. (A) Each officer or employee of the Partnership shall owe to the Partnership, but not to any Partner, all such duties (fiduciary or otherwise) as are imposed upon such an officer or employee of a Delaware corporation. Without limitation of the foregoing, each officer and employee in any dealings with a Partner shall have a duty to act in good faith and to deal fairly. (B) The policies and procedures of the Partnership adopted by the Partnership Governance Committee may set forth the powers and duties of the officers of the Partnership to the extent not set forth in or inconsistent with this Agreement. The officers of the Partnership shall have such powers and duties, except as modified by the Partnership Governance Committee, as generally pertain to their respective offices in the case of a Delaware corporation, as well as such powers and duties as from time to time may be conferred by the Partnership Governance Committee and by this Agreement. The CEO and the other officers and employees of the Partnership shall develop and implement management and other Partnership policies and procedures consistent with this Agreement and the general policies and procedures established by the Partnership Governance Committee. The duties of each officer shall include the obligation to notify the Partnership Governance Committee of any facts or circumstances of which such officer becomes aware that indicate a Partner or any of its Affiliates is or may be in breach of its obligations under this Agreement or under any of the Related Agreements. (C) Notwithstanding any other provision of this Agreement, no Partner, Representative, officer, employee or agent of the Partnership shall have the power or authority, without specific authorization from the Partnership Governance Committee, to undertake any of the following: (i) to do any act which contravenes (or otherwise is inconsistent with) this Agreement or which would make it impossible to carry on the Partnership Business; (ii) to confess a judgment against the Partnership; (iii) to possess Partnership property other than in the ordinary conduct of the Partnership Business; or 13 (iv) to take, or cause to be taken, any of the actions described in Section 3.8. 4.5. CEO. The CEO shall be the chief executive and chief operating officer of the Partnership, shall have general authority for direction of the business and affairs of the Partnership and general supervision over its several officers, subject, however, to the control of the Partnership Governance Committee and shall see that all orders and resolutions of the Partnership Governance Committee or, as applicable, any Auxiliary Committee(s) are carried into effect. The CEO shall be authorized to execute and deliver, in the name and on behalf of the Partnership, (i) contracts or other instruments authorized by Partnership Governance Committee Action and (ii) contracts or instruments in the usual and regular course of business, except in cases when the execution and delivery thereof shall be expressly delegated by the Partnership Governance Committee to some other officer or agent of the Partnership, and, in general, shall perform all duties incident to the office of CEO and such other duties as from time to time may be assigned to him or her by the Partnership Governance Committee (consistent with Section 3.8.(O)) or as are prescribed by this Agreement. Unless otherwise requested by a Representative, the CEO shall attend all meetings of the Partnership Governance Committee. 4.6. Vice Presidents. The Vice Presidents shall perform such duties as may, from time to time, be assigned to them by the Partnership Governance Committee (consistent with Section 3.8.(O)). In addition, at the request of the CEO, or in the absence or disability of the CEO, the Vice Presidents, or any of them, in the order of their election or in any other order determined by the Partnership Governance Committee, temporarily shall perform all (or if limited through the scope of the delegation, some of) the duties of the CEO, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the CEO. 4.7. Secretary. The Secretary shall keep the minutes of all meetings (and copies of written records of action taken without a meeting) of the Partnership Governance Committee and the Auxiliary Committees in minute books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of this Agreement. The Secretary shall be the custodian of the records. The Secretary shall have general charge of books and papers of the Partnership as the Partnership Governance Committee may direct and, in general, shall perform all duties and exercise all powers incident to the office of Secretary and such other duties and powers as the Partnership Governance Committee (consistent with Section 3.8.(O)) or the CEO from time to time may assign to or confer upon the Secretary. 4.8. Assistant Officers. Any assistant officer appointed by the Partnership Governance Committee shall have power to perform, and shall perform, all duties incumbent upon the officer he or she is assisting, subject to the general direction of such officer, and shall perform such other duties as this Agreement may require or the Partnership Governance Committee (consistent with Section 3.8.(O)) may prescribe. 14 4.9. Other Officers. The Partnership Governance Committee may appoint such other officers and delegate (consistent with Section 3.8.(O)) to them such duties as it sees fit. 4.10. Salaries. The salaries or other compensation of the Executive Officers of the Partnership shall be fixed from time to time by the Partnership Governance Committee. Except for previously granted stock options, stock appreciation rights, deferred compensation and other similar arrangements, the benefits of which might be realized subsequent to the officer becoming an employee of the Partnership, no officer or employee (other than an employee of a Partner or an Affiliate of a Partner) of the Partnership shall receive any fees or compensation from any Partner or any Affiliate of any Partner. Further, all fees and compensation of the officers and employees of the Partnership with respect to their services as such officers and employees shall be payable solely by the Partnership and no Partner or its Affiliates shall pay (or offer to pay) any such fees or compensation to any officer or employee, except to the extent permitted by Section 4.13. in the case of loaned employees or that the Partnership shall have agreed with a Partner or one of its Affiliates pursuant to a separate agreement that a portion of the compensation of such officer or employee shall be paid by such Partner or Affiliate. 4.11. Bonds of Officers. The Partnership Governance Committee may (but shall have no obligation to) secure the fidelity of any officer of the Partnership by bond or otherwise, on such terms and with such surety or sureties, conditions, penalties or securities as shall be deemed proper by the Partnership Governance Committee. 4.12. Delegation. The Partnership Governance Committee may delegate temporarily the powers and duties of any officer of the Partnership, in case of absence or for any other reason, to any other officer of the Partnership, and may authorize the delegation by any officer of the Partnership of any of such officer's powers and duties to any other officer or employee of the Partnership, subject to the general supervision of such officer. 4.13. Loaned Employees. If there is a vacancy in a job position above a certain grade (but below the level of the Executive Officers) in the Partnership (such grade to be established by the Partnership Governance Committee), either General Partner shall be entitled to nominate one of its (or its Affiliate's) own employees to fill such vacancy for a fixed period of up to three years, subject to renewal or extension by the CEO with the consent of each General Partner. The selection of a nominating General Partner's (or its Affiliate's) employee to fill a Partnership vacancy and all of the terms of such selection and the nominated employee's service shall be subject to the approval and control of the CEO; provided, however, that the selection and appointment of a nominating General Partner's (or its Affiliate's) employee to fill a vacancy shall be confirmed by Partnership Governance Committee Action. A nominating General Partner's (or its Affiliate's) employee who fills a Partnership vacancy shall in all respects perform as an employee of the Partnership and, as such, shall have the duties to the Partnership and the General Partners set forth or referred to in Section 4.4. (and each General Partner shall at all times cause all of its (or its Affiliate's) employees 15 on loan to the Partnership to perform in a manner consistent with the requirements of Section 4.4.); provided, however, that such employees shall continue to participate in the compensation and benefit plans of the nominating General Partner or its Affiliate. Each General Partner shall at any one time have no more than 10 of its (or its Affiliate's) employees filling Partnership vacancies. The Partnership shall compensate the nominating General Partner (or its Affiliate) for the services of the employee in accordance with terms determined by the nominating General Partner and the CEO prior to the employee's commencing work for the Partnership. 4.14. Employee Transfers. With the prior approval of the Partnership Governance Committee, which approval shall not be unreasonably withheld, either General Partner (or its Affiliates) shall be entitled to hire specific employees of the Partnership to fill vacancies with such General Partner or its Affiliate. With the prior approval of the relevant General Partner, which approval shall not be unreasonably withheld, the Partnership shall be entitled to hire specific employees of either General Partner (or its Affiliates) to fill vacancies with the Partnership. The granting of credit for past service with the prior employer for purposes of the hired employee's compensation and benefit plans shall be within the discretion of the General Partner who is hiring such employee, or in the case of the Partnership, shall be determined in accordance with an appropriate Partnership policy or procedure. 4.15. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the officers as set forth in this Agreement. No Person dealing with any officer with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with. No Person dealing with the Partnership shall be required to investigate or inquire as to the authority of the officers of the Partnership to execute contracts, agreements, deeds, mortgages, security agreements, promissory notes or other instruments or documents with respect to any business or property of the Partnership or to take actions on behalf of the Partnership. 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS 5.1. Delegation. The Partners acknowledge that the General Partners (acting through the Partnership Governance Committee) are permitted to delegate responsibility for day-to-day operations of the Partnership to officers and employees of the Partnership. 5.2. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the General Partners as set forth in this Agreement or as specifically authorized by Partnership Governance Committee Action. No Person dealing with either General Partner or such General Partner's agents or representatives with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of a General Partner or a General Partner's 16 representatives. Nothing in this Section 5.2. shall be deemed to be a waiver or release of any General Partner's obligations to the other Partners as set forth elsewhere in this Agreement. 5.3. Nature of Partner Obligations. Each Partner (directly or through its Affiliates) is a sophisticated party possessing extensive knowledge of and experience relating to, and is actively engaged in, significant businesses, in addition to the Refinery Business, has been represented by legal counsel, is capable of evaluating and has thoroughly considered the merits, risks and consequences of the provisions of this Section 5.3. and is agreeing to such provisions knowingly and advisedly. The liability of each of the General Partners (including any liability of its Affiliates or its and their respective officers, directors, agents and employees), either to the Partnership or to any other Partner, for any act or omission by such Partner in its capacity as a partner of the Partnership that is imposed by such Partner's status as a "general partner" or "limited partner" (as such terms are used in the Act) of a limited partnership is hereby eliminated, waived and limited to the fullest extent permitted by law. Nothing in this subsection shall relieve any Partner from liability for any breach of this Agreement and each General Partner shall at all times owe to the other General Partner a duty to act in good faith with respect to all matters involving the Partnership; provided, however, that the duty of a Nonconflicted General Partner in exercising the authority described in Section 5.7. shall be as set forth in Section 5.7.(B). 5.4. Limited Partners. (A) No Limited Partner shall take part in the management or control of the Partnership Business, transact any business in the Partnership's name or have the power to sign documents for or otherwise to bind the Partnership. (B) Each Limited Partner shall have the rights with respect to the Partnership's books and records as set forth in Section 5.9. 5.5. Partner Not Agent of Other Partners. Except as expressly provided in Section 2.7., Section 5.7., Section 10.5. or Section 11.1., nothing in this Agreement shall be deemed to constitute a Partner as an agent or legal representative of any other Partner. 5.6. Transactions with the Partnership. Subject to any required approval of the Nonconflicted General Partner in accordance with Section 5.7., each Partner and its Affiliates shall be entitled without restriction to enter into contracts and transactions with the Partnership. Upon receipt of any required approval by the Nonconflicted General Partner Representatives, all contracts and transactions between the Partnership and a Partner or its Affiliates shall be deemed to be entered into on an arm's-length basis and to be subject to ordinary contract and commercial law. 17 5.7. Control of Certain Claims and Certain Transactions. (A) With respect to each Conflict Circumstance, the Nonconflicted General Partner (through its Representatives) shall have the sole and exclusive power and right for and on behalf, and at the sole expense, of the Partnership (i) to control (including the right from time to time, in its discretion, to make delegations to officers or employees of the Partnership as to) all decisions, elections, notifications, actions, exercises or nonexercises and waivers of all rights, privileges and remedies provided to, or possessed by, the Partnership with respect to a Conflict Circumstance and (ii) in the event of any potential, threatened or asserted claim, dispute or action with respect to such Conflict Circumstance, to retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all such claims, disputes and actions. Accordingly, Partnership Governance Committee Action with respect to a Conflict Circumstance shall require only the approval of the Representatives of the Nonconflicted General Partner. As used herein, the term "Conflict Circumstance" shall mean any transaction, dealing or agreement between the Partnership, on the one hand, and a General Partner (the "Conflicted General Partner") or any of its Affiliates, on the other hand, including each of the Related Agreements to which the Partnership is a party and each transaction thereunder; provided, however, that a Conflict Circumstance shall cease to exist (i) upon the Conflicted General Partner ceasing to be a Partner or (ii) upon the third party with which the transaction, dealing or agreement exists, ceasing to be an Affiliate of a General Partner. As used herein the term "Nonconflicted General Partner" shall mean the General Partner that is not the Conflicted General Partner. Each General Partner shall, and shall cause its Affiliates to, take all such actions, execute all such documents and enter into all such agreements as may be necessary or appropriate to facilitate or further assure the accomplishment of this Section 5.7. (B) The Nonconflicted General Partner, in exercising its control, power and rights pursuant to this Section 5.7., shall act in good faith and in a manner it reasonably believes to be in the best interests of the Partnership. The Conflicted General Partner (or its Affiliate) that is the other party to such negotiation, contract, transaction, claim, dispute or action shall have the right to deal with the Partnership and with the Nonconflicted General Partner on an arm's-length basis and in its own best interests, but in any event in good faith. (C) This Section 5.7. shall not apply to: (i) any sale by the Partnership of a product or service that the Partnership also sells to unrelated third parties; provided, however, that any agreement for such sales by the Partnership to a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such sales shall be at market-based 18 prices that are not less than the prices the Partnership charges third parties for such products or services; or (ii) any purchase by the Partnership of a product or service that the Partnership also purchases from unrelated third parties; provided, however, that any agreement for such purchases by the Partnership from a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such purchases shall be at market-based prices that are not more than the prices the Partnership pays third parties for such products or services. 5.8. Partnership Interest. All assets contributed to or acquired by the Partnership shall be owned by the Partnership. Each Partner shall have a right only to its "partnership interest" (as such term is used in the Act) in the Partnership (an "Interest"), and to the maximum extent permitted by applicable law each Partner waives any right to partition of the Partnership's assets and agrees that it will not seek or be entitled to partition any such assets, whether by way of physical partition, judicial sale or otherwise, prior to the termination of the Partnership. 5.9. Access to and Copies of Records and Documents. (A) Except as otherwise required by law, any Partner may examine and copy, in person or by representative, at any reasonable time, all records and other information of the Partnership. (B) Upon request by any Partner, the Partnership shall provide without charge true copies of the Certificate of Limited Partnership, this Agreement, all amendments or restatements thereto, and copies of all federal, state, and local information or income tax returns for each of the Partnership's six most recent tax years. 5.10. Partner Covenants. Except to the extent it takes action pursuant to its rights as a Nondefaulting Partner under Section 11., each Partner covenants and agrees with the Partnership and with each other Partner as follows: (A) It shall not exercise, or purport or attempt to exercise, its authority (i) to withdraw, retire, resign, or assert that it has been expelled from the Partnership, or (ii) to dissolve or enter into any proceeding seeking any dissolution of such Partner, or (iii) to make any application for judicial dissolution of the Partnership; (B) It shall not do any act that would make it impossible or impracticable to carry on the Partnership Business; (C) It shall not, directly or indirectly through any entity, conduct or engage in any business other than the holding of its Interest and the doing of things necessary or incidental in connection therewith, the exercise of its authority as a Partner, the exercise of its authority pursuant to Section 5.7., and the performance and enforcement of its obligations and rights pursuant to this Agreement; and 19 (D) It shall not act or purport or attempt to act in a manner inconsistent with any Partnership Governance Committee Action or in a manner contrary to the agreements of the Partners set forth in this Agreement. 5.11. Indemnification. (A) (1) Indemnification by Partnership. The Partnership shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each Partner, its Affiliates and their respective officers, directors and employees from, against and in respect of any losses, claims, damages, costs and expenses (including costs of investigation, defense and attorneys' fees) and liabilities arising out of or in connection with the business or affairs of the Partnership (collectively, "Indemnified Losses"), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement. The Partnership shall periodically reimburse any Person entitled to indemnity under this Section 5.11.(A)(1) for its legal and other expenses incurred in connection with defending any claim (other than a claim by the Partnership or a Partner) with respect to such Indemnified Losses if such Person shall agree to reimburse promptly the Partnership for such amounts if it is finally judicially determined that such Person was not entitled to indemnity hereunder. (2) Partner's Right of Contribution. Each Affiliated Partner Group hereby agrees to indemnify, defend and hold harmless the other Affiliated Partner Group and their respective officers, directors and employees from and against the indemnifying Affiliated Partner Group's Participation Percentage of any Indemnified Losses (calculated at the time any such Indemnified Loss was incurred), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Affiliated Partner Group or any of their respective officers, directors or employees (acting in their capacity as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement; provided, however, that such indemnified Affiliated Partner Group, and their respective officers, directors and employees shall not be entitled to indemnity under this Section 5.11.(A)(2) unless (i) the indemnified Affiliated Partner Group shall make a written demand for indemnification from the Partnership in accordance with Section 5.11.(D) and the Partnership shall fail to satisfy 20 such demand in a manner reasonably satisfactory to the indemnified Affiliated Partner Group within sixty (60) days of such notice or (ii) the Partnership is Insolvent or otherwise unable to satisfy its obligations. (B) Indemnification by Partners. Each Partner hereby indemnifies and shall hold harmless the Partnership and the other Partners, their Affiliates and each director, officer and employee of such other Partners, its Affiliates and the Partnership without duplication from and against any and all Indemnified Losses arising out of any act of, or any purported assumption of any obligation or responsibility by, such indemnifying Partner or its Affiliates, or any of the directors, officers or employees of such indemnifying Partner or its Affiliates, in violation of this Agreement. (C) Indemnification Under Related Agreements. Notwithstanding any other provision of this Agreement, no Partner or its Affiliates or their respective officers, directors or employees shall be entitled to indemnification under this Section 5.11. in respect of any breach by such Partner or its Affiliates of the Related Agreements or in respect of any matter for which such Partner or its Affiliates is required to indemnify the Partnership under the applicable terms of any of the Related Agreements. (D) Procedures. Promptly after receipt by a person entitled to indemnification under Section 5.11.(A) or Section 5.11.(B) (an "Indemnified Party") of notice of any pending or threatened claim against it (an "Action"), such Indemnified Party shall give notice to the party to whom the Indemnified Party is entitled to look for indemnification (the "Indemnifying Party") of the commencement thereof, but the failure so to notify the Indemnifying Party shall not relieve it of any liability that it may have to any Indemnified Party except to the extent the Indemnifying Party demonstrates that it is prejudiced thereby. In case any Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B) shall be brought against an Indemnified Party and it shall give notice to the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section for any fees of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation. Notwithstanding an Indemnifying Party's election to assume the defense of any such Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B), the Indemnified Party shall have the right to employ separate counsel 21 and to participate in the defense of such Action, and the Indemnifying Party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Indemnifying Party to represent the Indemnified Party would present such counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any such Action include both the Indemnifying Party and the Indemnified Party, and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such Action on the Indemnified Party's behalf); (iii) the Indemnifying Party shall not have employed counsel satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the institution of such Action; or (iv) the Indemnifying Party shall authorize the Indemnified Party to employ separate counsel at the Indemnifying Party's expense. If an Indemnifying Party assumes the defense of such Action, (a) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party's consent (which shall not be unreasonably withheld) unless (I) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claims that may be made against the Indemnified Party and (II) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (b) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld). The indemnities contained in this Section 5.11. shall survive the termination and liquidation of the Partnership. 6.1. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE 6.1. Prior Capital Contributions. Upon formation of the Company, LParent on behalf of Lyondell GP and CParent on behalf of CITGO LP, contributed certain Assets to and the Company assumed certain liabilities and obligations, as provided for in the Regulations and the Contribution Agreement. From time to time prior to the Conversion Date, Lyondell GP and CITGO LP, as the two members of the Company, made Capital Contributions and loans to the Company as provided for in the Regulations. Capital Contributions and proceeds of loans made prior to the Conversion Date that were of a specific character or designated for a specific purpose shall retain such character or designation and be subject to the restrictions applicable thereto set forth in the Regulations. 6.2. Capital Contributions. Except as expressly provided in this Section 6., Section 7.1(D) or as determined by the Partnership Governance Committee, the Partners (i) shall have no obligation to contribute any capital to the Partnership for any purpose and (ii) shall not be entitled to contribute any capital to the Partnership. 22 6.3. Partner Loans. A Partner or its Affiliates may loan funds to the Partnership on such terms and conditions as may be approved by the Partnership Governance Committee pursuant to Section 3.8.(E), and, subject to other applicable law, have the same rights and obligations with respect thereto as a Person who is neither a Partner nor an Affiliate of a Partner. The existence of such a relationship and acting in such a capacity will not result in a Limited Partner being deemed to be participating in the control of the business of the Partnership or otherwise affect the limited liability of a Limited Partner. If a Partner or any Affiliate thereof is a lender, in exercising its rights as a lender, including making its decision whether to foreclose on property of the Partnership, such lender will have no duty to consider (i) its status as a Partner or an Affiliate of a Partner, (ii) the interests of the Partnership, or (iii) any duty it may have to any other Partner or the Partnership. 6.4. Participation Percentages. (A) Capital Contributions and Participation Percentages. (1) As of and following the Conversion Date, the Partners' respective Capital Contributions shall be equal to the respective amounts set forth in Exhibit 6.4 hereto plus any adjustments thereto made following the Conversion Date in accordance with the terms of this Section 6.4. (2) Each Partner's respective Capital Contributions shall be adjusted to reflect the Distributions (as hereinafter defined), if any, from any financing by the Partnership from the Conversion Date until the Option Date (the "Refinancing"). As used herein, the term "Distributions" shall mean the net proceeds of the Refinancing after the Partnership (i) repays any existing indebtedness of the Partnership (including any and all indebtedness owed to the Partners) which the Partners have agreed to repay but excluding any repayment of the Partnership's revolving credit facility which may be refinanced subsequent to the Refinancing and (ii) withholds any amount of such Refinancing proceeds which the Partnership Governance Committee determines should be maintained by the Partnership. (3) The Participation Percentage for each Partner shall equal the sum of the Capital Contributions of such Partner divided by the sum of the Capital Contributions of all Partners. (4) For the Calendar Quarter in which the Conversion occurs, the Participation Percentages through the end of that Calendar Quarter shall be as set forth on Exhibit 6.4. For each Calendar Quarter following such Calendar Quarter, the Participation Percentages of the Partners shall be calculated and in effect as of the first day of the Calendar Quarter based on all events 23 which occurred or are deemed to have occurred through the close of business on the last day of the preceding Calendar Quarter. Except as otherwise provided, the Participation Percentages in effect as of the first day of the Calendar Quarter shall be operative for the entire Calendar Quarter and shall not be changed for any reason until the first day of the next succeeding Calendar Quarter. (B) From the Option Date, if any: (i) each of the CITGO Partners' Capital Contributions shall include the amount of the Option Date Payment and shall be adjusted by the CITGO Partners Option Date Amount; and (ii) each of the Lyondell Partners' Capital Contributions shall be adjusted by their respective amounts of the Lyondell Partners Option Date Amount. 6.5. Capital Expenditure Funding. To the extent that the Partnership Governance Committee determines at any time after the Conversion Date that certain capital expenditures will be required and that funds are needed by the Partnership for such capital expenditures, the Partners shall fund the amount needed by the Partnership for such purposes. With respect to the funding required under this Section, the Partnership Governance Committee or the CEO shall inform the Partners as to the aggregate amount required to be funded, the intended use of the funds, and the due date or dates for each Partner's funding obligation. The amount required to be funded by each Partner on any given date shall equal the aggregate amount due on such date multiplied by the Partner's Participation Percentage on such date. The amounts to be funded by the Partners shall be funded with Capital Contributions, if such amounts are funded prorated in accordance with the Partners' Participation Percentage, or may be funded with loans (by unanimous consent of the Partnership Governance Committee). The amounts funded hereunder shall be used solely for the purposes set forth herein as determined by the Partnership Governance Committee. 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage. (A) CITGO Partners may elect (and in the event of such election shall give the Partnership and Lyondell Partners written notice of CITGO Partners' election), as provided herein, to increase CITGO Partners' Participation Percentage to any Participation Percentage up to fifty percent (50%), in the aggregate (the "Intended Percentage"). The notice shall set forth (i) the Intended Percentage, (ii) CITGO Partners' tentative calculation of the amount it must contribute in order to achieve the Intended Percentage and (iii) the date on which CITGO Partners will make the Capital Contribution to achieve the Intended Percentage, which date ("Option Date") shall be the last date of a calendar quarter, subsequent to January 1, 2000 and not later than September 30, 2000 and must not be less than thirty (30) days following the date of the notice. 24 (B) CITGO Partners shall be permitted to elect to increase their Participation Percentage only one time under the provisions of this Section 6.6. (C) On the Option Date, CITGO Partners shall contribute to the Partnership cash in an amount equal to 50% of the Option Date Payment and a promissory note equal to 50% of the Option Date Payment given to the Partnership in accordance with the terms of Section 6.6.(E). "Option Date Payment" shall mean the amount of a Capital Contribution by CITGO Partners such that on the day following the Option Date, and after giving effect to the CITGO Partners Option Date Amount and the Lyondell Partners Option Date Amount, CITGO Partners Participation Percentage would equal the Intended Percentage. (D) To the extent the exact amount of the Option Date Payment cannot be determined on the Option Date, CITGO Partners shall contribute on the Option Date an amount equal to CITGO Partners' good faith estimate of the amount of cash due hereunder. At least ten (10) Business Days prior to the Option Date, CITGO Partners shall furnish the Partnership and Lyondell Partners with a written determination of CITGO Partners' good faith estimate of the total amount due under Section 6.6.(C). Promptly after the Option Date, the Partnership Governance Committee shall determine such amounts as are necessary to be contributed by CITGO Partners under this Section 6.6. Within five (5) Business Days of the determination by the Partnership Governance Committee of the amount of cash required to be contributed by CITGO Partners under this Section 6.6., CITGO Partners shall contribute to the Partnership (i) the difference between such amount and the amount of cash contributed by CITGO Partners on the Option Date plus (ii) interest on the amount contributed under clause (i) at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date CITGO Partners makes the contribution required herein. If the amount of cash contributed by CITGO Partners on the Option Date is greater than the amount required to have been contributed by CITGO Partners, then within five (5) Business Days of such determination the Partnership shall pay such excess to CITGO Partners with interest at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date the Partnership makes the required payment. For purposes of determining Participation Percentages, only the final net amount of CITGO Partners' contribution under this Section 6.6. shall be taken into account and any interim contributions or distributions or interest payments shall be disregarded. (E) CITGO Partners shall deliver to the Partnership a promissory note equal to 50% of the Option Date Payment. The promissory note shall be delivered to the Partnership as soon as the exact amount of the Option Date Payment is determined pursuant to the procedures set forth in Section 6.6.(D). The promissory note shall be in the form set forth in Exhibit 6.6(E) to this Agreement. All scheduled payments of 25 principal under the promissory note shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2). The Partnership shall have the right to withhold from distributions payable to CITGO Partners any amounts then due under the promissory note and to apply such withheld amounts to the amounts payable by CITGO Partners to the Partnership under the promissory note. (F) The amount contributed by CITGO Partners under Section 6.6.(C) shall be applied, in order of priority, towards repayment of the Initial Construction Loan, the Additional Construction Loan and, to the extent funds are available, any loan from Lyondell Partners. Any such amounts used to repay Lyondell Partners Loans shall be applied in inverse order by reference to the date each such loan was extended, that is the first repayment shall be of the loans most recently made by Lyondell Partners. If no such loans are outstanding on the Option Date, the amount contributed by CITGO Partners under Section 6.6.(C) shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2) and all depreciation, cost recovery, or amortization deductions associated with said capital expenditures shall be allocated to CITGO Partners in accordance with Section 7.7.(B)(2). 6.7. Return of Capital Contributions. Except as otherwise expressly provided by this Agreement, no Partner shall be entitled to have all or any part of its Capital Contribution returned and no Partner shall be paid interest or any other return on any Capital Contribution or on the balance of its Capital Account, as that term is hereafter defined. 6.8. Administration and Investment of Funds. The administration and investment of Partnership funds shall be in accordance with the procedures and guidelines as shall be adopted by the Partnership Governance Committee. The Partnership may delegate to a third party (which may be a Partner or an Affiliate of one of the Partners) the responsibility for administering and investing Partnership funds pursuant to such guidelines. 7. ALLOCATIONS AND DISTRIBUTIONS 7.1. Capital Accounts. A separate capital account (each a "Capital Account") will be maintained for each Partner. Each Partner's Capital Account shall be credited and debited in accordance with the following provisions: (A) To each Partner's Capital Account there shall be credited such Partner's capital contributions (including the principal amount of any promissory note contributed by a CITGO Partner pursuant to Section 26 6.6.(E) but excluding the payment of principal on such promissory note), such Partner's distributive share of Profits as determined under Section 7.6(A), and the amount of any Partnership liabilities secured by any Partnership properties distributed to such Partner such that the Partner is considered to assume or take subject to such liabilities under Section 752 of the Code; (B) To each Partner's Capital Account there shall be debited the amount of cash and the fair market value of any Partnership properties distributed to such Partner pursuant to any provision of this Agreement and such Partner's distributive share of Losses as determined under Section 7.6(A); (C) On the day following an Option Date Payment, if any, the Capital Accounts of the Partners shall be adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to reflect the Asset Value on such date of (i) the Working Capital, (ii) the Assets and (iii) any capital assets acquired with funds contributed to the Partnership by a Partner so that the balances in such accounts are in the Proper Ratio on the date of such adjustment; provided, however, that for purposes of this Section 7.1.(C), the Asset Value of such assets shall be adjusted to the extent necessary to cause the balances in the Partners' Capital Accounts to be in the Proper Ratio; (D) Any payment made by LParent or the Lyondell Partners to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement shall be considered a Capital Contribution; provided, however, the increase to Lyondell Partners' Capital Accounts as a result of any such Capital Contribution shall occur simultaneously with the corresponding reduction in Lyondell Partners' Capital Accounts due to the reduction in Asset Value of the Assets because of the receipt by the Partnership of any such payment. Subject to the provisions of Section 7.4.(B), to the extent any such payment is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, such amount shall be deposited in the operating fund; and (E) Any adjustment of Capital Accounts under this Section 7.1. shall have no impact upon the determination of Participation Percentages. 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances. Profits and Losses shall be allocated as of the close of business on the last day of each Calendar Quarter. Distributions of Distributable Cash shall be made on a monthly basis and, regardless of the date a distribution is actually paid, distributions shall be treated as having been made on the last day of the calendar month immediately preceding the date of the distribution. Any other provisions of this Agreement to the contrary notwithstanding, however, the Partnership shall not make any distribution of Distributable Cash or any advances for so long as, under the terms of any agreement, contract or instrument evidencing, governing 27 or securing any indebtedness for borrowed money (including loans or capital leases), an event of default exists (or would exist upon the making of such distribution or advance) and such agreement, contract or instrument prohibits the making of such distribution or advance during the continuance of such event of default. 7.3. Distributable Cash. (A) Following the end of each calendar month the amount of Distributable Cash for the immediately preceding calendar month shall be determined, and, subject to the provisions set forth herein, such Distributable Cash amount shall be distributed promptly to the Partners as provided in Section 7.4. Notwithstanding any other provision of this Agreement, the Partnership shall not be required to make any distribution if such distribution is prohibited by Section 17-607 of the Act. (B) The amount of the Partnership's Distributable Cash for any calendar month shall be the Partnership's net cash provided or used by operating activities for such month (determined in accordance with GAAP) less (i) cash used in financing activities for repayment of long term debt (including but not limited to bonds and Partner Loans) and (ii) any capitalized interest. If the resulting Distributable Cash for any calendar month is negative, no distribution of cash will be made to any Partner until after such amount is reserved from future positive amounts. A Partner's Distributable Cash for any calendar month shall be equal to the product of (i) the Partnership's Distributable Cash for such month and (ii) such Partner's Participation Percentage for the Calendar Quarter in which such month occurs. (C) To the extent that the Partnership does not have sufficient cash or remaining capacity under its working capital credit facility to make the distributions as provided in Section 7.4., then, except as otherwise expressly provided, distributions shall be made in proportion to the amounts distributable to each Partner. Any amount which is required to be distributed pursuant to Section 7.3.(A), but which is not distributed for any reason, including, without limitation, by reason of insufficient cash or by virtue of the last sentence of Section 7.2., shall constitute a debt owed by the Partnership to the Partner entitled to such distribution, which debt is to be paid, with interest at the Agreed Rate (subject to Section 12.11.), as quickly as possible, but in all events before any other distributions with respect to subsequent months are paid to the Partners. 28 7.4. Distributions. (A) Except as otherwise expressly provided in this Agreement, each Partner's Distributable Cash for each calendar month shall be distributed to such Partner. If, following the end of a Calendar Quarter, it is determined that the sum of the monthly distributions to a Partner attributable to the Calendar Quarter exceeds the Partner's Distributable Cash for the Calendar Quarter, such Partner shall promptly contribute the excess to the Partnership together with interest thereon at the Agreed Rate (subject to Section 12.11.). Additional distributions shall be made in such amounts as the Partnership Governance Committee shall determine; provided, however, that such distributions shall be made in proportion to the Partners' Participation Percentages for the Calendar Quarter in which the distribution is made. (B) After the earlier of the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6., any cash attributable to a payment described in Section 7.1.(D) but which is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, shall be distributed to the Partners in proportion to their Participation Percentages. 7.5. Interim Loans. Distributions under this Section 7.5 may be made, as provided herein, to both Partners of an Affiliated Partner Group at any time. Each Affiliated Partner Group shall be entitled to receive distributions hereunder not more than once during each calendar quarter provided additional distributions can be made with the consent of the General Partner of the other Affiliated Partner Group, which consent shall be granted or withheld in the sole discretion of such other General Partner. Any time the Partnership's cash (excluding cash in the capital fund and any other cash held for a specific project) is greater than the Cash Balance Amount, by written notice to the Partnership both Partners of an Affiliated Partner Group shall be entitled to borrow from the Partnership and the Partnership shall promptly advance to such Partners, their respective Participation Percentages of the Partnership's cash in excess of the Cash Balance Amount. The "Cash Balance Amount" shall initially be $20 million, which amount may be changed from time to time by Unanimous Partnership Governance Committee Action. Any advance hereunder shall (subject to Section 12.11) bear interest at the same rate payable by the Partnership on its working capital facility or if the Partnership has no such facility then at the Agreed Rate. Any advance hereunder shall be repaid by withholding from all distributions otherwise payable to the Partner the amount of the advance plus interest thereon. Amounts withheld shall first be applied to interest and thereafter to principal. Each loan shall have a term of 90 days so that if the amount of the loan plus interest thereon is not repaid from distributions otherwise payable to the Partner within 90 days of the loan, then the Partner shall be required to repay the loan with other funds. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes. (A) General. For each Calendar Quarter or portion thereof, except as provided in this Section 7.6., each item comprising Profits or Losses shall be allocated to the Partners in proportion to their Participation Percentages. (B) Internal Revenue Code Section 704(b) Book Depreciation. For each Calendar Quarter or portion thereof, Depreciation shall be allocated to the Partners in proportion to their Participation Percentages. (C) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of Section 7., if there is a net decrease in "partnership minimum gain" (as defined in Treasury Regulation (S)1.704-2(b)(2)) during any Partnership taxable year, each Partner shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and, if necessary, subsequent years) equal to such Partner's share of the net decrease in minimum gain (determined in accordance with Treasury Regulation (S)1.704-2(g)). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "minimum gain chargeback" within the meaning of Treasury Regulation (S)1.704- 2(f). (D) Partner Minimum Gain Chargeback. Notwithstanding any provision of Section 7. except Section 7.6.(C), if there is a net decrease in "partner nonrecourse debt minimum gain" (as defined in Treasury Regulation (S)1.704-2(i)(2)) during any Partnership taxable year, each Partner with a share of that partnership nonrecourse debt minimum gain (determined under Treasury Regulation (S)1.704-2(i)(5)) as of the beginning of the year shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and if necessary, subsequent years) equal to that Partner's share of the net decrease in partner nonrecourse debt minimum gain. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "chargeback of Partner nonrecourse debt minimum gain" as prescribed by Treasury Regulation (S)1.704-2(i)(4). (E) Distribution of Property to Partners. In the event that any property (other than cash) is distributed by the Partnership to a Partner, gain or loss will be allocated to the Partners as if there were a taxable disposition of such property on the date of distribution. (F) Indemnity Payment Expenditure. All deductions attributable to the expenditure of all amounts described in Section 7.1.(D) shall be allocated to Lyondell LP. 30 (G) Qualified Income Offset. Notwithstanding any other provisions of Section 7.6. or 7.7., if a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation (S)1.704-1(b)(2)(ii)(d)(4), (5) or (6) which would create a deficit balance in its Capital Account (and reduced by the amount described in Treasury Regulation (S)1.704- 1(b)(2)(ii)(d) and the outstanding principal amount of any promissory note(s) contributed by the CITGO Partners to the Partnership pursuant to Section 6.6.(E) such Partner(s) will be allocated gross income and gain in an amount and manner sufficient to eliminate such deficit as quickly as possible. Allocations under this Section 7.6.(G) shall be comprised of a pro rata share of each item of Partnership income and gain for the period. This provision shall be applied so that it will constitute a "qualified income offset" within the meaning of Treasury Regulation (S)1.704-1(b)(2)(ii)(d). (H) Curative Allocations. If items of income, gain, loss or deduction are allocated under Section 7.6.(G), to the extent possible the allocation of any remaining items of income, gain, loss or deduction pursuant to Section 7.6. shall be allocated such that the net amount allocated to each Partner will be the same amount that would have been allocated if no items of income gain, loss or deduction had been allocated under Section 7.6.(G). (I) Gain or Loss in Liquidation. To the extent the Partners' Capital Account balances are not in the Proper Ratio, gain or loss on the sale or distribution of assets under Section 11.11. shall be allocated, to the maximum extent possible, so as to cause the Partners' Capital Account balances to be in the Proper Ratio. 7.7. Tax Allocations. (A) General. Except as otherwise provided in this Section 7.7., for income tax purposes, each item of income, gain, deduction, loss and credit shall be allocated among the Partners in the same manner as the corresponding items are otherwise allocated under Section 7.6. (B) 704(c) Depreciation Allocations. For income tax purposes, pursuant to Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, depreciation, cost recovery and amortization deductions shall be allocated to the Partners as set forth in this Section 7.7.(B) in order to take into account any difference between (x) the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C)) of the assets on the date the assets are contributed to the Partnership or on any date on which the Capital Accounts are adjusted pursuant to Section 7.1.(C) and (y) the Partnership's adjusted tax basis in the assets on each such date. The foregoing allocation shall be implemented through the following provisions: 31 (1) If a Partner contributes property to the Partnership, all depreciation, cost recovery or amortization deductions attributable to the property shall be allocated to the Partner contributing the property; (2) Subject to Section 7.7.(B)(6) below, if a Partner contributes cash (including the amounts described in Section 7.1.(D) and payments made with respect to the promissory note, if any, delivered under Section 6.6.(E)) which is used or deemed to be used to acquire property, all depreciation, cost recovery or amortization deductions attributable to the property acquired with the Partner's contribution shall be allocated to the Partner contributing the cash; (3) All depreciation, cost recovery or amortization deductions attributable to the expenditure of any funds paid by LParent or a Lyondell Partner to the Partnership pursuant to LParent's indemnity obligation to the Partnership under the Contribution Agreement or any Related Agreement shall be allocated to Lyondell Partner LP; (4) Subject to Section 7.7.(B)(5) and Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to property acquired with funds loaned to the Partnership by a third party shall be allocated to the Partners in accordance with their Participation Percentages; (5) Subject to Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to funds loaned to the Partnership by a Partner shall be allocated to the Partner loaning such funds; and (6) If a Partner contributes cash to the Partnership which is used to repay a debt of the Partnership, any remaining deductions for depreciation, cost recovery or amortization attributable to the property acquired with the borrowed funds shall be allocated to the Partner contributing the funds used to repay the debt. If the Partnership borrows funds from a third party which are used to repay a debt of the Partnership from a Partner, any remaining deductions from depreciation, cost recovery or amortization attributable to the property acquired with the funds so borrowed from a Partner shall be allocated to the Partners in accordance with their Participation Percentages. (C) 704(c) Gain or Loss Allocations. Solely for income tax purposes, gain or loss resulting from any sale, exchange or disposition of an asset shall be allocated among the Partners, in accordance with Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, so as to take into account any difference between (i) the Asset Value (as 32 adjusted pursuant to the proviso in Section 7.1.(C)) of such asset, adjusted to reflect Depreciation and (ii) the Partnership's adjusted tax basis in such asset. (D) Recapture. Solely for income tax purposes, in the event that a portion of the taxable gain recognized on the sale, exchange or other disposition of a Partnership asset is characterized as ordinary income under the recapture provisions of the Code, each Partner's distributive share of taxable gain from the sale of Partnership assets (to the extent possible) shall include a proportionate share of the recapture income equal to that Partner's share of prior depreciation deductions with respect to the assets that gave rise to the recapture income. (E) Imputed Interest Income. To the extent the Partnership recognizes imputed interest income in connection with any transaction involving a Partner, such interest income shall, for tax purposes, be allocated to the Partner who is a party to the transaction which generated the imputed interest income. (F) Production Expenditures. All "production expenditures", as defined for purposes of Section 263A of the Code, which result from any construction that is financed with funds contributed by a Partner, shall be allocated to the Partner which contributed such funds. (G) Payments. To the extent that the Partnership recognizes income or gain as a result of any payment (other than any interest payments) made by LParent or Lyondell LP to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement, such income or gain shall be allocated to Lyondell LP. 7.8. Transfers of Interest. Each item of income, gain, loss, deduction and credit allocable to any Interest transferred during a quarter shall be allocated between the transferor and transferee in proportion to the number of days during the quarter for which each was the owner of the Interest, without regard to the results of Partnership operations during the portions of the quarter the transferor and transferee owned the Interest. Distributions attributable to the ownership of a transferred Interest shall be paid to the Person who owned the Interest on the last day of the calendar month preceding the date of the distribution. 8. BOOKS OF ACCOUNT AND TAX MATTERS 8.1. Books of Account. The Partnership will maintain at its principal office proper books of account on the accrual method of accounting in accordance with GAAP. The Partnership shall also maintain proper books of account necessary to enable the Partnership to file all required tax returns and reports and to make all determinations required under this Agreement. Financial statements and a list of commitments for expenditures will be delivered to the Partners monthly. The books of account shall be reviewed quarterly and audited annually and certified 33 financial statements in accordance with GAAP will be delivered to each Partner. Further, the Partnership shall keep and maintain books and records at its principal office as required by applicable law. 8.2. Tax Treatment. (A) Amounts reimbursed pursuant to Section 6.6.(D) shall be treated as distributions described in Treasury Regulation 1.707-4(d). (B) The Partnership will be taxed as a partnership and no Partner will elect to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code or any similar provision of any applicable state law. (C) The Partnership will use the LIFO method of accounting for inventory unless the Partnership Governance Committee unanimously decides to use an alternative method. (D) The Partnership will file an election under Section 754 of the Code to cause the tax basis of Partnership property to be adjusted for federal income tax purposes as provided in Sections 734, 743 and 754 of the Code. 8.3. Tax Returns. (A) Lyondell GP shall be the Tax Matters Partner as defined in Section 6231(a)(7) of the Code ("TMP") for all taxable years of the Partnership through the earlier of the taxable year that includes the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6. Thereafter, at any time during the first sixty (60) days of a taxable year, CITGO GP, by written notice to Lyondell GP, may elect to be the TMP for the current taxable year and the next two succeeding taxable years; provided, however, that CITGO GP shall serve as TMP at no cost to the Partnership. Thereafter, the Partnership Governance Committee shall select one of the General Partners to serve as TMP for a specified term. If the Partnership Governance Committee cannot agree as to which General Partner shall be the TMP, the General Partners shall alternate serving as TMP for a term of three taxable years each, beginning with the General Partner that has not served as TMP for the most recent taxable year; provided, however, that any General Partner serving as TMP shall serve at no cost to the Partnership. In the event of any change of TMP, the General Partner serving as TMP for a given taxable year shall (unless such General Partner ceases to be a General Partner) continue as TMP with respect to all matters concerning that year. The TMP shall use its best efforts to cause the Partnership to file all tax returns and reports by the due date thereof (after taking into account any extensions thereof). At least twelve (12) weeks prior to the filing of the Partnership's U.S. 34 Partnership Return of Income, a draft of such return shall be circulated to the other Partners for their review. The TMP shall circulate to the other Partners a draft of any state income tax return promptly after it is available, and, in any event, at least four (4) weeks prior to the filing of any such return. Prior to the filing of any other federal, state or local tax return, the TMP shall cause a draft of such tax return to be circulated to the other Partners for their review promptly after it is available. (B) If a Partner objects to the tax treatment of an item on any income tax return, such Partner shall promptly inform the TMP of its objection and the grounds upon which the objection is based and shall in any event use its best efforts to inform the TMP of such objection and the grounds upon which such objection is based at least two (2) weeks (eight (8) weeks as to any U.S. Partnership Return of Income) prior to the date on which the tax return is required to be filed. However, if the TMP, after due consideration of a Partner's objection, is of the view that the tax treatment of the item in question on the return as originally submitted is reasonable, then the TMP shall cause the Partnership to file the return reporting the item in question in the manner originally submitted. A Partner may treat the item in question (but no other item) in a manner different from that reported on the return and file a statement of inconsistent treatment with its tax return. If any Partner files a statement of inconsistent treatment of a Partnership item, the Partner filing the statement shall use its best efforts to inform the Partnership at least two (2) weeks prior to filing the statement. 8.4. Tax Controversies. The Partners shall comply with the responsibilities outlined in this Section 8.4. and in Sections 6222 through 6231 and 6050K of the Code (including any Treasury Regulations promulgated thereunder) and in doing so shall incur no liability to any other Partner. The TMP shall not agree to any extension of the statute of limitations for making assessments of tax on behalf of any other Partner without first obtaining the written consent of such other Partner. The TMP shall not bind any other Partner to a settlement agreement in respect of taxes without obtaining the written consent of such other Partner. If a notice or assessment for any tax (Federal or State) is agreed to by the TMP, the TMP shall notify each other partner of such agreement within 30 days from the date such notice or assessment is agreed to. Any Partner who enters into a settlement agreement with the Secretary of the Treasury with respect to any "partnership items", as defined by Section 6231(a)(3) of the Code, shall notify each other Partner of such settlement agreement and its terms within ninety (90) days from the date of settlement. No Partner shall file a request pursuant to Section 6227 of the Code for an administrative adjustment of partnership items for any partnership taxable year without first notifying each other Partner. If each of the other Partners agrees with a requested adjustment, the TMP shall file the request for administrative adjustment on behalf of the Partnership. If any other Partner does not agree with the requested adjustment within thirty (30) days from such notice, or, if shorter, within the period required to timely file the request for administrative adjustment, then the requesting Partner may file a request for 35 administrative adjustment on its own behalf. The TMP shall not, in its capacity as TMP, file a petition under Code Sections 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, without the consent of each Partner. A Partner intending to file a petition under Section 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, will notify each of the other Partners of that intention and the nature of the contemplated proceeding. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this Section 8.4., that Partner will notify the other Partners of that intended action. The provisions of this Section 8.4. will survive the termination of the Partnership and the transfer of any Partner's Interest and will remain binding on the Partners for a period of time necessary to resolve any and all matters regarding the federal and, if applicable, state income taxation of the Partnership. The Partnership shall retain its records with respect to each fiscal year until the expiration of ninety (90) days after the period within which additional federal or state income tax may be assessed for such year. 8.5. Tax Rulings. No Person other than the TMP shall request an administrative ruling (or similar administrative procedures) from any taxing authority with respect to any tax issue relating to the Partnership or affecting the taxation of any other Partner. The TMP shall not request such a ruling (or similar procedure) without the consent of each General Partner. 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS 9.1. Fiscal Year. The fiscal year of the Partnership shall be the calendar year. 9.2. Annual Budgets. The Partnership will operate on the basis of the following annual budgets: (A) "Operating Budget," which shall be an estimate for a fiscal year of all of the Partnership's operating revenues and expenses, including expenses required to maintain, repair and restore to good and usable condition the Partnership's assets; and (B) "Capital Budget", which shall be an estimate for a fiscal year of the capital expenditures (i) necessary to maintain the Partnership's assets; (ii) necessary to achieve or maintain compliance with any Environmental Law; (iii) necessary to accomplish capital enhancement projects approved by the Partnership Governance Committee ("Capital Enhancement Projects"); and (iv) permitted, pursuant to Partnership Governance Committee Action, to be undertaken by the CEO in his or her discretion (the funding and overrun provisions with respect to such expenditures being set forth in such budget). 36 9.3. Approval of Budgets. (A) Each budget shall be approved by Partnership Governance Committee Action. Prior to November 15 of each fiscal year, the CEO shall prepare and submit to the Partnership Governance Committee for approval each of the budgets for the ensuing fiscal year (and, as appropriate, for subsequent periods), and on or before December 1, the Partnership Governance Committee shall by Partnership Governance Committee Action approve, with such modifications as it considers appropriate, each such budget. (B) If the Partnership Governance Committee does not approve the Operating Budget for the next fiscal year by December 1, pending approval of such budget by Partnership Governance Committee Action, the preceding fiscal year's Operating Budget shall, to the extent practicable, guide the operation of the Partnership. The failure to approve an Operating Budget shall in no way limit or restrain the authority of the Partnership or its officers to conduct operations. (C) The Partnership Governance Committee may, by Partnership Governance Committee Action, amend or supplement any previously approved budget at any time. 9.4. Funding of Budgets. The Operating Budget and all operating expenses regardless of whether included in any such budget shall be funded from operating cash flows. The Capital Budget shall be funded in accordance with Section 6.5. and no other additional Capital Contributions by the Partners shall be required with respect thereto unless otherwise agreed by the Partnership Governance Committee. 9.5. Implementation of Budgets and Discretionary Expenditures by CEO. (A) After the Capital Budget has been approved, the Partnership will be authorized, without further action by the Partnership Governance Committee, to make any expenditures specifically identified within such budget; provided, however, that all internal control policies and procedures, including those regarding the required authority for certain expenditures, shall have been followed and that with respect to each capital expenditure above an amount established from time to time by Unanimous Partnership Governance Committee Action there shall have been a Partnership Governance Committee Action approval of the "authority for commitment." (B) In any emergency, the CEO or the CEO's designee shall be authorized to take such actions and to make such expenditures as may be reasonably necessary to react to the emergency, regardless of whether such expenditures have been included in an approved budget. As soon as practical after the commencement of an emergency, the CEO or such designee shall notify the Representatives of the response that has been 37 made, or is committed or proposed to be made, with respect to the emergency. 9.6. Five Year Plan. The CEO of the Partnership shall prepare and furnish annually to the Partnership Governance Committee a projected five year business plan. 9.7. Commercial Loans. (A) Other Loans. The Partnership Governance Committee may by Partnership Governance Committee Action, authorize the CEO to cause the Partnership to borrow funds from third party lenders. No Partner shall be required, and the Partnership Governance Committee shall not be authorized to require any Partner, to guarantee or to provide other credit or financial support for any loan. (B) Partner Loans. The Partnership Governance Committee may by unanimous Partnership Governance Committee Action, subject to Section 3.8., authorize the CEO to cause the Partnership to borrow money from a Partner. 9.8. Insurance and Risk Management. The Company is either an additional named insured under LParent's insurance program or has its own policy of insurance under LParent's insurance program and as of the Conversion Date, LParent shall substitute the Partnership for the Company, making the Partnership an additional named insured, if applicable, under LParent's insurance program. As such coverages become subject to renewal or otherwise expire, the Partnership, by Partnership Governance Committee Action, shall approve any material change in the amount and scope of such coverages (including the extent to which the Partnership will continue to be included as an additional named insured under LParent's insurance program), or in the portion of the premium charges for such coverages allocable to the Partnership. 10. TRANSFERS AND PLEDGES 10.1. Prohibition of Transfer. Except pursuant to Section 11. or as described below in this Section 10., a Partner shall not, in any transaction or series of transactions, directly or indirectly, (i) sell, assign or otherwise in any manner dispose of all or any part of its Interest (such term, as used in this Section 10.1., including any Profits Interest), whether by act, deed, merger or otherwise (any of the foregoing, as referred to in this Section 10., a "transfer"), or (ii) mortgage, pledge or create a lien or security interest upon all or any part of its Interest; provided, however, that notwithstanding this Section 10.1., a General Partner may transfer all or any portion of its Interest to its Affiliated Limited Partner and a Limited Partner may transfer all or any portion of its Interest to its Affiliated General Partner. Any attempt by a Partner to transfer all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to transfer such Interest or any portion thereof. 38 10.2. Transfers Prior to the Option Date. No Partner shall transfer all or any part of its Interest or Profits Interest prior to the Option Date; provided, however, that in any event this restriction shall cease upon the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6. 10.3. Transfers After the Option Date. (A) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., an Affiliated Partner Group (the "transferring Partners") may transfer all (but not less than all) of its Profits Interests; provided, however, that it complies with all of the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F). (B) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., any Affiliated Partner Group may transfer all (but not less than all) of its Interests, collectively, but only if: (i) it obtains the prior written consent of the other Affiliated Partner Group (the "nontransferring Partners"), which consent may be withheld in the sole discretion of such other Affiliated Partner Group; (ii) it complies with the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F); and (iii) the purchaser or transferee of such Interests executes a written agreement to be bound by this Agreement (including the encumbrance of such Interest pursuant to this Agreement including Section 11.1.), to assume and satisfy all the liabilities and pay and perform all the obligations and duties of the transferring Partners and, subject to the consent of the nontransferring Partners as provided in Section 10.4., to become substituted Partners in place of the transferring Partners. (C) Any Affiliated Partner Group desiring to transfer its Interest (such term, as used in Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F), meaning either its Interest or its Profits Interest, as applicable) shall deliver a written notice to the other Affiliated Partner Group, which notice shall specify the Interests desired to be transferred and shall constitute an offer to sell all (but not less than all) of the transferring Partners' Interests (the "Purchase Offer"). The Purchase Offer shall specify the price (which shall be cash payable in same-day funds in Houston, Texas) and other terms (e.g., provisions for the elimination of loans to or from the Partners, the release of any guarantees, the procedure for closing the books on the effective date of the sale and the treatment of Partnership distributions payable to the transferring Partners) upon which the transferring Partners are willing to sell all (but not less than all) of their Interests to the nontransferring Partners. The nontransferring Partners shall have sixty (60) days from the date of receipt of the Purchase Offer within which to accept the Purchase Offer and shall have the right to assign their rights with respect to the 39 Purchase Offer in whole or in part to an Affiliate or to any other person or entity. If the nontransferring Partners or their assignee accept the Purchase Offer, the closing shall take place within sixty (60) days of such acceptance. (D) If the nontransferring Partners do not accept a Purchase Offer pursuant to Section 10.3.(C), the transferring Partners shall, as provided herein, have one hundred eighty (180) days after expiration of the first 60-day period described in Section 10.3.(C) (or after the earlier express written rejection of the Purchase Offer by the nontransferring Partners) within which, subject to the provisions of this Section 10.3.(D), Section 10.1., Section 10.3.(B) and Section 10.4., the transferring Partners may attempt to sell all of their Interests, subject to Section 10.3.(F), to a single (and only a single) third party at a price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer. If during this 180-day period, the transferring Partners identify a proposed purchaser (i) that is a single entity that is organized under the laws of the United States, (ii) that is not insolvent prior to or immediately upon consummation of the proposed transfer, and (iii) that makes a bona fide offer (not subject to due diligence, financing or any other similar contingencies) to purchase the transferring Partners' Interests at a cash price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer, the transferring Partners shall notify the nontransferring Partners of the identity of the proposed purchaser and the terms of the proposed sale (the "Second Notice"). The nontransferring Partners or their assignee then shall have thirty (30) days from the Second Notice within which to elect to purchase the transferring Partner's Interests at the cash price and on the terms and conditions contained in the Second Notice. If the nontransferring Partners elect to make the purchase, the closing shall take place within sixty (60) days of its election to purchase. (E) If the nontransferring Partners or their assignee do not elect to purchase the transferring Partners' Interest after receiving the Second Notice, then subject to Section 10.1., Section 10.3.(B) and Section 10.4. the transferring Partners may then sell such Interest to the third party at the cash price and on the terms and conditions specified in the Second Notice; provided, however, that if the transferring Partners do not dispose of their Interest at the cash price and on the terms and conditions specified in the Second Notice, and in all events within sixty (60) days after expiration of the 30-day period described in the penultimate sentence of Section 10.3.(D) (or after the earlier express written rejection by the nontransferring Partners after receiving the Second Notice), the transferring Partners' Interest shall not be transferred and shall again be subject to the restrictions contained in Section 10.3. 40 (F) Inclusion of General or Limited Partner Interest. No Limited Partner may transfer its Interest to any Person unless the Interest of its Affiliated General Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. No General Partner may transfer its Interest to any Person unless the Interest of its Affiliated Limited Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. 10.4. Transferees. The purchaser or transferee of a Partner's Interest pursuant to Section 10.3. or Section 10.5. shall not become a Partner without the consent of the nontransferring Partners as provided for in clause (i) of Section 10.3.(B) A transferee who acquires an Interest pursuant to Section 10.3. or Section 10.5. but who does not receive such consent shall be entitled only to allocations of income and loss and distributions with respect to such Interest in accordance with this Agreement and shall not be or become entitled to exercise the rights or powers of a Partner. However, the nontransferring Partners may, in the exercise of their sole discretion, at any time thereafter consent to such purchaser or transferee becoming a Partner or withhold such consent. A purchaser or transferee as to whom the nontransferring Partners at any time grants such consent shall be deemed to become a substituted Partner in place of the transferring Partners when and as provided in such consent. 10.5. Pledge of Interest. (A) Except as contemplated by Section 10.5.(B) and Section 11.1., no Partner shall mortgage, pledge, encumber or create or suffer to exist any pledge, lien or encumbrance upon, or security interest in ("pledge"), all or any part of its Interest (such term, as used in this Section 10.5., including any Profits Interest). Any attempt by a Partner to pledge all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to pledge such Interest. (B) Any Affiliated Partner Group (the "pledging Partners") may pledge its Interest; provided, however, that (i) any such pledge, shall expressly be subject and fully subordinated, on terms reasonably acceptable to the other Affiliated Partner Group (the "nonpledging Partners"), to the encumbrance of the pledging Partners' Interests pursuant to this Agreement including Section 11.1. and (ii) no such pledge shall give any right to the pledgee as a Partner (as such term is used in the Act) with respect to the Partnership or the nonpledging Partners or create any duty to the pledgee on the part of the Partnership or the nonpledging Partners other than the payment to the extent pledged of distributions from the Partnership under Section 7. (C) Prior to any pledge under Section 10.5.(B), (i) the pledging Partners shall submit to the nonpledging Partners all documentation relating to the proposed pledge for the approval of the nonpledging Partners and shall not effect such pledge without the prior written approval of the nonpledging Partners (such approval not to be unreasonably withheld); 41 (ii) the proposed pledgee shall deliver a written agreement of such pledgee (which shall be binding upon any of its successors or assigns) to the Partnership and the nonpledging Partners, providing that (a) the right to foreclose upon the pledging Partners' Interests pursuant to the pledge shall be conditioned upon delivery to the nonpledging Partners of an opinion of counsel satisfactory to the nonpledging Partners that such foreclosure would not cause the Partnership to be treated as an association taxable as a corporation and that any "termination" of the Partnership within the meaning of Section 708 of the Code caused by such foreclosure would not create any adverse consequences for the nonpledging Partners and (b) the pledgee's right to receive any distributions that are pledged is subject to being reduced pursuant to the provisions of this Agreement; and (iii) the proposed pledgee and the pledging Partners shall deliver to the nonpledging Partners a written agreement, in form reasonably satisfactory to the nonpledging Partners, providing that (a) the pledgee shall notify the nonpledging Partners in writing at least one hundred twenty (120) days prior to initiation of foreclosure proceedings, (b) the nonpledging Partners shall have the right during such 120-day period to purchase the debt owed by the pledging Partners to the pledgee, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, for an amount equal to the outstanding principal amount of such debt plus the interest due and payable on and any cost of collection associated with such debt, (c) immediately upon the purchase of the debt, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, by the nonpledging Partners pursuant to clause (iii)(b) of this Section 10.5.(C), the pledgee shall (1) deliver to the nonpledging Partners a written acknowledgment that its debt has been satisfied in full and (2) take any action necessary to transfer to the nonpledging Partners possession of a perfected first priority security interest in the pledging Partners' Interest and (d) the pledging Partners appoint the nonpledging Partners as its attorney-in-fact authorized to take on the pledging Partners' behalf all actions required to effect any purchase of the pledgee's debt and any transfer of the pledging Partners' Interest pursuant to this clause (iii) of this Section 10.5.(C). 11. REMEDIES AND DISSOLUTION 11.1. Security for Performance. Each Affiliated Partner Group (the "Pledgor Group") shall and hereby does pledge and grant to the other Affiliated Partner Group (the "Pledgee Group") a first priority lien on and security interest in the Pledgor Group's Interests in the Partnership as security for the satisfaction of all the Pledgor Group's liabilities and the payment and performance of all the Pledgor Group's obligations and duties under this Agreement. At any time and from time to time, the Pledgor Group also will promptly execute and deliver all such further agreements, instruments and documents and take all such further action that may be necessary or desirable or that the Pledgee Group may reasonably request in order (i) to perfect and protect the lien and security interest created hereby, including the execution and filing of appropriate financing statements and 42 directing the Partnership to register, on the Partnership's books and records, the pledge of the Pledgor Group's Interest to the Pledgee Group; (ii) to enable the Pledgee Group to exercise and enforce its rights and remedies under this Agreement in respect to the Pledgor Group's Interest; or (iii) otherwise to effect the purposes of this Section 11.1. The Pledgor Group hereby authorizes the Pledgee Group to file, without the signature of such Pledgor Group granting the security interest provided for herein, where permitted by applicable law, at any time the Pledgee Group acting as a secured party deems necessary or appropriate to protect its lien and security interest under this Agreement, one or more financing or continuation statements, and amendments thereto, relating to such lien and security interest. If the Pledgor Group fails to perform any agreement or obligation contained in this Section 11.1., the Pledgee Group may perform, or cause performance of, such agreement or obligation, and the expenses of the Pledgee Group so performing incurred in connection therewith shall be payable to the Pledgee Group, on demand, by the Pledgor Group that has failed to so perform. The Pledgee Group shall not, without the prior written consent of the Pledgor Group, sell, assign, transfer, mortgage, pledge or otherwise encumber any of its rights in the Pledgor Group's Interests as pledged to the Pledgee Group under this Section 11.1. except with regard to a failure by the Pledgor Group to satisfy the Pledgor Group's liabilities, and the payment and performance of all its obligations and duties under this Agreement. 11.2. Default. (A) Each of the following events shall, upon determination of the existence thereof as provided in Section 11.2.(B), constitute a "Default" and create the rights provided for in this Agreement in favor of the Nondefaulting Partners against the Defaulting Partners: (1) the failure by a Partner to make any contribution, including, without limitation, a Partner's failure to make when due any contribution for capital expenditures as determined by Partnership Governance Committee Action to be due form the Partners, or loan to the Partnership as required by this Agreement, which failure continues for at least three (3) Business Days from the date such contribution should have been received; (2) other than as described in item (1) above, a material breach or violation under this Agreement by a Partner, which breach or violation continues unremedied for at least ninety (90) days after the Nondefaulting Partners have given written notice of such breach or violation to the Defaulting Partners; (3) as to Lyondell Partners, a material breach or default by LParent under the terms of the Contribution Agreement, which breach or default continues unremedied or uncured for at least 90 days after the Partnership or the CITGO GP has given written notice of such breach or default to LParent; 43 (4) as to CITGO Partners, a material breach or default by CParent under the terms of the Product Purchase Agreement, which breach or default continues unremedied or uncured for at least ninety (90) days after the Partnership or Lyondell GP has given written notice of such breach or default to CParent; or (5) the withdrawal, retirement, resignation or dissolution of a Partner; or the bankruptcy of a Partner or its Parent (including the filing against a Partner or its Parent of a petition in bankruptcy or seeking any reorganization, liquidation or similar relief, which petition shall remain undismissed or unstayed for an aggregate of ninety (90) days; the adjudication of a Partner or its Parent as Insolvent, or the institution by a Partner or its Parent of proceedings to be adjudicated as a voluntary bankrupt, or the consent by a Partner or its Parent to the filing of a bankruptcy proceeding against it, or the failure of a Partner or its Parent to contest a bankruptcy proceeding against it; or the appointment, or any consent by a Partner or its Parent to the appointment, of a receiver, custodian, liquidator or trustee for the Partner or its Parent or for all or any substantial portion of its property, which appointment remains undismissed or unstayed for a period of ninety (90) days). (B) The existence of a Default shall be determined either by written agreement among the Partners or by resort to an appropriate court. Once such Default has been determined to exist (including, as appropriate, exhausting all appeals), then the Defaulting Partners shall have thirty (30) days from the determination date to cure such Default; provided, however, that there shall not be a cure period for a Default described in Section 11.2.(A)(5) and that the cure period for a Default described in Section 11.2.(A)(1) shall be limited to three (3) Business Days. (C) The day upon which the Default is determined to exist (or if the Default is subject to a cure period and is not timely cured, then the day following the end of the applicable cure period) shall be the "Default Date." Without prejudice to a Partner's (or any of its Affiliates') rights to seek temporary or preliminary judicial relief, prior to any such Default Date all rights and obligations of the Partners under this Agreement shall remain in full force and effect. (D) With respect to any Default, the term "Damages" shall mean (in each case to the extent reasonably and necessarily incurred) any and all obligations (including all obligations to take an affirmative or curative act), liabilities, damages (including, damages arising out of any breach of any representation or warranty, damages related to investigations, proceedings, audits, the interruption of the Partnership's Business, restrictions upon the use of, or adverse impact on, the assets or the Partnership's Business, or the interruption, breach or termination of 44 any Related Agreements, including any lost profits attributable thereto), fines, penalties, deficiencies, losses, judgments, settlements, costs and expenses (including costs and expenses incurred in connection with performing obligations, bonding and appellate costs and attorneys', accountants', engineers', health, safety, environmental and other consultants' and investigators' fees and disbursements, liquidating, selling or offering for sale the Partnership Business and assets or winding up the Partnership Business, or other payments in respect of such payments) arising out of or incurred in connection with such Default, regardless of whether any of the foregoing are foreseeable, unforeseeable, matured or unmatured, existing or contingent as of the date of such Default. "Damages" also shall include, if and to the extent interest is not already included therein under applicable law or other provisions hereof and subject to Section 12.11., interest on amounts actually due until payment thereof is made at a rate per annum equal to the rate set forth in Section 12.10.(B). 11.3. Remedies for Default. Provided that there shall be no duplication of remedies, without prejudice to the Nondefaulting Partners' right to foreclose upon the Defaulting Partners' Interest pursuant to the lien and security interest created in Section 11.1. or to pursue independently and at any time, including simultaneously, any other remedy it may have under law, including the right to seek to recover Damages, or equity, upon determination (either judicially or otherwise) of a Default and the related Damages, and the failure of the Defaulting Partners to cure such Default as provided in Section 11.2.(B), the Nondefaulting Partners in their sole discretion may elect to pursue the following remedies: (A) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages), the Nondefaulting Partners may elect to exercise their purchase right for the Defaulting Partners' Interest as described in Section 11.5. and thereby cause the Partnership to dissolve under Section 11.9(D); provided, however, that within ten (10) days after the determination of the Fair Market Value, the Nondefaulting Partners may elect not to proceed with a purchase of the Defaulting Partners' Interest, in which case the Nondefaulting Partners shall have an additional thirty (30) days from its determination not to proceed to elect as an alternative remedy Section 11.3.(B) below; and (B) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages) (or if the Nondefaulting Partners initially elected to pursue its remedy under Section 11.3.(A) above, then at any time prior to the expiration of the 30-day extension period), the Nondefaulting Partners may elect to effect a liquidation of the Partnership under Section 11.6. and thereby cause the Partnership to dissolve under Section 11.9.(E). 45 11.4. Consequences of Default. Notwithstanding any other provision of this Agreement, commencing on the Default Date and (i) prior to the Nondefaulting Partners' collection of Damages through the exercise of its legal remedies or otherwise, or (ii) while the Nondefaulting Partners are pursuing its remedies under Section 11.5. or Section 11.6., the Defaulting Partners' Representatives on the Partnership Governance Committee shall not have any voting rights and all matters requiring Partnership Governance Committee Action shall be determined solely by the Nondefaulting Partners' Representatives; provided, however, that the foregoing loss of voting rights shall not occur as a result of a Default caused solely by the insolvency, bankruptcy or similar proceedings of a Partner or a Parent described in the second through final clauses of Section 11.2.(A)(5); and provided further, that the foregoing loss of voting rights shall not apply to those voting rights contained in Sections 3.8.(A), 3.8.(B), 3.8.(C), 3.8.(D), 3.8.(F), and 3.8.(Y), which voting rights shall continue in full force and effect at all times. 11.5. Purchase of Defaulting Partners' Interest (A) The Nondefaulting Partners shall have the right to elect to purchase the Interest of the Defaulting Partners by delivering notice of such election in writing to the Partnership Governance Committee and the Defaulting Partners (the "Purchase Notice"). The purchase of such Interest shall be consummated prior to the expiration of thirty (30) days from the determination of the purchase price as provided herein. (B) The purchase price that the Nondefaulting Partners shall pay to the Defaulting Partners for the Defaulting Partners' Interest shall be an amount equal to (i) the amount that the Defaulting Partners would receive in a Liquidation (assuming that the sale under Section 11.11.(B)(1) is for an amount equal to the Fair Market Value) reduced by (ii) the Damages incurred by the Partnership. (C) "Fair Market Value" shall be the fair market value of all of the Partnership Business and assets (including tangible and intangible assets) as of the date of the Purchase Notice, without giving effect to the Damages, determined as follows: (1) The Defaulting Partners and the Nondefaulting Partners shall first attempt to agree on such value, which if agreed to shall be the Fair Market Value; (2) If the Partners are unable to agree within twenty (20) days of the Purchase Notice, then the Defaulting Partners, on the one hand, and the Nondefaulting Partners, on the other hand, shall (at their own cost) cause an independent, qualified appraiser to deliver a written appraisal of such value within fifty (50) days of the Purchase Notice. If the lower appraised value is greater than or equal to ninety percent (90%) of the higher appraised value, then the average of the two appraised values shall be the Fair Market Value; and 46 (3) If the lower appraised value is less than ninety percent (90%) of the higher appraised value, then the Partners shall jointly appoint a mutually acceptable neutral person or entity (the "Neutral") not affiliated with either of the Partners within seventy (70) days of the Purchase Notice (and if the Partners have been unable to agree upon such appointment within sixty (60) days of the Purchase Notice, then such Neutral shall upon the application of either the Defaulting Partners or the Nondefaulting Partners be appointed within seventy (70) days of the Purchase Notice by the Center for Public Resources, or if such appointment is not so made then promptly thereafter by the American Arbitration Association in New York, New York, or if such appointment is not so made then promptly thereafter by the senior United States District Court judge sitting in the Borough of Manhattan, in New York, New York), and the Neutral shall within ninety (90) days of the Purchase Notice or, if later, within twenty (20) days of the appointment of the Neutral determine which of the two appraised values is closest to the fair market value of the Partnership's assets as determined by the Neutral, and that appraised value shall be the Fair Market Value. 11.6. Liquidation. The Nondefaulting Partners shall have the right to elect to dissolve and liquidate the Partnership pursuant to the procedures in Section 11.11. (such procedures constituting a "Liquidation"); provided, however, that any amount payable to the Defaulting Partners in such Liquidation pursuant to Section 11.11.(B)(7) shall be reduced by the Nondefaulting Partners' Participation Percentage of the Damages incurred by the Partnership. The Nondefaulting Partners shall deliver notice of such election to dissolve and liquidate in writing to the Partnership Governance Committee and the Defaulting Partners. 11.7. Closing of Purchase Rights. In the event of the exercise of purchase rights pursuant to Section 11.5. (any such event a "Purchase"), the Purchase shall be consummated by appropriate and customary documentation (including customary representations and warranties) as soon as practicable and in any event within the applicable time period specified in Section 11.5 or Section 11.8. The Partners entitled or obligated to Purchase shall have the right to transfer or assign, in whole or in part, its right or obligation to Purchase to an Affiliate or to a third party. 11.8. Recision. In the event that the Partnership is rendered Insolvent by reason of a breach, default or failure of an agreement, covenant, indemnity, representation or warranty made by LParent in the Contribution Agreement (including the exhibits and schedules thereto) and such breach, default or failure has not been cured as provided in the Contribution Agreement (a "Recision Event"), then CITGO GP shall deliver a notice to Lyondell GP specifying in reasonable detail the particulars of such Recision Event (a "Recision Event Notice"). Within 60 days after the earlier to occur of agreement between the Partners or final judicial determination that a Recision Event has occurred, Lyondell Partners shall purchase CITGO Partners' Interest (a "Recision Purchase") for an amount of cash 47 (the "Recision Purchase Price") equal to the sum, without duplication, of the following amounts, each calculated or determined from the Closing Date to the date of purchase: (i) CITGO Partners' capital contributions made pursuant to Section 6., plus (ii) all Profits allocated to CITGO Partners, minus (iii) all Losses allocated to CITGO Partners and minus (iv) the amount of all distributions actually made to CITGO Partners pursuant to Section 7.4. In the event of a Recision Purchase, CITGO Partners shall execute and deliver to Lyondell Partners such documents as Lyondell Partners shall reasonably require to evidence and effect the Recision Purchase against receipt by CITGO Partners of the Recision Purchase Price. The amount of any debt to CITGO Partners under Section 7.3.(C) shall be deemed to be paid upon payment of the Recision Purchase Price. 11.9. Dissolution. The Partnership shall be dissolved within the meaning of the Act upon the first to occur of the following: (A) the written determination of all General Partners to dissolve the Partnership; (B) the bankruptcy (including the matters referred to in Section 11.2.(A)(5) of the Partnership; (C) the withdrawal, retirement, resignation, dissolution or bankruptcy (including the matters referred to in Section 11.2.(A)(5)) of a Partner; (D) the closing of a Purchase as the result of a Default; (E) the election of the Nondefaulting Partners to effect a dissolution of the Partnership under Section 11.6.; or (F) any other act or event which results in the dissolution of a limited partnership under the Act. 11.10. Reconstitution of Partnership. If the Partnership dissolves pursuant to Section 11.9.(C) or Section 11.9(D) (even if other dissolution provisions also are invoked), it may be reconstituted and continued upon the written consent of all remaining Partners other than the former Partner that sold its Interest. 11.11. Liquidation; Winding Up and Distributions upon Dissolution. (A) Upon a dissolution, absent a reconstitution and continuation of the Partnership under Section 11.10., the Partnership shall commence to wind up its affairs and the Partners shall file appropriate documents of dissolution and proceed to effect the Liquidation of the Partnership pursuant to the procedures set forth in this Section 11.11.; provided, however, that in the event of a dissolution resulting from an event described in Section 11.9.(D), sufficient time shall be allowed prior to any liquidation or winding up of the Partnership to give effect to the remedies provided by Section 11.5. and Section 11.6. Notwithstanding any other provision of this Agreement, during the period of the 48 winding up, the Nondefaulting Partners (or the Partnership Governance Committee if the Partners have agreed to terminate the Partnership or there are otherwise not Nondefaulting Partners) shall make all decisions relating to the conduct of any business or operations, and the sale or disposition of the Partnership's assets. (B) Upon dissolution of the Partnership, the following shall occur unless the Partners agree otherwise: (1) The Partnership's assets shall be collected and sold to unaffiliated third parties in arm's-length transactions; provided, however, that any Partner or its Affiliates shall have the right to participate in any public sale or auction of the Partnership's property or any other reasonable competitive bid process (such as a private sale pursuant to a "data room" process conducted by an independent investment banking firm); (2) Gain or loss with respect to the Partnership's sale or distribution of assets shall be allocated to the Partners' Capital Accounts as provided in Section 7.6.; (3) Any liabilities owed to third parties shall be paid in full; (4) Appropriate reserves for contingencies shall be established; (5) Any outstanding loans that have been made to the Partnership by any Partner shall be repaid in full; (6) CITGO Partners' Capital Accounts shall be reduced by the amount of the outstanding principal of any promissory note contributed to the Partnership pursuant to Section 6.6.; and (7) Any remaining cash or non-cash assets that cannot be sold for cash shall be distributed to the Partners in accordance with their positive Capital Account balances. No Partner shall have any obligation to contribute capital to restore any negative balance in its Capital Account. 11.12. Enforcement. Only a General Partner shall have the ability to enforce the provisions of this Section 11. 12. MISCELLANEOUS 12.1. Confidentiality and Use of Information. Each Partner will keep confidential all information regarding the business of the Partnership and will not use any such information in any manner not related to the business of the Partnership; provided, however, that the term "information" as used in this Section does not include any information that (i) is or becomes generally available to and known by the public 49 or the petroleum refining industry (other than as a result of an unpermitted disclosure directly or indirectly by the Partnership or a Partner), (ii) is or becomes available to a Partner on a nonconfidential basis from a source other than the Partnership or a Partner; provided, however, that such source is not and was not bound by a confidentiality agreement with, or other obligation of secrecy to, the Partnership or any other Partner, (iii) has already been or is hereafter independently acquired or developed by a Partner without violating any confidentiality agreement with or other obligation of secrecy to the Partnership or another Partner or (iv) is generated by the Partnership with the intention that it not be held as confidential. 12.2. Auditors. Selection of the Partnership's auditors will be delegated to the Finance-Control Committee. The Partnership Governance Committee will have final authority to select, appoint and establish the terms of the engagement of the Partnership's auditors. The Partnership Governance Committee shall, in consultation with the Finance and Control Committee, establish the accounting policies for the Partnership, including the policy for determining whether an expenditure should be capitalized or expensed. 12.3. Indemnification of Officers. (A) The Partnership shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a named defendant or respondent to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal to such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (collectively, such actions, suits, proceedings, appeals, inquiries and investigations are referred to collectively as "Proceedings" and individually as "Proceeding") by reason of the fact that such person either is or was an officer of the Partnership, or, while an officer of the Partnership, is or was serving at the request of the Partnership as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another domestic or foreign corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by such person in connection with such Proceeding if it is determined that such person conducted himself in good faith, and if such conduct was in such person's official capacity as an officer of the Partnership, in a manner he reasonably believed to be in the best interests of the Partnership and, in all other cases, in a manner he reasonably believed was not opposed to the best interests of the Partnership, and, in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful; provided, however, that if a person is found liable to the Partnership or is found liable on the basis that personal benefit was improperly received by him, the indemnification shall not be available. The Partnership may pay or reimburse expenses incurred by an officer 50 in connection with such person's appearance as a witness or other participation in a Proceeding at a time when such person is not a named defendant or respondent in such Proceeding. (B) The determination to be made in the preceding subsection (A) shall be made (i) by the Partnership Governance Committee; or (ii) by special legal counsel selected by the Partnership Governance Committee. A determination as to the reasonableness of expenses (including court costs and attorneys' fees) shall be made in the same manner as the determination that indemnification is permissible. (C) Reasonable expenses incurred by an officer in connection with a Proceeding may be paid by the Partnership in advance of the final disposition of such Proceeding and without any of the determinations specified in the preceding subsection (B) upon receipt by the Partnership of a written affirmation by the officer of his good faith belief that he has met the standard of conduct necessary for indemnification under this Section 12.3. and a written undertaking by or on behalf of the officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Partnership as authorized in this Section 12.3., which undertaking shall be an unlimited general obligation of such officer and may be unsecured. (D) The right to indemnification conferred in this Section 12.3. shall be a contract right and shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other law, agreement, Partnership Governance Committee Action, or otherwise, both as to action in their official capacities and as to action in another capacity while acting as an officer and shall continue as to a person who has ceased to be an officer and shall inure to the benefit of the heirs, executors and administrators of such person. Any indemnification of or advance of expenses to an officer in accordance with this Section 12.3. shall be reported in writing to the Partnership Governance Committee. (E) The Partnership may purchase and maintain insurance on behalf of any person who is or was an officer or employee of the Partnership, or who is or was serving at the request of the Partnership as a manager, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against or incurred by that person in such a capacity or arising out of his status as such a person, whether or not the Partnership would have the power to indemnify such person against such liability under this Section 12.3. (F) Except as indicated in the proviso in Section 12.3.(A), the Partnership intends that the indemnification provided hereunder shall indemnify its 51 officers to the fullest extent possible under the Act; and if any indemnification which would otherwise be granted by this Section 12.3. shall be disallowed by any competent court or administrative body as illegal, then any officer with respect to whom such adjudication was made, and any other officer, shall be indemnified to the fullest extent permitted under the Act. 12.4. Waivers, Modifications and Amendments. All modifications or amendments of this Agreement or the Certificate of Limited Partnership shall require the approval of Representatives representing 100 percent of the total votes as provided in Section 3.8.(C). 12.5. Further Assurances. From time to time, each Partner agrees to execute and deliver such additional documents, and will provide such additional information and assistance as the Partnership may reasonably require to carry out the terms of this Agreement and to accomplish the Partnership's Business. 12.6. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors of the Partners, but, except as expressly provided herein, no Limited Partner or its Affiliated General Partner may assign or delegate any of their rights or obligations under this Agreement without the prior written consent of the other Partners, which consent shall be in the sole and absolute discretion of such other Partners. Any purported assignment or delegation without such consent shall be void and ineffective. 12.7. Benefits of Agreement Restricted to the Parties. This Agreement is made solely for the benefit of the Partnership and the Partners, and no other person or entity shall have any right, claim or cause of action under or by virtue of this Agreement. 12.8. Expenses. Except as otherwise provided herein, each party hereto shall be responsible for its own expenses incurred in connection with this Agreement. 12.9. Currency Conversions. All contributions, allocations, distributions and other payments shall be made, and all calculations performed and books and records kept, in United States currency, without any reference to foreign currency exchange rates or other conversion calculations. 12.10. Payment Terms and Interest Calculations (A) If the payment due date for any payment hereunder (including Capital Contributions and Damages) falls on a Saturday or a bank or federal holiday, other than a Monday, the payment shall be due on the past preceding business day. If the payment due date falls on a Sunday or Monday bank or federal holiday, the payment shall be due on the following business day. (B) Interest shall accrue on any unpaid and outstanding amount from the time such amount is due and payable through the date upon which such amount, together with accrued interest thereon, is paid in full. Interest 52 shall, subject to the provisions of Section 12.11., accrue at a per annum rate equal to the lesser of (i) 125 percent of the Agreed Rate, compounded quarterly, to the extent permitted by law or (ii) the Highest Lawful Rate. (C) A wire transfer or delivery of a check shall not operate to discharge any payment under this Agreement and shall be accepted subject to collection. 12.11. Usury Savings Clause. Notwithstanding any other provision of this Agreement, it is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of any indebtedness arising under this Agreement whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Agreement (the "Applicable Usury Laws"). Accordingly, if any payments made pursuant to this Agreement result in any person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this Section 12.11. shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Agreement shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the payor by the recipient hereof; (iii) no person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of any interest payable under this Agreement shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Agreement immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to any person pursuant to this Agreement for the use, forbearance or detention of any indebtedness arising hereunder shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of any such indebtedness so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest that may be lawfully contracted for, charged or received by any person in connection with any indebtedness arising under this Agreement under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged to any person under all Applicable Usury Laws on any principal balance from time to time outstanding pursuant to this Agreement. 12.12. Notices. All notices, requests, demands and other communications that are required or may be given under this Agreement shall, unless otherwise provided for elsewhere in this Agreement, be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile, (ii) delivered 53 personally or (iii) mailed, first class mail, postage prepaid, return receipt requested, as follows: (a) if to CITGO LP, CITGO GP or its Representatives: CITGO Refining Investment Company P. O. Box 3758 Tulsa, Oklahoma 74556 Attention: Treasurer Telecopy: 918-495-4511 with a copy to: Vice President and General Counsel CITGO Petroleum Corporation P. O. Box 3758 Tulsa, Oklahoma 74556 Telecopy: 918-495-5559 (b) if to Lyondell LP, Lyondell GP or its Representatives: Lyondell Refining Company P. O. Box 3646 Houston, Texas 77253-3646 Attention: Vice President, General Counsel & Secretary with a copy to: Lyondell Refining LP, LLC P. O. Box 3646 Houston, Texas 77252-3646 Attention: Vice President, General Counsel & Secretary Telecopy: 713-309-4718 (c) if to the Partnership: LYONDELL-CITGO Refining LP P. O. Box 2451 Houston, Texas 77252-2451 Attention: President & CEO Telecopy: 713-321-6900 Any changes to the addresses set forth above shall be made by written notice delivered to the Secretary of the Partnership who shall maintain such addresses. 12.13. Waiver of Immunity. EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM FOR ITSELF OR 54 WITH RESPECT TO ITS REVENUES, ASSETS OR PROPERTIES IMMUNITY FROM THE JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS. TO THE EXTENT ANY JURISDICTION WOULD ATTRIBUTE SUCH IMMUNITY TO EITHER OR BOTH OF THE CITGO PARTNERS, EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT TO CLAIM SUCH IMMUNITY AND TO ANY DEFENSES AVAILABLE TO IT UNDER THE FOREIGN SOVEREIGN IMMUNITIES ACT, AND ANY DEFENSE BASED ON IMMUNITY ARISING UNDER U.S. FEDERAL OR STATE LAW, OR UNDER ANY INTERNATIONAL, FOREIGN OR OTHER APPLICABLE LAW. 12.14. Governing Law. THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, AND ALL MATTERS RELATING HERETO, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAW. 12.15. Jurisdiction; Consent to Service of Process; Waiver. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY OF THE PARTNERS OR THE PARTNERSHIP OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTNERS AND THE PARTNERSHIP ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTNERS AND THE PARTNERSHIP SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF NEW YORK BY ENTERING INTO AN AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTNER AND THE PARTNERSHIP SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF EXISTENCE OF THE PARTNERSHIP. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTNERSHIP AND THE PARTNERS. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE 55 RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE PARTNERSHIP TO ASSERT A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1(II)(A) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE PARTNERSHIP TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE PARTNERSHIP FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. 12.16. Entire Agreement. This Agreement, together with the Certificate of Limited Partnership, the Master Transaction Agreement, the Confidentiality Agreements (as defined in the Master Transaction Agreement) and the Related Agreements constitute the entire agreement between the parties and supersedes all prior agreements and understandings, oral and written, between the parties with respect to the subject matter hereof, with the exception of those matters which will continue to be governed under the Regulations. 12.17. Severability. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any Partner, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. 12.18. Construction. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumptions that any Partner had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to 56 include the singular, and vice versa; (vi) each gender shall be deemed to include the other genders; and (vii) each exhibit, attachment and schedule to this Agreement is a part of this Agreement. 12.19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. [signature page follows] 57 IN WITNESS WHEREOF, this Limited Partnership Agreement has been executed on behalf of each Partner, by their respective officers thereunto duly authorized, effective as of the 31st day of December, 1998. LYONDELL REFINING LP, LLC a Delaware limited liability company (Lyondell LP) By: --------------------------------- Name: Title: CITGO GULF COAST REFINING, INC. a Delaware corporation (CITGO GP) By: --------------------------------- Name: Title: LYONDELL REFINING COMPANY, a Delaware corporation (Lyondell GP) By: --------------------------------- Name: Title: CITGO REFINING INVESTMENT COMPANY an Oklahoma corporation (CITGO LP) By: --------------------------------- Name: Title: 58 EXHIBIT 1 TO PARTNERSHIP AGREEMENT DEFINITION OF TERMS IN PARTNERSHIP AGREEMENT Act. The Delaware Revised Uniform Limited Partnership Act, as amended and in effect from time to time. See Section 2.2. Action. See Section 5.11.(D). Additional Construction Loan. As defined in the Regulations. Affiliate. As to any specified Person, any other Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person; provided, however, that for purposes of this Agreement and regardless of whether the specified Person would otherwise be deemed an Affiliate for any other purpose or under any other agreement, the Partnership or any entities controlled by the Partnership shall not be deemed to be an Affiliate of LParent, Lyondell GP or Lyondell LP or any entities controlled by LParent, Lyondell GP or Lyondell LP or of CParent, CITGO GP or CITGO LP or any entities controlled by CParent, or CITGO GP or CITGO LP. For purposes of this definition the term "control" shall have the meaning set forth in 17 CFR 230.405. Affiliated General Partner. In the case of Lyondell LP, the "Affiliated General Partner" shall mean Lyondell GP. In the case of CITGO LP, the "Affiliated General Partner" shall mean CITGO GP. Affiliated Limited Partner. In the case of Lyondell GP, the "Affiliated Limited Partner" shall mean Lyondell LP. In the case of CITGO GP, the "Affiliated Limited Partner" shall mean CITGO LP. Affiliated Partner Group. A General Partner and its Affiliated Limited Partner. Agent. See Section 12.15. Agreed Rate. With respect to any period for which interest is to be calculated, the Citibank, N.A. "base rate" from time to time in effect for each day in such period, calculated by multiplying the Citibank, N.A. "base rate" by the number of days such "base rate" is in effect, determining the sum of the products obtained thereby and dividing such sum by the number of days in such period. Alternate. See Section 3.2.(B). Annual Meeting. See Section 3.4.(A). Applicable Usury Laws. See Section 12.11. Assets. The assets defined as such in the Contribution Agreement together with all assets provided to the Partnership pursuant to the Related Agreements. Exhibit 1, Page 1 Asset Value. With respect to any asset, the asset's adjusted basis for federal income tax purposes, except that the Asset Value of any asset contributed by a Partner to the Partnership or acquired with funds contributed by a Partner shall be the fair market value of such asset on the date of contribution or on any date on which the asset is revalued pursuant to Section 7.1.(C) hereof; provided, however, that the fair market value of the Assets (net of the Assumed Liabilities) on each such date shall be deemed to be $825 million, reduced, without duplication, (i) by the amount of any payment described in Section 7.1.(D) and (ii) by the amount of any indemnification forgone by the Partnership pursuant to the proviso of Section 5.2 of the Contribution Agreement; and provided further (a) that the fair market value of the Working Capital on each such date shall be the amount determined pursuant to Exhibit 6.1(B) and (b) that the fair market value of the assets which are acquired with funds contributed by a Partner in each such date shall be the original cost of such assets. Any such adjustments shall be effective on a prospective basis only. Auxiliary Committee. See Section 3.10. Average Participation Percentage. The mathematical average of a Partner's Participation Percentages, by Calendar Quarter, for any applicable period. Blended Rate. For any Calendar Quarter or portion thereof, a fraction (i) the numerator of which is equal to the aggregate federal income tax depreciation, amortization or other cost recovery deductions for such period with respect to all assets and (ii) the denominator of which is equal to the aggregate adjusted tax basis of the assets on the date such assets were contributed to the Partnership or, if any adjustment to the Capital Accounts has occurred pursuant to Section 7.1.(C), the date of the most recent such adjustment. Business Day. Any day other than a Saturday, Sunday or other day on which banks are closed in New York City, New York. Calendar Quarter. In each year, each calendar quarter. Capital Account. See Section 7.1. Capital Budget. See Section 9.2.(B). Capital Contribution. See Section 6.4. Capital Enhancement Projects. See Section 9.2.(B). Cash Balance Amount. See Section 7.5. CEO. The President and Chief Executive Officer of the Partnership. See Section 4.5. CERCLA shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Chemical Substance shall mean (i) any chemical substance, pollutant, contaminant, constituent, chemical, mixture, raw material, intermediate, product or byproduct that is regulated (including any requirement for the reporting of any Release thereof) under any Environmental Law, as now or hereafter in effect, or defined or listed as an industrial, toxic, deleterious, harmful, Exhibit 1, Page 2 radioactive, infectious, disease-causing or hazardous substance, material or Waste under any Environmental Law, as now or hereafter in effect, and (ii) petroleum or any fraction thereof, asbestos or asbestos-containing material or polychlorinated biphenyls. CITGO GP. CITGO Gulf Coast Refining, Inc., a Delaware corporation, the General Partner that is an Affiliate of CParent. See Section 2.2. CITGO LP. CITGO Refining Investment Company, an Oklahoma corporation, the Limited Partner that is an Affiliate of CParent. See Section 2.2. CITGO Partners. CITGO GP and CITGO LP. CITGO Partners Option Date Amount. The product of (i) CITGO Partners Average Participation Percentage for the period beginning on the day following the In-Service Date and ending on the Option Date times (ii) the remainder of Option Date Working Capital minus In-Service Date Working Capital. Closing Date. See Section 2.2. Code. The Internal Revenue Code of 1986, as amended and in effect from time to time and any successor thereto. Company. LYONDELL-CITGO Refining Company Ltd., a Texas limited liability company, which was converted into the Partnership as of the date of this Agreement. Compensation Committee. See Section 3.10.(A). Conflict Circumstance. See Section 5.7. Conflicted General Partner. See Section 5.7. Contribution Agreement. The agreement dated July 1, 1993 between the Company and LParent pursuant to which the Refinery Business and certain other Assets and Working Capital were contributed to the Company by LParent on behalf of Lyondell Refining Company n/k/a Lyondell GP. Conversion Date. See Section 2.2. CParent. CITGO Petroleum Corporation, a Delaware corporation. See Section 2.2. Damages. See Section 11.2.(D). Default. See Section 11.2.(A). Default Date. See Section 11.2.(C). Defaulting Partners. Lyondell GP and Lyondell LP, in the case of a Default by Lyondell GP or Lyondell LP; and CITGO GP and CITGO LP, in the case of a Default by CITGO GP or CITGO LP. Exhibit 1, Page 3 Depreciation. For each Calendar Quarter or portion thereof, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such period. Notwithstanding the preceding sentence, if the Asset Value (after taking into account any adjustment pursuant to the proviso of Section 7.1.(C)) of an asset differs from its adjusted tax basis on the date such asset is contributed or, if applicable, on the date of any adjustment to Capital Accounts which has taken place pursuant to Section 7.1.(C), Depreciation for any period shall be an amount which bears the same ratio to such Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) as the federal income tax depreciation, amortization or other cost recovery deduction for such period bears to such adjusted tax basis, except that in the case of any asset that has a zero adjusted tax basis on either the date of its contribution to the Partnership or on the date of any adjustment pursuant to Section 7.1.(C), Depreciation for any period shall be an amount equal to the product of (i) the Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) of such asset on the date of contribution, or, if applicable, the date of the most recent adjustment to Capital Accounts pursuant to Section 7.1.(C) and (ii) the Blended Rate. Distributable Cash. The amount of cash distributable to the Partners as determined under Section 7.3., and in regard to each Partner. Distributions. See 6.4.(A)(2). Environment shall mean any ambient air, surface water, drinking water, groundwater, land surface, subsurface strata, river sediment, natural resources or real property and the physical buildings, structures and fixtures thereon, including sewer, septic and waste treatment, storage or disposal systems. Environmental Law shall mean any legal requirement or permit relating to (i) the Environment, including pollution, contamination, cleanup, preservation, protection and reclamation of the Environment; (ii) health or safety, including the exposure of employees and other Persons to any Chemical Substance; (iii) the Release or threatened Release of any Chemical Substance, noxious noise or odor, including investigation, study, assessment, testing, monitoring, containment, removal, remediation, response, cleanup and abatement of such Release or threatened Release; and (iv) the management of any Chemical Substance, including the manufacture, generation, formulation, processing, labeling, use, treatment, handling, storage, disposal, transportation, distribution, re-use, recycling or reclamation of any Chemical Substance. Executive Officers. Those officers of the Partnership then designated as Executive Officers by Partnership Governance Committee Action. Fair Market Value. See Section 11.5(C). Finance-Control Committee. See Section 3.10(A). Financing Plan. Certain Partnership plans, as approved by unanimous actions of the Partnership Governance Committee, setting forth the Partnership's funding requirements for the Capital Budget and the sources of funds to finance such requirements. GAAP. Generally accepted accounting principles. Exhibit 1, Page 4 General Partners. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a general partner of the Partnership, unless such General Partner ceases to be a General Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute General Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute General Partner, if any, of the Partnership as provided herein, in such Person's capacity as a general partner of the Partnership. Highest Lawful Rate. See Section 12.11. Indemnified Losses. See Section 5.11.(A)(1). Indemnified Party. See Section 5.11.(D). Indemnifying Party. See Section 5.11.(D). Initial Construction Loan. As defined in the Regulations. In-Service Date. February 28, 1997, except for the Working Capital Valuation for which the In-Service Date is March 31, 1997. In-Service Date Working Capital. The value of the Working Capital on the In-Service Date determined pursuant to Exhibit 6.1(B). Insolvent and Insolvency. The Partnership is insolvent if it has ceased to pay its debts in the ordinary course of business or cannot pay its debts as they become due or is insolvent within the meaning of the federal bankruptcy law. Intended Percentage. See Section 6.6.(A). Interest. At any point in time, the entire ownership interest of a Partner in the Partnership at such time. See Section 5.8. Limited Partner. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a limited partner of the Partnership, unless such Limited Partner ceases to be a Limited Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute Limited Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute Limited Partner, if any, of the Partnership as provided herein, in such Person's capacity as a limited partner of the Partnership. Liquidation. See Section 11.6. LParent. Lyondell Chemical Company, a Delaware corporation, formerly known as Lyondell Petrochemical Company. See Section 2.2. Lyondell GP. Lyondell Refining Company, a Delaware corporation, the General Partner that is an Affiliate of LParent. Lyondell LP. Lyondell Refining LP, LLC, a Delaware limited liability company, the Limited Partner that is an Affiliate of LParent. Exhibit 1, Page 5 Lyondell Partners. Lyondell GP and Lyondell LP. Lyondell Partners Option Date Amount. The product of (i) Lyondell Partners Average Participation Percentage for the period beginning on the first day following the In-Service Date and ending on the Option Date times (ii) the remainder of the Option Date Working Capital minus In-Service Date Working Capital. Maintenance Capital. Those capital expenditures reasonably required to fund capital expenditures that are necessary to maintain the Refinery in substantially the same condition existing on the Closing Date. Master Transaction Agreement. The agreement so named, dated as of May 5, 1993, among LParent, CParent, Lyondell GP and CITGO LP. Maximum Amount. See Section 12.11. Neutral. See Section 11.5.(C)(3). Nonconflicted General Partner. See Section 5.7. Nondefaulting Partners. The Partners other than the Defaulting Partners. See Section 11.2. Operating Budget. See Section 9.2.(A). Operating Committee. See Section 3.10.(A). Option Date. See Section 6.6(A). Option Date Payment. See Section 6.6(C). Option Date Working Capital. The value of Working Capital on the Option Date determined pursuant to Section 6.6. Owners. Lyondell GP and CITGO LP in their capacity as members of the Company. Parents. LParent and CParent. Partners. The General Partners and the Limited Partners on the date of this Agreement until such Person ceases to be a partner of the Partnership. Partnership Business. See Section 2.3. Partnership Governance Committee. The committee of six Representatives through which the General Partners manage the Partnership. See Section 3.1.(A). Partnership Governance Committee Action. The formal actions taken by vote of the Partnership Governance Committee, which is the exclusive method by which the General Partners manage the Partnership. See Section 3.6(A). Exhibit 1, Page 6 Participation Percentage. The percentage calculated for each Partner, from time to time, pursuant to Section 6.4. Person. Any natural person or any corporation, limited liability company, partnership, group, joint venture, trust or other entity. Pledgee Group. See Section 11.1. Pledgor Group. See Section 11.1. Product Sales Agreement. The Product Sales Agreement-Refined Products dated July 1, 1993 between the Company and CITGO Petroleum Corporation, as amended from time to time. Profit and/or Losses. For each Calendar Quarterly period or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined for federal income tax purposes in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, deduction or credit required to be stated separately pursuant to Code Section 703(a)(1) shall be included in Profits or Losses), with the following adjustments: (i) any income of the Partnership that is exempt form federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such Profits or subtracted from such Losses; (ii) any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition, shall be subtracted from such Profits or added to such Losses; (iii) gain or loss resulting from any disposition of an asset with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C), adjusted to reflect Depreciation; and (iv) in lieu of the depreciation, amortization, and other cost recovery deductions otherwise required to be taken into account in computing such Profits or Losses, there shall be taken into account Depreciation. Profits Interest. The right of any Partner to receive Profits allocated or cash distributed to such Partner pursuant to Section 7, but not including the right to participate in or manage the affairs of the Partnership as a Partner, the right to receive any information or accounting of the affairs of the Partnership, the right to inspect the books or records of the Partnership or any other right of a Partner pursuant to this Agreement. Proper Ratio. With respect to the Capital Account balances of the Partners at any time, the ratio of the Partners' Participation Percentages at such time. Purchase. See Section 11.7. Exhibit 1, Page 7 Purchase Notice. Notice given by the Nondefaulting Partners exercising their purchase rights. See Section 11.5.(A). Purchase Offer. See Section 10.3.(C). Recision Event. See Section 11.8. Recision Event Notice. See Section 11.8. Refinery. The Refinery located at 12000 Lawndale in Houston, Texas. Refinery Business. The Refinery and lube blending facility located in Birmingport, Alabama and all related assets (of every kind, nature, character and description, tangible and intangible, real, personal or mixed, wherever located), businesses, contracts and permits, that are used solely in the operations of such Refinery and lube blending facility, and all activities reasonably related or incidental thereto. Regulations. See Section 2.2. Related Agreements. Those agreements defined as such in Exhibit 1A to this Agreement. Release shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, dumping, discharge, dispersal, leaching, escaping, emanation or migration of any Chemical Substance in, into or onto the Environment of any kind whatsoever, including the movement of any Chemical Substance through or in the Environment, exposure of any type in any workplace, any release as defined under CERCLA or any other Environmental Law and any noxious noise or odor emission. Representatives. Those persons designated by each General Partner to serve as such General Partner's representatives on the Partnership Governance Committee. See Section 3.2.(A). Second Notice. See Section 10.3.(D). Secretary. See Section 4.7. Substitute General Partner. A Person who is admitted as a General Partner to the Partnership in place of and with the rights of a General Partner. Substitute Limited Partner. A Person who is admitted as a Limited Partner to the Partnership in place of and with the rights of a Limited Partner. TMP. The "tax matters partner" as defined in Section 6231(a)(7) of the Code. See Section 8.3.(A). Treasury Regulations. The income tax regulations promulgated by the Department of Treasury, as amended from time to time. Treasury Regulations include final and temporary regulations. Unanimous Partnership Governance Committee Action. See Section 3.8. Exhibit 1, Page 8 U.S. Partnership Return of Income. See Section 8.3.(A). Vice President. See Section 4.6. Wholly Owned Subsidiary. As to any Person, a subsidiary of such Person all of the equity interests of which are owned, directly or indirectly, by such Person. Working Capital. The Partnership's current assets minus current liabilities (excluding the current portion of long-term debt and capital leases). Current assets and current liabilities will be determined in accordance with current accounting principles under GAAP as in effect at the Conversion Date, except (i) that any cash, cash equivalents and short-term investments included in the capital fund will be excluded and (ii) that inventory will be carried at its Fair Market Value. The inventory value on the Conversion Date will be its actual Fair Market Value as determined by Exhibit 6.1.(B) and on other valuation dates will be valued in accordance with Exhibit 6.1.(B). Exhibit 1, Page 9 EXHIBIT 1A RELATED AGREEMENTS TIER 1 RELATED AGREEMENTS 1. Amended and Restated Regulations 2. Performance Guaranty and Control Agreement 3. Contribution Agreement, including the following exhibits: 3.1 General Warranty Deed (relating to Houston Land) (Exhibit A-1) 3.2 General Warranty Deed (relating to Birmingport Land) (Exhibit A-2) 3.3 Assignment of Real Property Interests (relating to the "Ballpark") (Exhibit A-3) 3.4 Pipeline Deed, Bill of Sale and Assignment of Easements (relating to the Company Pipelines) (Exhibit A-4) 3.5 Assignment and Assumption Agreement (between Lyondell and the Company relating to Assets other than real property) (Exhibit A-5) 3.6 Grants of Easements for Pipelines and Meter Sites (Exhibit B) 4. Crude Supply Agreement 5. Supplemental Supply Agreement 6. Product Sales Agreement Refined Products -- CITGO 7. Inter-Plant Agreements: 7.1 Company Feedstock Purchase Agreements: (A) Heavy Pyrolysis Gasoline (B) Light Pyrolysis Gasoline (C) C5 Raffinate (D) OP Hydrogen (E) MeOH Hydrogen (F) Pyrolysis Gas Oil (G) Toluene (H) Methanol Exhibit 1A, Page 1 (I) RAFF II (J) RAFF II Isomerate (K) MTBE (L) Isopentane/Heavy Py Mix (M) Ethylene 7.2. Company Product Sales Agreement -- Lyondell: (A) OP -- 400 (B) OP -- 700 (C) Mixed Propylene (D) Refinery Normal Butane (E) Refinery Propane (F) Alkylation Normal Butane (G) Alkylation Propane (H) Benzene (I) Toluene 7.3. Tolling Agreement TIER 2 RELATED AGREEMENTS 1. Employee Transfer and Benefits Agreement 2. Intellectual Property Rights Agreement 3. Trademark Assignment Agreement 4. Trademark License Agreement 5. Tradename Licensing Agreement 6. Software Agreement 7. Terminal and Storage Agreement 8. Mont Belvieu Storage and Pipeline Agreement 9. Marketing Services Agreement -- Aromatics 10. Paraffinic Lubricants Base Oil Sales Agreement 11. Naphthenic Lubricants, White Mineral Oils and Specialty Oils Sales Agreement Exhibit 1A, Page 2 12. Lubricant Facility Operating Agreement 13. Manufacturing Services Agreement 14. Employee Services Agreement 15. Administrative Services Agreement 16. Product Sales Agreement MTBE -- Lyondell and CITGO 17. Refinery Office Lease 18. Exchange Agreement 19. Assignment and Assumption Agreement - CITGO and LCR (Lubricants) EXHIBIT 6.4 CONVERSION DATE CAPITAL PARTICIPATION CONTRIBUTION PERCENTAGES Lyondell LP 784,315,812 48.65 Lyondell GP 162,828,154 10.10 $ 947,143,966 58.75% -------------- ------ CITGO LP 648,866,453 40.25 CITGO GP 16,120,906 1.00 -------------- ------ $ 664,987,359 41.25% -------------- ------ $1,612,131,325 100.00% ============== ====== EXHIBIT B FORM OF QUALIFIED SUBORDINATED DEBT THIS NOTE IS NOT TRANSFERABLE OR ASSIGNABLE (EXCEPT AS PROVIDED UNDER "ASSIGNMENT") PROMISSORY NOTE $____________ (U.S.) ____________, ____ Houston, Texas FOR VALUE RECEIVED, and intending to be legally bound, LYONDELL-CITGO Refining LP, a Delaware limited partnership (the "Maker"), promises to pay to ________________ (the "Payee") at its offices located at ________, ___________, in lawful money of the United States of America and in immediately available funds, __________________________ AND NO/100 DOLLARS ($____________________), or so much thereof as may be advanced and outstanding hereunder prior to maturity, together with interest thereon at the annual rate specified below. INTEREST RATE The unpaid principal of this Note shall bear interest from the date of advance to maturity during any Interest Period (as defined herein), at a rate per annum that shall be equal to the lesser of (i) LIBOR (as defined herein) plus the Basis Points (as defined herein) or (ii) the Highest Lawful Rate (as defined herein). "Basis Points", for the purposes of this Note, shall mean the percentage points added to LIBOR for purposes of determining the rate of interest this Note shall bear for any Interest Period. "Interest Period", for the purposes of this Note, shall mean any period of 30 days, 180 days or 360 days beginning on the advancement date (in the case of the initial Interest Period) or on the last day of the next preceding Interest Period (in the case of any subsequent Interest Period). For the purposes of this Note, "LIBOR", with respect to any Interest Period, means the rate of interest (expressed as an annual rate), as it appears on the display screen of the Dow Jones Telerate Service or the Reuter Monitor Money Rates Service, at which deposits in United States dollars are offered to major banks in the London interbank market, at approximately __:__ _.m. (New York time) on the second London Banking Day before the first day of that Interest Period in an amount substantially equal to the amount of the unpaid principal scheduled to be outstanding throughout that Interest Period. Not later than two days before the commencement of each Interest Period (including the initial Interest Period), the Payee shall provide the Maker with three Basis Point options for the succeeding Interest Period, with one option being based on interest being reset at 30 days, another at 180 days and the third at 360 days. The Payee shall make a good faith effort to set the Basis Point options that correspond to the Interest Periods in accordance with current market conditions and as if the Maker has a long-term debt rating issued by Standard & Poor's Corporation and its successors of at least BBB+. On the day prior to the commencement of each Interest Period (including the initial Interest Period), the Maker shall, in its sole discretion, select the duration of each successive Interest Period (and thus the Basis Points that correspond to such Interest Period) and shall notify the Payee of its selection. If the Maker does not so notify the Payee, the duration of the succeeding Interest Period shall be 30 days (and the Basis Points shall be those that correspond to such 30 day Interest Period). All past due principal and, to the fullest extent permitted by applicable law, interest shall bear interest after the due date thereof at the rate per annum equal to the lesser of (i) the rate of interest payable under this Note on the date of default plus 3% or (ii) the Highest Lawful Rate. Interest shall be calculated on the basis of a 365-day year for the actual number of days elapsed. TERMS OF REPAYMENT Interest on the unpaid principal amount of this Note shall be due and payable quarterly, commencing on ________________, 19__, and continuing regularly and quarterly thereafter on the _____ day of each [March, June, September, December] until maturity. On ______________, 19__ [the 10th anniversary of Closing Date], the entire unpaid principal balance of this Note, together with all accrued unpaid interest, shall be due and payable in full. PREPAYMENT The Maker reserves the right to prepay this Note, in whole or in part, at any time, without penalty or notice. All prepayments hereunder, whether designated as payments of principal or interest, shall be applied first to accrued and unpaid interest, if any, and then to principal. TERMS OF ISSUANCE; ADJUSTMENT OF PRINCIPAL This Note is issued pursuant to the terms of the Maker's limited partnership agreement, as now or hereafter in effect ("Partnership Agreement"). Reference is hereby made to the Partnership Agreement for the terms and provisions thereof, to which this Note is in all respects subject, including, without limitation, provisions for the reduction of the principal amount to be repaid hereunder. -2- SUBORDINATION Repayment of this Note by the Maker is fully subordinated to the prior payment in full of any indebtedness of the Maker for borrowed money, whether now outstanding or subsequently incurred ("Senior Indebtedness"). In the event that the Maker shall default in the payment of any principal of (or premium, if any) or interest on any Senior Indebtedness when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, or in the event that any event of default with respect to Senior Indebtedness shall have occurred and be continuing, or would occur as a result of the payment referred to herein, then, upon written notices of such default or event of default to the Maker by the holders of Senior Indebtedness or any trustee therefor, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set- off or otherwise) shall be made or agreed to be made on account of the principal of or interest on this Note. In the event of any insolvency, bankruptcy, receivership, conservatorship, reorganization, readjustment of debt, marshalling of assets and liabilities or similar proceedings or any liquidation, dissolution or winding-up of or relating to the Maker as a whole, whether voluntary or involuntary, all obligations of the Maker to holders of Senior Indebtedness (including any interest thereon accruing after the commencement of any such proceedings) shall be entitled to be paid in full before any payment shall be made on any account of the principal of or interest on this Note. In the event of any such proceeding, after payment in full of all sums owing with respect to Senior Indebtedness, the Payee, together with the holders of any obligations of the Maker ranking on a parity with this Note, shall be entitled to be paid from the remaining assets of the Maker the amounts at the time due and owing on account of unpaid principal of and interest on this Note before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Maker ranking junior to this Note. DEFAULT If any payment provided herein, either of principal or interest, is not paid when due or within five days of delivery by Payee to Maker of written notice of such failure to pay, or in the event of the insolvency or bankruptcy of the Maker hereof or if any proceedings in bankruptcy or for the relief of debtors or readjustment of debts is filed by or against the Maker hereof, then the Payee may, at its option, declare this Note to be forthwith due and payable. WAIVER; UNCONDITIONAL OBLIGATION All signers and endorsers of this Note are to be regarded as principals as to their respective joint and several liability to any legal holder hereof, and the Maker and each of the guarantors, sureties and endorsers, to the fullest extent permitted by applicable law, hereby expressly and severally waive grace, and all notices, demands, presentments for payment, notice of nonpayment, -3- protest and notice of protest, notice of intent to accelerate, notice of acceleration of the indebtedness due hereunder, and diligence in collecting this Note or enforcing any security rights of the Payee under any document securing this Note, and agree (i) that the Payee may, at any time, and from time to time, extend the date of maturity of all or any part hereof, without notifying or consulting with the Maker or principal hereof, who shall remain fully obligated for the payment hereof; (ii) that it will not be necessary for the Payee, in order to enforce payment of this Note, to first institute or exhaust its remedies against the Maker or other party liable therefor or to enforce its rights against any security for this Note; and (iii) to any substitution, exchange or release of any security now or hereafter given for this Note, or the release of any party primarily or secondarily liable hereon, or any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Maker or any guarantors, sureties and endorses in respect of the obligations of any such party in respect of this Note. REIMBURSEMENT OF COSTS AND EXPENSES To the fullest extent permitted by applicable law, if this Note is collected by suit or legal proceedings or through bankruptcy proceedings, the Maker agrees to pay to the Payee the reasonable costs and reasonable attorney's fees incurred in the collection hereof. NO WAIVER; ELECTION OF REMEDIES No failure by the Payee to exercise, and no delay in exercising, any right or remedy hereunder or under any document, instruments or agreements executed in connection herewith shall constitute a waiver thereof on the part of the Payee; nor shall any single or partial exercise of any right or remedy under any documents, instruments or agreements executed in connection herewith preclude any other or further exercise thereof or the exercise of any other right or remedy. USURY SAVINGS CLAUSE It is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of the indebtedness evidenced by this Note whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Note (the "Applicable Usury Laws"). Accordingly, if any acceleration of the maturity of this Note or any payment by the Maker or any other person results in the Maker or such other person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this paragraph shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Note shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the Maker by the Payee; (iii) neither the Maker nor any other person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum -4- Amount; and (iv) the effective rate of interest on this Note shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Note immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to the Payee for the use, forbearance or detention of the indebtedness of the Maker to the Payee evidenced by this Note shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of the indebtedness evidenced by this Note so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term hereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest which may be lawfully contracted for, charged or received by the Payee in connection with the indebtedness evidenced by this Note under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged the Maker under all Applicable Usury Laws on the principal balance of this Note from time to time outstanding. ASSIGNMENT This Note may not be transferred or assigned by the Payee to any person; provided, however, that the Payee may transfer or assign this Note to a bona fide affiliate of the Payee (which affiliate shall also be referred to herein as "Payee"). GOVERNING LAW THIS NOTE SHALL BE SUBJECT TO AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES. JURISDICTION; AGENT FOR SERVICE OF PROCESS; WAIVER ANY JUDICIAL PROCEEDING BROUGHT AGAINST EITHER OF THE PARTIES TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK, NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT"), AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK BY ENTERING INTO AN AGREEMENT AS OF THE DATE OF THIS AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTY SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO -5- THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF THIS AGREEMENT. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE RESPECTIVE PARTIES TO THIS AGREEMENT. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE MAKER TO ASSERT A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1(ii)(a) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE MAKER TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE MAKER FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. -6- IN WITNESS WHEREOF, the undersigned has caused this Note to be executed at the place and on the date first above appearing. LYONDELL-CITGO REFINING LP By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ ATTEST By: -------------------------------- Secretary -7- EX-4.6(C) 4 AMENDMENT #3 TO THE LCR $450,000,000 CREDIT AGMT. EXHIBIT 4.6(c) CONSENT AND THIRD AMENDMENT TO CREDIT AGREEMENT dated as of January 27, 1997 LYONDELL-CITGO REFINING COMPANY LTD., a Texas limited liability company (the "Borrower"), the LENDERS listed on the signature pages hereof and any Lender hereafter becoming a party to the below-mentioned Agreement in accordance with the provisions thereof, ABN AMRO BANK N.V., THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS, THE FIRST NATIONAL BANK OF CHICAGO and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents, and THE BANK OF NEW YORK, as Agent and as Issuer, agree to this Consent and Third Amendment (this "Amendment"), dated as of January 27, 1997 (the "Amendment Date"), to the Credit Agreement, dated as of May 5, 1995, among the Borrower, the Lenders parties thereto, such Co-Agents and such Agent and Issuer, as previously amended (the "Agreement"; capitalized terms used but not otherwise defined herein having the meanings assigned to them in the Agreement, and references herein to Sections being references to Sections of the Agreement unless indicated otherwise), as follows: Section 1. Consent. Section 6.3 of the Regulations may be amended substantially as set forth in Exhibit A attached hereto by appropriate Owners Committee Action, subject to the Consent and Third Amendment to Revolving Credit Agreement of even date herewith, which amends the Revolving Credit Agreement, becoming effective in accordance with the terms thereof. Pursuant to Section 6.01(d)(iv)(A), the Borrower will furnish to the Agent a copy of that amendment to Section 6.3 of the Regulations within five Business Days after the effective date thereof. Section 2. Amendments. Subject to the terms and provisions herein set forth, effective as of the Amendment Date, the Agreement hereby is amended in the following respects: (a) Section 7.06(d)(i) of the Agreement is hereby amended in its entirety, as follows: (i) if such Indebtedness is owing to LRC pursuant to Section 6.4.(D) of the Regulations or to CRIC pursuant to Section 6.3 of the Regulations, the Borrower may make scheduled payments of interest thereon so long as no Event of Default exists or would exist after giving effect to any such payment; (b) Section 7.06(d)(ii) of the Agreement is hereby amended in its entirety, as follows: (ii) if such Indebtedness is Affiliate Indebtedness of the Borrower not owing to LRC pursuant to Section 6.4.(D) of the Regulations or to CRIC pursuant to Section 6.3 of the Regulations, the Borrower may make scheduled payments of interest thereon when due in accordance with its terms (including terms of subordination); and -1- (c) The definition of "Owner Refinery Expansion Project Investments" is hereby amended in its entirety, as follows: "Owner Refinery Expansion Project Investments" means the funds Section 6.3 of the Regulations requires CRIC and LRC to provide to the Borrower for the Refinery Expansion Project. Section 3. Fees and Expenses. The Borrower agrees to pay to the Agent for the account of counsel to the Agent all reasonable fees and expenses of such counsel in connection with this Amendment. Section 4. Effect of Consent and Amendments. Except for the consent and amendments evidenced hereby, the Agreement and other Loan Documents remain in full force and effect, and the Agreement, as amended hereby, and the other Loan Documents are hereby ratified and confirmed by the Borrower. The consent evidenced hereby is limited to the matter specifically addressed herein and is not effective for any other purpose. The execution and delivery of this Amendment shall not, except as specifically set forth herein, operate as an amendment or waiver of compliance by the Borrower with respect to any other provision or condition of the Agreement, as amended hereby, or any other Loan Document, or of any right, power or remedy of the Agent, any Co-Agent, any Lender or the Issuer under the Agreement, as amended hereby, or any other Loan Document, or prejudice any right or remedy that the Agent, any Co-Agent, any Lender or the Issuer may now have or may have in the future with respect to any Default, or otherwise, under or in connection with the Agreement, as amended hereby, or any other Loan Document. Section 5. Conditions to Effectiveness. The effectiveness of the consent and amendments made by this Amendment to the Agreement is subject to its execution by the Agent and the Agent's receipt of (a) counterparts of this Amendment signed by the Borrower and the Required Lenders and (b) each of the following, in form and substance reasonably satisfactory to the Agent: (i) a copy, certified by the Secretary of the Borrower under date of the Amendment Date, of the resolutions adopted by Owners Committee Action taken by the Owners Committee in accordance with the applicable requirements of the Regulations to authorize the execution and delivery of this Amendment; (ii) a certificate of a Responsible Officer, dated the Amendment Date, to the effect that on and as of the Amendment Date, after giving effect to this Amendment, (A) the representations and warranties set forth in Article V of the Agreement (other than in Section 5.06(a)(ii)) are true and correct in all material respects (unless made as of a specific date as set forth in that Article) and (B) no Default exists; and (iii) an opinion of the general counsel of the Borrower, dated the Amendment Date, to the effect that this Amendment has been duly authorized by Owners Committee Action and validly executed and delivered by the Borrower. Notwithstanding the foregoing, this Amendment will be nullified and of no further force or effect if the Owners Commitee fails to take Owners Committee Action amending Section 6.3 of the Regulations consistent with the consent granted hereby on or before February 7, 1997. -2- Section 6. Miscellaneous. This Amendment is governed by the terms and other provisions of Sections 1.02, 1.03, 10.05, 10.07, 10.10 (the first sentence thereof) and 10.12 as if this Amendment were the Agreement. -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers all as of the Amendment Date. LYONDELL-CITGO REFINING COMPANY LTD. By: /s/ D. Lyndon James -------------------------------------- Name: D. Lyndon James Title: Vice President and Controller THE BANK OF NEW YORK, As Agent, as Issuer and as a Lender By: /s/ Raymond J. Palmer ------------------------------------- Name: Raymond J. Palmer -------------------------------- Title: Vice President ------------------------------- OTHER LENDERS: By: ABN AMRO North America, Inc., as agent By: /s/ Robert Cunningham ------------------------------------- Name: Robert Cunningham -------------------------------- Title: Vice President & Director ------------------------------- By: /s/ H. Gene Shiels ------------------------------------- Name: H. Gene Shiels -------------------------------- Title: Vice President & Director ------------------------------- -4- THE BANK OF NOVA SCOTIA By: /s/ M.D. Smith ------------------------------------- Name: M.D. Smith -------------------------------- Title: Agent ------------------------------- BANK POLSKA KASA OPIEKI, S.A. By: /s/ William A. Shea ------------------------------------- Name: William A. Shea -------------------------------- Title: Vice President ------------------------------- Senior Lending Officer ------------------------------- BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: /s/ John L. Stacy ------------------------------------- Name: John L. Stacy -------------------------------- Title: Vice President ------------------------------- CAISSE NATIONALE DE CREDIT AGRICOLE By: /s/ David Bouhl ------------------------------------- Name: David Bouhl, F.V.P. -------------------------------- Title: Head of Corporate Banking Chicago ------------------------------- -5- COBANK, ACB By: /s/ James M. Papai ------------------------------------- Name: James M. Papai -------------------------------- Title: Vice President ------------------------------- CREDIT LYONNAIS CAYMAN ISLAND BRANCH By: /s/ Pascal Poupelle ------------------------------------- Name: Pascal Poupelle -------------------------------- Title: Authorized Signature ------------------------------- DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By: /s/ Lawrence H. Siegel ------------------------------------- Name: Lawrence H. Siegel -------------------------------- Title: Vice President ------------------------------- By: /s/ Karen A. Brinkman ------------------------------------- Name: Karen A. Brinkman -------------------------------- Title: Vice President ------------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Leo Loughead ------------------------------------- Name: Leo Loughead -------------------------------- Title: Corporate Banking Officer ------------------------------- -6- THE INDUSTRIAL BANK OF JAPAN, LTD. New York Branch By: /s/ Kazutoshi Kuwahara ------------------------------------- Name: Kazutoshi Kuwahara -------------------------------- Title: Executive Vice President, Houston Office ------------------------------- NATIONSBANK OF TEXAS, N.A. By: /s/ W. Keith Buchanan ------------------------------------- Name: W. Keith Buchanan -------------------------------- Title: V.P. ------------------------------- THE NIPPON CREDIT BANK, LTD. NEW YORK BRANCH By: /s/ Yoshihide Watanabe ------------------------------------- Name: Yoshihide Watanabe -------------------------------- Title: Vice President & Manager ------------------------------- PNC BANK, NATIONAL ASSOCIATION By: /s/ Thomas K. Grundman ------------------------------------- Name: Thomas K. Grundman -------------------------------- Title: Senior Vice President ------------------------------- -7- ROYAL BANK OF CANADA By: /s/ J.D. Frost ------------------------------------- Name: J.D. Frost -------------------------------- Title: Senior Manager ------------------------------- SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Elizabeth W. Hunter ------------------------------------- Name: Elizabeth W. Hunter -------------------------------- Title: Vice President ------------------------------- THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By: /s/ Takashi Mikumo ------------------------------------- Name: Takashi Mikumo -------------------------------- Title: Vice President ------------------------------- -8- WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Richard R. Newman ------------------------------------- Name: Richard R. Newman -------------------------------- Title: Vice President ------------------------------- By: /s/ Thomas Lee ------------------------------------- Name: Thomas Lee -------------------------------- Title: Associate ------------------------------- THE YASUDA TRUST AND BANKING COMPANY, LTD. NEW YORK BRANCH By: /s/ Makoto Tagawa ------------------------------------- Name: Makoto Tagawa -------------------------------- Title: Deputy General Manager ------------------------------- -9- EXHIBIT A AMENDMENT NO. 3 TO AMENDED AND RESTATED LIMITED LIABILITY COMPANY REGULATIONS OF LYONDELL-CITGO REFINING COMPANY LTD Amendment No. 3 (the "Amendment") to the Amended and Restated Limited Liability Company Regulations (the "Regulations") of LYONDELL-CITGO Refining Company Ltd. (the "Company") is effective, by unanimous written consent of the Representatives of the Owners Committee in accordance with Section 3.4.(E) of the Regulations, as of January __, 1997. All terms defined in the Regulations are used herein with the meanings provided in the Regulations. 1. Section 6.3. of the Regulations is hereby amended to read hereafter in its entirety as follows: 6.3. Additional Refinery Expansion Project Funding. In the event that additional funds are required under Section 10 for the Refinery Expansion Project, then in any such event such funds shall be provided equally by the Owners unless otherwise mutually agreed. Except as provided hereinbelow, the amounts to be funded by COwner shall be funded with capital contributions and the amounts to be funded by LOwner shall be funded by LOwner loans, as provided in Section 6.4.(D). The amounts in excess of the Cost Ceiling to be funded by COwner shall be funded (i) with capital contributions up to $25,000,000 and (ii) for any amounts required beyond $25,000,000, at COwner's option, either capital contributions or COwner loans (the terms of which shall be, subject to Section 13.11, as set forth on Exhibit 6.4.(D). 2. Except as set forth above, the Regulations remain unmodified, and as amended above, the Regulations remain in full force and effect. A-1 EX-4.6(D) 5 AMENDMENT #4 TO THE LCR $450,000,000 CREDIT AGMT. EXHIBIT 4.6(d) CONSENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT dated as of December 31, 1998 LYONDELL-CITGO REFINING COMPANY LTD., a Texas limited liability company (the "Borrower"), the LENDERS listed on the signature pages hereof and any Lender hereafter becoming a party to the below-mentioned Agreement in accordance with the provisions thereof, ABN AMRO BANK N.V., THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS, THE FIRST NATIONAL BANK OF CHICAGO and THE INDUSTRIAL BANK OF JAPAN, LTD., as Co-Agents, and THE BANK OF NEW YORK, as Agent and as Issuer, agree to this Consent and Fourth Amendment (this "Amendment"), dated as of December 31, 1998, to the Credit Agreement, dated as of May 5, 1995, among the Borrower, the Lenders parties thereto, such Co-Agents and such Agent and Issuer, as previously amended (the "Agreement"; capitalized terms used but not otherwise defined herein having the meanings assigned to them in the Agreement, and references herein to Sections being references to Sections of the Agreement unless indicated otherwise), as follows: Section 1. Consent. The Lenders hereby consent to the conversion of the Borrower from a Texas limited liability company to a Delaware limited partnership and the replacement of the Regulations with a Limited Partnership Agreement substantially in the form attached hereto as Exhibit A, subject to the Consent and Fourth Amendment to Revolving Credit Agreement of even date herewith, which amends the Revolving Credit Agreement, being signed and delivered by the "Required Lenders" thereunder. Pursuant to Section 6.01(d)(iv)(A), the Borrower will furnish to the Agent a copy of all the Borrower's Charter Documents, including a copy of the Limited Partnership Agreement of LYONDELL-CITGO Refining LP, within 5 Business Days after the Amendment Date (as such term is hereinafter defined). Section 2. Amendments. Subject to the terms and provisions herein set forth, effective as of the Amendment Date, the Agreement hereby is amended in the following respects: (a) The opening recital to the Agreement is hereby amended to reflect the new name and business structure of the Borrower as follows: LYONDELL-CITGO Refining LP, a Delaware limited partnership (b) Certain definitions set forth in Section 1.01 are changed or deleted in their entirety, and additional terms are defined, in Section 1.01, as follows: -1- (i) The last sentence of the definition of "Affiliate" is changed to read in its entirety as follows: For purposes of this Agreement, each of the Partners is an Affiliate of the Borrower. (ii) In the definition of "Applicable Margin" column "B" is deleted in its entirety and clause (b) is changed to read in its entirety as follows: (b) for any subsequent period from and including any Determination Date, beginning with the first Determination Date after the date of this Agreement, to the next Determination Date to occur, if the Applicable Debt Percentage Ratio on the first day of such period is within a range set forth in column A below the per annum percentage equal to the percentage set forth for that range in column C below: (iii) The definition of "Borrower" is changed to read in its entirety as follows: "Borrower" means LYONDELL-CITGO Refining LP, a Delaware limited partnership. (iv) The definition of "Change of Control" is changed to read in its entirety as follows: "Change of Control" means the failure of CITGO or Lyondell, individually or collectively, to own, legally and beneficially, directly or indirectly, at least 35% of the outstanding ownership and voting interest in the Borrower. (v) Clause (a) of the definition of "Charter Documents" is changed to read in its entirety as follows: (a) the Borrower, (i) its Certificate of Limited Partnership, (ii) the Partnership Agreement, (iii) its Certificate of Conversion, and (vi) The definition of "Custodian" is changed to read in its entirety as follows: -2- "Custodian" means any custodian, receiver, sequestrator, trustee or similar official (a) under Bankruptcy Law, (b) under any business corporation statute in the case or assets of any corporation or (c) under or pursuant to any limited liability company or limited partnership statute in the case of assets of any limited liability company or limited partnership. (vii) The definition of "Distribution Debt" is changed to read in its entirety as follows: "Distribution Debt" means obligations of the Borrower created under Section 7.3.(C) of the Partnership Agreement in respect of distributions required to be made pursuant to Section 7.4 of the Partnership Agreement. (viii) The definition of "Lyondell" is changed to read in its entirety as follows: "Lyondell" means Lyondell Chemical Company, a Delaware corporation formally known as Lyondell Petrochemical Company. (ix) The definition of "Owners" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partners" means Lyondell LP, CRIC, LRC and CITGO GP and any of their respective successors and assigns under the Partnership Agreement. All uses of the terms "Owners" and "Owner" elsewhere in the Agreement are changed to the terms "Partners" and "Partner", respectively. (x) "Owners Committee" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partnership Governance Committee" means the committee of representatives of the General Partners through which the General Partners manage the Borrower in accordance with Article 3 of the Partnership Agreement. All uses of the term "Owners Committee" elsewhere in the Agreement are changed to the term "Partnership Governance Committee". -3- (xi) "Owners Committee Action" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "Partnership Governance Committee Action" has the meaning specified in Section 3.06.(A) of the Partnership Agreement. All uses of the term "Owners Committee Action" elsewhere in the Agreement are changed to the term "Partnership Governance Committee Action". (xii) In clause (c) of the definition of "Permitted Investments" references to "Section 7.6" are changed to "Section 7.5". (xiii) Clause (a)(i) of the definition of "Qualified Subordinated Debt" is changed in its entirety to read as follows: (a)(i) to any Partner or any Affiliate of any Partner having, at the option of the Borrower, (A) subordination terms substantially identical to those set forth in Exhibit 1.01-A to the Agreement or (B) such other terms of subordination as are satisfactory to the Required Lenders or Exhibit 1.01-A referred to above is attached to this Amendment as Exhibit B. (xiv) "Regulations" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order : "Partnership Agreement" means the Limited Partnership Agreement of the Borrower dated as of December 31, 1998, as amended, modified and supplemented from time to time to the extent no Event of Default occurs under Section 8.01(i)(iii) as a result of such amendment, modification or supplement. All uses of the term "Regulations" elsewhere in the Agreement are changed to the term "Partnership Agreement". (xv) The last sentence of the definition of "Restricted Payment" is changed to read in its entirety as follows: -4- Without limiting the generality of the foregoing, a "Restricted Payment" by the Borrower or any Subsidiary includes any distribution made by the Borrower, or any Subsidiary for the account of the Borrower, to a Partner pursuant to the Partnership Agreement, including, without limitation, Sections 7.2, 7.4 and 7.5 thereof. (xvi) The definition of "TLLCA" is deleted in its entirety and the following definition is added to Section 1.01 in its proper alphabetical order: "DRULPA" means the Delaware Revised Uniform Limited Partnership Act. All uses of the term "TLLCA" elsewhere in the Agreement are changed to the term "DRULPA". (xvii) The definitions of "Approved Costs", "Initial Refinery Expansion Project Contribution", "In-Service Date", "Mechanical Completion", "Owner Refinery Expansion Project Investments", "Post-Completion Period", "Post-In Service Date", "Pre-Completion Period", "Recommended Design", "Refinery Expansion Budget", "Refinery Expansion Project" and "Specified Production Capability" are deleted in their entirety. (xviii) The following definitions are added to Section 1.01 in the proper alphabetical order: "CITGO GP" means CITGO Gulf Coast Refining, Inc., a Delaware corporation that is a Wholly-Owned Subsidiary of CITGO and a general partner in the Borrower. "General Partners" means LRC and CITGO GP. "Limited Partners" means Lyondell LP and CRIC. "Lyondell LP" means "Lyondell Refining LP, LLC, a Delaware limited liability company that is a Wholly- Owned Subsidiary of Lyondell and a limited partner in the Borrower. (c) Section 4.01(l) is deleted in its entirety. -5- (d) The first three sentences of Section 5.01 are changed to read in their entirety as follows: The Borrower (a) is a limited partnership duly organized, validly existing and in good standing under the DRULPA and (b) has all the requisite power and authority under the DRULPA and its Charter Documents to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted. The Borrower is, and each Subsidiary is, duly registered, qualified or licensed and in good standing as a foreign limited liability company, a foreign limited partnership or a foreign corporation, as the case may be, in good standing, when applicable, in each jurisdiction in which it owns or leases property or proposes to own or lease property or in which the carrying on of its business as now conducted or as proposed to be conducted so requires, except to the extent that failures to be so registered, qualified or licensed individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. (e) The first sentence of Section 5.13 is deleted in its entirety. (f) In Section 6.01(b)(ii) "Coopers & Lybrand" is changed to "PriceWaterhouseCoopers". (g) Section 6.01(c) is deleted in its entirety. (h) The first sentence of Section 7.01(a) is changed to read in its entirety as follows: The Borrower shall remain a limited partnership. The Borrower shall cause each Subsidiary that is a limited liability company or a limited partnership when it becomes a Subsidiary to maintain its existence as a limited liability company or limited partnership, as the case may be, under the appropriate act under which it was originally formed. (i) Section 7.06 is changed as follows: (i) The reference to Section 7.6 is deleted from the third line of Section 7.06. (ii) Clause (a) is changed in its entirety to read as follows: (a) so long as no Event of Default exists or would exist after giving effect thereto, the Borrower may make distributions to the Partners pursuant to and in accordance with Sections 7.2, 7.4 and 7.5 -6- of the Partnership Agreement, including, without limitation, distributions in satisfaction of Distribution Debt and advances pursuant to Section 7.5 of the Partnership Agreement; (iii) Clause (d) is changed in its entirety to read as follows: (d) with respect to Qualified Subordinated Debt that is not Permitted Replacement Debt: (i) if such Indebtedness is Affiliate Indebtedness of the Borrower, the Borrower may make scheduled payments of interest thereon when due in accordance with its terms (including terms of subordination); and (ii) if such Indebtedness is not Affiliate Indebtedness of the Borrower, the Borrower may make scheduled payments of principal, interest, fees and other charges to the holders of such Qualified Subordinated Debt when due in accordance with its terms (including terms of subordination); Notwithstanding the foregoing amendment to clause (d) of Section 7.06, so long as no Event of Default exists or would exist after giving effect thereto, the Borrower may make scheduled payments of interest on Affiliated Indebtedness incurred prior to the Amendment Date pursuant to Section 6.4 (D) or 6.3 of the Regulations. (iv) Clause (e) is deleted in its entirety. (j) In Section 7.10 the reference to "Sections 5.3 and 5.4" is changed to "Sections 5.6 and 5.7". (k) In Section 7.17(b) the term "Articles of Organization" is changed to "Certificate of Limited Partnership". (l) In Section 8.01(e)(i)(C) the words "limited liability company" are changed to "limited partnership". (m) Clause (iii) of Section 8.01(e) is changed in its entirety to read as follows: (iii) any Partner applies to any court of competent jurisdiction for the dissolution of the Borrower or an event of dissolution (within the meaning of Section 11 of the Partnership Agreement or the DRULPA) occurs and the business of the Borrower is not continued pursuant to the vote of the requisite -7- Partners within 90 days after such event of dissolution or the Borrower is not otherwise reconstituted in accordance with Section 11.10 of the Partnership Agreement within 90 days after such event of dissolution. (n) Section 8.01(i) is changed as follows: (i) Clause (iii) is changed in its entirety to read as follows: any of Sections 3.1.(B), 5.6, 5.7, 6.2, 6.5, 6.6, 6.7, 7.2, 7.3, 7.4 and 7.5 of the Partnership Agreement is amended, modified or supplemented (directly or indirectly by means of an amendment to the Borrower's Partnership Agreement or Certificate of Limited Partnership) (it being understood that if any term defined elsewhere in the Partnership Agreement or the Exhibits to the Partnership Agreement and used (directly or by inclusion in such a defined term) in any of such enumerated Sections is amended, modified or supplemented in a manner materially detrimental to the Lenders with respect to any of such Sections, such amendment, modification or supplement will be deemed an amendment or modification of or supplement to each of the enumerated Sections in which it is used) without the prior written consent of the Required Lenders (which consent shall not be unreasonably withheld) or (B) any other term or condition of the Partnership Agreement is amended, modified or supplemented (directly or indirectly as aforesaid) in such a manner that the effect thereof, together with the effect of all previous amendments and modifications of and supplements to such other term or conditions, could reasonably be expected to have a Material Adverse Effect; (ii) The references in clauses (iv) and (v) to "CRIC or LRC" are changed to "any Partner". (iii) The reference in clause (v) to "Section 12.2(A)(2)" is changed to Section "11.2". (o) Section 8.01(l) is changed to read in its entirety as follows: (i) Either LRC or Lyondell LP shall transfer its interest as a Partner of the Borrower in accordance with the terms of the Partnership Agreement to a Person other than an "Affiliate" (as defined in the Crude Supply Agreement) of Lyondell or (ii) neither CITGO nor any of its "Affiliates" (as defined in the Crude Supply Agreement) is a Partner of the Borrower. -8- Section 3. Other Loan Documents. If any term defined in Section 1.10 of the Agreement is used in any other Loan Document and that term is amended by this Amendment or is replaced by another term, that Loan Document is also amended hereby to reflect the amendment or replacement, as the case may be, of that term. Section 4. Fees and Expenses. The Borrower agrees to pay to the Agent for the account of counsel to the Agent all reasonable fees and expenses of such counsel in connection with this Amendment. Section 5. Effect of Consent and Amendments. Except for the consent and amendments evidenced hereby, the Agreement and other Loan Documents remain in full force and effect, and the Agreement and the other Loan Documents, each as amended hereby, are hereby ratified and confirmed by the Borrower. The consent evidenced hereby is limited to the matter specifically addressed herein and is not effective for any other purpose. The execution and delivery of this Amendment shall not, except as specifically set forth herein, operate as an amendment or waiver of compliance by the Borrower with respect to any other provision or condition of the Agreement or any other Loan Document, each as amended hereby, or of any right, power or remedy of the Agent, any Co-Agent, any Lender or the Issuer under the Agreement or any other Loan Document, each as amended hereby, or prejudice any right or remedy that the Agent, any Co-Agent, any Lender or the Issuer has, under or in connection with the Agreement, or any other Loan Document, each as amended hereby. Section 6. Conditions to Effectiveness. This Amendment will be effective December 31, 1998 (the "Amendment Date") subject to (a) its execution by the Agent and the Agent's receipt of (i) counterparts of this Amendment signed by the Borrower and the Required Lenders and (ii) each of the following, in form and substance reasonably satisfactory to the Agent: (A) a copy, certified by the Secretary of the Borrower dated the Amendment Date, of the resolutions adopted by Owners Committee Action taken by the Owners Committee in accordance with the applicable requirements of the Regulations to authorize the execution and delivery of this Amendment; (B) a certificate of a Responsible Officer, dated the Amendment Date, to the effect that on and as of the Amendment Date, after giving effect to this Amendment, (1) the representations and warranties set forth in Article V of the Agreement (other than in Section 5.06(a)(ii)) are true and correct in all material respects (unless made as of a specific date as set forth in that Article) and (2) no Default exists; and (C) an opinion of counsel to the Borrower, dated the Amendment Date, to the effect that this Amendment has been duly authorized by Owners Committee Action and validly executed and delivered by the Borrower and (b) the filing by the Borrower of the Certificate of Limited Partnership and the Certificate of Conversion with the Secretary of State of Delaware and the filing of the Articles of Conversion with the Secretary of State of Texas. -9- Section 7. Miscellaneous. This Amendment is governed by the terms and other provisions of Sections 1.02, 1.03, 10.05, 10.07, 10.10 (the first sentence thereof) and 10.12 as if this Amendment were the Agreement. -10- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers all as of the Amendment Date. LYONDELL-CITGO REFINING COMPANY LTD. a Texas limited liability company By: /s/ Jose L. Rodriguez ----------------------------------- Name: Jose L. Rodriguez Title: Vice President THE BANK OF NEW YORK, As Agent, as Issuer and as a Lender By: /s/ Raymond J. Palmer ----------------------------------- Name: Raymond J. Palmer Title: Vice President OTHER LENDERS: ABN AMRO BANK N.V. HOUSTON AGENCY By: ABN AMRO North America, Inc., as agent By: /s/ Michael W. Nepveux ----------------------------------- Name: Michael W. Nepveux Title: Group Vice President By: /s/ Rodney D. Kubicek ----------------------------------- Name: Rodney D. Kubicek Title: Vice President -11- THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ----------------------------------- Name: F.C.H. Ashby Title: Senior Manager, Loan Operations BANK POLSKA KASA OPIEKI, S.A. By: /s/ B.W. Henry ----------------------------------- Name: B.W. Henry Title: Vice President BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By:/s/ Warren Ross ----------------------------------- Name: Warren Ross Title: Assistant Vice President CREDIT AGRICOLE INDOSUEZ By: /s/ Katherine L. Abbott ----------------------------------- Name: Katherine L. Abbott Title: First Vice President By: /s/ David Bouhl ----------------------------------- Name: David Bouhl Title: First Vice President Head of Corporate Banking Chicago -12- COBANK, ACB By: /s/ Brian J. Klatt ----------------------------------- Name: Brian J. Klatt Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Phillipps Soustra ----------------------------------- Name: Phillipps Soustra Title: Senior Vice President DG BANK DEUTSCHE GENOSSENSCHAFTSBANK By: /s/ Leo Von Reissig ----------------------------------- Name: Leo Von Reissig Title: Vice President By: /s/ Karen A. Brinkman ----------------------------------- Name: Karen A. Brinkman Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Helen A. Carr ----------------------------------- Name: Helen A. Carr Title: Vice President -13- THE INDUSTRIAL BANK OF JAPAN, LTD. NEW YORK BRANCH By: /s/ Mike Oakes ----------------------------------- Name: Mike Oakes Title: Senior Vice President, Houston Office LEHMAN COMMERCIAL PAPER INC. & SYND. FUNDING TRUST By: /s/ Michele Swanson ----------------------------------- Name: Michele Swanson Title: Authorized Signatory NATIONSBANK, N.A. By: /s/ Mary Louise Allen ----------------------------------- Name: Mary Louise Allen Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ John R. Way ----------------------------------- Name: John R. Way Title: Assistant Vice President -14- ROYAL BANK OF CANADA By: /s/ J.D. Frost ----------------------------------- Name: J.D. Frost Title: Senior Manager SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Elizabeth W. Hunter ----------------------------------- Name: Elizabeth W. Hunter Title: Director THE TOYO TRUST & BANKING CO., LTD. NEW YORK BRANCH By: /s/ K. Yamauchi ----------------------------------- Name: K. Yamauchi Title: Vice President -15- WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK AND CAYMAN ISLANDS BRANCHES By: /s/ Duncan M. Robertson ----------------------------------- Name: Duncan M. Robertson Title: Vice President By: /s/ Felicia La Forgia ----------------------------------- Name: Felicia La Forgia Title: Vice President -16- EXHIBIT A Draft 12/19/98 CONFIDENTIAL LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP - -------------------------------------------------------------------------------- UNDER THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT - -------------------------------------------------------------------------------- DATED DECEMBER 31, 1998 TABLE OF CONTENTS 1. DEFINITIONS............................................................ 1 2. ORGANIZATION MATTERS................................................... 1 2.1. Name....................................................... 1 2.2. Conversion to Partnership and Partners..................... 1 2.3. Purpose and Business....................................... 2 2.4. Principal Office........................................... 3 2.5. Term....................................................... 3 2.6. Filings.................................................... 3 2.7. Power of Attorney.......................................... 3 3. MANAGEMENT............................................................. 4 3.1. Partnership Governance Committee.......................... 4 3.2. Partnership Governance Committee Composition.............. 4 3.3. Partnership Governance Committee: Duties, Powers and Authority................................................. 6 3.4. Partnership Governance Committee: Meetings............... 6 3.5. Compensation of Representatives........................... 8 3.6. Partnership Governance Committee Action................... 8 3.7. Partnership Governance Committee: Quorum and Voting...... 8 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary............................... 9 3.9. Majority Approval......................................... 11 3.10. Auxiliary Committees...................................... 11 4. OFFICERS AND EMPLOYEES................................................. 12 4.1. Partnership Officers...................................... 12 4.2. Selection; Term; Qualification............................ 12 4.3. Removal and Vacancies..................................... 12 4.4. Duties.................................................... 13 4.5. CEO....................................................... 14 4.6. Vice Presidents........................................... 14 4.7. Secretary................................................. 14 4.8. Assistant Officers........................................ 14 4.9. Other Officers............................................ 15 4.10. Salaries.................................................. 15 4.11. Bonds of Officers......................................... 15 4.12. Delegation................................................ 15 4.13. Loaned Employees.......................................... 15 4.14. Employee Transfers........................................ 16 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS............................... 16 5.1. Delegation................................................ 16 5.2. General Authority......................................... 16 (ii) 5.3. Nature of Partner Obligations.............................. 17 5.4. Limited Partners........................................... 17 5.5. Partner Not Agent of Other Partners........................ 17 5.6. Transactions with the Partnership.......................... 17 5.7. Control of Certain Claims and Certain Transactions......... 18 5.8. Partnership Interest....................................... 19 5.9. Access to and Copies of Records and Documents.............. 19 5.10. Partner Covenants.......................................... 19 5.11. Indemnification............................................ 20 6. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE..................... 22 6.1. Prior Capital Contributions................................ 22 6.2. Capital Contributions...................................... 22 6.3. Partner Loans.............................................. 23 6.4. Participation Percentages.................................. 23 6.5. Capital Expenditure Funding................................ 24 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage................................... 24 6.7. Return of Capital Contributions............................ 26 6.8. Administration and Investment of Funds..................... 26 7. ALLOCATIONS AND DISTRIBUTIONS.......................................... 26 7.1. Capital Accounts........................................... 26 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances................................ 27 7.3. Distributable Cash......................................... 28 7.4. Distributions.............................................. 29 7.5. Interim Loans.............................................. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes.......................................... 30 7.7. Tax Allocations............................................ 31 7.8. Transfers of Interest...................................... 33 8. BOOKS OF ACCOUNT AND TAX MATTERS....................................... 33 8.1. Books of Account........................................... 33 8.2. Tax Treatment.............................................. 34 8.3. Tax Returns................................................ 34 8.4. Tax Controversies.......................................... 35 8.5. Tax Rulings................................................ 36 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS.................... 36 9.1. Fiscal Year................................................ 36 9.2. Annual Budgets............................................. 36 9.3. Approval of Budgets........................................ 37 9.4. Funding of Budgets......................................... 37 (iii) 9.5. Implementation of Budgets and Discretionary Expenditures by CEO.................................................... 37 9.6. Five Year Plan............................................. 38 9.7. Commercial Loans........................................... 38 9.8. Insurance and Risk Management.............................. 38 10. TRANSFERS AND PLEDGES................................................. 38 10.1. Prohibition of Transfer.................................... 38 10.2. Transfers Prior to the Option Date......................... 39 10.3. Transfers After the Option Date............................ 39 10.4. Transferees................................................ 41 10.5. Pledge of Interest......................................... 41 11. REMEDIES AND DISSOLUTION.............................................. 42 11.1. Security for Performance.................................. 42 11.2. Default................................................... 43 11.3. Remedies for Default...................................... 45 11.4. Consequences of Default................................... 46 11.5. Purchase of Defaulting Partners' Interest................. 46 11.6. Liquidation............................................... 47 11.7. Closing of Purchase Rights................................ 47 11.8. Recision.................................................. 47 11.9. Dissolution............................................... 48 11.10. Reconstitution of Partnership............................. 48 11.11. Liquidation; Winding Up and Distributions upon Dissolution.............................................. 48 11.12. Enforcement............................................... 49 12. MISCELLANEOUS......................................................... 49 12.1. Confidentiality and Use of Information.................... 49 12.2. Auditors.................................................. 50 12.3. Indemnification of Officers............................... 50 12.4. Waivers, Modifications and Amendments..................... 52 12.5. Further Assurances........................................ 52 12.6. Successors and Assigns.................................... 52 12.7. Benefits of Agreement Restricted to the Parties........... 52 12.8. Expenses.................................................. 52 12.9. Currency Conversions...................................... 52 12.10. Payment Terms and Interest Calculations................... 52 12.11. Usury Savings Clause...................................... 53 12.12. Notices................................................... 53 12.13. Waiver of Immunity........................................ 54 12.14. Governing Law............................................. 55 12.15. Jurisdiction; Consent to Service of Process; Waiver....... 55 12.16. Entire Agreement.......................................... 56 12.17. Severability.............................................. 56 12.18. Construction.............................................. 56 12.19. Counterparts.............................................. 57 (iv) EXHIBITS. Exhibit 1 Definition of Terms in Agreement Exhibit 1A Related Agreements Exhibit 6.1(B) Working Capital Valuation Exhibit 6.4 Qualified Capital Contributions; Participation Percentages Exhibit 6.6(E) Form of Note for Portion of Option Date Payment (v) LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP (THE "PARTNERSHIP") 1. DEFINITIONS The definitions of the capitalized defined terms used in this Limited Partnership Agreement (the "Agreement"), including the Exhibits hereto other than Exhibit 1, and not elsewhere defined herein or therein, as well as cross- references to all capitalized defined terms, are set forth in Exhibit 1 to this Agreement. 2. ORGANIZATION MATTERS 2.1. Name. The name of the limited partnership is "LYONDELL-CITGO Refining LP" (the "Partnership"). The Partnership Business may be conducted under such name or any other name or names deemed advisable by the Partnership Governance Committee. The General Partners will comply or cause the Partnership to comply with all applicable laws and other requirements relating to fictitious or assumed names. 2.2. Conversion to Partnership and Partners. The Partnership converted from LYONDELL-CITGO Refining Company Ltd., a limited liability company formed under the laws of the State of Texas (the "Company"), effective as of the date of this Agreement (the "Conversion Date"), pursuant to Articles of Conversion filed pursuant to the Texas Limited Liability Company Act, and a Certificate of Conversion and a Certificate of Limited Partnership, each filed pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Act"). In connection with such conversion, the Amended and Restated Regulations of the Company dated July 1, 1993 (the "Closing Date"), as amended (the "Regulations"), were superseded by this Agreement. On the Conversion Date, the limited liability company interests in the Company were converted into partnership interests in the Partnership held by (i) Lyondell Refining LP, LLC, a Delaware limited liability company ("Lyondell LP"), a Wholly Owned Subsidiary of Lyondell Chemical Company (formerly known as Lyondell Petrochemical Company), a Delaware corporation ("LParent"), (ii) CITGO Refining Investment Company, an Oklahoma corporation ("CITGO LP"), a Wholly Owned Subsidiary of CITGO Petroleum Corporation, a Delaware corporation ("CParent"), (iii) Lyondell Refining Company, a Delaware corporation ("Lyondell GP"), a Wholly Owned Subsidiary of LParent, and (iv) CITGO Gulf Coast Refining, Inc., a Delaware corporation ("CITGO GP"), a Wholly Owned Subsidiary of CParent. Upon the Conversion Date, the percentage ownership of the Partnership was as follows: Lyondell GP 10.10% CITGO GP 1.00% Lyondell LP 48.65% CITGO LP 40.25% 1 Upon the Conversion Date, Lyondell GP's 10.10% interest consists of a 1.00% general partnership interest and a 9.10% limited partnership interest; provided, however, that for all other purposes under this Agreement, Lyondell GP shall be considered only a General Partner (as defined herein) and not a Limited Partner (as defined herein). Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. Without the need for the consent of any other Person, upon the execution of this Agreement: (i) each of Lyondell GP and CITGO GP is hereby admitted to the Partnership as a general partner of the Partnership (together, the "General Partners"), and (ii) each of Lyondell LP and CITGO LP is hereby admitted to the Partnership as a limited partner of the Partnership (together, the "Limited Partners"). Subject to the restrictions set forth in this Agreement, the Partnership shall have the power to exercise all the powers and privileges granted by this Agreement and by the Act, together with any powers incidental thereto, so far as such powers and privileges are necessary, appropriate, convenient or incidental for the conduct, promotion or attainment of the purposes of the Partnership. As of the Conversion Date, the Regulations (i) are superseded by this Agreement except to the extent of their ongoing relevance in governing matters relating to the Company and (ii) shall no longer have any force or effect except to the extent of their ongoing relevance in governing matters relating to the Company, provided, however, that all prior acts of Lyondell Refining Company, a Delaware corporation, and CITGO Refining Investment Company, an Oklahoma corporation, as members, or acts of or on behalf of the Company, under the Regulations shall remain in effect until modified or rescinded by Partnership Governance Committee Action. 2.3. Purpose and Business. The business of the Partnership (the "Partnership Business") shall be as follows: (i) to own and operate the Refinery Business, (ii) to carry out any Capital Enhancement Projects, (iii) to purchase, sell, exchange and refine crude oil and other feedstocks, (iv) to market the products produced by the Partnership, (v) to engage in the refining business generally, and (vi) to do all things necessary or incidental in connection with the foregoing as are permitted under the Act, all such business being managed, subject to then existing contractual obligations, with the objectives of (a) operating the Refinery, as modified by any Capital Enhancement Projects, and any other refinery or refining business owned or operated by the Partnership so as to maximize long-term Partnership value as measured by cash flow and earnings and (b) achieving the highest levels of efficiency, productivity and profitability consistent with good safety and environmental practices and performance. The Partnership shall be strictly limited to the Partnership Business, and the Partnership Business shall not be extended by implication or otherwise, except by express written amendment to this Agreement or by Unanimous Partnership Governance Committee Action pursuant to Section 3.8.(A). 2 2.4. Principal Office. The principal business office of the Partnership shall be at 12000 Lawndale, Houston, Texas 77017 or such other place as may be designated from time to time by the Partnership Governance Committee. The registered agent of the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. 2.5. Term. The Partnership shall continue until dissolved as described in Section 11.9. 2.6. Filings. The General Partners shall, or shall cause the Partnership to, execute, swear to, acknowledge, deliver, file or record in public offices and publish all such certificates, notices, statements or other instruments, and take all such other actions, as may be required by law for the formation, reformation, qualification, registration, operation or continuation of the Partnership in any jurisdiction, to maintain the limited liability of the Limited Partners, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law. Upon request of the General Partners, the Limited Partners shall execute all such certificates and other documents as may be necessary, in the sole judgment of the General Partners, in order for the General Partners to accomplish all such executions, swearings, acknowledgments, deliveries, filings, recordings in public offices, publishings and other acts. Each General Partner hereby agrees and covenants that it will execute any appropriate amendment to the Certificate of Limited Partnership of the Partnership pursuant to Section 17-204 of the Act to reflect any admission of a Substitute General Partner in accordance with this Agreement. 2.7. Power of Attorney. Each Limited Partner hereby irrevocably makes, constitutes and appoints its Affiliated General Partner and any successor thereto permitted as provided herein, with full power of substitution and resubstitution, as the true and lawful agent and attorney-in-fact of such Limited Partner, with full power and authority in the name, place and stead of such Limited Partner to execute, swear, acknowledge, deliver, file or record in public offices and publish: (i) all certificates and other instruments (including counterparts thereof) which such General Partner deems appropriate to reflect any amendment, change or modification of or supplement to this Agreement in accordance with and as permitted by the terms of this Agreement; (ii) all certificates and other instruments and all amendments thereto which such General Partner deems appropriate or necessary to form, qualify or continue the Partnership in any jurisdiction, to maintain the limited liability of such Limited Partner, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law; and (iii) all conveyances and other instruments or documents which such General Partner deems appropriate or necessary to reflect the transfers or assignments of interests in, to or under this Agreement, including the Interests, the dissolution, liquidation and termination of the Partnership, and the distribution of assets of the Partnership in connection therewith, in accordance with and as permitted by the terms of this Agreement. Each Limited Partner hereby agrees to execute and deliver to its Affiliated General Partner within five (5) Business Days after receipt of a written request therefor such other further statements of interest and holdings, designations, 3 powers of attorney and other instruments as such General Partner deems necessary. The power of attorney granted herein is hereby declared irrevocable and a power coupled with an interest, shall survive the bankruptcy, dissolution or termination of such Limited Partner and shall extend to and be binding upon such Limited Partner's successors and permitted assigns. Each Limited Partner hereby (i) agrees to be bound by any representations made by the agent and attorney-in-fact acting in good faith pursuant to such power of attorney; and (ii) waives any and all defenses which may be available to contest, negate, or disaffirm any action of the agent and attorney-in-fact taken in accordance with such power of attorney. 3. MANAGEMENT. 3.1. Partnership Governance Committee. (A) To facilitate the management of the Partnership by the General Partners, the General Partners hereby establish a committee (the "Partnership Governance Committee") to manage and control the business, property and affairs of the Partnership, including the determination and implementation of the Partnership's strategic direction. Except to the extent expressly set forth in this Agreement, each General Partner agrees to exercise its authority to manage the affairs of the Partnership only through Partnership Governance Committee Action. Further, each General Partner agrees not to exercise, or purport or attempt to exercise, its authority (notwithstanding that each General Partner may have such authority pursuant to the Act) (i) to act for or incur, create or assume any obligation, liability or responsibility on behalf of the Partnership or any other General Partner, or (ii) to execute any documents on behalf of, or otherwise bind, or purport or attempt to bind, the Partnership, or (iii) to otherwise transact any business in the Partnership's name, in each case except pursuant to Partnership Governance Committee Action or except as provided in Section 5.7. (B) Except as expressly set forth in this Agreement, no Person or Persons other than (i) the General Partners, acting through the Partnership Governance Committee, and (ii) the officers of the Partnership appointed in accordance with this Agreement and acting as agents or employees, as applicable, of the Partnership in conformity with this Agreement and any applicable Partnership Governance Committee Action, shall be authorized (a) to exercise the powers of the Partnership, (b) to manage the business, property and affairs of the Partnership or (c) to contract for, or incur on behalf of, the Partnership any debts, liabilities or other obligations. 3.2. Partnership Governance Committee Composition. (A) The Partnership Governance Committee shall consist of six representatives (each a "Representative") and each General Partner shall designate three Representatives. All the Representatives of both 4 General Partners shall together constitute the Partnership Governance Committee. Representatives shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., a Representative may also serve as a member of an Auxiliary Committee. (B) Each General Partner may designate one or more individuals (each an "Alternate") who (i) shall be authorized, in the event a Representative is absent from any meeting of the Partnership Governance Committee (and in the order of succession designated by the General Partner so designating the Alternates), to attend such meeting in the place of, and as substitute for, such Representative and (ii) shall be vested with all the powers to cast votes on behalf of such General Partner which the absent Representative could have exercised at such meeting. Alternates shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., an Alternate may also serve as a member of an Auxiliary Committee. The term "Representative," when used herein with reference to any Representative who is absent from a meeting of the Partnership Governance Committee, shall mean and refer to any Alternate attending such meeting in place of such absent Representative. (C) Each General Partner may, by written notice delivered to the other General Partner and the CEO, at any time or from time to time, remove or replace one or more of its Representatives or Auxiliary Committee members or change one or more of its Alternates. If a Representative, Auxiliary Committee member or Alternate dies, resigns, or becomes disabled or incapacitated, the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be, shall promptly designate a replacement. Each Representative, each Auxiliary Committee member and each Alternate shall serve until replaced by the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be. The Owners Committee Representatives, the Auxiliary Committee members and the Alternates representing Lyondell GP and CITGO LP, respectively (in their capacities as members of the Company), who are serving in such capacities in respect of the Company as of the Conversion Date will continue to hold such positions representing Lyondell GP and CITGO GP, respectively (in their capacities as General Partners), following the Conversion Date until removed or replaced in accordance with the terms of this Section 3.2.(C). (D) Copies of all written notices designating Representatives, Auxiliary Committee members and Alternates shall be delivered to the Secretary and shall be placed in the Partnership minute books, but the failure to deliver a copy of any such notice to the Secretary shall not affect the validity or effectiveness of such notice or the designation described therein. 5 (E) Each Representative, in his capacity as such, shall be the agent of the General Partner that designated such Representative. Accordingly, (i) each Representative, as such, shall act (or refrain from acting) with respect to the business, property and affairs of the Partnership solely in accordance with the wishes of the General Partner that designated such Representative and (ii) no Representative, as such, shall owe (or be deemed to owe) any duty (fiduciary or otherwise) to the Partnership, to any General Partner (other than the General Partner that designated such Representative), or to any Limited Partner; provided, however, that nothing in this Agreement is intended to or shall relieve or discharge any Representative or General Partner from liability to the Partnership or the Partners on account of any fraudulent or intentional misconduct of such Representative; and provided further, that each Representative shall not disclose any material information regarding the business of the Partnership and shall not use any such information, in either case, in any manner not related to the Partnership Business. 3.3. Partnership Governance Committee: Duties, Powers and Authority. (A) Except as otherwise provided by this Agreement, the Partnership Governance Committee (on behalf of the General Partners) shall have (i) the full authority of the General Partners to exercise all of the powers of the Partnership and (ii) full control (on behalf of the General Partners) over the business, property and affairs of the Partnership. (B) The Partnership Governance Committee shall adopt policies and procedures, not inconsistent with this Agreement (including Section 3.8.) or the Act, governing financial controls and legal compliance, including delegations of authority (and limitations thereon) to the officers of the Partnership as described in Section 4. Such policies and procedures may be revised or revoked (in a manner consistent with this Agreement and the Act) from time to time as determined by the Partnership Governance Committee. Without limiting the generality of the foregoing, the General Partners intend that the Partnership's policies and procedures will address such matters as conflicts of interest, political contributions, illegal or unethical business practices, antitrust compliance, anti-boycott compliance, Foreign Corrupt Practices Act compliance, employee practices, agreements with employees relating to inventions, contractual obligations, purchasing and advertising. To the extent any authority is not delegated to officers of the Partnership in this Agreement or in accordance with Partnership Governance Committee Action, it shall remain with the Partnership Governance Committee. 3.4. Partnership Governance Committee: Meetings. (A) Regular meetings of the Partnership Governance Committee shall be held at such times (no less frequently than quarterly) and at such places (within the States of Texas or Oklahoma or any other state designated 6 by the Partnership Governance Committee) as shall from time to time be determined by the Partnership Governance Committee. The first regular meeting of the Partnership Governance Committee during each fiscal year of the Partnership shall be deemed to be the "Annual Meeting." No notice need be given with respect to any regular meeting of the Partnership Governance Committee; however, the Secretary following receipt of comments thereto from each General Partner shall deliver, by messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), an agenda for such meeting to each of the Representatives at least five (5) Business Days prior to such meeting. At any regular meeting of the Partnership Governance Committee at which a quorum is present, any and all business of the Partnership may be transacted. (B) Special meetings of the Partnership Governance Committee may be called by any Representative or the CEO by delivering, via messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), written notice to each of the other Representatives, or, in the case of a meeting called by the CEO, each of the Representatives, at least three (3) Business Days before such meeting. Each notice of a special meeting shall specify, to a reasonable degree, the business to be transacted at, or the purpose of, such meeting; provided, however, that additional business may be transacted at any special meeting as agreed by all the Representatives present at such meeting. Special meetings of the Partnership Governance Committee shall be held at such times and at such places within the State of Texas or Oklahoma as may be stated in the notice of such meeting or in a duly executed waiver of notice thereof. Any Representative may waive notice of any special meeting (whether before or after the time of such meeting) but only if the waiver is in writing. Attendance of any Representative at any special meeting shall constitute a waiver of notice of such meeting by such Representative, unless the Representative states at the beginning of the meeting his objection to the transaction of business because the meeting was not lawfully called or convened. (C) One Representative shall serve as chair of each meeting (regular or special) of the Partnership Governance Committee. The right to designate the chair of meetings of the Partnership Governance Committee shall rotate between the respective General Partners every calendar year. The Representative who on the Conversion Date is serving as chair of the meetings shall continue to so serve until December 31, 1998, which is the next rotation date. (D) Following each meeting of the Partnership Governance Committee, the Secretary shall promptly draft and distribute minutes of such meeting to the Representatives for approval at the next meeting, and after such approval shall retain the minutes in the Partnership minute books. 7 (E) Representatives may participate in or hold regular or special meetings of the Partnership Governance Committee by means of a telephone conference or any comparable device or technology by which all individuals participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting. (F) Any action required or permitted to be taken at a meeting of the Partnership Governance Committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by at least two (2) Representatives (or their Alternates) of each General Partner, and such consent shall have the same force and effect as a duly conducted vote of the Partnership Governance Committee. A counterpart of each such consent to action shall be delivered to the Secretary for placement in the minute books of the Partnership, but the failure to deliver a counterpart of any such consent to action to the Secretary shall not affect the validity or effectiveness of such consent to action. 3.5. Compensation of Representatives. Representatives shall not receive from the Partnership any compensation for their service or any reimbursement for attendance at meetings of the Partnership Governance Committee. 3.6. Partnership Governance Committee Action. (A) The Partnership Governance Committee shall act exclusively by means of Partnership Governance Committee Action. As used in this Agreement, "Partnership Governance Committee Action" means any action which the Partnership Governance Committee is authorized and empowered to take in accordance with this Agreement and the Act and which is taken by the Partnership Governance Committee either (i) by votes cast at a meeting of the Partnership Governance Committee duly called and held in accordance with this Agreement or (ii) by a formal written consent complying with the requirements of Section 3.4.(F). In no event shall the Partnership Governance Committee be authorized to act other than by Partnership Governance Committee Action, and any action or purported action by the Partnership Governance Committee (including any authorization, consent, approval, waiver, decision or vote) not constituting a Partnership Governance Committee Action shall be null and void and of no force and effect. (B) Each Partnership Governance Committee Action shall be binding on the Partnership. 3.7. Partnership Governance Committee: Quorum and Voting. (A) The presence of one Representative (including any duly present Alternates) from each General Partner shall constitute a quorum of the Partnership Governance Committee for the transaction of business and 8 the taking of any Partnership Governance Committee Action at any meeting, except that no quorum of the Partnership Governance Committee will be deemed to exist (i) with respect to any regular meeting of the Partnership Governance Committee unless an agenda for such meeting is delivered in accordance with Section 3.4.(A) or (ii) with respect to any special meeting of the Partnership Governance Committee unless a notice of such meeting is given or waived in accordance with Section 3.4.(B). No Partnership Governance Committee Action may be taken at any meeting at which a quorum is not present. (B) All actions of the Partnership Governance Committee shall be determined by vote of the Representatives. Collectively, the Representatives shall have 100 votes. The Representatives of a General Partner shall have, in the aggregate, such number of votes as is equal to the product of 100 and the sum of the Participation Percentages of such General Partner and its Affiliated Limited Partner. The Representatives of each General Partner present at the meeting shall together and by joint action cast all of the votes held by all of the Representatives of such General Partner. 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary. Subject to Section 5.7., Section 11.4. and Section 11.11.(A), no Partnership Governance Committee Action will be deemed for any purpose to have been taken at any Partnership Governance Committee meeting unless and until 100 votes (constituting all the outstanding votes) are duly cast at such meeting in favor of such Partnership Governance Committee Action which would cause or permit the Partnership (or any Person acting in the name or on behalf of the Partnership), directly or indirectly, to take (or commit to take) any of the actions (each a "Unanimous Partnership Governance Committee Action") described below in this Section 3.8. (whether in a single transaction or series of related transactions): (A) to engage, participate or invest in any business outside the scope of the Partnership Business; (B) to make any acquisition or divestiture of any other entity or of any material line of business or business unit, or to merge or consolidate the Partnership with any other entity; (C) to amend or alter this Agreement or the Certificate of Limited Partnership; (D) to issue, redeem or acquire any Interests (or rights to acquire, or any securities convertible into, Interests) in the Partnership; (E) to borrow money or to engage in other financing activities, including the grant or use of credit and the pledge of any assets or the granting of a security interest in any asset; 9 (F) to file a petition in bankruptcy or seeking any reorganization, liquidation or similar relief on behalf of the Partnership; or to consent to the filing of a petition in bankruptcy against the Partnership; or to consent to the appointment of a receiver, custodian, liquidator or trustee for the Partnership or for all or any substantial portion of its property; (G) to approve the entry into of, amendments to, or termination or modification of, any material permit, government approval or other right; (H) to approve any Capital Enhancement Project or any expenditures pursuant to a Capital Budget pursuant to Section 9.2.(B), or to increase the amount below which a capital expenditure would not require Partnership Governance Committee Action regarding an "authority for commitment" as contemplated by Section 9.5.(A); (I) to make distributions other than those expressly provided for in Section 7.; (J) to enter into, amend, terminate or modify any product sales agreement or any raw materials purchase agreement pursuant to which the Partnership's commitments can reasonably be expected to exceed $50 million annually or that is for a term in excess of 18 months; (K) to enter into, amend, terminate or modify any agreement other than as described in Section 3.8.(J) pursuant to which the Partnership's commitments can reasonably be expected to exceed $25 million; (L) to commence or settle any litigation or arbitration proceeding by or on behalf of, or in the name or right of, the Partnership involving any claims or payments in excess of $1 million; (M) to make determinations with respect to the Partnership's commercial insurance program in accordance with Section 9.8.; (N) to designate or disband Auxiliary Committees and to establish the purposes thereof in all cases as described in Section 3.10.; (O) to delegate to any Auxiliary Committee powers or authority to take any action that would otherwise require unanimous approval by the Partnership Governance Committee, or to delegate to any officer powers or authority to take any action that would otherwise require approval by the Partnership Governance Committee; (P) to adopt or amend, as the Partnership Governance Committee, the policies and procedures referred to in Section 3.3.(B); (Q) to enter into, materially amend or terminate any employee benefit plan; 10 (R) to fix the salary and other compensation of Executive Officers in accordance with Section 4.10.; (S) to consent to the loan of an employee to the Partnership by a Partner as provided in Section 4.13. or to consent to the hiring of employees of the Partnership by a General Partner (or a General Partner's Affiliate) as anticipated by Section 4.14.; (T) to make any determinations concerning indemnification of officers pursuant to Section 1.23.; (U) to adopt or effect any change in the Partnership's accounting policies or practices in regards to Maintenance Capital; (V) to approve, amend or supplement either annual budget referred to in Section 9.2., including any Financing Plan thereunder; (W) to change at any time the Cash Balance Amount as provided for in Section 7.5; (X) to appoint the CEO or to designate an officer as an Executive Officer; or (Y) to change the Partnership's method of accounting for inventory as provided in Section 8.2.(C). 3.9. Majority Approval. Except as otherwise expressly provided in this Agreement, the approval of Representatives representing a majority of the total 100 votes will be sufficient for the Partnership Governance Committee to take any Partnership Governance Committee Action. 3.10. Auxiliary Committees. (A) The Partnership Governance Committee shall, by Partnership Governance Committee Action, designate an (i) Operating Committee, (ii) a Finance and Control Committee and (iii) a Compensation Committee. Each such committee shall be a standing committee. (B) From time to time, the Partnership Governance Committee may, by resolution adopted by the Partnership Governance Committee, designate one or more additional committees or disband any committee. (C) Each committee designated by the Partnership Governance Committee pursuant to this Section 3.10. (each an "Auxiliary Committee") shall (i) operate under the auspices of the Partnership Governance Committee for the purpose of assisting the Partnership Governance Committee in managing (on behalf of the General Partners) the 11 business and affairs of the Partnership and (ii) report to the Partnership Governance Committee. (D) Each Auxiliary Committee shall consist of two or more members and each General Partner shall have the right to appoint one member. The remaining members, if any, of each Auxiliary Committee shall be appointed by the Partnership Governance Committee. (E) Auxiliary Committee members may (but need not) be members of the Partnership Governance Committee or employees of the Partnership. No Auxiliary Committee member shall be compensated by the Partnership for service as a member of such Auxiliary Committee. (F) Each resolution adopted by the Partnership Governance Committee for the purpose of designating an Auxiliary Committee shall set forth (i) the size, name and rotation and designation of a chairman of such Auxiliary Committee and (ii) in such detail as the Partnership Governance Committee deems appropriate, the purposes, powers and authorities of such Auxiliary Committee; provided, however, that in no event shall any Auxiliary Committee have any powers or authority not permitted by this Agreement or the Act. 4. OFFICERS AND EMPLOYEES 4.1. Partnership Officers. The officers of the Partnership shall consist of a President and Chief Executive Officer ("CEO"), one or more Vice Presidents, a Secretary and such other officers and assistant officers and agents as may be deemed necessary or desirable by the Partnership Governance Committee. Officers shall be elected or appointed pursuant to Partnership Governance Committee Action (subject to Section 3.8.(X)) and shall have such authority and shall perform such duties in the management of the Partnership as may be provided in this Agreement or as may be determined by resolution of the Partnership Governance Committee (consistent with Section 3.8.(O)). In its discretion, the Partnership Governance Committee may leave unfilled any office or offices, except those of CEO and Secretary. Two or more offices may be held by the same person. The officers of the Company on the Conversion Date shall remain in office until such officers are changed by Partnership Governance Committee Action. 4.2. Selection; Term; Qualification. All officers shall be chosen by the Partnership Governance Committee annually at the Annual Meeting of the Partnership Governance Committee. Prior to each Annual Meeting the CEO shall present the Partnership Governance Committee with a list of nominees, but the Partnership Governance Committee shall not be bound to select officers solely from such list. The CEO and each other officer shall hold office until a successor has been chosen and qualified, or until the officer's death, resignation, or removal. 4.3. Removal and Vacancies. Any officer or agent may be removed by Partnership Governance Committee Action, with or without cause, whenever in the judgment of the Partnership Governance Committee the best interests of the Partnership 12 would be served thereby. Any vacancy in any office may be filled by the Partnership Governance Committee at any time. The CEO may, at any time, recommend to the Partnership Governance Committee the appointment or removal of any officer. 4.4. Duties. (A) Each officer or employee of the Partnership shall owe to the Partnership, but not to any Partner, all such duties (fiduciary or otherwise) as are imposed upon such an officer or employee of a Delaware corporation. Without limitation of the foregoing, each officer and employee in any dealings with a Partner shall have a duty to act in good faith and to deal fairly. (B) The policies and procedures of the Partnership adopted by the Partnership Governance Committee may set forth the powers and duties of the officers of the Partnership to the extent not set forth in or inconsistent with this Agreement. The officers of the Partnership shall have such powers and duties, except as modified by the Partnership Governance Committee, as generally pertain to their respective offices in the case of a Delaware corporation, as well as such powers and duties as from time to time may be conferred by the Partnership Governance Committee and by this Agreement. The CEO and the other officers and employees of the Partnership shall develop and implement management and other Partnership policies and procedures consistent with this Agreement and the general policies and procedures established by the Partnership Governance Committee. The duties of each officer shall include the obligation to notify the Partnership Governance Committee of any facts or circumstances of which such officer becomes aware that indicate a Partner or any of its Affiliates is or may be in breach of its obligations under this Agreement or under any of the Related Agreements. (C) Notwithstanding any other provision of this Agreement, no Partner, Representative, officer, employee or agent of the Partnership shall have the power or authority, without specific authorization from the Partnership Governance Committee, to undertake any of the following: (i) to do any act which contravenes (or otherwise is inconsistent with) this Agreement or which would make it impossible to carry on the Partnership Business; (ii) to confess a judgment against the Partnership; (iii) to possess Partnership property other than in the ordinary conduct of the Partnership Business; or 13 (iv) to take, or cause to be taken, any of the actions described in Section 3.8. 4.5. CEO. The CEO shall be the chief executive and chief operating officer of the Partnership, shall have general authority for direction of the business and affairs of the Partnership and general supervision over its several officers, subject, however, to the control of the Partnership Governance Committee and shall see that all orders and resolutions of the Partnership Governance Committee or, as applicable, any Auxiliary Committee(s) are carried into effect. The CEO shall be authorized to execute and deliver, in the name and on behalf of the Partnership, (i) contracts or other instruments authorized by Partnership Governance Committee Action and (ii) contracts or instruments in the usual and regular course of business, except in cases when the execution and delivery thereof shall be expressly delegated by the Partnership Governance Committee to some other officer or agent of the Partnership, and, in general, shall perform all duties incident to the office of CEO and such other duties as from time to time may be assigned to him or her by the Partnership Governance Committee (consistent with Section 3.8.(O)) or as are prescribed by this Agreement. Unless otherwise requested by a Representative, the CEO shall attend all meetings of the Partnership Governance Committee. 4.6. Vice Presidents. The Vice Presidents shall perform such duties as may, from time to time, be assigned to them by the Partnership Governance Committee (consistent with Section 3.8.(O)). In addition, at the request of the CEO, or in the absence or disability of the CEO, the Vice Presidents, or any of them, in the order of their election or in any other order determined by the Partnership Governance Committee, temporarily shall perform all (or if limited through the scope of the delegation, some of) the duties of the CEO, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the CEO. 4.7. Secretary. The Secretary shall keep the minutes of all meetings (and copies of written records of action taken without a meeting) of the Partnership Governance Committee and the Auxiliary Committees in minute books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of this Agreement. The Secretary shall be the custodian of the records. The Secretary shall have general charge of books and papers of the Partnership as the Partnership Governance Committee may direct and, in general, shall perform all duties and exercise all powers incident to the office of Secretary and such other duties and powers as the Partnership Governance Committee (consistent with Section 3.8.(O)) or the CEO from time to time may assign to or confer upon the Secretary. 4.8. Assistant Officers. Any assistant officer appointed by the Partnership Governance Committee shall have power to perform, and shall perform, all duties incumbent upon the officer he or she is assisting, subject to the general direction of such officer, and shall perform such other duties as this Agreement may require or the Partnership Governance Committee (consistent with Section 3.8.(O)) may prescribe. 14 4.9. Other Officers. The Partnership Governance Committee may appoint such other officers and delegate (consistent with Section 3.8.(O)) to them such duties as it sees fit. 4.10. Salaries. The salaries or other compensation of the Executive Officers of the Partnership shall be fixed from time to time by the Partnership Governance Committee. Except for previously granted stock options, stock appreciation rights, deferred compensation and other similar arrangements, the benefits of which might be realized subsequent to the officer becoming an employee of the Partnership, no officer or employee (other than an employee of a Partner or an Affiliate of a Partner) of the Partnership shall receive any fees or compensation from any Partner or any Affiliate of any Partner. Further, all fees and compensation of the officers and employees of the Partnership with respect to their services as such officers and employees shall be payable solely by the Partnership and no Partner or its Affiliates shall pay (or offer to pay) any such fees or compensation to any officer or employee, except to the extent permitted by Section 4.13. in the case of loaned employees or that the Partnership shall have agreed with a Partner or one of its Affiliates pursuant to a separate agreement that a portion of the compensation of such officer or employee shall be paid by such Partner or Affiliate. 4.11. Bonds of Officers. The Partnership Governance Committee may (but shall have no obligation to) secure the fidelity of any officer of the Partnership by bond or otherwise, on such terms and with such surety or sureties, conditions, penalties or securities as shall be deemed proper by the Partnership Governance Committee. 4.12. Delegation. The Partnership Governance Committee may delegate temporarily the powers and duties of any officer of the Partnership, in case of absence or for any other reason, to any other officer of the Partnership, and may authorize the delegation by any officer of the Partnership of any of such officer's powers and duties to any other officer or employee of the Partnership, subject to the general supervision of such officer. 4.13. Loaned Employees. If there is a vacancy in a job position above a certain grade (but below the level of the Executive Officers) in the Partnership (such grade to be established by the Partnership Governance Committee), either General Partner shall be entitled to nominate one of its (or its Affiliate's) own employees to fill such vacancy for a fixed period of up to three years, subject to renewal or extension by the CEO with the consent of each General Partner. The selection of a nominating General Partner's (or its Affiliate's) employee to fill a Partnership vacancy and all of the terms of such selection and the nominated employee's service shall be subject to the approval and control of the CEO; provided, however, that the selection and appointment of a nominating General Partner's (or its Affiliate's) employee to fill a vacancy shall be confirmed by Partnership Governance Committee Action. A nominating General Partner's (or its Affiliate's) employee who fills a Partnership vacancy shall in all respects perform as an employee of the Partnership and, as such, shall have the duties to the Partnership and the General Partners set forth or referred to in Section 4.4. (and each General Partner shall at all times cause all of its (or its Affiliate's) employees 15 on loan to the Partnership to perform in a manner consistent with the requirements of Section 4.4.); provided, however, that such employees shall continue to participate in the compensation and benefit plans of the nominating General Partner or its Affiliate. Each General Partner shall at any one time have no more than 10 of its (or its Affiliate's) employees filling Partnership vacancies. The Partnership shall compensate the nominating General Partner (or its Affiliate) for the services of the employee in accordance with terms determined by the nominating General Partner and the CEO prior to the employee's commencing work for the Partnership. 4.14. Employee Transfers. With the prior approval of the Partnership Governance Committee, which approval shall not be unreasonably withheld, either General Partner (or its Affiliates) shall be entitled to hire specific employees of the Partnership to fill vacancies with such General Partner or its Affiliate. With the prior approval of the relevant General Partner, which approval shall not be unreasonably withheld, the Partnership shall be entitled to hire specific employees of either General Partner (or its Affiliates) to fill vacancies with the Partnership. The granting of credit for past service with the prior employer for purposes of the hired employee's compensation and benefit plans shall be within the discretion of the General Partner who is hiring such employee, or in the case of the Partnership, shall be determined in accordance with an appropriate Partnership policy or procedure. 4.15. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the officers as set forth in this Agreement. No Person dealing with any officer with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with. No Person dealing with the Partnership shall be required to investigate or inquire as to the authority of the officers of the Partnership to execute contracts, agreements, deeds, mortgages, security agreements, promissory notes or other instruments or documents with respect to any business or property of the Partnership or to take actions on behalf of the Partnership. 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS 5.1. Delegation. The Partners acknowledge that the General Partners (acting through the Partnership Governance Committee) are permitted to delegate responsibility for day-to-day operations of the Partnership to officers and employees of the Partnership. 5.2. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the General Partners as set forth in this Agreement or as specifically authorized by Partnership Governance Committee Action. No Person dealing with either General Partner or such General Partner's agents or representatives with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of a General Partner or a General Partner's 16 representatives. Nothing in this Section 5.2. shall be deemed to be a waiver or release of any General Partner's obligations to the other Partners as set forth elsewhere in this Agreement. 5.3. Nature of Partner Obligations. Each Partner (directly or through its Affiliates) is a sophisticated party possessing extensive knowledge of and experience relating to, and is actively engaged in, significant businesses, in addition to the Refinery Business, has been represented by legal counsel, is capable of evaluating and has thoroughly considered the merits, risks and consequences of the provisions of this Section 5.3. and is agreeing to such provisions knowingly and advisedly. The liability of each of the General Partners (including any liability of its Affiliates or its and their respective officers, directors, agents and employees), either to the Partnership or to any other Partner, for any act or omission by such Partner in its capacity as a partner of the Partnership that is imposed by such Partner's status as a "general partner" or "limited partner" (as such terms are used in the Act) of a limited partnership is hereby eliminated, waived and limited to the fullest extent permitted by law. Nothing in this subsection shall relieve any Partner from liability for any breach of this Agreement and each General Partner shall at all times owe to the other General Partner a duty to act in good faith with respect to all matters involving the Partnership; provided, however, that the duty of a Nonconflicted General Partner in exercising the authority described in Section 5.7. shall be as set forth in Section 5.7.(B). 5.4. Limited Partners. (A) No Limited Partner shall take part in the management or control of the Partnership Business, transact any business in the Partnership's name or have the power to sign documents for or otherwise to bind the Partnership. (B) Each Limited Partner shall have the rights with respect to the Partnership's books and records as set forth in Section 5.9. 5.5. Partner Not Agent of Other Partners. Except as expressly provided in Section 2.7., Section 5.7., Section 10.5. or Section 11.1., nothing in this Agreement shall be deemed to constitute a Partner as an agent or legal representative of any other Partner. 5.6. Transactions with the Partnership. Subject to any required approval of the Nonconflicted General Partner in accordance with Section 5.7., each Partner and its Affiliates shall be entitled without restriction to enter into contracts and transactions with the Partnership. Upon receipt of any required approval by the Nonconflicted General Partner Representatives, all contracts and transactions between the Partnership and a Partner or its Affiliates shall be deemed to be entered into on an arm's-length basis and to be subject to ordinary contract and commercial law. 17 5.7. Control of Certain Claims and Certain Transactions. (A) With respect to each Conflict Circumstance, the Nonconflicted General Partner (through its Representatives) shall have the sole and exclusive power and right for and on behalf, and at the sole expense, of the Partnership (i) to control (including the right from time to time, in its discretion, to make delegations to officers or employees of the Partnership as to) all decisions, elections, notifications, actions, exercises or nonexercises and waivers of all rights, privileges and remedies provided to, or possessed by, the Partnership with respect to a Conflict Circumstance and (ii) in the event of any potential, threatened or asserted claim, dispute or action with respect to such Conflict Circumstance, to retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all such claims, disputes and actions. Accordingly, Partnership Governance Committee Action with respect to a Conflict Circumstance shall require only the approval of the Representatives of the Nonconflicted General Partner. As used herein, the term "Conflict Circumstance" shall mean any transaction, dealing or agreement between the Partnership, on the one hand, and a General Partner (the "Conflicted General Partner") or any of its Affiliates, on the other hand, including each of the Related Agreements to which the Partnership is a party and each transaction thereunder; provided, however, that a Conflict Circumstance shall cease to exist (i) upon the Conflicted General Partner ceasing to be a Partner or (ii) upon the third party with which the transaction, dealing or agreement exists, ceasing to be an Affiliate of a General Partner. As used herein the term "Nonconflicted General Partner" shall mean the General Partner that is not the Conflicted General Partner. Each General Partner shall, and shall cause its Affiliates to, take all such actions, execute all such documents and enter into all such agreements as may be necessary or appropriate to facilitate or further assure the accomplishment of this Section 5.7. (B) The Nonconflicted General Partner, in exercising its control, power and rights pursuant to this Section 5.7., shall act in good faith and in a manner it reasonably believes to be in the best interests of the Partnership. The Conflicted General Partner (or its Affiliate) that is the other party to such negotiation, contract, transaction, claim, dispute or action shall have the right to deal with the Partnership and with the Nonconflicted General Partner on an arm's-length basis and in its own best interests, but in any event in good faith. (C) This Section 5.7. shall not apply to: (i) any sale by the Partnership of a product or service that the Partnership also sells to unrelated third parties; provided, however, that any agreement for such sales by the Partnership to a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such sales shall be at market-based 18 prices that are not less than the prices the Partnership charges third parties for such products or services; or (ii) any purchase by the Partnership of a product or service that the Partnership also purchases from unrelated third parties; provided, however, that any agreement for such purchases by the Partnership from a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such purchases shall be at market-based prices that are not more than the prices the Partnership pays third parties for such products or services. 5.8. Partnership Interest. All assets contributed to or acquired by the Partnership shall be owned by the Partnership. Each Partner shall have a right only to its "partnership interest" (as such term is used in the Act) in the Partnership (an "Interest"), and to the maximum extent permitted by applicable law each Partner waives any right to partition of the Partnership's assets and agrees that it will not seek or be entitled to partition any such assets, whether by way of physical partition, judicial sale or otherwise, prior to the termination of the Partnership. 5.9. Access to and Copies of Records and Documents. (A) Except as otherwise required by law, any Partner may examine and copy, in person or by representative, at any reasonable time, all records and other information of the Partnership. (B) Upon request by any Partner, the Partnership shall provide without charge true copies of the Certificate of Limited Partnership, this Agreement, all amendments or restatements thereto, and copies of all federal, state, and local information or income tax returns for each of the Partnership's six most recent tax years. 5.10. Partner Covenants. Except to the extent it takes action pursuant to its rights as a Nondefaulting Partner under Section 11., each Partner covenants and agrees with the Partnership and with each other Partner as follows: (A) It shall not exercise, or purport or attempt to exercise, its authority (i) to withdraw, retire, resign, or assert that it has been expelled from the Partnership, or (ii) to dissolve or enter into any proceeding seeking any dissolution of such Partner, or (iii) to make any application for judicial dissolution of the Partnership; (B) It shall not do any act that would make it impossible or impracticable to carry on the Partnership Business; (C) It shall not, directly or indirectly through any entity, conduct or engage in any business other than the holding of its Interest and the doing of things necessary or incidental in connection therewith, the exercise of its authority as a Partner, the exercise of its authority pursuant to Section 5.7., and the performance and enforcement of its obligations and rights pursuant to this Agreement; and 19 (D) It shall not act or purport or attempt to act in a manner inconsistent with any Partnership Governance Committee Action or in a manner contrary to the agreements of the Partners set forth in this Agreement. 5.11. Indemnification. (A) (1) Indemnification by Partnership. The Partnership shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each Partner, its Affiliates and their respective officers, directors and employees from, against and in respect of any losses, claims, damages, costs and expenses (including costs of investigation, defense and attorneys' fees) and liabilities arising out of or in connection with the business or affairs of the Partnership (collectively, "Indemnified Losses"), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement. The Partnership shall periodically reimburse any Person entitled to indemnity under this Section 5.11.(A)(1) for its legal and other expenses incurred in connection with defending any claim (other than a claim by the Partnership or a Partner) with respect to such Indemnified Losses if such Person shall agree to reimburse promptly the Partnership for such amounts if it is finally judicially determined that such Person was not entitled to indemnity hereunder. (2) Partner's Right of Contribution. Each Affiliated Partner Group hereby agrees to indemnify, defend and hold harmless the other Affiliated Partner Group and their respective officers, directors and employees from and against the indemnifying Affiliated Partner Group's Participation Percentage of any Indemnified Losses (calculated at the time any such Indemnified Loss was incurred), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Affiliated Partner Group or any of their respective officers, directors or employees (acting in their capacity as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement; provided, however, that such indemnified Affiliated Partner Group, and their respective officers, directors and employees shall not be entitled to indemnity under this Section 5.11.(A)(2) unless (i) the indemnified Affiliated Partner Group shall make a written demand for indemnification from the Partnership in accordance with Section 5.11.(D) and the Partnership shall fail to satisfy 20 such demand in a manner reasonably satisfactory to the indemnified Affiliated Partner Group within sixty (60) days of such notice or (ii) the Partnership is Insolvent or otherwise unable to satisfy its obligations. (B) Indemnification by Partners. Each Partner hereby indemnifies and shall hold harmless the Partnership and the other Partners, their Affiliates and each director, officer and employee of such other Partners, its Affiliates and the Partnership without duplication from and against any and all Indemnified Losses arising out of any act of, or any purported assumption of any obligation or responsibility by, such indemnifying Partner or its Affiliates, or any of the directors, officers or employees of such indemnifying Partner or its Affiliates, in violation of this Agreement. (C) Indemnification Under Related Agreements. Notwithstanding any other provision of this Agreement, no Partner or its Affiliates or their respective officers, directors or employees shall be entitled to indemnification under this Section 5.11. in respect of any breach by such Partner or its Affiliates of the Related Agreements or in respect of any matter for which such Partner or its Affiliates is required to indemnify the Partnership under the applicable terms of any of the Related Agreements. (D) Procedures. Promptly after receipt by a person entitled to indemnification under Section 5.11.(A) or Section 5.11.(B) (an "Indemnified Party") of notice of any pending or threatened claim against it (an "Action"), such Indemnified Party shall give notice to the party to whom the Indemnified Party is entitled to look for indemnification (the "Indemnifying Party") of the commencement thereof, but the failure so to notify the Indemnifying Party shall not relieve it of any liability that it may have to any Indemnified Party except to the extent the Indemnifying Party demonstrates that it is prejudiced thereby. In case any Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B) shall be brought against an Indemnified Party and it shall give notice to the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section for any fees of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation. Notwithstanding an Indemnifying Party's election to assume the defense of any such Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B), the Indemnified Party shall have the right to employ separate counsel 21 and to participate in the defense of such Action, and the Indemnifying Party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Indemnifying Party to represent the Indemnified Party would present such counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any such Action include both the Indemnifying Party and the Indemnified Party, and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such Action on the Indemnified Party's behalf); (iii) the Indemnifying Party shall not have employed counsel satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the institution of such Action; or (iv) the Indemnifying Party shall authorize the Indemnified Party to employ separate counsel at the Indemnifying Party's expense. If an Indemnifying Party assumes the defense of such Action, (a) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party's consent (which shall not be unreasonably withheld) unless (I) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claims that may be made against the Indemnified Party and (II) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (b) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld). The indemnities contained in this Section 5.11. shall survive the termination and liquidation of the Partnership. 6.1. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE 6.1. Prior Capital Contributions. Upon formation of the Company, LParent on behalf of Lyondell GP and CParent on behalf of CITGO LP, contributed certain Assets to and the Company assumed certain liabilities and obligations, as provided for in the Regulations and the Contribution Agreement. From time to time prior to the Conversion Date, Lyondell GP and CITGO LP, as the two members of the Company, made Capital Contributions and loans to the Company as provided for in the Regulations. Capital Contributions and proceeds of loans made prior to the Conversion Date that were of a specific character or designated for a specific purpose shall retain such character or designation and be subject to the restrictions applicable thereto set forth in the Regulations. 6.2. Capital Contributions. Except as expressly provided in this Section 6., Section 7.1(D) or as determined by the Partnership Governance Committee, the Partners (i) shall have no obligation to contribute any capital to the Partnership for any purpose and (ii) shall not be entitled to contribute any capital to the Partnership. 22 6.3. Partner Loans. A Partner or its Affiliates may loan funds to the Partnership on such terms and conditions as may be approved by the Partnership Governance Committee pursuant to Section 3.8.(E), and, subject to other applicable law, have the same rights and obligations with respect thereto as a Person who is neither a Partner nor an Affiliate of a Partner. The existence of such a relationship and acting in such a capacity will not result in a Limited Partner being deemed to be participating in the control of the business of the Partnership or otherwise affect the limited liability of a Limited Partner. If a Partner or any Affiliate thereof is a lender, in exercising its rights as a lender, including making its decision whether to foreclose on property of the Partnership, such lender will have no duty to consider (i) its status as a Partner or an Affiliate of a Partner, (ii) the interests of the Partnership, or (iii) any duty it may have to any other Partner or the Partnership. 6.4. Participation Percentages. (A) Capital Contributions and Participation Percentages. (1) As of and following the Conversion Date, the Partners' respective Capital Contributions shall be equal to the respective amounts set forth in Exhibit 6.4 hereto plus any adjustments thereto made following the Conversion Date in accordance with the terms of this Section 6.4. (2) Each Partner's respective Capital Contributions shall be adjusted to reflect the Distributions (as hereinafter defined), if any, from any financing by the Partnership from the Conversion Date until the Option Date (the "Refinancing"). As used herein, the term "Distributions" shall mean the net proceeds of the Refinancing after the Partnership (i) repays any existing indebtedness of the Partnership (including any and all indebtedness owed to the Partners) which the Partners have agreed to repay but excluding any repayment of the Partnership's revolving credit facility which may be refinanced subsequent to the Refinancing and (ii) withholds any amount of such Refinancing proceeds which the Partnership Governance Committee determines should be maintained by the Partnership. (3) The Participation Percentage for each Partner shall equal the sum of the Capital Contributions of such Partner divided by the sum of the Capital Contributions of all Partners. (4) For the Calendar Quarter in which the Conversion occurs, the Participation Percentages through the end of that Calendar Quarter shall be as set forth on Exhibit 6.4. For each Calendar Quarter following such Calendar Quarter, the Participation Percentages of the Partners shall be calculated and in effect as of the first day of the Calendar Quarter based on all events 23 which occurred or are deemed to have occurred through the close of business on the last day of the preceding Calendar Quarter. Except as otherwise provided, the Participation Percentages in effect as of the first day of the Calendar Quarter shall be operative for the entire Calendar Quarter and shall not be changed for any reason until the first day of the next succeeding Calendar Quarter. (B) From the Option Date, if any: (i) each of the CITGO Partners' Capital Contributions shall include the amount of the Option Date Payment and shall be adjusted by the CITGO Partners Option Date Amount; and (ii) each of the Lyondell Partners' Capital Contributions shall be adjusted by their respective amounts of the Lyondell Partners Option Date Amount. 6.5. Capital Expenditure Funding. To the extent that the Partnership Governance Committee determines at any time after the Conversion Date that certain capital expenditures will be required and that funds are needed by the Partnership for such capital expenditures, the Partners shall fund the amount needed by the Partnership for such purposes. With respect to the funding required under this Section, the Partnership Governance Committee or the CEO shall inform the Partners as to the aggregate amount required to be funded, the intended use of the funds, and the due date or dates for each Partner's funding obligation. The amount required to be funded by each Partner on any given date shall equal the aggregate amount due on such date multiplied by the Partner's Participation Percentage on such date. The amounts to be funded by the Partners shall be funded with Capital Contributions, if such amounts are funded prorated in accordance with the Partners' Participation Percentage, or may be funded with loans (by unanimous consent of the Partnership Governance Committee). The amounts funded hereunder shall be used solely for the purposes set forth herein as determined by the Partnership Governance Committee. 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage. (A) CITGO Partners may elect (and in the event of such election shall give the Partnership and Lyondell Partners written notice of CITGO Partners' election), as provided herein, to increase CITGO Partners' Participation Percentage to any Participation Percentage up to fifty percent (50%), in the aggregate (the "Intended Percentage"). The notice shall set forth (i) the Intended Percentage, (ii) CITGO Partners' tentative calculation of the amount it must contribute in order to achieve the Intended Percentage and (iii) the date on which CITGO Partners will make the Capital Contribution to achieve the Intended Percentage, which date ("Option Date") shall be the last date of a calendar quarter, subsequent to January 1, 2000 and not later than September 30, 2000 and must not be less than thirty (30) days following the date of the notice. 24 (B) CITGO Partners shall be permitted to elect to increase their Participation Percentage only one time under the provisions of this Section 6.6. (C) On the Option Date, CITGO Partners shall contribute to the Partnership cash in an amount equal to 50% of the Option Date Payment and a promissory note equal to 50% of the Option Date Payment given to the Partnership in accordance with the terms of Section 6.6.(E). "Option Date Payment" shall mean the amount of a Capital Contribution by CITGO Partners such that on the day following the Option Date, and after giving effect to the CITGO Partners Option Date Amount and the Lyondell Partners Option Date Amount, CITGO Partners Participation Percentage would equal the Intended Percentage. (D) To the extent the exact amount of the Option Date Payment cannot be determined on the Option Date, CITGO Partners shall contribute on the Option Date an amount equal to CITGO Partners' good faith estimate of the amount of cash due hereunder. At least ten (10) Business Days prior to the Option Date, CITGO Partners shall furnish the Partnership and Lyondell Partners with a written determination of CITGO Partners' good faith estimate of the total amount due under Section 6.6.(C). Promptly after the Option Date, the Partnership Governance Committee shall determine such amounts as are necessary to be contributed by CITGO Partners under this Section 6.6. Within five (5) Business Days of the determination by the Partnership Governance Committee of the amount of cash required to be contributed by CITGO Partners under this Section 6.6., CITGO Partners shall contribute to the Partnership (i) the difference between such amount and the amount of cash contributed by CITGO Partners on the Option Date plus (ii) interest on the amount contributed under clause (i) at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date CITGO Partners makes the contribution required herein. If the amount of cash contributed by CITGO Partners on the Option Date is greater than the amount required to have been contributed by CITGO Partners, then within five (5) Business Days of such determination the Partnership shall pay such excess to CITGO Partners with interest at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date the Partnership makes the required payment. For purposes of determining Participation Percentages, only the final net amount of CITGO Partners' contribution under this Section 6.6. shall be taken into account and any interim contributions or distributions or interest payments shall be disregarded. (E) CITGO Partners shall deliver to the Partnership a promissory note equal to 50% of the Option Date Payment. The promissory note shall be delivered to the Partnership as soon as the exact amount of the Option Date Payment is determined pursuant to the procedures set forth in Section 6.6.(D). The promissory note shall be in the form set forth in Exhibit 6.6(E) to this Agreement. All scheduled payments of 25 principal under the promissory note shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2). The Partnership shall have the right to withhold from distributions payable to CITGO Partners any amounts then due under the promissory note and to apply such withheld amounts to the amounts payable by CITGO Partners to the Partnership under the promissory note. (F) The amount contributed by CITGO Partners under Section 6.6.(C) shall be applied, in order of priority, towards repayment of the Initial Construction Loan, the Additional Construction Loan and, to the extent funds are available, any loan from Lyondell Partners. Any such amounts used to repay Lyondell Partners Loans shall be applied in inverse order by reference to the date each such loan was extended, that is the first repayment shall be of the loans most recently made by Lyondell Partners. If no such loans are outstanding on the Option Date, the amount contributed by CITGO Partners under Section 6.6.(C) shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2) and all depreciation, cost recovery, or amortization deductions associated with said capital expenditures shall be allocated to CITGO Partners in accordance with Section 7.7.(B)(2). 6.7. Return of Capital Contributions. Except as otherwise expressly provided by this Agreement, no Partner shall be entitled to have all or any part of its Capital Contribution returned and no Partner shall be paid interest or any other return on any Capital Contribution or on the balance of its Capital Account, as that term is hereafter defined. 6.8. Administration and Investment of Funds. The administration and investment of Partnership funds shall be in accordance with the procedures and guidelines as shall be adopted by the Partnership Governance Committee. The Partnership may delegate to a third party (which may be a Partner or an Affiliate of one of the Partners) the responsibility for administering and investing Partnership funds pursuant to such guidelines. 7. ALLOCATIONS AND DISTRIBUTIONS 7.1. Capital Accounts. A separate capital account (each a "Capital Account") will be maintained for each Partner. Each Partner's Capital Account shall be credited and debited in accordance with the following provisions: (A) To each Partner's Capital Account there shall be credited such Partner's capital contributions (including the principal amount of any promissory note contributed by a CITGO Partner pursuant to Section 26 6.6.(E) but excluding the payment of principal on such promissory note), such Partner's distributive share of Profits as determined under Section 7.6(A), and the amount of any Partnership liabilities secured by any Partnership properties distributed to such Partner such that the Partner is considered to assume or take subject to such liabilities under Section 752 of the Code; (B) To each Partner's Capital Account there shall be debited the amount of cash and the fair market value of any Partnership properties distributed to such Partner pursuant to any provision of this Agreement and such Partner's distributive share of Losses as determined under Section 7.6(A); (C) On the day following an Option Date Payment, if any, the Capital Accounts of the Partners shall be adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to reflect the Asset Value on such date of (i) the Working Capital, (ii) the Assets and (iii) any capital assets acquired with funds contributed to the Partnership by a Partner so that the balances in such accounts are in the Proper Ratio on the date of such adjustment; provided, however, that for purposes of this Section 7.1.(C), the Asset Value of such assets shall be adjusted to the extent necessary to cause the balances in the Partners' Capital Accounts to be in the Proper Ratio; (D) Any payment made by LParent or the Lyondell Partners to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement shall be considered a Capital Contribution; provided, however, the increase to Lyondell Partners' Capital Accounts as a result of any such Capital Contribution shall occur simultaneously with the corresponding reduction in Lyondell Partners' Capital Accounts due to the reduction in Asset Value of the Assets because of the receipt by the Partnership of any such payment. Subject to the provisions of Section 7.4.(B), to the extent any such payment is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, such amount shall be deposited in the operating fund; and (E) Any adjustment of Capital Accounts under this Section 7.1. shall have no impact upon the determination of Participation Percentages. 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances. Profits and Losses shall be allocated as of the close of business on the last day of each Calendar Quarter. Distributions of Distributable Cash shall be made on a monthly basis and, regardless of the date a distribution is actually paid, distributions shall be treated as having been made on the last day of the calendar month immediately preceding the date of the distribution. Any other provisions of this Agreement to the contrary notwithstanding, however, the Partnership shall not make any distribution of Distributable Cash or any advances for so long as, under the terms of any agreement, contract or instrument evidencing, governing 27 or securing any indebtedness for borrowed money (including loans or capital leases), an event of default exists (or would exist upon the making of such distribution or advance) and such agreement, contract or instrument prohibits the making of such distribution or advance during the continuance of such event of default. 7.3. Distributable Cash. (A) Following the end of each calendar month the amount of Distributable Cash for the immediately preceding calendar month shall be determined, and, subject to the provisions set forth herein, such Distributable Cash amount shall be distributed promptly to the Partners as provided in Section 7.4. Notwithstanding any other provision of this Agreement, the Partnership shall not be required to make any distribution if such distribution is prohibited by Section 17-607 of the Act. (B) The amount of the Partnership's Distributable Cash for any calendar month shall be the Partnership's net cash provided or used by operating activities for such month (determined in accordance with GAAP) less (i) cash used in financing activities for repayment of long term debt (including but not limited to bonds and Partner Loans) and (ii) any capitalized interest. If the resulting Distributable Cash for any calendar month is negative, no distribution of cash will be made to any Partner until after such amount is reserved from future positive amounts. A Partner's Distributable Cash for any calendar month shall be equal to the product of (i) the Partnership's Distributable Cash for such month and (ii) such Partner's Participation Percentage for the Calendar Quarter in which such month occurs. (C) To the extent that the Partnership does not have sufficient cash or remaining capacity under its working capital credit facility to make the distributions as provided in Section 7.4., then, except as otherwise expressly provided, distributions shall be made in proportion to the amounts distributable to each Partner. Any amount which is required to be distributed pursuant to Section 7.3.(A), but which is not distributed for any reason, including, without limitation, by reason of insufficient cash or by virtue of the last sentence of Section 7.2., shall constitute a debt owed by the Partnership to the Partner entitled to such distribution, which debt is to be paid, with interest at the Agreed Rate (subject to Section 12.11.), as quickly as possible, but in all events before any other distributions with respect to subsequent months are paid to the Partners. 28 7.4. Distributions. (A) Except as otherwise expressly provided in this Agreement, each Partner's Distributable Cash for each calendar month shall be distributed to such Partner. If, following the end of a Calendar Quarter, it is determined that the sum of the monthly distributions to a Partner attributable to the Calendar Quarter exceeds the Partner's Distributable Cash for the Calendar Quarter, such Partner shall promptly contribute the excess to the Partnership together with interest thereon at the Agreed Rate (subject to Section 12.11.). Additional distributions shall be made in such amounts as the Partnership Governance Committee shall determine; provided, however, that such distributions shall be made in proportion to the Partners' Participation Percentages for the Calendar Quarter in which the distribution is made. (B) After the earlier of the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6., any cash attributable to a payment described in Section 7.1.(D) but which is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, shall be distributed to the Partners in proportion to their Participation Percentages. 7.5. Interim Loans. Distributions under this Section 7.5 may be made, as provided herein, to both Partners of an Affiliated Partner Group at any time. Each Affiliated Partner Group shall be entitled to receive distributions hereunder not more than once during each calendar quarter provided additional distributions can be made with the consent of the General Partner of the other Affiliated Partner Group, which consent shall be granted or withheld in the sole discretion of such other General Partner. Any time the Partnership's cash (excluding cash in the capital fund and any other cash held for a specific project) is greater than the Cash Balance Amount, by written notice to the Partnership both Partners of an Affiliated Partner Group shall be entitled to borrow from the Partnership and the Partnership shall promptly advance to such Partners, their respective Participation Percentages of the Partnership's cash in excess of the Cash Balance Amount. The "Cash Balance Amount" shall initially be $20 million, which amount may be changed from time to time by Unanimous Partnership Governance Committee Action. Any advance hereunder shall (subject to Section 12.11) bear interest at the same rate payable by the Partnership on its working capital facility or if the Partnership has no such facility then at the Agreed Rate. Any advance hereunder shall be repaid by withholding from all distributions otherwise payable to the Partner the amount of the advance plus interest thereon. Amounts withheld shall first be applied to interest and thereafter to principal. Each loan shall have a term of 90 days so that if the amount of the loan plus interest thereon is not repaid from distributions otherwise payable to the Partner within 90 days of the loan, then the Partner shall be required to repay the loan with other funds. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes. (A) General. For each Calendar Quarter or portion thereof, except as provided in this Section 7.6., each item comprising Profits or Losses shall be allocated to the Partners in proportion to their Participation Percentages. (B) Internal Revenue Code Section 704(b) Book Depreciation. For each Calendar Quarter or portion thereof, Depreciation shall be allocated to the Partners in proportion to their Participation Percentages. (C) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of Section 7., if there is a net decrease in "partnership minimum gain" (as defined in Treasury Regulation (S)1.704-2(b)(2)) during any Partnership taxable year, each Partner shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and, if necessary, subsequent years) equal to such Partner's share of the net decrease in minimum gain (determined in accordance with Treasury Regulation (S)1.704-2(g)). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "minimum gain chargeback" within the meaning of Treasury Regulation (S)1.704- 2(f). (D) Partner Minimum Gain Chargeback. Notwithstanding any provision of Section 7. except Section 7.6.(C), if there is a net decrease in "partner nonrecourse debt minimum gain" (as defined in Treasury Regulation (S)1.704-2(i)(2)) during any Partnership taxable year, each Partner with a share of that partnership nonrecourse debt minimum gain (determined under Treasury Regulation (S)1.704-2(i)(5)) as of the beginning of the year shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and if necessary, subsequent years) equal to that Partner's share of the net decrease in partner nonrecourse debt minimum gain. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "chargeback of Partner nonrecourse debt minimum gain" as prescribed by Treasury Regulation (S)1.704-2(i)(4). (E) Distribution of Property to Partners. In the event that any property (other than cash) is distributed by the Partnership to a Partner, gain or loss will be allocated to the Partners as if there were a taxable disposition of such property on the date of distribution. (F) Indemnity Payment Expenditure. All deductions attributable to the expenditure of all amounts described in Section 7.1.(D) shall be allocated to Lyondell LP. 30 (G) Qualified Income Offset. Notwithstanding any other provisions of Section 7.6. or 7.7., if a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation (S)1.704-1(b)(2)(ii)(d)(4), (5) or (6) which would create a deficit balance in its Capital Account (and reduced by the amount described in Treasury Regulation (S)1.704- 1(b)(2)(ii)(d) and the outstanding principal amount of any promissory note(s) contributed by the CITGO Partners to the Partnership pursuant to Section 6.6.(E) such Partner(s) will be allocated gross income and gain in an amount and manner sufficient to eliminate such deficit as quickly as possible. Allocations under this Section 7.6.(G) shall be comprised of a pro rata share of each item of Partnership income and gain for the period. This provision shall be applied so that it will constitute a "qualified income offset" within the meaning of Treasury Regulation (S)1.704-1(b)(2)(ii)(d). (H) Curative Allocations. If items of income, gain, loss or deduction are allocated under Section 7.6.(G), to the extent possible the allocation of any remaining items of income, gain, loss or deduction pursuant to Section 7.6. shall be allocated such that the net amount allocated to each Partner will be the same amount that would have been allocated if no items of income gain, loss or deduction had been allocated under Section 7.6.(G). (I) Gain or Loss in Liquidation. To the extent the Partners' Capital Account balances are not in the Proper Ratio, gain or loss on the sale or distribution of assets under Section 11.11. shall be allocated, to the maximum extent possible, so as to cause the Partners' Capital Account balances to be in the Proper Ratio. 7.7. Tax Allocations. (A) General. Except as otherwise provided in this Section 7.7., for income tax purposes, each item of income, gain, deduction, loss and credit shall be allocated among the Partners in the same manner as the corresponding items are otherwise allocated under Section 7.6. (B) 704(c) Depreciation Allocations. For income tax purposes, pursuant to Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, depreciation, cost recovery and amortization deductions shall be allocated to the Partners as set forth in this Section 7.7.(B) in order to take into account any difference between (x) the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C)) of the assets on the date the assets are contributed to the Partnership or on any date on which the Capital Accounts are adjusted pursuant to Section 7.1.(C) and (y) the Partnership's adjusted tax basis in the assets on each such date. The foregoing allocation shall be implemented through the following provisions: 31 (1) If a Partner contributes property to the Partnership, all depreciation, cost recovery or amortization deductions attributable to the property shall be allocated to the Partner contributing the property; (2) Subject to Section 7.7.(B)(6) below, if a Partner contributes cash (including the amounts described in Section 7.1.(D) and payments made with respect to the promissory note, if any, delivered under Section 6.6.(E)) which is used or deemed to be used to acquire property, all depreciation, cost recovery or amortization deductions attributable to the property acquired with the Partner's contribution shall be allocated to the Partner contributing the cash; (3) All depreciation, cost recovery or amortization deductions attributable to the expenditure of any funds paid by LParent or a Lyondell Partner to the Partnership pursuant to LParent's indemnity obligation to the Partnership under the Contribution Agreement or any Related Agreement shall be allocated to Lyondell Partner LP; (4) Subject to Section 7.7.(B)(5) and Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to property acquired with funds loaned to the Partnership by a third party shall be allocated to the Partners in accordance with their Participation Percentages; (5) Subject to Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to funds loaned to the Partnership by a Partner shall be allocated to the Partner loaning such funds; and (6) If a Partner contributes cash to the Partnership which is used to repay a debt of the Partnership, any remaining deductions for depreciation, cost recovery or amortization attributable to the property acquired with the borrowed funds shall be allocated to the Partner contributing the funds used to repay the debt. If the Partnership borrows funds from a third party which are used to repay a debt of the Partnership from a Partner, any remaining deductions from depreciation, cost recovery or amortization attributable to the property acquired with the funds so borrowed from a Partner shall be allocated to the Partners in accordance with their Participation Percentages. (C) 704(c) Gain or Loss Allocations. Solely for income tax purposes, gain or loss resulting from any sale, exchange or disposition of an asset shall be allocated among the Partners, in accordance with Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, so as to take into account any difference between (i) the Asset Value (as 32 adjusted pursuant to the proviso in Section 7.1.(C)) of such asset, adjusted to reflect Depreciation and (ii) the Partnership's adjusted tax basis in such asset. (D) Recapture. Solely for income tax purposes, in the event that a portion of the taxable gain recognized on the sale, exchange or other disposition of a Partnership asset is characterized as ordinary income under the recapture provisions of the Code, each Partner's distributive share of taxable gain from the sale of Partnership assets (to the extent possible) shall include a proportionate share of the recapture income equal to that Partner's share of prior depreciation deductions with respect to the assets that gave rise to the recapture income. (E) Imputed Interest Income. To the extent the Partnership recognizes imputed interest income in connection with any transaction involving a Partner, such interest income shall, for tax purposes, be allocated to the Partner who is a party to the transaction which generated the imputed interest income. (F) Production Expenditures. All "production expenditures", as defined for purposes of Section 263A of the Code, which result from any construction that is financed with funds contributed by a Partner, shall be allocated to the Partner which contributed such funds. (G) Payments. To the extent that the Partnership recognizes income or gain as a result of any payment (other than any interest payments) made by LParent or Lyondell LP to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement, such income or gain shall be allocated to Lyondell LP. 7.8. Transfers of Interest. Each item of income, gain, loss, deduction and credit allocable to any Interest transferred during a quarter shall be allocated between the transferor and transferee in proportion to the number of days during the quarter for which each was the owner of the Interest, without regard to the results of Partnership operations during the portions of the quarter the transferor and transferee owned the Interest. Distributions attributable to the ownership of a transferred Interest shall be paid to the Person who owned the Interest on the last day of the calendar month preceding the date of the distribution. 8. BOOKS OF ACCOUNT AND TAX MATTERS 8.1. Books of Account. The Partnership will maintain at its principal office proper books of account on the accrual method of accounting in accordance with GAAP. The Partnership shall also maintain proper books of account necessary to enable the Partnership to file all required tax returns and reports and to make all determinations required under this Agreement. Financial statements and a list of commitments for expenditures will be delivered to the Partners monthly. The books of account shall be reviewed quarterly and audited annually and certified 33 financial statements in accordance with GAAP will be delivered to each Partner. Further, the Partnership shall keep and maintain books and records at its principal office as required by applicable law. 8.2. Tax Treatment. (A) Amounts reimbursed pursuant to Section 6.6.(D) shall be treated as distributions described in Treasury Regulation 1.707-4(d). (B) The Partnership will be taxed as a partnership and no Partner will elect to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code or any similar provision of any applicable state law. (C) The Partnership will use the LIFO method of accounting for inventory unless the Partnership Governance Committee unanimously decides to use an alternative method. (D) The Partnership will file an election under Section 754 of the Code to cause the tax basis of Partnership property to be adjusted for federal income tax purposes as provided in Sections 734, 743 and 754 of the Code. 8.3. Tax Returns. (A) Lyondell GP shall be the Tax Matters Partner as defined in Section 6231(a)(7) of the Code ("TMP") for all taxable years of the Partnership through the earlier of the taxable year that includes the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6. Thereafter, at any time during the first sixty (60) days of a taxable year, CITGO GP, by written notice to Lyondell GP, may elect to be the TMP for the current taxable year and the next two succeeding taxable years; provided, however, that CITGO GP shall serve as TMP at no cost to the Partnership. Thereafter, the Partnership Governance Committee shall select one of the General Partners to serve as TMP for a specified term. If the Partnership Governance Committee cannot agree as to which General Partner shall be the TMP, the General Partners shall alternate serving as TMP for a term of three taxable years each, beginning with the General Partner that has not served as TMP for the most recent taxable year; provided, however, that any General Partner serving as TMP shall serve at no cost to the Partnership. In the event of any change of TMP, the General Partner serving as TMP for a given taxable year shall (unless such General Partner ceases to be a General Partner) continue as TMP with respect to all matters concerning that year. The TMP shall use its best efforts to cause the Partnership to file all tax returns and reports by the due date thereof (after taking into account any extensions thereof). At least twelve (12) weeks prior to the filing of the Partnership's U.S. 34 Partnership Return of Income, a draft of such return shall be circulated to the other Partners for their review. The TMP shall circulate to the other Partners a draft of any state income tax return promptly after it is available, and, in any event, at least four (4) weeks prior to the filing of any such return. Prior to the filing of any other federal, state or local tax return, the TMP shall cause a draft of such tax return to be circulated to the other Partners for their review promptly after it is available. (B) If a Partner objects to the tax treatment of an item on any income tax return, such Partner shall promptly inform the TMP of its objection and the grounds upon which the objection is based and shall in any event use its best efforts to inform the TMP of such objection and the grounds upon which such objection is based at least two (2) weeks (eight (8) weeks as to any U.S. Partnership Return of Income) prior to the date on which the tax return is required to be filed. However, if the TMP, after due consideration of a Partner's objection, is of the view that the tax treatment of the item in question on the return as originally submitted is reasonable, then the TMP shall cause the Partnership to file the return reporting the item in question in the manner originally submitted. A Partner may treat the item in question (but no other item) in a manner different from that reported on the return and file a statement of inconsistent treatment with its tax return. If any Partner files a statement of inconsistent treatment of a Partnership item, the Partner filing the statement shall use its best efforts to inform the Partnership at least two (2) weeks prior to filing the statement. 8.4. Tax Controversies. The Partners shall comply with the responsibilities outlined in this Section 8.4. and in Sections 6222 through 6231 and 6050K of the Code (including any Treasury Regulations promulgated thereunder) and in doing so shall incur no liability to any other Partner. The TMP shall not agree to any extension of the statute of limitations for making assessments of tax on behalf of any other Partner without first obtaining the written consent of such other Partner. The TMP shall not bind any other Partner to a settlement agreement in respect of taxes without obtaining the written consent of such other Partner. If a notice or assessment for any tax (Federal or State) is agreed to by the TMP, the TMP shall notify each other partner of such agreement within 30 days from the date such notice or assessment is agreed to. Any Partner who enters into a settlement agreement with the Secretary of the Treasury with respect to any "partnership items", as defined by Section 6231(a)(3) of the Code, shall notify each other Partner of such settlement agreement and its terms within ninety (90) days from the date of settlement. No Partner shall file a request pursuant to Section 6227 of the Code for an administrative adjustment of partnership items for any partnership taxable year without first notifying each other Partner. If each of the other Partners agrees with a requested adjustment, the TMP shall file the request for administrative adjustment on behalf of the Partnership. If any other Partner does not agree with the requested adjustment within thirty (30) days from such notice, or, if shorter, within the period required to timely file the request for administrative adjustment, then the requesting Partner may file a request for 35 administrative adjustment on its own behalf. The TMP shall not, in its capacity as TMP, file a petition under Code Sections 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, without the consent of each Partner. A Partner intending to file a petition under Section 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, will notify each of the other Partners of that intention and the nature of the contemplated proceeding. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this Section 8.4., that Partner will notify the other Partners of that intended action. The provisions of this Section 8.4. will survive the termination of the Partnership and the transfer of any Partner's Interest and will remain binding on the Partners for a period of time necessary to resolve any and all matters regarding the federal and, if applicable, state income taxation of the Partnership. The Partnership shall retain its records with respect to each fiscal year until the expiration of ninety (90) days after the period within which additional federal or state income tax may be assessed for such year. 8.5. Tax Rulings. No Person other than the TMP shall request an administrative ruling (or similar administrative procedures) from any taxing authority with respect to any tax issue relating to the Partnership or affecting the taxation of any other Partner. The TMP shall not request such a ruling (or similar procedure) without the consent of each General Partner. 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS 9.1. Fiscal Year. The fiscal year of the Partnership shall be the calendar year. 9.2. Annual Budgets. The Partnership will operate on the basis of the following annual budgets: (A) "Operating Budget," which shall be an estimate for a fiscal year of all of the Partnership's operating revenues and expenses, including expenses required to maintain, repair and restore to good and usable condition the Partnership's assets; and (B) "Capital Budget", which shall be an estimate for a fiscal year of the capital expenditures (i) necessary to maintain the Partnership's assets; (ii) necessary to achieve or maintain compliance with any Environmental Law; (iii) necessary to accomplish capital enhancement projects approved by the Partnership Governance Committee ("Capital Enhancement Projects"); and (iv) permitted, pursuant to Partnership Governance Committee Action, to be undertaken by the CEO in his or her discretion (the funding and overrun provisions with respect to such expenditures being set forth in such budget). 36 9.3. Approval of Budgets. (A) Each budget shall be approved by Partnership Governance Committee Action. Prior to November 15 of each fiscal year, the CEO shall prepare and submit to the Partnership Governance Committee for approval each of the budgets for the ensuing fiscal year (and, as appropriate, for subsequent periods), and on or before December 1, the Partnership Governance Committee shall by Partnership Governance Committee Action approve, with such modifications as it considers appropriate, each such budget. (B) If the Partnership Governance Committee does not approve the Operating Budget for the next fiscal year by December 1, pending approval of such budget by Partnership Governance Committee Action, the preceding fiscal year's Operating Budget shall, to the extent practicable, guide the operation of the Partnership. The failure to approve an Operating Budget shall in no way limit or restrain the authority of the Partnership or its officers to conduct operations. (C) The Partnership Governance Committee may, by Partnership Governance Committee Action, amend or supplement any previously approved budget at any time. 9.4. Funding of Budgets. The Operating Budget and all operating expenses regardless of whether included in any such budget shall be funded from operating cash flows. The Capital Budget shall be funded in accordance with Section 6.5. and no other additional Capital Contributions by the Partners shall be required with respect thereto unless otherwise agreed by the Partnership Governance Committee. 9.5. Implementation of Budgets and Discretionary Expenditures by CEO. (A) After the Capital Budget has been approved, the Partnership will be authorized, without further action by the Partnership Governance Committee, to make any expenditures specifically identified within such budget; provided, however, that all internal control policies and procedures, including those regarding the required authority for certain expenditures, shall have been followed and that with respect to each capital expenditure above an amount established from time to time by Unanimous Partnership Governance Committee Action there shall have been a Partnership Governance Committee Action approval of the "authority for commitment." (B) In any emergency, the CEO or the CEO's designee shall be authorized to take such actions and to make such expenditures as may be reasonably necessary to react to the emergency, regardless of whether such expenditures have been included in an approved budget. As soon as practical after the commencement of an emergency, the CEO or such designee shall notify the Representatives of the response that has been 37 made, or is committed or proposed to be made, with respect to the emergency. 9.6. Five Year Plan. The CEO of the Partnership shall prepare and furnish annually to the Partnership Governance Committee a projected five year business plan. 9.7. Commercial Loans. (A) Other Loans. The Partnership Governance Committee may by Partnership Governance Committee Action, authorize the CEO to cause the Partnership to borrow funds from third party lenders. No Partner shall be required, and the Partnership Governance Committee shall not be authorized to require any Partner, to guarantee or to provide other credit or financial support for any loan. (B) Partner Loans. The Partnership Governance Committee may by unanimous Partnership Governance Committee Action, subject to Section 3.8., authorize the CEO to cause the Partnership to borrow money from a Partner. 9.8. Insurance and Risk Management. The Company is either an additional named insured under LParent's insurance program or has its own policy of insurance under LParent's insurance program and as of the Conversion Date, LParent shall substitute the Partnership for the Company, making the Partnership an additional named insured, if applicable, under LParent's insurance program. As such coverages become subject to renewal or otherwise expire, the Partnership, by Partnership Governance Committee Action, shall approve any material change in the amount and scope of such coverages (including the extent to which the Partnership will continue to be included as an additional named insured under LParent's insurance program), or in the portion of the premium charges for such coverages allocable to the Partnership. 10. TRANSFERS AND PLEDGES 10.1. Prohibition of Transfer. Except pursuant to Section 11. or as described below in this Section 10., a Partner shall not, in any transaction or series of transactions, directly or indirectly, (i) sell, assign or otherwise in any manner dispose of all or any part of its Interest (such term, as used in this Section 10.1., including any Profits Interest), whether by act, deed, merger or otherwise (any of the foregoing, as referred to in this Section 10., a "transfer"), or (ii) mortgage, pledge or create a lien or security interest upon all or any part of its Interest; provided, however, that notwithstanding this Section 10.1., a General Partner may transfer all or any portion of its Interest to its Affiliated Limited Partner and a Limited Partner may transfer all or any portion of its Interest to its Affiliated General Partner. Any attempt by a Partner to transfer all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to transfer such Interest or any portion thereof. 38 10.2. Transfers Prior to the Option Date. No Partner shall transfer all or any part of its Interest or Profits Interest prior to the Option Date; provided, however, that in any event this restriction shall cease upon the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6. 10.3. Transfers After the Option Date. (A) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., an Affiliated Partner Group (the "transferring Partners") may transfer all (but not less than all) of its Profits Interests; provided, however, that it complies with all of the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F). (B) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., any Affiliated Partner Group may transfer all (but not less than all) of its Interests, collectively, but only if: (i) it obtains the prior written consent of the other Affiliated Partner Group (the "nontransferring Partners"), which consent may be withheld in the sole discretion of such other Affiliated Partner Group; (ii) it complies with the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F); and (iii) the purchaser or transferee of such Interests executes a written agreement to be bound by this Agreement (including the encumbrance of such Interest pursuant to this Agreement including Section 11.1.), to assume and satisfy all the liabilities and pay and perform all the obligations and duties of the transferring Partners and, subject to the consent of the nontransferring Partners as provided in Section 10.4., to become substituted Partners in place of the transferring Partners. (C) Any Affiliated Partner Group desiring to transfer its Interest (such term, as used in Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F), meaning either its Interest or its Profits Interest, as applicable) shall deliver a written notice to the other Affiliated Partner Group, which notice shall specify the Interests desired to be transferred and shall constitute an offer to sell all (but not less than all) of the transferring Partners' Interests (the "Purchase Offer"). The Purchase Offer shall specify the price (which shall be cash payable in same-day funds in Houston, Texas) and other terms (e.g., provisions for the elimination of loans to or from the Partners, the release of any guarantees, the procedure for closing the books on the effective date of the sale and the treatment of Partnership distributions payable to the transferring Partners) upon which the transferring Partners are willing to sell all (but not less than all) of their Interests to the nontransferring Partners. The nontransferring Partners shall have sixty (60) days from the date of receipt of the Purchase Offer within which to accept the Purchase Offer and shall have the right to assign their rights with respect to the 39 Purchase Offer in whole or in part to an Affiliate or to any other person or entity. If the nontransferring Partners or their assignee accept the Purchase Offer, the closing shall take place within sixty (60) days of such acceptance. (D) If the nontransferring Partners do not accept a Purchase Offer pursuant to Section 10.3.(C), the transferring Partners shall, as provided herein, have one hundred eighty (180) days after expiration of the first 60-day period described in Section 10.3.(C) (or after the earlier express written rejection of the Purchase Offer by the nontransferring Partners) within which, subject to the provisions of this Section 10.3.(D), Section 10.1., Section 10.3.(B) and Section 10.4., the transferring Partners may attempt to sell all of their Interests, subject to Section 10.3.(F), to a single (and only a single) third party at a price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer. If during this 180-day period, the transferring Partners identify a proposed purchaser (i) that is a single entity that is organized under the laws of the United States, (ii) that is not insolvent prior to or immediately upon consummation of the proposed transfer, and (iii) that makes a bona fide offer (not subject to due diligence, financing or any other similar contingencies) to purchase the transferring Partners' Interests at a cash price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer, the transferring Partners shall notify the nontransferring Partners of the identity of the proposed purchaser and the terms of the proposed sale (the "Second Notice"). The nontransferring Partners or their assignee then shall have thirty (30) days from the Second Notice within which to elect to purchase the transferring Partner's Interests at the cash price and on the terms and conditions contained in the Second Notice. If the nontransferring Partners elect to make the purchase, the closing shall take place within sixty (60) days of its election to purchase. (E) If the nontransferring Partners or their assignee do not elect to purchase the transferring Partners' Interest after receiving the Second Notice, then subject to Section 10.1., Section 10.3.(B) and Section 10.4. the transferring Partners may then sell such Interest to the third party at the cash price and on the terms and conditions specified in the Second Notice; provided, however, that if the transferring Partners do not dispose of their Interest at the cash price and on the terms and conditions specified in the Second Notice, and in all events within sixty (60) days after expiration of the 30-day period described in the penultimate sentence of Section 10.3.(D) (or after the earlier express written rejection by the nontransferring Partners after receiving the Second Notice), the transferring Partners' Interest shall not be transferred and shall again be subject to the restrictions contained in Section 10.3. 40 (F) Inclusion of General or Limited Partner Interest. No Limited Partner may transfer its Interest to any Person unless the Interest of its Affiliated General Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. No General Partner may transfer its Interest to any Person unless the Interest of its Affiliated Limited Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. 10.4. Transferees. The purchaser or transferee of a Partner's Interest pursuant to Section 10.3. or Section 10.5. shall not become a Partner without the consent of the nontransferring Partners as provided for in clause (i) of Section 10.3.(B) A transferee who acquires an Interest pursuant to Section 10.3. or Section 10.5. but who does not receive such consent shall be entitled only to allocations of income and loss and distributions with respect to such Interest in accordance with this Agreement and shall not be or become entitled to exercise the rights or powers of a Partner. However, the nontransferring Partners may, in the exercise of their sole discretion, at any time thereafter consent to such purchaser or transferee becoming a Partner or withhold such consent. A purchaser or transferee as to whom the nontransferring Partners at any time grants such consent shall be deemed to become a substituted Partner in place of the transferring Partners when and as provided in such consent. 10.5. Pledge of Interest. (A) Except as contemplated by Section 10.5.(B) and Section 11.1., no Partner shall mortgage, pledge, encumber or create or suffer to exist any pledge, lien or encumbrance upon, or security interest in ("pledge"), all or any part of its Interest (such term, as used in this Section 10.5., including any Profits Interest). Any attempt by a Partner to pledge all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to pledge such Interest. (B) Any Affiliated Partner Group (the "pledging Partners") may pledge its Interest; provided, however, that (i) any such pledge, shall expressly be subject and fully subordinated, on terms reasonably acceptable to the other Affiliated Partner Group (the "nonpledging Partners"), to the encumbrance of the pledging Partners' Interests pursuant to this Agreement including Section 11.1. and (ii) no such pledge shall give any right to the pledgee as a Partner (as such term is used in the Act) with respect to the Partnership or the nonpledging Partners or create any duty to the pledgee on the part of the Partnership or the nonpledging Partners other than the payment to the extent pledged of distributions from the Partnership under Section 7. (C) Prior to any pledge under Section 10.5.(B), (i) the pledging Partners shall submit to the nonpledging Partners all documentation relating to the proposed pledge for the approval of the nonpledging Partners and shall not effect such pledge without the prior written approval of the nonpledging Partners (such approval not to be unreasonably withheld); 41 (ii) the proposed pledgee shall deliver a written agreement of such pledgee (which shall be binding upon any of its successors or assigns) to the Partnership and the nonpledging Partners, providing that (a) the right to foreclose upon the pledging Partners' Interests pursuant to the pledge shall be conditioned upon delivery to the nonpledging Partners of an opinion of counsel satisfactory to the nonpledging Partners that such foreclosure would not cause the Partnership to be treated as an association taxable as a corporation and that any "termination" of the Partnership within the meaning of Section 708 of the Code caused by such foreclosure would not create any adverse consequences for the nonpledging Partners and (b) the pledgee's right to receive any distributions that are pledged is subject to being reduced pursuant to the provisions of this Agreement; and (iii) the proposed pledgee and the pledging Partners shall deliver to the nonpledging Partners a written agreement, in form reasonably satisfactory to the nonpledging Partners, providing that (a) the pledgee shall notify the nonpledging Partners in writing at least one hundred twenty (120) days prior to initiation of foreclosure proceedings, (b) the nonpledging Partners shall have the right during such 120-day period to purchase the debt owed by the pledging Partners to the pledgee, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, for an amount equal to the outstanding principal amount of such debt plus the interest due and payable on and any cost of collection associated with such debt, (c) immediately upon the purchase of the debt, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, by the nonpledging Partners pursuant to clause (iii)(b) of this Section 10.5.(C), the pledgee shall (1) deliver to the nonpledging Partners a written acknowledgment that its debt has been satisfied in full and (2) take any action necessary to transfer to the nonpledging Partners possession of a perfected first priority security interest in the pledging Partners' Interest and (d) the pledging Partners appoint the nonpledging Partners as its attorney-in-fact authorized to take on the pledging Partners' behalf all actions required to effect any purchase of the pledgee's debt and any transfer of the pledging Partners' Interest pursuant to this clause (iii) of this Section 10.5.(C). 11. REMEDIES AND DISSOLUTION 11.1. Security for Performance. Each Affiliated Partner Group (the "Pledgor Group") shall and hereby does pledge and grant to the other Affiliated Partner Group (the "Pledgee Group") a first priority lien on and security interest in the Pledgor Group's Interests in the Partnership as security for the satisfaction of all the Pledgor Group's liabilities and the payment and performance of all the Pledgor Group's obligations and duties under this Agreement. At any time and from time to time, the Pledgor Group also will promptly execute and deliver all such further agreements, instruments and documents and take all such further action that may be necessary or desirable or that the Pledgee Group may reasonably request in order (i) to perfect and protect the lien and security interest created hereby, including the execution and filing of appropriate financing statements and 42 directing the Partnership to register, on the Partnership's books and records, the pledge of the Pledgor Group's Interest to the Pledgee Group; (ii) to enable the Pledgee Group to exercise and enforce its rights and remedies under this Agreement in respect to the Pledgor Group's Interest; or (iii) otherwise to effect the purposes of this Section 11.1. The Pledgor Group hereby authorizes the Pledgee Group to file, without the signature of such Pledgor Group granting the security interest provided for herein, where permitted by applicable law, at any time the Pledgee Group acting as a secured party deems necessary or appropriate to protect its lien and security interest under this Agreement, one or more financing or continuation statements, and amendments thereto, relating to such lien and security interest. If the Pledgor Group fails to perform any agreement or obligation contained in this Section 11.1., the Pledgee Group may perform, or cause performance of, such agreement or obligation, and the expenses of the Pledgee Group so performing incurred in connection therewith shall be payable to the Pledgee Group, on demand, by the Pledgor Group that has failed to so perform. The Pledgee Group shall not, without the prior written consent of the Pledgor Group, sell, assign, transfer, mortgage, pledge or otherwise encumber any of its rights in the Pledgor Group's Interests as pledged to the Pledgee Group under this Section 11.1. except with regard to a failure by the Pledgor Group to satisfy the Pledgor Group's liabilities, and the payment and performance of all its obligations and duties under this Agreement. 11.2. Default. (A) Each of the following events shall, upon determination of the existence thereof as provided in Section 11.2.(B), constitute a "Default" and create the rights provided for in this Agreement in favor of the Nondefaulting Partners against the Defaulting Partners: (1) the failure by a Partner to make any contribution, including, without limitation, a Partner's failure to make when due any contribution for capital expenditures as determined by Partnership Governance Committee Action to be due form the Partners, or loan to the Partnership as required by this Agreement, which failure continues for at least three (3) Business Days from the date such contribution should have been received; (2) other than as described in item (1) above, a material breach or violation under this Agreement by a Partner, which breach or violation continues unremedied for at least ninety (90) days after the Nondefaulting Partners have given written notice of such breach or violation to the Defaulting Partners; (3) as to Lyondell Partners, a material breach or default by LParent under the terms of the Contribution Agreement, which breach or default continues unremedied or uncured for at least 90 days after the Partnership or the CITGO GP has given written notice of such breach or default to LParent; 43 (4) as to CITGO Partners, a material breach or default by CParent under the terms of the Product Purchase Agreement, which breach or default continues unremedied or uncured for at least ninety (90) days after the Partnership or Lyondell GP has given written notice of such breach or default to CParent; or (5) the withdrawal, retirement, resignation or dissolution of a Partner; or the bankruptcy of a Partner or its Parent (including the filing against a Partner or its Parent of a petition in bankruptcy or seeking any reorganization, liquidation or similar relief, which petition shall remain undismissed or unstayed for an aggregate of ninety (90) days; the adjudication of a Partner or its Parent as Insolvent, or the institution by a Partner or its Parent of proceedings to be adjudicated as a voluntary bankrupt, or the consent by a Partner or its Parent to the filing of a bankruptcy proceeding against it, or the failure of a Partner or its Parent to contest a bankruptcy proceeding against it; or the appointment, or any consent by a Partner or its Parent to the appointment, of a receiver, custodian, liquidator or trustee for the Partner or its Parent or for all or any substantial portion of its property, which appointment remains undismissed or unstayed for a period of ninety (90) days). (B) The existence of a Default shall be determined either by written agreement among the Partners or by resort to an appropriate court. Once such Default has been determined to exist (including, as appropriate, exhausting all appeals), then the Defaulting Partners shall have thirty (30) days from the determination date to cure such Default; provided, however, that there shall not be a cure period for a Default described in Section 11.2.(A)(5) and that the cure period for a Default described in Section 11.2.(A)(1) shall be limited to three (3) Business Days. (C) The day upon which the Default is determined to exist (or if the Default is subject to a cure period and is not timely cured, then the day following the end of the applicable cure period) shall be the "Default Date." Without prejudice to a Partner's (or any of its Affiliates') rights to seek temporary or preliminary judicial relief, prior to any such Default Date all rights and obligations of the Partners under this Agreement shall remain in full force and effect. (D) With respect to any Default, the term "Damages" shall mean (in each case to the extent reasonably and necessarily incurred) any and all obligations (including all obligations to take an affirmative or curative act), liabilities, damages (including, damages arising out of any breach of any representation or warranty, damages related to investigations, proceedings, audits, the interruption of the Partnership's Business, restrictions upon the use of, or adverse impact on, the assets or the Partnership's Business, or the interruption, breach or termination of 44 any Related Agreements, including any lost profits attributable thereto), fines, penalties, deficiencies, losses, judgments, settlements, costs and expenses (including costs and expenses incurred in connection with performing obligations, bonding and appellate costs and attorneys', accountants', engineers', health, safety, environmental and other consultants' and investigators' fees and disbursements, liquidating, selling or offering for sale the Partnership Business and assets or winding up the Partnership Business, or other payments in respect of such payments) arising out of or incurred in connection with such Default, regardless of whether any of the foregoing are foreseeable, unforeseeable, matured or unmatured, existing or contingent as of the date of such Default. "Damages" also shall include, if and to the extent interest is not already included therein under applicable law or other provisions hereof and subject to Section 12.11., interest on amounts actually due until payment thereof is made at a rate per annum equal to the rate set forth in Section 12.10.(B). 11.3. Remedies for Default. Provided that there shall be no duplication of remedies, without prejudice to the Nondefaulting Partners' right to foreclose upon the Defaulting Partners' Interest pursuant to the lien and security interest created in Section 11.1. or to pursue independently and at any time, including simultaneously, any other remedy it may have under law, including the right to seek to recover Damages, or equity, upon determination (either judicially or otherwise) of a Default and the related Damages, and the failure of the Defaulting Partners to cure such Default as provided in Section 11.2.(B), the Nondefaulting Partners in their sole discretion may elect to pursue the following remedies: (A) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages), the Nondefaulting Partners may elect to exercise their purchase right for the Defaulting Partners' Interest as described in Section 11.5. and thereby cause the Partnership to dissolve under Section 11.9(D); provided, however, that within ten (10) days after the determination of the Fair Market Value, the Nondefaulting Partners may elect not to proceed with a purchase of the Defaulting Partners' Interest, in which case the Nondefaulting Partners shall have an additional thirty (30) days from its determination not to proceed to elect as an alternative remedy Section 11.3.(B) below; and (B) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages) (or if the Nondefaulting Partners initially elected to pursue its remedy under Section 11.3.(A) above, then at any time prior to the expiration of the 30-day extension period), the Nondefaulting Partners may elect to effect a liquidation of the Partnership under Section 11.6. and thereby cause the Partnership to dissolve under Section 11.9.(E). 45 11.4. Consequences of Default. Notwithstanding any other provision of this Agreement, commencing on the Default Date and (i) prior to the Nondefaulting Partners' collection of Damages through the exercise of its legal remedies or otherwise, or (ii) while the Nondefaulting Partners are pursuing its remedies under Section 11.5. or Section 11.6., the Defaulting Partners' Representatives on the Partnership Governance Committee shall not have any voting rights and all matters requiring Partnership Governance Committee Action shall be determined solely by the Nondefaulting Partners' Representatives; provided, however, that the foregoing loss of voting rights shall not occur as a result of a Default caused solely by the insolvency, bankruptcy or similar proceedings of a Partner or a Parent described in the second through final clauses of Section 11.2.(A)(5); and provided further, that the foregoing loss of voting rights shall not apply to those voting rights contained in Sections 3.8.(A), 3.8.(B), 3.8.(C), 3.8.(D), 3.8.(F), and 3.8.(Y), which voting rights shall continue in full force and effect at all times. 11.5. Purchase of Defaulting Partners' Interest (A) The Nondefaulting Partners shall have the right to elect to purchase the Interest of the Defaulting Partners by delivering notice of such election in writing to the Partnership Governance Committee and the Defaulting Partners (the "Purchase Notice"). The purchase of such Interest shall be consummated prior to the expiration of thirty (30) days from the determination of the purchase price as provided herein. (B) The purchase price that the Nondefaulting Partners shall pay to the Defaulting Partners for the Defaulting Partners' Interest shall be an amount equal to (i) the amount that the Defaulting Partners would receive in a Liquidation (assuming that the sale under Section 11.11.(B)(1) is for an amount equal to the Fair Market Value) reduced by (ii) the Damages incurred by the Partnership. (C) "Fair Market Value" shall be the fair market value of all of the Partnership Business and assets (including tangible and intangible assets) as of the date of the Purchase Notice, without giving effect to the Damages, determined as follows: (1) The Defaulting Partners and the Nondefaulting Partners shall first attempt to agree on such value, which if agreed to shall be the Fair Market Value; (2) If the Partners are unable to agree within twenty (20) days of the Purchase Notice, then the Defaulting Partners, on the one hand, and the Nondefaulting Partners, on the other hand, shall (at their own cost) cause an independent, qualified appraiser to deliver a written appraisal of such value within fifty (50) days of the Purchase Notice. If the lower appraised value is greater than or equal to ninety percent (90%) of the higher appraised value, then the average of the two appraised values shall be the Fair Market Value; and 46 (3) If the lower appraised value is less than ninety percent (90%) of the higher appraised value, then the Partners shall jointly appoint a mutually acceptable neutral person or entity (the "Neutral") not affiliated with either of the Partners within seventy (70) days of the Purchase Notice (and if the Partners have been unable to agree upon such appointment within sixty (60) days of the Purchase Notice, then such Neutral shall upon the application of either the Defaulting Partners or the Nondefaulting Partners be appointed within seventy (70) days of the Purchase Notice by the Center for Public Resources, or if such appointment is not so made then promptly thereafter by the American Arbitration Association in New York, New York, or if such appointment is not so made then promptly thereafter by the senior United States District Court judge sitting in the Borough of Manhattan, in New York, New York), and the Neutral shall within ninety (90) days of the Purchase Notice or, if later, within twenty (20) days of the appointment of the Neutral determine which of the two appraised values is closest to the fair market value of the Partnership's assets as determined by the Neutral, and that appraised value shall be the Fair Market Value. 11.6. Liquidation. The Nondefaulting Partners shall have the right to elect to dissolve and liquidate the Partnership pursuant to the procedures in Section 11.11. (such procedures constituting a "Liquidation"); provided, however, that any amount payable to the Defaulting Partners in such Liquidation pursuant to Section 11.11.(B)(7) shall be reduced by the Nondefaulting Partners' Participation Percentage of the Damages incurred by the Partnership. The Nondefaulting Partners shall deliver notice of such election to dissolve and liquidate in writing to the Partnership Governance Committee and the Defaulting Partners. 11.7. Closing of Purchase Rights. In the event of the exercise of purchase rights pursuant to Section 11.5. (any such event a "Purchase"), the Purchase shall be consummated by appropriate and customary documentation (including customary representations and warranties) as soon as practicable and in any event within the applicable time period specified in Section 11.5 or Section 11.8. The Partners entitled or obligated to Purchase shall have the right to transfer or assign, in whole or in part, its right or obligation to Purchase to an Affiliate or to a third party. 11.8. Recision. In the event that the Partnership is rendered Insolvent by reason of a breach, default or failure of an agreement, covenant, indemnity, representation or warranty made by LParent in the Contribution Agreement (including the exhibits and schedules thereto) and such breach, default or failure has not been cured as provided in the Contribution Agreement (a "Recision Event"), then CITGO GP shall deliver a notice to Lyondell GP specifying in reasonable detail the particulars of such Recision Event (a "Recision Event Notice"). Within 60 days after the earlier to occur of agreement between the Partners or final judicial determination that a Recision Event has occurred, Lyondell Partners shall purchase CITGO Partners' Interest (a "Recision Purchase") for an amount of cash 47 (the "Recision Purchase Price") equal to the sum, without duplication, of the following amounts, each calculated or determined from the Closing Date to the date of purchase: (i) CITGO Partners' capital contributions made pursuant to Section 6., plus (ii) all Profits allocated to CITGO Partners, minus (iii) all Losses allocated to CITGO Partners and minus (iv) the amount of all distributions actually made to CITGO Partners pursuant to Section 7.4. In the event of a Recision Purchase, CITGO Partners shall execute and deliver to Lyondell Partners such documents as Lyondell Partners shall reasonably require to evidence and effect the Recision Purchase against receipt by CITGO Partners of the Recision Purchase Price. The amount of any debt to CITGO Partners under Section 7.3.(C) shall be deemed to be paid upon payment of the Recision Purchase Price. 11.9. Dissolution. The Partnership shall be dissolved within the meaning of the Act upon the first to occur of the following: (A) the written determination of all General Partners to dissolve the Partnership; (B) the bankruptcy (including the matters referred to in Section 11.2.(A)(5) of the Partnership; (C) the withdrawal, retirement, resignation, dissolution or bankruptcy (including the matters referred to in Section 11.2.(A)(5)) of a Partner; (D) the closing of a Purchase as the result of a Default; (E) the election of the Nondefaulting Partners to effect a dissolution of the Partnership under Section 11.6.; or (F) any other act or event which results in the dissolution of a limited partnership under the Act. 11.10. Reconstitution of Partnership. If the Partnership dissolves pursuant to Section 11.9.(C) or Section 11.9(D) (even if other dissolution provisions also are invoked), it may be reconstituted and continued upon the written consent of all remaining Partners other than the former Partner that sold its Interest. 11.11. Liquidation; Winding Up and Distributions upon Dissolution. (A) Upon a dissolution, absent a reconstitution and continuation of the Partnership under Section 11.10., the Partnership shall commence to wind up its affairs and the Partners shall file appropriate documents of dissolution and proceed to effect the Liquidation of the Partnership pursuant to the procedures set forth in this Section 11.11.; provided, however, that in the event of a dissolution resulting from an event described in Section 11.9.(D), sufficient time shall be allowed prior to any liquidation or winding up of the Partnership to give effect to the remedies provided by Section 11.5. and Section 11.6. Notwithstanding any other provision of this Agreement, during the period of the 48 winding up, the Nondefaulting Partners (or the Partnership Governance Committee if the Partners have agreed to terminate the Partnership or there are otherwise not Nondefaulting Partners) shall make all decisions relating to the conduct of any business or operations, and the sale or disposition of the Partnership's assets. (B) Upon dissolution of the Partnership, the following shall occur unless the Partners agree otherwise: (1) The Partnership's assets shall be collected and sold to unaffiliated third parties in arm's-length transactions; provided, however, that any Partner or its Affiliates shall have the right to participate in any public sale or auction of the Partnership's property or any other reasonable competitive bid process (such as a private sale pursuant to a "data room" process conducted by an independent investment banking firm); (2) Gain or loss with respect to the Partnership's sale or distribution of assets shall be allocated to the Partners' Capital Accounts as provided in Section 7.6.; (3) Any liabilities owed to third parties shall be paid in full; (4) Appropriate reserves for contingencies shall be established; (5) Any outstanding loans that have been made to the Partnership by any Partner shall be repaid in full; (6) CITGO Partners' Capital Accounts shall be reduced by the amount of the outstanding principal of any promissory note contributed to the Partnership pursuant to Section 6.6.; and (7) Any remaining cash or non-cash assets that cannot be sold for cash shall be distributed to the Partners in accordance with their positive Capital Account balances. No Partner shall have any obligation to contribute capital to restore any negative balance in its Capital Account. 11.12. Enforcement. Only a General Partner shall have the ability to enforce the provisions of this Section 11. 12. MISCELLANEOUS 12.1. Confidentiality and Use of Information. Each Partner will keep confidential all information regarding the business of the Partnership and will not use any such information in any manner not related to the business of the Partnership; provided, however, that the term "information" as used in this Section does not include any information that (i) is or becomes generally available to and known by the public 49 or the petroleum refining industry (other than as a result of an unpermitted disclosure directly or indirectly by the Partnership or a Partner), (ii) is or becomes available to a Partner on a nonconfidential basis from a source other than the Partnership or a Partner; provided, however, that such source is not and was not bound by a confidentiality agreement with, or other obligation of secrecy to, the Partnership or any other Partner, (iii) has already been or is hereafter independently acquired or developed by a Partner without violating any confidentiality agreement with or other obligation of secrecy to the Partnership or another Partner or (iv) is generated by the Partnership with the intention that it not be held as confidential. 12.2. Auditors. Selection of the Partnership's auditors will be delegated to the Finance-Control Committee. The Partnership Governance Committee will have final authority to select, appoint and establish the terms of the engagement of the Partnership's auditors. The Partnership Governance Committee shall, in consultation with the Finance and Control Committee, establish the accounting policies for the Partnership, including the policy for determining whether an expenditure should be capitalized or expensed. 12.3. Indemnification of Officers. (A) The Partnership shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a named defendant or respondent to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal to such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (collectively, such actions, suits, proceedings, appeals, inquiries and investigations are referred to collectively as "Proceedings" and individually as "Proceeding") by reason of the fact that such person either is or was an officer of the Partnership, or, while an officer of the Partnership, is or was serving at the request of the Partnership as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another domestic or foreign corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by such person in connection with such Proceeding if it is determined that such person conducted himself in good faith, and if such conduct was in such person's official capacity as an officer of the Partnership, in a manner he reasonably believed to be in the best interests of the Partnership and, in all other cases, in a manner he reasonably believed was not opposed to the best interests of the Partnership, and, in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful; provided, however, that if a person is found liable to the Partnership or is found liable on the basis that personal benefit was improperly received by him, the indemnification shall not be available. The Partnership may pay or reimburse expenses incurred by an officer 50 in connection with such person's appearance as a witness or other participation in a Proceeding at a time when such person is not a named defendant or respondent in such Proceeding. (B) The determination to be made in the preceding subsection (A) shall be made (i) by the Partnership Governance Committee; or (ii) by special legal counsel selected by the Partnership Governance Committee. A determination as to the reasonableness of expenses (including court costs and attorneys' fees) shall be made in the same manner as the determination that indemnification is permissible. (C) Reasonable expenses incurred by an officer in connection with a Proceeding may be paid by the Partnership in advance of the final disposition of such Proceeding and without any of the determinations specified in the preceding subsection (B) upon receipt by the Partnership of a written affirmation by the officer of his good faith belief that he has met the standard of conduct necessary for indemnification under this Section 12.3. and a written undertaking by or on behalf of the officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Partnership as authorized in this Section 12.3., which undertaking shall be an unlimited general obligation of such officer and may be unsecured. (D) The right to indemnification conferred in this Section 12.3. shall be a contract right and shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other law, agreement, Partnership Governance Committee Action, or otherwise, both as to action in their official capacities and as to action in another capacity while acting as an officer and shall continue as to a person who has ceased to be an officer and shall inure to the benefit of the heirs, executors and administrators of such person. Any indemnification of or advance of expenses to an officer in accordance with this Section 12.3. shall be reported in writing to the Partnership Governance Committee. (E) The Partnership may purchase and maintain insurance on behalf of any person who is or was an officer or employee of the Partnership, or who is or was serving at the request of the Partnership as a manager, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against or incurred by that person in such a capacity or arising out of his status as such a person, whether or not the Partnership would have the power to indemnify such person against such liability under this Section 12.3. (F) Except as indicated in the proviso in Section 12.3.(A), the Partnership intends that the indemnification provided hereunder shall indemnify its 51 officers to the fullest extent possible under the Act; and if any indemnification which would otherwise be granted by this Section 12.3. shall be disallowed by any competent court or administrative body as illegal, then any officer with respect to whom such adjudication was made, and any other officer, shall be indemnified to the fullest extent permitted under the Act. 12.4. Waivers, Modifications and Amendments. All modifications or amendments of this Agreement or the Certificate of Limited Partnership shall require the approval of Representatives representing 100 percent of the total votes as provided in Section 3.8.(C). 12.5. Further Assurances. From time to time, each Partner agrees to execute and deliver such additional documents, and will provide such additional information and assistance as the Partnership may reasonably require to carry out the terms of this Agreement and to accomplish the Partnership's Business. 12.6. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors of the Partners, but, except as expressly provided herein, no Limited Partner or its Affiliated General Partner may assign or delegate any of their rights or obligations under this Agreement without the prior written consent of the other Partners, which consent shall be in the sole and absolute discretion of such other Partners. Any purported assignment or delegation without such consent shall be void and ineffective. 12.7. Benefits of Agreement Restricted to the Parties. This Agreement is made solely for the benefit of the Partnership and the Partners, and no other person or entity shall have any right, claim or cause of action under or by virtue of this Agreement. 12.8. Expenses. Except as otherwise provided herein, each party hereto shall be responsible for its own expenses incurred in connection with this Agreement. 12.9. Currency Conversions. All contributions, allocations, distributions and other payments shall be made, and all calculations performed and books and records kept, in United States currency, without any reference to foreign currency exchange rates or other conversion calculations. 12.10. Payment Terms and Interest Calculations (A) If the payment due date for any payment hereunder (including Capital Contributions and Damages) falls on a Saturday or a bank or federal holiday, other than a Monday, the payment shall be due on the past preceding business day. If the payment due date falls on a Sunday or Monday bank or federal holiday, the payment shall be due on the following business day. (B) Interest shall accrue on any unpaid and outstanding amount from the time such amount is due and payable through the date upon which such amount, together with accrued interest thereon, is paid in full. Interest 52 shall, subject to the provisions of Section 12.11., accrue at a per annum rate equal to the lesser of (i) 125 percent of the Agreed Rate, compounded quarterly, to the extent permitted by law or (ii) the Highest Lawful Rate. (C) A wire transfer or delivery of a check shall not operate to discharge any payment under this Agreement and shall be accepted subject to collection. 12.11. Usury Savings Clause. Notwithstanding any other provision of this Agreement, it is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of any indebtedness arising under this Agreement whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Agreement (the "Applicable Usury Laws"). Accordingly, if any payments made pursuant to this Agreement result in any person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this Section 12.11. shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Agreement shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the payor by the recipient hereof; (iii) no person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of any interest payable under this Agreement shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Agreement immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to any person pursuant to this Agreement for the use, forbearance or detention of any indebtedness arising hereunder shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of any such indebtedness so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest that may be lawfully contracted for, charged or received by any person in connection with any indebtedness arising under this Agreement under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged to any person under all Applicable Usury Laws on any principal balance from time to time outstanding pursuant to this Agreement. 12.12. Notices. All notices, requests, demands and other communications that are required or may be given under this Agreement shall, unless otherwise provided for elsewhere in this Agreement, be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile, (ii) delivered 53 personally or (iii) mailed, first class mail, postage prepaid, return receipt requested, as follows: (a) if to CITGO LP, CITGO GP or its Representatives: CITGO Refining Investment Company P. O. Box 3758 Tulsa, Oklahoma 74556 Attention: Treasurer Telecopy: 918-495-4511 with a copy to: Vice President and General Counsel CITGO Petroleum Corporation P. O. Box 3758 Tulsa, Oklahoma 74556 Telecopy: 918-495-5559 (b) if to Lyondell LP, Lyondell GP or its Representatives: Lyondell Refining Company P. O. Box 3646 Houston, Texas 77253-3646 Attention: Vice President, General Counsel & Secretary with a copy to: Lyondell Refining LP, LLC P. O. Box 3646 Houston, Texas 77252-3646 Attention: Vice President, General Counsel & Secretary Telecopy: 713-309-4718 (c) if to the Partnership: LYONDELL-CITGO Refining LP P. O. Box 2451 Houston, Texas 77252-2451 Attention: President & CEO Telecopy: 713-321-6900 Any changes to the addresses set forth above shall be made by written notice delivered to the Secretary of the Partnership who shall maintain such addresses. 12.13. Waiver of Immunity. EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM FOR ITSELF OR 54 WITH RESPECT TO ITS REVENUES, ASSETS OR PROPERTIES IMMUNITY FROM THE JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS. TO THE EXTENT ANY JURISDICTION WOULD ATTRIBUTE SUCH IMMUNITY TO EITHER OR BOTH OF THE CITGO PARTNERS, EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT TO CLAIM SUCH IMMUNITY AND TO ANY DEFENSES AVAILABLE TO IT UNDER THE FOREIGN SOVEREIGN IMMUNITIES ACT, AND ANY DEFENSE BASED ON IMMUNITY ARISING UNDER U.S. FEDERAL OR STATE LAW, OR UNDER ANY INTERNATIONAL, FOREIGN OR OTHER APPLICABLE LAW. 12.14. Governing Law. THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, AND ALL MATTERS RELATING HERETO, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAW. 12.15. Jurisdiction; Consent to Service of Process; Waiver. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY OF THE PARTNERS OR THE PARTNERSHIP OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTNERS AND THE PARTNERSHIP ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTNERS AND THE PARTNERSHIP SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF NEW YORK BY ENTERING INTO AN AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTNER AND THE PARTNERSHIP SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF EXISTENCE OF THE PARTNERSHIP. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTNERSHIP AND THE PARTNERS. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE 55 RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE PARTNERSHIP TO ASSERT A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1(II)(A) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE PARTNERSHIP TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE PARTNERSHIP FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. 12.16. Entire Agreement. This Agreement, together with the Certificate of Limited Partnership, the Master Transaction Agreement, the Confidentiality Agreements (as defined in the Master Transaction Agreement) and the Related Agreements constitute the entire agreement between the parties and supersedes all prior agreements and understandings, oral and written, between the parties with respect to the subject matter hereof, with the exception of those matters which will continue to be governed under the Regulations. 12.17. Severability. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any Partner, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. 12.18. Construction. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumptions that any Partner had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to 56 include the singular, and vice versa; (vi) each gender shall be deemed to include the other genders; and (vii) each exhibit, attachment and schedule to this Agreement is a part of this Agreement. 12.19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. [signature page follows] 57 IN WITNESS WHEREOF, this Limited Partnership Agreement has been executed on behalf of each Partner, by their respective officers thereunto duly authorized, effective as of the 31st day of December, 1998. LYONDELL REFINING LP, LLC a Delaware limited liability company (Lyondell LP) By: --------------------------------- Name: Title: CITGO GULF COAST REFINING, INC. a Delaware corporation (CITGO GP) By: --------------------------------- Name: Title: LYONDELL REFINING COMPANY, a Delaware corporation (Lyondell GP) By: --------------------------------- Name: Title: CITGO REFINING INVESTMENT COMPANY an Oklahoma corporation (CITGO LP) By: --------------------------------- Name: Title: 58 EXHIBIT 1 TO PARTNERSHIP AGREEMENT DEFINITION OF TERMS IN PARTNERSHIP AGREEMENT Act. The Delaware Revised Uniform Limited Partnership Act, as amended and in effect from time to time. See Section 2.2. Action. See Section 5.11.(D). Additional Construction Loan. As defined in the Regulations. Affiliate. As to any specified Person, any other Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person; provided, however, that for purposes of this Agreement and regardless of whether the specified Person would otherwise be deemed an Affiliate for any other purpose or under any other agreement, the Partnership or any entities controlled by the Partnership shall not be deemed to be an Affiliate of LParent, Lyondell GP or Lyondell LP or any entities controlled by LParent, Lyondell GP or Lyondell LP or of CParent, CITGO GP or CITGO LP or any entities controlled by CParent, or CITGO GP or CITGO LP. For purposes of this definition the term "control" shall have the meaning set forth in 17 CFR 230.405. Affiliated General Partner. In the case of Lyondell LP, the "Affiliated General Partner" shall mean Lyondell GP. In the case of CITGO LP, the "Affiliated General Partner" shall mean CITGO GP. Affiliated Limited Partner. In the case of Lyondell GP, the "Affiliated Limited Partner" shall mean Lyondell LP. In the case of CITGO GP, the "Affiliated Limited Partner" shall mean CITGO LP. Affiliated Partner Group. A General Partner and its Affiliated Limited Partner. Agent. See Section 12.15. Agreed Rate. With respect to any period for which interest is to be calculated, the Citibank, N.A. "base rate" from time to time in effect for each day in such period, calculated by multiplying the Citibank, N.A. "base rate" by the number of days such "base rate" is in effect, determining the sum of the products obtained thereby and dividing such sum by the number of days in such period. Alternate. See Section 3.2.(B). Annual Meeting. See Section 3.4.(A). Applicable Usury Laws. See Section 12.11. Assets. The assets defined as such in the Contribution Agreement together with all assets provided to the Partnership pursuant to the Related Agreements. Exhibit 1, Page 1 Asset Value. With respect to any asset, the asset's adjusted basis for federal income tax purposes, except that the Asset Value of any asset contributed by a Partner to the Partnership or acquired with funds contributed by a Partner shall be the fair market value of such asset on the date of contribution or on any date on which the asset is revalued pursuant to Section 7.1.(C) hereof; provided, however, that the fair market value of the Assets (net of the Assumed Liabilities) on each such date shall be deemed to be $825 million, reduced, without duplication, (i) by the amount of any payment described in Section 7.1.(D) and (ii) by the amount of any indemnification forgone by the Partnership pursuant to the proviso of Section 5.2 of the Contribution Agreement; and provided further (a) that the fair market value of the Working Capital on each such date shall be the amount determined pursuant to Exhibit 6.1(B) and (b) that the fair market value of the assets which are acquired with funds contributed by a Partner in each such date shall be the original cost of such assets. Any such adjustments shall be effective on a prospective basis only. Auxiliary Committee. See Section 3.10. Average Participation Percentage. The mathematical average of a Partner's Participation Percentages, by Calendar Quarter, for any applicable period. Blended Rate. For any Calendar Quarter or portion thereof, a fraction (i) the numerator of which is equal to the aggregate federal income tax depreciation, amortization or other cost recovery deductions for such period with respect to all assets and (ii) the denominator of which is equal to the aggregate adjusted tax basis of the assets on the date such assets were contributed to the Partnership or, if any adjustment to the Capital Accounts has occurred pursuant to Section 7.1.(C), the date of the most recent such adjustment. Business Day. Any day other than a Saturday, Sunday or other day on which banks are closed in New York City, New York. Calendar Quarter. In each year, each calendar quarter. Calendar Account. See Section 7.1. Capital Budget. See Section 9.2.(B). Capital Contribution. See Section 6.4. Capital Enhancement Projects. See Section 9.2.(B). Cash Balance Amount. See Section 7.5. CEO. The President and Chief Executive Officer of the Partnership. See Section 4.5. CERCLA shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Chemical Substance shall mean (i) any chemical substance, pollutant, contaminant, constituent, chemical, mixture, raw material, intermediate, product or byproduct that is regulated (including any requirement for the reporting of any Release thereof) under any Environmental Law, as now or hereafter in effect, or defined or listed as an industrial, toxic, deleterious, harmful, Exhibit 1, Page 2 radioactive, infectious, disease-causing or hazardous substance, material or Waste under any Environmental Law, as now or hereafter in effect, and (ii) petroleum or any fraction thereof, asbestos or asbestos-containing material or polychlorinated biphenyls. CITGO GP. CITGO Gulf Coast Refining, Inc., a Delaware corporation, the General Partner that is an Affiliate of CParent. See Section 2.2. CITGO LP. CITGO Refining Investment Company, an Oklahoma corporation, the Limited Partner that is an Affiliate of CParent. See Section 2.2. CITGO Partners. CITGO GP and CITGO LP. CITGO Partners Option Date Amount. The product of (i) CITGO Partners Average Participation Percentage for the period beginning on the day following the In-Service Date and ending on the Option Date times (ii) the remainder of Option Date Working Capital minus In-Service Date Working Capital. Closing Date. See Section 2.2. Code. The Internal Revenue Code of 1986, as amended and in effect from time to time and any successor thereto. Company. LYONDELL-CITGO Refining Company Ltd., a Texas limited liability company, which was converted into the Partnership as of the date of this Agreement. Compensation Committee. See Section 3.10.(A). Conflict Circumstance. See Section 5.7. Conflicted General Partner. See Section 5.7. Contribution Agreement. The agreement dated July 1, 1993 between the Company and LParent pursuant to which the Refinery Business and certain other Assets and Working Capital were contributed to the Company by LParent on behalf of Lyondell Refining Company n/k/a Lyondell GP. Conversion Date. See Section 2.2. CParent. CITGO Petroleum Corporation, a Delaware corporation. See Section 2.2. Damages. See Section 11.2.(D). Default. See Section 11.2.(A). Default Date. See Section 11.2.(C). Defaulting Partners. Lyondell GP and Lyondell LP, in the case of a Default by Lyondell GP or Lyondell LP; and CITGO GP and CITGO LP, in the case of a Default by CITGO GP or CITGO LP. Exhibit 1, Page 3 Depreciation. For each Calendar Quarter or portion thereof, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such period. Notwithstanding the preceding sentence, if the Asset Value (after taking into account any adjustment pursuant to the proviso of Section 7.1.(C)) of an asset differs from its adjusted tax basis on the date such asset is contributed or, if applicable, on the date of any adjustment to Capital Accounts which has taken place pursuant to Section 7.1.(C), Depreciation for any period shall be an amount which bears the same ratio to such Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) as the federal income tax depreciation, amortization or other cost recovery deduction for such period bears to such adjusted tax basis, except that in the case of any asset that has a zero adjusted tax basis on either the date of its contribution to the Partnership or on the date of any adjustment pursuant to Section 7.1.(C), Depreciation for any period shall be an amount equal to the product of (i) the Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) of such asset on the date of contribution, or, if applicable, the date of the most recent adjustment to Capital Accounts pursuant to Section 7.1.(C) and (ii) the Blended Rate. Distribution Cash. The amount of cash distributable to the Partners as determined under Section 7.3., and in regard to each Partner. Distributions. See 6.4.(A)(2). Environment shall mean any ambient air, surface water, drinking water, groundwater, land surface, subsurface strata, river sediment, natural resources or real property and the physical buildings, structures and fixtures thereon, including sewer, septic and waste treatment, storage or disposal systems. Environmental Law shall mean any legal requirement or permit relating to (i) the Environment, including pollution, contamination, cleanup, preservation, protection and reclamation of the Environment; (ii) health or safety, including the exposure of employees and other Persons to any Chemical Substance; (iii) the Release or threatened Release of any Chemical Substance, noxious noise or odor, including investigation, study, assessment, testing, monitoring, containment, removal, remediation, response, cleanup and abatement of such Release or threatened Release; and (iv) the management of any Chemical Substance, including the manufacture, generation, formulation, processing, labeling, use, treatment, handling, storage, disposal, transportation, distribution, re-use, recycling or reclamation of any Chemical Substance. Executive Officers. Those officers of the Partnership then designated as Executive Officers by Partnership Governance Committee Action. Fair Market Value. See Section 11.5.(C). Finance-Control Committee. See Section 3.10(A). Financing Plan. Certain Partnership plans, as approved by unanimous actions of the Partnership Governance Committee, setting forth the Partnership's funding requirements for the Capital Budget and the sources of funds to finance such requirements. GAAP. Generally accepted accounting principles. Exhibit 1, Page 4 General Partners. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a general partner of the Partnership, unless such General Partner ceases to be a General Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute General Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute General Partner, if any, of the Partnership as provided herein, in such Person's capacity as a general partner of the Partnership. Highest Lawful Rate. See Section 12.11. Indemnified Losses. See Section 5.11.(A)(1). Indemnified Party. See Section 5.11.(D). Indemnifying Party. See Section 5.11.(D). Initial Construction Loan. As defined in the Regulations. In-Service Date. February 28, 1997, except for the Working Capital Valuation for which the In-Service Date is March 31, 1997. In-Service Date Working Capital. The value of the Working Capital on the In-Service Date determined pursuant to Exhibit 6.1(B). Insolvent and Insolvency. The Partnership is insolvent if it has ceased to pay its debts in the ordinary course of business or cannot pay its debts as they become due or is insolvent within the meaning of the federal bankruptcy law. Intended Percentage. See Section 6.6.(A). Interest. At any point in time, the entire ownership interest of a Partner in the Partnership at such time. See Section 5.8. Limited Partner. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a limited partner of the Partnership, unless such Limited Partner ceases to be a Limited Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute Limited Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute Limited Partner, if any, of the Partnership as provided herein, in such Person's capacity as a limited partner of the Partnership. Liquidation. See Section 11.6. LParent. Lyondell Chemical Company, a Delaware corporation, formerly known as Lyondell Petrochemical Company. See Section 2.2. Lyondell GP. Lyondell Refining Company, a Delaware corporation, the General Partner that is an Affiliate of LParent. Lyondell LP. Lyondell Refining LP, LLC, a Delaware limited liability company, the Limited Partner that is an Affiliate of LParent. Exhibit 1, Page 5 Lyondell Partners. Lyondell GP and Lyondell LP. Lyondell Partners Option Date Amount. The product of (i) Lyondell Partners Average Participation Percentage for the period beginning on the first day following the In-Service Date and ending on the Option Date times (ii) the remainder of the Option Date Working Capital minus In-Service Date Working Capital. Maintenance Capital. Those capital expenditures reasonably required to fund capital expenditures that are necessary to maintain the Refinery in substantially the same condition existing on the Closing Date. Master Transaction Agreement. The agreement so named, dated as of May 5, 1993, among LParent, CParent, Lyondell GP and CITGO LP. Maximum Amount. See Section 12.11. Neutral. See Section 11.5.(C)(3). Nonconflicted General Partner. See Section 5.7. Nondefaulting Partners. The Partners other than the Defaulting Partners. See Section 11.2. Operating Budget. See Section 9.2.(A). Operating Committee. See Section 3.10.(A). Option Date. See Section 6.6.(A). Option Date Payment. See Section 6.6.(C). Option Date Working Capital. The value of Working Capital on the Option Date determined pursuant to Section 6.6. Owners. Lyondell GP and CITGO LP in their capacity as members of the Company. Parents. LParent and CParent. Partners. The General Partners and the Limited Partners on the date of this Agreement until such Person ceases to be a partner of the Partnership. Partnership Business. See Section 2.3. Partnership Governance Committee. The committee of six Representatives through which the General Partners manage the Partnership. See Section 3.1.(A). Partnership Governance Committee Action. The formal actions taken by vote of the Partnership Governance Committee, which is the exclusive method by which the General Partners manage the Partnership. See Section 3.6.(A). Exhibit 1, Page 6 Participation Percentage. The percentage calculated for each Partner, from time to time, pursuant to Section 6.4. Person. Any natural person or any corporation, limited liability company, partnership, group, joint venture, trust or other entity. Pledgee Group. See Section 11.1. Pledgor Group. See Section 11.1. Product Sales Agreement. The Product Sales Agreement-Refined Products dated July 1, 1993 between the Company and CITGO Petroleum Corporation, as amended from time to time. Profits and/or Losses. For each Calendar Quarterly period or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined for federal income tax purposes in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, deduction or credit required to be stated separately pursuant to Code Section 703(a)(1) shall be included in Profits or Losses), with the following adjustments: (i) any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such Profits or subtracted from such Losses; (ii) any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition, shall be subtracted from such Profits or added to such Losses; (iii) gain or loss resulting from any disposition of an asset with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C), adjusted to reflect Depreciation; and (iv) in lieu of the depreciation, amortization, and other cost recovery deductions otherwise required to be taken into account in computing such Profits or Losses, there shall be taken into account Depreciation. Profits Interest. The right of any Partner to receive Profits allocated or cash distributed to such Partner pursuant to Section 7, but not including the right to participate in or manage the affairs of the Partnership as a Partner, the right to receive any information or accounting of the affairs of the Partnership, the right to inspect the books or records of the Partnership or any other right of a Partner pursuant to this Agreement. Proper Ratio. With respect to the Capital Account balances of the Partners at any time, the ratio of the Partners' Participation Percentages at such time. Purchase. See Section 11.7. Exhibit 1, Page 7 Purchase Notice. Notice given by the Nondefaulting Partners exercising their purchase rights. See Section 11.5.(A). Purchase Offer. See Section 10.3.(C). Recision Event. See Section 11.8. Recision Event Notice. See Section 11.8. Refinery. The Refinery located at 12000 Lawndale in Houston, Texas. Refinery Business. The Refinery and lube blending facility located in Birmingport, Alabama and all related assets (of every kind. nature, character and description, tangible and intangible, real, personal or mixed, wherever located), businesses, contracts and permits, that are used solely in the operations of such Refinery and lube blending facility, and all activities reasonably related or incidental thereto. Regulation. See Section 2.2. Related Agreements. Those agreements defined as such in Exhibit 1A to this Agreement. Release shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, dumping, discharge, dispersal, leaching, escaping, emanation or migration of any Chemical Substance in, into or onto the Environment of any kind whatsoever, including the movement of any Chemical Substance through or in the Environment, exposure of any type in any workplace, any release as defined under CERCLA or any other Environmental Law and any noxious noise or odor emission. Representatives. Those persons designated by each General Partner to serve as such General Partner's representatives on the Partnership Governance Committee. See Section 3.2.(A). Second Notice. See Section 10.3.(D). Secretary. See Section 4.7. Substitute General Partner. A Person who is admitted as a General Partner to the Partnership in place of and with the rights of a General Partner. Substitute Limited Partner. A Person who is admitted as a Limited Partner to the Partnership in place of and with the rights of a Limited Partner. TMP. The "tax matters partner" as defined in Section 6231(a)(7) of the Code. See Section 8.3.(A). Treasury Regulations. The income tax regulations promulgated by the Department of Treasury, as amended from time to time. Treasury Regulations include final and temporary regulations. Unanimous Partnership Governance Commitee Action. See Section 3.8. Exhibit 1, Page 8 U.S. Partnership Return of Income. See Section 8.3.(A). Vice President. See Section 4.6. Wholly Owned Subsidiary. As to any Person, a subsidiary of such Person all of the equity interests of which are owned, directly or indirectly, by such Person. Working Capital. The Partnership's current assets minus current liabilities (excluding the current portion of long-term debt and capital leases). Current assets and current liabilities will be determined in accordance with current accounting principles under GAAP as in effect at the Conversion Date, except (i) that any cash, cash equivalents and short-term investments included in the capital fund will be excluded and (ii) that inventory will be carried at its Fair Market Value. The inventory value on the Conversion Date will be its actual Fair Market Value as determined by Exhibit 6.1.(B) and on other valuation dates will be valued in accordance with Exhibit 6.1.(B). Exhibit 1, Page 9 EXHIBIT 1A RELATED AGREEMENTS TIER 1 RELATED AGREEMENTS 1. Amended and Restated Regulations 2. Performance Guaranty and Control Agreement 3. Contribution Agreement, including the following exhibits: 3.1 General Warranty Deed (relating to Houston Land) (Exhibit A-1) 3.2 General Warranty Deed (relating to Brimingport Land) (Exhibit A-2) 3.3 Assignment of Real Property Interests (relating to the "Ballpark") (Exhibit A-3) 3.4 Pipeline Deed, Bill of Sale and Assignment of Easements (relating to the Company Pipelines) (Exhibit A-4) 3.5 Assignment and Assumption Agreement (between Lyondell and the Company relating to Assets other than real property) (Exhibit A-5) 3.6 Grants of Easements for Pipelines and Meter Sites (Exhibit B) 4. Crude Supply Agreement 5. Supplemental Supply Agreement 6. Product Sales Agreement Refined Products -- CITGO 7. Inter-Plant Agreements: 7.1 Company Feedstock Purchase Agreements: (A) Heavy Pyrolysis Gasoline (B) Light Pyrolysis Gasoline (C) C5 Raffinate (D) OP Hydrogen (E) MeOH Hydrogen (F) Pyrolysis Gas Oil (G) Toluene (H) Methanol Exhibit 1A, Page 1 (I) RAFF II (J) RAFF II Isomerate (K) MTBE (L) Isopentane/Heavy Py Mix (M) Ethylene 7.2. Company Product Sales Agreement -- Lyondell: (A) OP -- 400 (B) OP -- 700 (C) Mixed Propylene (D) Refinery Normal Butane (E) Refinery Propane (F) Alkylation Normal Butane (G) Alkylation Propane (H) Benzene (I) Toluene 7.3. Tolling Agreement TIER 2 RELATED AGREEMENTS 1. Employee Transfer and Benefits Agreement 2. Intellectual Property Rights Agreement 3. Trademark Assignment Agreement 4. Trademark License Agreement 5. Tradename Licensing Agreement 6. Software Agreement 7. Terminal and Storage Agreement 8. Mont Belvieu Storage and Pipeline Agreement 9. Marketing Services Agreement -- Aromatics 10. Paraffinic Lubricants Base Oil Sales Agreement 11. Naphthenic Lubricants, White Mineral Oils and Specialty Oils Sales Agreement Exhibit 1A, Page 2 12. Lubricant Facility Operating Agreement 13. Manufacturing Services Agreement 14. Employee Services Agreement 15. Administrative Services Agreement 16. Product Sales Agreement MTBE -- Lyondell and CITGO 17. Refinery Office Lease 18. Exchange Agreement 19. Assignment and Assumption Agreement - CITGO and LCR (Lubricants) EXHIBIT 6.4 CONVERSION DATE CAPITAL PARTICIPATION CONTRIBUTION PERCENTAGES Lyondell LP 784,315,812 48.65 Lyondell GP 162,828,154 10.10 $ 947,143,966 58.75% -------------- ------ CITGO LP 648,866,453 40.25 CITGO GP 16,120,906 1.00 -------------- ------ $ 664,987,359 41.25% -------------- ------ $1,612,131,325 100.00% ============== ====== EXHIBIT B FORM OF QUALIFIED SUBORDINATED DEBT THIS NOTE IS NOT TRANSFERABLE OR ASSIGNABLE (EXCEPT AS PROVIDED UNDER "ASSIGNMENT") PROMISSORY NOTE $____________ (U.S.) ____________, ____ Houston, Texas FOR VALUE RECEIVED, and intending to be legally bound, LYONDELL-CITGO Refining LP, a Delaware limited partnership (the "Maker"), promises to pay to ________________ (the "Payee") at its offices located at ________, ___________, in lawful money of the United States of America and in immediately available funds, __________________________ AND NO/100 DOLLARS ($____________________), or so much thereof as may be advanced and outstanding hereunder prior to maturity, together with interest thereon at the annual rate specified below. INTEREST RATE The unpaid principal of this Note shall bear interest from the date of advance to maturity during any Interest Period (as defined herein), at a rate per annum that shall be equal to the lesser of (i) LIBOR (as defined herein) plus the Basis Points (as defined herein) or (ii) the Highest Lawful Rate (as defined herein). "Basis Points", for the purposes of this Note, shall mean the percentage points added to LIBOR for purposes of determining the rate of interest this Note shall bear for any Interest Period. "Interest Period", for the purposes of this Note, shall mean any period of 30 days, 180 days or 360 days beginning on the advancement date (in the case of the initial Interest Period) or on the last day of the next preceding Interest Period (in the case of any subsequent Interest Period). For the purposes of this Note, "LIBOR", with respect to any Interest Period, means the rate of interest (expressed as an annual rate), as it appears on the display screen of the Dow Jones Telerate Service or the Reuter Monitor Money Rates Service, at which deposits in United States dollars are offered to major banks in the London interbank market, at approximately __:__ .m. (New York time) on the second London Banking Day before the first day of that Interest Period in an amount substantially equal to the amount of the unpaid principal scheduled to be outstanding throughout that Interest Period. Not later than two days before the commencement of each Interest Period (including the initial Interest Period), the Payee shall provide the Maker with three Basis Point options for the succeeding Interest Period, with one option being based on interest being reset at 30 days, another at 180 days and the third at 360 days. The Payee shall make a good faith effort to set the Basis Point options that correspond to the Interest Periods in accordance with current market conditions and as if the Maker has a long-term debt rating issued by Standard & Poor's Corporation and its successors of at least BBB+. On the day prior to the commencement of each Interest Period (including the initial Interest Period), the Maker shall, in its sole discretion, select the duration of each successive Interest Period (and thus the Basis Points that correspond to such Interest Period) and shall notify the Payee of its selection. If the Maker does not so notify the Payee, the duration of the succeeding Interest Period shall be 30 days (and the Basis Points shall be those that correspond to such 30 day Interest Period). All past due principal and, to the fullest extent permitted by applicable law, interest shall bear interest after the due date thereof at the rate per annum equal to the lesser of (i) the rate of interest payable under this Note on the date of default plus 3% or (ii) the Highest Lawful Rate. Interest shall be calculated on the basis of a 365-day year for the actual number of days elapsed. TERMS OF REPAYMENT Interest on the unpaid principal amount of this Note shall be due and payable quarterly, commencing on ________________, 19__, and continuing regularly and quarterly thereafter on the _____ day of each [March, June, September, December] until maturity. On ______________, 19__ [the 10th anniversary of Closing Date], the entire unpaid principal balance of this Note, together with all accrued unpaid interest, shall be due and payable in full. PREPAYMENT The Maker reserves the right to prepay this Note, in whole or in part, at any time, without penalty or notice. All prepayments hereunder, whether designated as payments of principal or interest, shall be applied first to accrued and unpaid interest, if any, and then to principal. TERMS OF ISSUANCE; ADJUSTMENT OF PRINCIPAL This Note is issued pursuant to the terms of the Maker's limited partnership agreement, as now or hereafter in effect ("Partnership Agreement"). Reference is hereby made to the Partnership Agreement for the terms and provisions thereof, to which this Note is in all respects subject, including, without limitation, provisions for the reduction of the principal amount to be repaid hereunder. 2 SUBORDINATION Repayment of this Note by the Maker is fully subordinated to the prior payment in full of any indebtedness of the Maker for borrowed money, whether now outstanding or subsequently incurred ("Senior Indebtedness"). In the event that the Maker shall default in the payment of any principal of (or premium, if any) or interest on any Senior Indebtedness when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, or in the event that any event of default with respect to Senior Indebtedness shall have occurred and be continuing, or would occur as a result of the payment referred to herein, then, upon written notices of such default or event of default to the Maker by the holders of Senior Indebtedness or any trustee therefor, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set- off or otherwise) shall be made or agreed to be made on account of the principal of or interest on this Note. In the event of any insolvency, bankruptcy, receivership, conservatorship, reorganization, readjustment of debt, marshalling of assets and liabilities or similar proceedings or any liquidation, dissolution or winding-up of or relating to the Maker as a whole, whether voluntary or involuntary, all obligations of the Maker to holders of Senior Indebtedness (including any interest thereon accruing after the commencement of any such proceedings) shall be entitled to be paid in full before any payment shall be made on any account of the principal of or interest on this Note. In the event of any such proceeding, after payment in full of all sums owing with respect to Senior Indebtedness, the Payee, together with the holders of any obligations of the Maker ranking on a parity with this Note, shall be entitled to be paid from the remaining assets of the Maker the amounts at the time due and owing on account of unpaid principal of and interest on this Note before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Maker ranking junior to this Note. DEFAULT If any payment provided herein, either of principal or interest, is not paid when due or within five days of delivery by Payee to Maker of written notice of such failure to pay, or in the event of the insolvency or bankruptcy of the Maker hereof or if any proceedings in bankruptcy or for the relief of debtors or readjustment of debts is filed by or against the Maker hereof, then the Payee may, at its option, declare this Note to be forthwith due and payable. WAIVER; UNCONDITIONAL OBLIGATION All signers and endorsers of this Note are to be regarded as principals as to their respective joint and several liability to any legal holder hereof, and the Maker and each of the guarantors, sureties and endorsers, to the fullest extent permitted by applicable law, hereby expressly and severally waive grace, and all notices, demands, presentments for payment, notice of nonpayment, 3 protest and notice of protest, notice of intent to accelerate, notice of acceleration of the indebtedness due hereunder, and diligence in collecting this Note or enforcing any security rights of the Payee under any document securing this Note, and agree (i) that the Payee may, at any time, and from time to time, extend the date of maturity of all or any part hereof, without notifying or consulting with the Maker or principal hereof, who shall remain fully obligated for the payment hereof; (ii) that it will not be necessary for the Payee, in order to enforce payment of this Note, to first institute or exhaust its remedies against the Maker or other party liable therefor or to enforce its rights against any security for this Note; and (iii) to any substitution, exchange or release of any security now or hereafter given for this Note, or the release of any party primarily or secondarily liable hereon, or any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Maker or any guarantors, sureties and endorses in respect of the obligations of any such party in respect of this Note. REIMBURSEMENT OF COSTS AND EXPENSES To the fullest extent permitted by applicable law, if this Note is collected by suit or legal proceedings or through bankruptcy proceedings, the Maker agrees to pay to the Payee the reasonable costs and reasonable attorney's fees incurred in the collection hereof. NO WAIVER; ELECTION OF REMEDIES No failure by the Payee to exercise, and no delay in exercising, any right or remedy hereunder or under any document, instruments or agreements executed in connection herewith shall constitute a waiver thereof on the part of the Payee; nor shall any single or partial exercise of any right or remedy under any documents, instruments or agreements executed in connection herewith preclude any other or further exercise thereof or the exercise of any other right or remedy. USURY SAVINGS CLAUSE It is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of the indebtedness evidenced by this Note whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Note (the "Applicable Usury Laws"). Accordingly, if any acceleration of the maturity of this Note or any payment by the Maker or any other person results in the Maker or such other person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this paragraph shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Note shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the Maker by the Payee; (iii) neither the Maker nor any other person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum 4 Amount; and (iv) the effective rate of interest on this Note shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Note immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to the Payee for the use, forbearance or detention of the indebtedness of the Maker to the Payee evidenced by this Note shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of the indebtedness evidenced by this Note so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term hereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest which may be lawfully contracted for, charged or received by the Payee in connection with the indebtedness evidenced by this Note under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged the Maker under all Applicable Usury Laws on the principal balance of this Note from time to time outstanding. ASSIGNMENT This Note may not be transferred or assigned by the Payee to any person; provided, however, that the Payee may transfer or assign this Note to a bona fide affiliate of the Payee (which affiliate shall also be referred to herein as "Payee"). GOVERNING LAW THIS NOTE SHALL BE SUBJECT TO AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES. JURISDICTION; AGENT FOR SERVICE OF PROCESS; WAIVER ANY JUDICIAL PROCEEDING BROUGHT AGAINST EITHER OF THE PARTIES TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK, NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT"), AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK BY ENTERING INTO AN AGREEMENT AS OF THE DATE OF THIS AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTY SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO 5 THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF THIS AGREEMENT. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE RESPECTIVE PARTIES TO THIS AGREEMENT. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE MAKER TO ASSERT A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1(ii)(a) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE MAKER TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE MAKER FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. 6 IN WITNESS WHEREOF, the undersigned has caused this Note to be executed at the place and on the date first above appearing. LYONDELL-CITGO REFINING LP By: --------------------------------- Name: ---------------------------- Title: --------------------------- ATTEST By: ----------------------------- Secretary 7 EX-4.9 6 EQUISTAR CREDIT AGREEMENT DATED NOVEMBER 25, 1997 EXHIBIT 4.9 CONFORMED COPY ================================================================================ CREDIT AGREEMENT Dated as of November 25, 1997 among EQUISTAR CHEMICALS, LP, as Borrower MILLENNIUM AMERICA INC., as Guarantor, and THE LENDERS PARTY HERETO ================================================================================ [CS&M Ref. No. 4408-140] TABLE OF CONTENTS Page ---- ARTICLE I Definitions SECTION 1.01. Definitions............................................. 1 SECTION 1.02. Accounting Terms........................................ 21 SECTION 1.03. Terms Generally......................................... 22 SECTION 1.04. Classification of Loans and Borrowings.................. 22 ARTICLE II The Loans SECTION 2.01. Commitments............................................. 22 SECTION 2.02. Loans................................................... 22 SECTION 2.03. Competitive Bid Procedure............................... 25 SECTION 2.04. Notice of Borrowings.................................... 27 SECTION 2.05. Conversions and Continuations........................... 28 SECTION 2.06. Swingline Loans......................................... 29 SECTION 2.07. Letters of Credit....................................... 31 SECTION 2.08. Fees.................................................... 36 SECTION 2.09. Repayment of Loans; Evidence of Debt.................... 37 SECTION 2.10. Interest on Loans....................................... 38 SECTION 2.11. Interest on Overdue Amounts; Alternative Rate of Interest............................................ 39 SECTION 2.12. Termination and Reduction of Commitments................ 40 SECTION 2.13. Prepayment of Loans..................................... 41 SECTION 2.14. Reserve Requirements; Change in Circumstances........... 41 SECTION 2.15. Change in Legality...................................... 44 SECTION 2.16. Indemnity............................................... 45 SECTION 2.17. Pro Rata Treatment...................................... 46 SECTION 2.18. Sharing of Setoffs...................................... 46 SECTION 2.19. Taxes................................................... 47 SECTION 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances................................. 49 2 Page ---- ARTICLE III Representations and Warranties SECTION 3.01. Organization............................................ 50 SECTION 3.02. Authorization........................................... 50 SECTION 3.03. Absence of Conflicts.................................... 50 SECTION 3.04. Governmental Approvals.................................. 51 SECTION 3.05. Enforceability.......................................... 51 SECTION 3.06. Financial Statements.................................... 51 SECTION 3.07. Material Adverse Effect................................. 52 SECTION 3.08. Litigation.............................................. 52 SECTION 3.09. Compliance with Laws and Agreements..................... 53 SECTION 3.10. Federal Reserve Regulations............................. 53 SECTION 3.11. Tax Returns............................................. 53 SECTION 3.12. Employee Benefit Plans.................................. 53 SECTION 3.13. Accuracy of Information................................. 54 SECTION 3.14. Investment Company Act; Public Utility Holding Company Act........................................... 54 SECTION 3.15. Environmental and Safety Matters........................ 54 SECTION 3.16. Title to Properties..................................... 55 SECTION 3.17. Senior Ranking.......................................... 55 SECTION 3.18 Representations of MAI.................................. 55 ARTICLE IV Conditions of Lending SECTION 4.01. All Borrowings.......................................... 55 SECTION 4.02. Effective Date.......................................... 57 ARTICLE V Affirmative Covenants SECTION 5.01. Existence............................................... 59 SECTION 5.02. Businesses and Properties............................... 59 SECTION 5.03. Insurance............................................... 59 SECTION 5.04. Taxes................................................... 59 SECTION 5.05. Financial Statements, Reports, etc...................... 59 SECTION 5.06. Litigation and Other Notices............................ 61 SECTION 5.07. ERISA................................................... 61 SECTION 5.08. Access to Premises and Records.......................... 62 SECTION 5.09. Compliance with Laws.................................... 62 SECTION 5.10. Environmental Compliance................................ 62 3 Page ---- ARTICLE VI Negative Covenants SECTION 6.01. Liens................................................... 63 SECTION 6.02. Sale and Leaseback Transactions......................... 66 SECTION 6.03. Subsidiary Indebtedness and Preferred Stock............. 67 SECTION 6.04. Leverage Ratio.......................................... 67 SECTION 6.05. Interest Coverage Ratio................................. 67 SECTION 6.06. Consolidations, Mergers, Sales of Assets................ 67 SECTION 6.07. Change of Business...................................... 68 SECTION 6.08. Use of Proceeds......................................... 69 SECTION 6.09. Restrictive Agreements.................................. 69 ARTICLE VII Events of Default........................... 69 ARTICLE VIII Administrative Agents......................... 73 ARTICLE IX Guarantee............................... 76 ARTICLE X Miscellaneous SECTION 10.01. Notices................................................ 77 SECTION 10.02. No Waivers; Amendments................................. 79 SECTION 10.03. Payments............................................... 80 SECTION 10.04. Governing Law; Submission to Jurisdiction.............. 80 SECTION 10.05. Expenses; Documentary Taxes; Indemnity................. 81 SECTION 10.06. Survival of Agreements, Representations and Warranties, etc....................................... 82 SECTION 10.07. Successors and Assigns................................. 82 SECTION 10.08. Right of Setoff........................................ 86 4 Page ---- SECTION 10.09. Severability........................................... 87 SECTION 10.10. Cover Page, Table of Contents and Section Headings..... 87 SECTION 10.11. Counterparts; Effectiveness............................ 87 SECTION 10.12. WAIVER OF JURY TRIAL................................... 87 SECTION 10.13. Entire Agreement....................................... 88 SECTION 10.14 Confidentiality........................................ 87 SECTION 10.15. Limitation on Recourse to General Partners; Pari Passu Obligations............................................ 88 Schedules Schedule 2.01 Lenders' Commitments Exhibits Exhibit A Form of Assignment and Acceptance Exhibit B Form of Revolving Borrowing Request Exhibit C-1 Form of Competitive Bid Request Exhibit C-2 Form of Notice of Competitive Bid Request Exhibit C-3 Form of Competitive Bid Exhibit C-4 Form of Competitive Bid Accept/Reject Letter Exhibit D Form of Letter of Credit Application Exhibit E-1 Opinion of Baker & Botts L.L.P., counsel for the Borrower Exhibit E-2 Opinion of Kerry Galvin, Esq., General Counsel of Lyondell GP Exhibit E-3 Opinion of George H. Hempstead, III, Esq., General Counsel of MAI CREDIT AGREEMENT dated as of November 25, 1997, among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party hereto, initially consisting of those listed on Schedule 2.01 hereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents"). The Borrower (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in Article I) has requested the Lenders to extend credit in order to enable it to borrow on a revolving basis an aggregate principal amount not in excess of $1,250,000,000. The proceeds of such Borrowings are to be used to finance a $750,000,000 payment to Millennium at the closing of the Joint Venture, to provide working capital availability (including the financing of $250,000,000 required by the Borrower as a result of retention of certain accounts receivable by Millennium Petrochemicals Inc.) and for general partnership purposes, including non-hostile acquisitions and capital expenditures. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I Definitions SECTION 1.01. Definitions. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with Article II. 2 "Acceptable Subordinated Loan" shall mean any loan to the Borrower from a Partner or an Affiliate of a Partner (other than the Borrower or a Subsidiary), but only to the extent that (a) such loan does not mature, and no payment, prepayment, redemption or repurchase of the principal amount thereof is required by the terms thereof, prior to the Maturity Date and (b) such loan is subordinated to the Obligations on terms acceptable to the Administrative Agents. "Administrative Fees" shall have the meaning assigned to such term in Section 2.08(c). "Affiliate" shall mean, with respect to any person, any other person which directly or indirectly controls, is under common control with or is controlled by such person. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards to the next higher 1/16th of 1%) equal to the greater of (a) the Reference Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Servicing Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including, without limitation, the inability of the Servicing Agent to obtain sufficient bids in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. "Applicable Lending Office" shall mean, with respect to each Lender, (i) such Lender's domestic lending office in the case of an ABR Loan, a NIBOR Loan or a Fixed Rate Loan or (ii) such Lender's LIBOR Lending Office in the case of a LIBOR Loan. "Applicable Percentage" shall mean, for any day, with respect to any LIBOR Loan (other than any Competitive Loan) or NIBOR Loan, or with respect to the Facility Fee, as the case may be, the applicable percentage set forth below under the caption 3 "LIBOR/NIBOR Spread" or "Facility Fee Percentage", as the case may be, based upon the Index Ratings: Facility Index LIBOR/NIBOR Fee Ratings Spread Percentage ------- ------ ----------- - ---------------------------------------------------------------------- Category 1 .170% .080% A-/A3 or higher - ---------------------------------------------------------------------- Category 2 .200% .100% BBB+/Baa1 - ---------------------------------------------------------------------- Category 3 .275% .125% BBB/Baa2 - ---------------------------------------------------------------------- Category 4 .350% .150% BBB-/Baa3 - ---------------------------------------------------------------------- Category 5 .450% .200% BB+/Ba1 - ---------------------------------------------------------------------- Category 6 .500% .250% BB/Ba2 or lower - ---------------------------------------------------------------------- For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect an Index Rating (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established an Index Rating in Category 6; (ii) if the Index Ratings established or deemed to have been established by Moody's and S&P shall fall within adjacent Categories, the Applicable Percentage shall be based on the higher of the two ratings; provided, that if the ratings established or deemed to have been established by Moody's and S&P differ by two or more Categories, the Applicable Percentage shall be based on the Category next below that in which the higher rating falls; and (iii) if the Index Ratings established or deemed to have been established by Moody's and S&P shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Percentage shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrower and the Administrative Agents shall negotiate in good faith to amend this definition to reflect such changed rating system or the non-availability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Percentage shall be determined by reference to the Index Rating of such rating agency most 4 recently in effect prior to such change or cessation. Notwithstanding any other provision of this definition, if the Index Ratings at any time in effect shall be the ratings applicable to the Assumed Lyondell Debt and the Administrative Agents or the Required Lenders shall notify the Borrower that, in their good faith judgment, the Index Ratings are affected by the status of Lyondell as an obligor on the Assumed Lyondell Debt in such a manner that they do not fairly represent the Borrower's creditworthiness, the Borrower shall within 180 days either (i) obtain from S&P and Moody's ratings or indicative ratings of the sort referred to in clauses (a) and (b) of the definition of "Index Ratings" or (ii) agree with the Lenders on amendments to the definition of "Applicable Percentage" that in the judgment of the Borrower and the Lenders are appropriate to reflect the creditworthiness of the Borrower (which agreement will be set forth in an amendment to this Agreement). Pending the obtaining of such ratings or indicative ratings or such agreement, the Applicable Percentage will be determined by reference to the Index Ratings in effect on the 60th day prior to the giving of such notice by the Administrative Agents or the Required Lenders. "Asset Contribution Agreements" shall mean (i) the Asset Contribution Agreement between Lyondell, Lyondell LP and the Borrower and (ii) the Asset Contribution Agreement between Millennium Petrochemicals Inc., Millennium LP and the Borrower, each dated as of the Effective Date and as amended, supplemented or otherwise modified from time to time. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, in the form of Exhibit A. "Assumed Lyondell Debt" shall mean outstanding Indebtedness of Lyondell in an aggregate principal amount of $745,000,000 outstanding under the Lyondell Indentures and to be assumed by the Borrower. "Availability Period" shall mean the period from and including the Effective Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrower" shall mean Equistar Chemicals, LP, a Delaware limited partnership. "Borrowing" shall mean (a) a Loan or group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect, (b) a Competitive Loan or group of Competitive Loans made by the Lender or Lenders whose 5 Competitive Bids have been accepted pursuant to Section 2.03 and made on a single date and as to which a single Interest Period is in effect or (c) a Swingline Loan. "Business Day" shall mean any day which is not a Saturday, Sunday or legal holiday in the State of New York or the State of Texas on which banks are open for business in New York City and Houston; provided, however, that (i) when used in connection with a LIBOR Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in deposits in Dollars in the London interbank market and (ii) when used in connection with a NIBOR Loan, the term "Business Day" shall also exclude any day on which the lending offices of the Lender that is the Servicing Agent where its Eurodollar funding operations are customarily conducted are closed. "Capitalized Lease Obligations" of any person shall mean obligations of such person and its consolidated subsidiaries to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real and/or personal property, which obligations are accounted for as a capital lease on the consolidated balance sheet of such person, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Cash Management Subsidiary" shall mean a Subsidiary engaged solely in borrowing, lending and investing in the Borrower and its Subsidiaries and short- term investment activities in connection with the Borrower and its Subsidiaries and that holds no material assets other than cash, cash equivalents and intercompany receivables. A "Change in Control" shall occur if at any time Lyondell and Millennium cease to own in the aggregate partnership interests representing at least a majority of the total equity interest and voting power of the Borrower. "Class", when used in respect of any Loan or Borrowing, shall refer to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Competitive Loans or Swingline Loans. "Closing Date" shall mean the date of this Agreement. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum 6 aggregate amount of such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.11 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 10.07. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders' Commitments is $1,250,000,000. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by the Borrower pursuant to Section 2.03(d) in the form of Exhibit C-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.03(b), (i) in the case of a LIBOR Loan, the Margin and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. The Competitive Bid Rate submitted by any Lender shall include any and all reserve requirement costs of such Lender of the type referred to in Section 2.14(a) which shall be in effect on the date of the submission of such Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03 in the form of Exhibit C-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted by the Borrower under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a loan from a Lender to the Borrower pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be a LIBOR Competitive Loan or a Fixed Rate Loan. "Competitive Loan Exposure" shall mean, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Competitive Loans made by such Lender. "Confidential Information Memorandum" shall mean the Confidential Information Memorandum dated October 1997 relating to the Borrower, the transactions contemplated herein and the Joint Venture. "Consolidated Net Tangible Assets" shall mean the total amount of assets of the Borrower and its Subsidiaries (less 7 applicable depreciation, amortization and other valuation reserves), except to the extent resulting from the write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom all goodwill, trade names, trademarks, patents, unamortized debt issuance fees and expenses and other like intangibles, determined on a consolidated basis. "Credit Event" shall mean any Borrowing (including a Borrowing resulting from a conversion or continuation of Loans pursuant to Section 2.05) or any issuance, amendment, renewal or extension of a Letter of Credit. "Default" shall mean any event which with the giving of notice or lapse of time or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful currency of the United States of America. "EBITDA" shall mean, with respect to the Borrower and its Subsidiaries for any period, the sum, without duplication, of (a) Operating Income, (b) amortization, depreciation and depletion and (c) non-cash compensation expense (including deferred compensation expense), determined on a consolidated basis; provided, that for any fiscal quarter in which the Borrower or any Subsidiary shall incur downtime at or with respect to any plant or manufacturing or processing unit (as determined in good faith by the Borrower), the Borrower shall have the right to add up to the lesser of (i) the estimated amount by which EBITDA is impacted by such downtime or (ii) $20,000,000 to the amount of EBITDA calculated for such fiscal quarter; provided further, that such addition may only be made in the calculation of EBITDA for each of two fiscal quarters during the term of this Agreement and that any such addition may only be made for one fiscal quarter during any four consecutive fiscal quarters. "Effective Date" shall mean the first date on which all the conditions specified in Section 4.01 have been satisfied (or waived in accordance with Section 10.02). "Environmental Liability" shall mean any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental and Safety Laws, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release of any Hazardous Materials into the environment or (e) any 8 contract, agreement or other consensual arrangement pursuant to which liability is assumed with respect to any of the foregoing. "Environmental and Safety Laws" shall have the meaning assigned to such term in Section 3.16. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414 of the Code. "Event of Default" shall have the meaning specified in Article VII. "Exchangeable Notes" shall mean the 2.39% Senior Exchangeable Discount Notes due 2001 of MAI (formerly Hanson America Inc.) (including the Rights appurtenant thereto issued by Hanson (Bermuda) Limited, which permit the Exchangeable Notes to be redeemed by MAI and the proceeds thereof to be used by the holders thereof to purchase American Depositary Shares of Hanson PLC) in an aggregate outstanding principal amount (including accretion of original issue discount) of $42,866,000 on the date hereof. "Excluded Taxes" shall mean, with respect to either Administrative Agent, the Servicing Agent, any Lender, the Fronting Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income, franchise or doing business taxes imposed on (or measured by) its net income, or bank share taxes, imposed by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.20(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.19(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.19(a). 9 "Facility Fee" shall have the meaning assigned to such term in Section 2.08(a). "Federal Funds Effective Rate" shall mean, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Servicing Agent from three Federal funds brokers of recognized standing selected by it. "Fees" shall mean the Facility Fee, the Letter of Credit Fees and the Administrative Fees. "Financial Officer" of any person shall mean the chief financial officer, the treasurer or the principal accounting officer of such person. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "Foreign Lender" shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Fronting Bank" shall mean Chase, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.07(i). The Fronting Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Fronting Bank, in which case the term "Fronting Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, department, instrumentality or regulatory body. 10 "Guarantee" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness. "Hazardous Materials" shall mean all substances or wastes of any nature regulated pursuant to any Environmental and Safety Laws, including all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas and infectious or medical wastes. "Illegality" shall have the meaning assigned to such term in Section 2.15(a). "Indebtedness" of any person shall mean, without duplication, (a) the outstanding principal amounts of all obligations of such person for borrowed money (including repurchase obligations), (b) the outstanding principal amounts of all obligations of such person evidenced by bonds, debentures, notes or similar instruments or letters of credit in support of bonds, notes, debentures or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person to pay the deferred purchase price of property or services under any conditional sale or other title retention agreement, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (other than accounts payable to suppliers and accrued liabilities (i) that are incurred in the ordinary course of business and paid within 60 days after the date due or (ii) that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP), (f) all Capitalized Lease Obligations of such person, (g) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property or assets owned or acquired by such person, whether or not the obligations secured thereby have been assumed and (h) all Guarantees of such person. 11 "Indemnified Taxes" shall mean Taxes other than Excluded Taxes. "Index Debt" shall mean senior, unsecured, unguaranteed, non-credit enhanced long-term debt of the Borrower. "Index Ratings" shall mean (a) the ratings of S&P and Moody's applicable on such date to outstanding Index Debt, or (b) if no Index Debt rated by S&P and Moody's shall be outstanding, any indicative ratings made available by S&P and Moody's for senior unsecured obligations of the Borrower that would, if outstanding, constitute Index Debt, or (c) if no ratings or indicative ratings of the sort referred to in the preceding clauses (a) and (b) shall be available, the ratings of S&P and Moody's applicable on such date to the Assumed Lyondell Debt. "Interest Coverage Ratio" shall mean the ratio of EBITDA to Net Interest Expense for the Borrower and its Subsidiaries, determined on a consolidated basis and calculated to exclude interest expense on Acceptable Subordinated Loans. "Interest Payment Date" shall mean (a) with respect to any Loan, the last day of each Interest Period applicable to the Borrowing of which such Loan is a part and (b) in the case of a LIBOR Loan, a NIBOR Loan or a Fixed Rate Loan with an Interest Period of more than three months' duration (unless otherwise specified in the applicable Competitive Bid Request), each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Loan and, in addition, the date of any continuation or conversion of such Loan with or to a Loan of a different Type. "Interest Period" shall mean (a) as to any LIBOR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months (or, with the consent of the Servicing Agent, 9 or 12 months) thereafter, as the Borrower may elect, (b) as to any NIBOR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending (i) on the corresponding day in the week that is 1, 2 or 3 weeks thereafter as the Borrower may elect or (ii) after such other period of up to one month approved by the Servicing Agent as the Borrower may elect, (c) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the next succeeding March 31, June 30, September 30 or December 31 or, if earlier, the 12 date of prepayment or conversion of such Borrowing, (d) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offers to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than 7 days after the date of such Borrowing or later than 360 days after the date of such Borrowing, and (e) as to any Swingline Loan, the period commencing on the date of such Loan and ending on the date specified by the Borrower as provided in Section 2.06(b), which shall not be later than 7 Business Days after the date of such Loan; provided, however, that (i) if any Interest Period would end on a day that shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of LIBOR Loans or NIBOR Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) no Interest Period with respect to any Loan shall end later than the Maturity Date and (iii) interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Joint Proxy Statement" shall mean the Joint Proxy Statement filed by Lyondell and Millennium with the Securities and Exchange Commission on October 17, 1997. "Joint Venture" shall mean the combination of certain of Lyondell's and Millennium's respective petrochemicals businesses to form a joint venture, which will be organized as a Delaware limited partnership named Equistar Chemicals, LP and headquartered in Houston, Texas, all on terms and in a manner not materially inconsistent with the Master Transaction Agreement, the Asset Contribution Agreements, the Limited Partnership Agreement and the description thereof in the Joint Proxy Statement. "LC Disbursement" shall mean a payment made by the Fronting Bank pursuant to a Letter of Credit. "LC Exposure" shall mean, at any time, the sum of (a) the aggregate amount available for drawing (assuming satisfaction of applicable drawing conditions) under all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Pro Rata Percentage of the total LC Exposure at such time. "Lenders" shall mean the persons listed on Schedule 2.01 and any other person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be party hereto pursuant to an Assignment 13 and Acceptance. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "Letter of Credit" shall mean any letter of credit issued pursuant to this Agreement. "Letter of Credit Fees" shall mean the fees payable under paragraph (b) of Section 2.08. "Leverage Ratio" shall mean the ratio of Total Indebtedness (minus Acceptable Subordinated Debt) to Total Capitalization, determined for the Borrower and its Subsidiaries at any time on a consolidated basis. "LIBO Rate" shall mean, with respect to any Borrowing comprised of LIBOR Loans for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service), or, if no such page of the Telerate Service shall be available, on the Bloomberg Screen British Banker's LIBOR fixing, at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Borrowing for such Interest Period shall be the rate at which dollar deposits of approximately $5,000,000 and for a maturity comparable to such Interest Period are offered to the principal London office of the Servicing Agent in immediately available funds by major banks in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIBOR Borrowing" shall mean a Borrowing comprised of LIBOR Loans. "LIBOR Competitive Borrowing" shall mean a Competitive Borrowing comprised of LIBOR Competitive Loans. "LIBOR Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "LIBOR Lending Office" shall mean, with respect to each Lender, the branches or Affiliates of such Lender which such Lender has designated as its "LIBOR Lending Office" on Schedule 2.01 or, as to any person who becomes a Lender after the Closing Date, in the Assignment and Acceptance executed by such person or such other office of such Lender as such Lender may hereafter designate from time to time as its "LIBOR Lending Office" by notice to the Borrower, as applicable, and the Servicing Agent. 14 "LIBOR Loan" shall mean any LIBOR Revolving Loan or any LIBOR Competitive Loan. "LIBOR Revolving Borrowing" shall mean a Borrowing comprised of LIBOR Revolving Loans. "LIBOR Revolving Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset or (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Limited Partnership Agreement" shall mean the Limited Partnership Agreement dated as of October 10, 1997 and as amended, supplemented or otherwise modified from time to time, by and among the Borrower, Lyondell GP, Millennium GP, Lyondell LP and Millennium LP. "Loan" shall mean a Competitive Loan or a Revolving Loan, whether made as a LIBOR Loan, a NIBOR Loan, an ABR Loan or a Fixed Rate Loan, or a Swingline Loan. "Lyondell" shall mean Lyondell Petrochemical Company, a Delaware corporation, and its successors and assigns. "Lyondell GP" shall mean Lyondell Petrochemical G.P., Inc., the wholly owned subsidiary of Lyondell that serves as one of the general partners of the Joint Venture, and its successors and assigns. "Lyondell Indentures" shall mean (i) the indenture dated as of May 31, 1989, as supplemented by the First Supplemental Indenture thereto dated as of May 31, 1989, between Lyondell, as issuer, and Texas Commerce National Bank Association, as trustee, providing for the issuance of 9.95% Notes due 1996 and 10.00% Notes due 1999; (ii) the indenture dated as of March 10, 1992, as supplemented by the First Supplemental Indenture thereto dated as of March 10, 1992, between Lyondell, as issuer, and Continental Bank, National Association, as trustee, providing for the issuance of 8.25% Notes due 1997 and 9.125% Notes due 2002; (iii) the indenture dated as of January 29, 1996, as supplemented by the First Supplemental Indenture thereto, dated as of February 15, 1996, between Lyondell, as issuer, and Texas Commerce Bank National Association, as trustee, providing for the issuance of 6.50% Notes due 2006 and 7.55% Debentures due 2026; (iv) the 15 $200,000,000 of Medium-Term Notes issued by Lyondell on February 20, 1990, and maturing on various dates from 1998 to 2005; and (v) the $150,000,000 of Medium- Term Notes issued by Lyondell on August 21, 1991, and maturing on various dates from 1998 to 2005, each as amended, supplemented or otherwise modified from time to time. "Lyondell LP" shall mean Lyondell Petrochemical L.P., Inc., the wholly owned subsidiary of Lyondell that serves as one of the limited partners of the Joint Venture, and its successors and assigns. "MAI" shall mean Millennium America Inc., a Delaware corporation, and its successors and assigns. "Margin" shall mean, as to any LIBOR Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Stock" shall have the meaning given such term under Regulation U. "Master Transaction Agreement" shall mean the Master Transaction Agreement dated as of July 25, 1997, as amended by the First Amendment thereto dated as of October 10, 1997 and as further amended, supplemented or otherwise modified from time to time, between Lyondell and Millennium, pursuant to which Lyondell and Millennium have agreed to form the Joint Venture. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations or financial condition of the Borrower and its Subsidiaries taken as a whole, (b) material impairment of the ability of the Borrower to perform any of its obligations under this Agreement or (c) material impairment of the rights of or benefits available to the Lenders, the Administrative Agents or the Servicing Agent under this Agreement; provided, however, that the term "Material Adverse Effect" shall exclude any changes that both (i) affect the petrochemicals industry as a whole and (ii) would not reasonably be expected to impair materially the ability of the Borrower to perform its obligations under this Agreement. "Material Subsidiary" shall mean (a) any Subsidiary other than Subsidiaries that, individually or in the aggregate, do not account for more than 5% of the assets, or more than 5% of the revenues for the four fiscal quarters most recently ended, of the Borrower and its Subsidiaries on a consolidated basis, and (b) any Subsidiary that owns a Material Subsidiary; provided that the term 16 "Material Subsidiary" shall exclude (i) any Cash Management Subsidiary and (ii) any Subsidiary engaged solely in the business of purchasing and owning accounts receivable generated by the Borrower and its other Subsidiaries in connection with any Securitization Transaction. "Maturity Date" shall mean the fifth anniversary of the Closing Date. "Millennium" shall mean Millennium Chemicals Inc., a Delaware corporation, and its successors and assigns. "Millennium GP" shall mean Millennium Petrochemicals GP LLC, the indirect, wholly owned subsidiary of MAI that serves as one of the general partners of the Joint Venture, and its successors and assigns. "Millennium Indentures" shall mean (i) the indenture dated as of March 1, 1994, as amended by the First Supplemental Indenture thereto dated as of May 16, 1994, the Second Supplemental Indenture thereto dated as of September 18, 1996 and the Third Supplemental Indenture dated as of October 1, 1996, among MAI, as issuer, Millennium, as guarantor, and The Bank of New York, as trustee, providing for the issuance of the Exchangeable Notes; and (ii) the indenture dated as of November 27, 1996, among MAI, as issuer, Millennium, as guarantor, and The Bank of New York, as trustee, providing for the issuance of 7% Senior Notes due November 15, 2006 and 7.625% Senior Debentures due November 15, 2026, each as amended, supplemented or otherwise modified from time to time. "Millennium LP" shall mean Millennium Petrochemicals LP LLC, the indirect, wholly owned subsidiary of MAI that serves as one of the limited partners of the Joint Venture, and its successors and assigns. "Moody's" shall mean Moody's Investors Service, Inc., and its successors. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Net Interest Expense" shall mean, with respect to the Borrower and its Subsidiaries for any period, (a) the interest expense of the Borrower and its Subsidiaries, including, without limitation, (i) the amortization of debt discounts, (ii) the amortization 17 of all fees (including, without limitation, fees with respect to interest rate protection agreements) payable in connection with the incurrence of Indebtedness to the extent included in interest expense and (iii) the portion of any payments due under any Capitalized Lease Obligation allocable to interest expense, less (b) the amount of interest income of the Borrower and its Subsidiaries for such period, in each case determined on a consolidated basis. For purposes of the fore going, interest expense shall be determined after giving effect to any net payments made or received by the Borrower and its Subsidiaries with respect to interest rate protection agreements entered into as a hedge against interest rate exposure. "NIBO Rate" shall mean, with respect to any Borrowing comprised of NIBOR Loans for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next higher 1/16th of 1%) equal to the interest rate (adjusted for reserve requirements as incurred) at which deposits in Dollars approximately equal in principal amount to the NIBOR Loan of the Lender that is the Servicing Agent for which the NIBO Rate is being determined and for a maturity equal to the applicable Interest Period are offered in immediately available funds to such Lender by major banks in the New York interbank market at approximately 10:00 a.m., New York City time, two days prior to the commencement of such Interest Period. "NIBOR Borrowing" shall mean a Borrowing comprised of NIBOR Loans. "NIBOR Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the NIBO Rate in accordance with the provisions of Article II. "Obligations" shall mean the obligations of the Borrower under this Agreement (as the same may hereafter be amended, restated, extended, supplemented or otherwise modified from time to time) with respect to the due and punctual payment, whether at maturity, by acceleration or otherwise, of (i) the principal amount of the Loans, (ii) interest on the Loans, (iii) LC Disbursements and interest thereon and (iv) all other monetary obligations of the Borrower, whether for fees, costs, indemnification or otherwise. "Operating Income" shall mean with respect to the Borrower and its Subsidiaries for any period the aggregate income (or deficit) of the Borrower and its Subsidiaries for such period equal to operating revenues and other proper income less, to the extent included in operating revenues or income, the aggregate for the Borrower and its Subsidiaries of (i) operating expenses, (ii) selling, administrative and general expenses and (iii) depreciation, depletion and amortization of properties. 18 "Other Taxes" shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement (but excluding any Excluded Taxes). "Partners" shall mean the direct or indirect wholly owned subsidiaries through which Lyondell and Millennium hold their interests in the Joint Venture. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor thereto. "person" shall mean any natural person, judicial entity, corporation, business trust, joint venture, association, company, limited liability company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (as defined in Section 3(2) of ERISA) (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code with respect to which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Preferred Stock" of any person shall mean capital stock or other ownership interests of or in such person of any class or classes (however designated) that ranks prior, as to the payment of dividends and/or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such person, to shares of capital stock or other ownership interests of or in any other class of such person. For purposes of this Agreement, the "amount" of any Preferred Stock shall be the amount payable to the holder thereof upon the liquidation or dissolution of the issuer thereof. "Pro Rata Percentage" shall mean, with respect to any Lender, the percentage of the Total Commitment represented by such Lender's Commitment. If the Commitments shall have been terminated or shall have expired, the Pro Rata Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any subsequent assignments pursuant to Section 10.07. "Reference Rate" shall mean the rate of interest per annum publicly announced from time to time by BofA in San Francisco as its "reference rate"; each change in the Reference 19 Rate shall be effective on the date such change is announced. The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate. "Register" shall have the meaning assigned to such term in Section 10.07(f). "Regulation G" shall mean Regulation G of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Related Parties" shall mean, with respect to any specified person, such person's Affiliates and the respective directors, officers, employees, agents and advisors of such person and such person's Affiliates. "Reportable Event" shall mean any reportable event as defined in Section 4043(c) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code). "Required Lenders" shall mean Lenders representing at least 51% of the Total Commitment; provided, however, that for purposes of acceleration of the Loans pursuant to Article VII or following the termination of the Commitments, "Required Lenders" shall mean Lenders holding Loans representing at least 51% of the aggregate principal amount of the Revolving Loans and Competitive Loans outstanding. "Responsible Officer" of any person shall mean the chief executive officer, the president, the treasurer, any assistant treasurer, any vice president, the chief financial officer or the principal accounting officer of such person. "Revolving Borrowing" shall mean a Borrowing consisting of simultaneous Revolving Loans from each of the Lenders. "Revolving Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit B. 20 "Revolving Credit Exposure" shall mean, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure and Swingline Exposure at such time. "Revolving Loan" shall mean a Loan made pursuant to Section 2.02(a). "S&P" means Standard & Poor's Ratings Group. "SEC" shall mean the Securities and Exchange Commission. "Securitization Transaction" shall mean any transaction in which the Borrower or any Subsidiary sells or otherwise transfers accounts receivable (a) to one or more third party purchasers or (b) to a special purpose entity that borrows against such accounts receivable or sells such accounts receivable to one or more third party purchasers, but only to the extent that (i) amounts received in connection with the sale or other transfer of such accounts receivable would not under GAAP be accounted for as liabilities on a consolidated balance sheet of the Borrower, (ii) the aggregate outstanding amount at any time of the accounts receivable sold pursuant to all such transactions by the Borrower and the Subsidiaries (the "Aggregate Sold Receivables") does not exceed $300,000,000 and (iii) the Commitments are promptly reduced by any amount by which the Aggregate Sold Receivables at any time shall exceed $150,000,000 (and any related prepayment required by Section 2.13(b) is promptly made). "Servicing Agent" shall mean BofA, in its capacity as servicing agent for the Lenders hereunder. "Subsidiary" shall mean any subsidiary of the Borrower. "subsidiary" shall mean, with respect to any person (the "parent"), any corporation, association or other business entity of which securities or other ownership interests representing 50% or more of the ordinary voting power are, at the time as of which any determination is being made, beneficially owned by the parent, by one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Swingline Exposure" shall mean, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Pro Rata Percentage of the total Swingline Exposure at such time. "Swingline Lender" shall mean BofA, in its capacity as lender of Swingline Loans hereunder. 21 "Swingline Loan" shall mean a Loan made pursuant to Section 2.06. "Taxes" shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Total Capitalization" shall mean at any time, as to the Borrower and its Subsidiaries, the sum of (a) the Total Indebtedness of the Borrower and its Subsidiaries and (b) the partners' equity of the Borrower and its Subsidiaries determined on a consolidated basis. "Total Commitment" shall mean at any time the aggregate amount of the Commitments at such time. "Total Indebtedness" shall mean, as to any person, (a) all Indebtedness of such person less (b) all cash and cash equivalents of such person in excess of $25,000,000, all determined on a consolidated basis in accordance with GAAP. "Transferee" shall have the meaning assigned to such term in Section 2.19(a). "Type", when used in respect of any Loan or Borrowing, shall refer to the rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "rate" shall include the LIBO Rate, the NIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or any fixed rate. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Accounting Terms. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that if the Borrower notifies the Servicing Agent that it requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Servicing Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. 22 SECTION 1.03. Terms Generally. Except where the context requires otherwise, the definitions in Section 1.01 shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless otherwise stated, references to Sections, Articles, Schedules and Exhibits made herein are to Sections, Articles, Schedules or Exhibits, as the case may be, of this Agreement. SECTION 1.04. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "LIBOR Loan") or by Class and Type (e.g., a "LIBOR Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "LIBOR Borrowing") or by Class and Type (e.g., a "LIBOR Revolving Borrowing"). ARTICLE II The Loans SECTION 2.01. Commitments. (a) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Revolving Loans to the Borrower from time to time during the Availability Period. (b) Notwithstanding anything to the contrary contained in this Agreement, in no event may Loans be borrowed under this Article II if, after giving effect thereto (and to any concurrent repayment or prepayment of Loans and/or LC Disbursements), (i) the aggregate Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the Total Commitment. (c) Within the foregoing limits, the Borrower may borrow, pay or prepay and reborrow Revolving Loans hereunder during the Availability Period and subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made ratably by the Lenders in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Revolving Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of 23 any other Lender to make any Revolving Loan to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Loans comprising any Borrowing shall be (i) in the case of Competitive Loans, in an aggregate principal amount which is not less than $25,000,000, (ii) in the case of Revolving Loans (other than ABR Loans), in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than the lesser of $5,000,000 and the remaining aggregate balance of the Commitments and (iii) in the case of ABR Loans, in an aggregate principal amount which is an integral multiple of $1,000,000. (b) Each Competitive Borrowing shall be comprised entirely of LIBOR Competitive Loans or Fixed Rate Loans and each Revolving Borrowing shall be comprised entirely of LIBOR Revolving Loans, NIBOR Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or Section 2.04, as applicable. Each Lender may at its option make any LIBOR Loan or NIBOR Loan by causing any branch or Affiliate of such Lender to make such Loan; provided, however, that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement; provided, further, that if the designation of any such foreign branch or Affiliate shall result in any costs, reductions or Taxes which would not otherwise have been applicable and for which such Lender would, but for this proviso, be entitled to request compensation under Section 2.15, 2.16 or 2.19, such Lender shall not be entitled to request such compensation unless it shall in good faith have determined such designation to be necessary or advisable to avoid any material disadvantage to it. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing which, if made, would result in an aggregate of more than 20 separate Borrowings (excluding Competitive Borrowings) being outstanding hereunder at any one time. For purposes of the fore going, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. (c) Subject to Section 2.05 and paragraph (d) below, each Lender shall make its Loans on the proposed date or dates thereof (i) in the case of Revolving Loans and Competitive Loans, by wire transfer of immediately available funds to the Servicing Agent in New York, New York, not later than 12:00 noon, New York City time, and (ii) in the case of Swingline Loans, as provided for in Section 2.06. The Servicing Agent shall credit on such date the amounts so received to the general deposit account of the Borrower with the Servicing Agent or to another account specified by the Borrower and acceptable to the Servicing Agent by 3:00 p.m., New York City time; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement shall be 24 remitted by the Servicing Agent to the Fronting Bank; and provided, further, that if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, the Servicing Agent shall return the amounts so received to the respective Lenders. Loans shall be made by the Lenders in accordance with their Pro Rata Percentages as provided in Section 2.17 and Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted. Unless the Servicing Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Servicing Agent such Lender's portion of such Borrowing, the Servicing Agent may assume that such Lender has made such portion available to the Servicing Agent on the date of such Borrowing in accordance with this paragraph (c) and the Servicing Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Servicing Agent, such Lender and the Borrower severally agree to repay to the Servicing Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Servicing Agent at (i) in the case of the Borrower, the interest rate applicable to ABR Loans and (ii) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Servicing Agent in accordance with banking industry rules on interbank compensation. If such Lender shall repay to the Servicing Agent such corresponding amount, such amount shall be deemed to constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement as if it were made on the date of such Borrowing. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. SECTION 2.03. Competitive Bid Procedure. (a) In order to request Competitive Bids, the Borrower shall hand deliver or telecopy to the Servicing Agent a duly completed Competitive Bid Request in the form of Exhibit C-1, to be received by the Servicing Agent (i) in the case of a LIBOR Competitive Borrowing, not later than 10:00 a.m., New York City time, four Business Days before a proposed LIBOR Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Borrowing or NIBOR Borrowing shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit C-1 may be rejected in the Servicing Agent's sole discretion, and the Servicing Agent shall promptly notify the 25 Borrower of such rejection by telecopier. Such request shall in each case refer to this Agreement and specify, (x) whether such Borrowing is to be a LIBOR Competitive Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof (which shall comply with the third sentence of Section 2.02(a)) and (z) the Interest Period with respect thereto (which may not end after the Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Servicing Agent shall invite by telecopier (in the form set forth in Exhibit C-2) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans pursuant to such Competitive Bid Request. (b) Each Lender may, in its sole discretion, make one or more Competitive Bids to the Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Servicing Agent by telecopier, in the form of Exhibit C-3, (i) in the case of a LIBOR Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. Multiple bids will be accepted by the Servicing Agent. Competitive Bids that do not conform substantially to the format of Exhibit C-3 may be rejected by the Servicing Agent after conferring with, and upon the instruction of, the Borrower, and the Servicing Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $5,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan that the Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates at which such Lender is prepared to make the Competitive Loan or Loans and (z) the Interest Period and the last day thereof. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. (c) The Servicing Agent shall promptly notify the Borrower by telecopier of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Servicing Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject any Competitive Bid referred to in paragraph (c) above. 26 The Borrower shall notify the Servicing Agent by telephone, confirmed by telecopier in the form of a Competitive Bid Accept/Reject Letter in the form of Exhibit C-4, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above, (x) in the case of a LIBOR Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (y) in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above, (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate with respect to any Competitive Bid Request if the Borrower has decided to reject a bid made at a lower Competitive Bid Rate with respect to such Competitive Bid Request, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in such Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at a single Competitive Bid Rate in part, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid and (v) no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000; provided further, however, that, if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allo cation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (d) shall be irrevocable. (e) The Servicing Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and, if so, in what amount and at what Competitive Bid Rate) by telecopier sent by the Servicing Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (f) The Borrower may submit Competitive Bid Requests for more than one Type of Loan or for more than one Interest Period at the same time on any day, but no Competitive Bid Request shall be made within five Business Days after any date on which one or more Competitive Bid Requests have previously been submitted. 27 (g) If the Servicing Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Borrower one- quarter of an hour earlier than the latest time at which the other Lenders are required to submit their bids to the Servicing Agent pursuant to paragraph (b) above. (h) All notices required by this Section 2.03 shall be given in accordance with Section 10.01. SECTION 2.04. Notice of Borrowings. (a) In order to request a Revolving Borrowing, the Borrower shall give written or telecopy notice (or telephone notice promptly confirmed in writing or by telecopy) to the Servicing Agent in the form of Exhibit B (i) in the case of a LIBOR Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, (ii) in the case of a NIBOR Borrowing, not later than 11:00 a.m., New York City time, two Business Days before a proposed Borrowing and (iii) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the day of a proposed Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Revolving Borrowing Request. (b) The Servicing Agent may waive any prior notice in connection with any Revolving Borrowing to be made on the date hereof. Any notice given pursuant to this Section 2.04 shall be irrevocable and shall in each case refer to this Agreement and specify (x) whether such Borrowing is to be a LIBOR Revolving Borrowing, a NIBOR Borrowing or an ABR Borrowing; (y) the date of such Borrowing (which shall be a Business Day) and the amount thereof; and (z) if such Borrowing is to be a LIBOR Borrowing or a NIBOR Borrowing, the Interest Period with respect thereto. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any LIBOR Revolving Borrowing or NIBOR Borrowing is specified in any such notice, then the applicable Borrower shall be deemed to have selected an Interest Period of one week's duration. The Servicing Agent shall promptly advise the Lenders of each notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. SECTION 2.05. Conversions and Continuations. Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a LIBOR Revolving Borrowing or a NIBOR Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower shall have the right at any time upon prior irrevocable telephonic notice (which shall be confirmed promptly in writing or by telecopy) to the Servicing Agent by the time that a Borrowing Request would be required under Section 2.04 if the 28 Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election, subject in each case to the following: (a) if fewer than all the Loans comprising any Borrowing are to be converted or continued, such conversion or continuation shall be made pro rata among the Lenders in accordance with the respective Loans of such Lenders that are part of such Borrowing immediately prior to such conversion or continuation; (b) in the case of a conversion or continuation of fewer than all the Loans comprising any Borrowing, the aggregate principal amount of Loans converted or continued shall be an amount that would be a permitted Borrowing amount for Loans of the same Type under the third sentence of Section 2.02(a); (c) accrued interest on a Loan (or portion thereof) being converted or continued shall be paid by the Borrower at the time of conversion or continuation; (d) if any LIBOR Revolving Loan or NIBOR Loan is converted at a time other than the end of an Interest Period applicable thereto, the Borrower shall pay any increased costs associated therewith pursuant to Section 2.16; and (e) no portion of a Loan may be converted into or continued as a LIBOR Revolving Loan or a NIBOR Loan with an Interest Period ending after the Maturity Date and any portion of a LIBOR Revolving Loan or NIBOR Loan for which the shortest available Interest Period would extend beyond such date shall be automatically converted at the end of the Interest Period at the time in effect into an ABR Loan. The Interest Period applicable to any LIBOR Revolving Loan or NIBOR Loan resulting from a conversion of a Loan shall be specified by the Borrower in the irrevocable notice of conversion delivered pursuant to this Section; provided, however, that if no such Interest Period shall be specified, the Borrower shall be deemed to have selected an Interest Period of one month's duration, in the case of a LIBOR Loan, or one week's duration, in the case of a NIBOR Loan. If the Borrower shall not have given timely notice to continue any Loan (other than a Competitive Loan or a Swingline Loan) into a subsequent Interest Period (and shall not otherwise have given notice to convert such Loan), such Loan (unless repaid pursuant to the terms hereof) shall, subject to clauses (c) and (e) above, automatically be continued into a new Interest Period, which shall be of one month's duration, in the case of a LIBOR Loan, or one week's duration, in the case of a NIBOR Loan. The Servicing Agent shall promptly advise the Lenders 29 of any notice given pursuant to this Section and of each Lender's portion of the continuation or conversion hereunder. This Section shall not apply to Competitive Borrowings or Swingline Borrowings, which may not be converted or continued. SECTION 2.06. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $35,000,000 or (ii) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the Total Commitment; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Borrower shall notify the Swingline Lender of such request by telephone (confirmed by telecopy if requested by the Swingline Lender), not later than 12:00 noon, New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan and the Interest Period to be applicable thereto. If so requested by the Borrower, the Swingline Lender will quote an interest rate that, if accepted by the Borrower, will be applicable to the requested Swingline Loan, and the Borrower will promptly notify the Swingline Lender in the event it accepts such rate. The Swingline Lender will promptly advise the Servicing Agent of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.07(e), by remittance to the Fronting Bank) by 3:00 p.m., New York City time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Servicing Agent not later than 10:00 a.m., New York City time, on any Business Day require the Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders will participate. Promptly upon receipt of such notice, the Servicing Agent will give notice thereof to each Lender, specifying in such notice such Lender's Pro Rata Percentage of such Swingline Loan or Loans. Each Lender hereby absolutely and unconditionally agrees, 30 upon receipt of notice as provided above, to pay to the Servicing Agent, for the account of the Swingline Lender, such Lender's Pro Rata Percentage of such Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.02 with respect to Loans made by such Lender (and Section 2.02 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Servicing Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Servicing Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Servicing Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Servicing Agent; any such amounts received by the Servicing Agent shall be promptly remitted by the Servicing Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. Any payment by a Lender pursuant to this paragraph to purchase a participation in a Swingline Loan shall not constitute a Revolving Loan and shall not relieve the Borrower of its obligation to repay such Swingline Loan. SECTION 2.07. Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Servicing Agent and the Fronting Bank, at any time and from time to time during the period beginning on the Effective Date and ending on the fifth Business Day prior to the Maturity Date. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of the letter of credit application submitted by the Borrower to, or entered into by the Borrower with, the Fronting Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so 31 have been approved by the Fronting Bank) to the Fronting Bank and the Servicing Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Fronting Bank, the Borrower also shall submit a letter of credit application in the form of Exhibit D hereto in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $100,000,000 and (ii) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans shall not exceed the Total Commitment. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Fronting Bank or the Lenders, the Fronting Bank hereby grants to each Lender, and each Lender hereby acquires from the Fronting Bank, a participation in such Letter of Credit equal to such Lender's Pro Rata Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Servicing Agent, for the account of the Fronting Bank, such Lender's Pro Rata Percentage of each LC Disbursement made by the Fronting Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding 32 or reduction whatsoever; provided that such participations by a Lender shall not be construed as a waiver of any claims such Lender may have against the Fronting Bank for gross negligence or wilful misconduct (as finally determined by a court of competent jurisdiction). (e) Reimbursement. If the Fronting Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Servicing Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that the Borrower may, subject to the conditions to the Borrowing set forth herein, request in accordance with Section 2.04 or 2.06 that such payment be financed with an ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Servicing Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Pro Rata Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Servicing Agent its Pro Rata Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.02 with respect to Loans made by such Lender (and Section 2.02 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Servicing Agent shall promptly pay to the Fronting Bank the amounts so received by it from the Lenders. Promptly following receipt by the Servicing Agent of any payment from the Borrower pursuant to this paragraph, the Servicing Agent shall distribute such payment to the Fronting Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Fronting Bank, then to such Lenders and the Fronting Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Fronting Bank for any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. 33 (f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Fronting Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. None of the Administrative Agents, the Lenders nor the Fronting Bank, nor any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Fronting Bank; provided that the foregoing shall not be construed to excuse the Fronting Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Fronting Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Fronting Bank (as finally determined by a court of competent jurisdiction), the Fronting Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Fronting Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. 34 (g) Disbursement Procedures. The Fronting Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Fronting Bank shall promptly notify the Servicing Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Fronting Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Fronting Bank and the Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Fronting Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.11 shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Fronting Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Fronting Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Fronting Bank. The Fronting Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agents, the replaced Fronting Bank and the successor Fronting Bank. The Servicing Agent shall notify the Lenders of any such replacement of the Fronting Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Fronting Bank pursuant to Section 2.08(b). From and after the effective date of any such replacement, (i) the successor Fronting Bank shall have all the rights and obligations of the Fronting Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Fronting Bank" shall be deemed to refer to such successor or to any previous Fronting Bank, or to such successor and all previous Fronting Banks, as the context shall require. After the replacement of an Fronting Bank hereunder, the replaced Fronting Bank shall remain a party hereto and shall continue to have all the rights and obligations of a Fronting Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing and the maturity of the Loans shall 35 be accelerated or the Commitments terminated as provided in Article VII, on the Business Day that the Borrower receives notice from the Administrative Agents or Lenders with LC Exposure representing greater than 50% of the total LC Exposure demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Servicing Agent, in the name of the Servicing Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (e) or (f) of Article VII. Such deposit shall be held by the Servicing Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Servicing Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Such deposits shall, pending their application as provided below, be invested by the Servicing Agent, at the Borrower's risk and expense, in repurchase obligations with respect to United States Treasury securities or other high-quality overnight or short-term investments (which may include certificates of deposit of BofA), and any interest earned through the investment of such deposits shall be for the Borrower's account and shall be added to the deposits held by the Servicing Agent under this Section and applied as provided herein. Moneys in such account shall be applied by the Servicing Agent to reimburse the Fronting Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure, be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount, together with any interest earned thereon (to the extent not applied as aforesaid), shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. SECTION 2.08. Fees. (a) The Borrower agrees to pay to each Lender, through the Servicing Agent, on each March 31, June 30, September 30 and December 31, commencing December 31, 1997, and on the date on which the Commitment of such Lender shall be terminated as provided herein, a facility fee (the "Facility Fee") equal to the Applicable Percentage in effect from time to time on the amount of the Commitment of such Lender, whether used or unused, during the preceding quarter (or other period commencing on the Closing Date or ending on the Maturity Date or 36 any date on which the Commitment of such Lender shall be terminated). The Facility Fee shall be computed on the basis of the actual number of days elapsed over a year of 360 days (including the first day but excluding the last day). The Facility Fee due to each Lender shall commence to accrue on the Closing Date and shall cease to accrue on the earlier of the Maturity Date and the termination of the Commitment of such Lender as provided herein. (b) The Borrower agrees to pay (i) to the Servicing Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Percentage as shall be used in determining the interest rate applicable to LIBOR Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Fronting Bank a fronting fee, which shall accrue at the rate of 0.100% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure. Participation fees and fronting fees shall be payable on each March 31, June 30, September 30 and December 31, commencing March 31, 1998; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agents, for their respective accounts, agent and administrative fees (the "Administrative Fees") at the times and in the amounts agreed upon in the fee letter agreements dated October 9, 1997, between Lyondell and Millennium and BofA and between Lyondell and Millennium and Chase, respectively. (d) All Fees shall be paid on the dates due, in immediately available funds, to the Servicing Agent (or to the Fronting Bank, in the case of fees payable to it) for distribution, if and as appropriate, among the Lenders. The Administrative Fees of BofA and Chase shall be paid on the dates due, in immediately available funds, to BofA and Chase directly. Once paid, none of the Fees shall be refundable under any circumstances. 37 SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby agrees as to Loans made to it that (i) the outstanding principal balance of each Revolving Loan shall be payable on the Maturity Date, (ii) the outstanding principal balance of each Competitive Loan shall be payable on the last day of the Interest Period applicable thereto and (iii) the outstanding principal balance of each Swingline Loan shall be payable to the Swingline Lender on the last day of the Interest Period applicable to such Swingline Loan; provided that on each date that a Revolving Borrowing or Competitive Borrowing is made, the Borrower shall repay all Swingline Loans then outstanding. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Servicing Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Class and Type of each Loan and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Servicing Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Servicing Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms. (e) Notwithstanding any other provision of this Agreement, in the event any Lender shall request a promissory note or notes evidencing the Loans made by it hereunder, the Borrower shall deliver such a note or notes, satisfactory to the Administrative Agents, payable to such Lender and its registered assigns, and the interests represented by such note or notes shall at all times (including after any assignment of all or part of such interests pursuant to Section 10.07) be represented by one or more promissory notes payable to the payee named therein or its registered assigns. SECTION 2.10. Interest on Loans. (a) Subject to the provisions of Section 2.11, each ABR Loan (including any Swingline Loan that is not bearing interest at a rate quoted by the 38 Swingline Lender in accordance with paragraph (d) below) shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, for periods during which the Alternate Base Rate is determined by reference to the Reference Rate and 360 days for other periods) at a rate per annum equal to the Alternate Base Rate. Interest on each ABR Loan shall be payable on each applicable Interest Payment Date. The Alternate Base Rate shall be determined by the Servicing Agent, and such determination shall be conclusive absent manifest error. (b) Subject to the provisions of Section 2.11, (i) each LIBOR Loan (other than a LIBOR Competitive Loan) and each NIBOR Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate or NIBO Rate, as the case may be, for the Interest Period in effect for such Loan plus the Applicable Percentage, and (ii) each LIBOR Competitive Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Competitive Loan plus (or minus, as applicable) the Margin offered by the Lender making such Competitive Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each LIBOR Loan shall be payable on each applicable Interest Payment Date (and, in the case of Revolving Loans, upon termination of the Commitments). The LIBO Rate or NIBO Rate, as applicable, for each Interest Period shall be determined by the Servicing Agent, and such determination shall be conclusive absent manifest error. The Servicing Agent shall promptly advise the Borrower and each applicable Lender of such determination. (c) Subject to the provisions of Section 2.11, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Fixed Rate Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. (d) Subject to the provisions of Section 2.11, each Swingline Loan shall bear interest at (i) the rate per annum applicable to ABR Loans as provided in paragraph (a) above or (ii) any other rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) which shall be quoted by the Swingline Lender on the date such Loan is made and accepted by the Borrower as provided in Section 2.06; provided, that commencing on any date on which the Swingline Lender requires the Lenders to acquire participations in a Swingline Loan pursuant 39 to Section 2.06(c), such Loan shall bear interest at the rate per annum applicable to ABR Loans as provided in paragraph (a) above. (e) Interest on each Loan shall accrue from and including the date on which such Loan is made and to but excluding the date such Loan is repaid. SECTION 2.11. Interest on Overdue Amounts; Alternative Rate of Interest. (a) If the Borrower shall default in the payment of the principal of or interest on any Loan or any Fees or other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, the Borrower shall on demand from time to time from the Servicing Agent pay interest from and including the date of such default, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed as provided in Section 2.10(a)) equal to (i) in the case of the principal of any Loan, the rate otherwise applicable to such Loan plus 2% per annum and (ii) in the case of any other amount, the Alternate Base Rate plus 2% per annum. (b) In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a LIBOR Borrowing or NIBOR Borrowing the Servicing Agent shall have determined that deposits in the requested principal amounts of the LIBOR Loans or NIBOR Loans, as applicable, are not generally available in the London interbank market or the New York interbank market, as applicable, to the Required Lenders (or, in the case of a LIBOR Competitive Loan, the Lender that is required to make such Loan) or that reasonable means do not exist for ascertaining the LIBO Rate or the NIBO Rate or that the rate at which such deposits are being offered will not adequately and fairly reflect the cost to the Required Lenders (or, in the case of a LIBOR Competitive Loan, the Lender that is required to make such Loan) of making such LIBOR Loan or NIBOR Loan, as applicable, during such Interest Period, the Servicing Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrower and any request by the Borrower for a LIBOR Borrowing or a NIBOR Borrowing shall, until the circumstances giving rise to such notice no longer exist, (i) if such notice relates to a Revolving Borrowing, be deemed a request for an ABR Borrowing; provided, however, that the Borrower may withdraw any such request prior to the making of any such ABR Borrowing, (ii) if such notice relates to the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a LIBOR Borrowing or a NIBOR Borrowing, be deemed ineffective, as applicable, or (iii) if such notice relates to a LIBOR Competitive Borrowing, be deemed ineffective; provided that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for LIBOR 40 Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted. Each determination by the Servicing Agent hereunder shall be conclusive absent manifest error. SECTION 2.12. Termination and Reduction of Commitments. (a) Unless previously terminated, the Commitments shall be automatically and permanently terminated on the Maturity Date. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Servicing Agent (a copy of which the Servicing Agent shall promptly provide to each Lender), the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $25,000,000 and (ii) no such termination or reduction shall be made (A) which would reduce the Total Commitment to an amount less than the sum of the aggregate Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans or (B) which would reduce any Lender's Commitment to an amount that is less than the sum of such Lender's Revolving Credit Exposure. (c) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Servicing Agent for the account of the Lenders, on the date of each termination or reduction of the Total Commitment, the Facility Fee on the amount of the Total Commitment so terminated or reduced accrued through the date of such termination or reduction. SECTION 2.13. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon giving telephonic notice (which shall be confirmed promptly in writing or by telecopy) to the Servicing Agent (which shall promptly provide a copy to each Lender): (i) before 11:00 a.m., New York City time, three Business Days prior to prepayment, in the case of LIBOR Loans or NIBOR Loans, (ii) before 11:00 a.m., New York City time, one Business Day prior to prepayment, in the case of ABR Loans and (iii) before 12:00 noon, New York City time, on the date of prepayment, in the case of Swingline Loans; provided, however, that each such partial prepayment of principal shall be in a minimum principal amount of $1,000,000 and an integral multiple of $1,000,000. The Borrower shall not have the right to prepay any Competitive Borrowing without the prior consent of the Lender thereof. 41 (b) On the date of any termination or reduction of the Total Commitment pursuant to Section 2.12, the Borrower shall pay or prepay so much of the Borrowings as shall be necessary in order that the sum of the aggregate Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans will not exceed the Total Commitment after giving effect to such termination or reduction. (c) Except to the extent otherwise specified by the Borrower making a prepayment, all prepayments under this Section 2.13 shall be applied to outstanding ABR Loans up to the full amount thereof and then shall be applied to outstanding LIBOR Loans (other than LIBOR Competitive Loans) up to the full amount thereof. (d) All prepayments under this Section shall be subject to Section 2.16 but otherwise without premium or penalty. All prepayments other than prepayments of ABR Loans shall be accompanied by accrued interest on the principal amount being prepaid to the date of prepayment. SECTION 2.14. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein (but subject to paragraph (d) below and Section 2.20), if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender or the Fronting Bank, as applicable, of the principal of or interest on any LIBOR Loan, NIBOR Loan or Fixed Rate Loan made by such Lender or any Letter of Credit or participation therein or any fees or other amounts payable hereunder (other than changes in respect of Taxes referred to in clause (a) or (b) of the definition of "Excluded Taxes") or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender or Fronting Bank or shall impose on such Lender, the Fronting Bank or the London interbank market any other condition affecting this Agreement or LIBOR Loans, NIBOR Loans or Fixed Rate Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any such Loan or to increase the cost to such Lender or the Fronting Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Fronting Bank hereunder (whether of principal, interest or otherwise) in respect thereof by an amount deemed by such Lender to be material, then the Borrower 42 will pay to such Lender or the Fronting Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Fronting Bank for such additional costs incurred or reduction suffered. (b) Subject to Section 2.20, if any Lender or the Fronting Bank shall have determined that the adoption after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change after the date hereof in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender or the Fronting Bank (or any lending office of such Lender or the Fronting Bank) or any Lender's or the Fronting Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) made or promulgated after the date hereof by any such Governmental Authority, has or would have the effect of reducing the rate of return on such Lender's or the Fronting Bank's capital or on the capital of such Lender's or the Fronting Bank's holding company, if any, as a consequence of its obligations under this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Fronting Bank, pursuant hereto to a level below that which such Lender or the Fronting Bank or such Lender's or the Fronting Bank's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or the Fronting Bank's guidelines with respect to capital adequacy) by an amount deemed by such Lender or the Fronting Bank to be material, then from time to time the Borrower shall pay to such Lender or the Fronting Bank such additional amount or amounts as will compensate such Lender or the Fronting Bank or such Lender's or the Fronting Bank's holding company for any such reduction suffered. (c) A certificate of each Lender or the Fronting Bank setting forth such amount or amounts as shall be necessary to compensate such Lender or the Fronting Bank (or its participating banks or other entities pursuant to Section 10.07) as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. Except as provided in paragraph (d) below, the Borrower shall pay each Lender or the Fronting Bank the amount shown as due on any such certificate delivered by such Lender or the Fronting Bank within 30 days after receipt of the same. Each Lender or the Fronting Bank shall submit such a certificate no more often than monthly; provided, however, that certificates with respect to amounts due with respect to identifiable Loans may be submitted at the ends of such Loans' Interest Periods. 43 (d) Failure on the part of any Lender or the Fronting Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender's or the Fronting Bank's rights with respect to any period to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to such period or any other period; provided, however, that neither any Lender nor the Fronting Bank shall be entitled to compensation under this Section 2.14 for any costs incurred or reductions suffered more than 90 days prior to the date on which it shall have requested compensation therefor; provided further, that if the change in law or regulation or in the interpretation or administration thereof that shall give rise to any such costs or reductions shall be retroactive, then the 90-day period referred to above shall be extended to include the period of retroactive effect thereof. Notwithstanding any other provision of this Section 2.14, neither any Lender nor the Fronting Bank shall demand compensation for any increased cost or reduction referred to above if it shall not at the time be the general policy or practice of such Lender or the Fronting Bank to demand such compensation in similar circumstances under comparable provisions of other credit agreements, if any. If any Lender or the Fronting Bank shall receive as a refund any moneys from any source that it has listed on the certificate provided pursuant to (c) above as an increased cost, to the extent that the Borrower has previously paid such increased cost to such Lender or the Fronting Bank, such Lender or the Fronting Bank shall promptly forward such refund to the Borrower without interest. (e) Notwithstanding the foregoing provisions of this Section, no Lender shall demand compensation pursuant to this Section in respect of any Competitive Loan for any increased cost or reduction referred to above if the circumstance that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.15. Change in Legality. (a) Notwithstanding anything to the contrary herein contained (but subject to Section 2.20), if after the date of this Agreement any change in any law or regulation or in the interpretation thereof or any new law, regulation or interpretation by any Governmental Authority charged with the administration or interpretation thereof or any judgment, order or directive of any competent court, tribunal or authority shall make it unlawful for any Lender or its Applicable Lending Office to make or maintain any LIBOR Loan or NIBOR Loan or to give effect to its obligations as contemplated hereby with respect to any LIBOR Loan or NIBOR Loan (collectively, an 44 "Illegality"), then, by written notice to the Borrower and to the Servicing Agent, such Lender, so long as such Illegality continues to exist: (i) may declare that LIBOR Loans or NIBOR Loans, as applicable, will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a LIBOR Borrowing or a NIBOR Borrowing, as applicable, (x) shall, as to such Lender only, be deemed a request for an ABR Borrowing or (y) at the option of the Borrower, shall be withdrawn as to the Lender prior to the time for making the Borrowing; and (ii) shall promptly enter into negotiations with the Borrower and negotiate in good faith to agree to a solution to such Illegality; provided, however, that if such an agreement has not been reached by the date at which such change in law is given effect with respect to the outstanding LIBOR Loans or NIBOR Loans of such Lender, the Borrower shall immediately prepay the affected Loans. (b) For purposes of this Section 2.15, a notice by a Lender shall be effective as to each Loan, if lawful, on the last day of the then current Interest Period with respect thereto; provided, however, that such notice shall be effective on the date of receipt if there are no outstanding LIBOR Loans or NIBOR Loans; provided further, that if it is not lawful for such Lender to maintain any Loan in its current form until the end of the Interest Period applicable thereto, then the notice shall be effective upon receipt. (c) Each Lender that has delivered a notice of Illegality pursuant to paragraph (a) above agrees that it will notify the Borrower as soon as practicable if the conditions giving rise to the Illegality cease to exist. SECTION 2.16. Indemnity. The Borrower agrees to indemnify each Lender against any loss or expense which such Lender may sustain or incur as a consequence of (a) any payment, prepayment or conversion of a LIBOR Loan, NIBOR Loan or Fixed Rate Loan made to it required by any provision of this Agreement or otherwise made, or any transfer of any such Loan pursuant to Section 2.20(b), on a date other than the last day of the applicable Interest Period, (b) any default in payment or prepayment of the principal amount of any Loan made to it or any part thereof or interest accrued thereon, as and when due and payable (whether at scheduled maturity, by notice of prepayment, acceleration or otherwise), (c) the occurrence of any Event of Default, including any loss sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a LIBOR Loan, NIBOR Loan or Fixed Rate Loan, (d) any 45 failure by the Borrower to fulfill on the date of any Borrowing by it hereunder the applicable conditions set forth in Article IV, (e) any failure of the Borrower to borrow or to convert or continue any Loan made to it hereunder after irrevocable notice of such Borrowing, conversion or continuation has been given pursuant to Section 2.03, 2.04 or 2.05 or (f) any failure of the Borrower to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan. Such loss or expense shall be the difference as reasonably determined by such Lender between (x) an amount equal to the principal amount of such LIBOR Loan, NIBOR Loan or Fixed Rate Loan being paid, prepaid, converted or transferred or not borrowed, converted or continued multiplied by a percentage per annum (computed on the basis of a 360-day year and actual days remaining for the balance of the Interest Period applicable, or which would have been applicable, to such LIBOR Loan, NIBOR Loan or Fixed Rate Loan being paid, prepaid, converted, transferred or not borrowed, converted or continued) equal to the greater of (i) the LIBO Rate or NIBO Rate applicable to such LIBOR Loan or NIBOR Loan being paid, prepaid, converted or transferred or not borrowed, converted or continued or, in the case of a Fixed Rate Loan, the fixed rate of interest applicable thereto or (ii) such Lender's cost of obtaining the funds for such LIBOR Loan, NIBOR Loan or such Fixed Rate Loan being paid, prepaid, converted, transferred or not borrowed, converted or continued, but in the case of LIBOR Loans or NIBOR Loans, not in excess of the LIBO Rate or NIBO Rate applicable to such Loan plus 1/16th of 1% per annum, and (y) any lesser amount that would be realized by such Lender in reemploying the funds received in payment, prepayment, conversion or transfer or as a result of the failure to borrow, convert or continue during the period from the date of such payment, prepayment, conversion or transfer or failure to borrow, convert or continue to the end of the Interest Period applicable to such LIBOR Loan, NIBOR Loan or Fixed Rate Loan at the interest rate that would apply to an interest period of approximately such duration. Any such Lender shall provide to the Borrower a statement explaining the amount of any such loss or expense, which statement shall, in the absence of manifest error, be conclusive. SECTION 2.17. Pro Rata Treatment. Each Revolving Borrowing, each payment of the Facility Fee and each reduction of the Total Commitment shall be allocated among the Lenders in accordance with their respective Pro Rata Percentages. Except as required under Section 2.15, each payment or prepayment of principal of any Revolving Borrowing and each continuation or conversion of any Revolving Borrowing shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their outstanding Revolving Loans comprising such Borrowing. Each payment of interest on any Revolving Borrowing shall be allocated pro rata among the Lenders in accordance with the respective amounts of accrued and unpaid interest on their outstanding Revolving Loans comprising such Borrowing. Each 46 payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Swingline Borrowing or LC Disbursement shall be allocated in accordance with Sections 2.06 and 2.07, respectively. SECTION 2.18. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, obtain payment (voluntary or involuntary) in respect of any Revolving Loans or participations in LC Disbursements or Swingline Loans as a result of which the unpaid principal portion of its Revolving Loans or participations in LC Disbursements or Swingline Loans shall be proportionately less than the unpaid principal portion of the Revolving Loans or participations in LC Disbursements or Swingline Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the applicable Revolving Loans or participations in LC Disbursements or Swingline Loans of such other Lender, so that the aggregate unpaid principal amount of such Revolving Loans or participations in LC Disbursements or Swingline Loans and participations in the foregoing held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all such Revolving Loans or participations in LC Disbursements or Swingline Loans then outstanding as the principal amount of its Revolving Loans or participations in LC Disbursements or Swingline Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all such Revolving Loans or participations in LC Disbursements or Swingline Loans outstanding prior to such exercise of such banker's lien, setoff or counterclaim or other event; provided, however, that (i) if any such purchase or adjustments shall be made pursuant to this Section 2.18 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest and (ii) the provisions of this Section shall not be construed to apply to any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements or 47 Swingline Loans to any assignee or participant other than the Borrower or any Affiliate thereof. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan made to it or participations in LC Disbursements or Swingline Loans deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation. SECTION 2.19. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Servicing Agent, Lender (which term, as used in this Section, shall include any assignee or transferee of a Lender, including any participation holder, subject to Section 10.07) or Fronting Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify each Administrative Agent, the Servicing Agent, each Lender and the Fronting Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by such Administrative Agent, the Servicing Agent, such Lender or the Fronting Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by an Administrative Agent, a Lender or the Fronting Bank, or by the Servicing Agent on its own behalf or on behalf of a Lender or the Fronting Bank, shall be conclusive absent manifest error. 48 (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Servicing Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Servicing Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Servicing Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. (f) If an Administrative Agent, the Servicing Agent, a Lender or the Fronting Bank shall become aware that it is entitled to receive a refund in respect of Indemnified Taxes or Other Taxes for which it shall have received payment from the Borrower under this Section, it shall promptly notify the Borrower of the availability of such refund and shall, within 10 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If an Administrative Agent, the Servicing Agent, any Lender or the Fronting Bank shall receive a refund in respect of any such Indemnified Taxes or Other Taxes, it shall promptly repay such refund (including any penalties or interest received with respect thereto) to the Borrower, net of all out-of- pocket expenses of such Administrative Agent, the Servicing Agent, such Lender or the Fronting Bank, provided that the Borrower, upon the request of such Administrative Agent, the Servicing Agent, such Lender or the Fronting Bank, agrees to return such refund (plus penalties, interest or other charges) to such Administrative Agent, the Servicing Agent, such Lender or the Fronting Bank in the event such Administrative Agent, the Servicing Agent, such Lender or the Fronting Bank shall be required to repay such refund. SECTION 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances. (a) If any Lender (or Transferee) claims any additional amounts payable pursuant to Section 2.14 or exercises its rights under Section 2.15 or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.19, then such Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document, including, without limitation, any such certificate or document reasonably requested by the Borrower, or 49 to change the jurisdiction of its Applicable Lending Office or to take other actions (including the filing of certificates or documents) known to it to be available if the making of such a filing or change or the taking of such other action would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue or avoid the circumstances giving rise to such exercise and would not, in the sole determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (b) In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.14 or 2.15, or the Borrower shall be required to make additional payments to any Lender under Section 2.19, the Borrower shall have the right, at its own expense (which shall include the processing and recordation fee referred to in Section 10.07(b)), upon notice to such Lender and the Servicing Agent, to require such Lender to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 10.07) all its interests, rights and obligations hereunder (other than any outstanding Competitive Loans held by it) to another financial institution approved by the Servicing Agent (and, if a Commitment is being assigned, the Fronting Bank and the Swingline Lender) (which approval shall not be unreasonably withheld) which shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided, however, that (i) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority and (ii) the assignee or the Borrower shall pay to the affected Lender in immediately available funds on the date of such assignment the outstanding principal of its Loans (other than Competitive Loans) and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts accrued for its account or owed to it hereunder (including the additional amounts asserted and payable pursuant to Section 2.14 or 2.19, if any). ARTICLE III Representations and Warranties The Borrower (and, in the case of Section 3.18, MAI) represents and warrants to the Lenders that: SECTION 3.01. Organization. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has the requisite power and authority under its constitutive documents and applicable law to own its property and assets and to carry on its business as now conducted and is duly qualified and is in good standing and is authorized to do business in every 50 jurisdiction where such qualification or authorization is required, except where the failure so to qualify, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.02. Authorization. It has the power and authority under its constitutive documents and applicable law to execute, deliver and carry out the provisions of this Agreement and to borrow hereunder and all such actions have been duly and validly authorized by all necessary proceedings on its part under its constitutive documents and applicable law. SECTION 3.03. Absence of Conflicts. The execution, delivery and performance by it of this Agreement, any Borrowings by it hereunder, the formation of the Joint Venture and the other transactions contemplated hereby will not (a) violate (i) any provision of the Master Transaction Agreement, the Limited Partnership Agreement or any other agreement governing its organization and/or scope of power and authority or (ii) any applicable law, rule, regulation (including Regulation G, U or X) or order of any Governmental Authority binding upon it, (b) result in a breach of or constitute (alone or with notice or lapse of time or both) a material default under any indenture or any material agreement or other instrument to which it is a party, or by which it or any of its properties or assets are bound, or (c) result in or require the creation or imposition of any Lien upon any of its material property or assets. SECTION 3.04. Governmental Approvals. No registration with or consent or approval of, or other action by, any Governmental Authority is or will be required in connection with its execution, delivery or performance of this Agreement or any Borrowing hereunder, or in connection with the Joint Venture or the other transactions contemplated hereby, other than any which have been made or obtained or the failure to obtain, give, file or take which could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.05. Enforceability. This Agreement will constitute its legal, valid and binding obligation, enforceable in accordance with the terms hereof, except as such enforce ability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application from time to time affecting the rights of creditors generally and by general principles of equity, including implied obligations of good faith and fair dealing. SECTION 3.06. Financial Statements. (a) The Borrower has heretofore furnished to the Lenders balance sheets, statements of income, invested capital and cash flows for the respective businesses to be contributed by each of Lyondell and Millennium to 51 the Joint Venture in accordance with the Master Transaction Agreement and the Asset Contribution Agreements (each a "Contributed Business", and together, the "Contributed Businesses") (i) as of and for the fiscal year ended December 31, 1996, reported on by independent public accountants (Coopers & Lybrand L.L.P, in the case of the Lyondell Contributed Business, and Price Waterhouse LLP, in the case of the Millennium Contributed Business), and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended June 30, 1997, each certified by the chief financial officer of Lyondell or Millennium, as the case may be. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of each of Contributed Businesses as of such dates and for such periods in accordance with GAAP, subject in the case of such quarterly statements to year-end audit adjustments. (b) The Borrower has heretofore furnished to the Lenders (i) the unaudited income statement of the Borrower and its Subsidiaries prepared on a pro forma combined basis for the 12-month period ended December 31, 1996 and for the six-month period ended June 30, 1997, and (ii) the unaudited balance sheet of the Borrower and its Subsidiaries prepared on a pro forma combined basis, as of June 30, 1997. Such pro forma income statements and balance sheet have been prepared in good faith based on the assumptions used to prepare the pro forma financial information contained in the Joint Proxy Statement (which assumptions are believed by the Borrower on the date hereof to be reasonable), are based on the best information available to the Borrower as of the date of delivery thereof, accurately reflect all adjustments required to be made to give effect to the Joint Venture and present fairly on a pro forma basis the estimated combined financial position of the Borrower and its Subsidiaries as of June 30, 1997, and the estimated combined results of operations of the Borrower and its Subsidiaries for the 12-month period ended December 31, 1996 and the six-month period ended June 30, 1997, assuming that the Joint Venture had been consummated at such date or at the beginning of each such period, as the case may be. (c) The projections contained in the Confidential Information Memorandum were prepared in good faith on the basis of the assumptions described in the Confidential Information Memorandum, which assumptions were believed by the Borrower in good faith to be reasonable in light of conditions existing at the time of preparation thereof, and the Borrower has no knowledge of any event or circumstance that would cause it to change any such assumptions in any material respect as of the date hereof, it being understood by the Administrative Agents and the Lenders that actual results may vary from the projected results set forth therein. 52 (d) Each financial statement delivered pursuant to Section 5.05 (a) or (b) will, at the time it is delivered, present fairly, in all material respects, the financial position, results of operations or cash flows, as the case may be, of the Borrower as of the date or for the period to which it relates in accordance with GAAP, subject in the case of quarterly statements to year-end audit adjustments. SECTION 3.07. Material Adverse Effect. From June 30, 1997, to the date of this Agreement, there has not occurred any development or event affecting, or any change in the business, assets, results of operations, financial condition or prospects of, the Borrower and its Subsidiaries, taken as a whole, which has had or could reasonably be expected to have a Material Adverse Effect. SECTION 3.08. Litigation. There are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to its knowledge, threatened against or affecting it or any of its Subsidiaries or the businesses, assets or rights of it or any of its Subsidiaries as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. SECTION 3.09. Compliance with Laws and Agreements. (a) Neither it nor any of its Subsidiaries is in violation of any law, or in default with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect. (b) Neither it nor any of its Subsidiaries is in default under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Federal Reserve Regulations. (a) Neither it nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of the Loans has been or will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose which entails a violation of the provisions of the Regulations of the 53 Board, including, without limitation, Regulation G, U or X thereof. After giving effect to each Credit Event and the application of the proceeds thereof, not more than 25% of the value, determined in accordance with Regulation U, of the assets subject to Section 6.01 will consist of Margin Stock. SECTION 3.11. Tax Returns. All Federal, state, local and foreign tax returns which to its knowledge are required to have been filed by or on behalf of the Borrower and its Subsidiaries, or by Lyondell or Millennium or their subsidiaries, with respect to the assets or operations of the Borrower and its Subsidiaries, have been filed, and all taxes shown to be due and payable on such returns or on any assessments received by the Borrower and its Subsidiaries (or by Lyondell or Millennium or their subsidiaries) have been paid, except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.12. Employee Benefit Plans. (a) It and its ERISA Affiliates are in compliance in all material respects with those provisions of ERISA and the regulations and published interpretations thereunder which are applicable to it, except where noncompliance could not reasonably be expected to result in a Material Adverse Effect. No Reportable Event has occurred with respect to any Plan that could reasonably be expected to result in a Material Adverse Effect, and no unfunded liabilities exist under all of the Plans in the aggregate that could reasonably be expected to result in a Material Adverse Effect. (b) Neither it nor any ERISA Affiliate has incurred any Withdrawal Liability that materially and adversely affects the financial condition of it and its Subsidiaries taken as a whole or that materially and adversely impairs its ability to perform its obligations under this Agreement or any other Loan Document. Neither it nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, where such reorganization or termination has resulted or is likely to result in an increase in the contributions required to be made to such Multiemployer Plan that could reasonably be expected to result in a Material Adverse Effect. SECTION 3.13. Accuracy of Information. (a) No information, report, exhibit or schedule furnished by or on behalf of it to the Administrative Agents or any Lender in connection with the negotiation of this Agreement or included herein contained or contains any material misstatement of fact or omitted or omits to state any material fact necessary to make the statements 54 therein, in the light of the circumstances under which they were made, not misleading. (b) The representations and warranties set forth in the Master Transaction Agreement and the Asset Contribution Agreements are and will be true and correct in all material respects on and as of the date hereof and on and as of the Effective Date, except to the extent that (i) the accuracy of any thereof has been waived by the party or parties to such agreements for whose benefit the same shall have been made and (ii) the event or circumstance necessitating such waiver could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.14. Investment Company Act; Public Utility Holding Company Act. Neither it nor any of its Subsidiaries is an "investment company" as defined in, or is otherwise subject to regulation under, the Investment Company Act of 1940. Neither it nor any of its Subsidiaries is subject to regulation as a "holding company" under the Public Utility Holding Company Act of 1935. SECTION 3.15. Environmental and Safety Matters. It and each of its Subsidiaries and the businesses conducted by them have complied in all material respects with all Federal, state, local and other statutes, ordinances, orders, judgments, rulings and regulations relating to the environment or to protection of the environment or to employee health and safety ("Environmental and Safety Laws") except for violations that either alone or in the aggregate could not reasonably be expected to result in a Material Adverse Effect. Neither it nor any of its Subsidiaries manages or handles any hazardous wastes, hazardous substances, hazardous materials, toxic substances or toxic pollutants regulated by Environmental and Safety Laws in violation of such Environmental and Safety Laws where such violation could reasonably be expected to result, individually or together with other violations, in a Material Adverse Effect. To the best of its knowledge, neither it nor any of its Subsidiaries has any liabilities or contingent liabilities relating to environmental or employee health and safety matters which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. SECTION 3.16. Title to Properties. It and each of its Material Subsidiaries has good and, in the case of real property, marketable title to, or valid leasehold interests in or other rights to use, all its material assets and properties (including, on the Effective Date, all the assets and properties referred to in the Joint Proxy Statement as being transferred to or owned by it), except for such assets and properties as are no longer being used or useful in the conduct of its businesses or have been disposed of in the ordinary course of business and except for defects in title and exceptions to leasehold interests that either 55 alone or in the aggregate could not reasonably be expected to result in a Material Adverse Effect. All such material assets and properties are free and clear of all mortgages, pledges, liens, charges, security interests and other encumbrances other than those permitted by Section 6.01. SECTION 3.17. Senior Ranking. The Obligations will rank equally with all of its senior, unsecured indebtedness, whether now existing or hereafter created. SECTION 3.18. Representations of MAI. (a) MAI is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. MAI has the corporate power and authority to execute and deliver this Agreement and to carry out the provisions of Article IX hereof, and all such actions have been duly and validly authorized by all necessary corporate proceedings on its part. The execution and delivery by MAI of this Agreement and the performance of its obligations hereunder will not (a) violate (i) any provision of its certificate of incorporation or by-laws or (ii) any applicable law, rule, regulation or order of any Governmental Authority binding upon it, (b) result in a breach of or constitute (alone or with notice or lapse of time or both) a material default under any indenture, agreement or other instrument to which it is a party, or by which it or any of its properties or assets are bound, or (c) result in or require the creation or imposition of any Lien upon any of its material property or assets. No registration with or consent or approval of, or other action by, any Governmental Authority is or will be required in connection with MAI's execution or delivery of this Agreement or the performance of its obligations under Article IX hereof, other than any which have been made or obtained or the failure to obtain, give, file or take which could not reasonably be expected to result in a Material Adverse Effect. ARTICLE IV Conditions of Lending SECTION 4.01. All Borrowings. On the date of each Credit Event, the obligations of the Lenders to make Loans and the obligation of the Fronting Bank to issue, amend, renew or extend any Letter of Credit hereunder shall be subject to the satisfaction of the following conditions: (a) The Servicing Agent or the Fronting Bank shall have received a notice of such Credit Event as required by Section 2.03, Section 2.04 or Section 2.07, as applicable. 56 (b) Except in the case of Borrowings that do not increase the aggregate principal amount of the Loans of any Lender outstanding, the representations and warranties set forth in Article III shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) At the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a representation and warranty on the date of such Credit Event as to the matters specified in paragraphs (b) and (c) of this Section. SECTION 4.02. Effective Date. The obligations of the Lenders and the Fronting Bank to make Loans and issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions has been satisfied (or waived in accordance with Section 10.02): (a) The Administrative Agents shall have received a certificate dated the Effective Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01 and paragraph (g) of this Section (with compliance with the conditions set forth in such paragraphs (b) and (c) being determined after giving effect to the transactions referred to in such paragraph (i)). (b) The Administrative Agents shall have received for the benefit of each Lender a signed copy of the favorable written opinion, dated the Effective Date and addressed to the Lenders, of (i) Baker & Botts L.L.P., counsel for the Borrower, substantially in the form set forth in Exhibit E- 1, (ii) Kerry Galvin, Esq., General Counsel of Lyondell GP, substantially in the form set forth in Exhibit E-2 and (iii) George H. Hempstead, III, Esq., General Counsel of MAI, substantially in the form set forth in Exhibit E-3, in each case satisfactory to Cravath, Swaine & Moore, counsel for the Administrative Agents. (c) The Administrative Agents shall have received such documents and certificates as the Administrative Agents or their counsel may reasonably request relating to the organization, existence and good standing of each of the Borrower, Lyondell, Millennium, Lyondell GP, Millennium GP, Lyondell LP, Millennium LP and MAI, the authorization of the Joint Venture and the transactions contemplated hereby and 57 any other legal matters relating to the foregoing, all in form and substance satisfactory to the Administrative Agents and their counsel. (d) The Administrative Agents shall have received counterparts of this Agreement which, when taken together, bear the signatures of all the parties hereto. (e) The Administrative Agents shall have received, for each Lender, copies certified by a Financial Officer of the Borrower of (i) the Master Transaction Agreement, (ii) the Limited Partnership Agreement, and (iii) the Asset Contribution Agreements, each of which shall be in full force and effect. (f) All consents, approvals and waivers sought to be obtained from the respective noteholders under each of the Millennium Indentures in connection with the Joint Venture and the other transactions contemplated hereby shall have been obtained, and no default will exist under the Millennium Indentures or will result under such Indentures from the consummation of the Joint Venture or the other transactions contemplated hereby; provided, however, that the consent of the holders of the Exchangeable Notes need not be obtained if, after a reasonable effort on the part of Millennium, such consent has not been obtained. (g) The closing of the Joint Venture, and the related transfers of assets by Lyondell and Millennium, shall have occurred or shall simultaneously occur in accordance with applicable law and on terms and in a manner not materially inconsistent with the Master Transaction Agreement, the Asset Contribution Agreements, the Limited Partnership Agreement and the description thereof in the Joint Proxy Statement. (h) The Administrative Agents shall have received all Fees and other amounts due and payable on or prior to the Effective Date, including to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (i) All legal matters incidental to this Agreement and the Borrowings hereunder shall be satisfactory to the Lenders and to Cravath, Swaine & Moore, counsel for the Administrative Agents. The Administrative Agents shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Fronting Bank to issue Letters of Credit hereunder shall not become effective unless each 58 of the foregoing conditions is satisfied (or waived pursuant to Section 10.02) at or prior to 3:00 p.m., New York City time, on December 31, 1997 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated, the principal of and interest on each Loan and all Fees payable hereunder shall have been paid in full, all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that it will, and will cause each of its Material Subsidiaries to: SECTION 5.01. Existence. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise permitted by Section 6.06. SECTION 5.02. Businesses and Properties. Except as otherwise permitted by Section 6.06, at all times (a) do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect the rights, licenses, permits, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business; and (b) maintain, preserve and protect all property material to the conduct of such business. SECTION 5.03. Insurance. Maintain insurance consistent either with the insurance maintained on the date hereof with respect to the businesses to be contributed to the Borrower or with general practices in effect from time to time in the Borrower's industry, in either case to the extent available to the Borrower and the Subsidiaries on commercially reasonable terms, and furnish to the Administrative Agents upon request information in reasonable detail as to the insurance so carried. SECTION 5.04. Taxes. Pay and discharge promptly when due all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, as well as all lawful material claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to liens or charges upon such properties or any part thereof, unless and to the extent that any such tax, assessment, charge, levy or claim is being contested in good faith by appropriate 59 proceedings and adequate reserves are being maintained on its books with respect thereto to the extent required by GAAP. SECTION 5.05. Financial Statements, Reports, etc. Furnish to each Administrative Agent and to the Servicing Agent with a copy for each of the Lenders: (a) Within 105 days after the end of each fiscal year of the Borrower, financial statements (which shall include a balance sheet and income statement, as well as statements of partners' equity and cash flows) showing the financial condition and results of operations of the Borrower and its Subsidiaries as of the end of and for such fiscal year prepared on a consolidated basis. The financial statements of the Borrower and its consolidated Subsidiaries delivered pursuant to this paragraph will be audited and reported on by independent public accountants of recognized standing. (b) Within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, unaudited financial statements (which shall include a balance sheet and income statement, as well as statements of partners' equity and cash flow) showing the financial condition and results of operations of the Borrower and its Subsidiaries as of the end of and for such fiscal quarter prepared on a consolidated basis, in each case certified by a Financial Officer of the Borrower as presenting fairly the financial position and results of operations of the Borrower and its consolidated Subsidiaries and as having been prepared in accordance with GAAP, subject to year-end adjustments. (c) Promptly after the same shall have been filed or furnished as described below, copies of such registration statements, annual, periodic and other reports, and such proxy statements and other information, if any, as shall be filed by the Borrower or any Subsidiary with the SEC pursuant to the requirements of the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules promulgated thereunder. (d) Concurrently with (a) and (b) above, a certificate of a Financial Officer of the Borrower, (i) certifying compliance, as of the dates of the financial statements being furnished at such time and for the periods then ended, with the covenants set forth in Sections 6.01, 6.02 and 6.03, and demonstrating compliance with the covenants set forth in Sections 6.04 and 6.05 and (ii) certifying that to the best knowledge of such Financial Officer no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto. 60 (e) Promptly, from time to time, such other information regarding this Agreement or the affairs, operations or condition (financial or otherwise) of the Borrower or any Subsidiary as the Servicing Agent may reasonably request at the request of any Lender and which is susceptible of being obtained, produced or generated by any of them or of which any of them has knowledge. SECTION 5.06. Litigation and Other Notices. Give the Servicing Agent prompt written notice (which the Servicing Agent shall promptly deliver to the Lenders) after any Responsible Officer learns of the following: (i) the issuance by any Governmental Authority of any injunction, order, decision or other restraint prohibiting, or having the effect of prohibiting, the making of the Loans, or having the effect of invalidating any provision of this Agreement or the initiation of any litigation or similar proceeding seeking any such injunction, order, decision or other restraint; (ii) the filing or commencement of any action, suit or proceeding against the Borrower or any Subsidiary, whether at law or in equity or by or before any Governmental Authority or any arbitrator, as to which action, suit or proceeding there is a reasonable possibility of an adverse determination and which, if determined adversely to the Borrower or any Subsidiary, could reasonably be expected to result in a Material Adverse Effect; (iii) the occurrence of any development or event or any change in the business, assets, results of operations or financial condition of the Borrower and its Subsidiaries, taken as a whole, which could reasonably be expected to result in a Material Adverse Effect; and (iv) any Default or Event of Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto. SECTION 5.07. ERISA. (a) Comply in all material respects with the applicable provisions of ERISA, except where noncompliance could not reasonably be expected to result in a Material Adverse Effect, and (b) furnish to the Administrative Agents and each Lender (i) as soon as possible, and in any event within 30 days after any Responsible Officer of the Borrower or any ERISA Affiliate knows that any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of the Borrower or any Subsidiary to the PBGC that could reasonably be expected to result in a Material Adverse Effect, a statement of a Financial 61 Officer setting forth details as to such Reportable Event and the action proposed to be taken with respect thereto, together with a copy of the notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any notice that the Borrower or any Subsidiary may receive from the PBGC of an intent to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) or to appoint a trustee to administer any Plan or Plans and (iii) promptly and in any event within 30 days after receipt thereof by the Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice concerning (A) the imposition of any Withdrawal Liability in an amount that could reasonably be expected to result in a Material Adverse Effect or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, both within the meaning of Title IV of ERISA, which, in each case, is expected to result in an increase in annual contributions of the Borrower or any Subsidiary to such Multiemployer Plan in an amount that could reasonably be expected to result in a Material Adverse Effect. SECTION 5.08. Access to Premises and Records. Keep and maintain proper books of record and account and a system of accounting established and administered in accordance with sound business practice and adequate to permit the preparation of the financial statements required to be delivered under Section 5.05, and upon reasonable notice permit representatives of the Lenders to have access to such books of record and account and the premises of the Borrower or any Subsidiary at reasonable times and to make such excerpts from such books of record and account as such representatives deem necessary in connection with their evaluation of the ability of the Borrower to repay the Loans. SECTION 5.09. Compliance with Laws. Comply with all applicable laws, rules and regulations, and all orders of any Governmental Authority applicable to it or any of its property, business, operations or transactions to the extent noncompliance could reasonably be expected to result in a Material Adverse Effect. SECTION 5.10. Environmental Compliance. Comply with all Environmental and Safety Laws, except where the failure so to comply could not reasonably be expected to result in a Material Adverse Effect, and provide prompt written notice to the Servicing Agent following the receipt of any notice of any violation of any Environmental and Safety Laws from any Federal, state or local Governmental Authority charged with enforcing such Environmental and Safety Laws which could reasonably be expected to result in a Material Adverse Effect. 62 ARTICLE VI Negative Covenants Until the Commitments have expired or been terminated, the principal of and interest on each Loan and all Fees payable hereunder have been paid in full, all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that it will not, and will not permit any of its Material Subsidiaries, either directly or indirectly, to: SECTION 6.01. Liens. Incur, create, assume or permit to exist any Lien on any of its property or assets, whether owned at the date hereof or hereafter acquired, or assign or convey any rights to or security interests in any future revenues, except: (a) Liens incurred and pledges and deposits made in the ordinary course of business in connection with workmen's compensation, disability or unemployment insurance, old-age pensions, retiree health benefits and other social security benefits and deposits securing liabilities to insurance carriers under insurance or self-insurance arrangements; (b) Liens securing the performance of bids, tenders, leases, government contracts, other contracts (other than for the repayment of borrowed money), statutory and regulatory obligations, surety, customs and appeal bonds and other obligations of a like nature, incurred as an incident to and in the ordinary course of business; (c) Liens encumbering pipelines or pipeline facilities that arise by operation of law, and other Liens imposed by law, such as carriers', warehousemen's, mechanics', materialmen's and vendors' liens, incurred in good faith in the ordinary course of business and securing obligations which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings as to which the Borrower or any such Subsidiary, as the case may be, shall have, to the extent required by GAAP, set aside on its books adequate reserves; (d) Liens securing the payment of taxes, assessments and governmental charges or levies, either (i) not delinquent or (ii) being contested in good faith by appropriate legal or administrative proceedings and as to the Borrower or any such Subsidiary, as the case may be, shall have, to the extent required by GAAP, set aside on its books adequate reserves; (e) (i) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, 63 restrictions on the use of property, minor irregularities of title and similar encumbrances incurred or suffered in the ordinary course of business (and with respect to leasehold interests, the interest of the landlord or owner in the leased property and mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or owner of the leased property, with or without consent of the lessee) and (ii) licenses or leases of patents, copyrights, trademarks, tradenames and other intellectual property, which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (f) Liens upon any real property or equipment acquired (by merger or otherwise), constructed or improved by the Borrower or any Subsidiary which are created or incurred prior to or within 180 days after such acquisition, construction or improvement to secure or provide for the payment of any part of the purchase price of such real property or equipment or the cost of such construction or improvement, including carrying costs (but no additional amounts); provided that any such Lien shall not apply to any other property of the Borrower or any Subsidiary; (g) Liens on property existing at the time such property is acquired (by merger or otherwise) by the Borrower or a Subsidiary (provided that such Liens do not apply to any other property of the Borrower or any Subsidiary and such Liens and the obligations secured thereby were not created in contemplation of the acquisition by the Borrower or such Subsidiary of such property) and Liens on property of any person at the time such person becomes a Subsidiary (provided that such Liens do not apply to any other property of the Borrower or any Subsidiary and such Liens and the obligations secured thereby (other than any Liens on real property or equipment and the obligations secured thereby) were not created in contemplation of such Subsidiary of such property or of such person becoming a Subsidiary); (h) Liens on the property or assets of any Material Subsidiary in favor of the Borrower or any other Subsidiary; (i) Liens on accounts receivable deemed to arise in connection with any Securitization Transaction; (j) extensions, renewals and replacements of Liens referred to in clauses (a) through (i) above; provided that any such extension, renewal or replacement Lien shall be limited to the property or assets covered by the Lien extended, renewed or replaced and that the obligations 64 secured by any such extension, renewal or replacement Lien shall be in an amount not greater than the amount of the obligations secured by the Lien extended, renewed or replaced; (k) prejudgment, attachment or judgment Liens not giving rise to a Default or Event of Default and which are being contested in good faith by appropriate proceedings; (l) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Borrower and its Subsidiaries; (m) customary Liens for the fees, costs and expenses of trustees and escrow agents pursuant to any indenture, escrow agreement or similar agreement establishing a trust or escrow arrangement, and Liens pursuant to merger agreements, stock purchase agreements, asset sale agreements, option agreements and similar agreements in respect of the disposition of property or assets of the Borrower and the Subsidiaries, to the extent such dispositions are permitted hereunder and such Liens relate only to the assets or properties to be disposed of; (n) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (o) customary Liens in favor of issuers of documentary letters of credit; (p) netting provisions and setoff rights in favor of counterparties to swap and other interest or exchange rate hedging agreements; and (q) other Liens to secure Indebtedness or other monetary obligations if, immediately after the incurrence thereof, the sum (without duplication) of (i) all amounts of Indebtedness and other monetary obligations secured by Liens which would not be permitted but for this clause (q), (ii) the obligations of the Borrower and its Material Subsidiaries in respect of sale and leaseback transactions referred to in Section 6.02 and (iii) all amounts of unsecured Indebtedness and Preferred Stock of Material Subsidiaries which would not be permitted but for clause (d) of Section 6.03, does not exceed the greater of $250,000,000 or 15% of Consolidated Net Tangible Assets as shown on the most recent audited consolidated balance sheet of the Borrower and its Subsidiaries delivered pursuant to Section 5.05(a); provided, that for purposes of determining compliance at any time with this clause (q), the amounts of 65 any other monetary obligations referred to in subclause (i) above or of any obligations (other than Capitalized Lease Obligations) referred to in subclause (ii) above shall be the stated or determinable amounts of such obligations at such time, unless the amounts of such obligations shall not be stated or determinable, in which case the amounts of such obligations shall be deemed to be the maximum reasonably anticipated liability of the Borrower and the Material Subsidiaries in respect thereof as determined in good faith by the Borrower; provided that, except for the Liens referred to in clause (m) above, none of the foregoing exceptions shall permit the Borrower or any Material Subsidiary to incur, create, assume or permit to exist any consensual Lien on the capital stock owned by it of any Material Subsidiary. SECTION 6.02. Sale and Leaseback Transactions. Enter into any arrangement, directly or indirectly, with any person whereby the Borrower or a Material Subsidiary shall sell or transfer any property, real or personal, and used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, without the consent of the Required Lenders. Notwithstanding the foregoing, the Borrower or any Material Subsidiary may engage in any sale and leaseback transaction, without seeking the consent of the Required Lenders, if, immediately after the consummation of such transaction, the sum (without duplication) of (a) all amounts of Indebtedness and other monetary obligations secured by Liens which would not be permitted but for clause (q) of Section 6.01, (b) the obligations of the Borrower and its Material Subsidiaries in respect of sale and leaseback transactions referred to in this Section 6.02 and (c) all amounts of unsecured Indebtedness and Preferred Stock of Material Subsidiaries which would not be permitted but for clause (d) of Section 6.03, does not exceed the greater of $250,000,000 or 15% of Consolidated Net Tangible Assets as shown on the most recent audited consolidated balance sheet of the Borrower and its Subsidiaries delivered pursuant to Section 5.05(a); provided, that for purposes of determining compliance at any time with this sentence, the amounts of any other monetary obligations referred to in subclause (a) above or of any obligations (other than Capitalized Lease Obligations) referred to in subclause (b) above shall be the stated or determinable amounts of such obligations at such time, unless the amounts of such obligations shall not be stated or determinable, in which case the amounts of such obligations shall be deemed to be the maximum reasonably anticipated liability of the Borrower and the Material Subsidiaries in respect thereof as determined in good faith by the Borrower; provided, further, that the 66 consideration received for the sale of such assets shall be at least equal to the then-current fair market value of such assets. For purposes of the foregoing, the value of each such sale and leaseback transaction shall (except as the Borrower and the Required Lenders shall otherwise agree) be deemed to be (a) the price at which the property pertaining thereto is sold or transferred to the lessor thereof or (b) (if higher than (a) and if the relevant lease or leases represent Capitalized Lease Obligations) the balance sheet value of such lease or leases. SECTION 6.03. Subsidiary Indebtedness and Preferred Stock. In the case of the Material Subsidiaries, incur, issue, create, assume or permit to exist any Indebtedness or Preferred Stock other than (a) Indebtedness or Preferred Stock of any Material Subsidiary issued to or held by the Borrower or any other Material Subsidiary, (b) Indebtedness consisting of obligations for the purchase price of real property or equipment or the cost of construction or improvement thereof referred to in Section 6.01(f) and secured by Liens permitted under such Section, (c) Indebtedness consisting of obligations referred to in Section 6.01(g) and secured by Liens permitted under such Section, and (d) any other Indebtedness or Preferred Stock; provided that the sum (without duplication) of (i) all Indebtedness and Preferred Stock of Material Subsidiaries which would not be permitted but for this clause (d), (ii) all Indebtedness and other monetary obligations secured by Liens which would not be permitted but for clause (q) of Section 6.01 and (iii) all obligations of the Borrower and its Material Subsidiaries in respect of sale and leaseback transactions referred to in Section 6.02, shall not exceed the greater of $250,000,000 or 15% of Consolidated Net Tangible Assets as shown on the most recent audited consolidated balance sheet of the Borrower and its Subsidiaries delivered pursuant to Section 5.05(a); provided further, that for purposes of determining compliance at any time with this clause (d), the amounts of any other monetary obligations referred to in subclause (i) above or of any obligations (other than Capitalized Lease Obligations) referred to in subclause (ii) above shall be the stated or determinable amounts of such obligations at such time, unless the amounts of such obligations shall not be stated or determinable, in which case the amounts of such obligations shall be deemed to be the maximum reasonably anticipated liability of the Borrower and the Material Subsidiaries in respect thereof as determined in good faith by the Borrower. SECTION 6.04. Leverage Ratio. Permit the Leverage Ratio at any time to exceed 0.60 to 1. SECTION 6.05. Interest Coverage Ratio. At any time on or after March 31, 1998, permit the Interest Coverage Ratio for the most recently ended period of four consecutive fiscal quarters 67 (or such lesser number of fiscal quarters as shall have elapsed since December 31, 1997) to be less than 3.0 to 1. SECTION 6.06. Consolidations, Mergers, Sales of Assets. (a) Consolidate with or merge into any other person, or permit another person to merge into it, except that, so long as at the time thereof and immediately after giving effect thereto no Event of Default or Default has occurred and is continuing, (i) any Material Subsidiary may be merged, liquidated or dissolved into the Borrower or into another Material Subsidiary and (ii) any other person may be merged into the Borrower or a Subsidiary in a transaction in which the surviving person is the Borrower or a wholly owned Subsidiary and, in the case of any transaction in which the consideration (other than equity interests of the Borrower) paid by the Borrower and the Subsidiaries has an aggregate value in excess of 10% of Consolidated Net Tangible Assets as of the most recently ended fiscal quarter, the Borrower has submitted to the Administrative Agents calculations reasonably satisfactory to the Administrative Agents showing pro forma compliance with the covenants in Sections 6.04 and 6.05 assuming that such transaction had occurred at the most recent fiscal quarter end for which financial statements shall have been delivered pursuant to Section 5.05 (in the case of Section 6.04) or at the beginning of the period of four fiscal quarters ended on such date (in the case of Section 6.05). (b) Sell, lease, transfer or assign to any person or otherwise dispose of (i) in one transaction or a series of related transactions, the assets of the Borrower and its consolidated Subsidiaries (whether now owned or hereafter acquired) substantially as an entirety or (ii) in one transaction or a series of related transactions, assets representing more than 10% of Consolidated Net Tangible Assets as of the most recently ended fiscal quarter (other than to the Borrower or another Subsidiary) unless, in the case of any transaction or series of related transactions referred to in this clause (ii), the Borrower shall first have delivered to the Administrative Agents pro forma consolidated financial information demonstrating compliance with the covenants set forth in Sections 6.04 and 6.05 as of the most recent fiscal quarter end and for the period of four quarters or other relevant period then ended on a pro forma basis as if such transaction or series of related transactions had occurred at the beginning of such period. SECTION 6.07. Change of Business. The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Material Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto; provided that the Borrower and its Material Subsidiaries may engage in other businesses representing not more 68 than 10% of Consolidated Net Tangible Assets of the Borrower as shown on the most recent audited consolidated balance sheet of the Borrower and its Subsidiaries delivered pursuant to Section 5.05(a). SECTION 6.08. Use of Proceeds. (a) Use or permit the use of the proceeds of Borrowings or other extensions of credit hereunder for purposes other than those set forth in the preamble to this Agreement. (b) Use the proceeds of Borrowings or other extensions of credit hereunder to acquire capital stock of or other ownership interests in any publicly held company unless such acquisition shall have been approved by the board of directors or comparable governing body of such company prior to the acquisition by the Borrower of a controlling interest in such company or the commencement by the Borrower of a tender offer or proxy solicitation with respect to shares of capital stock of, or other ownership interests in, such company. SECTION 6.09. Restrictive Agreements. Enter into or permit to exist any agreement that restricts the ability of any Material Subsidiary to pay dividends or other distributions, or to make or repay loans or advances, to the Borrower or, in the case of dividends, to any other Subsidiary owning capital stock of such Subsidiary; provided that the foregoing shall not apply to (a) customary restrictions and conditions contained in (i) any agreement relating to the sale of a Material Subsidiary, or all or substantially all of its assets, pending such sale or (ii) any agreement relating to secured Indebtedness permitted by this Agreement, if such restrictions or conditions apply only to such Subsidiary or to the property or assets securing such Indebtedness, as the case may be, (b) customary provisions in leases and other contracts restricting the assignment thereof or (c) restrictions and conditions existing with respect to any Material Subsidiary at the time it becomes a Subsidiary and not created in contemplation of such Subsidiary becoming a Subsidiary. ARTICLE VII Events of Default In case of the happening of any of the following events (herein called "Events of Default"): (a) any representation or warranty made or deemed made in or in connection with this Agreement or the extensions of credit hereunder or any representation, warranty or statement made or deemed made with respect to any financial statement 69 or in any report, certificate or other instrument or agreement furnished in connection with this Agreement or in connection with the extensions of credit hereunder shall prove to have been false or misleading in any material respect when made or deemed made; (b) default shall be made in the payment of any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount due under this Agreement when and as the same shall become due and payable, and such default shall continue for a period of five days; (d) (i) default shall be made in the due observance or performance of any covenant, condition or agreement contained in Section 5.01 or 5.06 or in Article VI; (ii) default shall be made in the due observance or performance of any covenant, condition or agreement contained in Section 5.05, which default referred to in this clause (ii) shall continue for a period of five days or (iii) default shall be made in the due observance or performance of any other covenant, condition or agreement to be observed or performed on the part of the Borrower or any Subsidiary pursuant to the terms of this Agreement, which default referred to in this clause (iii) shall continue for a period of 30 days after notice thereof from either Administrative Agent or the Required Lenders to the Borrower; (e) the Borrower or any Material Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code or any other Federal or state bankruptcy, insolvency, liquidation or similar law, (ii) consent to the institution of, or fail to contravene in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Borrower or any Subsidiary or for a substantial part of its property or assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) become unable or fail generally to pay its debts as they become due; 70 (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Material Subsidiary or of a substantial part of the property or assets of the Borrower or any Material Subsidiary, under Title 11 of the United States Code or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Borrower or any Material Subsidiary or for a substantial part of the property or assets of the Borrower or any Material Subsidiary or (iii) the winding up or liquidation of the Borrower or any Material Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for 30 days; (g) (i) default shall be made or another event shall occur with respect to any Indebtedness of the Borrower or any Subsidiary if the effect of any such default or other event shall be to accelerate, or to permit the holder or obligee of any Indebtedness (or any trustee on behalf of such holder or obligee) to accelerate (with or without the giving of notice or lapse of time or both), such Indebted ness in an aggregate amount in excess of $50,000,000; or (ii) any amount of principal of or interest on any Indebtedness of the Borrower or any Subsidiary in an aggregate principal amount in excess of $50,000,000 shall not be paid when due, whether at maturity, by acceleration or otherwise (after giving effect to any period of grace specified in the instrument evidencing or governing such Indebtedness); or (iii) without limiting the rights of the Lenders under clauses (g)(i) and (g)(ii) above, the Borrower or any Subsidiary shall default in the payment of principal of any Indebtedness, which principal, individually or in the aggregate with other defaulted principal, shall be in excess of $15,000,000, when due and payable (after giving effect to any period of grace specified in the instrument evidencing or governing such Indebtedness), or the principal of such Indebtedness in excess of $15,000,000 shall be declared due and payable prior to the date on which it would otherwise be due and payable and such acceleration shall not have been rescinded or annulled, or such accelerated Indebtedness shall not have been discharged, within five Business Days of such acceleration; (h) (A) a Reportable Event or Reportable Events, or a failure to make a required payment (within the meaning of Section 412(n)(1) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in a Material Adverse Effect; or (B) a 71 trustee shall be appointed by a United States District Court to administer any such Plan or Plans or the PBGC shall institute proceedings to terminate any Plan or Plans and such appointment or termination proceedings could reasonably be expected to result in a Material Adverse Effect; (i) (i) the Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not, in fact, contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of the Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid by the Borrower and its ERISA Affiliates to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or dates of such notification), could reasonably be expected to result in a Material Adverse Effect; (j) the Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased could reasonably be expected to result in a Material Adverse Effect; (k) one or more judgments for the payment of money (not reimbursed by insurance policies of the Borrower or any Subsidiary) in excess of $20,000,000 in the aggregate shall be rendered by a court or other tribunal against the Borrower or any Subsidiary and shall remain undischarged for a period of 30 consecutive days during which the execution of such judgments shall not have been stayed effectively or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Subsidiary to enforce any such judgment; or (l) a Change in Control shall occur; then, and in any such event (other than an event with respect to the Borrower described in paragraph (e) or (f) above), and at any time thereafter during the continuance of such event, the Administrative Agents may, or at the written direction of the Required Lenders shall, by written or telecopied notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments, 72 (ii) demand cash collateral as provided in Section 2.07(j) and (iii) declare the Loans then outstanding to be forth with due and payable, whereupon the principal of the Loans so declared due and payable, together with accrued interest and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall become forthwith due and payable both as to principal and interest, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding; provided, however, that, in the event of a default with respect to the Borrower described in paragraph (e) or (f) above, the Commitments shall automatically terminate, the deposit of cash collateral as provided in Section 2.07(j) shall automatically be required and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding. ARTICLE VIII Administrative Agents Each of the Lenders and the Fronting Bank irrevocably authorizes the Administrative Agents (and for purposes of this Article VIII, the term "Administrative Agent" or "Administrative Agents" shall include BofA in its capacity as Servicing Agent, as applicable) to take such action on its behalf and to exercise such powers hereunder as are specifically delegated to the Administrative Agents by the terms hereof together with such powers as are reasonably incidental thereto. Each of the Administrative Agents may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents selected and appointed by such Administrative Agent. Each of the Administrative Agents and any such sub-agent may perform any and all its duties and exercise its rights and powers through Affiliates or its or its Affiliates' employees. The exculpatory provisions of the following paragraphs shall apply to any such sub-agent, to the Affiliates of the Administrative Agents and any such sub-agent and to the directors, officers and employees of the Administrative Agents, any such sub-agent and their respective Affiliates. The Administrative Agents are hereby expressly authorized and directed by the Lenders to the extent provided in this Agreement, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the 73 Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agents have actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Administrative Agents. Neither the Administrative Agents nor any of their directors, officers, employees or agents shall be liable as such for any action taken or omitted to be taken by it or them hereunder or in connection herewith (a) at the request or with the approval of the Required Lenders (or, if otherwise specifically required hereunder, the consent of all the Lenders) or (b) in the absence of its or their own gross negligence or wilful misconduct. Each Lender acknowledges that it has decided to enter into this Agreement and to extend the Loans hereunder based on its own analysis of the creditworthiness of the Borrower and agrees that the Administrative Agents shall bear no responsibility for such creditworthiness. The Administrative Agents shall not be responsible in any manner to any of the Lenders for the effectiveness, enforceability, genuineness, validity or due execution of this Agreement or any other agreements or certificates, requests, financial statements, notices or opinions of counsel or for any recitals, statements, warranties or representations contained herein or in any such instrument or be under any obligation to ascertain or inquire as to the performance or observance of any of the terms, provisions, covenants, conditions, agreements or obligations of this Agreement or any other agreements on the part of the Borrower and, without limiting the generality of the foregoing, the Administrative Agents shall, in the absence of knowledge to the contrary, be entitled to accept any certificate furnished pursuant to this Agreement as conclusive evidence of the facts stated therein and shall be entitled to rely on any note, notice, consent, certificate, affidavit, letter, telegram, teletype or telecopy message, statement, order or other document which it reasonably believes to be genuine and correct and to have been signed or sent by the proper person or persons. It is understood and agreed that each of the Administrative Agents may exercise its rights and powers under other agreements and instruments to which it is or may be a party and engage in other transactions with the Borrower or any Subsidiary or other Affiliate as though it were not the agent of the Lenders hereunder. The Administrative Agents may consult with legal counsel selected by them in connection with matters arising under this Agreement and any action taken or suffered in good faith by 74 either of them in accordance with the opinion of such counsel shall be full justification and protection to it. Each of the Administrative Agents may exercise any of its powers and rights and perform any duty under this Agreement through agents or attorneys. The Lenders shall, in accordance with their Pro Rata Percentages at the time of demand for indemnification hereunder, indemnify each of the Administrative Agents, in its capacity as agent on behalf of the Lenders (to the extent not reimbursed by the Borrower pursuant to the terms hereof and without limiting the obligations of the Borrower to do so) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as results from such Administrative Agent's gross negligence or wilful misconduct) that such Administrative Agent may suffer or incur in connection with this Agreement or any action taken or omitted by it hereunder. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agents may resign at any time by notifying the Lenders, the Fronting Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent; provided that if only one Administrative Agent resigns, the remaining Administrative Agent automatically shall be deemed to have been appointed as, and have accepted the position of, successor to the resigning Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agents give notice of resignation, then the retiring Administrative Agents may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank having an office (or an Affiliate with an office) in New York, New York, with a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, or upon the deemed appointment of one of the Administrative Agent or Agents as successor to the other, such successor shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agents and each of the retiring Administrative Agents shall be discharged from its duties and obligations hereunder. After any Administrative Agent's resignation hereunder, the provisions of this Article shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. The Lenders hereby acknowledge that the Administrative Agents shall not be under any duty to take any discretionary 75 action permitted to be taken by them pursuant to the provisions of this Agreement unless they shall be requested in writing to do so by the Required Lenders or, where required, all the Lenders. ARTICLE IX Guarantee In order to induce the Lenders to extend credit hereunder, MAI hereby irrevocably and unconditionally guarantees, on the terms and subject to the limitations set forth in this Article, the Borrower's obligations in respect of up to $750,000,000 principal amount of the Loans and LC Disbursements outstanding at any time together with all interest accrued and unpaid thereon (such obligations being called the "Guaranteed Obligations"), which guarantee of MAI will remain in effect as long as any Guaranteed Obligations remain outstanding. Notwithstanding any other provision of this Article, MAI is executing this Agreement as a secondary rather than as a primary obligor, and the guarantee of MAI hereunder shall be a guarantee of collection rather than of payment when and as due, it being agreed that MAI shall be obligated to pay the Guaranteed Obligations only after the Lenders shall have pursued their other remedies to compel payment of such Guaranteed Obligations by the Borrower and after exhaustion of all available remedies, including without limitation, the liquidation of assets, payment cannot be obtained from the Borrower. The obligations of MAI hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever, by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations, any impossibility in the performance of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of MAI hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agents or any Lender to assert any claim or demand or to enforce any remedy under this Agreement or under any other agreement, by any waiver or modification of any of the Guaranteed Obligations, by any default, failure or delay, wilful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of MAI or otherwise operate as a discharge of MAI as a matter of law or equity. MAI further agrees that its obligations hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Guaranteed 76 Obligation is rescinded or must otherwise be restored by the Administrative Agents, the Servicing Agent, the Fronting Bank or any Lender upon the bankruptcy or reorganization of the Borrower or otherwise, unless those obligations of MAI have otherwise been terminated in accordance with the terms of this Agreement. Upon payment by MAI of any Guaranteed Obligations, each Lender shall, in a reasonable manner, assign to MAI the amount of the Guaranteed Obligations owed to it and so paid, such assignment to be pro tanto to the extent to which the Guaranteed Obligations in question were discharged by MAI, or make such disposition thereof as MAI shall direct (all without recourse to and without any representation or warranty by any Lender). Upon payment by MAI of any sums as provided above, all rights of MAI against the Borrower arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full of all the Guaranteed Obligations to the Lenders. ARTICLE X Miscellaneous SECTION 10.01. Notices. Except as specifically provided elsewhere herein, notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or, if by telecopy equipment of the sending party, delivered by such equipment) addressed: (a) If to the Borrower, in all cases to it at Equistar Chemicals, LP 1221 McKinney Street, Suite 1600 Houston, Texas 77010 Telecopy: 713-652-4538 Attention of Joseph M. Putz (b) If to the Administrative Agents, in all cases to: Bank of America National Trust and Savings Association 1850 Gateway Blvd. Concord, California 94520 Telecopy: 510-675-8500 Attention of Ando Perlas 77 The Chase Manhattan Bank 712 Main Street, 7th Floor Houston, Texas 77002 Telecopy: 713-216-6387 Attention of David Mills (c) If to the Servicing Agent, in all cases to it at: Bank of America National Trust and Savings Association 1850 Gateway Blvd. Concord, California 94520 Telecopy: 510-675-8500 Attention of Ando Perlas (d) If to any Lender, in all cases to it at its address as set forth in Schedule 2.01 or as it shall subsequently specify in writing to the Borrower and the Administrative Agents. (e) If to the Swingline Lender, to it at: Bank of America National Trust and Savings Association 1850 Gateway Blvd. Concord, California 94520 Telecopy: 510-675-8500 Attention of Ando Perlas (f) If to the Fronting Bank, to it at: The Chase Manhattan Bank 712 Main Street, 7th Floor Houston, Texas 77002 Telecopy: 713-216-6387 Attention of David Mills All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy equipment of the sender, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 10.01. 78 SECTION 10.02. No Waivers; Amendments. (a) No failure or delay of the Administrative Agents, the Servicing Agent, the Fronting Bank or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agents, the Servicing Agent, the Fronting Bank and the Lenders hereunder are cumulative and not exclusive of any rights or remedies which they would otherwise have. Except as may be otherwise expressly provided herein, no waiver of any provision of this Agreement nor any consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Required Lenders (unless otherwise specified herein), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agents, the Servicing Agent, any Lender or the Fronting Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement or any Exhibit or Schedule hereto may be amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and by the Required Lenders; provided, however, that no such agreement shall (i) change the Commitment of any Lender without the prior written consent of such Lender, (ii) postpone the scheduled date of payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any Fee payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iii) amend or modify or otherwise affect the rights or duties of the Administrative Agents, the Servicing Agent, the Fronting Bank or the Swingline Lender without the prior written consent of the Administrative Agents, the Servicing Agent, the Fronting Bank or the Swingline Lender, as the case may be, or (iv) amend or modify the definition of "Required Lenders", Section 2.17, this Section 10.02 or Section 10.07, without the prior written consent of each Lender. (c) Notwithstanding any other provision of this Agreement, MAI may terminate its guarantee under Article IX at any time that it may do so under Section 8.6(c) of the Limited 79 Partnership Agreement (as Section 8.6(c) is in effect on the date hereof or as such Section is hereafter amended with the consent of the Required Lenders); provided, however, that no such termination shall be effective to the extent of the amount of any Guaranteed Obligations with respect to which an Event of Default under Article VII (b) or (c) has occurred and is continuing at the time that those conditions have been satisfied until such amount has been paid in full, together with all accrued and unpaid interest thereon (it being expressly understood that under certain circumstances MAI's guarantee under Article IX may be effectively terminated by MAI as to all Guaranteed Obligations upon satisfaction of such Section 8.6(c) conditions even though an Event of Default may have occurred and be continuing). SECTION 10.03. Payments. Except as otherwise provided in this Agreement, all payments to be made by the Borrower to the Lenders hereunder shall be made to the Servicing Agent in immediately available funds at Bank of America National Trust and Savings Association (ABA #121000358, Account #12339- 15888 and Reference: Equistar) not later than 11:00 a.m., New York City time, on the date due. Funds received after the applicable time shall be deemed to have been received by the Lenders on the following Business Day. Unless otherwise provided herein, if any payment of principal, interest or any other amount payable by the Borrower hereunder shall fall due on a day that is not a Business Day, then such due date shall be extended to the next succeeding Business Day, and such extension of time shall be included in computing interest, if any, in connection with such payment. Upon receipt of any payment for the accounts of the Lenders hereunder, the Servicing Agent will promptly distribute to each Lender its share of such payment. SECTION 10.04. Governing Law; Submission to Jurisdiction. (a) THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (b) To the extent it may effectively do so under applicable law, each of the Borrower and MAI irrevocably (i) submits to the nonexclusive jurisdiction of any New York State or Federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or any other document contemplated hereby, irrevocably waives and (ii) agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any 80 claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each of the Borrower and MAI agrees, to the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to in paragraph (b) above brought in any such court shall be conclusive and binding upon the Borrower or MAI, as the case may be, and may be enforced in the courts of the United States of America or the State of New York (or any other courts to the jurisdiction of which the Borrower or MAI, as the case may be, is or may be subject) by a suit upon such judgment. (d) To the extent it may effectively do so under applicable law, each of the Borrower and MAI consents to process being served in any suit, action or proceeding of the nature referred to in paragraph (b) by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of the Borrower or MAI, as the case may be, as set forth or referred to in Section 10.01. To the extent it may effectively do so under applicable law, each of the Borrower and MAI agrees that such service (i) shall be deemed in every respect effective service of process upon the Borrower or MAI, as the case may be, in any such suit, action or proceeding and (ii) shall be taken and held to be valid personal service upon and personal delivery to the Borrower or MAI, as the case may be. (e) Nothing in this Section 10.04 shall affect the right of the Administrative Agents, the Servicing Agent or any Lender to serve process in any manner permitted by law, or limit any right that the Administrative Agents, the Servicing Agent or any Lender may have to bring proceedings against the Borrower or MAI, as the case may be, in the courts of any jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. SECTION 10.05. Expenses; Documentary Taxes; Indemnity. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agents, the Servicing Agent, the Fronting Bank and their respective Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agents, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Fronting Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out- of-pocket expenses incurred by the Administrative Agents, the Servicing Agent, the 81 Fronting Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agents, the Servicing Agent, the Fronting Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout or restructuring in respect of such Loans or Letters of Credit. (b) The Borrower shall indemnify the Administrative Agents, the Servicing Agent, the Fronting Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of any actual or threatened claim, litigation, investigation or proceeding, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto, relating to (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Fronting Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), or (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 10.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of the Loans, the invalidity or unenforceability of any term or provision of this Agreement, or any investigation made by or on behalf of the Lenders or the Administrative Agents. All amounts due under this Section 10.05 shall be payable on written demand therefor. SECTION 10.06. Survival of Agreements, Representations and Warranties, etc. All warranties, representations and covenants made by the Borrower herein or in any certificate or 82 other instrument delivered by the Borrower or on its behalf in connection with this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making of the Loans and issuance of any Letters of Credit herein contemplated regardless of any investigation made by the Lenders, the Administrative Agents or the Servicing Agent or on their behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid. The right of each Lender to receive payments pursuant to Sections 2.14, 2.16 and 2.19 shall survive the termination of this Agreement and the repayment of the Loans. SECTION 10.07. Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns (including any Affiliate of the Fronting Bank that issues any Letter of Credit). The Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all the Lenders. (b) Each Lender may assign all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment (and the Loans at the time owing to it)); provided, however, that (i) except in the case of an assignment by a Lender to an Affiliate of such Lender or to another Lender, the Borrower and the Servicing Agent (and, in the case of an assignment of all or a portion of a Commitment or any Lender's obligations in respect of its LC Exposure or Swingline Exposure, the Fronting Bank and the Swingline Lender) must consent to such assignment in writing (which consent may not be unreasonably withheld), (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (iii) except in the case of an assignment to another Lender or in the case of an assignment of the assigning Lender's total Commitment, the aggregate amount of the Commitment of the assigning Lender subject to any such assignment shall not be less than $10,000,000 (or any other smaller amount agreed upon by the Administrative Agents and the Borrower, and (iv) the parties to each such assignment shall execute and deliver to the Servicing Agent for its acceptance and recording in the Register an Assignment and Acceptance, together with a processing and recordation fee of $3,500; and provided, further, that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under paragraph (e) or (f) of Article VII has occurred and is continuing. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be (unless waived by the Servicing Agent) at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto, and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and (B) the assignor thereunder 83 shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of the assignor's rights and obligations under this Agreement, the assignor shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.16 and 10.05 as well as to any interest and Facility Fee accrued for its account hereunder and not yet paid). Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assignor and the assignee thereunder shall be deemed to confirm to and agree with each other and the Borrower as follows: (i) such assignor warrants that it is the legal and beneficial owner of the interest being assigned free and clear of any adverse claim; (ii) except as set forth in clause (i) above, the assignor makes no other representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any other instrument or document furnished pursuant hereto or thereto, or the execution, legality, validity, enforce ability, genuineness, sufficiency or value of this Agreement, or any other instrument or document furnished pursuant hereto or thereto, or the financial condition of the Borrower or the performance or observance by the Borrower of any of its Obligations under this Agreement or any other instrument or document furnished pursuant hereto or thereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements described in Section 3.06 or the most recent financial statements delivered pursuant to Section 5.05, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the assignor and based on such documents and information as it shall deem appropriate at the time continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agents and the Servicing Agent to take such action as agent on its behalf and to exercise such powers under this Agreement, as are delegated to the Administrative Agents and the Servicing Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will, to the extent of the interest assigned to it, perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by the Lenders. 84 (d) The Borrower agrees that each Lender may without the consent of the Borrower, the Servicing Agent, the Fronting Bank or the Swingline Lender sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the same portion of the Loans owing to it) and the Borrower agrees that any purchaser of a participation in such Loans so acquired may exercise any and all rights of banker's lien, setoff, counterclaim or otherwise with respect to any and all moneys owing by the Borrower to such purchaser as fully as if such purchaser were a Lender acquiring such Loans hereunder in the amount of such participation; provided, however, that (i) such selling Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the Borrower for the performance of its obligations hereunder, (iii) the participating lenders or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.19 to the same extent as if they were such Lender (but the amount claimed by any participating lender or other entity shall not exceed the amount that could have been claimed by the Lender from which it acquired its participation) and (iv) the Borrower, the Administrative Agents, the Fronting Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve, without the consent of or consultation with any participant, any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers with respect to Fees payable hereunder or an increase in the amount of principal of or a decrease in the rate at which interest is payable on the Loans, or an extension of the dates fixed for payments of principal of or interest on the Loans or payments of Fees). (e) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.07, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower or the Subsidiaries furnished to the Lenders (including pursuant to Section 5.08) by or on behalf of the Borrower or the Subsidiaries, as applicable; provided that, prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of any confidential information relating to the Borrower or any Subsidiary received from the Lenders. 85 (f) The Servicing Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and the principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agents, the Servicing Agent, the Fronting Bank and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice. (g) Any Lender may at any time pledge all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such pledge shall release any Lender from its obligations hereunder or substitute any such Federal Reserve Bank for such Lender as a party hereto. (h) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC") of such Granting Bank, identified as such in writing from time to time by the Granting Bank to the Administrative Agents and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Bank would otherwise be obligated to make to the Borrower pursuant to Section 2.02, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Bank shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall be deemed to utilize the Commitments of all the Lenders to the same extent, and as if, such Loan were made by the Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any payment under this Agreement for which a Lender would otherwise be liable, for so long as, and to the extent, the related Granting Bank makes such payment. In furtherance of the foregoing, each party hereto hereby agrees that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 10.07, any SPC may assign all 86 or a portion of its interests in any Loans to its Granting Bank or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans; provided, however, that except in the case of an assignment to a Granting Bank or a financial institution that is either an affiliate of such SPC or another Lender, the Borrower and the Servicing Agent must consent to such assignment in writing (which consent may not be unreasonably withheld). SECTION 10.08. Right of Setoff. (a) Upon the occurrence and during the continuation of any Event of Default each Lender is hereby authorized, in addition to any other right or remedy that any Lender may have by operation of law or otherwise, at any time and from time to time, without notice to the Borrower except to the extent required by applicable law (any such notice being expressly waived by the Borrower to the maximum extent possible under applicable law), and subject to any requirements or limitations imposed by applicable law, to exercise its banker's lien or right of setoff and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or any of its Affiliates to or for the credit or the account of the Borrower against any and all the obligations of the Borrower now or hereafter existing under this Agreement, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. (b) Each Lender agrees promptly to notify the Administrative Agents and the Borrower after any such setoff and application; provided, however, that, to the extent permitted by applicable law, the failure to give any such notice shall not affect the validity of such setoff and application. (c) Upon the insolvency or bankruptcy of any Lender, the Borrower is hereby authorized, in addition to any other right or remedy that it may have by operation of law or otherwise, at any time and from time to time, to exercise a right of setoff and apply any and all amounts due and owing it from such Lender to or for the account of the Borrower against amounts due from the Borrower to such Lender. Any such setoffs may be made only against payments due to such insolvent or bankrupt Lender, when and as the same become due, and no setoff may be made against any amount due and payable to any other Lender. The Borrower may not exercise any right of setoff with respect to all or any portion of deposits which are insured by the Federal Deposit Insurance Corporation. 87 SECTION 10.09. Severability. In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.10. Cover Page, Table of Contents and Section Headings. The cover page, Table of Contents and Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 10.11. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts with the same effect as if the signatures thereon and hereon were upon the same instrument. This Agreement shall become effective when copies hereof which, when taken together, bear the signatures of each of the parties hereto shall have been received by the Servicing Agent. SECTION 10.12. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.12. SECTION 10.13. Entire Agreement. This Agreement, the letter agreements referred to in Section 2.08(c) and any promissory notes delivered pursuant hereto constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and such letter agreements, except to the extent expressly provided therein. Nothing in this Agreement or such letter agreements or promissory notes, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto and Indemnitees referred to in Section 10.05(b) any rights, remedies, obligations or liabilities under or by reason of this Agreement or such letter agreements or promissory notes. 88 SECTION 10.14. Confidentiality. Each of the Administrative Agents, the Servicing Agent, the Fronting Bank, the Lenders and the SPC's (as defined in Section 10.07(h)) agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to obtaining a written agreement containing provisions substantially the same as those of this Section from the intended recipient of such Information, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement (including any assignee or any prospective assignee of an SPC of the type described in the last sentence of Section 10.07(h)), (g) with the consent of the Borrower, (h) for purposes of Section 10.07(h) only, to any rating agency or (i) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agents, the Servicing Agent, the Fronting Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agents, the Servicing Agent, the Fronting Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower. Any person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord to its own confidential information. SECTION 10.15. Limitation on Recourse to General Partners; Pari Passu Obligations. (a) The Lenders, the Administrative Agents, the Servicing Agent and the Fronting Bank agree that payment and performance of the obligations due to them from the Borrower under this Agreement and any promissory notes delivered hereunder shall be obligations of the Borrower only (and of MAI to the extent set forth in Article IX), and none of the Lenders, the Administrative Agents, the Servicing Agent or the Fronting Bank shall have any claim against or recourse (whether by operation of law or otherwise) to Lyondell GP or Millennium GP, any of their Affiliates (other than the Borrower and its 89 Subsidiaries) or any director, officer, employee, agent or advisor of any such person in respect of such obligations. (b) The Asset Contribution Agreement between Lyondell, Lyondell LP and the Borrower (as referred to in the definition of "Asset Contribution Agreements") contains provisions under which the Borrower would be obligated to reimburse Lyondell for any amounts paid by Lyondell on account of the principal of or interest on the Assumed Lyondell Debt. The Lenders acknowledge and agree that the obligations of the Borrower in respect of such reimbursement obligations will rank pari passu with the Obligations. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the day and year first above written. EQUISTAR CHEMICALS, LP, by /s/ Joseph Putz --------------------------------- Name: Joseph M. Putz Title: Senior Vice President Finance and Administration MILLENNIUM AMERICA INC., as Guarantor, by /s/ Christine Wubbolding ---------------------------------- Name: Christine Wubbolding Title: V.P. & Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, individually and as Administrative Agent, Documentation Agent and Servicing Agent, by /s/ Steve Aronowitz ---------------------------------------- Name: Steve Aronowitz Title: Managing Director THE CHASE MANHATTAN BANK, individually and as Administrative Agent and Syndication Agent, by /s/ Mary Elizabeth Swerz ---------------------------------------- Name: Mary Elizabeth Swerz Title: Vice President ABN AMRO BANK N.V., by /s/ Micheal W. Nepveux ---------------------------------------- Name: Micheal W. Nepveux Title: Vice President by /s/ Collis G. Sanders ---------------------------------------- Name: Collis G. Sanders Title: Sr. Vice President BANK AUSTRIA AG, by /s/ Joseph A. Steiner ---------------------------------------- Name: Joseph A. Steiner Title: Senior Vice President by /s/ Jonathan B. Bakker ---------------------------------------- Name: Jonathan B. Bakker Title: Vice President THE BANK OF NEW YORK, by /s/ Raymond Palmer ---------------------------------------- Name: Raymond Palmer Title: Vice President THE BANK OF NOVA SCOTIA, by /s/ F.C.H. Ashby ---------------------------------------- Name: F.C.H. Ashby Title: Senior Manger Loan Operations THE BANK OF TOKYO-MITSUBISHI, by /s/ Takeshi Yokokawa ---------------------------------------- Name: Takeshi Yokokawa Title: Deputy General Manager BANQUE NATIONALE DE PARIS by /s/ Philip Ugalde ---------------------------------------- Name: Philip Ugalde Title: Banking Officer CIBC INC. by /s/ Neal A. Sobol ---------------------------------------- Name: Neal A. Sobol Title: Executive Director CIBC Oppenheimer Corp., as Agent COMMERZBANK AG, ATLANTA AGENCY by /s/ D. Suttles ---------------------------------------- Name: D. Suttles Title: Vice President by /s/ P. Mahoney ---------------------------------------- Name: P. Mahoney Title: Assistant Treasurer CREDIT LYONNAIS NEW YORK BRANCH, by /s/ Pascal Poupelle ---------------------------------------- Name: Pascal Poupelle Title: Executive Vice President THE DAI-ICHI-KANGO BANK, LTD., by /s/ Matthew G. Murphy ---------------------------------------- Name: Matthew G. Murphy Title: Vice President DG BANK By /s/ Mark Connelly ---------------------------------------- Name: Mark Connelly Title: Vice President By /s/ Wolfgang Bollman ---------------------------------------- Name: Wolfgang Bollman Title: Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO, by /s/ Leo Loughead ---------------------------------------- Name: Leo Loughead Title: Corporate Banking Officer THE INDUSTRIAL BANK OF JAPAN, LTD., NEW YORK BRANCH by /s/ Kensaku Iwata ---------------------------------------- Name: Kensaku Iwata Title: Senior Vice President & Deputy General Manager, Houston Office KREDEITBANK N.V. by /s/ Robert Snauffer ---------------------------------------- Name: Robert Snauffer Title: Vice President by /s/ Raymond F. Murray ---------------------------------------- Name: Raymond F. Murray Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED by /s/ Douglas A. Whiddon ---------------------------------------- Name: Douglas A. Whiddon Title: Senior Vice President MARINE MIDLAND BANK, by /s/ Rochelle Forster ---------------------------------------- Name: Rochelle Forster Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, by /s/ James S. Finch ---------------------------------------- Name: James S. Finch Title: Vice President NATIONSBANK, N.A., by /s/ Marcus A. Boyer ---------------------------------------- Name: Marcus A. Boyer Title: Senior Vice President PNC BANK, National Association by /s/ Timothy J. Marchando ---------------------------------------- Name: Timothy J. Marchando Title: Vice President THE SANWA BANK LIMITED, by /s/ Ryoichi Shinke ---------------------------------------- Name: Ryoichi Shinke Title: Assistant Vice President SOCIETE GENERALE, NEW YORK BRANCH by /s/ Karen M. Sager ---------------------------------------- Name: Karen M. Sager Title: Vice President THE SUMITOMO BANK, LIMITED by /s/ Kazuyoshi Ogawa ---------------------------------------- Name: Kazuyoshi Ogawa Title: Joint General Manager SUNTRUST BANK, ATLANTA, by /s/ Steven J. Newby ---------------------------------------- Name: Steven J. Newby Title: Corporate Banking Officer THE TORONTO-DOMINION BANK by /s/ Jorge A. Garcia ---------------------------------------- Name: Jorge A. Garcia Title: Manager Credit Administration EXHIBIT A TO THE CREDIT AGREEMENT [FORM OF] ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of November 25, 1997 (as amended, modified, supplemented or waived, the "Credit Agreement"), among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents"). Capitalized terms used but not defined herein shall have the meanings specified in the Credit Agreement. 1. The Assignor named below hereby sells and assigns, without recourse to the Assignor, to the Assignee named below, and the Assignee hereby purchases and assumes, without recourse to the Assignor, from the Assignor, effective as of the Effective Date set forth below, the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Effective Date, and the Competitive Loans and Revolving Loans owing to the Assignor which are outstanding on the Effective Date, together with unpaid interest accrued on the assigned Loans to the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 10.07 of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) except as otherwise provided in the Credit Agreement, the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 2. This Assignment and Acceptance is being delivered to the Servicing Agent and the Borrower together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms referred to in Section 2.19 (e) of the Credit Agreement, duly completed and executed by such Assignee, (ii) if the Assignee is not already a Lender under the Agreement, an administrative questionnaire in the form provided by the Servicing Agent and (iii) a processing and recordation fee of $3,500. 3. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 1 Date of Assignment: ____________________________________________________________ Legal Name of Assignor: ________________________________________________________ Legal Name of Assignee: ________________________________________________________ Assignee's Address for Notices: ________________________________________________ ________________________________________________________________________________ Assignee's Domestic Lending Office Address: ____________________________________ ________________________________________________________________________________ Assignee's LIBOR Lending Office Address: _______________________________________ ________________________________________________________________________________ Effective Date of Assignment (may not be fewer than 5 Business Days after the Date of Assignment except as specified in the Credit Agreement): _________________________________________ 2 Percentage Assigned of Principal Amount Facility/or Commitment Assigned (set forth, to at least (and identifying 8 decimals, as a information percentage of the as to individual Facility and the Revolving Loans aggregate Commitments and Competitive of all Lenders Facility Loans) thereunder) - ---------------------- ---------------- ----------------------- Commitment Assigned: $ % Revolving Loans: $ % Competitive Loans: $ % The terms set forth herein are hereby agreed to: Accepted (if required): _________________, as Assignor, EQUISTAR CHEMICALS, LP By:__________________ Name: By:______________________ Title: Name: Title: _________________, as Assignee, By:__________________ Name: Title: 3 EXHIBIT B TO THE CREDIT AGREEMENT [FORM OF] STANDBY BORROWING REQUEST Bank of America National Trust and Savings Association, as Servicing Agent for the Lenders referred to below, 1850 Gateway Blvd. Concord, CA 94520 Attention: Agency Management Services Dear Sirs: The undersigned, Equistar Chemicals, LP (the "Borrower"), refers to the Credit Agreement dated as of November 25, 1997 among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents") (as amended, modified, supplemented or waived, the "Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings specified in the Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.04 of the Credit Agreement that it requests a Revolving Borrowing under the Credit Agreement, and in that connection sets forth below the terms on which such Revolving Borrowing is requested to be made: (A) Date of Borrowing (which is a Business Day) ______________________ (B) Principal amount of Borrowing ______________________ (C) Interest rate basis/1/ ______________________ (D) Interest Period and the last day thereof/2/ ________________________ /1/ LIBOR Borrowing, NIBOR Borrowing or ABR Borrowing. /2/ Which shall be subject to the definition of "Interest Period" and end not later than the Maturity Date. 1 Upon the making of any or all of the Loans made by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Sections 4.01(b), to the extent applicable to this Revolving Borrowing, and (c) of the Credit Agreement have been satisfied. Very truly yours, EQUISTAR CHEMICALS, LP By ________________________ Title:[Responsible Officer] 2 EXHIBIT C-1 TO THE CREDIT AGREEMENT [FORM OF] COMPETITIVE BID REQUEST Bank of America National Trust and Savings Association, as Servicing Agent for the Lenders referred to below, 1850 Gateway Blvd. Concord, CA 94520 [Date] Attention: Agency Management Services Dear Sirs: The undersigned, Equistar Chemicals, LP (the "Borrower"), refers to the Credit Agreement dated as of November 25, 1997, among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents") (as amended, modified, supplemented or waived, the "Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings specified in the Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.03 (a) of the Credit Agreement that it requests a Competitive Borrowing, and in that connection sets forth below the terms on which such Competitive Borrowing is requested to be made: (A) Date of Competitive Borrowing (which is a Business Day) ________________________ (B) Principal Amount of Competitive Borrowing/1/ ________________________ (C) Interest rate basis/2/ ________________________ (D) Interest Period and the last day thereof/3/ ________________________ ___________________________ /1/ Not less than $5,000,000. /2/ LIBOR Competitive Borrowing or Fixed Rate Borrowing. /3/ Which shall be subject to the definition of "Interest Period" and end not later than the Maturity Date. 1 Upon acceptance of any or all of the Competitive Loans offered by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Sections 4.01(b), to the extent applicable to this Borrowing, and (c) of the Credit Agreement have been satisfied. Very truly yours, EQUISTAR CHEMICALS, LP by ____________________________ Title: [Responsible Officer] 2 EXHIBIT C-2 TO THE CREDIT AGREEMENT [FORM OF] NOTICE OF COMPETITIVE BID REQUEST [Name of Lender] [Address] [Date] Attention: Dear Sirs: Reference is made to the Credit Agreement dated as of November 25, 1997, among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents") (as amended, modified, supplemented or waived, the "Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings specified in the Credit Agreement. A Borrower made a Competitive Bid Request on [ ], 19[ ], pursuant to Section 2.03(a) of the Credit Agreement, and in that connection you are invited to submit a Competitive Bid by [Date] / [Time]./1/ Your Competitive Bid must comply with Section 2.03(b) of the Credit Agreement and the terms set forth below on which the Competitive Bid Request was made: (A) Date of Competitive Borrowing _______________________________________ (B) Principal amount of Competitive Borrowing ________________________________________ (C) Interest rate basis ________________________________________ (D) Interest Period and the last day thereof ________________________________________ ______________________ /1/ The Competitive Bid must be received by the Administrative Agent (i) in the case of LIBOR Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed Competitive Borrowing, and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day of the proposed Competitive Borrowing. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Servicing Agent, By________________________________________ Title:______________________________ 2 EXHIBIT C-3 TO THE CREDIT AGREEMENT [FORM OF] COMPETITIVE BID Bank of America National Trust and Savings Association, as Servicing Agent for the Lenders referred to below, 1850 Gateway Blvd. Concord, CA 94520 [Date] Attention: Agency Management Services Dear Sirs: The undersigned, [Name of Lender], refers to the Credit Agreement dated as of November 25, 1997, among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents") (as amended, modified, supplemented or waived, the "Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings specified in the Credit Agreement. The undersigned hereby makes a Competitive Bid pursuant to Section 2.03(b) of the Credit Agreement, in response to the Competitive Bid Request made by Equistar Chemicals, LP (the "Borrower") on [ ], 19[ ], and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount/1/ ___________________________________ (B) Competitive Bid Rate/2/ ___________________________________ _____________________ /1/ Not less than $5,000,000 and not greater than the requested Competitive Borrowing. Multiple bids will be accepted by the Administrative Agent. /2/ I.e., LIBO Rate + or - %, in the case of LIBOR Competitive Loans, or ----- %, in the case of Fixed Rate Loans. The Competitive Bid Rate shall be inclusive of any and all reserve requirement costs of the Lender pursuant to Section 2.14(a) of the Credit Agreement. (C) Interest Period and last day thereof ______________________________ The undersigned hereby confirms that it is prepared to extend credit to the Borrower upon acceptance by the Borrower of this bid in accordance with Section 2.03(d) of the Credit Agreement. Very truly yours, [NAME OF LENDER], by __________________________________ Title: 2 EXHIBIT C-4 TO CREDIT AGREEMENT [FORM OF] COMPETITIVE BID ACCEPT/REJECT LETTER [Date] Bank of America National Trust and Savings Association, as Servicing Agent for the Lenders referred to below 1850 Gateway Blvd. Concord, CA 94520 Attention: Agency Management Services Dear Sirs: The undersigned, Equistar Chemicals, LP (the "Borrower"), refers to the Credit Agreement dated as of November 25, 1997 (as amended, modified, supplemented or waived, the "Credit Agreement"), among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents"). In accordance with Section 2.03(c) of the Credit Agreement, we have received a summary of bids in connection with our Competitive Bid Request dated ____________ and, in accordance with Section 2.03(d) of the Credit Agreement, we hereby accept following bids for maturity on [date]: Principal Amount Fixed Rate/Margin - ---------------- ----------------- Lender ------ $ [%] / [+ / -. %] We hereby reject the following bids: Principal Amount Fixed Rate/Margin - ---------------- ----------------- Lender ------ $ [%] / [+ / -. %] The funds should be deposited in Bank of America National Trust and Savings Association account number [ ] on [date] [or] [wire transferred to [Name of Bank] account number [ ] [other wire instructions] on [date]]. Very truly yours, EQUISTAR CHEMICALS, LP by ___________________________ Name: Title: 2 EXHIBIT D TO THE CREDIT AGREEMENT APPLICATION AND AGREEMENT FOR IRREVOCABLE STANDBY LETTER OF CREDIT [_] WITHOUT RENEWALS [_] WITH RENEWALS Renewable until __________. latest date FOR BANK USE ONLY -------------------------------------------- To: TEXAS COMMERCE BANK NATIONAL ASSOCIATION Date: L/C No.: -------------------------------------------- P.O. Box 2558 Applicant No.: -------------------------------------------- Houston, Texas 77252-8300 Beneficiary No.: -------------------------------------------- Date of this Application _____________ Advising Bank No.: -------------------------------------------- Gentlemen: The undersigned Applicant(s) hereby request(s) you to establish an irrevocable Standby Letter of Credit as set forth below in such language as you may deem appropriate, with such variations from such terms as you may in your discretion determine are necessary and are not materially inconsistent with this Application and Agreement, and forward the same by: [_] Cable/telex (full details) [_] Airmail [_] Brief Cable/telex [_] Other______________________________________________ [_] Through your correspondent for delivery to the beneficiary or advised through_________________________________________________ [_] Directly to beneficiary All banking charges other than the issuing Bank's are for [_] Beneficiary [_] Applicant(s) - ------------------------------------------------------------------------------------------------------------------------------------ Liability of on Behalf of (as to appear on Letter of Credit) ___________________In favor of (Beneficiary)___________________ ___________________________________________________ Amount In figures: In words: - ------------------------------------------------------------------------------------------------------------------------------------ Partial drawings: [_] Allowed [_] Not Allowed Expiring at the close of business on If drawings are allowed in installments within given periods and no drawing is made for an installment within the applicable period, the credit ___________________________________________________________ [_] Shall [_] Shall not be available for subsequent installments At your counters, unless otherwise indicated, for Sight Payment - ------------------------------------------------------------------------------------------------------------------------------------ To be available by drafts at sight drawn on you duly signed and endorsed, or specify any other drawee: _____________________________ And accompanied by documents as specified below: Beneficiary's manually signed statement on its letterhead reading exactly as follows: - ------------------------------------------------------------------------------------------------------------------------------------ (Complete only when the beneficiary's bank or correspondent is to issue its undertaking based on the issued Standby Letter of Credit) [_] Request beneficiary's bank to issue and deliver their (specify type of undertaking, bid or performance bond, or other) __________________________________________________________ In favor of: __________________________________________________________ For an amount not exceeding that specified above, effective immediately and expiring at their office on ____________________________________ (30 days prior to expiry date above) relative to ___________________________________________________ . - ------------------------------------------------------------------------------------------------------------------------------------
The opening of this credit is subject to the terms and conditions as set forth in the Credit Agreement among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the lenders from time to time party hereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BofA"), as Servicing Agent and Documentation Agent; THE CHASE MANHATTAN BANK ("Chase"), as Syndication Agent; and BofA and Chase as administrative agents (in such capacity, the "Administrative Agents"), to which terms and conditions agree. APPLICANTS: __________________________________ ___________________________________ Printed Name Printed Name By:_______________________________ By: _______________________________ Authorized Signature Authorized Signature CORRESPONDENT/MEMBER BANK: __________________________________ ___________________________________ Printed Name Printed Name By:_______________________________ By: _______________________________ Authorized Signature Authorized Signature BANK ACCEPTANCE: The Bank's Acceptance evidenced by the undersigned authorized representative's signature is provided as its acknowledgment that his agreement represents the final agreement by the parties which may not be contradicted by evidence of prior contemporaneous, or subsequent oral agreements between the parties. TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: _____________________________________ [Letterhead of] GEORGE H. HEMPSTEAD, III GENERAL COUNSEL OF MILLENNIUM AMERICA INC. AND MILLENNIUM PETROCHEMICALS GP LLC December 1, 1997 To: Bank of American National Trust and Savings Association, as Servicing Agent and Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent, and each Lender named on the signature pages to the Credit Agreement referred to below EQUISTAR CHEMICALS, LP Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 4.02(b) of the Credit Agreement dated as of November 25, 1997 among Equistar Chemicals, LP, as Borrower; Millennium America Inc., as Guarantor; the Lenders from time to time party thereto; Bank of America National Trust and Savings Association ("BofA"), as Servicing Agent and Documentation Agent; The Chase Manhattan Bank ("Chase"), as Syndication Agent; and each of BofA and Chase, as Administrative Agents (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein have the meanings given to them in the Credit Agreement. I am the General Counsel of Millennium America Inc. (the "Guarantor"); and I, or individuals under my direction, have examined originals, or copies certified or otherwise identified, of the Credit Agreement, the Asset Contribution Agreement to which the Borrower, Millennium Petrochemicals Inc. and Millennium LP are a party (the "Millennium Asset Contribution Agreement"), certificates of public officials and other documents, as the basis for my opinion hereinafter set forth. On the basis of the foregoing, and subject to the assumptions, qualifications and limitations set forth below, I am of the opinion that: 1. The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Guarantor has the requisite corporate power and authority to execute and deliver the Credit Agreement and to perform its obligations under Article IX of the Credit Agreement, and all such actions have been duly and validly authorized by all necessary corporate proceedings on its part. 2. The execution and delivery of the Credit Agreement and the performance of the Guarantor's obligations under Article IX thereof do not (a) require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained, made or taken or the failure to obtain, make or take which would not reasonably be expected to result in a Material Adverse Effect, (b) violate any provision of its certificate of incorporation or bylaws, (c) violate any applicable federal law or regulation or any law or regulation of the State of New York or the General Corporation Law of the State of Delaware or any order of any Governmental Authority binding on it, (d) result in a material breach of or constitute (alone or with notice or lapse of time or both) a material default under any indenture, material agreement or other instrument to which it is a party, or by which it or any of its properties or assets is bound or (e) result in the creation or imposition of any Lien on any of its material properties or assets. 3. The Credit Agreement has been duly executed and delivered by the Guarantor and constitutes a legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium and other laws affecting creditors' rights and remedies generally, (b) general principles of equity (regardless of whether considered in a proceeding in equity or at law) and (c) any implied covenants of good faith and fair dealing. 4. Neither the Guarantor nor any of its Subsidiaries, is a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 5. The Asset Contribution Agreement and the conveyancing documents contemplated thereby are effective to transfer the assets covered thereby, subject to obtaining from third parties all requisite consents to the transfer of those assets (the "Third Party Consents"). No Third Party Consent is required for the transfer of any assets covered by the Asset Contribution Agreement, except such that have been obtained or the failure to obtain which would not reasonably be expected to result in a Material Adverse Affect. The foregoing opinion is subject to the following assumptions, qualifications and limitations: A. I have, without independent verification, relied on certificates of representatives of the Guarantor and the representations and warranties of the Guarantor contained in the Credit Agreement with respect to the accuracy of the factual matters contained therein and assumed (i) that each party to the Credit Agreement has the power and authority to enter into the Credit Agreement and to perform its obligations thereunder (other than the Guarantor), (ii) the due authorization, execution and delivery of the Credit Agreement by each party thereto (other than the Guarantor), (iii) that the Credit Agreement constitutes the legal, valid, binding and enforceable obligation of each party thereto (other than the Guarantor) and (iv) the genuineness of all signatures (other than the signature of the Guarantor), the conformity to authentic, original documents of all documents submitted to us as certified or photostatic copies and the authenticity of all documents submitted to us as originals. B. No opinion is expressed above as to the enforceability of Section 10.09 of the Credit Agreement or any provisions in the Credit Agreement that purport to (i) provide that rights and remedies are not exclusive, that every right and remedy is cumulative and may be exercised in addition to any other right or remedy and that the election of a particular remedy does not preclude recourse to one or more others, (ii) (a) prohibit oral amendments to or waivers of provisions of the Credit Agreement or (b) waive rights of any party that cannot be waived as a matter of applicable law, (iii) entitle a party to indemnification or absolution from liability in respect of any matters arising under any securities laws or in whole or in part by reason of any illegal, wrongful or grossly negligent act or omission of that party or (iv) establish any evidentiary standard. C. No opinion is expressed above as to various state and federal laws and regulations regulating banks or other financial institutions or the business or lending transactions of any Agent, Lender, SPC or the Fronting Bank which may relate to the Credit Agreement or the transactions contemplated thereby. With respect to the opinion set forth in paragraph 4 above, I have relied upon In the Matter of Suburban Propane Gas Corporation (SEC Release No. ------------------------------------------------- 22847) and In the Matter of National Distillers and Chemical Corporation (SEC ------------------------------------------------------------- Release No. 22848) and the Application of Suburban Propane, L.P. for Declaration of Non-Utility Company Status Pursuant to Section 2(a)(4) and for Exempt Holding Company Status pursuant to Section 3(a)(3) under the Public Utility Company Holding Act of 1935, filed with the Securities and Exchange Commission on February 26, 1996. This opinion is limited to applicable federal law, the applicable law of the State of New York and the General Corporation Law of the State of Delaware and is rendered solely to you in connection with the above matter. This opinion may not be relied on by you for any other purpose or relied on by any other Person without my prior written consent, except that copies of this opinion may be furnished to, and relied on by, any Person who is an assignee pursuant to Section 10.07 of the Credit Agreement, other than any assignee that is an SPC or an assignee of an SPC. Very truly yours, George H. Hempstead, III General Counsel Kerry A. Galvin General Counsel LYONDELL PETROCHEMICAL G.P. INC. 1221 McKinney, Suite 1600 Houston, TX 77010 December 1, 1997 To: Bank of American National Trust and Savings Association, as Servicing Agent and Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent, and each Lender named on the signature pages to the Credit Agreement referred to below EQUISTAR CHEMICALS, LP Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 4.02(b) of the Credit Agreement dated as of November 25, 1997 among Equistar Chemicals, LP, as Borrower; Millennium America Inc., as Guarantor; the Lenders from time to time party thereto; Bank of America National Trust and Savings Association ("BofA"), as Servicing Agent and Documentation Agent; The Chase Manhattan Bank ("Chase"), as Syndication Agent; and each of BofA and Chase, as Administrative Agents (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein have the meanings given to them in the Credit Agreement. I am the General Counsel of Lyondell Petrochemical G.P. Inc., a general partner of the Borrower, and I, or individuals under my direction, have examined originals, or copies certified or otherwise identified, of the Credit Agreement, the Limited Partnership Agreement, the Asset Contribution Agreement to which the Borrower, Lyondell Petrochemical Company and Lyondell LP are a party (the "Asset Purchase Agreement"), certificates of public officials and other documents as the basis for my opinion hereinafter set forth. On the basis of the foregoing, and subject to the assumptions, qualifications and limitations set forth below, I am of the opinion that: -2- December 1 1997 1. The Borrower (a) is a limited partnership duly formed under the Revised Uniform Limited Partnership Act of the State of Delaware (the "Delaware Limited Partnership Act") and validly existing and in good standing under the laws of that State, (b) has all requisite power and authority under the Limited Partnership Agreement and the Delaware Limited Partnership Act to own its property and assets and to carry on its business as now conducted and (c) except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, is qualified, licensed or registered to do business in, and is in good standing in, every jurisdiction where such qualification, licensing or registration is required. 2. The Borrower has the requisite power and authority under the Limited Partnership Agreement and the Delaware Limited Partnership Act to execute, deliver and carry out the provisions of the Credit Agreement and to borrow thereunder; and all such actions have been duly and validly authorized by all necessary proceedings on its part under the Limited Partnership Agreement and the Delaware Limited Partnership Act. 3. The execution, delivery and performance by the Borrower of the Credit Agreement, the Borrowings by it thereunder and the other transactions of the Borrower contemplated thereby and the transactions contemplated by the Master Transaction Agreement do not (a) require any consent or approval of, registration or filing with, or any other action by any Governmental Authority, except such as have been obtained, made or taken and are in full force and effect or the failure to obtain, make or take which would not reasonably be expected to result in a Material Adverse Effect, (b) violate the Limited Partnership Agreement, (c) violate any applicable federal law or regulation or the Delaware Limited Partnership Act or any order of any Governmental Authority binding on it, (d) result in a material breach of or constitute a material default under any indenture, material agreement or other instrument to which it is a party, or by which it or any of its properties or assets is bound or (e) result in the creation or imposition of any Lien on any of its material properties or assets. 4. There are no actions, suits or proceedings by or before any Governmental Authority pending against or, to my knowledge, threatened against or affecting the Borrower or any of its Subsidiaries or the respective businesses, assets or rights of the Borrower or any of its Subsidiaries as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 5. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" within the meaning of the Investment Company Act of 1940 or (b) a "holding company" as defined in the Public Utility Holding Company Act of 1935. -3- December 1, 1997 6. The Asset Contribution Agreement and the conveyancing documents contemplated thereby are effective to transfer the assets covered thereby, subject to obtaining from third parties all requisite consents to the transfer of those assets (the "Third Party Consents"). No Third Party Consent is required for the transfer of any assets covered by the Asset Contribution Agreement, except such that have been obtained or the failure to obtain which would not reasonably be expected to result in a Material Adverse Effect. 7. If all material facts and issues of law were presented and properly argued, a Texas court, or a federal court sitting in the State of Texas, should give effect to the governing law provisions of the Credit Agreement, subject to Section 35.51(f)(4) of the Texas Business and Commerce Code. The foregoing opinion is subject to the following assumptions, qualifications and limitations: A. I have, without independent verification, relied on certificates of representatives of the Borrower and the representations and warranties of the Borrower contained in the Credit Agreement with respect to the accuracy of the factual matters contained therein and assumed (i) that each party to the Credit Agreement (other than the Borrower) has the power and authority to enter into the Credit Agreement and to perform its obligations thereunder, (ii) the due authorization, execution and delivery of the Credit Agreement by each party thereto (other than the Borrower), (iii) that the Credit Agreement constitutes the legal, valid, binding and enforceable obligation of each party thereto (other than the Borrower) and (iv) the genuineness of all signatures (other than the Borrower's), the conformity to authentic, original documents of all documents submitted to me as certified or photostatic copies and the authenticity of all documents submitted to me as originals. B. No opinion is expressed above as to the enforceability of the Credit Agreement. C. No opinion is expressed above as to various state and federal laws and regulations regulating banks or other financial institutions or the business or lending transactions of any Agent, Lender, SPC or the Fronting Bank which may relate to the Credit Agreement or the transactions contemplated thereby. This opinion is limited to applicable federal law, the applicable law of the State of Texas and the Delaware Limited Partnership Act and is rendered solely to you in connection with -4- December 1, 1997 the above matter. This opinion may not be relied on by you for any other purpose or relied on by any other Person without my prior written consent, except that copies of this opinion may be furnished to, and relied on by, any Person who is an assignee pursuant to Section 10.07 of the Credit Agreement, other than any assignee that is an SPC or an assignee of an SPC. Very truly yours, ------------------------------ Kerry A. Galvin General Counsel December 1, 1997 To: Bank of American National Trust and Savings Association, as Servicing Agent and Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent, and each Lender named on the signature pages to the Credit Agreement referred to below EQUISTAR CHEMICALS, LP Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 4.02(b) of the Credit Agreement dated as of November 25, 1997 among Equistar Chemicals, LP, as Borrower; Millennium America Inc., as Guarantor; the Lenders from time to time party thereto; Bank of America National Trust and Savings Association ("BofA"), as Servicing Agent and Documentation Agent; The Chase Manhattan Bank ("Chase"), as Syndication Agent; and each of BofA and Chase, as Administrative Agents (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein have the meanings given to them in the Credit Agreement. We have acted as counsel to the Borrower in connection with the Credit Agreement. In that connection we have examined the Credit Agreement and originals, or copies certified or otherwise identified, of the Limited Partnership Agreement furnished to us by the Borrower, certificates of public officials and representatives of the Borrower and other documents as the basis for our opinion hereinafter set forth. Upon the basis of the foregoing, and subject to the assumptions, qualifications and limitations set forth below, we are of the opinion that: 1. The Credit Agreement constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium and other laws affecting creditors' rights and remedies generally, (b) general principles of equity (regardless -2- December 1, 1997 of whether considered in a proceeding in equity or at law) and (c) any implied covenants of good faith and fair dealing. 2. The credit transactions contemplated by the Credit Agreement do not (a) require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained, made or taken and are in full force and effect or the failure to obtain, make or take which would not reasonably be expected to result in a Material Adverse Effect, (b) violate the terms of the Limited Partnership Agreement or (c) violate any applicable federal law or regulation or any applicable law or regulation of the State of New York or the Delaware Limited Partnership Act. 3. The Borrower is not (a) an "investment company" within the meaning of the Investment Company Act of 1940 or (b) a "holding company" as defined in the Public Utility Holding Company Act of 1935. 4. The execution, delivery and performance of the Credit Agreement by the Borrower, the Borrowing by the Borrower thereunder and the use of the proceeds thereof in accordance with Section 3.10 and the other provisions of the Credit Agreement do not violate Regulation U or X of the Board of Governors of the Federal Reserve System. The foregoing opinion is subject to the following assumptions, qualifications and limitations: A. We have, without independent verification, relied on certificates of representatives of the Borrower and the representations and warranties of the Borrower contained in the Credit Agreement with respect to the accuracy of the factual matters contained therein and assumed (i) that each party to the Credit Agreement has the power and authority to enter into the Credit Agreement and to perform its obligations thereunder, (ii) the due authorization, execution and delivery of the Credit Agreement by each party thereto, (iii) that the Credit Agreement constitutes the legal, valid, binding and enforceable obligation of each party thereto (other than the Borrower) and (iv) the genuineness of all signatures, the conformity to authentic, original documents of all documents submitted to us as certified or photostatic copies and the authenticity of all documents submitted to us as originals. B. No opinion is expressed above as to the enforceability of Section 10.09 of the Credit Agreement or any provisions in the Credit Agreement that purport to (i) provide that rights and remedies are not exclusive, that every right and remedy is cumulative and may be exercised in addition to any other right or remedy and that the election of a particular remedy -3- December 1, 1997 does not preclude recourse to one or more others, (ii) (a) prohibit oral amendments to or waivers of provisions of the Credit Agreement or (b) waive rights of any party that cannot be waived as a matter of applicable law, (iii) entitle a party to indemnification or absolution from liability in respect of any matters arising under any securities laws or in whole or in part by reason of any illegal, wrongful or grossly negligent act or omission of that party or (iv) establish any evidentiary standard. C. No opinion is expressed above as to various state and federal laws and regulations regulating banks or other financial institutions or the business or lending transactions of any Agent, Lender, SPC or the Fronting Bank which may relate to the Credit Agreement or the transactions contemplated thereby. This opinion is limited to applicable federal law, the applicable law of the State of New York and the Delaware Revised Uniform Limited Partnership Act and is rendered solely to you in connection with the above matter. This opinion may not be relied on by you for any other purpose or relied on by any other Person without our prior written consent, except that copies of this opinion may be furnished to, and relied on by, any Person who is an assignee pursuant to Section 10.07 of the Credit Agreement, other than any assignee that is an SPC or an assignee of an SPC. Very truly yours, KLW/SAM EX-4.9(A) 7 AMENDMENT TO THE EQUISTAR CREDIT AGMT. OF NOVEMBER 25 EXHIBIT 4.9(a) AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 25, 1997, as amended and restated February 5, 1999, among EQUISTAR CHEMICALS, LP, a Delaware limited partnership; MILLENNIUM AMERICA INC., a Delaware corporation, as Guarantor; the Lenders party thereto; BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as Servicing Agent, Documentation Agent and Administrative Agent; and THE CHASE MANHATTAN BANK, as Syndication Agent and Administrative Agent. WHEREAS, the Borrower (such term and each other capitalized term used but not defined herein having the meaning assigned to it in the Credit Agreement as amended and restated hereby, the "Amendment and Restatement"), the Lenders, BofA and Chase are parties to the Credit Agreement dated as of November 25, 1997 (the "Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders amend and restate the Credit Agreement; and WHEREAS, the undersigned Lenders are willing, on the terms and subject to the conditions set forth herein, to approve such Amendment and Restatement; NOW, THEREFORE, in consideration of these premises, the Borrower, Millennium America Inc. and the undersigned Lenders hereby agree as follows: SECTION 1. Amendments. Effective as of the Amendment and Restatement Effective Date (as defined in Section 3 hereof), the Credit Agreement is hereby amended and restated in its current form with the following amendments: (a) The following definitions are added to Section 1.01 of the Credit Agreement in their appropriate alphabetical positions: "Assumed Occidental Liabilities" shall mean amounts due under the Lease Intended for Security, Corpus Christi Ethylene Cracking Facility, dated December 18, 1991, among Oxy Petrochemicals Inc., as assignee of Occidental Chemical Corporation, as Lessee, the institutions listed on the Schedule I thereto, as Lessors, Norwest Bank Minnesota, N.A., as Agent and Chemical Bank and the Bank of Nova Scotia, as Information Agents, as amended and supplemented from time to time. "Equistar GP" shall mean any general partner of the Borrower. "Occidental Asset Contribution Agreement" means the Agreement and Plan of Merger and Asset Contribution dated as of May 15, 1998, among 2 Occidental GP, Occidental LP1, Occidental LP2, Oxy Petrochemicals Inc. and the Borrower. (b) The definition of "Applicable Percentage" in Section 1.01 of the Credit Agreement is hereby amended by (i) replacing the table contained therein with the following table: Facility Index LIBOR/NIBOR Fee Ratings Spread Percentage ------- ----------- ---------- Category 1 .285% .090% A-/A3 or higher Category 2 .375% .125% BBB+/Baa1 Category 3 .475% .150% BBB/Baa2 Category 4 .675% .200% BBB-/Baa3 Category 5 .775% .225% BBB-/Ba1 or BB+/Baa3 Category 6 1.000% .250% BB+/Ba1 Category 7 1.200% .300% BB/Ba2 or lower - -------------------------------------------------------- (ii) replacing the number "6" at the end of clause (i) thereof with the number "7" and (iii) inserting immediately before the semicolon at the end of clause (ii) thereof the following: "(except that for purposes of this clause (ii), Category 5 shall be disregarded in determining the number of Categories by which the Index Ratings differ)". (c) The definition of "Change in Control" in Section 1.01 of the Credit Agreement is hereby amended by replacing the definition in its entirety with the following: A "Change in Control" shall occur if at any time Lyondell, Millennium and Occidental cease to own in the aggregate, through ownership by one or more of them, partnership interests representing at least a majority of the total equity interest and voting power of the Borrower. (d) The second proviso in the definition of "EBITDA" in Section 1.01 of the Credit Agreement is hereby amended to read as follows: "provided further, that after December 31, 1998, such addition may only be made in the calculation of EBITDA for each of two fiscal quarters during the remaining term of this Agreement and any such addition may only be made for one fiscal quarter during any four consecutive fiscal quarters." 3 (e) The Interest Coverage Ratio in Section 6.05 of the Credit Agreement is hereby amended by inserting at the end thereof, the following: "except that for any period of four consecutive fiscal quarters ending on any date set forth below, the Interest Coverage Ratio shall not be less than the ratio set forth below opposite such date: Date Ratio - ---- ------ March 31, 1999. . . . . . . . . . . . . . . .2.50 to 1.0 June 30, 1999 . . . . . . . . . . . . . . . .2.25 to 1.0 September 30, 1999. . . . . . . . . . . . . .2.00 to 1.0 December 31, 1999 . . . . . . . . . . . . . .2.00 to 1.0 March 31, 2000. . . . . . . . . . . . . . . .2.15 to 1.0 June 30, 2000 . . . . . . . . . . . . . . . .2.25 to 1.0 September 30, 2000. . . . . . . . . . . . . .2.50 to 1.0 December 31, 2000 . . . . . . . . . . . . . .2.75 to 1.0 (f) Section 10.15(a) of the Credit Agreement is hereby amended by replacing "Lyondell GP or Millennium GP, or any of their Affiliates" with "any Equistar GP or any of its Affiliates" (g) Section 10.15(b) of the Credit Agreement is hereby amended by replacing all the text immediately after the first sentence thereof with the following: "The Occidental Asset Contribution Agreement contains provisions under which the Borrower would be obligated to reimburse Occidental for any amounts paid by Occidental or its Affiliates on account of the fixed rent, purchase obligation and variable rent on the Assumed Occidental Liabilities. The Lenders acknowledge and agree that the obligations of the Borrower in respect of any such reimbursement obligations will rank pari passu with the Obligations" SECTION 3. Effectiveness. This Amendment and Restatement shall become effective as of the date (the "Amendment and Restatement Effective Date") when the Administrative Agents (or their counsel) shall have received copies hereof that, when taken together, bear the signatures of the Borrower and the Required Lenders. SECTION 4. Amendment and Restatement Fee. The Borrower shall pay to the Administrative Agents on the Amendment and Restatement Effective Date a fee as separately agreed to for the account of each Lender executing this Amendment and Restatement. SECTION 5. Applicable Law. This Amendment and Restatement shall be construed in accordance with and governed by the law of the State of New York. SECTION 6. No Other Amendments. Except as expressly set forth herein, this Amendment and Restatement shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of any party under, the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement, all of which are ratified and 4 affirmed in all respects and shall continue in full force and effect. This Amendment and Restatement shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. SECTION 7. Counterparts. This Amendment and Restatement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Amendment and Restatement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Amendment and Restatement. SECTION 8. Headings. Section headings used herein are for convenience of reference only, are not part of this Amendment and Restatement and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment and Restatement. SECTION 9. Expenses. The Borrower shall reimburse the Administrative Agents for their reasonable out-of-pocket expenses incurred in connection with this Amendment and Restatement, including the reasonable fees and expenses of Cravath, Swaine & Moore, counsel for the Administrative Agents. IN WITNESS WHEREOF, the Borrower, Millennium America Inc. and the undersigned Lenders have caused this Amendment and Restatement to be duly executed by their duly authorized officers, all as of the date first above written. EQUISTAR CHEMICALS, LP by /s/ EUGENE R. ALLSPACH ---------------------------- Name: Eugene R. Allspach Title: President MILLENNIUM AMERICA, INC. by /s/ CHRISTINE WUBBOLDING ---------------------------- Name: Christine Wubbolding Title: Vice President and Treasurer 5 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, individually and as Administrative Agent, Documentation Agent and Servicing Agent, by /s/ Michael J. Dillon ---------------------------- Name: Michael J. Dillon Title: Managing Director THE CHASE MANHATTAN BANK, individually and as Administrative Agent and Syndication Agent, by /s/ Mary Elizabeth Swerz ---------------------------- Name: Mary Elizabeth Swerz Title: Vice President ABN AMRO BANK N.V., by /s/ Collis G. Sanders ---------------------------- Name: Collis G. Sanders Title:Senior Vice President & Managing Director by /s/ Gordon D. Chang ---------------------------- Name: Gordon D. Chang Title: Vice President 6 BANK AUSTRIA AG, by /s/ R. Tenhave ---------------------------- Name: R. Tenhave Title: Senior Vice President /s/ Karen L. Jill ---------------------------- Name: Karen L. Jill Title: Assistant Vice President THE BANK OF NEW YORK, by /s/ Raymond J. Palmer --------------------------- Name: Raymond J. Palmer Title: Vice President THE BANK OF NOVA SCOTIA, by /s/ F. C. H. Ashby ------------------------- Name: F. C. H. Ashby Title: Senior Manger Loan Operations THE BANK OF TOKYO-MITSUBISHI, by /s/ Ichiro Otani ------------------------ Name: Ichiro Otani Title: Deputy General Manager 7 BANQUE NATIONALE DE PARIS, by /s/ John Stacy ------------------------- Name: John Stacy Title: Vice President CIBC INC., by CIBC OPPENHEIMER CORP, as Agent, by /s/ Ihor Zaluckyj ------------------------- Name: Ihor Zaluckyj Title: Executive Director COMMERZBANK AG, by /s/ W. David Suttles ------------------------- Name: W. David Suttles Title: Vice President by /s/ D. L. Ward ------------------------- Name: D. L. Ward Title: Assistant Treasurer CREDIT LYONNAIS NEW YORK BRANCH, by /s/ Phillippe Soustra ------------------------- Name: Phillippe Soustra Title: Senior Vice President 8 THE DAI-ICHI-KANGO BANK, LTD., by /s/ Timothy White ------------------------- Name: Timothy White Title: Senior Vice President DEUTSCHE GENOSSENSCHAFTS BANK AG, by /s/ Mark Connelly ------------------------- Name: Mark Connelly Title: Vice President by /s/ Elizabeth L. Ryan ------------------------ Name: Elizabeth L. Ryan Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, by /s/ Dixon P. Schultz ------------------------ Name: Dixon P. Schultz Title: First Vice President 9 THE INDUSTRIAL BANK OF JAPAN, LTD., by /s/ Mike Oakes ------------------------ Name: Mike Oakes Title: Senior Vice President Houston Office KBC BANK N. V., by /s/ Robert Snauffer ------------------------- Name: Robert Snauffer Title: First Vice President by /s/ Marcel Claes ------------------------- Name: Marcel Claes Title: Deputy General Manager THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, by /s/ Sadao Muraoko -------------------------- Name: Sadao Muraoko Title: Head of Southwest Region 10 MARINE MIDLAND BANK, by /s/ George Linhart -------------------------- Name: George Linhart Title: Relationship Manager MORGAN GUARANTY TRUST COMPANY OF NEW YORK, by /s/ Anna Marie Fallon ---------------------------- Name: Anna Marie Fallon Title: Vice President NATIONSBANK, N.A., by /s/ Michael J. Dillon ---------------------------- Name: Michael J. Dillon Title: Managing Director PNC BANK, by /s/ Marc T. Kennedy --------------------------- Name: Marc T. Kennedy Title: Vice President THE SANWA BANK LIMITED, by /s/ Jean-Michel Fatovic ---------------------------- Name: Jean-Michel Fatovic Title: Vice President 11 SOCIETE GENERALE, by /s/ Karen M. Sager -------------------------- Name: Karen M. Sager Title: Vice President THE SUMITOMO BANK, LTD., by /s/ J. Bruce Meredith ---------------------------- Name: J. Bruce Meredith Title: Senior Vice President SUNTRUST BANK, ATLANTA, by /s/ M. Anne Ford ------------------------------ Name: M. Anne Ford Title: Corporate Banking Officer by /s/ Steven J. Newby ------------------------------ Name: Steven J. Newby Title: Corporate Banking Officer THE TORONTO-DOMINION BANK, by /s/ Sonja R. Jordan --------------------------- Name: Sonja R. Jordan Title: Manager, Credit Administration WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, by /s/ Felicia LaForgia --------------------------- Name: Felicia LaForgia Title: Vice President by /s/ Thomas Lee -------------------------- Name: Thomas Lee Title: Associate EX-4.11 8 EQUISTAR INDENTURE DATED AS OF JANUARY 15, 1999 EXHIBIT 4.11 EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION as Issuers and THE BANK OF NEW YORK as Trustee Indenture Dated as of January 15, 1999 EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of January 15, 1999 Section of Section(s) of Trust Indenture Act of 1939 Indenture - ---------------- ------------------ ----------------- (S) 310 (a)(1)..............................7.10 (a)(2)..............................7.10 (a)(3)....................Not Applicable (a)(4)....................Not Applicable (a)(5)..............................7.10 (b)...........................7.08, 7.10 (S) 311 (a).................................7.11 (b).................................7.11 (c).......................Not Applicable (S) 312 (a).................................2.07 (b)................................10.03 (c)................................10.03 (S) 313 (a).................................7.06 (b).................................7.06 (c).................................7.06 (d).................................7.06 (S) 314 (a)...........................4.03, 4.04 (b).......................Not Applicable (c)(1).............................10.04 (c)(2).............................10.04 (c)(3)....................Not Applicable (d).......................Not Applicable (e)................................10.05 (S) 315 (a)..............................7.01(b) (b).................................7.05 (c)..............................7.01(a) (d)..............................7.01(c) (d)(1)........................7.01(c)(1) (d)(2)........................7.01(c)(2) (d)(3)........................7.01(c)(3) (e).................................6.11 (S) 316 (a)(1)(A)...........................6.05 (a)(1)(B)...........................6.04 (a)(2)....................Not Applicable i (a)(last sentence)................2.11 (b)...............................6.07 (S) 317 (a)(1)............................6.08 (a)(2)............................6.09 (b)...............................2.06 (S) 318 (a)..............................10.01 ____________ Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. ii TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE............. 1 SECTION 1.01 Definitions............................................ 1 SECTION 1.02 Other Definitions...................................... 7 SECTION 1.03 Incorporation by Reference of Trust Indenture Act...... 7 SECTION 1.04 Rules of Construction.................................. 8 ARTICLE II THE SECURITIES......................................... 8 SECTION 2.01 Amount Unlimited; Issuable in Series................... 8 SECTION 2.02 Denominations.......................................... 11 SECTION 2.03 Forms Generally........................................ 11 SECTION 2.04 Execution, Authentication, Delivery and Dating......... 12 SECTION 2.05 Registrar and Paying Agent............................. 14 SECTION 2.06 Paying Agent to Hold Money in Trust.................... 14 SECTION 2.07 Holder Lists........................................... 15 SECTION 2.08 Transfer and Exchange.................................. 15 SECTION 2.09 Replacement Securities................................. 16 SECTION 2.10 Outstanding Securities................................. 16 SECTION 2.11 Original Issue Discount, Foreign-Denominated and Treasury Securities................................... 17 SECTION 2.12 Temporary Securities................................... 17 SECTION 2.13 Cancellation........................................... 17 SECTION 2.14 Payments; Defaulted Interest........................... 18 SECTION 2.15 Persons Deemed Owners.................................. 18 SECTION 2.16 Computation of Interest................................ 18 SECTION 2.17 Global Securities; Book-Entry Provisions............... 18 ARTICLE III REDEMPTION............................................. 21 SECTION 3.01 Applicability of Article............................... 21 SECTION 3.02 Notice to the Trustee.................................. 21 SECTION 3.03 Selection of Securities To Be Redeemed................. 21 SECTION 3.04 Notice of Redemption................................... 22 SECTION 3.05 Effect of Notice of Redemption......................... 22 SECTION 3.06 Deposit of Redemption Price............................ 23 SECTION 3.07 Securities Redeemed or Purchased in Part............... 23 SECTION 3.08 Purchase of Securities................................. 23 SECTION 3.09 Mandatory and Optional Sinking Funds................... 24 SECTION 3.10 Satisfaction of Sinking Fund Payments with Securities.. 24 SECTION 3.11 Redemption of Securities for Sinking Fund.............. 24 i ARTICLE IV COVENANTS.............................................. 25 SECTION 4.01 Payment of Securities.................................. 25 SECTION 4.02 Maintenance of Office or Agency........................ 25 SECTION 4.03 SEC Reports; Financial Statements ..................... 26 SECTION 4.04 Compliance Certificate................................. 26 SECTION 4.05 Corporate Existence.................................... 27 SECTION 4.06 Waiver of Stay, Extension or Usury Laws................ 27 SECTION 4.07 Additional Amounts..................................... 28 SECTION 4.08 Limitation on Liens.................................... 28 SECTION 4.09 Limitation on Sale and Lease-Back Transactions......... 30 ARTICLE V............................................................ 30 SECTION 5.01 Consolidation, Merger and Sale of Assets............... 30 SECTION 5.02 Successor Person Substituted........................... 31 ARTICLE VI DEFAULTS AND REMEDIES.................................. 31 SECTION 6.01 Events of Default...................................... 31 SECTION 6.02 Acceleration........................................... 34 SECTION 6.03 Other Remedies......................................... 34 SECTION 6.04 Waiver of Existing or Past Defaults.................... 34 SECTION 6.05 Control by Majority.................................... 35 SECTION 6.06 Limitations on Suits................................... 35 SECTION 6.07 Rights of Holders to Receive Payment................... 36 SECTION 6.08 Collection Suit by Trustee............................. 36 SECTION 6.09 Trustee May File Proofs of Claim....................... 36 SECTION 6.10 Priorities............................................. 37 SECTION 6.11 Undertaking for Costs.................................. 38 ARTICLE VII TRUSTEE................................................ 38 SECTION 7.01 Other Definitions...................................... 38 SECTION 7.02 Rights of Trustee...................................... 39 SECTION 7.03 May Hold Securities.................................... 40 SECTION 7.04 Trustees Disclaimer.................................... 41 SECTION 7.05 Notice of Defaults..................................... 41 SECTION 7.06 Reports by Trustee to Holders.......................... 41 SECTION 7.07 Compensation and Indemnity............................. 41 SECTION 7.08 Replacement of Trustee................................. 42 SECTION 7.09 Successor Trustee by Merger, etc....................... 44 SECTION 7.10 Eligibility; Disqualification.......................... 44 SECTION 7.11 Preferential Collection of Claims Against Issuers...... 45 ii ARTICLE VIII DISCHARGE OF INDENTURE................................. 45 SECTION 8.01 Termination of Issuers Obligations..................... 45 SECTION 8.02 Application of Trust Money............................. 49 SECTION 8.03 Repayment to Issuers................................... 49 SECTION 8.04 Reinstatement.......................................... 50 ARTICLE IX SUPPLEMENTAL INDENTURES AND AMENDMENTS................. 50 SECTION 9.01 Without Consent of Holders............................. 50 SECTION 9.02 With Consent of Holders................................ 52 SECTION 9.03 Compliance with Trust Indenture Act.................... 53 SECTION 9.04 Revocation and Effect of Consents...................... 53 SECTION 9.05 Notation on or Exchange of Securities.................. 54 SECTION 9.06 Trustee to Sign Amendments, etc........................ 54 ARTICLE X MISCELLANEOUS.......................................... 55 SECTION 10.01 Trust Indenture Act Controls........................... 55 SECTION 10.02 Notices................................................ 55 SECTION 10.03 Communication by Holders with Other Holders............ 56 SECTION 10.04 Certificate and Opinion as to Conditions Precedent..... 56 SECTION 10.05 Statements Required in Certificate or Opinion.......... 56 SECTION 10.06 Rules by Trustee and Agents............................ 57 SECTION 10.07 Legal Holidays......................................... 57 SECTION 10.08 No Recourse Against Others............................. 57 SECTION 10.09 Governing Law.......................................... 57 SECTION 10.10 No Adverse Interpretation of Other Agreements.......... 58 SECTION 10.11 Successors............................................. 58 SECTION 10.12 Severability........................................... 58 SECTION 10.13 Counterpart Originals.................................. 58 SECTION 10.14 Table of Contents, Headings, etc....................... 58 iii INDENTURE dated as of January 15, 1999 among Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), Equistar Funding Corporation, a Delaware corporation ("Equistar Funding" and, together with Equistar, the "Issuers"), and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Issuers' (i) unsecured debentures, notes or other evidences of indebtedness (the "Initial Securities") to be issued from time to time in one or more series as provided in this Indenture, and, (ii) if and when issued in exchange for Initial Securities, exchange securities (the "Exchange Securities" and, together with the Initial Securities, the "Securities" ) as provided in the Registration Rights Agreement or a similar agreement: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 DEFINITIONS. "Additional Amounts" means any additional amounts required by the express terms of a Security or by or pursuant to a Resolution, under circumstances specified therein or pursuant thereto, to be paid by the Issuers with respect to certain taxes, assessments or other governmental charges imposed on certain Holders and that are owing to such Holders. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, such specified Person. For purposes of this definition, "control" of a Person shall mean the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing. "Agent" means any Registrar or Paying Agent. "Bankruptcy Law" means Title 11 of the United States Code or any similar federal, state or foreign law for the relief of debtors. "Business Day" means any day that is not a Legal Holiday. "Consolidated Net Tangible Assets" means the total amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (a) all current liabilities (excluding any thereof which are by their terms extendible or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed), and (b) all goodwill, trade names, trademarks, patents, purchased technology, unamortized debt discount and other like intangible assets, all as set forth on the most recent 1 quarterly balance sheet of Equistar and computed in accordance with generally accepted accounting principles. "Corporate Trust Office" of the Trustee means the principal corporate trust office of the Trustee located at 101 Barclay Street, New York, New York 10286, and as may be located at such other address as the Trustee may give notice to the Issuers. "Debt" means notes, bonds, Securities or other similar evidences of indebtedness for money borrowed. "Default" means any event, act or condition that is, or after notice or the passage of time or both would be, an Event of Default. "Depositary" means, with respect to the Securities of any series issuable or issued in whole or in part in global form, The Depository Trust Company or the Person specified pursuant to Section 2.01 hereof as the initial Depositary with respect to the Securities of such series, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture, and thereafter "Depositary" shall mean or include such successor. "Dollar" or "$" means a dollar or other equivalent unit in such currency of the United States as at the time shall be legal tender for the payment of public and private debt. "Equistar Funding Board of Directors" means the Board of Directors of Equistar Funding or any committee thereof duly authorized, with respect to any particular matter, to act by or on behalf of the Board of Directors of Equistar Funding. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor statute. "Funded Debt" means indebtedness of either of the Issuers (including Securities, provided that Securities may only be redeemed at the redemption prices and in accordance with the other provisions of the form thereof), maturing by the terms thereof more than one year after the original creation thereof and ranking at least pari passu with the Securities. "GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, as in effect from time to time. "Global Security" means a Security that is issued in global form and registered in the name of the Depositary with respect thereto or its nominee. 2 "Government Obligations" means, with respect to a series of Securities, direct obligations of the government that issues the currency in which the Securities of the series are payable for the payment of which the full faith and credit of such government is pledged, or obligations of a person controlled or supervised by and acting as an agency or instrumentality of such government, the payment of which is unconditionally guaranteed as a full faith and credit obligation by such government. "Holder" means a Person in whose name a Security is registered. "Indenture" means this Indenture as amended or supplemented from time to time, and includes the terms of a particular series of Securities established as contemplated by Section 2.01. "Interest" means, with respect to an Original Issue Discount Security that by its terms bears interest only after Maturity, interest payable after Maturity. "Interest Payment Date," when used with respect to any Security, shall have the meaning assigned to such term in the Security as contemplated by Section 2.01. "Issue Date" means, with respect to Securities of a series, the date on which the Securities of such series are originally issued under this Indenture. "Issuers" means the Persons named as the "Issuers" in the first paragraph of this instrument until a successor or successors shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Issuers" shall mean such successor and the remaining Issuer or the successors, as the case may be; provided, however, that for purposes of any provision contained herein which is required by the TIA, "Issuers" shall also mean each other obligor (if any) on the Securities of a series. "Issuers Order" and "Issuers Request" mean, respectively, a written order or request signed in the name of each of the Issuers by two Officers of each of the Issuers, and delivered to the Trustee. "Joint Venture" means (1) with respect to properties located in the United States, any partnership, corporation or other entity, in which up to and including 50% of the partnership interests, outstanding voting stock or other equity interests is owned, directly or indirectly, by either of the Issuers and/or one or more Subsidiaries, and (2) with respect to properties located outside the United States, any partnership, corporation or other entity, in which up to and including 60% of the partnership interests, outstanding voting stock or other equity interests is owned, directly or indirectly, by either of the Issuers and/or one or more Subsidiaries. A Joint Venture shall not be a Subsidiary. 3 "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in any of The City of New York, New York, Houston, Texas or a Place of Payment are authorized or obligated by law, regulation or executive order to remain closed. "Liens" means any mortgages, liens, pledges or other encumbrances. "Maturity " means, with respect to any Security, the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity thereof, or by declaration of acceleration, call for redemption or otherwise. "Officer" means the Chief Executive Officer, the President, any Vice President, the chief financial officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of a Person. "Officers' Certificate" means a certificate signed on behalf of Equistar by two Officers of Equistar and on behalf of Equistar Funding by two Officers of Equistar Funding. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. Such counsel may be an employee of or counsel to the Issuers or the Trustee. "Original Issue Discount Security" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 6.02. "Partnership Governance Committee" means the Partnership Governance Committee of Equistar or any committee thereof duly authorized, with respect to any particular matter, to act by or on behalf of the Partnership Governance Committee of Equistar. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof or other entity of any kind. "Place of Payment" means, with respect to the Securities of any series, the place or places where the principal of, premium (if any) on and interest on the Securities of that series are payable as specified in accordance with Section 2.01 subject to the provisions of Section 4.02. "Principal" of a Security means the principal of the Security plus, when appropriate, the premium, if any, on the Security. "Redemption Date" means, with respect to any Security to be redeemed, the date fixed for such redemption pursuant to this Indenture. 4 "Redemption Price" means, with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to this Indenture. "Registration Rights Agreement" means the Registration Rights Agreement among the Issuers, Chase Securities Inc. and NationsBanc Montgomery Securities LLC dated as of February 16, 1999. "Repayment Date" means, with respect to any Security to be repaid, the date fixed for such repayment pursuant to this Indenture. "Resolution" means (i) a copy of a resolution certified by the Secretary or an Assistant Secretary of Equistar to have been duly adopted by the Partnership Governance Committee and to be in full force and effect on the date of such certification, together with (ii) a copy of a resolution certified by the Secretary or an Assistant Secretary of Equistar Funding to have been duly adopted by the Equistar Funding Board of Directors and to be in full force and effect on the date of such certification; and in the case of both of (i) and (ii), delivered to the Trustee. "Restricted Property" means: (a) any plant for the production of petrochemicals owned by Equistar or a Subsidiary, except (i) related facilities which in the opinion of the Partnership Governance Committee are transportation or marketing facilities, and (ii) any plant for the production of petrochemicals which in the opinion of the Partnership Governance Committee is not a principal plant of Equistar and its Subsidiaries; and (b) any shares of capital stock or indebtedness of a Restricted Subsidiary owned by Equistar or a Subsidiary. "Restricted Subsidiary" means any Subsidiary which owns any Restricted Property. "Rule 144A Securities" means Securities of a series designated pursuant to Section 2.01 as entitled to the benefits of Section 4.03(b). "Sale and Lease-Back Transaction" means any arrangement with any Person (other than Equistar or a Subsidiary), or to which any such Person is a party, providing for the leasing to Equistar or a Restricted Subsidiary for a period of more than five years of any Restricted Property which has been or is to be sold or transferred by Equistar or such Restricted Subsidiary to such Person or to any other Person (other than Equistar or a Subsidiary), to which funds have been or are to be advanced by such Person on the security of the leased property. "SEC" means the Securities and Exchange Commission. 5 "Securities" has the meaning stated in the preamble of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Security Custodian" means, with respect to Securities of a series, the Trustee for Securities of such series, as custodian with respect to the Securities of such series issued in global form, or any successor entity thereto. "Stated Maturity" means, when used with respect to any Security or any installment of principal thereof or interest thereon, the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means any corporation at least a majority of the outstanding securities of which having ordinary voting power to elect a majority of the board of directors of such corporation (whether or not any other class of securities has or might have voting power by reason of the happening of a contingency) is at the time owned or controlled directly or indirectly by Equistar or one or more Subsidiaries or by Equistar and one or more Subsidiaries. "TIA" means the Trust Indenture Act of 1939, as amended (15 U.S.C. (S)(S) 77aaa-77bbbb), as in effect on the date hereof. "Trust Officer" means, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Trustee" means the Person, not in its individual capacity but solely as Trustee, named as such above, until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter "Trustee" means each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series means the Trustee with respect to Securities of that series. "United States " means the United States of America (including the States and the District of Columbia) and its "possessions," which include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. "United States Alien" means any Person who, for United States federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident alien or foreign fiduciary of an estate or trust, or a foreign partnership. 6 "U.S. Government Obligations" means Government Obligations with respect to Securities payable in Dollars. "Value" means, with respect to a Sale and Lease-Back Transaction, the amount equal to the greater of (i) the net proceeds of the sale or transfer of the property leased pursuant to such Sale and Lease-Back Transaction or (ii) the fair value, in the opinion of the Partnership Governance Committee, of such property at the time of entering into such Sale and Lease-Back Transaction, in either case divided first by the number of full years of the term of the lease and then multiplied by the number of full years of such term remaining at the time of determination, without regard to any renewal or extension options contained in the lease. SECTION 1.02 OTHER DEFINITIONS DEFINED TERM IN SECTION "Bankruptcy Custodian".............................. 6.01 "covenant defeasance"............................... 8.01 "Conversion Event".................................. 6.01 "Event of Default".................................. 6.01 "Equistar"..........................................Preamble "Equistar Funding"..................................Preamble "Exchange Securities"...............................Preamble "Exchange Rate"..................................... 2.11 "Initial Securities"................................Preamble "Judgment Currency"................................. 6.10 "legal defeasance".................................. 8.01 "mandatory sinking fund payment".................... 3.09 "optional sinking fund payment"..................... 3.09 "Paying Agent"...................................... 2.05 "Registrar"......................................... 2.05 "Required Currency"................................. 6.10 "Successor"......................................... 5.01 SECTION 1.03 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "Commission" means the SEC. "Indenture Securities" means the Securities. 7 "Indenture Security Holder" means a Holder. "Indenture to be Qualified" means this Indenture. "Indenture Trustee" or "Institutional Trustee" means the Trustee. "Obligor" on the indenture securities means the Issuers or any other obligor on the Securities. All terms used in this Indenture that are defined by the TIA, defined by a TIA reference to another statute or defined by an SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04 RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) all references in this Agreement to Articles and Sections are references to the corresponding Articles and Sections in and of this Indenture. ARTICLE II THE SECURITIES SECTION 2.01 AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities that may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established in or pursuant to a Resolution, and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series: 8 (1) the title of the Securities of the series (which shall distinguish the Securities of the series from the Securities of all other series); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.08, 2.09, 2.12, 3.07 or 9.05); (3) whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form, as Global Securities or otherwise, and, if so, whether beneficial owners of interests in any such Global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 2.17, and the initial Depositary for any Global Security or Securities of such series, if other than The Depository Trust Company; (4) the manner in which any interest payable on a temporary Global Security on any Interest Payment Date will be paid if other than in the manner provided in Section 2.14; (5) the date or dates on which the principal of (and premium, if any, on) the Securities of the series is payable or the method of determination thereof; (6) the rate or rates, or the method of determination thereof, at which the Securities of the series shall bear interest, if any, whether and under what circumstances Additional Amounts with respect to such Securities shall be payable, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and the record date for the interest payable on any Securities on any Interest Payment Date, or if other than provided herein, the Person to whom any interest on Securities of the series shall be payable; (7) the place or places where, subject to the provisions of Section 4.02, the principal, premium (if any), interest and any Additional Amounts with respect to the Securities of the series shall be payable; (8) the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Issuers, if the Issuers are to have that option, and the manner in which the Issuers must exercise any such option, if different from those set forth herein; 9 (9) the obligation, if any, of the Issuers to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices (whether denominated in cash, securities or otherwise) at which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid in whole or in part pursuant to such obligation; (10) if other than denominations of $1,000 and any integral multiple thereof, the denomination in which any Securities of that series shall be issuable; (11) if other than Dollars, the currency or currencies (including composite currencies) or the form, including equity securities, other debt securities (including Securities), warrants or any other securities or property of the Issuers or any other Person, in which payment of the principal, premium (if any), interest and any Additional Amounts with respect to the Securities of the series shall be payable; (12) if the principal of, premium (if any) or interest on or any Additional Amounts with respect to the Securities of the series are to be payable, at the election of the Issuers or a Holder thereof, in a currency or currencies (including composite currencies) other than that in which the Securities are stated to be payable, the currency or currencies (including composite currencies) in which payment of the principal, premium (if any), interest and any Additional Amounts with respect to Securities of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made; (13) if the amount of payments of principal, premium (if any), interest and any Additional Amounts with respect to the Securities of the series may be determined with reference to any commodities, currencies or indices, values, rates or prices or any other index or formula, the manner in which such amounts shall be determined; (14) if other than the entire principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 6.02; (15) any additional means of satisfaction and discharge of this Indenture and any additional conditions or limitations to discharge with respect to Securities of the series pursuant to Article VIII or any modifications of or deletions from such conditions or limitations; (16) any deletions or modifications of or additions to the Events of Default set forth in Section 6.01 or covenants of the Issuers set forth in Article IV pertaining to the Securities of the series; 10 (17) any restrictions or other provisions with respect to the transfer or exchange of Securities of the series, which may amend, supplement, modify or supersede those contained in this Article II; (18) if the Securities of the series are to be convertible into or exchangeable for capital stock, other debt securities (including Securities), warrants, other equity securities or any other securities or property of the Issuers or any other Person, at the option of the Issuers or the Holder or upon the occurrence of any condition or event, the terms and conditions for such conversion or exchange; (19) if the Securities of the series are to be entitled to the benefit of Section 4.03(b) (and accordingly constitute Rule 144A Securities); and (20) any other terms of the series (which terms shall not be prohibited by the provisions of this Indenture). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Resolution referred to and (subject to Section 2.03) set forth, or determined in the manner provided, in the Officers' Certificate referred to or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Resolution, a copy of an appropriate record of such actions together with such Resolution shall be set forth in an Officers' Certificate or certified in the case of each Issuer by the Secretary or an Assistant Secretary of such Issuer and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 2.02 DENOMINATIONS. The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 2.01. In the absence of any such provisions with respect to the Securities of any series, the Securities of such series denominated in Dollars shall be issuable in denominations of $1,000 and any integral multiples thereof. SECTION 2.03 FORMS GENERALLY. The Securities of each series shall be in fully registered form and in substantially such form or forms (including temporary or permanent global form) established by or pursuant to a Resolution or in one or more indentures supplemental hereto. The Securities may have notations, legends or endorsements required by law, securities exchange rule, Equistar's partnership agreement or Equistar Funding's certificate of incorporation, bylaws or other similar governing documents, agreements to which either of the Issuers are subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Issuers). A copy of the 11 Resolution establishing the form or forms of Securities of any series shall be delivered to the Trustee at or prior to the delivery of the Issuers Order contemplated by Section 2.04 for the authentication and delivery of such Securities. The definitive Securities of each series shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution thereof. The Trustee's certificate of authentication shall be in substantially the following form: "This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. The Bank of New York, as Trustee Dated: By: -------------------------------------- Authorized Signatory". SECTION 2.04 EXECUTION, AUTHENTICATION, DELIVERY AND DATING. Two Officers of each of the Issuers shall sign the Securities on behalf of the Issuers by manual or facsimile signature. The Issuers' seals, if any, shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. If an Officer of either of the Issuers whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall be valid nevertheless. A Security shall not be entitled to any benefit under this Indenture or be valid or obligatory for any purpose until authenticated by the manual signature of an authorized signatory of the Trustee, which signature shall be conclusive evidence that the Security has been authenticated under this Indenture. Notwithstanding the foregoing, if any Security has been authenticated and delivered hereunder but never issued and sold by the Issuers, and the Issuers deliver such Security to the Trustee for cancellation as provided in Section 2.13 together with a written statement (which need not comply with Section 10.05 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Issuers, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. The Trustee shall authenticate and deliver Securities of a series for original issue upon an Issuers Order for the authentication and delivery of such Securities or pursuant to such procedures acceptable to the Trustee as may be specified from time to time by Issuers Order. Such Issuers Order shall specify the amount of the Securities to be authenticated, the date on 12 which the original issue of Securities is to be authenticated, the name or names of the initial Holder or Holders and any other terms of the Securities of such series not otherwise determined. If provided for in such procedures, such Issuers Order may authorize (1) authentication and delivery of Securities of such series for original issue from time to time, with certain terms (including, without limitation, the Maturity dates or dates, original issue date or dates and interest rate or rates) that differ from Security to Security and (2) authentication and delivery pursuant to oral or electronic instructions from the Issuers or their duly authorized agent, which instructions shall be promptly confirmed in writing. If the form or terms of the Securities of the series have been established in or pursuant to one or more Resolutions as permitted by Section 2.01, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive (in addition to the Issuers Order referred to above and the other documents required by Section 10.04), and (subject to Section 7.01) shall be fully protected in relying upon: (a) an Officers' Certificate setting forth the Resolution and, if applicable, an appropriate record of any action taken pursuant thereto, as contemplated by the last paragraph of Section 2.01; and (b) an Opinion of Counsel to the effect that: (i) if the form of such Securities has been established by or pursuant to a Resolution, as is permitted by Section 2.01, that such form has been established in conformity with the provisions of this Indenture; (ii) if the terms of such Securities have been established by or pursuant to a Resolution, as is permitted by Section 2.01, that such terms have been established in conformity with the provisions of this Indenture; and (iii) that such Securities, when authenticated and delivered by the Trustee and issued by the Issuers in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and binding obligations of the Issuers, enforceable against the Issuers in accordance with their terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws in effect from time to time affecting the rights of creditors generally, and the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Trustee shall not be required to authenticate such Securities if the issuance of such Securities pursuant to this Indenture would affect the Trustee's own rights, duties or immunities 13 under the Securities and this Indenture or otherwise in a manner not reasonably acceptable to the Trustee. The Trustee may appoint an authenticating agent acceptable to the Issuers to authenticate Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Issuers or an Affiliate of the Issuers. Each Security shall be dated the date of its authentication. SECTION 2.05 REGISTRAR AND PAYING AGENT. The Issuers shall maintain an office or agency and may designate additional offices or agencies for each series of Securities where Securities of such series may be presented for registration of transfer or exchange ("Registrar") and an office or agency where Securities of such series may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Securities of such series and of their transfer and exchange. The Issuers may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar and the term "Paying Agent" includes any additional paying agent. The Issuers shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Issuers shall notify the Trustee of the name and address of any Agent not a party to this Indenture. The Issuers may change any Paying Agent or Registrar without notice to any Holder. If the Issuers fail to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. Either of the Issuers or any of Equistar's Subsidiaries may act as Paying Agent or Registrar. The Issuers initially appoint the Trustee as Registrar and Paying Agent. SECTION 2.06 PAYING AGENT TO HOLD MONEY IN TRUST. The Issuers shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on or any Additional Amounts with respect to Securities and will notify the Trustee of any default by the Issuers in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. The Issuers at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon payment over to the Trustee and upon accounting for any funds disbursed, the Paying Agent (if other than either of the Issuers or a Subsidiary of Equistar) shall have no further liability for the money. If either of the Issuers or a Subsidiary of Equistar 14 acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Each Paying Agent shall otherwise comply with TIA (S) 317(b). SECTION 2.07 HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar with respect to a series of Securities, the Issuers shall furnish to the Trustee at least five Business Days before each Interest Payment Date with respect to such series of Securities, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of such series, and the Issuers shall otherwise comply with TIA (S) 312(a). SECTION 2.08 TRANSFER AND EXCHANGE. Except as set forth in Section 2.17 or as may be provided pursuant to Section 2.01: When Securities of any series are presented to the Registrar with the request to register the transfer of such Securities or to exchange such Securities for an equal principal amount of Securities of the same series of like tenor and of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if is satisfied with the evidence of ownership and identity of the Person making the request and if its other requirements for such transactions are met; provided, however, that the Securities presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form reasonably satisfactory to the Registrar duly executed by the Holder thereof or by his attorney, duly authorized in writing, on which instruction the Registrar can rely. To permit registrations of transfers and exchanges, the Issuers shall execute and the Trustee shall authenticate Securities at the Issuers' written request and submission of the Securities or Global Securities. No service charge shall be made to a Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Issuers may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Section 2.12, 3.07 or 9.05). The Trustee shall authenticate Securities in accordance with the provisions of Section 2.04. Notwithstanding any other provisions of this Indenture to the contrary, in the event of any redemption in whole or in part, the Issuers will not be required (i) to register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before any selection of Securities of that series to be redeemed and ending at the close of business on the date the relevant notice of redemption is mailed, (ii) to register the transfer of or exchange any Security or portion thereof called for redemption, except the unredeemed portion, if any, of a Security being redeemed in part or (iii) to register the transfer of or exchange any Security that has been surrendered for 15 repayment at the option of the holder, except the portion, if any, of such Security not to be so repaid. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture, a Resolution, any indenture supplemental hereto or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Agent Members (as hereinafter defined) or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, a Resolution, or any indenture supplemental hereto and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.09 REPLACEMENT SECURITIES. If any mutilated Security is surrendered to the Trustee, or if the Holder of a Security claims that the Security has been destroyed, lost or stolen and the Issuers and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of such Security, the Issuers shall issue and the Trustee shall authenticate a replacement Security of the same series if the Trustee's requirements are met. If any such mutilated, destroyed, lost or stolen Security has become or is to become due and payable, the Issuers in their discretion may, instead of issuing a new Security, pay such Security. If required by the Trustee or the Issuers, such Holder must furnish an indemnity bond that is sufficient in the judgment of the Trustee and the Issuers to protect the Issuers, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Security is replaced. The Issuers and the Trustee may charge a Holder for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Issuers. SECTION 2.10 OUTSTANDING SECURITIES. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Security effected by the Trustee hereunder and those described in this Section 2.10 as not outstanding. If a Security is replaced pursuant to Section 2.09, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the principal amount of any Security is considered paid under Section 4.01, it ceases to be outstanding and interest on it ceases to accrue. 16 A Security does not cease to be outstanding because the Issuers or an Affiliate of the Issuers holds the Security. SECTION 2.11 ORIGINAL ISSUE DISCOUNT, FOREIGN-DENOMINATED AND TREASURY SECURITIES. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, amendment, supplement, waiver or consent, (a) the principal amount of an Original Issue Discount Security shall be the principal amount thereof that would be due and payable as of the date of such determination upon acceleration of the Maturity thereof pursuant to Section 6.02, (b) the principal amount of a Security denominated in a foreign currency shall be the Dollar equivalent, as determined by the Issuers by reference to the noon buying rate in The City of New York for cable transfers for such currency, as such rate is certified for customs purposes by the Federal Reserve Bank of New York (the "Exchange Rate") on the date of original issuance of such Security, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent, as determined by the Issuers by reference to the Exchange Rate on the date of original issuance of such Security, of the amount determined as provided in (a) above), of such Security and (c) Securities owned by the Issuers or any other obligor upon the Securities or any Affiliate of the Issuers or of such other obligor shall be disregarded, except that, for the purpose of determining whether the Trustee shall be protected in relying upon any such direction, amendment, supplement, waiver or consent, only Securities that the Trustee actually knows are so owned shall be so disregarded. SECTION 2.12 TEMPORARY SECURITIES. Until definitive Securities of any series are ready for delivery, the Issuers may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities, but may have variations that the Issuers consider appropriate for temporary Securities. Without unreasonable delay, the Issuers shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.13 CANCELLATION. The Issuers at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange, payment or redemption or for credit against any sinking fund payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, redemption, replacement or cancellation or for credit against any sinking fund. Unless the Issuers shall direct in writing that canceled Securities be returned to them, after written notice to the Issuers all canceled Securities held by the Trustee shall be disposed of in accordance with the usual disposal procedures of the Trustee, and the Trustee shall maintain a record of their 17 disposal. The Issuers may not issue new Securities to replace Securities that have been paid or that have been delivered to the Trustee for cancellation. SECTION 2.14 PAYMENTS; DEFAULTED INTEREST. The Issuers will pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the record date next preceding the Interest Payment Date, even if such Securities are canceled after such record date and on or before such Interest Payment Date. The Holder must surrender this Security to a Paying Agent to collect principal payments. Unless otherwise provided with respect to the Securities of any series, the Issuers will pay the principal of, premium (if any) and interest on and Additional Amounts with respect to the Securities in Dollars. If the Issuers default in a payment of interest on the Securities, they shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest on the defaulted interest, in each case at the rate provided in the Securities and in Section 4.01. The Issuers may pay the defaulted interest to the Persons who are Holders on a subsequent special record date. At least 15 days before any special record date selected by the Issuers, the Issuers (or the Trustee, in the name of and at the expense of the Issuers upon 20 days' prior written notice from the Issuers setting forth such record date and the interest amount to be paid) shall mail to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.15 PERSONS DEEMED OWNERS. The Issuers, the Trustee, any Agent and any authenticating agent may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payments of principal of, premium (if any) or interest on, or any Additional Amounts with respect to such Security and for all other purposes. None of the Issuers, the Trustee, any Agent or any authenticating agent shall be affected by any notice to the contrary. SECTION 2.16 COMPUTATION OF INTEREST. Except as otherwise specified as contemplated by Section 2.01 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a year comprising twelve 30-day months. SECTION 2.17 GLOBAL SECURITIES; BOOK-ENTRY PROVISIONS. If Securities of a series are issuable in global form as a Global Security, as contemplated by Section 2.01, then, notwithstanding clause (10) of Section 2.01 and the provisions of Section 2.02, any such Global Security shall represent such of the outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of 18 outstanding Securities from time to time endorsed thereon and that the aggregate amount of outstanding Securities represented thereby may from time to time be reduced or increased to reflect exchanges or redemptions. Any endorsement of a Global Security to reflect the amount, or any increase or decrease in the amount, of outstanding Securities represented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified in such Security or in an Issuers Order to be delivered to the Trustee pursuant to Section 2.04. Subject to the provisions of Section 2.04 and, if applicable, Section 2.12, the Trustee shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified in such Security or in the applicable Issuers Order. With respect to the Securities of any series that are represented by a Global Security, the Issuers authorize the execution and delivery by the Trustee of a letter of representations or other similar agreement or instrument in the form customarily provided for by the Depositary appointed with respect to such Global Security. Any Global Security may be deposited with the Depositary or its nominee, or may remain in the custody of the Trustee pursuant to a FAST Balance Certificate Agreement or similar agreement between the Trustee and the Depositary. If an Issuers Order has been, or simultaneously is, delivered, any instructions by the Issuers with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 10.05 and need not be accompanied by an Opinion of Counsel. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under such Global Security and the Depositary may be treated by the Issuers, the Trustee and any agent of the Issuers or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, (i) the registered holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action that a Holder is entitled to take under this Indenture or the Securities and (ii) nothing herein shall prevent the Issuers, the Trustee or any agent of the Issuers or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a beneficial owner of any Security. Notwithstanding Section 2.08, and except as otherwise provided pursuant to Section 2.01 transfers of a Global Security shall be limited to transfers of such Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred in accordance with the rules and procedures of the Depositary. Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Security if, and only if, (1) the Issuers notify the Trustee in writing that the Depositary is no longer willing or able to act as a depositary or if The Depository Trust Company ceases to be registered as a clearing agency under the Exchange Act and a successor Depositary is not appointed within 90 days of such notice or cessation, (2) the Issuers notify the Trustee in writing that they elect to cause the issuance of Securities in certificated form or (3) an Event of Default has occurred with respect to such series and is continuing and the Registrar has received a request from the Depositary to issue Securities in lieu of all or a portion 19 of the Global Security (in which case the Issuers shall deliver Securities within 30 days of such request). In connection with any transfer of a portion of the beneficial interest in a Global Security to beneficial owners pursuant to this Section 2.17, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Issuers shall execute, and the Trustee upon receipt of an Issuers Order for the authentication and delivery of Securities shall authenticate and deliver, one or more Securities of the same series of like tenor and amount. In connection with the transfer of an entire Global Security to beneficial owners pursuant to this Section 2.17, the Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Issuers shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Global Security, an equal aggregate principal amount of Securities of authorized denominations. Neither the Issuers nor the Trustee will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, Securities by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Securities. Neither the Issuers nor the Trustee shall be liable for any delay by the related Global Security Holder or the Depositary in identifying the beneficial owners, and each such Person may conclusively rely on, and shall be protected in relying on, instructions from such Global Security Holder or the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Securities to be issued). The provisions of the last sentence of the third paragraph of Section 2.04 shall apply to any Global Security if such Global Security was never issued and sold by the Issuers and the Issuers deliver to the Trustee the Global Security together with written instructions (which need not comply with Section 10.05 and need not be accompanied by an Opinion of Counsel) with regard to the cancellation or reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of the third paragraph of Section 2.04. Notwithstanding the provisions of Sections 2.03 and 2.14, unless otherwise specified as contemplated by Section 2.01, payment of principal of, premium (if any) and interest on and any Additional Amounts with respect to any Global Security shall be made to the Person or Persons specified therein. 20 ARTICLE III REDEMPTION SECTION 3.01 APPLICABILITY OF ARTICLE. Securities of any series that are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 2.01 for Securities of any series) in accordance with this Article III. SECTION 3.02 NOTICE TO THE TRUSTEE. If the Issuers elect to redeem Securities of any series pursuant to this Indenture, they shall notify the Trustee of the Redemption Date and principal amount of Securities of such series to be redeemed. The Issuers shall so notify the Trustee at least 45 days before the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee) by delivering to the Trustee an Officers' Certificate stating that such redemption will comply with the provisions of this Indenture and of the Securities of such series. Any such notice may be canceled at any time prior to the mailing of such notice of such redemption to any Holder and shall thereupon be void and of no effect. SECTION 3.03 SELECTION OF SECURITIES TO BE REDEEMED. If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the outstanding Securities of such series not previously called for redemption, pro rata, by lot or by such other method as the Trustee shall deem fair and appropriate and that may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series or of the principal amount of global Securities of such series. The Trustee shall promptly notify the Issuers and the Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any of the Securities redeemed or to be redeemed only in part, to the portion of the principal amount thereof which has been or is to be redeemed. 21 SECTION 3.04 NOTICE OF REDEMPTION. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at the address of such Holder appearing in the register of Securities maintained by the Registrar. All notices of redemption shall identify the Securities to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price; (3) that, unless the Issuers defaults in making the redemption payment, interest on Securities called for redemption ceases to accrue on and after the Redemption Date, and the only remaining right of the Holders of such Securities is to receive payment of the Redemption Price upon surrender to the Paying Agent of the Securities redeemed; (4) if any Security is to be redeemed in part, the portion of the principal amount thereof to be redeemed and that on and after the Redemption Date, upon surrender for cancellation of such Security to the Paying Agent, a new Security or Securities in the aggregate principal amount equal to the unredeemed portion thereof will be issued without charge to the Holder; (5) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price and the name and address of the Paying Agent; (6) that the redemption is for a sinking or analogous fund, if such is the case; and (7) the CUSIP number, if any, relating to such Securities. Notice of redemption of Securities to be redeemed at the election of the Issuers shall be given by the Issuers or, at the Issuers' written request, by the Trustee in the name and at the expense of the Issuers. SECTION 3.05 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender to the Paying Agent, such Securities called for redemption shall be paid at the Redemption Price, but interest installments whose maturity is on or prior to such Redemption Date will be payable on the 22 relevant Interest Payment Dates to the Holders of record at the close of business on the relevant record dates specified pursuant to Section 2.01. SECTION 3.06 DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, the Issuers shall deposit with the Trustee or the Paying Agent (or, if either of the Issuers are acting as Paying Agent, segregate and hold in trust as provided in Section 2.06) an amount of money in same day funds sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on and any Additional Amounts with respect to, the Securities or portions thereof which are to be redeemed on that date, other than Securities or portions thereof called for redemption on that date which have been delivered by the Issuers to the Trustee for cancellation. If the Issuers comply with the preceding paragraph, then, unless the Issuers default in the payment of such Redemption Price, interest on the Securities to be redeemed will cease to accrue on and after the applicable Redemption Date, whether or not such Securities are presented for payment, and the Holders of such Securities shall have no further rights with respect to such Securities except for the right to receive the Redemption Price upon surrender of such Securities. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal, premium, if any, any Additional Amounts, and, to the extent lawful, accrued interest thereon shall, until paid, bear interest from the Redemption Date at the rate specified pursuant to Section 2.01 or provided in the Securities or, in the case of Original Issue Discount Securities, such Securities' yield to maturity. SECTION 3.07 SECURITIES REDEEMED OR PURCHASED IN PART. Upon surrender to the Paying Agent of a Security to be redeemed in part, the Issuers shall execute and the Trustee shall authenticate and deliver to the Holder of such Security without service charge a new Security or Securities, of the same series and of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed. SECTION 3.08 PURCHASE OF SECURITIES. Unless otherwise specified as contemplated by Section 2.01, the Issuers and any Affiliate of the Issuers may at any time purchase or otherwise acquire Securities in the open market or by private agreement. Such acquisition shall not operate as or be deemed for any purpose to be a redemption of the indebtedness represented by such Securities. Any Securities purchased or acquired by the Issuers may be delivered to the Trustee and, upon such delivery, the indebtedness represented thereby shall be deemed to be satisfied. Section 2.13 shall apply to all Securities so delivered. 23 SECTION 3.09 MANDATORY AND OPTIONAL SINKING FUNDS. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment." Unless otherwise provided by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 3.10. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series and by this Article III. SECTION 3.10 SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES. The Issuers may deliver outstanding Securities of a series (other than any previously called for redemption) and may apply as a credit Securities of a series that have been redeemed either at the election of the Issuers pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such series of Securities; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 3.11 REDEMPTION OF SECURITIES FOR SINKING FUND. Not less than 45 days prior (unless a shorter period shall be satisfactory to the Trustee) to each sinking fund payment date for any series of Securities, the Issuers will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivery of or by crediting Securities of that series pursuant to Section 3.10 and will also deliver to the Trustee any Securities to be so delivered. Failure of the Issuers to timely deliver such Officers' Certificate and Securities specified in this paragraph, if any, shall not constitute a Default but shall constitute the election of the Issuers (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuers will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $100,000 (or the Dollar equivalent thereof 24 based on the applicable Exchange Rate on the date of original issue of the applicable Securities) or a lesser sum if the Issuers shall so request with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $100,000 (or the Dollar equivalent thereof as aforesaid) or less and the Issuers make no such request then it shall be carried over until a sum in excess of $100,000 (or the Dollar equivalent thereof as aforesaid) is available. Not less than 30 days before each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 3.03 and cause notice of the redemption thereof to be given in the name of and at the expense of the Issuers in the manner provided in Section 3.04. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 3.05, 3.06 and 3.07. ARTICLE IV COVENANTS SECTION 4.01 PAYMENT OF SECURITIES. The Issuers shall pay the principal of, premium (if any) and interest on and any Additional Amounts with respect to the Securities of each series on the dates and in the manner provided in the Securities of such series and in this Indenture. Principal, premium, interest and any Additional Amounts shall be considered paid on the date due if the Paying Agent, other than either of the Issuers or a Subsidiary of Equistar, holds on that date money deposited by the Issuers designated for and sufficient to pay all principal, premium, interest and any Additional Amounts then due. The Issuers shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium (if any), at a rate equal to the then applicable interest rate on the Securities to the extent lawful; and they shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and any Additional Amount (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY. The Issuers will maintain in each Place of Payment for any series of Securities an office or agency (which may be an office of the Trustee, the Registrar or the Paying Agent) where Securities of that series may be presented for registration of transfer or exchange, where Securities of that series may be presented for payment and where notices and demands to or upon the Issuers in respect of the Securities of that series and this Indenture may be served. Unless otherwise designated by the Issuers by written notice to the Trustee, such office or agency shall be the office of the Trustee in The City of New York, which on the date hereof, is located at 25 101 Barclay Street, New York, New York 10286. The Issuers will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuers shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Issuers may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Issuers of their obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Issuers will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Notwithstanding the foregoing, at the option of the Issuers, interest, if any, may be paid on Securities (i) by check mailed to the Person entitled thereto at such Person's address appearing in the register maintained by the Registrar or (ii) by wire transfer to an account located inside the United States maintained by the Person entitled thereto as specified in the register maintained by the Registrar. SECTION 4.03 SEC REPORTS; FINANCIAL STATEMENTS. (a) The Issuers shall file with the Trustee, within 15 days after they file the same with the SEC, copies of the annual reports and the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that either of the Issuers are required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Issuers shall also comply with the provisions of TIA (S) 314(a). (b) If the Issuers are not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Issuers shall furnish to all Holders of Rule 144A Securities and prospective purchasers of Rule 144A Securities designated by the Holders of Rule 144A Securities, promptly upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) promulgated under the Securities Act of 1933, as amended. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Issuers' compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). 26 SECTION 4.04 COMPLIANCE CERTIFICATE. (a) The Issuers shall deliver to the Trustee, within 120 days after the end of each fiscal year of Equistar, a statement signed by two Officers of each of the Issuers, which need not constitute an Officers' Certificate, complying with TIA (S) 314(a)(4) and stating that in the course of performance by the signing Officers of the Issuers of their duties as such Officers of the Issuers they would normally obtain knowledge of the keeping, observing, performing and fulfilling by the Issuers of their obligations under this Indenture, and further stating, as to each such Officer signing such statement, that to the best of his knowledge the Issuers have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and are not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which such Officer may have knowledge and what action the Issuers are taking or proposes to take with respect thereto). (b) The Issuers shall, so long as Securities of any series are outstanding, deliver to the Trustee, forthwith upon any Officer of either of the Issuers becoming aware of any Default or Event of Default under this Indenture, an Officers' Certificate specifying such Default or Event of Default and what action the Issuers are taking or propose to take with respect thereto. SECTION 4.05 CORPORATE EXISTENCE. Subject to Article V hereof, the Issuers shall do or cause to be done all things necessary to preserve and keep in full force and effect their existence and the corporate, partnership and other existence of each of Equistar's Subsidiaries and all rights (charter and statutory) and franchises of the Issuers and Equistar's Subsidiaries, provided that Equistar shall not be required to preserve the corporate existence of any Subsidiary or any such right or franchise if the Partnership Governance Committee shall determine that the preservation thereof is no longer desirable in the conduct of the business of Equistar and its Subsidiaries taken as a whole and that the loss thereof would not have a material adverse effect on the business, prospects, assets or financial condition of the Issuers and Equistar's Subsidiaries taken as a whole and would not have any material adverse effect on the payment and performance of the obligations of the Issuers under the Securities and this Indenture. SECTION 4.06 WAIVER OF STAY, EXTENSION OR USURY LAWS. The Issuers covenant (to the extent that they may lawfully do so) that they will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Issuers from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that they may lawfully do so) the Issuers hereby expressly waive all benefit or advantage of any such law, and covenant that they will not hinder, delay or impede the execution of any power herein granted to the Trustee, 27 but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.07 ADDITIONAL AMOUNTS. If the Securities of a series expressly provide for the payment of Additional Amounts, the Issuers will pay to the Holder of any Security of such series Additional Amounts as expressly provided therein. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or the net proceeds received from the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Section 4.07 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section 4.07 and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. Unless otherwise provided pursuant to Section 2.01 with respect to Securities of any series: If the Securities of a series provide for the payment of Additional Amounts, at least ten days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least ten days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers' Certificate, the Issuers shall furnish the Trustee and the Issuers' principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers' Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and any premium or interest on the Securities of that series shall be made to Holders of Securities of that series who are United States Aliens without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If any such withholding shall be required, then such Officers' Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities and the Issuers will pay to such Paying Agent the Additional Amounts required by this Section. The Issuers covenant to indemnify the Trustee and any Paying Agent for and to hold them harmless against any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers' Certificate furnished pursuant to this Section 4.07. SECTION 4.08 LIMITATION ON LIENS. Equistar will not, and will not permit any Restricted Subsidiary to, issue, assume or guarantee any Debt secured by Liens upon any Restricted Property, without effectively providing that any Securities then outstanding and thereafter created (together with, if Equistar so determines, any other indebtedness or obligation then existing and any other indebtedness or 28 obligation thereafter created ranking equally with the Securities then outstanding or thereafter created which is not subordinated to the Securities of each series) shall be secured equally and ratably with (or prior to) such Debt so long as such Debt shall be so secured, except that the foregoing provision shall not apply to: (a) Liens affecting property of a corporation existing at the time it becomes a Subsidiary or at the time it is merged into or consolidated with Equistar or a Subsidiary; (b) Liens on property existing at the time of acquisition thereof or incurred to secure payment of all or part of the purchase price thereof or to secure Debt incurred prior to, at the time of or within 24 months after acquisition thereof for the purpose of financing all or part of the purchase price thereof; (c) Liens on property of Equistar or a Subsidiary existing on the date of this Indenture; (d) Liens on any property to secure all or part of the cost of construction or improvements thereon or Debt incurred to provide funds for any such purpose in a principal amount not exceeding the cost of such construction or improvements; (e) Liens which secure only an indebtedness owing by a Subsidiary to Equistar or a Subsidiary; (f) Liens in favor of the United States or any state thereof, or any department, agency, instrumentality, or political subdivision of any such jurisdiction, to secure partial progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or cost of constructing or improving the property subject thereto, including, without limitation, Liens to secure Debt of the pollution control or industrial revenue bond type; (g) Liens required by any contract or statute in order to permit Equistar or a Subsidiary to perform any contract or subcontract made by it with or at the request of the United States of America, any state or any department, agency or instrumentality or political subdivision of either; or (h) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing clauses (a) to (g) inclusive, or of any Debt secured thereby, provided that the principal amount of Debt secured thereby shall not exceed the greater of (i) the principal amount of Debt so secured or (ii) the fair market value of the underlying property or assets to which such Lien relates at the time of such extension, renewal or replacement, and that such extension, renewal or replacement Lien shall be limited to all or part of substantially the 29 same property which secured the Lien extended, renewed or replaced (plus improvements on such property). Notwithstanding the foregoing provisions of this Section 4.08, Equistar and any one or more Restricted Subsidiaries may issue, assume or guarantee Debt secured by Liens which would otherwise be subject to the foregoing restrictions in an aggregate principal amount which, together with the aggregate outstanding principal amount of all other Debt of Equistar and the Restricted Subsidiaries which would otherwise be subject to the foregoing restrictions (not including Debt permitted to be secured under clauses (a) to (h) inclusive above) and the aggregate Value of the Sale and Lease-Back Transactions in existence at such time (not including Sale and Lease-Back Transactions as to which Equistar has complied with Section 4.09(b)), does not at any one time exceed 15% of the Consolidated Net Tangible Assets of Equistar and its consolidated Subsidiaries. SECTION 4.09 LIMITATION ON SALE AND LEASE-BACK TRANSACTIONS. Equistar will not, and will not permit any Restricted Subsidiary to, enter into any Sale and Lease-Back Transactions unless either: (a) Equistar or such Restricted Subsidiary would be entitled, pursuant to Section 4.08, to incur Debt in a principal amount equal to or exceeding the Value of such Sale and Lease-Back Transaction, secured by a Lien on the property to be leased, without equally and ratably securing the Securities; or (b) Equistar (and in any such case Equistar covenants and agrees that it will do so) within four months after the effective date of such Sale and Lease-Back Transaction (whether made by Equistar or a Restricted Subsidiary) applies to the voluntary retirement of Funded Debt, an amount equal to the Value of such Sale and Lease-Back Transaction, less the principal amount of Securities delivered, within four months after the effective date of such arrangements, to the Trustee for retirement and cancellation and the principal amount of other Funded Debt voluntarily retired by the Issuers within such four-month period, excluding retirements of Securities and other Funded Debt as a result of conversions or pursuant to mandatory sinking fund or prepayment provisions or by payment at maturity. ARTICLE V SECTION 5.01 CONSOLIDATION, MERGER AND SALE OF ASSETS Each of the Issuers may not consolidate with or merge into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person, unless each of the following conditions is satisfied. 30 (a) Immediately after giving effect to such transaction, no Default or Event of Default will have happened and be continuing; (b) Either (i) the applicable Issuer shall be the continuing partnership or corporation, as applicable, or (ii) the entity formed by such consolidation or into which the applicable Issuer is merged, or the Person to which such properties and assets will have been conveyed, transferred or leased, assumes the applicable Issuer's obligation as to the due and punctual payment of the principal of (and premium, if any, on) and interest, if any, on the Securities and the performance and observance of every covenant to be performed by the applicable Issuer hereunder; any such entity will be organized under the laws of the United States, one of the States thereof or the District of Columbia; and The Issuers have delivered to the Trustee an Officers' Certificate and Opinion of Counsel stating that the transaction complies with these conditions. In the event of any transaction described in this Section 5.01, if any Restricted Property would thereupon become subject to any Lien, the Securities will be secured, as to such Restricted Property, equally and ratably with (or prior to) the Debt that upon the occurrence of such transaction would become secured by such Lien, unless such Lien could be created under this Indenture without equally and ratably securing such Securities. SECTION 5.02 SUCCESSOR PERSON SUBSTITUTED. Upon any consolidation or merger of either of the Issuers or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of either of the Issuers in accordance with Section 5.01, the Successor formed by such consolidation or into or with which the applicable Issuer is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of the applicable Issuer under this Indenture and the Securities with the same effect as if such Successor had been named as the Issuer herein and the predecessor Issuer shall be discharged from all obligations and covenants under this Indenture and all obligations under the Securities. ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.01 EVENTS OF DEFAULT. Unless either inapplicable to a particular series or specifically deleted or modified in or pursuant to the supplemental indenture or Resolution establishing such series of Securities or in 31 the form of Security for such series, an "Event of Default," wherever used herein with respect to Securities of any series, occurs if: (1) the Issuers default in the payment of interest on or any Additional Amounts with respect to any Security of that series when the same becomes due and payable and such default continues for a period of 30 days; (2) the Issuers default in the payment of (A) the principal of any Security of that series at its Maturity or (B) premium (if any) on any Security of that series when the same becomes due and payable; (3) the Issuers default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series, and such default continues for a period of 30 days; (4) the Issuers fail to observe or perform any other covenant or agreement contained herein for 60 days after written notice of such failure (other than an agreement, covenant or provision that has expressly been included in this Indenture solely for the benefit of one or more series of Securities other than that series), requiring the Issuers to remedy the same, has been given to the Issuers by the Trustee or to the Issuers and the Trustee by the holders of at least 25% in aggregate principal amount of outstanding Securities affected by such default; (5) either of the Issuers pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Bankruptcy Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that remains unstayed and in effect for 90 days and that: (A) is for relief against either of the Issuers as debtor in an involuntary case, 32 (B) appoints a Bankruptcy Custodian of either of the Issuers or a Bankruptcy Custodian for all or substantially all of the property of either of the Issuers, or (C) orders the liquidation of either of the Issuers; or (D) any other Event of Default provided with respect to Securities of that series occurs. The term "Bankruptcy Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. The Trustee shall not be deemed to know or have notice of a Default unless a Trust Officer at the Corporate Trust Office of the Trustee receives written notice at the Corporate Trust Office of the Trustee of such Default with specific reference to such Default. When a Default is cured, it ceases. Notwithstanding the foregoing provisions of this Section 6.01, if the principal of, premium or interest on or Additional Amounts with respect to any Security is payable in a currency or currencies (including a composite currency) other than Dollars and such currency or currencies are not available to the Issuers for making payment thereof due to the imposition of exchange controls or other circumstances beyond the control of the Issuers (a "Conversion Event"), the Issuers will be entitled to satisfy their obligations to Holders of the Securities by making such payment in Dollars in an amount equal to the Dollar equivalent of the amount payable in such other currency, as determined by the Issuers by reference to the Exchange Rate on the date of such payment, or, if such rate is not then available, on the basis of the most recently available Exchange Rate. Notwithstanding the foregoing provisions of this Section 6.01, any payment made under such circumstances in Dollars where the required payment is in a currency other than Dollars will not constitute an Event of Default under this Indenture. Promptly after the occurrence of a Conversion Event, the Issuers shall give written notice thereof to the Trustee; and the Trustee, promptly after receipt of such notice, shall give notice thereof in the manner provided in Section 10.02 to the Holders. Promptly after the making of any payment in Dollars as a result of a Conversion Event, the Issuers shall give notice in the manner provided in Section 10.02 to the Holders, setting forth the applicable Exchange Rate and describing the calculation of such payments. A Default under clause (7) of this Section 6.01 is not an Event of Default until the Trustee notifies the Issuers, or the Holders of at least 25% in principal amount of the then outstanding Securities of the series affected by such Default notify the Issuers and the Trustee, of the Default, and the Issuers fails to cure the Default within 90 days after receipt of the notice. The notice 33 must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." SECTION 6.02 ACCELERATION. If an Event of Default with respect to any Securities of any series at the time outstanding (other than an Event of Default specified in clause (5) or (6) of Section 6.01) occurs and is continuing, the Trustee by notice to the Issuers, or the Holders of at least 25% in principal amount of the then outstanding Securities of the series affected by such Default (or, in the case of an Event of Default described in clause (4) of Section 6.01, if outstanding Securities of other series are affected by such Default, then at least 25% in principal amount of the then outstanding Securities so affected by notice to the Issuers and the Trustee, may declare the principal of (or, if any such Securities are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) and accrued and unpaid interest on all then outstanding Securities of such series or of all series, as the case may be), to be due and payable. Upon any such declaration the amounts due and payable on the Securities shall be due and payable immediately. If an Event of Default specified in clause (5) or (6) of Section 6.01 hereof occurs, such amounts shall ipso facto become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration with respect to Securities has been made, but before judgment or decree for payment of money has been obtained by the Trustee (as hereinafter in this Article provided), the Holders of a majority in principal amount of the then outstanding Securities of the series affected by such Default or all series, as the case may be, by written notice to the Trustee may rescind and annul an acceleration and its consequences (other than nonpayment of principal of or premium or interest on or any Additional Amounts with respect to the Securities) if all existing Events of Default with respect to Securities of that series (or of all series, as the case may be) have been cured or waived, except nonpayment of principal, premium, interest or any Additional Amounts that has become due solely because of the acceleration. SECTION 6.03 OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, or premium, if any, or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 34 SECTION 6.04 WAIVER OF EXISTING OR PAST DEFAULTS. Subject to Sections 6.07 and 9.02, the Holders of a majority in aggregate principal amount of the then outstanding Securities of any series or of all series (acting as one class) by notice to the Trustee may waive an existing or past Default or Event of Default with respect to such series or all series, as the case may be, and its consequences (including waivers obtained in connection with a tender offer or exchange offer for Securities of such series or all series or a solicitation of consents in respect of Securities of such series or all series, provided that in each case such offer or solicitation is made to all Holders of then outstanding Securities of such series or all series (but the terms of such offer or solicitation may vary from series to series)), except (1) a continuing Default or Event of Default in the payment of the principal of, or premium, if any, or interest on or any Additional Amounts with respect to any Security or (2) a continued Default in respect of a provision that under Section 9.02 cannot be amended or supplemented without the consent of each Holder affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.05 CONTROL BY MAJORITY. With respect to Securities of any series, the Holders of a majority in principal amount of the then outstanding Securities of such series may direct in writing the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it relating to or arising under an Event of Default described in clause (1), (2), (3) or (7) of Section 6.01, and with respect to all Securities, the Holders of a majority in principal amount of all the then outstanding Securities affected may direct in writing the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it not relating to or arising under such an Event of Default. However, the Trustee may refuse to follow any direction that conflicts with applicable law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders, or that may involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion from Holders directing the Trustee against all losses and expenses caused by taking or not taking such action. SECTION 6.06 LIMITATIONS ON SUITS. Subject to Section 6.07 hereof, a Holder of a Security of any series may pursue a remedy with respect to this Indenture or the Securities of such series only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default with respect to such series; 35 (2) the Holders of at least 25% in principal amount of the then outstanding Securities of such series make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity reasonably satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the Securities of that series do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of and premium, if any, and interest on and any Additional Amounts with respect to the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. SECTION 6.08 COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in clause (1) or (2) of Section 6.01 hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Issuers for the amount of principal, premium (if any), interest and any Additional Amounts remaining unpaid on the Securities of the series affected by the Event of Default, and interest on overdue principal and premium, if any, and, to the extent lawful, interest on overdue interest, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents and to take such actions, including participating as a member, voting or otherwise, of any committee of creditors, as may be necessary or advisable to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Issuers or 36 its creditors or properties and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any Bankruptcy Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders of the Securities may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES. If the Trustee collects any money pursuant to this Article VI, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.07; Second: to Holders for amounts due and unpaid on the Securities in respect of which or for the benefit of which such money has been collected, for principal, premium (if any), interest and any Additional Amounts ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium (if any), interest and any Additional Amounts, respectively; and Third: to the Issuers. The Trustee, upon prior written notice to the Issuers, may fix record dates and payment dates for any payment to Holders pursuant to this Article VI. To the fullest extent allowed under applicable law, if for the purpose of obtaining a judgment against the Issuers in any court it is necessary to convert the sum due in respect of the principal of, premium (if any) or interest on or Additional Amounts with respect to the Securities of any series (the "Required Currency") into a currency in which a judgment will be rendered (the "Judgment Currency"), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the New York Business Day next preceding 37 that on which final judgment is given. Neither the Issuers nor the Trustee shall be liable for any shortfall nor shall it benefit from any windfall in payments to Holders of Securities under this Section 6.10 caused by a change in exchange rates between the time the amount of a judgment against it is calculated as above and the time the Trustee converts the Judgment Currency into the Required Currency to make payments under this Section to Holders of Securities, but payment of such judgment shall discharge all amounts owed by the Issuers on the claim or claims underlying such judgment. SECTION 6.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by a Holder or Holders of more than 10% in principal amount of the then outstanding Securities of any series. ARTICLE VII TRUSTEE SECTION 7.01 DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in such exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default with respect to the Securities of any series: (1) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine such certificates and opinions to determine whether, on their face, they appear to conform to the requirements of this Indenture. 38 (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) this paragraph does not limit the effect of Section 7.01(b); (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to the provisions of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity reasonably satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuers. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. All money received by the Trustee shall, until applied as herein provided, be held in trust for the payment of the principal of, premium (if any) and interest on and Additional Amounts with respect to the Securities. SECTION 7.02 RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require instruction, an Officers' Certificate or an Opinion of Counsel or both to be provided. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such instruction, Officers' Certificate or Opinion of Counsel. The Trustee may consult at the Issuers' expense with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. 39 (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Issuers shall be sufficient if signed by an Officer of the Issuers. (f) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (g) subject to the Trustee's duty to act during a Default with the required standard of care, the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuers, personally or by agent or attorney at the sole cost of the Issuers and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; (i) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; and (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. SECTION 7.03 MAY HOLD SECURITIES. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Issuers or any of its Affiliates with the same rights it 40 would have if it were not Trustee. Any Agent may do the same with like rights and duties. However, the Trustee is subject to Sections 7.10 and 7.11. SECTION 7.04 TRUSTEES DISCLAIMER. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Issuers' use of the proceeds from the Securities or any money paid to the Issuers or upon the Issuers' direction under any provision hereof, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee and it shall not be responsible for any statement or recital herein or any statement in the Securities other than its certificate of authentication. SECTION 7.05 NOTICE OF DEFAULTS. If a Default or Event of Default with respect to the Securities of any series occurs and is continuing and it is known to the Trustee, the Trustee shall mail to Holders of Securities of such series a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, premium (if any) and interest on and Additional Amounts or any sinking fund installment with respect to the Securities of such series, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders of Securities of such series. SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 15 of each year after the execution of this Indenture, the Trustee shall mail to Holders of a series and the Issuers a brief report dated as of such reporting date that complies with TIA (S) 313(a); provided, however, that if no event described in TIA (S) 313(a) has occurred within the twelve months preceding the reporting date with respect to a series, no report need be transmitted to Holders of such series. The Trustee also shall comply with TIA (S) 313(b). The Trustee shall also transmit by mail all reports if and as required by TIA (S)(S) 313(c) and 313(d). A copy of each report at the time of its mailing to Holders of a series of Securities shall be filed by the Issuers with the SEC and each securities exchange, if any, on which the Securities of such series are listed. The Issuers shall notify the Trustee if and when any series of Securities is listed on any stock exchange and of any delisting thereof. SECTION 7.07 COMPENSATION AND INDEMNITY. The Issuers agree to pay to the Trustee from time to time such compensation for its acceptance of this Indenture and services hereunder as the Issuers and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on 41 compensation of a trustee of an express trust. The Issuers agree to reimburse the Trustee upon request for all reasonable disbursements, advances and expenses incurred by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Issuers hereby indemnify the Trustee against any loss, liability or expense incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in the next paragraph. The Trustee shall notify the Issuers promptly of any claim for which it may seek indemnity. The Issuers shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Issuers shall pay the reasonable fees and expenses of such counsel. The Issuers need not pay for any settlement made without their consent. The Issuers shall not be obligated to reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the payment obligations of the Issuers in this Section 7.07, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal of, premium (if any) and interest on and any Additional Amounts with respect to Securities of series. Such lien and the indemnity obligation under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08 REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign and be discharged at any time with respect to the Securities of one or more series by so notifying the Issuers. The Holders of a majority in principal amount of the then outstanding Securities of any series may remove the Trustee with respect to the Securities of such series by so notifying the Trustee and the Issuers. The Issuers may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; 42 (3) a Bankruptcy Custodian or public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, with respect to the Securities of one or more series, the Issuers shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series). Within one year after the successor Trustee with respect to the Securities of any series takes office, the Holders of a majority in principal amount of the Securities of such series may appoint a successor Trustee to replace the successor Trustee appointed by the Issuers. If a successor Trustee with respect to the Securities of any series does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Issuers or the Holders of at least 10% in principal amount of the then outstanding Securities of such series may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. If the Trustee with respect to the Securities of a series fails to comply with Section 7.10, any Holder of Securities of such series may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee with respect to the Securities of such series. In case of the appointment of a successor Trustee with respect to all Securities, each such successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuers. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the retiring Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. In case of the appointment of a successor Trustee with respect to the Securities of one or more (but not all) series, the Issuers, the retiring Trustee and each successor Trustee with respect to the Securities of one or more (but not all) series shall execute and deliver an indenture supplemental hereto in which each successor Trustee shall accept such appointment and that (1) shall confer to each successor Trustee all the rights, powers and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall confirm that all the rights, powers and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in 43 the retiring Trustee and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee. Nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust, and each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. Upon the execution and delivery of such supplemental indenture, the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee shall have all the rights, powers and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. On request of the Issuers or any successor Trustee, such retiring Trustee shall transfer to such successor Trustee all property held by such retiring Trustee as Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Notwithstanding replacement of the Trustee or Trustees pursuant to this Section 7.08, the obligations of the Issuers under Section 7.07 shall continue for the benefit of the retiring Trustee or Trustees. SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC. Subject to Section 7.10, if the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee; provided, however, that in the case of a transfer of all or substantially all of its corporate trust business to another corporation, the transferee corporation expressly assumes all of the Trustee's liabilities hereunder. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10 ELIGIBILITY; DISQUALIFICATION. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States, any State thereof or the District of Columbia and authorized under such laws to exercise corporate trust power, shall be subject to supervision or examination by Federal or State (or the District of Columbia) authority and shall have, or be a Subsidiary of a bank or bank holding company having, a combined capital and surplus of at least $50 million as set forth in its most recent published annual report of condition. 44 The Indenture shall always have a Trustee who satisfies the requirements of TIA (S)(S) 310(a)(1), 310(a)(2) and 310(a)(5). The Trustee is subject to and shall comply with the provisions of TIA (S) 310(b) during the period of time required by this Indenture. Nothing in this Indenture shall prevent the Trustee from filing with the SEC the application referred to in the penultimate paragraph of TIA (S) 310(b). SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST ISSUERS. The Trustee is subject to and shall comply with the provisions of TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated therein. ARTICLE VII DISCHARGE OF INDENTURE SECTION 8.01 TERMINATION OF ISSUERS OBLIGATIONS. This Indenture shall cease to be of further effect with respect to the Securities of a series (except that the Issuers' obligations under Section 7.07, the Trustee's and Paying Agent's obligations under Section 8.03 and the rights, powers, protections and privileges accorded the Trustee under Article VII shall survive), and the Trustee, on demand of the Issuers, shall execute proper instruments acknowledging the satisfaction and discharge of this Indenture with respect to the Securities of such series, when: (1) either (A) all outstanding Securities of such series theretofore authenticated and issued (other than destroyed, lost or stolen Securities that have been replaced or paid) have been delivered to the Trustee for cancellation; or (B) all outstanding Securities of such series not theretofore delivered to the Trustee for cancellation: (i) have become due and payable, (ii) will become due and payable at their Stated Maturity within one year, (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuers, 45 and, in the case of clause (i), (ii) or (iii) above, the Issuers have irrevocably deposited or caused to be deposited with the Trustee as funds (immediately available to the Holders in the case of clause (i)) in trust for such purpose (x) cash in an amount, or (y) U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash in an amount or (z) a combination thereof, which will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on the Securities of such series for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or for principal, premium, if any, and interest to the Stated Maturity or Redemption Date, as the case may be; or (C) the Issuers have properly fulfilled such other means of satisfaction and discharge as is specified, as contemplated by Section 2.01, to be applicable to the Securities of such series; (2) the Issuers have paid or caused to be paid all other sums payable by them hereunder with respect to the Securities of such series; and (3) the Issuers have delivered to the Trustee an Officers' Certificate stating that all conditions precedent to satisfaction and discharge of this Indenture with respect to the Securities of such series have been complied with, together with an Opinion of Counsel to the same effect. (b) Unless this Section 8.01(b) is specified as not being applicable to Securities of a series as contemplated by Section 2.01, the Issuers may terminate certain of their obligations under this Indenture, and failure to comply with such covenants will not constitute a Default or an Event of Default ("covenant defeasance") with respect to the Securities of a series if: (1) the Issuers have irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for and dedicated solely to the benefit of the Holders of Securities of such series, (i) money in the currency in which payment of the Securities of such series is to be made in an amount, or (ii) Government Obligations with respect to such series, maturing as to principal and interest at such times and in such amounts as will insure the availability of money in the currency in which payment of the Securities of such series is to be made in an amount or (iii) a combination thereof, that is sufficient, in the opinion (in the case of (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay, without consideration of the reinvestment of any such amounts and after payment of all taxes or other charges or assessments in respect thereof payable by 46 the Trustee, the principal of and premium (if any) and interest on all Securities of such series on each date that such principal, premium (if any) or interest is due and payable and (at the Stated Maturity thereof or upon redemption as provided in Section 8.01(e)) to pay all other sums payable by it hereunder; provided that the Trustee shall have been irrevocably instructed to apply such money and/or the proceeds of such U.S. Government Obligations to the payment of said principal, premium (if any) and interest with respect to the Securities of such series as the same shall become due; (2) the Issuers have delivered to the Trustee an Officers' Certificate stating that all conditions precedent to satisfaction and discharge of this Indenture with respect to the Securities of such series have been complied with and an Opinion of Counsel to the same effect; (3) no Default or Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit; (4) the Issuers shall have delivered to the Trustee an Opinion of Counsel from a nationally recognized counsel acceptable to the Trustee or a tax ruling to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of the Issuers' exercise of their option under this Section 8.01(b) and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised; (5) the Issuers have complied with any additional conditions specified pursuant to Section 2.01 to be applicable to the discharge of Securities of such series pursuant to this Section 8.01; and (6) such deposit and discharge shall not cause the Trustee to have a conflicting interest as defined in TIA (S) 310(b). In such event, this Indenture shall cease to be of further effect (except as set forth in this paragraph), and the Trustee, on demand of the Issuers, shall execute proper instruments acknowledging satisfaction and discharge under this Indenture. However, the Issuers' obligations in Sections 2.05, 2.06, 2.07, 2.08, 2.09, 4.01, 4.02, 5.01, 7.07, 7.08 and 8.04, the Trustee's and Paying Agent's obligations in Section 8.03 and the rights, powers, protections and privileges accorded the Trustee under Article VII shall survive until all Securities of such series are no longer outstanding. Thereafter, only the Issuers' obligations in Section 7.07 and the Trustee's and Paying Agent's obligations in Section 8.03 shall survive with respect to Securities of such series. After such irrevocable deposit made pursuant to this Section 8.01(b) and satisfaction of the other conditions set forth herein, the Trustee upon request shall acknowledge in writing the 47 discharge of the Issuers' obligations under this Indenture with respect to the Securities of such series except for those surviving obligations specified above. In order to have money available on a payment date to pay principal of or premium (if any) or interest on the Securities, the Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money. Government Obligations shall not be callable at the issuer's option. (c) If the Issuers have previously complied or are concurrently complying with Section 8.01(b) (other than any additional conditions specified pursuant to Section 2.01 that are expressly applicable only to covenant defeasance) with respect to Securities of a series, then, unless this Section 8.01(c) is specified as not being applicable to Securities of such series as contemplated by Section 2.01, the Issuers may elect to be discharged ("legal defeasance") from their obligations to make payments with respect to Securities of such series, if: (1) no Default or Event of Default under clauses (6) and (7) of Section 6.01 hereof shall have occurred at any time during the period ending on the 91st day after the date of deposit contemplated by Section 8.01(b) (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (2) unless otherwise specified with respect to Securities of such series as contemplated by Section 2.01, the Issuers have delivered to the Trustee an Opinion of Counsel from a nationally recognized counsel acceptable to the Trustee to the effect referred to in Section 8.01(b)(4) with respect to such legal defeasance, which opinion is based on (i) a private ruling of the Internal Revenue Service addressed to the Issuers, (ii) a published ruling of the Internal Revenue Service or (iii) a change in the applicable federal income tax law (including regulations) after the date of this Indenture; (3) the Issuers have complied with any other conditions specified pursuant to Section 2.01 to be applicable to the legal defeasance of Securities of such series pursuant to this Section 8.01(c); and (4) the Issuers have delivered to the Trustee an Issuers Request requesting such legal defeasance of the Securities of such series and an Officers' Certificate stating that all conditions precedent to with respect to such legal defeasance of the Securities of such series have been complied with, together with an Opinion of Counsel to the same effect. In such event, the Issuers will be discharged from their obligations under this Indenture and the Securities of such series to pay principal of, premium (if any) and interest on, and Additional Amounts with respect to, Securities of such series, the Issuers' obligations under Sections 4.01 and 5.01 shall terminate with respect to such Securities, and the entire indebtedness of the Issuers evidenced by such Securities shall be deemed paid and discharged. However, 48 Sections 2.08, 2.09, 4.02, 7.07, 7.08, 8.02 and 8.04, the Trustee's and Paying Agent's obligations in Section 8.03 and the rights, powers, protections and privileges accorded the Trustee under Article VII shall survive until all Securities of such series are no longer outstanding. (d) If and to the extent additional or alternative means of satisfaction, discharge or defeasance of Securities of a series are specified to be applicable to such series as contemplated by Section 2.01, the Issuers may terminate any or all of their obligations under this Indenture with respect to Securities of a series and any or all of their obligations under the Securities of such series if they fulfill such other means of satisfaction and discharge as may be so specified, as contemplated by Section 2.01, to be applicable to the Securities of such series. (e) If Securities of any series subject to subsections (a), (b), (c) or (d) of this Section 8.01 are to be redeemed prior to their Stated Maturity, whether pursuant to any optional redemption provisions or in accordance with any mandatory or optional sinking fund provisions, the terms of the applicable trust arrangement shall provide for such redemption, and the Issuers shall make such arrangements as are reasonably satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuers. SECTION 8.02 APPLICATION OF TRUST MONEY. The Trustee or a trustee satisfactory to the Trustee and the Issuers shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01 hereof. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of, premium (if any) and interest on and any Additional Amounts with respect to the Securities of the series with respect to which the deposit was made. The Issuers shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 8.01 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities. SECTION 8.03 REPAYMENT TO ISSUERS. The Trustee and the Paying Agent shall promptly pay to the Issuers upon written request any excess money or U.S. Government Obligations (or proceeds therefrom) held by them at any time upon the written request of the Issuers. Subject to the requirements of any applicable abandoned property laws, the Trustee and the Paying Agent shall pay to the Issuers upon written request any money held by them for the payment of principal, premium (if any), interest or any Additional Amounts that remains unclaimed for two years after the date upon which such payment shall have become due. After payment to the Issuers, Holders entitled to the money must look to the Issuers for payment as 49 general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and the Paying Agent with respect to such money shall cease. SECTION 8.04 REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money or U.S. Government Obligations deposited with respect to Securities of any series in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the obligations of the Issuers under this Indenture with respect to the Securities of such series and under the Securities of such series shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 hereof until such time as the Trustee or the Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01; provided, however, that if the Issuers have made any payment of principal of, premium (if any) or interest on or any Additional Amounts with respect to any Securities because of the reinstatement of its obligations, the Issuers shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or the Paying Agent. ARTICLE IX SUPPLEMENTAL INDENTURES AND AMENDMENTS SECTION 9.01 WITHOUT CONSENT OF HOLDERS. The Issuers and the Trustee may amend or supplement this Indenture or the Securities or waive any provision hereof or thereof without the consent of any Holder: (1) to cure any ambiguity, omission, defect or inconsistency provided such action does not adversely affect in any material respect the interests of the holders of Securities of any series hereunder; (2) to comply with Section 5.01; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities, or to provide for the issuance of bearer Securities (with or without coupons); (4) to provide any security for any series of Securities or to add guarantees of any series of Securities; (5) to comply with any requirement in order to effect or maintain the qualification of this Indenture under the TIA; 50 (6) to add to the covenants of the Issuers for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series), or to surrender any right or power herein conferred upon the Issuers; (7) to add any additional Events of Default with respect to all or any series of the Securities (and, if such Event of Default is applicable to less than all series of Securities, specifying the series to which such Event of Default is applicable); (8) to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective only when there is no outstanding Security of any series created prior to the execution of such amendment or supplemental indenture that is adversely affected in any material respect by such change in or elimination of such provision; (9) to establish the form or terms of Securities of any series as permitted by Section 2.01; (10) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Section 8.01; provided, however, that any such action shall not adversely affect the interest of the Holders of Securities of such series or any other series of Securities in any material respect; (11) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 7.08; (12) to provide for the issuance of Exchange Securities pursuant to the Registration Rights Agreement; or (13) to make any other change that does not adversely affect the rights of any Holder. Upon the request of the Issuers, accompanied by a Resolution, and upon receipt by the Trustee of the documents described in Section 9.06, the Trustee shall join with the Issuers in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and make any further appropriate agreements and stipulations that may be therein contained. 51 SECTION 9.02 WITH CONSENT OF HOLDERS. Except as provided below in this Section 9.02, the Issuers and the Trustee may amend or supplement this Indenture to add any provisions to or change or eliminate any provisions of the Indenture or modify the rights of such Holders, with the written consent (including consents obtained in connection with a tender offer or exchange offer for Securities of any one or more series or all series or a solicitation of consents in respect of Securities of any one or more series or all series, provided that in each case such offer or solicitation is made to all Holders of then outstanding Securities of each such series (but the terms of such offer or solicitation may vary from series to series)) of the Holders of at least a majority in aggregate principal amount of the then outstanding Securities of all series affected by such amendment or supplement (acting as one class). Upon the request of the Issuers, accompanied by a Resolution, and upon the filing with the Trustee of evidence of the consent of the Holders as aforesaid, and upon receipt by the Trustee of the documents described in Section 9.06, the Trustee shall join with the Issuers in the execution of such amendment or supplemental indenture. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. The Holders of a majority in principal amount of the then outstanding Securities of one or more series or of all series may waive compliance in a particular instance by the Issuers with any provision of this Indenture with respect to Securities of such series (including waivers obtained in connection with a tender offer or exchange offer for Securities of such series or a solicitation of consents in respect of Securities of such series, provided that in each case such offer or solicitation is made to all Holders of then outstanding Securities of such series (but the terms of such offer or solicitation may vary from series to series)). However, without the consent of each Holder affected, an amendment, supplement or waiver under this Section 9.02 may not: (1) change the Stated Maturity of the principal of (or premium, if any, on) or any installment of interest on any Security, or reduce the principal amount thereof (or any premium, if any, thereon) or the rate of interest, if any, thereon, or adversely affect the right of repayment, if any, at the option of the Holder, or change any Place of Payment where any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or on or after any Redemption Date or Repayment Date); (2) reduce the percentage in aggregate principal amount of Securities, the consent of the Holders of which is necessary to execute any supplemental indenture; or 52 (3) reduce the percentage in principal amount of outstanding Securities, the consent of the Holders of which is necessary to modify or waive any Default hereunder. A supplemental indenture that changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. The right of any Holder to participate in any consent required or sought pursuant to any provision of this Indenture (and the obligation of the Issuers to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as of a date identified by the Issuers in a notice furnished to Holders in accordance with the terms of this Indenture. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Issuers shall mail to the Holders of each Security affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Issuers to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver. SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Securities shall comply in form and substance with the TIA as then in effect. SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his or her Security or portion of a Security if the Trustee receives written notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. The Issuers may, but shall not be obligated to, fix a record date (which need not comply with Section 316(c) of the TIA) for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver or to take any other action under this Indenture. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only 53 those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Securities required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it is of the type described in any of clauses (1) through (9) of Section 9.02 hereof. In such case, the amendment, supplement or waiver shall bind each Holder who has consented to it and every subsequent Holder that evidences the same debt as the consenting Holder's Security. SECTION 9.05 NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment or supplement changes the terms of an outstanding Security, the Issuers may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security at the request of the Issuers regarding the changed terms and return it to the Holder. Alternatively, if the Issuers so determine, the Issuers in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment or supplement. Securities of any series authenticated and delivered after the execution of any amendment or supplement may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such amendment or supplement. SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment or supplement authorized pursuant to this Article if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplement, the Trustee shall be entitled to receive, and, subject to Section 7.01 hereof, shall be fully protected in relying upon, an Opinion of Counsel provided at the expense of the Issuers as conclusive evidence that such amendment or supplement is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Issuers in accordance with its terms. 54 ARTICLE X MISCELLANEOUS SECTION 10.01 TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of TIA (S) 318(c), the imposed duties shall control. SECTION 10.02 NOTICES. Any notice or communication by the Issuers or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail (registered or certified, return receipt requested), telex, facsimile or overnight air courier guaranteeing next day delivery, to the other's address: If to the Issuers: Equistar Chemicals, LP Equistar Funding Corporation One Houston Center, Suite 1600 1221 McKinney Street Houston, Texas 77010 Attention: Gerald A. O'Brien If to the Trustee: The Bank of New York 101 Barclay Street, 21W New York, New York 10286 Attention: Corporate Trust Administration The Issuers or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if by facsimile; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first-class mail, postage prepaid, to the Holder's address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. 55 If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it, except in the case of notice to the Trustee, it is duly given only when received. If the Issuers mail a notice or communication to Holders, they shall mail a copy to the Trustee and each Agent at the same time. All notices or communications, including without limitation notices to the Trustee or the Issuers by Holders, shall be in writing, except as otherwise set forth herein. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. SECTION 10.03 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Issuers, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). SECTION 10.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Issuers to the Trustee to take any action under this Indenture, the Issuers shall, if requested by the Trustee, furnish to the Trustee at the expense of the Issuers: (1) an Officers' Certificate (which shall include the statements set forth in Section 10.05) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with. SECTION 10.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA (S) 314(a)(4)) shall comply with the provisions of TIA (S) 314(e) and shall include: 56 (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 10.06 RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or the Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 10.07 LEGAL HOLIDAYS. If a payment date is a Legal Holiday at a Place of Payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 10.08 NO RECOURSE AGAINST OTHERS. A director, officer, employee, stockholder, partner or other owner of either of the Issuers or the Trustee, as such, shall not have any liability for any obligations of the Issuers under the Securities or for any obligations of the Issuers or the Trustee under this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release shall be part of the consideration for the issue of Securities. SECTION 10.09 GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS TO THE EXTENT THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 57 SECTION 10.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Issuers or any other Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.11 SUCCESSORS. All agreements of the Issuers in this Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 10.12 SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall, to the fullest extent permitted by applicable law, not in any way be affected or impaired thereby. SECTION 10.13 COUNTERPART ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 10.14 TABLE OF CONTENTS, HEADINGS, ETC The table of contents, cross-reference table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 58 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. EQUISTAR CHEMICALS, LP By: /s/ Gerald A. O'Brien -------------------------------------- Name: Gerald A. O'Brien Title: Vice President and General Counsel EQUISTAR FUNDING CORPORATION By: /s/ Gerald A. O'Brien -------------------------------------- Name: Gerald A. O'Brien Title: Vice President and General Counsel THE BANK OF NEW YORK, AS TRUSTEE By: /s/ Van K. Brown -------------------------------------- Name: Van K. Brown Title: Assistant Vice President 59 EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION 8 1/2% Notes Due 2004 8 3/4% Notes Due 2009 ______________ FIRST SUPPLEMENTAL INDENTURE Dated as of February 16, 1999 _____________ The Bank of New York TRUSTEE FIRST SUPPLEMENTAL INDENTURE dated as of February 16, 1999 among Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"), Equistar Funding Corporation, a Delaware corporation ("Equistar Funding" and, together with Equistar, the "Issuers"), and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). W I T N E S S E T H: WHEREAS, the Issuers have heretofore entered into an Indenture, dated as of January 15, 1999 (the "Original Indenture"), with the Trustee; WHEREAS, the Original Indenture is incorporated herein by this reference and the Original Indenture, as supplemented by this First Supplemental Indenture, is herein called the "Indenture"; WHEREAS, under the Original Indenture, a new series of Initial Securities may at any time be established pursuant to a supplemental indenture executed by the Issuers and the Trustee; WHEREAS, the Issuers propose to create under the Indenture two new series of Initial Securities; and WHEREAS, all conditions necessary to authorize the execution and delivery of this First Supplemental Indenture and to make it a valid and binding obligation of each of the Issuers have been done or performed. NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I Section 1.01 Establishment and Terms. (a) There is hereby established a new series of Initial Securities to be issued under the Indenture, to be designated as the Issuers' 8 1/2% Notes Due 2004 (the "8 1/2% Notes"). 1 There are to be authenticated and delivered $300,000,000 principal amount of 8 1/2% Notes to be issued at 99.992% of principal amount. The 8 1/2% Notes shall be issued in definitive fully registered form. The 8 1/2% Notes shall be issued in the form of three Global Securities in substantially the form set out in Exhibit A hereto and as further provided in Section 1.03. The initial Depositary with respect to the 8 1/2% Notes shall be The Depository Trust Company ("DTC"). There shall be no limit upon the aggregate principal amount of 8 1/2% Notes that may be authenticated and delivered under this Indenture. The 8 1/2% Notes will mature on February 15, 2004. The 8 1/2% Notes will bear interest at the rate of 8 1/2% per annum. Interest Payment Dates will be February 15 and August 15 of each year. The first Interest Payment Date will be August 15, 1999. Interest shall be paid to the Person in whose name the applicable 8 1/2% Note is registered at the close of business on February 1, in the case of the February 15 Interest Payment Date, and August 1, in the case of the August 15 Interest Payment Date. Interest will accrue from February 16, 1999. Interest will be computed on the basis of a 360- day year of twelve 30-day months. No Additional Amounts will be payable on the 8 1/2% Notes. The 8 1/2% Notes will be redeemable as provided in Section 1.02. The 8 1/2% Notes will not be subject to a sinking fund. The 8 1/2% Notes are being sold pursuant to Rule 144A and Regulation S under the Securities Act of 1933. They are entitled to the benefits of the Registration Rights Agreement and Section 4.03(b) of the Original Indenture. The 8 1/2% Notes shall, together with any Exchange Securities for which the 8 1/2% Notes are exchanged pursuant to the Registration Rights Agreement, constitute a single series of Securities under the Indenture. All payments of principal, premium (if any) and interest on the 8 1/2% Notes shall be made in accordance with Section 4.02 of the Original Indenture. The 8 1/2% Notes shall be subject to the restrictions on transfer and exchange set forth in Section 1.03, which restrictions on transfer and exchange shall amend, supplement, 2 modify or supersede those contained in Article II of the Original Indenture to the extent applicable. (b) There is hereby established a new series of Initial Securities to be issued under the Indenture, to be designated as the Issuers' 8 3/4% Notes Due 2009 (the "8 3/4% Notes"). There are to be authenticated and delivered $600,000,000 principal amount of 8 3/4% Notes to be issued at 99.718% of principal amount. The 8 3/4% Notes shall be issued in definitive fully registered form. The 8 3/4% Notes shall be issued in the form of four Global Securities in substantially the form set out in Exhibit A hereto and as further provided in Section 1.03. The initial Depositary with respect to the 8 3/4% Notes shall be The Depository Trust Company. There shall be no limit upon the aggregate principal amount of 8 3/4% Notes that may be authenticated and delivered under this Indenture. The 8 3/4% Notes will mature on February 15, 2009. The 8 3/4% Notes will bear interest at the rate of 8 3/4% Notes per annum. Interest Payment Dates will be February 15 and August 15 of each year. The first Interest Payment Date will be August 15, 1999. Interest shall be paid to the Person in whose name the applicable 8 3/4% Note is registered at the close of business on February 1, in the case of the February 15 Interest Payment Date, and August 1, in the case of the August 15 Interest Payment Date. Interest will accrue from February 16, 1999. Interest will be computed on the basis of a 360- day year of twelve 30-day months. No Additional Amounts will be payable. The 8 3/4% Notes will be redeemable as provided in Section 1.02. The 8 3/4% Notes will not be subject to a sinking fund. The 8 3/4% Notes are being sold pursuant to Rule 144A and Regulation S under the Securities Act of 1933. They are entitled to the benefits of the Registration Rights Agreement and Section 4.03(b) of the Original Indenture. The 8 3/4% Notes shall, together with any Exchange Securities for which the 8 3/4% Notes are exchanged pursuant 3 to the Registration Rights Agreement, constitute a single series of Securities under the Indenture. All payments of principal, premium (if any) and interest on the 8 3/4% Notes shall be made in accordance with Section 4.02 of the Original Indenture. The 8 3/4% Notes shall be subject to the restrictions on transfer and exchange set forth in Section 1.03, which restrictions on transfer and exchange shall amend, supplement, modify or supersede those contained in Article II of the Original Indenture to the extent applicable. SECTION 1.02. Optional Redemption. The 8 1/2% Notes and the 8 3/4% Notes (together the "Notes") will be redeemable only in accordance with this Section 1.02. Each of the 8 1/2% Notes and the 8 3/4% Notes will be redeemable, in whole or in part, at any time at the option of the Issuers at a redemption price (the "Redemption Price") equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed, or (ii) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest of the Notes to be redeemed discounted to the date of redemption (the "Redemption Date") on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued but unpaid interest to the Redemption Date. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each holder of the Notes to be redeemed. Unless the Issuers default in payment of the Redemption Price, interest will cease to accrue on the Notes to be redeemed, or portions thereof called for redemption on and after the Redemption Date. CERTAIN DEFINITIONS "Adjusted Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date, plus 0.25%. 4 "Comparable Treasury Issue" means the United States Treasury security selected by a Quotation Agent as having a maturity comparable to the remaining term of the 8 1/2% Notes or the 8 3/4% Notes, as applicable, to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such 8 1/2% Notes or the 8 3/4% Notes, as applicable. "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations for such Redemption Date or (b) if the Issuers obtain only one Reference Treasury Dealer Quotation, the Reference Treasury Dealer Quotation. "Quotation Agent" means one of the Reference Treasury Dealers appointed by the Issuers and certified to the Trustee by the Issuers. "Reference Treasury Dealer" means each of Chase Securities Inc., NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Issuers shall substitute therefor another Primary Treasury Dealer and certify same to the Trustee. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Issuers and certified to the Trustee by the Issuers, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Issuers by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. 5 SECTION 1.03 Form; Restrictions on Transfer and Exchange. (a) Rule 144A Global Notes. The Notes offered and sold to "qualified institutional buyers" (which term shall have the meaning assigned to it in Rule 144A under the Securities Act of 1933 (the "Act")) in the United States of America in reliance on Rule 144A will be issued as permanent Global Securities (the "Rule 144A Global Notes"), without interest coupons, substantially in the form of Exhibit A. The Rule 144A Global Notes will be duly executed by the Issuers, authenticated by the Trustee and deposited with the Trustee, on behalf of DTC. (b) Regulation S Global Notes. Notes offered and sold in offshore transactions to Non-U.S. Persons (which term shall have the meaning assigned to it in Regulation S under the Act ("Regulation S") in reliance on Regulation S will initially be issued in the form of one or more registered notes in temporary global form, without interest coupons (collectively, the "Regulation S Temporary Global Notes"), substantially in the form of Exhibit A hereto. Beneficial interests in the Regulation S Temporary Global Notes will be exchanged for beneficial interests in a corresponding note in permanent global form (the "Regulation S Permanent Global Notes" and, together with the Regulation S Temporary Global Notes, the "Regulation S Global Notes") within a reasonable period after the expiration of the Restricted Period (as defined below) upon certification that the beneficial interests in the Regulation S Temporary Global Notes are owned by either Non-U.S. Persons or U.S. persons who purchased such interests pursuant to an exemption from, or in transactions not subject to, the registration requirements of the Act. Each Regulation S Global Note will be deposited with, or on behalf of, a custodian for DTC for credit to the respective accounts of the purchasers (or to such other accounts as they may direct) at Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System ("Euroclear"), or Cedel Bank, societe anonyme ("Cedel"). Prior to the 40th day after the later of the commencement of the offering of the Notes and February 16, 1999 (such period through and including such 40th day, the "Restricted Period"), interests in the Regulation S Temporary Global Notes may only be held through Euroclear or Cedel (as indirect participants in DTC) unless exchanged for interests in the Rule 144A Global Notes. (c) Exchanges Among the Global Notes. Prior to the expiration of the Restricted Period, transfers by an owner of a beneficial interest in the Regulation S Temporary Global Notes to a transferee who takes delivery of such interest through the applicable Rule 144A Global Note will be made only in accordance with applicable procedures and upon receipt by the 6 Trustee of a written certification from the transferor of the beneficial interest substantially in the form of Exhibit B hereto. Transfers by an owner of a beneficial interest in a Rule 144A Global Note to a transferee who takes delivery of such interest through a Regulation S Global Note, whether before or after the expiration of the Restricted Period, will be made only upon receipt by the Trustee of a certification from the transferor substantially in the form of Exhibit C hereto. ARTICLE II SECTION 2.01. All moneys paid by the Issuers to the Trustee or a Paying Agent for the payment of principal of (or premium, if any) or interest, if any, on any Note that remains unclaimed for two years after such principal, premium or interest becomes due and payable will be repaid to the Issuers, and the holders of such Notes will (subject to applicable abandoned property or similar laws) thereafter, as unsecured general creditors, look only to the Issuers. SECTION 2.02. The recitals in this First Supplemental Indenture are made by the Issuers only and not by the Trustee, and all of the provisions contained in the Original Indenture in respect of the rights, privileges, immunities, powers and duties of the Trustee shall be applicable in respect of the 8 1/2% Notes or the 8 3/4% Notes, as applicable, and of this First Supplemental Indenture as fully and with like effect as if set forth herein in full. SECTION 2.03. The Original Indenture is in all respects ratified and confirmed, and the Original Indenture and this First Supplemental Indenture shall be read, taken and construed as one and the same instrument; provided that, in case of conflict between this First Supplemental Indenture and the Original Indenture, this First Supplemental Indenture shall control. SECTION 2.04. This First Supplemental Indenture may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts shall together constitute one and the same instrument. SECTION 2.05. Nothing in the Indenture expressed or implied is intended or shall be construed to confer upon, or to give or grant to, any person or entity, other than the Issuers, the Trustee, the Paying Agent and the registered owners of the Notes, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in the Indenture contained by and on behalf of 7 the Issuers shall be for the sole and exclusive benefit of the Issuers, the Trustee, the Paying Agent and the registered owners of the Notes. SECTION 2.06. Neither the Issuers nor the Trustee will have any responsibility for the performance of DTC, Euroclear or Cedel, or any of their participants, direct or indirect, of their respective obligations under the rules and procedures governing their operations. 8 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. EQUISTAR CHEMICALS, LP By: /s/ Gerald A. O'Brien Name: Gerald A. O'Brien Title: Vice President and General Counsel EQUISTAR FUNDING CORPORATION By: /s/ Gerald A. O'Brien Name: Gerald A. O'Brien Title: Vice President and General Counsel THE BANK OF NEW YORK, AS TRUSTEE By: /s/ Van K. Brown Name: Van K. Brown Title: Assistant Vice President 9 EXHIBIT A FORM OF NOTE [FACE OF SECURITY] [Rule 144A Global Note] [Regulation S Temporary Global Note] [Regulation S Permanent Global Note] [THIS GLOBAL NOTE IS A TEMPORARY GLOBAL NOTE FOR PURPOSES OF REGULATIONS UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). NEITHER THIS TEMPORARY GLOBAL NOTE NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, OR DELIVERED, EXCEPT AS PERMITTED BELOW. NO BENEFICIAL OWNERS OF THIS TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF PRINCIPAL OR INTEREST HEREON UNLESS THE REQUIRED CERTIFICATIONS HAVE BEEN DELIVERED PURSUANT TO THE TERMS OF THE INDENTURE (AS DEFINED HEREAFTER).]/1/ THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUERS OR ANY AFFILIATE OF THE ISSUERS WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) ONLY (A) TO THE ISSUERS, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, SUBJECT TO THE ISSUERS' AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE - ------------ /1/ To be included in a Regulation S Temporary Global Note. REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. [Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), shall act as the Depositary until a successor shall be appointed by the Issuers and the Registrar. Unless this certificate is presented by an authorized representative of DTC to the Issuers or their agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]/2/ - ------------ /2/ To be included in any Global Note. 2 EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION ____% NOTE DUE ______ No. ___ CUSIP No. _________ $ Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership," which term includes any successor Person under the Indenture hereinafter referred to), and Equistar Funding Corporation, a Delaware corporation (the "Corporation," which term includes any successor person under the Indenture hereinafter referred to, and, together with the Partnership, the "Issuers"), for value received promises to pay to _________ or registered assigns, the principal sum of_______________ Dollars[, or such greater or lesser amount as indicated on the Schedule of Exchanges of Securities hereto,]/2/ on February 15, _____. Interest Payment Dates: February 15 and August 15 Record Dates: February 1 and August 1 Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. IN WITNESS WHEREOF, each of the Partnership and the Corporation has caused this Security to be signed manually or by facsimile by their respective duly authorized officers. Dated: February 16, 1999 EQUISTAR CHEMICALS, LP By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: - --------------- /2/ To be included in any Global Note. 3 EQUISTAR FUNDING CORPORATION By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: Certificate of Authentication: This is one of the Securities of the series designated therein referred to in the within- mentioned Indenture. THE BANK OF NEW YORK By: Dated: February 16, 1999 ----------------------------------- Authorized Signatory 4 [REVERSE OF SECURITY] EQUISTAR CHEMICALS, LP EQUISTAR FUNDING CORPORATION ____% NOTE DUE _____ This Security is one of a duly authorized issue of ____% Notes Due _____ (the "Securities") of Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership") and Equistar Funding Corporation, a Delaware corporation (the "Corporation" and together referred to as the "Issuers"). 1. Interest. The Issuers promise to pay interest on the principal amount of this Security at ____% per annum from February 16, 1999 until maturity. The Issuers will pay interest semiannually on February 15 and August 15 of each year (each an "Interest Payment Date"), or if any such day is not a Business Day, on the next succeeding Business Day. Interest on the Securities will accrue from the most recent Interest Payment Date on which interest has been paid or, if no interest has been paid, from February 16, 1999; provided that if there is no existing Default in the payment of interest, and if this Security is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date; provided, further, that the first Interest Payment Date shall be August 15, 1999. The Issuers shall pay interest on overdue principal from time to time on demand at a rate equal to the interest rate then in effect; they shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Issuers will pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the record date next preceding the Interest Payment Date, even if such Securities are canceled after such record date and on or before such Interest Payment Date. The Holder must surrender this Security to a Paying Agent to collect principal payments. The Issuers will pay the principal of and interest on the Securities in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. The Issuers, however, may pay such amounts by check payable in such money. The Issuers may make payments in respect of the Securities evidenced by a Global Security (including principal, premium, if any, and interest) by wire transfer of immediately available funds to the accounts specified by the Holder of the Global Security. In all other cases, payment of interest may be made at the option of the Issuers by check to a Holder's registered address. 3. Paying Agent and Registrar. Initially, The Bank of New York (the "Trustee"), the Trustee under the Indenture, will act as Paying Agent and Registrar. The Issuers may change any Paying Agent, Registrar, co-registrar or additional paying agent without notice to any Holder. The Partnership, the Corporation, or any of the Partnership's subsidiaries may act in any such capacity. 4. Indenture. The Issuers issued the Securities under an Indenture dated as of January 15, 1999 among the Partnership, the Corporation and the Trustee, as supplemented by the First Supplemental Indenture dated as of February 16, 1999 (the "Indenture"). The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"), as in 1 effect on the date of execution of the Indenture. The Securities are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Securities are unsecured general obligations of the Issuers and are unlimited in aggregate principal amount. The Indenture provides for the issuance of other series of debt securities (including the Securities, the "Debt Securities") thereunder. 5. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Securities during the period between a record date and the corresponding Interest Payment Date or of any Security selected for redemption, except the unredeemed portion of any Security being redeemed in part. 6. Persons Deemed Owners. The registered Holder of a Security shall be treated as its owner for all purposes. 7. Redemption. The Securities will be redeemable, in whole or in part, at any time at the option of the Issuers, upon not less than 30 nor more than 60 days' prior notice as provided in the Indenture, at a redemption price (the "Redemption Price") equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed or (ii) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest on the Securities to be redeemed discounted to the date of redemption (the "Redemption Date") on a semiannual basis (assuming 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as hereafter defined), plus, in each case, accrued but unpaid interest to the Redemption Date. The Adjusted Treasury rate means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue (as hereafter defined), assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price (as hereafter defined) for such Redemption Date, plus 0.25%. Comparable Treasury Issue means the United States Treasury security selected by a Quotation Agent (as hereafter defined) as having a maturity comparable to the remaining term of the Securities to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Securities. Comparable Treasury Price means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations (as hereafter defined) for such Redemption Date or (b) if the Issuers obtain only one Reference Treasury Dealer Quotation, the Reference Treasury Dealer Quotation. 2 Quotation Agent means one of the Reference Treasury Dealers appointed by the Issuers and certified to the Trustee by the Issuers. Reference Treasury Dealer means each of Chase Securities Inc., NationsBanc Montgomery Securities LLC, ABN AMRO Incorporated, BNY Capital Markets, Inc., First Chicago Capital Markets, Inc. and J.P. Morgan Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Issuers shall substitute therefor another Primary Treasury Dealer and certify same to the Trustee. Reference Treasury Dealer Quotations means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Issuers and certified to the Trustee by the Issuers, of the bid and asked priced for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Issuers by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date. 8. Amendments and Waivers. Subject to certain exceptions and limitations, the Indenture or the Securities may be amended or supplemented with the consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Debt Securities of all series of Debt Securities affected by such amendment or supplement (acting as one class), and any existing or past Default or Event of Default under, or compliance with any provision of, the Indenture may be waived (other than any continuing Default or Event of Default in the payment of the principal of or premium, if any, or interest on the Securities) by the Holders of at least a majority in principal amount of the then outstanding Debt Securities of any series or of all series (acting as one class) in accordance with the terms of the Indenture. Without the consent of any Holder, the Partnership, the Corporation and the Trustee may amend or supplement the Indenture or the Securities or waive any provision of either, to cure any ambiguity, omission, defect or inconsistency (provided such action does not adversely affect in any material respect the interests of the Holders); to comply with the provisions of the Indenture relating to merger, consolidation and certain other transactions; to provide for uncertificated Securities in addition to or in place of certificated Securities or to provide for the issuance of bearer securities; to provide any security for the Securities or to add guarantees of the Securities; to comply with any requirement in order to effect or maintain the qualification of the Indenture under the TIA; to add to the covenants of the Issuers for the benefit of the Holders of the Securities, or to surrender any right or power conferred by the Indenture upon the Issuers; to add any additional Events of Default with respect to all or any series of the Debt Securities; to change or eliminate any of the provisions of the Indenture, provided that any such change or elimination shall become effective only when there is no outstanding Debt Security of any series created prior to the execution of such amendment or supplemental indenture that is adversely affected in any material respect by such changes in or elimination of such provisions; to establish the form or terms of Debt Securities of any series; to supplement any of the provisions of the Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of the Securities pursuant to the Indenture, provided that any such action shall not adversely affect the interest of the Holders of the Securities or any other series of Debt Securities in any material respect; to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts thereunder by more than one Trustee, pursuant to the requirements of the Indenture; to provide for the issuance of Exchange Securities (as defined in the Indenture) pursuant to the Registration Rights Agreement (as defined in the Indenture); or to make any other change that does not adversely affect the rights of any Holder. 3 The right of any Holder to participate in any consent required or sought pursuant to any provision of the Indenture (and the obligation of the Issuers to obtain any such consent otherwise required from such Holder) may be subject to the requirement that such Holder shall have been the Holder of record of any Securities with respect to which such consent is required or sought as of a date fixed in accordance with the terms of the Indenture. Without the consent of each Holder affected, the Issuers may not (i) change the Stated Maturity of the principal of (or premium, if any, on) or any installment of interest on any Security, or reduce the principal amount thereof (or any premium, if any, thereon) or the rate of interest, if any, thereon, or adversely affect the right of repayment, if any, at the option of the Holder, or change any Place of Payment where any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or on or after any Redemption Date or Repayment Date); (ii) reduce the aforesaid percentage in aggregate principal amount of Debt Securities, the consent of the Holders of which is necessary to execute any supplemental indenture; or (iii) reduce the percentage in principal amount of outstanding Debt Securities, the consent of the Holders of which is necessary to modify or waive any Default under the Indenture. A supplemental indenture that changes or eliminates any covenant or other provision of the Indenture which has expressly been included solely for the benefit of one or more particular series of Debt Securities under the Indenture, or which modifies the rights of the Holders of Debt Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under the Indenture of the Holders of Debt Securities of any other series. 9. Defaults and Remedies. Events of Default are defined in the Indenture and generally include: (i) default by the Issuers for 30 days in payment of any interest on the Securities; (ii) default by the Issuers in any payment of principal of (or premium, if any, on) the Securities; (iii) default by the Issuers in observing or performing any of their other covenants or agreements in, or provisions of, the Securities or in the Indenture which shall not have been remedied within 60 days after written notice to the Issuers by the Trustee or to the Issuers and Trustee by the holders of at least 25% in aggregate principal amount of the Debt Securities then outstanding affected by such default; or (iv) certain events involving bankruptcy, insolvency or reorganization affecting the Issuers. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Securities of the series affected by such default (or, in the case of an Event of Default described in clause (iii) above, if outstanding Debt Securities of other series are affected by such Default, then at least 25% in principal amount of the then outstanding Debt Securities so affected), may declare the principal of and interest on all the Securities to be immediately due and payable, except that in the case of an Event of Default arising from certain events of bankruptcy, insolvency or reorganization affecting the Issuers, all outstanding Securities become due and payable immediately without further action or notice. The amount due and payable upon the acceleration of any Security is equal to 100% of the principal amount thereof plus accrued interest to the date of payment. Holders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in aggregate principal amount of the then outstanding Securities (or affected Debt Securities) may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or may direct the Trustee in its exercise of any trust or power conferred on the Trustee. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Issuers must furnish an annual compliance certificate to the Trustee. 4 10. Discharge Prior to Maturity. The Indenture with respect to the Securities shall be discharged and canceled upon the payment of all of the Securities and shall be discharged except for certain obligations upon the irrevocable deposit with the Trustee of funds or U.S. Government Obligations sufficient for such payment. 11. Trustee Dealings with the Issuers. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Issuers or their Affiliates, and may otherwise deal with the Issuers or their Affiliates, as if it were not Trustee. 12. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Issuers shall not have any liability for any obligations of the Issuers under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 13. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 14. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Issuers have caused CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed thereon. 15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 16. Restrictions on Transfer; Additional Rights of Holders of Transfer Restricted Securities. By its acceptance of any Security bearing a legend restricting transfer, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in the officers' certificate executed pursuant to Section 2.04 of the Indenture in respect of the Securities and such legend and agrees that it will transfer such Security only as provided in such officers' certificate and in the Indenture. In addition to the rights provided by Holders of Securities under the Indenture, Holders shall have all the rights set forth in the Registration Rights Agreement. THE ISSUERS WILL FURNISH TO ANY HOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE. REQUEST MAY BE MADE TO: EQUISTAR CHEMICALS, LP 1221 MCKINNEY HOUSTON, TEXAS 77010 TELEPHONE: (713) 652-7200 ATTENTION: GENERAL COUNSEL 5 SCHEDULE OF EXCHANGES OF SECURITIES The following exchanges of a part of this Global Note for Definitive Notes [or a part of a Regulation S Global Note]/3/ [or a part of a Rule 144A Global Note]/4/ have been made:
Principal Amount Amount of Amount of of this Global Signature of decrease in increase in Note following authorized officer Principal Amount Principal Amount such decrease of Trustee or Date of Exchange of this Global Note of this Global Note (or increase) Security Custodian - ------------------- ------------------- ------------------- ----------------- ------------------
- ----------------- /3/ To be included in a Rule 144A Global Note. /4/ To be included in a Regulation S Global Note. ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to_______________________________________________ (Insert assignee's social security or tax I.D. number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_______________________________________________________ as agent to transfer this Security on the books of the Issuers. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: Your Signature: --------------------- ---------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: ------------------------------------------------------------ (Participant in a Recognized Signature Guaranty Medallion Program) This assignment relates to $_____ principal amount of ___% Notes held in /5/______ book-entry or /5/ ______ definitive form by _____________________ (the "Transferor"). The Transferor has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. In connection with such request and in respect of each such Note, the Transferor does hereby certify that the Transferor is familiar with the Indenture, as supplemented, relating to the above-captioned Notes and that the transfer of this Note does not require registration under the Securities Act (as defined below) because:/5/ [_] Such Note is being acquired for the Transferor's own account without transfer. [_] Such Note is being transferred to the Issuers. [_] Such Note is being transferred pursuant to a registration statement that has been declared effective under the Securities Act of 1933, as amended (the "Securities Act"). [_] Such Note is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act), in accordance with Rule 144A under the Securities Act. - ------------------ /5/ Fill in blank or check appropriate box, as applicable. [_] Such Note is being transferred pursuant to an exemption from registration in accordance with Rule 904 of Regulation S under the Securities Act, based upon an opinion of counsel if the Issuers or the Trustee so requests, together with a certification in substantially the form of attached to the Indenture. ------------------------------------------ [INSERT NAME OF TRANSFEROR] By: --------------------------------------- Name: Title: Address: Date: -------------------- EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO QUALIFIED INSTITUTIONAL BUYERS [Date] The Bank of New York Re: __% Notes Due ___ of Equistar Chemicals, LP and Equistar Funding Corporation (the "Notes") Dear Sirs: Reference is hereby made to the Indenture dated as of January 15, 1999, as amended and supplemented by the First Supplemental Indenture thereto, and as from time to time thereafter, (the "Indenture") between Equistar Chemicals, LP and Equistar Funding Corporation, as issuers, and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given them in the Indenture. This letter relates to $___________ aggregate principal amount of Notes which are held in the name of [name of transferor] (the "Transferor") to effect the transfer of such Notes in exchange for an equivalent beneficial interest in the Rule 144A Global Note. In connection with such request, and with respect to such Notes, the Transferor does hereby certify that such Notes are being transferred in accordance with (i) the transfer restrictions set forth in the Notes and (ii) Rule 144A under the United States Securities Act of 1933, as amended ("Rule 144A"), to a transferee that the Transferor reasonably believes is purchasing the Notes for its own account or an account with respect to which the transferee exercises sole investment discretion, and the transferee, as well as any such account, is a "qualified institutional buyer" within the meaning of Rule 144A, in a transaction meeting the B-1 requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction. You and the issuers are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferor] By:____________________________ _______________________________ Authorized Signature Signature Medallion Guaranteed B-2 EXHIBIT C FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S [Date] The Bank of New York Re: __% Notes Due ___ of Equistar Chemicals, LP and Equistar Funding Corporation (the "Notes") C-1 Dear Sirs: In connection with our proposed sale of $________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (a) the offer of the Notes was not made to a person in the United States; (b) either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; C-2 (c) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (d) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (e) we are the beneficial owner of the principal owner of Notes being transferred. In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. C-3 You and the issuers are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:____________________________ _______________________________ Authorized Signature Signature Medallion Guaranteed C-4 EX-4.12 9 ARCO CHEMICAL INDENTURE DATED JUNE 15, 1988 EXHIBIT 4.12 ================================================================================ ARCO CHEMICAL COMPANY AND THE BANK OF NEW YORK, Trustee ------------------------- INDENTURE Dated as of June 15, 1988 ------------------------- ================================================================================ TIE-SHEET of provisions of Trust Indenture Act of 1939 with Indenture dated as of June 15, 1988, between ARCO Chemical Company and The Bank of New York, as Trustee; Section of Act Section of Indenture - -------------- -------------------- 310(a)(1) and (2)............................ 8.09 310(a)(3) and (4)............................ Not applicable 310(b)....................................... 8.08 and 8.10(b) 310(c)....................................... Not applicable 311(a) and (b)............................... 8.13 311(c)....................................... Not applicable 312(a)....................................... 6.01 and 6.02(a) 312(b) and (c)............................... 6.02(b) and (c) 313(a)....................................... 6.04(a) 313(b)(1).................................... Not applicable 313(b)(2).................................... 6.04(b) 313(c)....................................... 6.04(c) 313(d)....................................... 6.04(d) 314(a)....................................... 6.03 314(b)....................................... Not applicable 314(c)(1) and (2)............................ 16.07 314(c)(3).................................... Not applicable 314(d)....................................... Not applicable 314(e)....................................... 16.07 315(a), (c) and (d).......................... 8.01 315(b)....................................... 7.08 315(e)....................................... 7.09 316(a)(1).................................... 7.01 and 7.07 316(a)(2).................................... Omitted 316(a) last sentence......................... 9.04 316(b)....................................... 7.04 317(a)....................................... 7.02 317(b)....................................... 5.07 318(a)....................................... 16.09 - ---------------- This tie-sheet is not part of the Indenture as executed. TABLE OF CONTENTS ---------------------- PAGE ---- Parties................................................................ 1 Recitals............................................................... 1 ARTICLE ONE. DEFINITIONS. Section 1.01. Definitions............................................ 1 Authorized Newspaper................................... 1 Board of Directors..................................... 2 Business Day........................................... 2 Company................................................ 2 Components............................................. 2 Consolidated Net Tangible Assets....................... 3 Conversion Date........................................ 3 Coupon Security........................................ 3 Dollar................................................. 3 ECU.................................................... 3 European Communities................................... 4 Event of Default....................................... 4 Exchange Rate.......................................... 4 Exchange Rate Agent.................................... 5 Exchange Rate Officer's Certificate.................... 5 Foreign Currency....................................... 5 Fully Registered Security.............................. 5 Holder................................................. 5 Indenture.............................................. 5 Interest............................................... 6 Interest Payment Date.................................. 6 Market Exchange Rate................................... 6 Maturity............................................... 7 Officers' Certificate.................................. 7 Opinion of Counsel..................................... 7 Original Issue Date.................................... 7 Original Issue Discount Security....................... 7 Person................................................. 8 Place of Payment....................................... 8 Principal Office of the Trustee........................ 8 Registered Coupon Security............................. 8 Registered Holder...................................... 8 Registered Security.................................... 9 ii PAGE ---- Required Currency...................................... 9 Responsible Officer.................................... 9 Restricted Property.................................... 9 Restricted Subsidiary.................................. 9 Security or Securities outstanding..................... 10 Stated Maturity........................................ 11 Subsidiary............................................. 11 Trustee................................................ 11 Trustee Indenture Act of 1939.......................... 12 Unregistered Security.................................. 12 ARTICLE TWO. THE SECURITIES AND SECURITY FORMS. Section 2.01. Amount Unlimited; Issuance in Series................... 12 Section 2.02. Form of Securities and of Trustee's Certificate of Authentication.................................... 15 Section 2.03. Denomination, Authentication and Dating Securities..... 15 Section 2.04. Execution of Securities................................ 17 Section 2.05. Registration, Registration of Transfer and Exchange.... 18 Section 2.06. Mutilated, Destroyed, Lost or Stolen Securities........ 19 Section 2.07. Temporary Securities................................... 21 Section 2.08. Cancellation of Securities Paid, etc................... 21 Section 2.09. Moneys of Different Currencies to be Segregated........ 22 Section 2.10. Payment to Be in Proper Currency....................... 22 Section 2.11. Payment in Currencies.................................. 23 ARTICLE THREE. REDEMPTION OF SECURITIES. Section 3.01. Applicability of Article............................... 26 Section 3.02. Notice of Redemption; Selection of Securities.......... 26 Section 3.03. Payment of Securities Called for Redemption............ 27 iii ARTICLE FOUR. SINKING FUNDS. PAGE ---- Section 4.01. Applicability of Article............................... 28 Section 4.02. Satisfaction of Mandatory Sinking Fund Payments with Securities........................................... 29 Section 4.03. Redemption of Securities for Sinking Fund.............. 29 ARTICLE FIVE. PARTICULAR COVENANTS OF THE COMPANY. Section 5.01. Payment of Principal, Premium and Interest............. 31 Section 5.02. Offices for Notices and Payments, etc.................. 31 Section 5.03. Limitation on Liens.................................... 32 Section 5.04. Limitation on Sale and Lease-Back...................... 34 Section 5.05. Definition of "Value".................................. 35 Section 5.06. Appointments to Fill Vacancies in Trustee's Office..... 35 Section 5.07. Provision as to Paying Agent........................... 35 Section 5.08. Annual Certificate to Trustee.......................... 37 ARTICLE SIX. HOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. Section 6.01. Holders Lists.......................................... 37 Section 6.02. Preservation and Disclosure of Lists................... 37 Section 6.03. Reports by the Company................................. 39 Section 6.04. Reports by the Trustee................................. 40 ARTICLE SEVEN. REMEDIES OF THE TRUSTEE AND HOLDERS ON EVENT OF DEFAULT. Section 7.01. Events of Default...................................... 42 Section 7.02. Payment of Securities on Default; Suit Therefor........ 45 Section 7.03. Application of Moneys Collected by Trustee............. 47 Section 7.04. Proceedings by Holders................................. 48 iv PAGE ---- Section 7.05. Proceedings by Trustee................................ 50 Section 7.06. Remedies Cumulative and Continuing.................... 50 Section 7.07. Direction of Proceedings and Waiver of Defaults by Majority of Holders.................................. 50 Section 7.08. Notice of Defaults..................................... 51 Section 7.09. Undertaking to Pay Costs............................... 52 Section 7.10. Judgment Currency...................................... 52 ARTICLE EIGHT. CONCERNING THE TRUSTEE. Section 8.01. Duties and Reponsibilities of Trustee.................. 53 Section 8.02. Reliance on Documents, Opinions, etc................... 55 Section 8.03. No Responsibility for Recitals, etc.................... 56 Section 8.04. Trustee, Paying Agent or Registrar May Own Securities.. 57 Section 8.05. Moneys to be Held in Trust............................. 57 Section 8.06. Compensation and Expenses of Trustee................... 57 Section 8.07. Officers' Certificate as Evidence...................... 58 Section 8.08. Conflicting Interest of Trustee........................ 58 Section 8.09. Eligibility of Trustee................................. 64 Section 8.10. Resignation or Removal of Trustee...................... 64 Section 8.11. Acceptance by Successor Trustee........................ 66 Section 8.12. Succession by Merger, etc.............................. 68 Section 8.13. Limitation on Rights of Trustee as a Creditor.......... 68 ARTICLE NINE. CONCERNING THE HOLDERS. Section 9.01. Action By Holders...................................... 73 Section 9.02. Proof of Execution by Holders.......................... 74 Section 9.03. Who Deemed Absolute Owners............................. 74 Section 9.04. Company-Owned Securities Disregarded................... 75 Section 9.05. Revocation of Consents; Future Holders Bound........... 76 v ARTICLE TEN. HOLDERS' MEETINGS. PAGE ---- Section 10.01. Purposes of Meetings................................... 76 Section 10.02. Call of Meetings by Trustee............................ 77 Section 10.03. Call of Meetings by Company or Holders................. 78 Section 10.04. Qualification for Voting............................... 78 Section 10.05. Regulations............................................ 78 Section 10.06. Voting................................................. 79 Section 10.07. No Delay of Rights by Meeting.......................... 80 ARTICLE ELEVEN. SUPPLEMENTAL INDENTURES. Section 11.01. Supplemental Indentures without Consent of Holders..... 80 Section 11.02. Supplemental Indentures with Consent of Holders of a Series............................................... 82 Section 11.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures.............................. 83 Section 11.04. Notation on Securities................................. 84 Section 11.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee.................................... 84 ARTICLE TWELVE. CONSOLIDATION, MERGER AND SALE. Section 12.01. Company May Consolidate, etc., on Certain Terms........ 84 Section 12.02. Securities to be Secured in Certain Events............. 85 Section 12.03. Successor Corporation to be Substituted................ 85 Section 12.04. Opinion of Counsel to be Given Trustee................. 86 ARTICLE THIRTEEN. SATISFACTION AND DISCHARGE OF INDENTURE. Section 13.01. Discharge of Indenture................................. 86 Section 13.02. Deposited Moneys to be Held in Trust by Trustee........ 87 Section 13.03. Paying Agent to Repay Moneys Held...................... 88 Section 13.04. Return of Unclaimed Moneys............................. 88 vi ARTICLE FOURTEEN. DEFEASANCE. PAGE ---- Section 14.01. Applicability of Article............................. 88 Section 14.02. Defeasance Upon Deposit of Moneys or U.S. Government Obligations........................................ 88 Section 14.03. Deposited Moneys and U.S. Government Obligations To Be held in Trust................................... 91 Section 14.04. Repayment to Company................................. 91 Section 14.05. Reinstatement........................................ 91 ARTICLE FIFTEEN. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. Section 15.01. Indenture and Securities Solely Corporate Obligations........................................ 92 ARTICLE SIXTEEN. MISCELLANEOUS PROVISIONS. Section 16.01. Provisions Binding on Company's Successors........... 92 Section 16.02. Benefits of Indenture Restricted to Parties and Holders............................................ 92 Section 16.03. Official Acts by Successor Corporation............... 92 Section 16.04. Addresses for Notices, etc........................... 93 Section 16.05. Notices to Holders; Waiver........................... 93 Section 16.06. New York Contract.................................... 94 Section 16.07. Evidence of Compliance with Conditions Precedent..... 94 Section 16.08. Legal Holidays....................................... 95 Section 16.09. Trust Indenture Act to Control....................... 95 Section 16.10. No Security Interest Created......................... 95 Section 16.11. Table of Contents, Headings, etc..................... 95 Section 16.12. Execution in Counterparts............................ 95 Section 16.13. Acceptance of Trust.................................. 95 Exhibit A Form of Election To Receive Payments in Foreign Currency or To Rescind Such Election 1 INDENTURE, dated as of June 15, 1988, between ARCO Chemical Company, a corporation duly organized and existing under the laws of the State of Delaware (the "Company"), and The Bank of New York, a New York banking corporation (the "Trustee"). Recital of the Company The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities"), as provided herein. AGREEMENT For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE. Definitions Section 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or which are by reference therein defined in the Securities Act of 1933, as amended, (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. Authorized Newspaper: The term "Authorized Newspaper" shall mean a newspaper of general circulation in The City of New York (and, if any Place of Payment is not in The City of New York, in each such Place of Payment) printed in the English language and customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays. Whenever successive weekly publications in an Authorized Newspaper are authorized hereunder, 2 they may be made (unless otherwise expressly provided herein) on the same or different days of the week and in the same or different Authorized Newspapers. Board of Directors: The term "Board of Directors" shall mean the Board of Directors of the Company or any committee of such Board duly authorized to act for such Board. Business Day: The term "Business Day" means any day, other than a Saturday or Sunday, that is (a) not a day on which banking institutions are authorized or required by law or regulation to be closed in The City of New York or The City of Philadelphia or, if a series of Securities is denominated in a Foreign Currency, the financial center of the country issuing such currency (which, in the case of European Currency Units, shall be Brussels, Belgium) and (b) if a Security has an interest rate determined with reference to the London interbank offered rate for deposits in a particular currency, any day on which dealings in deposits in such currency are transacted in the London interbank market. Company: The term "Company" shall mean ARCO Chemical Company, a Delaware corporation, and subject to the provisions of Article Twelve shall include its successors and assigns. Components: The term "Components," with respect to Foreign Currency which is a composite currency (including but not limited to the ECU), means the currency amounts that are components of such composite currency on the Conversion Date with respect to such composite currency. If the official unit of any Component currency is altered by way of combination or subdivision, the number of units of such currency as a Component shall be proportionately divided or multiplied. If two or more Component currencies are consolidated into a single currency, the amounts of those currencies as Components shall be replaced by an amount in such single currency equal to 3 the sum of the amounts of such consolidated Component currencies expressed in such single currency, and such amount shall thereafter be a Component. If after such Conversion Date any Component currency shall be divided into two or more currencies, the amount of such currency as a Component shall be replaced by amounts of such two or more currencies, each of which shall be equal to the amount of such former Component currency divided by the number of currencies into which such Component currency was divided, and such amounts shall thereafter be Components. Consolidated Net Tangible Assets: The term "Consolidated Net Tangible Assets" shall mean the total amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (a) all current liabilities (excluding any thereof which are by their terms extendible or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed), and (b) all goodwill, trade names, trademarks, patents, purchased technology, unamortized debt discount and other like intangible assets, all as set forth on the most recent quarterly balance sheet of the Company and its consolidated Subsidiaries and computed in accordance with generally accepted accounting principles. Conversion Date: The term "Conversion Date," with respect to a Foreign Currency which is a composite currency (including but not limited to the ECU), has the meaning specified in Section 2.11(d). Coupon Security: The term "Coupon Security" shall mean any Security authenticated and delivered with one or more interest coupons appertaining thereto. Dollar: The term "Dollar" or "$" means the coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. ECU: The term "ECU" means the European Currency Unit as defined and revised from time to time by the Council of the European Communities. 4 European Communities: The term "European Communities" means the European Economic Community, the European Coal and Steel Community and the European Atomic Energy Community. Event of Default: The term "Event of Default" shall mean any event specified in Section 7.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. Exchange Rate: The term "Exchange Rate" means (a) if pursuant to Section 2.11(a) payment is to be made in Dollars with respect to a Security denominated in a Foreign Currency, the highest firm bid quotation for Dollars received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date (or, if no such rates are quoted on such date, the last date on which such rates were quoted), from three recognized foreign exchange dealers in New York City selected by the Exchange Rate Agent and approved by the Company (one of which may be the Exchange Rate Agent) for the purchase by the quoting dealer, for settlement on such payment date, of the aggregate amount of the Foreign Currency payable on such payment date in respect of all Securities denominated in such Foreign Currency and (b) if an Exchange Rate is to be computed for purposes of any provision other than Section 2.11(a), the rate determined pursuant to the foregoing clause (a) on such date and at such time as may be specified in the relevant provision. In the case of clause (a) above, if no such bid quotations are available, payments pursuant to Section 2.11(a) will be made in the applicable Foreign Currency, unless such Foreign Currency is unavailable due to the imposition of exchange controls (or, in the case of a composite currency, such currency ceases to be used for the purposes for which it was established as provided in Section 2.11(d)(ii)) or other circumstances beyond the Company's control, in which case the Company will be entitled to make payments in Dollars on the basis of the Market Exchange Rate for such Foreign Currency on the second Business Day prior to such payment date as provided in Section 2.11(d)(i) or (ii), as applicable. 5 Exchange Rate Agent: The term "Exchange Rate Agent" means the New York clearing house bank designated pursuant to Section 2.01, or any successor thereto. Exchange Rate Officer's Certificate: The term "Exchange Rate Officer's Certificate," with respect to any date for the payment of principal of (and premium, if any) and interest on any series of Securities, means a certificate, signed by an officer of the Exchange Rate Agent and delivered to the Company and to the Trustee, setting forth the applicable Exchange Rate as of the second Business Day preceding the applicable payment date or such other date as provided herein, as the case may be, and the amounts payable in Dollars on Foreign Currency, as applicable, in respect of the principal of (and premium, if any) and interest on Securities denominated in Foreign Currency. Foreign Currency: The term "Foreign Currency" means a currency issued by the government of any country other than the United States of America or a composite currency based on the aggregate value of currencies of any group of countries, including but not limited to the ECU. Fully Registered Security: The term "Fully Registered Security" shall mean any Security registered as to principal and interest, if any. Holder: The term "Holder," "Holder of Securities," or other similar terms, when used with respect to any Security shall mean a bearer of an Unregistered Security or a Registered Holder of a Registered Security and when used with respect to any coupon, means the bearer thereof. Indenture: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, and shall include the form and terms of particular series of 6 Securities established as contemplated hereunder; provided, however, that if at any time more than one Person is acting as Trustee under this instrument, "Indenture" shall mean with respect to any one or more series of Securities for which such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of a particular series of Securities established as contemplated by Section 2.01, exclusive, however, of any provisions or terms which relate solely to one or more series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party. Interest: The term "interest" when used with respect to any series of non-interest bearing Securities, shall mean interest payable after Maturity. Interest Payment Date: The term "Interest Payment Date," with respect to any Security, means the Stated Maturity of an installment of interest on such Security. Market Exchange Rate: The term "Market Exchange Rate" means (a) if pursuant to Section 2.11(d)(i) payment is to be made in Dollars with respect to a Security denominated in a Foreign Currency (other than a composite currency), the noon buying rate in New York City for cable transfers of such Foreign Currency as certified by the Federal Reserve Bank of New York on the second Business Day preceding the applicable payment date and (b) if pursuant to Section 2.11(d)(ii) payment is to be made in Dollars with respect to a Security denominated in a composite currency, for each Component of such composite currency, the Market Exchange Rate determined pursuant to the foregoing clause (a) on the second Business Day preceding the applicable payment date. In the event a Market Exchange Rate as described in clause (a) or (b) above is not available, the Company will be entitled to make payments in 7 U.S. dollars pursuant to Section 2.11(d)(i) or (ii) on the basis of the most recently available Market Exchange Rate for such Foreign Currency or each Component of such composite currency, as the case may be. Maturity: The term "Maturity," when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, repayment at the option of the Holder or otherwise. Officers' Certificate: The term "Officers' Certificate" shall mean a certificate signed by the President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, or its Vice President and Treasurer, and by one of its Assistant Treasurers, its Secretary, an Assistant Secretary, the Controller or an Assistant Controller of the Company, and delivered to the Trustee. If applicable, each certificate shall include the statements provided for in Section 16.07 if and to the extent required by the provisions of such Section. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of, or of counsel to the Company, or may be other counsel. Each such opinion shall include the statements provided for in Section 16.07 if and to the extent required by the provisions of such Section. Original Issue Date: The term "original issue date" of any Security (or portion thereof) shall mean the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. Original Issue Discount Security: The term "Original Issue Discount Security" shall mean (a) a Security which has been issued at an issue price lower than the principal amount 8 thereof and which provides that upon redemption or acceleration of the maturity thereof an amount less than the principal amount thereof shall become due and payable and (b) any other Security which for United States federal income tax purposes would be considered an original issue discount security. Person: The term "Person" shall mean any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Place of Payment: The term "Place of Payment" for a series of Securities shall mean the Place or Places of Payment designated for each series pursuant to Sections 2.01(5) and 5.02. Principal Office of the Trustee: The term "Principal Office of the Trustee," or other similar term, shall mean the principal corporate trust office of the Trustee in the Borough of Manhattan, The City of New York, at which at any particular time its corporate trust business shall be administered and which on the date hereof is at 21 West Street, 12th Floor, New York, New York 10286 (except that with respect to presentation of Securities for payment and transfer, such term shall mean the office or agency of the Trustee in said city at which at any particular time its corporate agency business shall be conducted). Registered Coupon Security: The term "Registered Coupon Security" shall mean any Coupon Security registered as to principal only. Registered Holder: The term "Registered Holder," when used with respect to a Registered Security, shall mean the person in whose name such Security is registered on the books of the Company kept for that purpose in accordance with the terms hereof. 9 Registered Security: The term "Registered Security" shall mean any Security registered on the books of the Company. Required Currency: The term "Required Currency" means the currency in which the Securities of any series are payable, as specified by the Company pursuant to Section 2.01(13) and taking into account any election made by one or more Holders pursuant to Section 2.11(a). If, however, the Required Currency is a Foreign Currency and is unavailable for the reasons stated in Section 2.11(d)(i) or (ii), the Required Currency shall mean Dollars. Responsible Officer: The term "Responsible Officer" shall mean any officer to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Restricted Property: The term "Restricted Property" shall mean: (a) any manufacturing plant for the production of oxygenated chemicals or styrene-based polymers owned by the Company or a Subsidiary and located in the continental United States of America, except (1) related facilities which in the opinion of the Board of Directors are transportation or marketing facilities, and (2) any plant for the production of oxygenated chemicals or styrene-based polymers which in the opinion of the Board of Directors is not a principal plant of the Company and its Subsidiaries; and (b) any shares of capital stock or indebtedness of a Restricted Subsidiary. Restricted Subsidiary The term "Restricted Subsidiary" shall mean any Subsidiary which owns any Restricted Property, except a Subsidiary substantially all the physical properties of which are located outside the continental United States of America. 10 Security or Securities outstanding: The terms "Security" or "Securities" shall have the meaning stated in the recital of this Indenture and shall mean any Security or Securities, as the case may be, authenticated and delivered pursuant to this Indenture (including, without limitation, the Securities of any series issued in temporary or permanent global form pursuant to Section 2.01(15)); provided, however, that if at any time there is more than one Person acting as Trustee under this instrument, "Securities" with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the recital and shall more particularly mean Securities authenticated and delivered pursuant to this instrument, exclusive of Securities of any series as to which such Person is not Trustee. The term "outstanding," when used with reference to Securities or Securities of any series shall, subject to the provisions of Section 9.04, mean, as of any particular time, all such Securities authenticated and delivered by the Trustee pursuant to this Indenture, except: (a) such Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) such Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent), provided that if such Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been mailed as provided in Article Three, or provision satisfactory to the Trustee shall have been made for mailing such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.06 except to the extent that a bona fide holder in due course of any such Securities shall have presented proof satisfactory to the Trustee that such holder is a bona fide holder in due course of any such Securities. In determining whether the Holders of the requisite principal amount of outstanding Securities of a series have given any request, demand, authorization, direction, notice, consent or waiver hereunder: (i) the principal amount of an Original Issue Discount Security that shall be deemed to be 11 outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the Maturity thereof determined in accordance with Section 7.01; and (ii) each Security denominated in a Foreign Currency shall be deemed to have a principal amount determined by the Exchange Rate Agent (as evidenced by a certificate of such Exchange Rate Agent) by converting the principal amount of such Security in the currency in which such Security is denominated into Dollars at the Exchange Rate as of 9:00 A.M., New York City time, on the date such request, demand, authorization, direction, notice, consent or waiver is delivered to the Trustee and, where it is hereby expressly required, to the Company (or, if there is no such rate on such date for the reasons specified in Section 2.11(d), such rate on the date specified in such Section). Stated Maturity: The term "Stated Maturity" when used with respect to any Security or any installment of interest thereon shall mean the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. Subsidiary: The term "Subsidiary" shall mean any corporation at least a majority of the outstanding securities of which having ordinary voting power to elect a majority of the board of directors of such corporation (whether or not any other class of securities has or might have voting power by reason of the happening of a contingency) is at the time owned or controlled directly or indirectly by the Company or one or more Subsidiaries or by the Company and one or more Subsidiaries. Trustee: The term "Trustee" shall mean The Bank of New York, until another or a successor trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter shall mean and include each Person who is then a Trustee hereunder; provided, however, that if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean only the Trustee with respect to the Securities of that series. 12 Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as it was in force at the date of execution of this Indenture, except as provided in Section 11.03. Unregistered Security: The term "Unregistered Security" shall mean any Security or temporary bearer Security not registered as to principal. ARTICLE TWO. THE SECURITIES AND SECURITY FORMS. SECTION 2.01. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. Securities may be issued in one or more series. The terms and conditions listed below, as applicable, of any series of Securities shall be established (i) in an indenture supplemental hereto, (ii) in a resolution of the Board of Directors or (iii) by the certificate of an officer of the Company authorized pursuant to a resolution of the Board of Directors: (1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of all other series); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sections 2.05, 2.06, 2.07, 3.03 or 11.04); (3) the date or dates on which the principal and premium, if any, of the Securities of the series are payable; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the formula by which interest shall be calculated, the 13 date or dates from which such interest shall accrue, the interest payment dates on which such interest shall be payable and the record dates for the determination of Holders thereof to whom interest is payable; (5) the place or places where the principal of, and premium, if any, and any interest on Securities of the series shall be payable (herein called the "Place of Payment"); provided, however, that payment of principal, premium, if any, and interest with respect to Registered Securities may be made as provided in Section 5.02; (6) the price or prices at which, the period or periods within which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, pursuant to any sinking fund or otherwise; (7) the obligation, if any, of the Company to redeem, purchase or repay Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable; (9) if other than the principal amount at Stated Maturity thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 7.01 or provable in bankruptcy pursuant to Section 7.02 or used to determine the relative voting rights of the Holders thereof pursuant to Section 10.05 or the method by which such portion of the principal amount shall be determined; (10) any Events of Default with respect to the Securities of a particular series, if not set forth herein; (11) if the rate or rate at which the Securities of the series shall bear interest is to be fixed until Maturity, provisions, if any, for the defeasance of Securities of the series; (12) (A) the currency of denomination of the Securities of any series, which may be in Dollars or any Foreign Currency, (B) if such 14 currency of denomination is a composite currency other than the ECU, the agency or organization, if any, responsible for overseeing such composite currency and (C) if such Securities are denominated in a Foreign Currency other than a composite currency, the financial center of the country issuing such Foreign Currency; (13) the designation of the currency or currencies in which payment of the principal of (and premium, if any) and interest on the Securities of the series will be made, and, if such currency or currencies is a Foreign Currency, whether payment of the principal (and premium, if any) or the interest on such Securities shall be payable in such Foreign Currency or in Dollars, and if in Dollars, whether the Holders thereof may elect instead to have such payments made in such Foreign Currency; (14) if the Securities of such series are to be denominated in a Foreign Currency, the designation of an agent for purposes of determining the amounts payable with respect to such Securities in Dollars and exchanging Foreign Currency into Dollars or Dollars into Foreign Currency, as the case may be (the "Exchange Rate Agent"), which shall be a New York clearing house bank; (15) the extent to which any Securities will be issuable in temporary or permanent global form, and the manner in which any payments on a temporary or permanent global Security will be made; (16) the form of Securities of such series; and (17) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any series issued under this Indenture shall in all respects be equally and ratably entitled to the benefits hereof with respect to such series without preference, priority or distinction on account of actual time or times of authentication and delivery or maturity of the Securities of such series. All Securities of the same series shall be substantially identical except as to denomination and except as may otherwise be provided in (i) an indenture supplemental hereto, (ii) a resolution of the Board of Directors or (iii) a certificate of an officer of the Company authorized pursuant to a resolution of the Board of Directors. 15 SECTION 2.02. Form of Securities and of Trustee's Certificate of Authentication. The Securities of each series, the appurtenant coupons, if any, and the certificates of authentication thereon shall be in substantially the form as shall be established as provided in Section 2.01 with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any law or with any rules made pursuant thereto or with any rules of any securities exchange or as may be determined consistently herewith by the officers executing such Securities and coupons, if any, as evidenced by their execution of the Securities and coupons, if any. The definitive Securities and coupons, if any, shall be printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange, all as determined by the officers executing such Securities and coupons, if any, as evidenced by their execution of such Securities and coupons, if any. The form of Trustee's certificate of authentication shall be as follows: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities issued under the within-mentioned Indenture. as Trustee By ------------------------------ Authorized Signatory SECTION 2.03. Denomination, Authentication and Dating of Securities. The Securities of each series may be issued as Registered Securities or Unregistered Securities, as provided in the terms of such Securities and shall be issuable in the denominations of $1,000 and any integral multiple of $1,000, or such other denominations as authorized as provided in Section 2.01. Each Security shall be dated as of the date of its authentication. 16 At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication. Except as otherwise provided in this Article Two, the Trustee shall thereupon authenticate and deliver said Securities to or upon the written order of the Company, signed by the President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, its Vice President and Treasurer or one of its Assistant Treasurers. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and, subject to Section 8.01, shall be fully protected in relying upon: (a) A copy of the resolution or resolutions of the Board of Directors in or pursuant to which the terms and form of the Securities were established, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect as of the date of such certificate, and if the terms and form of such Securities are established by an Officers' Certificate pursuant to general authorization of the Board of Directors, such Officers' Certificate; (b) an executed supplemental indenture, if any; (c) an Officers' Certificate delivered in accordance with Section 16.07; and (d) an Opinion of Counsel which shall state: (1) that the form of such Securities has been established by a supplemental indenture or by or pursuant to a resolution of the Board of Directors in accordance with Sections 2.01 and 2.02 and in conformity with the provisions of this Indenture; (2) that the terms of such Securities have been established in accordance with Section 2.01 and in conformity with the other provisions of this Indenture; (3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance 17 with their terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors' rights and to general equity principles; and (4) that all laws and requirements in respect of the execution and delivery by the Company of such Securities have been complied with. The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees or vice presidents shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 2.04. Execution of Securities. The Securities, and any coupons appertaining thereto, shall be signed in the name and on behalf of the Company manually or by facsimile by its President and Chief Executive Officer or its Senior Vice President and Chief Financial Officer and by its Vice President and Treasurer, its Secretary or one of its Assistant Secretaries, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed manually by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company; and any Security or coupon may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Securities or coupons, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. 18 SECTION 2.05. Registration, Registration of Transfer and Exchange. The Company shall keep or cause to be kept a register (herein sometimes referred to as the "registry books of the Company") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Registered Securities and the registration of transfers of Registered Securities. Any such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. At all reasonable times the information contained in such register or registers shall be available for inspection by the Trustee at the office or agency to be maintained by the Company as provided in Section 5.02. Upon surrender of any Registered Security of any series for registration of transfer at the office or agency of the Company to be maintained as provided in Section 5.02, the Company shall execute, and the Trustee, upon the written authorization or request of any officer of the Company, shall authenticate and deliver, in the name of the designated transferee or transferees, at the expense of the Company, one or more new Registered Securities of such series of any authorized denominations and of a like aggregate principal amount and Stated Maturity. At the option of the Holder thereof, Securities of a series, whether Registered or Unregistered, which by their terms are registrable as to principal only or as to principal and interest, may be exchanged for Registered Coupon Securities or Fully Registered Securities of such series, as may be issued by the terms thereof. Securities so issued in exchange for other Securities shall be of any authorized denomination and of like principal amount and Stated Maturity and shall be issued upon surrender of the Securities for which they are to be exchanged and, in the case of Coupon Securities, together with all unmatured coupons and all matured coupons in default appertaining thereto, at the office of the Company provided for in Section 5.02 and upon payment, if the Company shall require, of charges provided herein. Whenever any Securities are so surrendered, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making such exchange is entitled to receive. Upon presentation for registration of any Unregistered Security of any series which by its terms is registrable as to principal, at the office or agency of the Company to be maintained as provided in Section 5.02, such Security shall be registered as to principal in the name of the Holder thereof and such 19 registration shall be noted on such Security. Any Security so registered shall be transferable on the registry books of the Company, upon presentation of such Security at such office or agency for similar notation thereon, but such Security may be discharged from registration by being in like manner transferred to bearer, whereupon transferability by delivery shall be restored. Unregistered Securities shall continue to be subject to successive registrations and discharges from registration at the option of the Holders thereof. Unregistered Securities shall be transferable by delivery. Registration of any Coupon Security shall not affect the transferability by delivery of the coupons appertaining thereto which shall continue to be payable to bearer and transferable by delivery. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Registered Security presented or surrendered for registration of transfer or exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company duly executed, by the Holder thereof or his attorney duly authorized in writing. Unless otherwise provided in the Securities to be transferred or exchanged, no service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. The Company shall not be required (i) to issue, register the transfer of or exchange any Securities of any series for a period of 15 days next preceding any selection of Securities of such series to be redeemed, or (ii) to register the transfer or exchange of any Securities so selected for redemption in whole or in part except, in the case of any Security to be redeemed in part, the portion thereof not to be so redeemed. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Securities. In case any temporary or definitive Security or any coupon appurtenant to a Coupon Security shall become mutilated or be destroyed, lost or stolen, the Company 20 in its discretion may execute, and upon written authorization or request of any officer of the Company, the Trustee shall authenticate and deliver, a new Security (in the case of a Coupon Security, with coupons corresponding to the coupons appertaining to the mutilated, destroyed, lost or stolen Security or the Security with respect to which a coupon shall have become mutilated, destroyed, stolen or lost) of the same series and of like tenor and principal amount at Stated Maturity bearing a number not contemporaneously outstanding. In every case the applicant for a substituted Security shall furnish to each of the Company and the Trustee such security or indemnity as may be required by either of them, as the case may be, to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. In every case of mutilation, the applicant shall surrender to the Trustee, the mutilated Security or the Security to which the mutilated coupon appertains, in the case of a Coupon Security, with all coupons (including any mutilated coupons) appertaining thereto. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security or coupon which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security or coupon, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Security or coupon) if the applicant for such payment shall furnish to each of the Company and the Trustee such security or indemnity as may be required by either of them, as the case may be, to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and the Trustee of the destruction, loss or theft of such Security or coupon and of the ownership thereof. Every substituted Security, and in the case of Coupon Securities, its appurtenant coupons, issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any Security or coupon of that series is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security or coupon of that series shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other 21 Securities and coupons of that series duly issue hereunder. All Securities and coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and coupons and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.07. Temporary Securities. Pending the preparation of definitive Securities of any series the Company may execute and the Trustee, upon satisfaction of the provisions of Section 2.03, shall authenticate and deliver printed or lithographed temporary Securities. Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities of that series, but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security of any series shall be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities of that series. Without unreasonable delay, the Company will execute and deliver to the Trustee definitive Securities of that series and thereupon any or all temporary Securities of that series may be surrendered in exchange therefor, at the office or agency of the Company in the Place of Payment for such series, and the Company shall execute and the Trustee shall authenticate and deliver in exchange for such temporary Securities an equal aggregate principal amount at Stated Maturity of definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of that series authenticated and delivered hereunder. Section 2.08. Cancellation of Securities Paid, etc. Securities of any series surrendered for the purpose of payment, redemption, exchange or registration of transfer and all coupons surrendered for payment, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee for cancellation, or, if surrendered to the Trustee, shall be cancelled 22 by it, and no Securities or coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture or of such series of Securities. The Trustee shall destroy or otherwise dispose of, at its discretion, cancelled Securities or coupons and, where applicable, deliver a certificate of such destruction to the Company. If the Company shall acquire any of the Securities or coupons, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or coupons unless and until the same are surrendered to the Trustee for cancellation. Section 2.09. Moneys of Different Currencies to be Segregated. The Trustee shall segregate all moneys, funds and accounts held by the Trustee hereunder in one currency from any money, funds or accounts in any other currencies, notwithstanding any provision herein which would otherwise permit the Trustee to commingle such amounts. Section 2.10. Payment to Be in Proper Currency. The obligation of the Company to make any payment of principal of (and premium, if any) and interest on any Security shall not be discharged or satisfied by any tender by the Company, or recovery by the Trustee, in any currency other than the Required Currency, except to the extent that such tender or recovery shall result in the Trustee timely holding the full amount of the Required Currency then due and payable. If any such tender or recovery is in a currency other than the Required Currency, the Trustee may take such actions as it considers appropriate to exchange such currency for the Required Currency. The costs and risks of any such exchange, including without limitation the risks of delay and exchange rate fluctuation, shall be borne by the Company, and the Company shall remain fully liable for any shortfall or delinquency in the full amount of Required Currency then due and payable, and in no circumstances shall the Trustee be liable therefor. The Company hereby waives any defense of payment based upon any such tender or recovery which is not in the Required Currency, or which, when exchanged for the Required Currency by the Trustee, is less than the full amount of Required Currency then due and payable. Any costs incurred by or on behalf of the Company (other than costs incurred by the Trustee that are passed on to the Company as provided above) in connection with the conversion of Dollars to any Foreign Currency pursuant to an election made by a Holder in accordance with 23 Section 2.11(a) shall be borne by the Holder making such an election through deduction from payments required to be made to such Holder pursuant to the terms of this Indenture. Section 2.11. Payment in Currencies. (a) Payment of the principal of (and premium, if any) and interest on the Securities of any series, whether or not denominated in a Foreign Currency pursuant to Section 2.01(12), shall be made in Dollars, unless the Company specifies another currency or currencies pursuant to Section 2.01(13). If a series of Securities is denominated in a Foreign Currency, the amount receivable in Dollars by the Holders of such series shall be determined as provided in Section 2.11(c). Not later than one Business Day prior to each Interest Payment Date, the Trustee shall inform the Company of the total amount of the interest payments to be made by the Company on such Interest Payment Date and the currencies or currency units in which such interest payments are to be made. The Trustee shall provide monthly to the Company a list of the principal and interest to be paid on Securities of each series maturing in the next succeeding month. (b) If authorized pursuant to Section 2.01(13), any Holder of a Security of a series of Securities denominated in Foreign Currency may elect to receive payments in the Foreign Currency in which such Security is denominated pursuant to Section 2.01(12). A Holder may make such election by delivering to the Trustee: (i) a written notice thereof, substantially in the form attached hereto as Exhibit A or in such other form as may be acceptable to the Trustee, not later than the close of business on the record date immediately preceding the applicable Interest Payment Date or the fifteenth day immediately preceding the Maturity of an installment of principal, as the case may be, and (ii) wire transfer instructions as required by Section 5.02. Such election shall remain in effect with respect to such Holder until such Holder delivers to the Trustee a written notice rescinding such election, provided, however, that any such notice must be delivered to the Trustee not later than the close of business on the record date immediately preceding the next Interest Payment Date or the fifteenth day immediately preceding the Maturity of an installment of principal, as the case may be, in order to be effective for the payment to be made thereon; and provided further that no such recission may be made with respect to payments to be made on any Security with respect to which notice of redemption has been given by the Company pursuant to Article Three. The 24 Trustee shall deliver a copy of each notice received by it under this Section 2.11(b) to the Exchange Rate Agent and the Company as soon as practicable after receipt. Upon request, the Trustee will mail a copy of the form of Exhibit A to any Holder requesting a copy thereof to the address of such Holder set forth in such request. (c) For each series of Securities denominated in a Foreign Currency, the Exchange Rate Agent shall determine the amount receivable by the Holders thereof in Dollars, which amount shall equal the sum obtained by converting the applicable Foreign Currency into Dollars at the Exchange Rate. The applicable Exchange Rate shall be set forth in an Exchange Rate Officer's Certificate. The Exchange Rate Agent shall deliver to the Company and to the Trustee, not later than one Business Day prior to the date each payment is required to be made, a written notice specifying the amount of principal of (and premium, if any) and interest on such series of Securities to be paid on such payment date in Dollars and, if at least one Holder has made the election referred to in subsection (b) above to receive payments in Foreign Currency on a series of Securities denominated in a Foreign Currency, such Foreign Currency, together with a counterpart of the Exchange Rate Officer's Certificate, referred to above. (d)(i) If a Foreign Currency, other than a composite currency, in which the payment of principal of (and premium, if any) and interest on a series of Securities is required to be made is not available to the Company due to the imposition of exchange controls or other circumstances beyond the control of the Company, then with respect to each payment date occurring after the last date on which such Foreign Currency was so used, all payments with respect to the Securities of any such series shall be made in Dollars. If payment is to be made in Dollars to the Holders of any such series of Securities pursuant to the provisions of the preceding sentence, then the amount to be paid in Dollars on a payment date by the Company to the Trustee and by the Trustee or any paying agent to Holders shall be determined by the Exchange Rate Agent and shall be equal to the sum obtained by converting the applicable Foreign Currency into Dollars at the applicable Market Exchange Rate set forth in an Exchange Rate Officer's Certificate. (ii) If the ECU ceases to be used both within the European Monetary System and for the settlement of transactions by public institutions of or 25 within the European Communities or is not available due to circumstances beyond the control of the Company, or if any other composite currency in which the payment of principal of (and premium, if any) and interest on a series of Securities is required to be made ceases to be used for the purposes for which it was established or is not available due to circumstances beyond the control of the Company, then with respect to each payment date (the "Conversion Date") occurring after the last date on which the ECU or such other composite currency was so used, all payments with respect to the Securities of any such series shall be made in Dollars. If payment with respect to Securities of a series is to be made in Dollars pursuant to the provisions of the preceding sentence, then the amount to be paid in Dollars on a payment date by the Company to the Trustee and by the Trustee or any paying agent to Holders shall be determined by the Exchange Rate Agent and shall be equal to the sum of the amounts obtained by converting each Component of such composite currency into Dollars at its respective Market Exchange Rate set forth in an Exchange Rate Officer's Certificate, multiplied by the number of ECU or units of such other composite currency, as appropriate, that would have been so paid had the ECU or such other composite currency, as appropriate, not ceased to be so used. (e) All decisions and determinations of the Exchange Rate Agent regarding the Exchange Rate or conversion of Foreign Currency other than a composite currency into Dollars pursuant to subsection (d)(i) above or the conversion of ECU or any other composite currency into Dollars pursuant to subsection (d)(ii) shall, in the absence of manifest error, be conclusive for all purposes and irrevocably binding upon the Company, the Trustee, any paying agent and all Holders of the Securities. If a Foreign Currency, other than a composite currency, in which payment of the principal of (and premium, if any) and interest on a series of Securities is required pursuant to subsection (a) above, is not available to the Company for making payments thereof due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company, after learning thereof, will give notice thereof to the Trustee immediately (and the Trustee promptly thereafter will give notice to the Holders in the manner provided in Section 16.05) specifying the last date on which such Foreign Currency was used for the payment of principal of (and premium, if any) or interest on such series of Securities. In the event the ECU ceases to be used both within the European Monetary System and for the settlement of 26 transactions by public institutions of or within the European Communities or is not available due to circumstances beyond the control of the Company, or any other composite currency in which the principal of (and premium, if any) and interest on a series of Securities is required ceases to be used for the purposes for which it was established or is not available due to circumstances beyond the control of the Company, the Company, after learning thereof, will give notice thereof to the Trustee immediately (and the Trustee promptly thereafter will give notice to the Holders in the manner provided in Section 16.05). In the event of any subsequent change in any Component, the Company, after learning thereof, will give notice to the Trustee similarly (and the Trustee promptly thereafter will give notice to the Holders in the manner provided in Section 16.05). The Trustee shall be fully justified and protected in relying and acting upon the information so received by it from the Company and shall not otherwise have any duty or obligation to determine such information independently. ARTICLE THREE. Redemption of Securities. Section 3.01. Applicability of Article. The Company may reserve the right to redeem and pay, prior to Stated Maturity, all or any part of the Securities of any series, either by optional redemption, sinking fund or otherwise, by provision therefor in the Security for such series established pursuant to Sections 2.01 and 2.02. Redemption of Securities of any series shall be made in accordance with the terms of such Securities and, to the extent that this Article does not conflict with such terms, in accordance with this Article. Section 3.02. Notice of Redemption; Selection of Securities. In case the Company shall desire to exercise the right to redeem all or any part of the Securities of a series in accordance with their terms, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to each Holder of a Registered Security to be redeemed as a whole or in part at his address as the same appear on the registry books of the Company and, if Unregistered Securities are to be redeemed, shall publish a notice of redemption at least 30 and not more than 60 days prior to the date fixed for redemption in an 27 Authorized Newspaper in the Place of Payment. If mailed in the manner herein provided, the notice shall be conclusively presumed to have been duly given, whether or not any such Holder receives such notice. Any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. Each such notice of redemption shall specify the date fixed for redemption, the redemption price, the place where such Securities are to be surrendered for payment of the redemption price, which shall be the office or agency of the Company in each Place of Payment, that payment will be made upon presentation and surrender of such Securities and all coupons appertaining thereto, if any, that accrued interest, if any, to the redemption date will be paid as specified in said notice, and that on and after said date, interest thereon or on the portions thereof to be redeemed will cease to accrue. In case the redemption is on account of a sinking fund, said notice shall so specify. If less than all the outstanding Securities of a series are to be redeemed, the notice of redemption shall specify the numbers of the Securities of that series to be redeemed. In case any Security of a series is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities of that series in the principal amount and Stated Maturity equal to the unredeemed portion thereof will be issued. If fewer than all the Securities of a series are to be redeemed, the Company shall give the Trustee notice not less than 60 days prior to the redemption date as to the aggregate principal amount at Stated Maturity of Securities to be redeemed, and the Trustee shall select from the Securities outstanding in such manner as in its sole discretion it shall deem appropriate and fair, the Securities of that series or portions thereof to be redeemed. Securities of a series may be redeemed in part only in multiples of $1,000, except as otherwise set forth in the form of Security to be redeemed. Any notice of redemption to be mailed by the Company pursuant to this Section 3.02 may be mailed, at the Company's direction, by the Trustee in the name and at the expense of the Company. Section 3.03. Payment of Securities Called for Redemption. If notice of redemption has been mailed or published, as the case may be as above 28 provided, the Securities or portions of Securities of a series with respect to which such notice has been mailed or published shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price, together with accrued interest to the redemption date and on and after said date (unless the Company shall default in the payment of such Securities at the applicable redemption price, together with accrued interest, if any, to said date) any interest on the Securities or portions of Securities of any series so called for redemption shall cease to accrue, and such Securities and portions of Securities of any series shall be deemed not to be outstanding hereunder and shall not be entitled to any benefit under this Indenture except to receive payment of the redemption price, together with accrued interest, if any, to the date fixed for redemption. On or before the Business day preceding the redemption date specified in the notice of redemption, the Company shall deposit with the Trustee or with one or more paying agents an amount of money, in immediately available funds, sufficient to redeem on the redemption date all the Securities so called for redemption at the applicable redemption price, together with accrued interest, if any, to the date fixed for redemption. On presentation and surrender of such Securities at the Place of Payment, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with accrued interest, if any, to the date fixed for redemption. Upon presentation of any Security redeemed in part only, the Company shall execute and the trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of such series, of authorized denominations in aggregate principal amount and Stated Maturity equal to the unredeemed portion of the Security so presented. ARTICLE FOUR. Sinking Funds. Section 4.01. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of series except as otherwise specified as contemplated by Section 2.01 for Securities of such series. 29 The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment." Section 4.02. Satisfaction of Mandatory Sinking Fund Payments with Securities. In lieu of making all or any part of any mandatory sinking fund payment with respect to any Securities of a series in cash, the Company may at its option (a) deliver to the Trustee Securities of that series theretofore purchased or otherwise acquired by the Company, or (b) receive credit for the principal amount of Securities of that series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the redemption price specified in such Securities for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly. Section 4.03. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for any series of Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 4.02, which Securities will accompany such certificate, if not theretofore delivered, and whether the Company intends to exercise its right to make a permitted optional sinking fund payment with respect to such series. Such certificate shall also state that no Event of Default with respect to such series has occurred and is continuing. Any mandatory or optional sinking fund payment or payments made in cash plus any unused balance of any preceding sinking fund payments made in cash which shall equal or exceed $50,000 or an equivalent amount, if applicable, in a Foreign Currency (or a lesser sum if the Company shall so request) with respect to Securities of any particular series shall be applied by 30 the Trustee on the sinking fund payment date on which such payment is made (or, if such payment is made prior to a sinking fund payment date, on the sinking fund payment date following the date of such payment) to the redemption of such Securities at the redemption price specified in such Securities for operation of the sinking fund together with accrued interest to the date fixed for redemption. Any sinking fund moneys not so applied or allocated by the Trustee to the redemption of Securities shall be added to the next cash sinking fund payment received by the Trustee for such series and, together with such payment, shall be applied in accordance with the provisions of this Section 4.03. Any and all sinking fund moneys with respect to the Securities of any particular series held by the Trustee on the last sinking fund payment date with respect to such Securities, and not held for the payment or redemption of particular Securities, shall be applied by the Trustee, to the payment of the principal of the Securities of that series at maturity. The Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in the penultimate paragraph of Section 3.02 and the Company shall cause notice of the redemption thereof to be given in the manner provided in section 3.02. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Section 3.03. On each sinking fund payment dte, the Company shall pay to the Trustee in immediately available funds a sum equal to all accrued interest to the date fixed for redemption on Securities to be redeemed on such sinking fund payment date pursuant to this Section 4.03. The Trustee shall not redeem any Securities of a series with sinking fund moneys or mail or publish any notice of redemption of such Securities by operation of the sinking fund for such series during the continuance of a default in payment of interest on such Securities or of any Event of Default (other than an Event of Default occurring as a consequence of this paragraph), except that if the notice of redemption of any such Securities shall theretofore have been mailed or published in accordance with the provisions hereof, the Trustee shall redeem Securities if cash sufficient for that purpose shall be deposited with the Trustee for that purpose in accordance with the terms of this Article Four. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default 31 or Event of Default shall occur and any moneys thereafter paid into such sinking fund shall, during the continuance of such default or Event of Default, be held as security for the payment of all Securities of such series; provided, however, that in case such default or Event or Default shall have been cured or waived as provided herein, such moneys shall thereafter be applied on the next sinking fund payment date for such Securities on which such moneys may be applied pursuant to the provisions of this Section 4.03. ARTICLE FIVE Particular Covenants of the Company. Section 5.01. Payment of Principal, Premium and Interest. The Company shall duly and punctually pay or cause to be paid the principal of and premium, if any, and interest, if any, on the Securities of each series in the Required Currency in accordance with the terms thereof and this Indenture and shall comply with all other forms, agreements and conditions contained in or made in this Indenture for the benefit of such Securities. Section 5.02. Offices for Notices and Payments, etc. So long as any Securities of a series remain outstanding, the Company shall maintain in each Place of Payment for such series of Securities an office or agency where the Securities of that series may be presented for payment, for registration of transfer and for exchange as provided in this Indenture and where notices and demands to or upon the Company in respect of the Securities of that series or of this Indenture may be served. The Company shall give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made at the Principal Office of the Trustee (or at any other address previously furnished in writing to the Company by the Trustee) and notices may be served at the Principal Office of the Trustee. Unless otherwise provided pursuant to Section 2.01, the Company hereby initially designates as the Place of Payment for each series of Securities, the Borough of Manhattan, The City of New York, and initially appoints the Trustee its agent for payment, for registration of transfers, for exchange of the Securities and where notices and demands may be served upon the Company. 32 Notwithstanding any other provisions to the contrary, the Company at its option may make payment of principal, premium (if any) and interest with respect to Registered Securities by check mailed to the address of the Person entitled thereto, as such address appears on the registry books of the Company; provided, however, that in the case of a Registered Security issued between a record date and the initial Interest Payment Date relating to such record date, interest for the period beginning on the Original Issue Date and ending on such initial Interest Payment Date shall be paid on such initial Interest Payment Date to the person to whom such Registered Security shall have been originally issued. Notwithstanding the foregoing, a holder of U.S. $10,000,000 or more in aggregate principal amount of Registered Securities (or a holder of the equivalent thereof in a Foreign Currency) shall be entitled to receive such payments in Dollars by wire transfer of immediately available funds, but only if appropriate wire transfer instructions have been received in writing by the Trustee not less than fifteen days prior to the applicable Interest Payment Date. Simultaneously with the election by any holder to receive payments in a Foreign Currency as provided in Section 2.11, such holder shall provide appropriate wire transfer instructions to the Trustee, and all such payments will be made by wire transfer of immediately available funds to an account maintained by the payee with a bank located outside the United States. Section 5.03. Limitation on Liens. Nothing in this Indenture or in the Securities shall in any way restrict or prevent the Company or any Subsidiary from incurring any indebtedness; provided, however, that neither the Company nor any Restricted Subsidiary shall issue, assume or guarantee, any notes, bonds, debentures or other similar evidences of indebtedness for money borrowed (notes, bonds, debentures or other similar evidences of indebtedness for money borrowed being hereinafter in this Article Five called "Debt") secured by mortgage, lien, pledge or other encumbrance (mortgages, liens, pledges or other encumbrances being hereinafter in this Article Five called "Mortgages") upon any Restricted Property, without effectively providing that the Securities of each series then outstanding and thereafter created (together with, if the Company so determines, any other indebtedness or obligation then existing and any other indebtedness or obligation thereafter created ranking equally with the Securities then existing or thereafter created which is not subordinated to the Securities of each series) shall be secured equally and ratably with (or prior to) such 33 Debt so long as such Debt shall be so secured, except that the foregoing provisions shall not apply to: (a) Mortgages affecting property of a corporation existing at the time it becomes a Subsidiary or at the time it is merged into or consolidated with the Company or a Subsidiary; (b) Mortgages on property existing at the time of acquisition thereof or incurred to secure payment of all or part of the purchase price thereof or to secure Debt incurred prior to, at the time of or within 24 months after acquisition thereof for the purpose of financing all or part of the purchase price thereof; (c) Mortgages on any property to secure all or part of the cost of construction or improvements thereon or Debt incurred to provide funds for any such purpose in a principal amount not exceeding the cost of such construction or improvements; (d) Mortgages which secure only an indebtedness owing by a Subsidiary to the Company or a Subsidiary; (e) Mortgages in favor of the United States or any state thereof, or any department, agency, instrumentality, or political subdivision of any such jurisdiction, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or cost of constructing or improving the property subject thereto, including, without limitation, Mortgages to secure Debt of the pollution control or industrial revenue bond type; or (f) Mortgages required by any contract or statute in order to permit the Company or a Subsidiary to perform any contract or subcontract made by it with or at the request of the United States of America, any state or any department, agency or instrumentality or political subdivision of either; (g) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (a) to (f) inclusive or of any Debt secured thereby, provided that the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement 34 Mortgage shall be limited to all or part of substantially the same property which secured the Mortgage extended, renewed or replaced (plus improvements on such property). Notwithstanding the foregoing provisions of this Section 5.03, the Company and any one or more Restricted Subsidiaries may issue, assume or guarantee Debt secured by Mortgages which would otherwise be subject to the foregoing restrictions in an aggregate principal amount which, together with the aggregate outstanding principal amount of all other Debt of the Company and its Restricted Subsidiaries which would otherwise be subject to the foregoing restrictions (not including Debt permitted to be secured under clauses (a) to (g) inclusive above) and the aggregate Value, as defined in Section 5.05, of the Sale and Lease-Back Transactions, as defined in Section 5.04, in existence at such time (not including Sale and Lease-Back Transactions as to which the Company has complied with Section 5.04(b)), does not at any one time exceed 10% of the Consolidated Net Tangible Assets of the Company and its consolidated Subsidiaries. Section 5.04. Limitation on Sale and Lease-Back. Neither the Company nor any Restricted Subsidiary shall enter into any arrangement with any Person (other than the Company or a Subsidiary), or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary for a period of more than three years of any Restricted Property which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person (other than the Company or a Subsidiary), to which funds have been or are to be advanced by such Person on the security of the leased property (in this Article Five called "Sale and Lease-Back Transactions") unless either: (a) the Company or such Restricted Subsidiary would be entitled, pursuant to the provisions of Section 5.03, to incur Debt in a principal amount equal to or exceeding the Value of such Sale and Lease-Back Transaction, secured by a Mortgage on the property to be leased, without equally and ratably securing the Securities; or (b) the Company (and in any such case the Company covenants and agrees that it will do so) during or immediately after the expiration of four months after the effective date of such Sale and Lease-Back Transaction (whether made by the Company or a Restricted Subsidiary) applies to the voluntary retirement of indebtedness of the Company (including Securities, 35 provided that Securities may only be redeemed at the redemption prices and in accordance with the other provisions of the form thereof), maturing by the terms thereof more than one year after the original creation thereof and ranking at least pari passu with the Securities (hereinafter in this Section called "Funded Debt") an amount equal to the Value of such Sale and Lease-Back Transaction, less the principal amount of Securities delivered, within four months after the effective date of such arrangement, to the Trustee for retirement and cancellation and the principal amount of other Funded Debt voluntarily retired by the Company within such four-month period, excluding retirements of Securities and other Funded Debt as a result of conversions or pursuant to mandatory sinking fund or prepayment provisions or by payment at maturity. SECTION 5.05. Definition of "Value." For purposes of Sections 5.03 and 5.04, the term "Value" shall mean, with respect to a Sale and Lease-Back Transaction, as of any particular time, the amount equal to the greater of (1) the net proceeds of the sale or transfer of the property leased pursuant to such Sale and Lease-Back Transaction or (2) the fair value, in the opinion of the Board of Directors, of such property at the time of entering into such Sale and Lease-Back Transaction, in either case divided first by the number of full years of the term of the lease and then multiplied by the number of full years of such term remaining at the time of determination, without regard to any renewal or extension options contained in the lease. SECTION 5.06. Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee for any one or more series of Securities, shall appoint a Trustee, in the manner provided in Section 8.10 so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 5.07. Provision as to Paying Agent. (a) If the Company appoints a paying agent other than the Trustee with respect to the Securities of any series, it shall cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.07: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Securities of such series (whether such sums have been paid to it by the Company or by 36 any other obligor on the Securities of such series) in trust for the benefit of the Holders of the Securities of such series; and (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Securities of such series) to make any payment of the principal of and premium, if any, or interest, if any, on the Securities of such series when the same shall be due and payable. (b) If the Company acts as its own paying agent with respect to the Securities of any series it shall, on or prior to each due date of the principal of and premium, if any, or interest, if any, on any of the Securities of such series, set aside, segregate and hold in trust for the benefit of the Holders of such Securities or the coupons appertaining thereto, as the case may be, a sum sufficient to pay such principal and premium, if any, or interest, if any, so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under such Securities) to make any payment of the principal of and premium, if any, or interest, if any, on such Securities when the same shall become due and payable. (c) Whenever the Company has one or more paying agents with respect to the Securities of any series, it shall deposit with a paying agent (who shall make any necessary funds available to any other paying agents), on the Business Day next preceding each due date in funds available on the due date of the principal of, premium, if any, and interest, if any, on such Securities, a sum in immediately available funds sufficient to pay such principal, premium, if any, and interest, if any, so becoming due, such sum to be held in trust for the benefit of the Holders of such Securities or the coupons appertaining thereto, as the case may be, entitled to any such principal, premium and interest, and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee of its action or failure so to act. (d) Anything in this Section 5.07 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or any paying agent hereunder, as required by this Section 5.07, such sums to be held by the Trustee upon the trusts herein contained. 37 (e) Anything in this Section 5.07 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.07 is subject to Sections 13.03 and 13.04. SECTION 5.08. Annual Certificate to Trustee. The Company shall deliver to the Trustee on or before September 1 in each year during which any Securities are outstanding hereunder (beginning with respect to Securities of each series with the September 1 next following the issue date of any series of Securities) an Officers' Certificate stating that in the course of the performance by the signers of their duties as officers of the Company and based upon a review made under their supervision of the activities of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained in Sections 5.03, 5.04, 12.01 or 12.02, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof. ARTICLE SIX. HOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 6.01. Holders Lists. The Company shall furnish or cause to be furnished to the Trustee, with respect to the Registered Securities of each series (i) semi-annually, not later than each Interest Payment Date for such series and on dates to be determined pursuant to Section 2.01 for non-interest bearing Securities in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders, as of the respective record dates therefor, and on dates to be determined pursuant to Section 2.01 for non-interest bearing Securities, and (ii) at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request, a list in such form as the Trustee may reasonably require of the names and addresses of the Holders as of a date not more than 15 days prior to the time such information is furnished; provided, however, that so long as the Trustee shall be the registrar of a series of Securities all of which are Registered Securities, such list shall not be required to be furnished in respect of that series. SECTION 6.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all 38 information as to the names and addresses of the Holders of Registered Securities of any series contained in the most recent list furnished to it as provided in Section 6.01 or received by the Trustee in its capacity as Securities registrar. The Trustee may destroy any list furnished to it as provided in Section 6.01 upon receipt of a new list so furnished. (b) In case three or more Holders of Securities of the same series (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security of such series for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Securities of such series or with Holders of Securities of all series with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit for such purpose, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.02, or (2) inform such applicants as to the approximate number of Holders of Securities of such series or of all series, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.02 and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder of a Security of such series or of all series, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 6.02, a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, together with a copy of the material 39 to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the Holders of Securities of such series or of all series, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise, the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each Holder of any Security or coupon or both, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of the name and address of such Holder in accordance with the provisions of subsection (b) of this Section 6.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 6.03. Reports by the Company. (a) The Company shall file with the Trustee, within 15 days after the Company is required to file the same with the Securities and Exchange Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as said Commission may from time to time by rules and regulations prescribe) relating to the equity or debt securities of the Company which the Company may be required to file with said Commission pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and said Commission, in accordance with rules and regulations prescribed from time to time by said Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. 40 (b) The Company shall file with the Trustee and the Securities and Exchange Commission, in accordance with the rules and regulations prescribed from time to time by said Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company shall transmit by mail to each Holder of Securities, in the manner and to the extent provided in Section 6.04, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 6.03 as may be required by rules and regulations prescribed from time to time by the Securities and Exchange Commission. SECTION 6.04. Reports by the Trustee. (a) On or before December 15 in every year after the first series of Securities is issued hereunder, so long as any Securities are outstanding hereunder, the Trustee shall transmit to the Holders, as hereinafter in this Section 6.04 provided, a brief report dated as of the preceding October 15 with respect to: (1) its eligibility under Section 8.09 and its qualification under Section 8.08 or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under such Sections, a written statement to such effect; (2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to state such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount at Stated Maturity of the Securities outstanding on the date of such report; (3) the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising 41 in any manner described in paragraphs (2), (3), (4) or (6) of subsection (b) of Section 8.13; (4) the property and funds, if any, physically in the possession of the Trustee, as such, on the date of such report; (5) any additional issue of Securities which the Trustee has not previously reported; and (6) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects any of the Securities, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 7.08. (b) The Trustee shall transmit to the Holders, as hereinafter provided, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such), since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section 6.04 (or, if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Securities, on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Securities at Stated Maturity outstanding at such time, such report to be transmitted within 90 days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (1) to all Registered Holders of Securities, as the names and addresses of such Holders appear in the registry books of the Company; (2) to such Holders of Securities as have, within two years preceding such transmission, filed their names and addresses with the Trustee for that purpose; and (3) except in the case of reports pursuant to subsection (b) of this Section, to each Holder whose name and address is preserved at the time by the Trustee, as provided in Section 6.02. 42 (d) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed and also with the Securities and Exchange Commission. The Company shall notify the Trustee when any Securities are listed on any stock exchange. ARTICLE SEVEN. Remedies of the Trustee and Holders on Event of Default. Section 7.01. Events of Default. "Event of Default," whenever used herein with respect to Securities of any series means each one of the following events unless it is either inapplicable to a particular series or it is specifically deleted or modified in the supplemental indenture under which such series of Securities is issued, if any, or in the form of Security for such series: (a) default in the payment of any installment of interest upon any Security of that series when the same becomes due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of the principal of or premium, if any, on any Securities of that series as and when the same shall become due and payable either at Maturity, upon redemption, by declaration or otherwise; or (c) default in the payment of any sinking fund installment or analogous obligation as and when the same shall become due and payable by the terms of that series, and continuance of such default for a period of 30 days; or (d) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Securities of such series or in this Indenture (other than a covenant or agreement in respect of the Securities of such series a default in the performance of which or the breach of which is elsewhere in this Section 7.01 specifically provided for or which has expressly been included in this Indenture solely for the benefit of one or more series of Securities other than such series), and continuance of such default or breach for a period of 90 43 days after the date on which written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount at Stated Maturity of the Securities of that series at the time outstanding; or (e) if there shall be entered a decree or order by a court having jurisdiction for relief in respect of the Company under any applicable Federal or State bankruptcy law or other similar law, or appointing a receiver, trustee or liquidator, or other similar official of the Company or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; or (f) if the Company shall file a petition or an answer or consent seeking relief under any applicable Federal or State bankruptcy law or other similar law, or shall consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking possession by a receiver, trustee, custodian or other similar official of the Company or of any substantial part of its property, or the Company shall make an assignment for the benefit of creditors generally or shall admit in writing to its inability to pay its debts generally as they become due; or (g) any other event provided in the form of Security for such series, or in the supplemental indenture, Officers' Certificate or resolution of the Board of Directors under which such series of Securities is issued, if any. If an Event of Default described in clauses (a), (b), (c) or (g) with respect to Securities of any series at the time outstanding occurs and is continuing, then and in each and every such case, unless the principal of all the Securities of such series shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount at Stated Maturity of the Securities of such series then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Holders), may declare the principal amount (in the case of Securities that are Original Issue Discount Securities, such principal amount as may be determined in accordance with the terms of that series) of all the Securities of such series to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and 44 payable, anything in this Indenture or in the Securities of such series contained to the contrary notwithstanding. If an Event of Default described in clauses (d), (e) or (f) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount at Stated Maturity of all the Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Holders), may declare the principal amount (or, if any Securities are Original Issue Discount Securities, such portion of the principal amount as may be determined in accordance with the terms of that series) of all the Securities to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Securities contained to the contrary notwithstanding. The foregoing provisions are, however, subject to the condition that if, at any time after the principal amount (in the case of Securities that are Original Issue Discount Securities, such portion of the principal amount as may be determined in accordance with the terms of that series) of the Securities of any series or of all the Securities, as the case may be, shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series or of all of the Securities, as the case may be, and the principal of and premium, if any, on all Securities of such series or of all the Securities, as the case may be, which shall have become due otherwise than by acceleration (with interest on overdue installments of interest, to the extent that payment of such interest is enforceable under applicable law, and on such principal and premium, if any, at the rate of interest or yield to Maturity (in the case of Original Issue Discount Securities) borne by the Securities of such series or at the rates of interest or yields to Maturity of all the Securities, as the case may be, to the date of such payment or deposit) and all sums paid or advanced by the Trustee hereunder, and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any and all defaults under this Indenture, other than the nonpayment of principal of or premium, if any, or accrued interest, if any, on Securities of such series or of all of the Securities, as the case may be, which shall have become due by acceleration, shall have been remedied--then and in every such case the Holders of a 45 majority in aggregate principal amount at Stated Maturity of the Securities of such series or of all of the Securities, as the case may be, then outstanding, by written notice to the Company and to the Trustee, may waive all defaults with respect to that series or of all of the Securities, as the case may be, and rescind and annul such declaration and its consequences; but no waiver or rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceeding had been taken. Section 7.02. Payment of Securities on Default; Suit Therefor. In case (1) default shall be made in the payment of any installment of interest upon any Security of any series as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (2) default shall be made in the payment of the principal of or premium, if any, on any Security of any series as and when the same shall have become due and payable, whether at Maturity of Securities of that series or otherwise, or (3) default is made in the making or satisfaction of any sinking fund payment or analogous obligation when the same becomes due by the terms of the Securities of any series and such default shall continue for a period of 30 days--then, upon demand of the Trustee, the Company shall pay to the Trustee, for the benefit of the Holder of any such Security, the whole amount that then shall have become due and payable on any such Security for principal and premium, if any, or interest, if any, or both, as the case may be, with interest on the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on the overdue installments of interest at the rate of interest or yield to Maturity (in the case of Original Issue Discount Securities) borne by any such Security and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. 46 In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property, wherever situated, of the Company or any other obligor upon such Securities. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Securities of any series under any Federal or State bankruptcy law or other similar law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Securities of any series, or to the creditors or property of the Company or such other obligor, the Trustee (irrespective of whether the principal of any Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.02) shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and premium, if any, and interest, if any, owing and unpaid in respect of the Securities of any series (in the case of Securities that are Original Issue Discount Securities, such principal amount as would be then due and payable upon declaration of acceleration in accordance with the terms of that series) and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents or counsel) and of the Holders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities of any series, its or their creditors, or its or their property, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee, liquidator, sequestrator or trustee in 47 bankruptcy or reorganization is hereby authorized by each of the Holders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for compensation, expenses, disbursements and advances of the Trustee, its agents or counsel, and any other amounts due to the Trustee under Section 8.06 hereof. Nothing herein contained shall be deemed to authorize the Trustee to approve, consent, accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment, or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee with respect to the Securities of any series shall be brought in its own name as trustee of an express trust, and any recovery of judgement shall be for the ratable benefit of the Holders of the Securities in respect of which such action is taken. Section 7.03. Application of Moneys Collected by Trustee. Any moneys collected by the Trustee with respect to any series of Securities under this Article Seven shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys on account of principal, premium, if any, or interest, if any, upon presentation of the several Securities of such series or the coupons appertaining thereto, as the case may be, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of all amounts due the Trustee under Section 8.06 hereof; Second: In case the principal of the outstanding Securities of that series shall not have become due and be unpaid, to the payment of interest on the Securities of that series, in the order of the maturity of the installments of such interest with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate of interest (or yield to maturity in the 48 case of Original Issue Discount Securities) borne by the Securities of that series, such payments to be made ratably to the Persons entitled thereto; Third: In case the principal of the outstanding Securities of a series in respect of which such moneys have been collected shall have become due and payable, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Securities of that series for principal and premium, if any, and interest, if any, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon any overdue installments of interest at the rate of interest (or yield to Maturity in the case of Original Issue Discount Securities) borne by the Securities of that series, and in case such moneys shall be insufficient to pay in full the whole amounts so due and unpaid upon the Securities of that series, then to the payment of such principal and premium, if any, and interest, if any, without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or of any Security of that series over any other Security of that series, ratably to the aggregate of such principal and premium, if any, and any accrued and unpaid interest. The Holders of each series of Securities of which the Required Currency is a Foreign Currency shall be entitled to receive a ratable portion of the amount determined by the Exchange Rate Agent by converting the principal amount outstanding of such series of Securities in the Foreign Currency in which payments with respect to such series of Securities are required into Dollars at the Exchange Rate as of the date of declaration of acceleration of the Maturity of the Securities (or, if there is no such rate on such date for the reasons specified in Section 2.11(d), such rate on the date specified in such Section). Fourth: Any surplus then remaining shall be paid to the Company or to such other Person as shall be entitled to receive it. Section 7.04. Proceedings by Holders. No Holder of any Security of any series or of any coupon appertaining thereto shall have any right by virtue of or availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to 49 this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of not less than 25% in aggregate principal amount at Stated Maturity of the Securities of that series (or, in case of an Event of Default described in clause (d), (e) or (f) of Section 7.01, 25% in aggregate principal amount of all Securities then outstanding (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in Section 2.01(9))) shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as the Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee during such 60 day period by the Holders of a majority in principal amount at Stated Maturity of the outstanding Securities of such series, it being understood and intended, and being expressly covenanted by the Holder of every Security of that series with every other Holder of every Security of that series or coupons appertaining thereto and the Trustee, that no one or more Holders of Securities of any series shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder of Securities of that series or any other series or coupons appertaining thereto, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities. Notwithstanding any other provisions in this Indenture, however, the right of any Holder of any Security or coupon to receive payment of the principal of, and premium, if any, and interest, if any, on such Security, on or after the respective Stated Maturities expressed in such Security or, in the case of redemption or repayment on or after the redemption date or repayment date, as the case may be, and to institute suit for the enforcement of any such payment on or after such respective date shall not be impaired or affected without the consent of such Holder. 50 SECTION 7.05. Proceedings by Trustee. In case of an Event of Default hereunder, the Trustee, in its discretion, may proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 7.06. Remedies Cumulative and Continuing. All powers and remedies given by this Article Seven to the Trustee or to the Holders of Securities or coupons shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or such Holders, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any Holder to exercise any right or power accruing upon any default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 7.04, every power and remedy given by this Article Seven or by law to the Trustee or to the Holders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Holders. SECTION 7.07. Direction of Proceedings and Waiver of Defaults by Majority of Holders. The Holders of a majority in aggregate principal amount of the Securities of all series affected (voting as one class) (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in Section 2.01(9)) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that such direction shall not conflict with any rule of law or this Indenture, and provided further, that (subject to the provisions of Section 8.01) the Trustee may take any action deemed proper by the Trustee which is not inconsistent with such direction and the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee 51 in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities of a particular series (or all of the Securities as the case may be), the Holders of a majority in aggregate principal amount at Stated Maturity of the Securities of that series at the time outstanding may on behalf of the Holders of all the Securities of that series waive any past default or Event of Default described in clause (a), (b), (c) or (g) of Section 7.01 (or, in the case of an event specified in clause (d), (e) or (f) of Section 7.01, the Holders of an aggregate principal amount of all the Securities then outstanding (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in Section 2.01(9))) may waive such default or Event of Default as its consequences except (1) a default in the payment of interest, if any, or premium, if any, on, or the principal of, any of the Securities or in the payment of any sinking fund installment or analogous obligation with respect to Securities or (2) in respect of a covenant or provision hereof which under Article Eleven cannot be modified or amended without the consent of the Holder of each Security outstanding of the series affected. Upon any such waiver the Company, the Trustee and the Holders of Securities of that series (or all of the Securities, as the case may be) shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.07, said default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 7.08. Notice of Defaults. The Trustee shall, within 90 days after the occurrence of any default hereunder with respect to Securities of any series, mail to all Holders of Securities of that series in the manner and to the extent provided in Section 6.04(c) notice of such default known to the Trustee, unless such default shall have been cured prior to the giving of such notice; provided, however, that, except in the case of default in the payment of the principal of or premium, if any, or interest, if any, on any of the Securities of that series or in the making of any sinking fund payment or analogous obligation with respect to Securities of that series, the Trustee 52 shall be protected in withholding such notice if and so long as the board of directors or trustees, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of Securities of such series; and provided, further, that in the case of any default of the character specified in Section 7.01(d) with respect to Securities of such series, no such notice to Holders of Securities of such series shall be given until at least 90 days after the occurrence thereof. For the purpose of this Section, the term "default," with respect to Securities of any series, means any event which is, or after notice or lapse of time, or both, would become, an Event of Default with respect to Securities of such series. SECTION 7.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 7.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder or group of Holders, holding in the aggregate more than 10% in principal amount at Stated Maturity of the Securities outstanding of that series (or, in case of any suit relating to or arising under clause (d), (e) or (f) of Section 7.01, 10% in principal amount of all Securities outstanding (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in the definition of "Securities")) or to any suit instituted by any Holder for the enforcement of the payment of the principal of or premium, if any, or interest, if any, on any Security on or after the respective Stated Maturities expressed in such Securities (or in the case of redemption or repayment on or after the redemption date or repayment date). SECTION 7.10. Judgment Currency. If for the purpose of obtaining a judgment in any court with respect to any obligation of the Company hereunder or under any Security, it shall become necessary to convert into any other currency or currency unit (the "Judgment Currency") any amount 53 in the currency or currency unit due hereunder or under such Security (the "Contract Currency"), then such conversion shall be made at the Conversion Rate as in effect on the date the Company shall make payment to any person in satisfaction of such judgment. If pursuant to any such judgment, conversion shall be made on a date other than the date payment is made and there shall occur a change between such Conversion Rate and the Conversion Rate as in effect on the date of payment, the Company agrees to pay such additional amounts (if any) as may be necessary to ensure that the amount paid is the amount in the Judgment Currency which, when converted at the Conversion Rate as in effect on the date of payment, is equivalent to the amount then due hereunder or under such Security in the Contract Currency. Any amount due from the Company under this Section 7.10 shall be due as a separate debt and is not to be affected by or merged into any judgment being obtained for any other sums due hereunder or in respect of any Security. In no event, however, shall the Company be required to pay more in the Contract Currency at the Conversion Rate as in effect when payment is made than the amount stated to be due hereunder or under such Security so that in any event the Company's obligations hereunder or under such Security will be effectively maintained as obligations in the Contract Currency. For purposes of this Section 7.10, "Conversion Rate" shall mean the rate determined by the Exchange Rate Agent equal to the arithmetic average of the highest firm bid quotations in the Contract Currency received by the Exchange Rate Agent at approximately 11:00 a.m., New York City time, on the second Business Day preceding the applicable payment date (or, if no such rate is quoted on such date, the last date on which such rate was quoted), from three recognized foreign exchange dealers in New York City selected by the Exchange Rate Agent and approved by the Company (one of which may be the Exchange Rate Agent) for the purchase by the quoting dealer, for settlement on such payment date, of the aggregate amount of the Judgment Currency payable on such payment date. ARTICLE EIGHT. CONCERNING THE TRUSTEE. SECTION 8.01. Duties and Responsibilities of Trustee. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to 54 the occurrence of an Event of Default with respect to the Securities of that series and after the curing of all Events of Default which may have occurred with respect to the Securities of that series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations with respect to such series shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Securities of any series has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture with respect to that series and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. Prior to the occurrence of an Event of Default with respect to the Securities of a series, and after the curing or waiving of all Events of Default with respect to that series which may have occurred and in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts, and (b) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders pursuant to Section 7.07 of any series relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. 55 None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it has reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 8.01. SECTION 8.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 8.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a written statement signed in the name of the Company by the President and Chief Executive Officer, one of its Vice Presidents or its Treasurer (unless other evidence in respect thereof is herein specifically prescribed); and any resolution of the Board of Directors shall be sufficiently evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) Whenever in the administration of the Indenture, the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically provided) may, in the absence of bad faith on its part, rely on an Officer's Certificate; (d) the Trustee may consult with its counsel or require an Opinion of Counsel and any such advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; 56 (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders, pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (f) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (g) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the Holders of not less than a majority in principal amount at Stated Maturity of the Securities then outstanding of any series affected or of all the Securities, as the case may be; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (h) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 8.03. No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of any of the Securities or coupons; provided, however, that the Trustee shall not be relieved of its duty to authenticate Securities as authorized by this Indenture. The Trustee shall not be accountable for the use or application 57 by the Company of any Securities or the proceeds of any Securities authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. Section 8.04. Trustee, Paying Agent or Registrar May Own Securities. The Trustee or any paying agent or Security registrar or any other agent of the Company or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or the coupons appertaining thereto with the same rights it would have if it were not Trustee, paying agent or Security registrar. Section 8.05. Moneys to be Held in Trust. Subject to the provisions of Section 13.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. Section 8.06. Compensation and Expenses of Trustee. The Company shall pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company shall pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct. The Company shall indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability arising in connection with its duties under this Indenture. The obligations of the Company under this Section 8.06 to compensate the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute addtional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and 58 funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities. SECTION 8.07. Officers' Certificate as Evidence. Except as otherwise provided in Section 8.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 8.08. Conflicting Interest of Trustee. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section 8.08, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign in the manner and with the effect specified in Section 8.10. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section 8.08, the Trustee shall, within 10 days after the expiration of such 90 day period, transmit notice of such failure to all Holders of Securities, to the extent provided in Section 6.04(c). (c) For the purposes of this Section 8.08, the Trustee shall be deemed to have a conflicting interest with respect to Securities of any series if: (1) the Trustee is trustee under this Indenture with respect to the outstanding securities of any series other than that series or is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture; provided, however, that there shall be excluded from the operation of this paragraph this Indenture with respect to the Securities of any series other than that series or any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding if (A) this Indenture and such other indenture or indentures are 59 wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Securities and Exchange Commission shall have found and declared by order pursuant to subsection (b) of section 305 or subsection (c) of section 307 of the Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of that series and any such other series and such other indentures, or (B) the Company shall have sustained the burden of proving, on application to the Securities and Exchange Commission and after opportunity for hearing thereon, that the trusteeship under this Indenture with respect to Securities of that series and such other series and such other indenture is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to Securities of that series or such other series or such indenture or indentures; (2) the Trustee or any of its directors or executive officers is an obligor upon the Securities of any series issued under this Indenture or an underwriter for the Company; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Company or an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (A) one individual may be a director or an executive officer of the Trustee and a director or an executive officer of the Company, but may not be at the same time an executive officer of both the Trustee and the Company; (B) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer of the Trustee and a director of the Company; and (C) the Trustee may be designated by the Company or by an underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, 60 or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this subsection (c), to act as trustee whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner, or executive officer thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (A) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company, not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (B) 10% or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; or (9) the Trustee owns on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7) or (8) of this subsection (c). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence 61 shall not apply, for a period of two years from the date of such acquisition to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15, in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of principal of or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period and, after such date, notwithstanding the foregoing provisions of this paragraph (9), all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this subsection (c). The specifications of percentages in paragraphs (5) to (9), inclusive, of this subsection (c) shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this subsection (c). For the purposes of paragraphs (6), (7), (8) and (9) of this subsection (c) only, (A) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (B) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i) any security which it holds as collateral security (as trustee or otherwise) for an obligation which is not in default as defined in clause (B) above, or (ii) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (iii) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity. 62 Except as provided in the next preceding paragraph hereof, the words "security" or "securities" as used in this Indenture shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For the purposes of this Section 8.08: (1) The term "underwriter" when used with reference to the Company shall mean every person who, within three years prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated. (3) The term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any 63 trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "Company" shall mean any obligor upon the Securities. (6) The term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. The percentages of voting securities and other securities specified in this Section 8.08 shall be calculated in accordance with the following provisions: (A) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section 8.08 (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (B) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (C) The term "amount," when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security. (D) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; 64 (iv) securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (E) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes, and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 8.09. Eligibility of Trustee. The Trustee with respect to each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States or any State or Territory thereof or of the District of Columbia authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $10,000,000, subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority and having an office and place of business in The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 8.09, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee with respect to each series of Securities shall cease to be eligible in accordance with the provisions of this Section 8.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.10. SECTION 8.10. Resignation or Removal of Trustee. (a) The Trustee may resign with respect to any series of Securities at any time by giving written notice of such resignation to the Company and by giving notice thereof to the Holders of the applicable series of Securities in manner and to the extent provided in Section 6.04(c). Upon receiving such notice of resignation with respect to the applicable series of Securities, the Company 65 shall promptly appoint a successor trustee with respect to that series by written instruments, in duplicate, executed by or pursuant to a resolution of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If a successor trustee shall not have been so appointed with respect to any series of Securities, and shall have accepted appointment within 30 days after the giving of such notice of resignation to the Holders of such series, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Holder who has been a bona fide holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 7.09, on behalf of such Holder and all others similarly situated, petition any such court for the appointment of a successor trustee with respect to that series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur-- (1) the Trustee shall fail to comply with the provisions of subsection (a) of Section 8.08 after written request therefor by the Company or by any Holder who has been a bona fide holder of a Security or Securities of the applicable series for at least six months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting, with respect to any series of Securities or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation-- then, in any such case, the Company may remove the Trustee with respect to any one or more of such series of Securities and appoint a successor trustee of that series by written instrument, in duplicate, executed by or pursuant to order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or subject to the provisions of Section 7.09, any Holder has been a bona fide Holder of a Security or Securities of that series for at least six months may, 66 on behalf of such Holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to that series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee with respect to that series. (c) The Holders of a majority in aggregate principal amount at Stated Maturity of the Securities of any series at the time outstanding may at any time remove the Trustee with respect to such series and nominate with respect to such series a successor trustee which shall be deemed appointed as successor trustee with respect to such series unless within 10 days after such nomination the Company objects thereto, in which case the Trustee so removed or any Holder of Securities of the series may petition any court of competent jurisdiction for appointment of a successor trustee with respect to such series upon the terms and conditions and otherwise as provided in subsection (a) of this Section 8.10. (d) Any resignation or removal of the Trustee and any appointment of a successor trustee with respect to an applicable series of Securities pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee for that series as provided in Section 8.11. (e) The Company shall give notice as provided in Section 15.05 of each resignation or removal of the Trustee with respect to any series of Securities. Each notice shall include the name of such successor trustee and the address of its Principal Office and shall be given within 60 days of such event. SECTION 8.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor 67 trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers and trusts with respect to any series of Securities of the trustee so ceasing to act. Upon request of any successor trustee, the Company shall execute any and all instruments in writing in order more fully and certainly to vest in and confirm to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 8.06. In case of the appointment hereunder of a successor trustee with respect to the Securities of any one or more (but not all) series, the Company, the predecessor trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto wherein each successor trustee shall accept such appointment and which shall contain (1) such provisions as shall be necessary or desirable to transfer and confirm to, and vest in each successor trustee all of the rights, powers and duties of the predecessor trustee with respect to the Securities of that or those series to which the appointment of such successor trustee relates, (2) if the retiring trustee is not retiring with respect to all Securities, it shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor trustee with respect to the Securities of any series as to which the predecessor trustee is not retiring shall continue to be vested in the predecessor trustee and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such trustee. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.08 and eligible under the provisions of Section 8.09. 68 Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company shall mail notice of the succession of such trustee hereunder to all the Registered Holders of such series as the names and addresses of such Holders shall appear on the registry books of the Company and shall publish notice of such event once in an Authorized Newspaper in the Place of Payment. If the Company fails to mail such notice in the prescribed manner within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 8.12. Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the business of the Trustee, shall be the successor of the Trustee hereunder provided such corporation shall be qualified under the provisions of Section 8.08 and eligible under the provisions of Section 8.09 without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities of any series so authenticated; and in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities of any series either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities of any series or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or authenticate Securities of any series in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 8.13. Limitation on Rights of Trustee as a Creditor. (a) Subject to the provision of subsection (b) of this Section 8.13, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company or of any other obligor on the Securities of any 69 series within four months prior to a default, as defined in subsection (c) of this Section 8.13, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in special account for the benefit of the Trustee individually, the Holders of the Securities of any series, and the holders of other indenture securities (as defined in paragraph (2) of subsection (c) of this Section 8.13) (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such four-month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four-month period, or an amount equal to the proceeds of any such property, if disposed of, subject however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to Federal or State bankruptcy laws or other similar laws; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four-month period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four-month period and such property was received as security therefor simultaneously 70 with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in subsection (c) of this Section 8.13, would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four-month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Holders of Securities of a series as to which such Trustee is acting as Trustee hereunder and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal or State bankruptcy laws or other similar laws, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee, the Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal or State bankruptcy laws or other similar laws, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any 71 distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal or State bankruptcy laws or other similar laws, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, the Holders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such four-month period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four-month period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as trustee, occurred after the beginning of such four-month period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of subsection (a) of this Section 8.13 a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; 72 (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in Section 6.04 with respect to reports pursuant to subsections (a) and (b) thereof, respectively; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c) of this Section 8.13; (5) the ownership of stock or of other securities of a corporation organized under the provisions of section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in subsection (c) of this Section 8.13. (c) For the purposes of this Section 8.13: (1) The term "default" shall mean any failure to make payment in full of the principal of or interest upon one of the Securities of any series or upon the other indenture securities when and as such principal or interest becomes due and payable. (2) The term "other indenture securities" shall mean securities upon which the Company is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (A) under which the Trustee is also trustee, (B) which contains provisions substantially similar to the provisions of subsection (a) of this Section 8.13, and (C) under which a default exists at the time of the apportionment of the funds and property held in said special account. (3) The term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after 73 delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand. (4) The term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security; provided that the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation. (5) The term "Company" shall mean any obligor upon the Securities. ARTICLE NINE. CONCERNING THE HOLDERS. SECTION 9.01. Action by Holders. (a) Whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount at Stated Maturity of the Securities of any or all series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (A) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (B) by the record of the Holders of Securities voting in favor thereof at any meeting of Holders duly called and held in accordance with the provisions of Article Ten, or (C) by a combination of such instrument or instruments and any such record of such a meeting of such Holders. (b) If the Company shall solicit from the Holders of any or all series any request, demand, authorization, direction, notice, consent, waiver or other act, the Company may, at its option, by or pursuant to resolution of the Board of Directors fix in advance a record date for the determination of 74 Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other act may be given before or after the record date, but only the Holders of record at the close of business on the record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other act, and for that purpose the Securities deemed to be outstanding shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by the Holders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 9.02. Proof of Execution by Holders. Subject to the provisions of Sections 8.01, 8.02 and 10.05, proof of the execution of any instrument by a Holder, his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities of any series shall be proved by the registry books of the Company or by a certificate of the registrar of the Securities of any series. The record of any meeting of Holders of Securities may be proved in the manner provided in Section 10.06. SECTION 9.03. Who Deemed Absolute Owners. The Company, the Trustee, any paying agent, any transfer agent and any Security registrar may treat the Holder of any Unregistered Security and the Holder of any coupon, except with respect to a Fully Registered Security, whether or not the Security to which it appertained be registered, as the absolute owner of such Security or coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes (whether or not such Security or coupon shall be overdue) and neither the Company, the Trustee, any paying agent, any transfer agent nor any Security registrar shall be affected by any notice to the contrary. The Company, the Trustee, any paying agent, any transfer agent and any Security registrar may treat the person in whose name a Registered Security shall be registered upon the registry books of the Company as the absolute owner of such Security (whether or not such 75 Security shall be overdue) for the purpose of receiving payment of principal of, premium, if any, on and, if such Registered Security is a Fully Registered Security, interest, if any, on, such Registered Security and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any transfer agent nor any Security registrar shall be affected by any notice to the contrary. All such payments so made to any Holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon such Security. The amount of Unregistered Securities held by any Person executing any instrument or writing as a Holder, and the numbers of such Unregistered Securities, and the date of his holding the same, may be proved by the production of such Securities or by a certificate executed by any trust company, bank, banker or member of a national securities exchange (wherever situated), as depositary, if such certificate is in form satisfactory to the Trustee, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Unregistered Securities therein described; or such facts may be proved by the certificate or affidavit of the Person executing such instrument or writing as a Holder, if such certificate or affidavit is in form satisfactory to the Trustee. The Trustee and the Company may assume that such ownership of any Unregistered Security continues until (i) another certificate bearing a later date issued in respect of the same Unregistered Security is produced, or (ii) such Unregistered Security is produced by some other Person, or (iii) such Unregistered Security is registered as to principal or is surrendered in exchange for a Fully Registered Security, or (iv) such Unregistered Security has been cancelled in accordance with Section 2.08. SECTION 9.04. Company-Owned Securities Disregarded. In determining whether the Holders of the requisite aggregate principal amount at Stated Maturity of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on such Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction or consent only Securities which 76 the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Securities and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 9.05. Revocation of Consents; Future Holders Bound. (a) At any time prior to but not after, the evidencing to the Trustee, as provided in Section 9.01, of the taking of any action by the Holders of the percentage in aggregate principal amount at Stated Maturity of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the number, letter or other distinguishing symbol of which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 9.02, revoke such action so far as concerns such Holder and all future Holders and owners of such Security and any Securities which may be issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or such other Security issued in exchange or substitution therefor. (b) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of any action taken, suffered or omitted by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. ARTICLE TEN. HOLDERS' MEETINGS. SECTION 10.01. Purposes of Meetings. A meeting of the Holders of Securities of any or all series may be called at any time and from time to 77 time pursuant to the provisions of this Article Ten for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Seven; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Eight; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.02; or (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount at Stated Maturity of the Securities of any or all series, as the case may be, under any other provisions of this Indenture or under applicable law. Section 10.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Holders of Securities of any or all series to take any action specified in Section 10.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Holders of Securities of any or all series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to Holders of Registered Securities of each series affected, at their addresses as they appear on the registry books of the Company, and notice to Holders of Unregistered Securities of each series affected shall be published in an Authorized Newspaper in the Place of Payment. Such notice shall be mailed or published, as the case may be, not less than 20 nor more than 90 days prior to the date fixed for the meeting. However, if all Securities of any series with respect to which the meeting is to be held are Registered Securities no notice need be given except notice by mail as hereinabove provided. Failure to receive such notice or any defect therein shall in no case affect the validity of any action taken at such meeting. Any meeting of Holders of Securities of any or all series, as the case may be, shall be valid without notice if the Holders of all such Securities outstanding, the Company and the Trustee are present in person or by proxy or shall have waived notice thereof before or after the meeting. 78 Section 10.03. Call of Meetings by Company or Holders. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the Holders of at least 10% in aggregate principal amount at Stated Maturity of the Securities then outstanding of any or all series, as the case may be, that may be affected by the action proposed to be taken at the meeting, shall have requested the Trustee to call a meeting of Holders of Securities of any or all series, as the case may be, that may be so affected by written request setting forth in a reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Holders, in the amount specified, may determine the time and the place in said Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 10.01, by mailing notice thereof as provided in Section 10.02. Section 10.04. Qualification for Voting. To be entitled to vote at any meeting of Holders of Securities, a Person shall (a) be a Holder of one or more Securities with respect to which such meeting is being held or (b) at a Person appointed by an instrument in writing as proxy by such a Holder. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any or all series, as the case may be, shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 10.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 10.03, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman 79 and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount at Stated Maturity of the Securities represented at the meeting. Subject to the provisions of Section 9.04, at any meeting each Holder of Securities with respect to which such meeting is being held, or proxy therefor, shall be entitled to one vote for each $1,000 (or, if such Securities are denominated in a Foreign Currency, the minimum denomination of such Securities as specified pursuant to Section 2.01(8)) in principal amount (in the case of Original Issue Discount Securities, such principal amount to be determined as provided in Section 2.01(9)) of such Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any such Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than as a Holder of Securities or proxy therefor. At any meeting of Holders of Securities, the presence of Persons holding or representing the Securities with respect to which such meeting is being held in such aggregate principal amount sufficient to take action on the business for the transaction of which such meeting was called shall constitute a quorum, but, if less than a quorum is present, the Persons holding or representing a majority in such aggregate principal amount of such Securities represented at the meeting may adjourn such meeting with the same effect, for all intents and purposes, as though a quorum had been present. Any meeting of Holders of Securities with respect to which such meeting is being held duly called pursuant to the provisions of Section 10.02 or 10.03 may be adjourned from time to time by vote of the Holders of a majority in such aggregate principal amount of the Securities represented at the meeting and entitled to vote, and the meeting may be held as so adjourned without further notice. Section 10.06. Voting. The vote upon any resolution submitted to any meeting of Holders of Securities with respect to which such meeting is being held shall be by written ballots on which shall be inscribed the signatures of the Holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of 80 the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice as mailed as provided in Section 10.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.07. No Delay of Rights by Meeting. Nothing in this Article Ten contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders of Securities or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders of Securities under any of the provisions of this Indenture or of the Securities. ARTICLE ELEVEN. SUPPLEMENTAL INDENTURES. Section 11.01. Supplemental Indentures without Consent of Holders. Without the consent of any Holders of any series of Securities, the Company, when authorized by or pursuant to a resolution of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation, pursuant to Article Twelve hereof, of the covenants, agreements and obligations of the Company herein and in the Securities contained; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Holders of any series of 81 Securities as the Board of Directors and the Trustee shall consider to be for the protection of the Holders of such Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in the Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default and shall not adversely affect the interests of the Holders of Securities of any series; (c) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of any series, any property or assets which the Company may desire or may be required to convey, transfer, assign, mortgage or pledge in accordance with the provisions of Section 5.03 or Section 12.02; (d) to establish the form or terms of Securities of any series as permitted by Section 2.01; (e) to cure any ambiguity, to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; provided, however, that such action shall not adversely affect the interests of the Holders of Securities of any series; or (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 8.11; (g) to provide for the documentation necessary for the issuance of Securities outside the United States of America; or 82 (h) to conform the Indenture to the provisions of the Trust Indenture Act of 1939, as then in effect. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.01 may be executed by the Company and the Trustee without the consent of the Holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 11.02. Section 11.02. Supplemental Indentures with Consent of Holders of a Series. With the consent (evidenced as provided in Section 9.01) of the Holders of not less than 50% in aggregate principal amount at Stated Maturity of the Securities at the time outstanding of each series affected by such supplemental indenture or indentures, the Company, when authorized by or pursuant to a resolution of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series under this Indenture; provided, however, that no such supplemental indenture shall without the consent of the Holder of each outstanding Security affected thereby (i) extend the fixed Maturity of any Security, or reduce the rate of interest or extend the time of payment of interest, if any, thereon or reduce the principal thereof or the time during which premium is payable thereon or change the Required Currency, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 7.01 or the amount thereof provable in bankruptcy pursuant to Section 7.02 without the consent of the Holder of each Security so affected, or (ii) reduce the percentage in principal amount at Stated Maturity of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of 83 whose Holders is required for any waiver of compliance with certain provisions hereof or of certain defaults hereunder and their consequences provided for in this Indenture, or (iii) modify any provision of this Section 11.02 or Section 7.07 hereof except to increase any such percentage or to provide certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security affected thereby. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. Upon the request of the Company, accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Holders of such series as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Holders under this Section 11.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 11.03. Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Eleven shall comply with the Trust Indenture Act of 1939, as then in effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Eleven, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the Holders of the series of Securities affected shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such 84 supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 11.04. Notation on Securities. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article Eleven may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee and delivered in exchange for the Securities of such series then outstanding. Section 11.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee. The Trustee, subject to the provisions of Sections 8.01 and 8.02, shall be entitled to receive and shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto is authorized and permitted by this Indenture and complies with the requirements of this Article Eleven. ARTICLE TWELVE. CONSOLIDATION, MERGER AND SALE. Section 12.01. Company May Consolidate, etc., on Certain Terms. (a) Subject to the provisions of Section 12.02, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of all or substantially all the property of the Company, to any other corporation (whether or not affiliated with the Company) authorized to acquire and operate the same; provided, however, that, except as otherwise provided in Section 12.01(b) below, upon any such consolidation, merger, sale or conveyance, other than a consolidation or merger in which the Company is 85 the continuing corporation, the due and punctual payment of the principal of and premium, if any, and interest, if any, on all of the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture and in such series to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired such property; and provided further that the Company or such successor corporation, as the case may be, shall not immediately after such merger or consolidation, or such sale or conveyance, be in default in the performance of any such covenant or condition. (b) Notwithstanding the provisions of Section 12.01(a), the Company may sell or convey all or substantially all its property located in the United States of America to one or more wholly owned Subsidiaries organized under the laws of the United States of America or any political subdivision thereof, and such Subsidiary or Subsidiaries will not be required to assume the performance or observance of any of the Company's obligations under this Indenture or any Securities. SECTION 12.02. Securities to be Secured in Certain Events. If, upon any consolidation or merger of the Company with or into any other corporation, or upon any sale or conveyance of all or substantially all the property of the Company to any other corporation, any of the property of the Company or of any Restricted Subsidiary would thereupon become subject to any mortgage, lien or pledge, the Company, prior to or simultaneously with such consolidation, merger, sale or conveyance, will secure the Securities of each series outstanding hereunder, equally and ratably with any other obligations of the Company or any Restricted Subsidiary then entitled thereto, by a direct lien on all such property prior to all liens other than any theretofore existing thereon. SECTION 12.03. Successor Corporation to be Substituted. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest, if 86 any, on all of the Securities of each series and the due and punctual performance of all of the covenants and conditions of this Indenture and in such series to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein and, if the Company is to be voluntarily dissolved, the Company shall thereupon be released from all obligations hereunder and under the Securities of each series. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of ARCO Chemical Company any or all of the Securities of each series issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations of this Indenture prescribed, the Trustee shall authenticate and shall delivery any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the other Securities of such series theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. Section 12.04. Opinion of Counsel to be Given Trustee. Before the Trustee shall execute any supplemental indenture required pursuant to this Article Twelve, the Trustee, subject to Sections 8.01 and 8.02, shall receive and shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance and any such assumption complies with the provisions of this Article. ARTICLE THIRTEEN. SATISFACTION AND DISCHARGE OF INDENTURE. Section 13.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Securities of any series theretofore authenticated (other than any Securities of such series which shall have been 87 destroyed, lost or stolen or in lieu of or in substitution for which other Securities shall have been authenticated and delivered) and not theretofore cancelled, or (b) all the Securities of any series not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, an amount in the Required Currency (other than funds repaid by the Trustee to the Company in accordance with Section 13.04) sufficient to pay at maturity or upon redemption all of the Securities of such series (other than any Securities of such series which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Securities shall have been authenticated and delivered or which shall have been paid) not theretofore cancelled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest, if any, due or to become due to such date of maturity or redemption date, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect with respect to Securities of such series, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.07 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture with respect to Securities of such series, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities. Section 13.02. Deposited Moneys to be Held in Trust by Trustee. All moneys deposited with the Trustee pursuant to Section 13.01 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the Holders of the particular Securities for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. 88 Section 13.03. Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. Section 13.04. Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee for payment of the principal of (and premium, if any) or interest, if any, on Securities of any series and not applied but remaining unclaimed by the Holders of Securities of that series for three years after the date upon which the principal of, and premium, if any, or interest, if any, on such Securities, as the case may be, shall have become due and payable, shall, upon written demand, be repaid to the Company by the Trustee; and the Holder of any of such Securities shall thereafter look only to the Company for any payment which such Holder may be entitled to collect, provided, however, that, before being required to make any such repayment, the Trustee may (at the cost of the Company) mail to such Holders at their last known address or cause to be published once a week for two successive weeks, in each case on any day of the week, in an Authorized Newspaper in the Place of Payment, a notice (in such form as may be deemed appropriate by the Trustee) that said moneys remain unclaimed and that, after a date named therein, any unclaimed balance of said moneys then remaining will be returned to the Company (except that with respect to presentation of Securities for payment and transfer, such term shall mean the office or agency of the Trustee in said city at which at any particular time its corporate agency business shall be conducted). ARTICLE FOURTEEN. Defeasance. Section 14.01. Applicability of Article. If pursuant to Section 2.01 provision is made for the defeasance of Securities of a series, then the provisions of this Article shall be applicable except as otherwise specified as contemplated by Section 2.01 for Securities of such series. Section 14.02. Defeasance Upon Deposit of Moneys or U.S. Government Obligations. At the Company's option, either (x) the Company shall 89 be deemed to have been Discharged (as defined below) from its obligations with respect to Securities of any series on the 91st day after the applicable conditions set forth below have been satisfied, or (y) the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 5.03, 5.04, 5.08, 12.01 and 12.02 with respect to Securities of any series at any time after the applicable conditions set forth below have been satisfied: (a) the Company shall have deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series (i) money in the Required Currency in an amount, or (ii) in the case of Securities denominated in Dollars, U.S. Government Obligations (as defined below), which through the payment of interest, principal and premium, if any, in respect thereof in accordance with their terms will provide (without any reinvestment of such interest, principal or premium), not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee at or prior to the time of such deposit, to pay and discharge such installment of principal (including any mandatory sinking fund payments) of, premium, if any, and interest on, the outstanding Securities of such series on the dates such installments of interest, principal or premium are due or the outstanding Securities of such series are redeemable, if applicable, pursuant to Section 14.02(b) below; (b) in case any of the Securities of such series are to be redeemed on any date prior to their Stated Maturity, the Company shall have given to the Trustee an irrevocable notice pursuant to Section 3.02 of this Indenture requiring redemption of such Securities on such date and the Company shall have given to the Trustee in form satisfactory to the Trustee irrevocable instructions to publish notice of redemption of such Securities prior to said date as provided in Section 3.02 of this Indenture; and in the event such Securities are not to be redeemed within the 60 days next succeeding the date of such deposit with the Trustee, the Company shall have given the Trustee in form satisfactory to it irrevocable instructions to publish, as soon as practicable, once in each of two successive calendar weeks in an Authorized Newspaper, a notice to the Holders of such Securities that the 90 deposit required by Section 14.02(a) has been made with the Trustee and stating such Maturity or redemption date or dates upon which moneys are to be available for the payment of the principal of, premium, if any, and interest on such Securities. (c) the Company shall have delivered to the Trustee an Officers' Certificate certifying as to whether the Securities of such series are then listed on the New York Stock Exchange; (d) if the Securities of such series are then listed on the New York Stock Exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Company's exercise of its option under this Section would not cause such Securities to be delisted; (e) no Event of Default or event (including such deposit) which, with notice or lapse of time, or both, would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit; (f) the Company shall have paid or duly provided for payment of all amounts then due to the Trustee pursuant to Section 8.06. "Discharged" means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities of such series and to have satisfied all the obligations under this Indenture relating to the Securities of such series (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except (A) the rights of Holders of Securities of such series to receive, from the trust fund described in clause (a) above, payment of the principal of, and premium, if any, and the interest on such Securities when such payments are due, (B) the Company's obligations with respect to the Securities of such series under Sections 2.05, 2.06, 5.02 and 14.03 and (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including without limitation, the provisions of Section 8.06. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith 91 and credit obligation by the United States of America, which, in either case under clauses (i) or (ii) are not callable or redeemable at the option of the issuer thereof. Section 14.03. Deposited Moneys and U.S. Government Obligations To Be Held in Trust. All moneys and U.S. Government Obligations deposited with the Trustee pursuant to Section 14.02 in respect of Securities of a series shall be held in trust and applied by it, in accordance with the provisions of such Securities and the Indenture, to the payment, either directly or through any paying agent (including the Company acting as its own paying agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon for principal, premium, if any, and interest, if any, but such money need not be segregated from other funds except to the extent required by law. Section 14.04. Repayment to Company. After the Maturity and payment of the principal of, premium, if any, and interest on the Securities of any series for which money or U.S. Government Obligations have been deposited pursuant to Section 14.02, the Trustee and any paying agent shall promptly pay or return to the Company upon request any money and U.S. Government Obligations held by them that are not required for the payment of the principal of, premium, if any, and interest on the Securities of such series. The provisions of Section 13.04 shall apply to any money held by the Trustee or any paying agent under this Article that remains unclaimed for two years after the Maturity of any series of Securities for which money or U.S. Government Obligations have been deposited pursuant to Section 14.02. Section 14.05. Reinstatement. If the Trustee is unable to apply any money or U.S. Government Obligations in accordance with Section 14.02 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 14.02 until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with Section 14.02. 92 ARTICLE FIFTEEN. Immunity of Incorporators, Stockholders, Officers and Directors. Section 15.01. Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest, if any, on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE SIXTEEN. Miscellaneous Provisions. Section 16.01. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 16.02. Benefits of Indenture Restricted to Parties and Holders. Nothing in this Indenture or in the Securities, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and assigns and the Holders, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; and, subject to the provisions of Articles Nine and Fifteen, all of such covenants, conditions and provisions shall be for the sole benefit of the parties hereto and the Holders. Section 16.03. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be 93 done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. Section 16.04. Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities on the Company shall be deemed to have been sufficiently given or served, for all purposes, if given or served at the office of the Treasurer at the principal office of the Company at Newtown Square, 3801 West Chester Pike, Newtown Square, Pennsylvania 19073 (until another address is filed by the Company with the Trustee). Any notice, direction, request of demand by any Holder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Principal Office of the Trustee, addressed to the attention of its Corporate Trust Division. Section 16.05. Notices to Holders; Waiver. Where this Indenture or any Security provides for notice to Holders of any event, (a) if any of the Securities affected by such event are Registered Securities, such notice shall be sufficiently given (unless otherwise herein or in such Securities expressly provided) if in writing and mailed, first-class, postage prepaid, to each Registered Holder of such Securities, at his address as it appears on the registry books of the Company, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice, and (b) if any of the Securities affected by such event are Unregistered Securities, such notice shall be sufficiently given (unless otherwise herein or in such Securities expressly provided) if published once in an Authorized Newspaper in the Place of Payment not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. 94 In case, by reason of the suspension of publication of any Authorized Newspaper, or by reason of any other cause, it shall be impossible to make publication of any notice in one or more Authorized Newspapers as required by any Security or this Indenture, then such method of publication or notification as shall be made with the approval of the Trustee shall constitute a sufficient publication of such notice. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or otherwise, it shall be impractical to mail notice of any event to the Holders of Securities when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee and the Company shall be deemed to be a sufficient giving of such notice. Section 16.06. New York Contract. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. Section 16.07. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinion contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. 95 Section 16.08. Legal Holidays. In any case where the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security will not be a Business Day at the applicable Place of Payment, then payment of such interest and premium, if any, on or principal of the Securities need not be made at such Place of Payment on such date but may be made on the next Business Day at such Place of Payment with the same force and effect as if made on the date of maturity or the date fixed for redemption and no interest shall accrue for the period from and after such date. Section 16.09. Trust Indenture Act to Control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture which is required to be included in this Indenture by any of sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such required provision shall control. Section 16.10. No Security Interest Created. Nothing in this Indenture or in the Securities, expressed or implied, shall be construed to create or constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its Subsidiaries is located. Section 16.11. Table of Contents, Headings, etc. The table of contents and the titles and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 16.12. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. Section 16.13. Acceptance of Trust. The Trustee hereby accepts the trusts declared and provided in this Indenture, upon the terms and conditions hereinabove set forth. 96 In Witness Whereof, ARCO Chemical Company has caused this Indenture to be signed and acknowledged by its President and Chief Executive Officer, its Senior Vice President and Chief Financial Officer or its Treasurer, and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or an Assistant Secretary, and The Bank of New York, as Trustee, has caused this Indenture to be signed and acknowledged by one of its Vice Presidents or Assistant Vice Presidents, has caused its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or one of its Assistant Secretaries, as of the day and year first written above. ARCO Chemical Company (Seal) By DENNIS D. SCHIFFEL -------------------------------- Attest: JOHN E. G. BISCHOF - -------------------------------- Assistant Secretary The Bank of New York, as Trustee (Seal) By MICHAEL J. GUIRY -------------------------------- Attest: VINCENT P. McCONNELL - -------------------------------- Assistant Secretary 97 COMMONWEALTH OF PENNSYLVANIA ) ) ss.: COUNTY OF DELAWARE ) On this 26th day of July, 1988, before me, Dennis D. Schiffel, the undersigned officer, personally appeared who acknowledged himself to be the Vice President and Treasurer of ARCO Chemical Company, a corporation, and that he as such Vice President and Treasurer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as Vice President and Treasurer. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. BEVERLY L. LAWLESS ------------------------------- [Notary Public] (Seal) BEVERLY L. LAWLESS, Notary Public Newtown Square, Delaware County My Commission Expires May 27, 1991 98 STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On the 3rd day of August, 1988, before me personally came Michael J. Guiry, to me known, who, being by me duly sworn, did depose and say that he resides at 79-07 19th Drive, Queens, NY, that he is an Assistant Vice President of The Bank of New York, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation; and that he signed his name thereto by like order. VIRGINIA BARAZOTTI -------------------------------- [Notary Public] (Seal) VIRGINIA BARAZOTTI Notary Public, State of New York No. 41-4734647 Qualified in Queens County Certificate filed in New York County Commission Expires Nov. 30, 1989 EXHIBIT A Form of election to receive payments in Foreign Currency or to rescind such election The undersigned, registered owner of certificate number - (the "Certificate"), representing [name of series of Securities] (the "Securities") in an aggregate principal amount of , hereby elects to receive all payments in respect of the Securities in [Foreign Currency in which the Securities are denominated]. Subject to the terms and conditions set forth in the indenture under which the Securities were issued (the "Indenture"), this election shall take effect on the next record date after this election form is received by the Trustee and shall remain in effect until it is rescinded by the undersigned or until the Certificate is transferred or paid in full at Maturity. [Insert appropriate wire transfer instructions.] rescinds the election previously submitted by the undersigned to receive all payments in respect of the Securities in [Foreign Currency in which the Securities are denominated] represented by the Certificate. Subject to the terms and conditions set forth in the Indenture, this rescission shall take effect on the next record date after this election form is received by the Trustee, or, in the case of Maturity of an installment of principal, the fifteenth day immediately preceding such Maturity. The undersigned acknowledges that, except as provided in the Indenture, any costs incurred by or on behalf of the Company in connection with the conversion of Dollars into Foreign Currency shall be borne by the undersigned through deduction from payments required to be made to the undersigned pursuant to the terms of the Indenture. All capitalized terms used herein, unless otherwise defined herein, shall have the meanings assigned to them in the Indenture. ----------------------------- (Name of Owner) ----------------------------- (Signature of Owner) EX-4.13 10 FORM OF DEBENTURE DUE 2005 EXHIBIT 4.13 A-1 [FORM OF FRONT OF DEBENTURE] No. $ ARCO CHEMICAL COMPANY 9 3/8% Debenture Due 2005 CUSIP 001920AE7 ARCO CHEMICAL COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars at the office or agency of the Company in the Borough of Manhattan, The City of New York, on December 15, 2005 (the "Maturity Date"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on June 15 and December 15 of each year (each an "Interest Payment Date"), commencing with the Interest Payment Date next following December 17, 1990 (the "Original Issue Date"), and on the Maturity Date, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title hereof, from the June 15 or December 15, as the case may be, to which interest on this Debenture has been paid next preceding the applicable Interest Payment Date or, if no interest has been paid on this Debenture, from the Original Issue Date until payment of said principal sum has been made or duly provided for; provided, however, that any payment of principal or interest to be made on an Interest Payment Date or Maturity Date which is not a Business Day shall be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Maturity Date, as the case may be, and no additional interest shall accrue as a result of such delayed payment. For purposes of this Debenture, "Business Day" means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law or regulation to be closed in The City of New York or The City of Philadelphia. The interest so payable on any Interest Payment Date or the Maturity Date will, except as provided in the Indenture, be paid to the person in whose name the Debenture is registered at the close of business on the June 1 or December 1 next preceding such Interest Payment Date (a "Record Date") in the case of interest payments on other than the Maturity Date, and on the Maturity Date in the case of an interest payment on the Maturity Date, whether or not such first day or Maturity Date is a Business Day. At the option of the Company, interest so payable may be paid by check mailed to the registered address of such person; provided that, if the holder hereof is the holder of U.S. $10,000,000 or more in aggregate principal amount EXHIBIT 4 A-2 of Debentures, such payments will be made by wire transfer of immediately available funds, but only if appropriate wire transfer instructions have been received in writing by the Trustee not less than fifteen days prior to the applicable Interest Payment Date. Principal and interest payable at maturity in respect of this Debenture will be paid in immediately available funds upon surrender of this Debenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. All payments of principal and interest in respect of this Debenture will be made net of any deduction or withholding for or on account of all taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any governmental authority if the Company is required by law to deduct or withhold amounts for or on account of such taxes, duties, assessments or governmental charges. Reference is made to the further provisions of this Debenture set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. A-3 IN WITNESS WHEREOF, ARCO Chemical Company has caused this Debenture to be signed, manually or by facsimile, by its President and Chief Executive Officer and by its Vice President and Treasurer, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon by facsimile or otherwise). Dated: ARCO CHEMICAL COMPANY Attest: By -------------------------------------- President and Chief Executive Officer By ---------------------------------- Vice President and Treasurer [SEAL] [TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities issued under the within mentioned Indenture. THE BANK OF NEW YORK as Trustee By -------------------------------------- Authorized Signatory A-4 [FORM OF REVERSE OF DEBENTURE] ARCO CHEMICAL COMPANY 9 3/8% DEBENTURE DUE 2005 This Debenture is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Company (herein called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an Indenture dated as of June 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Company to The Bank of New York, Trustee (hereinafter called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any), may be subject to different covenants and Events of Default and may otherwise vary as provided in the Indenture. This Debenture is one of a series of Securities of the Company issued pursuant to the Indenture designated as the 9 3/8% Debentures Due 2005 (herein called the "Debentures") limited in aggregate principal amount to $100,000,000. In case an Event of Default shall occur and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than 50% in aggregate principal amount at Stated Maturity of the Securities at the time outstanding of each series affected by such supplemental indenture or indentures, evidenced as provided in the Indenture, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or any supplemental indenture as such provisions apply to such Securities or modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Security or reduce the rate of interest or extend the time of payment of A-5 interest thereon or reduce the principal thereof or the time during which premium is payable thereon or change the method of computing the amount of principal thereof or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided in the Securities or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof or the amount thereof provable in bankruptcy without the consent of the Holder thereof, or (ii) reduce the percentage in principal amount at Stated Maturity of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults under, and their consequences provided for in, the Indenture, without the consent of the Holders of each Security of such series so affected. Any such consent or waiver by the Holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Debenture and any Debentures which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Debenture at the place, at the respective times, at the rate and in the coin or currency herein prescribed. The Debentures are issuable in registered form without coupons in denominations of $1,000 and integral multiples thereof. Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations, without charge except for any tax or other governmental charge imposed in relation thereto, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and in the manner and subject to the limitations provided in the Indenture. The Debentures are unsecured obligations of the Company ranking pari passu without any preference among themselves and equally with all other unsecured indebtedness (other than subordinated indebtedness) of the Company from time to time outstanding. The Debentures are not redeemable on any date prior to maturity. A-6 Upon due presentment for registraton of transfer of this Debenture at the office or agency of the Company in the Borough of Manhattan, The City of New York, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount at Stated Maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in relation thereto. Prior to due presentment for registration of transfer of the Debenture, the Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the registered Holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon by anyone other than the Company, any Debenture registrar or the Trustee), for the purpose of receiving payment hereof or on account hereof, and for all other purposes (subject to the provisions appearing on the face hereof), and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. No recourse for the payment of the principal of or interest on this Debenture, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule or law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as a condition of and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are not defined herein shall have the meanings assigned to them in the Indenture. This Debenture shall be governed by and construed in accordance with the laws of the State of New York. A-7 The following abbreviations, when used in the inscription on the face of the within instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common Custodian TEN ENT --as tenants by the UNIF GIFT MIN ACT -- --------------- entireties (Cust) (Minor) JT TEN --as joint tenants with right under Uniform Gifts to Minors Act of survivorship and not as tenants in common ------------------------------------ (State) Additional abbreviations may also be used though not in the above list. --------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - -------------------------------------------------------------------------------- (NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE, MUST BE PRINTED OR TYPEWRITTEN) - -------------------------------------------------------------------------------- the within Debenture, and all rights thereunder, hereby irrevocably constituting and appointing attorney - ----------------------------------------------------------------------- to transfer such Debenture in the books of the Company, with full power of substitution in the premises. Dated: -------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-4.14 11 FORM OF DEBENTURE DUE 2020 EXHIBIT 4.14 A-1 [FORM OF FRONT OF DEBENTURE] No. $ ARCO CHEMICAL COMPANY 9.80% Debenture Due 2020 CUSIP ARCO CHEMICAL COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars at the office or agency of the Company in the Borough of Manhattan, The City of New York, on February 1, 2020 (the "Maturity Date"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on August 1 and February 1 of each year (each an "Interest Payment Date"), commencing with the Interest Payment Date next following February 6, 1990 (the "Original Issue Date"), and on the Maturity Date, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title hereof, from the August 1 or Februay 1, as the case may be, to which interest on this Debenture has been paid next preceding the applicable Interest Payment Date or, if no interest has been paid on this Debenture, from the Original Issue Date until payment of said principal sum has been made or duly provided for; provided, however, that any payment of principal or interest to be made on an Interest Payment Date or Maturity Date which is not a Business Day shall be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Maturity Date, as the case may be, and no additional interest shall accrue as a result of such delayed payment. For purposes of this Debenture, "Business Day" means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law or regulation to be closed in The City of New York or The City of Philadelphia. The interest so payable on any Interest Payment Date or the Maturity Date will, except as provided in the Indenture, be paid to the person in whose name the Debenture is registered at the close of business on the July 15 or January 15 next preceding such Interest Payment Date (a "Record Date") in the case of interest payments on other than the Maturity Date, and on the Maturity Date in the case of an interest payment on the Maturity Date, whether or not such fifteenth day or Maturity Date is a Business Day. At the option of the Company, interest so payable may be paid by check mailed to the registered address of such person; provided that, if the holder hereof is the holder of U.S. $10,000,000 or more in aggregate principal amount EXHIBIT 4 A-2 of Debentures, such payments will be made by wire transfer of immediately available funds, but only if appropriate wire transfer instructions have been received in writing by the Trustee not less than fifteen days prior to the applicable Interest Payment Date. Principal and interest payable at maturity in respect of this Debenture will be paid in immediately available funds upon surrender of this Debenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. All payments of principal and interest in respect of this Debenture will be made net of any deduction or withholding for or on account of all taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any governmental authority if the Company is required by law to deduct or withhold amounts for or on account of such taxes, duties, assessments or governmental charges. Reference is made to the further provisions of this Debenture set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. A-3 IN WITNESS WHEREOF, ARCO Chemical Company has caused this Debenture to be signed, manually or by facsimile, by its President and Chief Executive Officer and by its Vice President and Treasurer, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon by facsimile or otherwise). Dated: ARCO CHEMICAL COMPANY Attest: By -------------------------------------- President and Chief Executive Officer By ---------------------------------- Vice President and Treasurer [SEAL] [TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities issued under the within mentioned Indenture. THE BANK OF NEW YORK as Trustee By -------------------------------------- Authorized Signatory A-4 [FORM OF REVERSE OF DEBENTURE] ARCO CHEMICAL COMPANY 9.80% DEBENTURE DUE 2020 This Debenture is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Company (herein called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an Indenture dated as of June 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Company to The Bank of New York, Trustee (hereinafter called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any), may be subject to different covenants and Events of Default and may otherwise vary as provided in the Indenture. This Debenture is one of a series of Securities of the Company issued pursuant to the Indenture designated as the 9.80% Debentures Due 2020 (herein called the "Debentures") limited in aggregate principal amount to $225,000,000. In case an Event of Default shall occur and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than 50% in aggregate principal amount at Stated Maturity of the Securities at the time outstanding of each series affected by such supplemental indenture or indentures, evidenced as provided in the Indenture, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or any supplemental indenture as such provisions apply to such Securities or modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Security or reduce the rate of interest or extend the time of payment of A-5 interest thereon or reduce the principal thereof or the time during which premium is payable thereon or change the method of computing the amount of principal thereof or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided in the Securities or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof or the amount thereof provable in bankruptcy without the consent of the Holder thereof, or (ii) reduce the percentage in principal amount at Stated Maturity of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults under, and their consequences provided for in, the Indenture, without the consent of the Holders of each Security of such series so affected. Any such consent or waiver by the Holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Debenture and any Debentures which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Debenture at the place, at the respective times, at the rate and in the coin or currency herein prescribed. The Debentures are issuable in registered form without coupons in denominations of $1,000 and integral multiples thereof. Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations, without charge except for any tax or other governmental charge imposed in relation thereto, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and in the manner and subject to the limitations provided in the Indenture. The Debentures are unsecured obligations of the Company ranking pari passu without any preference among themselves and equally with all other unsecured indebtedness (other than subordinated indebtedness) of the Company from time to time outstanding. The Debentures are not redeemable on any date prior to maturity. A-6 Upon due presentment for registraton of transfer of this Debenture at the office or agency of the Company in the Borough of Manhattan, The City of New York, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount at Stated Maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in relation thereto. Prior to due presentment for registration of transfer of the Debenture, the Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the registered Holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon by anyone other than the Company, any Debenture registrar or the Trustee), for the purpose of receiving payment hereof or on account hereof, and for all other purposes (subject to the provisions appearing on the face hereof), and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. No recourse for the payment of the principal of or interest on this Debenture, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule or law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as a condition of and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are not defined herein shall have the meanings assigned to them in the Indenture. This Debenture shall be governed by and construed in accordance with the laws of the State of New York. A-7 The following abbreviations, when used in the inscription on the face of the within instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common Custodian TEN ENT --as tenants by the UNIF GIFT MIN ACT -- --------------- entireties (Cust) (Minor) JT TEN --as joint tenants with right under Uniform Gifts to Minors Act of survivorship and not as tenants in common ------------------------------------ (State) Additional abbreviations may also be used though not in the above list. --------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - -------------------------------------------------------------------------------- (NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE, MUST BE PRINTED OR TYPEWRITTEN) - -------------------------------------------------------------------------------- the within Debenture, and all rights thereunder, hereby irrevocably constituting and appointing attorney - ----------------------------------------------------------------------- to transfer such Debenture in the books of the Company, with full power of substitution in the premises. Dated: -------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-4.15 12 FORM OF DEBENTURE DUE 2000 EXHIBIT 4.15 A-1 [FORM OF FRONT OF DEBENTURE] No. $ ARCO CHEMICAL COMPANY 9.90% Debenture Due 2000 CUSIP ARCO CHEMICAL COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars at the office or agency of the Company in the Borough of Manhattan, The City of New York, on November 1, 2000 (the "Maturity Date"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on May 1 and November 1 of each year (each an "Interest Payment Date"), commencing with the Interest Payment Date next following November 7, 1990 (the "Original Issue Date"), and on the Maturity Date, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title hereof, from the May 1 or November 1, as the case may be, to which interest on this Debenture has been paid next preceding the applicable Interest Payment Date or, if no interest has been paid on this Debenture, from the Original Issue Date until payment of said principal sum has been made or duly provided for; provided, however, that any payment of principal or interest to be made on an Interest Payment Date or Maturity Date which is not a Business Day shall be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Maturity Date, as the case may be, and no additional interest shall accrue as a result of such delayed payment. For purposes of this Debenture, "Business Day" means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law or regulation to be closed in The City of New York or The City of Philadelphia. The interest so payable on any Interest Payment Date or the Maturity Date will, except as provided in the Indenture, be paid to the person in whose name the Debenture is registered at the close of business on the April 15 or October 15 next preceding such Interest Payment Date (a "Record Date") in the case of interest payments on other than the Maturity Date, and on the Maturity Date in the case of an interest payment on the Maturity Date, whether or not such fifteenth day or Maturity Date is a Business Day. At the option of the Company, interest so payable may be paid by check mailed to the registered address of such person; provided that, if the holder hereof is the holder of U.S. $10,000,000 or more in aggregate principal amount A-2 of Debentures, such payments will be made by wire transfer of immediately available funds, but only if appropriate wire transfer instructions have been received in writing by the Trustee not less than fifteen days prior to the applicable Interest Payment Date. Principal and interest payable at maturity in respect of this Debenture will be paid in immediately available funds upon surrender of this Debenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. All payments of principal and interest in respect of this Debenture will be made net of any deduction or withholding for or on account of all taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any governmental authority if the Company is required by law to deduct or withhold amounts for or on account of such taxes, duties, assessments or governmental charges. Reference is made to the further provisions of this Debenture set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. A-3 IN WITNESS WHEREOF, ARCO Chemical Company has caused this Debenture to be signed, manually or by facsimile, by its President and Chief Executive Officer and by its Vice President and Treasurer, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon by facsimile or otherwise). Dated: ARCO CHEMICAL COMPANY Attest: By -------------------------------------- President and Chief Executive Officer By ---------------------------------- Vice President and Treasurer [SEAL] [TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities issued under the within mentioned Indenture. THE BANK OF NEW YORK as Trustee By -------------------------------------- Authorized Signatory A-4 [FORM OF REVERSE OF DEBENTURE] ARCO CHEMICAL COMPANY 9.90% DEBENTURE DUE 2000 This Debenture is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Company (herein called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an Indenture dated as of June 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Company to The Bank of New York, Trustee (hereinafter called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any), may be subject to different covenants and Events of Default and may otherwise vary as provided in the Indenture. This Debenture is one of a series of Securities of the Company issued pursuant to the Indenture designated as the 9.90% Debentures Due 2000 (herein called the "Debentures") limited in aggregate principal amount to $200,000,000. In case an Event of Default shall occur and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than 50% in aggregate principal amount at Stated Maturity of the Securities at the time outstanding of each series affected by such supplemental indenture or indentures, evidenced as provided in the Indenture, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or any supplemental indenture as such provisions apply to such Securities or modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Security or reduce the rate of interest or extend the time of payment of A-5 interest thereon or reduce the principal thereof or the time during which premium is payable thereon or change the method of computing the amount of principal thereof or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided in the Securities or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof or the amount thereof provable in bankruptcy without the consent of the Holder thereof, or (ii) reduce the percentage in principal amount at Stated Maturity of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults under, and their consequences provided for in, the Indenture, without the consent of the Holders of each Security of such series so affected. Any such consent or waiver by the Holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Debenture and any Debentures which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Debenture at the place, at the respective times, at the rate and in the coin or currency herein prescribed. The Debentures are issuable in registered form without coupons in denominations of $1,000 and integral multiples thereof. Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations, without charge except for any tax or other governmental charge imposed in relation thereto, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and in the manner and subject to the limitations provided in the Indenture. The Debentures are unsecured obligations of the Company ranking pari passu without any preference among themselves and equally with all other unsecured indebtedness (other than subordinated indebtedness) of the Company from time to time outstanding. The Debentures are not redeemable on any date prior to maturity. A-6 Upon due presentment for registraton of transfer of this Debenture at the office or agency of the Company in the Borough of Manhattan, The City of New York, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount at Stated Maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in relation thereto. Prior to due presentment for registration of transfer of the Debenture, the Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the registered Holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon by anyone other than the Company, any Debenture registrar or the Trustee), for the purpose of receiving payment hereof or on account hereof, and for all other purposes (subject to the provisions appearing on the face hereof), and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. No recourse for the payment of the principal of or interest on this Debenture, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule or law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as a condition of and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are not defined herein shall have the meanings assigned to them in the Indenture. This Debenture shall be governed by and construed in accordance with the laws of the State of New York. A-7 The following abbreviations, when used in the inscription on the face of the within instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common Custodian TEN ENT --as tenants by the UNIF GIFT MIN ACT -- --------------- entireties (Cust) (Minor) JT TEN --as joint tenants with right under Uniform Gifts to Minors Act of survivorship and not as tenants in common ------------------------------------ (State) Additional abbreviations may also be used though not in the above list. --------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - -------------------------------------------------------------------------------- (NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE, MUST BE PRINTED OR TYPEWRITTEN) - -------------------------------------------------------------------------------- the within Debenture, and all rights thereunder, hereby irrevocably constituting and appointing attorney - ----------------------------------------------------------------------- to transfer such Debenture in the books of the Company, with full power of substitution in the premises. Dated: -------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-4.16 13 FORM OF DEBENTURE 2010 EXHIBIT 4.16 A-1 [FORM OF FRONT OF DEBENTURE] No. $ ARCO CHEMICAL COMPANY 10.25% Debenture Due 2010 CUSIP ARCO CHEMICAL COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars at the office or agency of the Company in the Borough of Manhattan, The City of New York, on November 1, 2010 (the "Maturity Date"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on May 1 and November 1 of each year (each an "Interest Payment Date"), commencing with the Interest Payment Date next following November 7, 1990 (the "Original Issue Date"), and on the Maturity Date, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title hereof, from the May 1 or November 1, as the case may be, to which interest on this Debenture has been paid next preceding the applicable Interest Payment Date or, if no interest has been paid on this Debenture, from the Original Issue Date until payment of said principal sum has been made or duly provided for; provided, however, that any payment of principal or interest to be made on an Interest Payment Date or Maturity Date which is not a Business Day shall be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Maturity Date, as the case may be, and no additional interest shall accrue as a result of such delayed payment. For purposes of this Debenture, "Business Day" means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are authorized or required by law or regulation to be closed in The City of New York or The City of Philadelphia. The interest so payable on any Interest Payment Date or the Maturity Date will, except as provided in the Indenture, be paid to the person in whose name the Debenture is registered at the close of business on the April 15 or October 15 next preceding such Interest Payment Date (a "Record Date") in the case of interest payments on other than the Maturity Date, and on the Maturity Date in the case of an interest payment on the Maturity Date, whether or not such fifteenth day or Maturity Date is a Business Day. At the option of the Company, interest so payable may be paid by check mailed to the registered address of such person; provided that, if the holder hereof is the holder of U.S. $10,000,000 or more in aggregate principal amount A-2 of Debentures, such payments will be made by wire transfer of immediately available funds, but only if appropriate wire transfer instructions have been received in writing by the Trustee not less than fifteen days prior to the applicable Interest Payment Date. Principal and interest payable at maturity in respect of this Debenture will be paid in immediately available funds upon surrender of this Debenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. All payments of principal and interest in respect of this Debenture will be made net of any deduction or withholding for or on account of all taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any governmental authority if the Company is required by law to deduct or withhold amounts for or on account of such taxes, duties, assessments or governmental charges. Reference is made to the further provisions of this Debenture set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Debenture shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. A-3 IN WITNESS WHEREOF, ARCO Chemical Company has caused this Debenture to be signed, manually or by facsimile, by its President and Chief Executive Officer and by its Vice President and Treasurer, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon by facsimile or otherwise). Dated: ARCO CHEMICAL COMPANY Attest: By -------------------------------------- President and Chief Executive Officer By ---------------------------------- Vice President and Treasurer [SEAL] [TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Securities issued under the within mentioned Indenture. THE BANK OF NEW YORK as Trustee By -------------------------------------- Authorized Signatory A-4 [FORM OF REVERSE OF DEBENTURE] ARCO CHEMICAL COMPANY 10.25% DEBENTURE DUE 2010 This Debenture is one of a duly authorized issue of debentures, notes, bonds or other evidences of indebtedness of the Company (herein called the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an Indenture dated as of June 15, 1988 (herein called the "Indenture"), duly executed and delivered by the Company to The Bank of New York, Trustee (hereinafter called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Securities. The Securities may be issued in one or more series, which different series may be issued in various aggregate principal amounts, may mature at different times, may bear interest (if any) at different rates, may be subject to different redemption provisions (if any), may be subject to different sinking, purchase or analogous funds (if any), may be subject to different covenants and Events of Default and may otherwise vary as provided in the Indenture. This Debenture is one of a series of Securities of the Company issued pursuant to the Indenture designated as the 10.25% Debentures Due 2010 (herein called the "Debentures") limited in aggregate principal amount to $100,000,000. In case an Event of Default shall occur and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than 50% in aggregate principal amount at Stated Maturity of the Securities at the time outstanding of each series affected by such supplemental indenture or indentures, evidenced as provided in the Indenture, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or any supplemental indenture as such provisions apply to such Securities or modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Security or reduce the rate of interest or extend the time of payment of A-5 interest thereon or reduce the principal thereof or the time during which premium is payable thereon or change the method of computing the amount of principal thereof or make the principal thereof or any premium or interest thereon payable in any coin or currency other than that provided in the Securities or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof or the amount thereof provable in bankruptcy without the consent of the Holder thereof, or (ii) reduce the percentage in principal amount at Stated Maturity of the outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of the Indenture or of certain defaults under, and their consequences provided for in, the Indenture, without the consent of the Holders of each Security of such series so affected. Any such consent or waiver by the Holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Debenture and any Debentures which may be issued in exchange or substitution herefor, irrespective of whether or not any notation thereof is made upon this Debenture or such other Debentures. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Debenture at the place, at the respective times, at the rate and in the coin or currency herein prescribed. The Debentures are issuable in registered form without coupons in denominations of $1,000 and integral multiples thereof. Debentures may be exchanged for a like aggregate principal amount of Debentures of other authorized denominations, without charge except for any tax or other governmental charge imposed in relation thereto, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and in the manner and subject to the limitations provided in the Indenture. The Debentures are unsecured obligations of the Company ranking pari passu without any preference among themselves and equally with all other unsecured indebtedness (other than subordinated indebtedness) of the Company from time to time outstanding. The Debentures are not redeemable on any date prior to maturity. A-6 Upon due presentment for registraton of transfer of this Debenture at the office or agency of the Company in the Borough of Manhattan, The City of New York, a new Debenture or Debentures of authorized denominations for an equal aggregate principal amount at Stated Maturity will be issued to the transferee in exchange therefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in relation thereto. Prior to due presentment for registration of transfer of the Debenture, the Company, the Trustee, any paying agent and any Debenture registrar may deem and treat the registered Holder hereof as the absolute owner of this Debenture (whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or other writing hereon by anyone other than the Company, any Debenture registrar or the Trustee), for the purpose of receiving payment hereof or on account hereof, and for all other purposes (subject to the provisions appearing on the face hereof), and neither the Company nor the Trustee nor any paying agent nor any Debenture registrar shall be affected by any notice to the contrary. No recourse for the payment of the principal of or interest on this Debenture, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule or law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as a condition of and as part of the consideration for the issue hereof, expressly waived and released. Terms used herein which are not defined herein shall have the meanings assigned to them in the Indenture. This Debenture shall be governed by and construed in accordance with the laws of the State of New York. A-7 The following abbreviations, when used in the inscription on the face of the within instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common Custodian TEN ENT --as tenants by the UNIF GIFT MIN ACT -- --------------- entireties (Cust) (Minor) JT TEN --as joint tenants with right under Uniform Gifts to Minors Act of survivorship and not as tenants in common ------------------------------------ (State) Additional abbreviations may also be used though not in the above list. --------------- FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - -------------------------------------------------------------------------------- (NAME AND ADDRESS OF ASSIGNEE, INCLUDING ZIP CODE, MUST BE PRINTED OR TYPEWRITTEN) - -------------------------------------------------------------------------------- the within Debenture, and all rights thereunder, hereby irrevocably constituting and appointing attorney - ----------------------------------------------------------------------- to transfer such Debenture in the books of the Company, with full power of substitution in the premises. Dated: -------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EX-10.15 14 1999 LONG-TERM INCENTIVE PLAN EXHIBIT 10.15 LYONDELL CHEMICAL COMPANY 1999 LONG-TERM INCENTIVE PLAN 1. Objectives. This Lyondell Chemical Company 1999 Incentive Plan (the "Plan") is intended to: . Focus Participants on key measures of value creation for the Company's shareholders . Provide significant upside and downside award potential commensurate with shareholder value creation . Encourage a long-term management perspective and reward for sustained long-term performance . Enhance the ability of Lyondell to attract and retain highly talented and competent individuals . Reinforce a team orientation among top management . Encourage ownership of the Company's stock among top management 2. Definitions. As used herein, the terms set forth below shall have the following respective meanings: "Award" means any Option, Performance Shares, Restricted Stock, Phantom Stock, Cash Award or Stock Appreciation Right, whether granted singly, in combination or in tandem, granted to a Participant pursuant to any applicable terms, conditions and limitations as the Committee may establish in order to fulfill the objectives of the Plan. "Award Agreement" means a written agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to an Award. "Board" means the Board of Directors of the Company. "Cash Award" means an award payable in cash. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Committee" means the Compensation Committee of the Board or any person or persons appointed by the Board to administer the Plan. "Company" means Lyondell Chemical Company. "Effective Date" means January 1, 1999, subject to approval by the Company's shareholders as provided in Section 19. "Employee" means an individual employed by the Company or a Subsidiary. "Exercise Price" means the price at which the Option Shares may be purchased under the terms of the Award Agreement. "Fair Market Value" of a share of Common Stock means, as of a particular date, (i) if shares of Common Stock are listed on a national securities exchange, the closing price per share of Common Stock reported on the consolidated transaction reporting system for the principal national securities exchange on which shares of Common Stock are listed on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (ii) if shares of Common Stock are not so listed but are quoted on the Nasdaq National Market, the closing price per share of Common Stock reported by the Nasdaq National Market on that date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported, (iii) if the Common Stock is not so listed or quoted, the mean between the closing bid and asked price on that date, or, if there are no quotations available for such date, on the last preceding date on which such quotations are available, as reported by the Nasdaq Stock Market, or, if not reported by the Nasdaq Stock Market, by 1 the National Quotation Bureau Incorporated or (iv) if shares of Common Stock are not publicly traded, the most recent value determined by an independent appraiser appointed by the Company for such purpose. "Grant Date" means the date on which an Award is granted by the Committee. "Option" means a right to purchase a particular number of shares of Common Stock at a particular Exercise Price, subject to certain terms and conditions as provided in the Plan and Award Agreement. "Option Shares" means the shares of Common Stock covered by a particular Option. "Participant" means an Employee to whom an Award has been granted under this Plan. "Performance-Based Award" means an Award that is paid, vested or otherwise deliverable solely based on the achievement of one or more Performance Goals as provided in Section 6(a). "Performance Goal" means a standard established by the Committee to determine in whole or in part whether Performance-Based Awards shall be earned. "Performance Shares" means the contingent right to receive an amount in cash or Common Stock, as determined by the Committee in its sole discretion, that is subject to the attainment of one or more Performance Goals. "Phantom Stock" means a right to receive the value of a specified number of shares of Common Stock. "Plan" means the Lyondell Chemical Company 1999 Long-Term Incentive Plan, as amended from time to time. "Restricted Stock" means shares of Common Stock that are restricted or subject to forfeiture provisions. "Stock Appreciation Rights" or "SARs" means the right to receive an amount in cash or Common Stock equal to the appreciation in value of a specified number of shares of Common Stock over a particular period of time. "Subsidiary" means (i) any corporation, limited liability company or similar entity of which the Company directly or indirectly owns shares representing more than fifty percent of the voting power of all classes or capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the shareholders of such entity, (ii) Equistar Chemicals, LP or LYONDELL-CITGO Refining, LP so long as the Company maintains an equity ownership interest equal to at least twenty- five percent in such entities, or (iii) any other entity in which the Company has an equity ownership interest of at least twenty-five percent, so long as such entity is designated by the Committee as a Subsidiary for purposes of this Plan; provided, however, that with respect to Options intended to qualify as incentive stock options within the meaning of Section 422 of the Code, "Subsidiary" shall have the meaning set forth in Section 424(f) of the Code or any successor provision. 3. Plan Administration and Designation of Participants. (a) Eligibility. All Employees of the Company and its Subsidiaries who, in the judgment of the Committee, are in a position to contribute significantly to its long-term profit and growth objectives are eligible for Awards under this Plan. The Committee shall select the Participants from time to time by the grant of Awards under the Plan and, subject to the terms and conditions of the Plan, shall determine all terms and conditions of the Award. (b) Administration. The Plan shall be administered by the Committee, which shall have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or appropriate. The Committee may delegate its duties hereunder to the Chief Executive Officer or other senior officers of the Company subject to such rules and regulations as the Committee establishes. The Committee may, in its discretion, retain the services of an outside administrator for the purpose 2 of performing any of its functions hereunder. The Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, eliminate or make less restrictive any restrictions contained in an Award Agreement, waive any restriction or other provision of this Plan or an Award Agreement or otherwise amend or modify an Award in any manner that is either (i) not adverse to the Participant holding the Award or (ii) consented to by such Participant. The Committee may grant an Award to an individual whom it expects to become an Employee of the Company or any of its Subsidiaries within the following six months, with such Award being subject to the individual's actually becoming an Employee within such time period, and subject to such other terms and conditions as may be established by the Committee. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award Agreement in the manner and to the extent the Committee deems necessary or desirable to further the Plan purposes. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. No member of the Committee and no officer of the Company to whom the Committee has delegated authority in accordance with this Plan shall be liable for anything done or omitted to be done by him or her in connection with the performance of any duties under this Plan, except for his or her own willful misconduct or as expressly provided by statute. 4. Award Agreement. Each Award granted hereunder, other than a Cash Award, shall be described in an Award Agreement, which shall be subject to the terms and conditions of the Plan and shall be signed by the Participant and by the appropriate officer for and on behalf of the Company. The Committee shall authorize written guidelines for the issuance of a Cash Award. 5. Shares of Common Stock Available for Awards. Subject to the provisions of Section 11 hereof, no Award shall be granted if it shall result in the aggregate number of shares of Common Stock issued under the Plan plus the number of shares of Common Stock covered by or subject to Awards then outstanding (after giving effect to the grant of the Award in question) to exceed the lesser of ten million or ten percent of the number of shares of Common Stock outstanding at the time of granting such Award. No Participant may be granted, during the term of the Plan, Options covering or relating to more than two million shares of Common Stock. No Participant may be granted, during the term of the Plan, Awards in the form of Performance Shares, Restricted Stock, Stock Appreciation Rights or Phantom Stock covering or relating to more than one million shares of Common Stock. No more than 2.5 million shares of Common Stock shall be available for Awards in the form of Performance Shares, Restricted Stock, Stock Appreciation Rights or Phantom Stock. No Participant may be granted Cash Awards in respect of any calendar year having a value in excess of $2 million. No more than one million shares of Common Stock shall be available for Incentive Stock Options. The number of shares of Common Stock that are the subject of Awards under this Plan that are forfeited or terminated, expire unexercised, are settled in cash in lieu of Common Stock or in a manner such that all or some of the shares covered by an Award are not issued to a Participant or are exchanged for Awards that do not involve Common Stock, shall again immediately become available for Awards hereunder. The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate. The Board and the appropriate officers of the Company shall from time to time take whatever actions are necessary to file any required documents with governmental authorities, stock exchanges and transaction reporting systems to ensure that shares of Common Stock are available for issuance pursuant to Awards. 6. Types of Awards. (a) Performance-Based Awards. Without limiting the type or number of Awards that may be made under the other provisions of this Plan, an Award may be in the form of a Performance-Based Award. Performance-Based Awards are Awards that shall be paid, vested or otherwise deliverable solely on account of the attainment of one or more pre-established, objective Performance Goals established by the Committee prior to the earlier to occur of (i) 90 days after the commencement of the period of service to which the Performance Goal relates and (ii) the lapse of twenty-five percent of the period of service (as scheduled in good faith at the time the goal is established), and in any event while the outcome is substantially uncertain. A Performance Goal is objective if a 3 third party having knowledge of the relevant facts could determine whether the goal is met. Such a Performance Goal may be based on one or more business criteria that apply to the Employee, one or more business units of the Company, or the Company as a whole, and may include one or more of the following: economic value, economic value added, increased revenue, net income, stock price, market share, earnings per share, return on equity, return on assets, decrease in costs, shareholder value, net cash flow, total shareholder return, return on capital, return on investors' capital, operating income, funds from operations, cash flow, cash from operations, after-tax operating income, and total market value. Prior to the payment of any compensation based on the achievement of Performance Goals, the Committee must certify in writing that applicable Performance Goals and any of the material terms thereof were, in fact, satisfied. In interpreting Plan provisions applicable to Performance Goals and Performance-Based Awards, it is the intent of the Plan to conform with the standards of Section 162(m) of the Code and Treasury Regulation Section 1.162-27(e)(2)(i), and the Committee in establishing such goals and interpreting the Plan shall be guided by such provisions. A Performance-Based Award may include Performance Shares, Options, Restricted Stock, Stock Appreciation Rights, Cash Awards or Phantom Stock. (b) Options. Options granted to Employees hereunder may be either incentive stock options within the meaning of Section 422 of the Code or nonqualified options within the meaning of Section 83 of the Code. The Exercise Price of an Option shall not be less than the Fair Market Value of a share of Common Stock on the Grant Date and shall not be less than the Fair Market Value of a share of Common Stock on the Grant Date of any outstanding Option that is relinquished in connection with a grant of a new Option. The terms, conditions and limitations applicable to Options awarded to Employees shall be determined by the Committee. (c) Performance Shares. An Award may be in the form of Performance Shares. Performance Shares shall be payable, in the sole discretion of the Committee in cash, shares of Common Stock, or any combination thereof. The terms, conditions and limitations applicable to an Award of Performance Shares shall be determined by the Committee. (d) Restricted Stock. An Award may be in the form of shares of Common Stock or Restricted Stock. The terms, conditions, and limitations applicable to any Award of shares of Common Stock or Restricted Stock pursuant to this Plan shall be determined by the Committee. (e) Phantom Stock. An Award may be in the form of Phantom Stock, or other bookkeeping account tied to the value of shares of Common Stock. The terms, conditions, and limitations applicable to any Awards of Phantom Stock shall be determined by the Committee. (f) Stock Appreciation Rights. An Award may be in the form of SARs. The exercise price of an SAR shall not be less than the Fair Market Value of a share of Common Stock on the Grant Date. The terms, conditions, and limitations applicable to any Awards of SARs shall be determined by the Committee. (g) Cash Awards. An Award may be in the form of a Cash Award. The terms, conditions and limitations applicable to any Cash Awards shall be determined by the Committee. 7. Payment of Awards. (a) General. Payment of Awards may be made in the form of cash or Common Stock or combinations thereof and may include such restrictions as the Committee shall determine including, in the case of Common Stock, restrictions on transfer and forfeiture provisions. (b) Deferral. The Committee may, in its discretion, (i) permit selected Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee or (ii) provide for the deferral of an Award in an Award Agreement or otherwise. Any such deferral may be in the form of installment payments or a future lump sum payment. Any deferred payment, whether elected by the Participant or specified by the Award Agreement or by the Committee, may be forfeited if and to the extent that the Award Agreement so provides. (c) Dividends and Interest. Dividends or dividend equivalent rights may be extended to and made part of any Award denominated in Common Stock or units of Common Stock, subject to such terms, conditions and restrictions as the Committee may establish. The Committee may also establish rules and procedures for the 4 crediting of interest on deferred cash payments and dividend equivalents for deferred payment denominated in Common Stock or units of Common Stock. (d) Substitution of Awards. At the discretion of the Committee, a Participant may be offered an election to substitute an Award for another Award or Awards of the same or different type. 8. Stock Option Exercise. The price at which shares of Common Stock may be purchased under an Option shall be paid in full at the time of exercise in cash or, if permitted by the Committee, by means of tendering Common Stock or surrendering all or part of that or any other Award, including Restricted Stock, valued at Fair Market Value on the date of exercise, or any combination thereof. The Committee shall determine acceptable methods for tendering Common Stock or Awards to exercise an Option as it deems appropriate. The Committee may provide for procedures to permit the exercise or purchase of Awards by use of the proceeds to be received from the sale of Common Stock issuable pursuant to an Award. Unless otherwise provided in the applicable Award Agreement, in the event shares of Restricted Stock are tendered as consideration for the exercise of an Option, a number of the shares issued upon the exercise of the Option, equal to the number of shares of Restricted Stock used as consideration therefor, shall be subject to the same restrictions as the Restricted Stock so submitted as well as any additional restrictions that may be imposed by the Committee. 9. Termination of Employment. Upon the termination of employment by a Participant, any unexercised, deferred or unpaid Awards shall be treated as provided in the specific Award Agreement evidencing the Award. Unless otherwise specifically provided in the Award Agreement, each Award granted pursuant to this Plan which is an Option shall immediately terminate to the extent the Option is not vested (or does not become vested as a result of such termination of employment) on the date the Participant terminates employment with the Company or its Subsidiaries. 10. Assignability. Except as otherwise provided herein, no Award granted under this Plan shall be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by a Participant other than by will or the laws of descent and distribution, and during the lifetime of a Participant, any Award shall be exercisable only by him, or, in the case of a Participant who is mentally incapacitated, the Award shall be exercisable by his guardian or legal representative. The Committee may prescribe and include in applicable Award Agreements other restrictions on transfer. Any attempted assignment or transfer in violation of this Section shall be null and void. Upon the Participant's death, the personal representative or other person entitled to succeed to the rights of the Participant (the "Successor Participant") may exercise such rights. A Successor Participant must furnish proof satisfactory to the Company of his or her right to exercise the Award under the Participant's will or under the applicable laws of descent and distribution. Subject to approval by the Committee in its sole discretion, all or a portion of the Awards granted to a Participant under the Plan may be transferable by the Participant, to the extent and only to the extent specified in such approval, to (i) the children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members ("Immediate Family Member Trusts"), or (iii) a partnership or partnerships in which such Immediate Family Members have at least ninety-nine percent of the equity, profit and loss interests ("Immediate Family Member Partnerships"); provided that the Award Agreement pursuant to which such Awards are granted (or an amendment thereto) must expressly provide for transferability in a manner consistent with this Section. Subsequent transfers of transferred Awards shall be prohibited except by will or the laws of descent and distribution, unless such transfers are made to the original Participant or a person to whom the original Participant could have made a transfer in the manner described herein. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. Following transfer, any such Awards shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, and, except as otherwise provided herein, the term "Participant" shall be deemed to refer to the transferee. The consequences of termination of employment shall continue to be applied with respect to the original Participant, following which the Awards shall be exercisable by the transferee only to the extent and for the periods specified in this Plan and the Award Agreement. 5 11. Adjustments. (a) The existence of outstanding Awards shall not affect in any manner the right or power of the Company or its partners to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the ownership of the Company or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock (whether or not such issue is prior to, on a parity with or junior to the Common Stock) or other obligations, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other Company act or proceeding of any kind, whether or not of a character similar to that of the acts or proceedings enumerated above. (b) In the event of any Common Stock distribution or split, recapitalization, extraordinary distribution, merger, consolidation, combination or exchange of shares of Common Stock or similar change or upon the occurrence of any other event that the Committee, in its sole discretion, deems appropriate, the (i) the number of shares of Common Stock reserved under this Plan and covered by outstanding Awards and related Incentive Stock Option award limitation; (ii) the Exercise Price in respect of such Awards; and (iii) the appropriate Fair Market Value and other price determinations for such Awards shall be adjusted as appropriate. (c) In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation (such event hereinafter referred to as a "Transaction"), the Board shall be authorized (i) to issue or assume Awards by means of substitution of new Awards, as appropriate, for previously issued Awards or to assume previously issued Awards as part of such adjustment, (ii) to make provision, prior to the transaction, for the acceleration of the vesting and exercisability of, or lapse of restrictions with respect to, Awards or (iii) in the event of a Transaction of which the Company is not the surviving corporation, to (A) cancel Awards that are Options or SARs and give the Participants who are the holders of such Awards notice and opportunity to exercise for 30 days prior to such cancellation or (B) settle an Award that is an Option or SAR by a cash payment equal to the difference between the Fair Market Value per share of Common Stock on the date of the Transaction and the Exercise Price of the Award, multiplied by the number of shares subject to the Award. 12. Purchase for Investment. Unless the Awards and shares of Common Stock covered by this Plan have been registered under the Securities Act of 1933, as amended, each person receiving shares of Common Stock pursuant to an Award under this Plan may be required by the Company to give a representation in writing in form and substance satisfactory to the Company to the effect that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of such shares or any part thereof. 13. Tax Withholding. The Company shall have the right to deduct applicable taxes from any Award payment and withhold, at the time of delivery or vesting of cash or shares of Common Stock under this Plan, an appropriate amount of cash or number of shares of Common Stock or a combination thereof for payment of taxes required by law or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for withholding of such taxes. The Committee may also permit withholding to be satisfied by the transfer to the Company of shares of Common Stock theretofore owned by the holder of the Award with respect to which withholding is required. If shares of Common Stock are used to satisfy tax withholding, such shares shall be valued based on the Fair Market Value when the tax withholding is required to be made. 14. Amendments or Termination. The Committee may amend, alter or discontinue this Plan, except that no amendment or alteration that would impair the rights of any Participant under any Award that he has been granted shall be made without his consent, and no amendment or alteration shall be effective prior to approval by the Company's shareholders to the extent such approval is determined by the Committee to be required by applicable laws, regulations or exchange requirements. No Awards shall be granted more than ten years after the Effective Date. 15. Restrictions. No shares of Common Stock or other form of payment shall be issued with respect to any Award unless the Company shall be satisfied based on the advice of its counsel that such issuance will be in 6 compliance with applicable federal and state securities laws. The Award Agreement may include provisions for the repurchase by the Company of Common Stock acquired pursuant to an Award and repurchase of the Participant's Option rights. 16. Unfunded Plan. Insofar as it provides for Awards of cash, Common Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Stock or rights thereto under this Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Stock or rights thereto, nor shall this Plan be construed as providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a trustee of any cash, Common Stock or rights thereto to be granted under this Plan. Any liability or obligation of the Company to any Participant with respect to a grant of cash, Common Stock or rights thereto under this Plan shall be based solely upon any contractual obligations that may be created by this Plan and any Award Agreement, and no such liability or obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. None of the Company, the Board or the Committee shall be required to give any security or bond for the performance of any obligation that may be created by this Plan. 17. Miscellaneous. The granting of any Award shall not impose upon the Company any obligation to maintain any Participant as an Employee and shall not diminish the power of the Company to discharge any Participant at any time. 18. Governing Law. This Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory provisions of the Code or the securities laws of the United States, shall be governed by and construed in accordance with the laws of the State of Texas. 19. Effective Date of Plan; Shareholder Approval. This Plan shall be effective as of the Effective Date; however, the adoption of this Plan is expressly conditioned upon the approval of the holders of a majority of the outstanding shares of Common Stock present, or represented, and entitled to vote at the annual meeting of shareholders in 1999 and upon shareholder approval at that annual meeting that satisfies the applicable exchange requirements for shareholder approval. If the shareholders of the Company should fail so to approve this Plan at such annual meeting, this Plan shall terminate and cease to be of any further force or effect and all grants of Awards hereunder shall be null and void. Attested to by the Secretary of Lyondell Chemical Company, as effective on the 11th day of December, 1998. /s/ Robert Millstone ------------------------------------- Robert Millstone 7 EX-10.16 15 LYONDELL CHEMICAL CO. EXEC. SEVERANCE PLAN EXHIBIT 10.16 LYONDELL CHEMICAL COMPANY EXECUTIVE SEVERANCE PAY PLAN 1. Purpose. This Lyondell Chemical Company Executive Severance Pay Plan (the "Plan") is intended to assure Lyondell Chemical Company (the "Company") that it will have the continued dedication of specified executives of the Company by eliminating the distractions of personal uncertainties associated with potential transactions that the Company may undertake in the future by providing for the payment to such executives of certain severance benefits upon a termination within a specified period following a Change in Control, as defined below. 2. Definitions. As used herein, the terms set forth below shall have the following respective meanings: "Applicable Annual Earnings" means the sum of a Participant's annual base salary in effect on the last day of employment with Company (or if greater, annual base salary in effect on the date of the Change in Control) and the Participant's Target Award (whether or not paid) for personal services on behalf of the Company. The "Target Award" shall be the actual bonus compensation target for the calendar year during which the Change of Control occurs, or if none has been established, the bonus compensation target for the immediately preceding calendar year. Applicable Annual Earnings shall include the Participant's current annual base salary and Target Award whether or not paid on a deferred basis, including without limitation, amounts contributed by or on behalf of the Participant under any Company-sponsored plan, such as a plan described in section 125 or 401(k) of the Internal Revenue Code of 1986, as amended, or the Company's Executive Deferral Plan. Notwithstanding the preceding provisions of this paragraph, for purposes of this Plan, the definition of Applicable Annual Earnings does not include any income attributable to stock options, stock appreciation rights, performance awards other than awards under an executive bonus plan described above, dividend credits, and restricted stock granted under, and dividends on shares acquired pursuant to, any stock option plan, restricted stock plan or performance unit plan. "Board" means the Board of Directors of the Company. "Change in Control" shall be deemed to have occurred as of the date that one or more of the following occurs: (i) Individuals who, as of February 1, 1999, constitute the entire Board ("Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the then Incumbent Directors shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest, as such terms are used in Rule 14a-11 under the Securities Exchange Act of 1934, as amended or other actual or threatened solicitation of proxies or consents by or on behalf of any Person (as defined below) other than the Board; (ii) The stockholders of the Company shall approve (A) any merger, consolidation or recapitalization of the Company (or, if the capital stock of the Company is affected, any subsidiary of the Company), or any sale, lease, or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company (each of the foregoing being an "Acquisition Transaction") where (1) the shareholders of the Company immediately prior to such Acquisition Transaction would not immediately after such Acquisition Transaction beneficially own, directly or indirectly, shares or other ownership interests representing in the aggregate eighty percent (80%) or more of (a) the then outstanding common stock or other equity interests of the corporation or other entity surviving or resulting from such merger, consolidation or recapitalization or acquiring such assets of the Company, as the case may be (the "Surviving Entity") (or of its ultimate parent corporation or other entity, if any), and (b) the Combined Voting Power of the then outstanding Voting Securities of the Surviving Entity (or of its ultimate parent corporation or other entity, if any) or (2) the Incumbent Directors at the time of the initial approval of such Acquisition Transaction would not immediately after such Acquisition Transaction constitute a majority of the Board of Directors, or similar managing group, of the Surviving Entity (or of its ultimate parent corporation or other entity, if any), or (B) any plan or proposal for the liquidation or dissolution of the Company; or (iii) Any Person shall be or become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing in the aggregate more than twenty percent (20%) of either (A) the then outstanding shares of common stock of the Company ("Common Shares") or (B) the Combined Voting Power of all then outstanding Voting Securities of the Company; provided, however, that notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred for purposes of this Subsection (iii): (1) Solely as a result of an acquisition of securities by the Company which, by reducing the number of Common Shares or other Voting Securities outstanding, increases (a) the proportionate number of Common Shares beneficially owned by any Person to more than twenty percent (20%) of the Common Shares then outstanding, or (b) the proportionate voting power represented by the Voting Securities beneficially owned by any Person to more than twenty percent (20%) of the Combined Voting Power of all then outstanding Voting Securities; or (2) Solely as a result of an acquisition of securities directly from the Company except for any conversion of a security that was not acquired directly from the Company, provided, further, that if any Person referred to in paragraph (1) or (2) of this Subsection (iii) shall thereafter become the beneficial owner of any additional Common Shares or other Voting Securities of the Company (other than pursuant to a stock split, stock dividend or similar transaction), then a Change in Control shall be deemed to have occurred for purposes of this Subsection (iii). (iv) For purposes of this definition of Change in Control: (1) "Affiliate" shall mean, as to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified Person, within the meaning of such terms as used in Rule 405 under the Securities Act of 1933, as amended, or any successor rule. -2- (2) "Combined Voting Power" shall mean the aggregate votes entitled to be cast generally in the election of the Board of Directors, or similar managing group, of a corporation or other entity by holders of then outstanding Voting Securities of such corporation or other entity. (3) "LCR" shall mean LYONDELL-CITGO Refining Company Ltd. (from and after January 1, 1999, LYONDELL-CITGO Refining LP), a Limited Liability Company organized under the laws of the State of Texas. (4) "Person" shall mean any individual, entity (including, without limitation, any corporation, partnership, trust, joint venture, association or governmental body) or group (as defined in Sections 14(d)(3) or 15(d)(2) of the Exchange Act and the rules and regulations thereunder); provided, however, that Person shall not include the Company or LCR, any of their subsidiaries, any employee benefit plan of the Company or LCR or any of their majority-owned subsidiaries or any entity organized, appointed or established by the Company, LCR or such subsidiaries for or pursuant to the terms of any such plan. (5) "Voting Securities" shall mean all securities of a corporation or other entity having the right under ordinary circumstances to vote in an election of the Board of Directors, or similar managing group, of such corporation or other entity. "Cause" means: (i) the continued and willful refusal by a Participant to substantially perform his duties (other than a willful refusal to perform a duty which constitutes Constructive Termination for Good Reason or refusal resulting from the Participant's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Board which demand specifically identifies the manner in which the Board has determined that the Participant has not substantially performed his duties, and the Participant's performance is not cured to the Board's reasonable satisfaction within thirty (30) days from such demand; (ii) the engagement by a Participant in willful misconduct or dishonesty that is materially injurious to the Company, monetarily or otherwise; or (iii) a Participant's final conviction of a felony. Notwithstanding the foregoing, the Company shall not be deemed to have terminated a Participant for Cause without (i) reasonable written notice to a Participant setting forth the reasons for the Company's intention to terminate the Participant for Cause and (ii) an opportunity for the Participant, together with his counsel, to be heard before the Board. Notwithstanding any contrary provision of this Plan, it is specifically agreed that Cause shall not include any act or omission by a Participant in the good faith exercise of the Participant's business judgment as an officer of the Company. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Committee" means the Compensation Committee of the Board or any person or persons appointed by the Board to administer the Plan. "Company" means Lyondell Chemical Company. -3- "Constructive Termination for Good Reason" means: (i) the Participant is assigned to any duties or responsibilities that are not comparable to the Participant's position, offices, duties, responsibilities or status with the Company at the time of the Change in Control, or the Participant's reporting responsibilities or titles are changed and the change results in a reduction of the Participant's responsibilities or position with the Company; (ii) the level of benefits (qualified and executive) or compensation (individual base compensation and short and long-term incentive opportunity) provided to the Participant is reduced below the comparable level payable to similarly situated executives at the Company; or (iii) the Participant is actually transferred, or offered a proposed transfer, as evidenced in a written communication from the Company to the Participant, to another location other than the location at which he was primarily employed immediately preceding the Change in Control, unless that new location is a major operating unit or facility of the Company that is located within 50 miles of the Participant's primary location as of the date immediately preceding a transfer; provided, however, (1) the Participant, within thirty (30) days from the date that he is given written notice by the Company of such actual or proposed transfer, shall provide the Committee or the Board with written notice that the transfer shall constitute a Constructive Termination for Good Reason, (2) the Company, within twenty (20) days of receipt of the notice, fails to provide the Participant with written notice rescinding the actual or proposed transfer and (3) if the Company does not rescind the transfer, the Participant must terminate his employment due to Constructive Termination for Good Reason within forty (40) days following expiration of the twenty (20)-day period so that in any event the Participant shall have terminated his employment with the Company within ninety (90) days after the Participant first receives written notice from the Company of such actual or proposed transfer. "Disability" means a permanent and total disability as defined in the Company's Executive Long-Term Disability Plan. "Effective Date" means March 15, 1999. "Employee" means an individual employed by the Company or a Subsidiary. "Level One" means the Chief Executive Officer and any Executive Vice President of the Company . "Level One Participant" means a Participant who is employed in a Level One position of the Company during the period relevant for determination of eligibility pursuant to Section 3. "Level Two" means an elected executive officer of the Company who does not serve in a capacity defined under Level One. -4- "Level Two Participant" means a Participant who is employed in a Level Two position of the Company during the period relevant for determination of eligibility pursuant to Section 3. "Level Three" means a senior management position of the Company which is designated by the Chief Executive Officer as eligible for participation. "Level Three Participant" means a Participant who is employed in a Level Three position of the Company during the period relevant for determination of eligibility pursuant to Section 3. "Participant" means an Employee who is eligible for a benefit under the Plan pursuant to Section 3 as a Level One Participant, Level Two Participant, or Level Three Participant. "Plan" means the Lyondell Chemical Company Executive Severance Pay Plan, as amended from time to time. "Subsidiary" means (i) any corporation, limited liability company or similar entity of which the Company directly or indirectly owns shares representing more than 50% of the voting power of all classes or capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the shareholders of such entity, (ii) Equistar Chemicals, LP or LYONDELL-CITGO Refining, LP so long as the Company maintains an equity ownership interest equal to at least 25% in such entities, or (iii) any other entity in which the Company has an equity ownership interest of at least 25%, so long as such entity is designated by the Committee as a Subsidiary for purposes of this Plan. 3. Administration and Eligibility. (a) Administration. The Plan shall be administered by the Committee, which shall have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or appropriate. The Committee may, in its discretion, retain the services of an outside administrator for the purpose of performing any of its functions hereunder. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. Notwithstanding the foregoing, after a Change in Control, the Board shall designate a successor plan administrator which shall in all events be independent of the Company and any affiliate of the Company. The successor plan administrator shall have all the powers given under the Plan to the Committee with respect to (i) determining all questions relating to Plan benefits; (ii) adopting rules and procedures to administer the Plan; and (iii) interpreting Plan provisions. (b) Eligibility to Participate. Individuals eligible to receive benefits under the plan are Employees who, at any time in the two (2) year period prior to a Change in Control, occupied a position classified as Level One or Level Two, and such individuals shall be Level One Participants and Level Two Participants, respectively. In addition, the Chief Executive Officer may designate Employees in Level Three, individually or by employee classification, as Level Three -5- Participants under the Plan. Any designation of an Employee as a Level Three Participant must be made by written notice signed by the Chief Executive Officer and delivered to the Participant with a copy sent to members of the Committee. Notwithstanding the foregoing, an Employee will not be eligible to become a Participant so long as such Employee is (i) currently eligible for a severance benefit upon termination of employment with the Company pursuant to a plan or agreement established by ARCO Chemical Company, or (ii) eligible for severance benefits from the Company or a Subsidiary under any other plan or agreement if such benefits are substantially equal to or greater than the benefits set forth in this Plan. (c) Eligibility for Severance Benefits. In the event that a Participant's employment is terminated, within two years following a Change in Control, (i) by the Participant within ninety (90) days following the occurrence of any event which shall constitute Constructive Termination for Good Reason, or (ii) by the Company for reasons other than (A) Cause, or (B) the Participants' death or Disability, then the Company will provide or cause to be provided to the Participant the rights and benefits provided in Section 4. 4. Severance Benefits. If a Participant is eligible for a severance benefit due to a termination under circumstances described in Section 3(c), then the Company shall provide or cause to be provided to the Participant benefits as follows: (a) Salary and Other Payment at Termination. The Company shall pay to the Participant not later than thirty (30) days following termination a lump-sum payment in cash in the amount of: (i) for Level One Participants, three (3) times the Participant's Applicable Annual Earnings; (ii) for Level Two Participants, two (2) times the Participant's Applicable Annual Earnings; and (iii) for Level Three Participants, one (1) times the Participant's Applicable Annual Earnings. (b) Stock Options. With respect to any stock options granted to the Participant under any of the Company's incentive plans (a "Stock Option Plan"), notwithstanding any provision of the Stock Option Plans or the Participant's associated stock option agreements, if any, to the contrary, all non-vested options shall become 100% vested and fully exercisable as of the date of the Change in Control. In the event the Company is the surviving entity following a Change in Control, all stock options owned by a Participant shall be freely exercisable for the remainder of their existing terms without regard to any earlier date that may be specified therein including, without limitation, an earlier expiration date specified with respect to a Participant's termination of employment. -6- (c) Minimum Retirement Benefits. The Company shall cause the Participant to be fully vested in the Company's qualified defined benefit retirement plan and Supplementary Executive Retirement Plan (or its successor) and to have satisfied the minimum age and service requirements for early retirement eligibility for purposes of determining the Participant's eligibility to commence receipt of benefits under such plans. For purposes of determining the amount of benefits payable under the Company's qualified defined benefit plan and Supplementary Executive Retirement Plan (or its successor), a Participant who has attained age 55 at the time benefit payments commence shall be deemed to have satisfied the early retirement eligibility requirements for benefit payment purposes, and a Participant who has not attained age 55 at the time benefit payments commence shall receive a benefit amount that is actuarially adjusted to reflect the early commencement of the benefit that would otherwise have been paid at attainment of early retirement age. Payments attributable to any early retirement benefit that would become payable under the Company's qualified defined benefit retirement plan pursuant to this Section 4(c) shall be payable in a lump sum cash payment. The Participant shall be eligible for coverage under the retiree medical plan of the Company (or its successor) upon termination of employment, regardless of attained age and service, with such coverage to be provided for the Participant and the Participant's dependents on the same terms and conditions, excluding eligibility requirements, as provided to other retired executives of the Company (or its successor) in the same class or category of position as was held by the Participant prior to the Change in Control. (d) Executive Deferral Plan. Notwithstanding any provisions of the Company's Executive Deferral Plan (the "Deferral Plan") to the contrary, the full amount of contributions and earnings accrued or credited to a Participant's account balance under the Deferral Plan (as of the date immediately preceding the Termination) shall be immediately distributed to the Participant in a cash lump-sum payment. (e) Insurance and Other Benefits. To the extent that a Participant is eligible thereunder, then for a period of twenty-four (24) months following termination, the Participant (and his or her dependents, as applicable) shall continue to be covered at the Company's expense by the Company's life insurance, medical, dental, accident and disability plans or any successor to a plan or program in effect at termination for employees in the same class or category as the Participant (hereafter individually and collectively referred to as "Welfare Plan"), subject to the terms of the Welfare Plan and to the Participant's making any required contributions thereto which contributions shall not exceed those charged to employees in the same class or category in which the Participant was employed by the Company. In the event that the Participant is ineligible to continue to be so covered under the terms of any Welfare Plan, or in the event that Participant is eligible but the benefits applicable to the Participant (and his dependents, as applicable) are not substantially equivalent to such benefits immediately prior to termination, then, for a period of twenty-four (24) months following termination, the Company, at its expense, shall provide to the Participant (and his or dependents, as applicable) through other sources such benefits as may be necessary to make the benefits applicable to the Participant (and his or her dependents, as applicable) substantially equivalent to those in effect immediately prior to termination. Continuation coverage provided pursuant to any group health plan maintained by the Company shall be in addition to any continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985 as amended ("COBRA"). Any retiree coverage provided to a Participant shall be on the same terms -7- and conditions, including bridging of coverage, as that provided to executives in the same class or category in which the Participant was employed by the Company. (f) Outplacement. The Company shall provide to the Participant, at its expense, reasonable outplacement assistance for a period not to exceed one (1) year for the Participant from a professional outplacement assistance firm which is reasonably suitable to the Participant and commensurate with his position and responsibilities. In no event will the amount expended for outplacement assistance for the Participant exceed $40,000. (g) Certain Tax Payments. If the Participant becomes entitled to one or more payments (with a "payment" including, without limitation, an increase in pension benefits and the vesting of an option or other non-cash benefit or property) pursuant to the terms of any plan, arrangement or agreement with the Company (the "Change in Control Payments"), which are or become subject to the tax imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to the Participant an additional cash amount (the "Additional Gross-up Payment") such that the net amount retained by the Participant after reduction for (i) any Excise Tax on the Change in Control Payments and (ii) any federal, state and local income or employment tax and Excise Tax payable with respect to the Additional Gross-up Payment, shall equal the Change in Control Payments. For purposes of determining the amount of the Additional Gross-up Payment, the Participant shall be deemed (i) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Additional Gross-up Payment is to be made; and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Additional Gross-up Payment is to be made. Any Additional Gross-up Payment required hereunder shall be made to the Participant at the same time any Change in Control Payment subject to the Excise Tax is paid or deemed received by the Participant. The Additional Gross- up Payment shall not be paid under this Plan if an Additional Gross-up Payment which is identical to or greater than the amount calculated in this Section 4(g) is paid under any plan, arrangement or agreement with the Company. If, in connection with the examination of a Participant's tax return, the Internal Revenue Service asserts that any amount payable or benefit provided hereunder is a "parachute payment" as defined in the Code and such amount or benefit was not treated as a parachute payment in determining an Additional Gross-up Payment, the Company at its cost shall assume the defense of any controversy involving such issue and shall indemnify and hold the Participant harmless for all liabilities, costs, taxes, interest and penalties attributable to such issue and shall to the extent necessary (without duplication) increase the Additional Gross-up Payment to give effect to any additional amount or benefit determined to be a parachute payment. The Participant shall cooperate with the Company so that the Company will be able to challenge any adverse determination by the Internal Revenue Service through administrative proceedings and, if determined by the Company, through litigation. (h) No Duty to Mitigate. A Participant's entitlement to benefits hereunder shall not be governed by any duty to mitigate the Participant's damages by seeking further employment nor offset by any compensation which the Participant may receive from future employment. -8- 5. Company Benefit Plans (a) Funding of Supplemental Executive Benefit Plans Trust. Immediately upon a Change in Control, the Company shall deposit with the trustee under the Company's Supplemental Executive Benefit Plans Trust Agreement (the "Trust") an amount which, together with the value of the assets then held under the Trust, will be sufficient to fund, and to enable the trustee to timely pay, the benefits due under the Supplementary Executive Retirement Plan, the Executive Deferral Plan and any other plans funded by the Trust, taking into consideration such factors as the person serving as the Chief Executive Officer of the Company immediately prior to the Change in Control or his designee deems relevant. (b) Other Benefit Plans. The specific arrangements referred to in this Plan are not intended (i) to exclude or limit a Participant's participation in other benefit plans or programs in which the Participant currently participates or may participate including, without limitation, retiree benefits, or benefits which are available to executive personnel generally in the same class or category as the Participant or, (ii) to preclude or limit other compensation or benefits as may be authorized by the Committee or the Board from time to time. To the extent not otherwise paid or provided, the Company shall timely pay or provide to the Participants and/or the Participant's dependents any other amounts or benefits required to be paid or provided or which the Participant or the Participant's dependents are eligible to receive pursuant to this Plan and under any plan program, policy or practice or contract or agreement of the Company as in effect and applicable generally to executive personnel in the same class or category of a Participant. 6. Payment Obligations Absolute. The Company's obligation to pay or provide, or to cause to be paid or provided to Participants the amounts and benefits and to make the arrangements provided in this Plan shall be absolute and unconditional and shall not be affected by any circumstances (including, without limitation, any setoff, claim, counterclaim, recoupment, defense or other right, which the Company may have against a Participant or anyone else). All amounts payable by or on behalf of the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by or on behalf of the Company shall be final and the Company and its subsidiaries or affiliates, for any reason whatsoever, shall not seek to recover all or any part of such payment from a Participant or from whomever shall be entitled thereto. In no event shall an asserted violation of any provision of this Plan constitute a basis for deferring or withholding any amount payable to, or on behalf of, a Participant under this Plan. 7. Confidentiality and Cooperation. (a) Cooperation. Following termination, Participants will furnish such information and render such assistance and cooperation as may reasonably be requested in connection with any litigation or legal proceedings concerning the Company, any of its Subsidiaries (other than any legal proceedings arising out of or concerning Participant's employment or Participant's termination). In connection with such cooperation, the Company will pay or reimburse Participants for reasonable expenses. -9- (b) Release of Liability. Each Participant must, prior to the time that he or she is eligible to receive any payments provided for in Section 4 of this Plan, execute and deliver to the Company, on a form reasonably satisfactory to the Company and the Participant, a separate release and waiver, which, without limiting the generality of the foregoing, shall include a release and discharge of the Company, its Subsidiaries, and its and their directors, board of directors, officers, employees, owners, agents, successors and assigns from any and all suits, causes of action, demands, claims, charges, complaints, liabilities, costs, losses, damages, injuries, bonds, judgments, attorneys' fees and expenses, in any form whatsoever, in law or in equity, whether known or unknown, whether suspect or unsuspected, arising out of the Participant's employment with Company or any Subsidiary through his termination, including, without limitation, claims arising under any federal, state or local law for breach of an implied covenant of good faith and fair dealing, breach of contract, defamation, slander, negligent misrepresentation, fraud, intentional or negligent interference with business relations, and employment discrimination, including, but not limited to, claims under the Age Discrimination in Employment Act, the Americans with Disabilities Act and the Texas Commission on Human Rights Act, except to the extent that the Participant's rights are vested under the terms of employee benefit plans sponsored by the Company and except with respect to such rights or claims (other than agreements herein to perform future employment-related actions) as may arise after termination. 8. Term of Plan. If a Change in Control occurs, this Plan shall continue in full force and effect and shall not terminate or expire until all Participants who become entitled to any payments hereunder shall have received such payments in full. The Plan shall be subject to amendment, substitution, revocation or termination by the Committee at any time prior to a Change in Control; provided, however, that no amendment, substitution, revocation or termination shall occur without the consent of the affected Participants if a third party has submitted a proposal to the Board that is reasonably calculated, in the judgment of the Committee, to effect a Change in Control. After a Change in Control, the Plan shall not be subject to amendment, substitution, revocation or termination in any respect which adversely affects the rights of a Participant without the consent of that Participant. 9. Notices. All notices, requests, demands and other communications required or permitted to be given hereunder (hereinafter referred to as "notices") shall be in writing and shall be deemed to have been duly given if delivered by-hand, given by facsimile or telegram, or mailed via certified or registered U.S. mail, to the party to receive such notice at such party's address set forth below; provided that either party may change its address for notice by giving to the other party written notice of such change. If to the Company: Lyondell Chemical Company 1221 McKinney, Suite 1600, Houston, TX 77010 Attn: Chairman of the Board of Directors -10- If to a Participant: Last address on the books of the Company. Any notice given pursuant to this Plan shall be deemed received (i) if delivered by-hand, when delivered; (ii) if sent by facsimile or telegram, 24 hours after sending; and (iii) if mailed, when delivered. 10. Claims Procedure. If a Participant makes a written request alleging a right to receive benefits under this Plan or alleging a right to receive an adjustment in benefits being paid under the Plan, the Committee shall treat it as a claim for benefits. All claims for benefits under the Plan shall be sent to the Committee and must be received within 30 days after termination of employment. If the Committee determines that any individual who has claimed a right to receive benefits, or different benefits, under the Plan is not entitled to receive all or any part of the benefits claimed, he will inform the claimant in writing of its determination and the reasons therefor in terms calculated to be understood by the claimant. The notice will be sent within 90 days of the claim unless the Committee determines additional time, not exceeding 90 days, is needed. The notice shall make specific reference to the pertinent Plan provisions on which the denial is based, and describe any additional material or information that is necessary. Such notice shall, in addition, inform the claimant what procedure the claimant should follow to take advantage of the review procedures set forth below in the event the claimant desires to contest the denial of the claim. The claimant may within 90 days thereafter submit in writing to the Committee a notice that the claimant contests the denial of his or her claim by the Committee and desires a further review. The Committee shall within 60 days thereafter review the claim and authorize the claimant to appear personally and review pertinent documents and submit issues and comments relating to the claim to the persons responsible for making the determination on behalf of the Committee. The Committee will render its final decision with specific reasons therefor in writing and will transmit it to the claimant within 60 days of the written request for review, unless the Committee determines additional time, not exceeding 60 days, is needed. 11. Arbitration of Disagreements. Any dispute, controversy or claim arising out of or relating to the obligations under this Plan (after exhaustion of the claims procedure remedies set forth in Section 10), shall be settled by final and binding arbitration in accordance with the American Arbitration Association Employment Dispute Resolution Rules. The arbitrator shall be selected by mutual agreement of the parties, if possible. If the parties fail to reach agreement upon appointment of an arbitrator within 30 days following receipt by one party of the other party's notice of desire to arbitrate, the arbitrator shall be selected from a panel or panels submitted by the American Arbitration Association (the "AAA"). The selection process shall be that which is set forth in the AAA Employment Dispute Resolution Rules, except that, if the parties fail to select an arbitrator from one or more panels, AAA shall not have the power to make an appointment but shall continue to submit additional panels until an arbitrator has been selected. All fees and expenses of the arbitration, including a transcript if requested, will be borne by the parties equally. -11- 12. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that Participant may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance, or annuity contract governing such right, benefit or interest. (b) Construction of Plan. Nothing in this Plan shall be construed to amend any provision of any plan or policy of the Company except as otherwise expressly noted herein. This Plan is not, and nothing herein shall be deemed to create, a commitment of continued employment of a Participant by the Company or any Subsidiary. The captions of this Plan are not part of the provisions hereof and shall have no force or effect. Whenever the context of this Plan so requires, the masculine gender includes the feminine gender, and words used in the singular or plural will include the other. The words "herein" "hereunder" and other similar compounds of the word "here" refer to the entire Plan and not to any particular section or provision. (c) Successors. A Participant's rights under this Plan are personal to the Participant and without the prior written consent of the Company shall not be assignable by a Participant otherwise than by will or the laws of descent and distribution. This Plan shall inure to the benefit of and be enforceable by a Participant's legal representatives. The Company will require any successor to assume this Plan, and to agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform this Plan if no such succession had taken place. Failure of the Company to obtain such assumption and agreement shall entitle a Participant to compensation from the Company in the same amount and on the same terms as he would be entitled hereunder with respect to Constructive Termination for Good Reason. This Plan shall be binding upon and inure to the benefit of the Company and any successor organization or organizations which shall success to substantially all of the business and/or assets of the Company (whether direct or indirect by means of merger, consolidation, acquisition of substantially all the assets of the of the Company, or otherwise, including by operation of law). (d) Taxes. Any payment or delivery required under this Plan shall be subject to all requirements of the law with regard to withholding of taxes, filing, making of reports and the like. (e) Governing Law. TO THE EXTENT THIS PLAN IS NOT GOVERNED BY FEDERAL LAW, THIS PLAN SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW PRINCIPLES. LYONDELL CHEMICAL COMPANY -12- EX-10.17 16 ARCO CHEMICAL CO. CHANGE OF CONTROL PLAN EXHIBIT 10.17 ARCO CHEMICAL COMPANY CHANGE OF CONTROL PLAN To record the adoption of the ARCO Chemical Company Change of Control Plan, effective February 19, 1998, the undersigned, being duly authorized to act on behalf of ARCO Chemical Company has executed this plan document at Newtown Square, Pennsylvania on the 9th day of April, 1998. ATTEST: ARCO CHEMICAL COMPANY BY: /s/ Valerie H. Perry BY: /s/ Francis W. Welsh ------------------------- ------------------------- Francis W. Welsh Vice President--Human Resources ARCO CHEMICAL COMPANY CHANGE OF CONTROL PLAN WHEREAS, the Board of Directors (the "Board") of ARCO Chemical Company, a Delaware corporation (the "Company"), recognizes that the possibility of a merger, takeover or other change of control of the Company may occur and can significantly distract its executives and personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to be able to retain the services of its executives and personnel in the event of a Change of Control of the Company, during the pendency of a possible Change of Control, and following a Change of Control, to ensure their continued dedication and efforts in any such event without undue concern for their personal financial and employment security. NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is adopted as of the Effective Date. ARTICLE I ESTABLISHMENT OF PLAN Effective February 19, 1998, the Company establishes the ARCO Chemical Company Change of Control Plan as set forth in this document. ARTICLE II DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. 2.1 "Accrued Compensation" means any amounts (other than amounts payable under this Plan) earned, accrued or otherwise payable to a Participant as of the Participant's Termination Date but not paid as of such Termination Date in respect of (i) base salary and (ii) bonus amounts for Plan Years prior to the Plan Year in which the Participant's Termination Date occurs. 2.2 "Affiliate" means with respect to any person or entity, any entity, directly or indirectly, controlled by, controlling or under common control with such person or entity. 2.3 "Base Salary" means a Participant's annualized base salary (including any portion that the Participant may have elected to defer), calculated at the greater of the rate in effect (i) immediately prior to a Change of Control or (ii) as of the Participant's Termination Date. 2.4 "Bonus Amount" means an amount equal to the greater of (i) a Participant's target bonus amount (including any portion that the Participant may have elected to defer) under the Company's Annual Incentive Plan (or successor annual incentive plan) for the Plan Year in which the Change of Control occurs or for the Plan Year in which the Participant's Termination Date occurs, whichever is greater or (ii) the average bonus amount paid or payable to the Participant (including any portion that the Participant may have elected to defer) under the Company's Annual Incentive Plan (or successor annual incentive plan) for the three Plan Years preceding the Plan Year in which the Change of Control occurs. 2 2.5 "Cause" means (a) for any Participant who is in Employee Classification A, B, C, D or E as set forth in Appendix A, (i) the willful and continued refusal by the Participant to perform substantially his or her reasonably assigned duties with the Company (other than any such failure resulting from his or her physical or mental incapacity) or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his or her action or omission was in the best interest of the Company. 2.6 "Change of Control" means at any time after the Effective Date and prior to the termination of the Plan: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change of Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change of Control. A "Non-Control Acquisition" shall mean an acquisition (i) by Atlantic Richfield Company, (ii) by an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (iii) the Company or its Subsidiaries or (iv) by any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of the Effective Date, are members of the Board (the "Incumbent Board") cease for any reason to constitute a majority of the members of the Board; provided, however, that if the election or nomination for election by the Company's common stockholders of any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (c) of this 3 definition) was approved by a vote of at least a majority of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office through either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; (c) A merger, consolidation or reorganization of the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of the Company where: (i) the stockholders of the Company immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Corporation; (d) A complete liquidation or dissolution of the Company; (e) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary); or (f) a "Change of Control" of Atlantic Richfield Company. For purposes of this Section 2.6(f) only, Change of Control shall mean Change of Control as defined in the Trust Agreement, to be entered into by and between Atlantic Richfield Company and State Street Bank and Trust Company. 4 Notwithstanding the foregoing, a Change of Control shall not be deemed to occur if the Change of Control occurs solely pursuant to Section 2.6(a) and results from an acquisition in a secondary offering of securities to the public by Atlantic Richfield Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities then outstanding, increases the percentage of shares Beneficially Owned by the Subject Person, provided that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change of Control shall occur. Notwithstanding anything to the contrary contained herein, if the employment of an Eligible Employee is terminated (i) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control and who effectuates a Change of Control or (ii) otherwise in connection with, or in anticipation of, a Change of Control which actually occurs, then for purposes of this Plan the date of a Change of Control with respect to that Eligible Employee shall be deemed to be the date immediately prior to the Eligible Employee's Termination Date. 2.7 "Compensation Committee" means the Compensation Committee of the Board as such committee may be constituted from time to time. 2.8 "Disability" means: (a) the term "Disability" as used in the Company's relevant long- term disability plan applicable to a Participant, if any; and (b) in all other cases, the term "Disability" means a physical or mental infirmity which impairs the Participant's ability to perform substantially his or her duties for a period of one hundred eighty (180) consecutive days. 5 2.9 "Effective Date" means February 19, 1998. 2.10 "Eligible Employee" means each regular full-time or regular part-time employee of the Company or any of its Affiliates. 2.11 "Good Reason" means the occurrence after a Change of Control of any of the following events or conditions: (a) for any Participant who is in Employee Classification A as set forth in Appendix A, (i) a change in the Participant's status, title, position or responsibilities (including reporting responsibilities) which, in the Participant's reasonable judgment, represents an adverse change from his or her status, title, position or responsibilities as in effect immediately prior thereto; (ii) with respect to either the Participant's annual base salary or target bonus then in effect under the Company's Annual Incentive Plan (or successor annual incentive plan), a reduction by ten percent (10%) or more from the greater of such base salary or target, as the case may be, in effect (x) as of the date of the Change of Control or (y) on any date following the Change of Control; (iii) the relocation of the Participant's principal place of work, but only if the "moving expenses" incurred in connection with such relocation would be deductible under Section 217 of the Internal Revenue Code of 1986, as amended; (b) for any Participant who is in Employee Classification B, C or D as set forth in Appendix A, the events or conditions described in Sections 2.12(a) (ii) or (iii); and (c) for any Participant who is in Employee Classification E as set forth in Appendix A, (i) the event described in Section 2.12(a)(iii), or (ii) with respect to the Participant's annual base salary, a reduction by ten percent (10%) or more from the greater of such base salary in effect (x) as of the date of the Change of Control or (y) on any date following the Change of Control. 2.12 "Operating Unit" means any subsidiary, division, or other business unit of the Company or any of its Affiliates. 6 2.13 "Participant" means an Eligible Employee who meets the eligibility requirements of Article III. 2.14 "Plan" means this ARCO Chemical Company Change of Control Plan. 2.15 "Plan Benefit" means the benefit payable in accordance with Article V of the Plan. 2.16 "Plan Year" means January 1 through December 31. 2.17 "Salary Separation Payment" has the meaning ascribed to it in Section 5.2(b). 2.18 "Termination Date" means the date of termination of a Participant's employment as set forth in Article VI. ARTICLE III ELIGIBILITY 3.1 Participation. For purposes of this Plan each individual who is an Eligible Employee as of the date of a Change of Control shall automatically be a Participant under this Plan. 3.2 Duration of Participation. Any individual who is a Participant shall continue as a Participant until he or she has received the entire amount of the Plan Benefit, if any, which such individual is entitled to under the Plan. ARTICLE IV CHANGE OF CONTROL BENEFITS 4.1 1990 ARCO Chemical Company Long-Term Incentive Plan (the "1990 LTIP"). Notwithstanding the terms of the 1990 LTIP, the following shall occur under the 1990 LTIP upon the occurrence of a Change of Control: (a) all outstanding stock options granted thereunder shall 7 become immediately and fully vested and exercisable; (b) all dividend share credits accrued thereunder shall become immediately vested; and (c) all dividend share credits that would have been earned through the remainder of the term of the option granted thereunder (as determined in accordance with the formula set forth in Appendix B) shall be credited no later than the date of the Change of Control and be immediately vested. 4.2 1998 ARCO Chemical Company Long-Term Incentive Plan (the "1998 LTIP"). The following shall occur pursuant to the 1998 LTIP upon the occurrence of a Change of Control: (a) each Participant shall receive a conversion of the Participant's Contingent Restricted Stock for the next Performance Objective level into Performance-Based Restricted Stock based on a proration of the Company's progress to the next Performance Objective level as of the date of the Change of Control. Participants will be entitled to receive a conversion of Contingent Restricted Stock for the next Performance Objective level, based on a calculation of the percentage of RCM achieved to the effective date of the Change of Control as compared to the total amount of RCM required to achieve the next Performance Objective. The remaining shares of Contingent Restricted Stock, if any, shall be forfeited; (b) the Performance Supplement will be calculated and applied as of the effective date of the Change of Control, using the stock price on the effective date of the Change of Control, assuming a Change of Control occurs during the basic Performance Period (and not during an extended period as described in Section 2(a) of Article III of the 1998 LTIP); (c) all Performance-Based Restricted Stock and Stock Options will become immediately vested; (d) where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Long-Term Incentive Plan Administration Subcommittee of the Compensation Committee determines otherwise, all outstanding Stock Options that are not exercised shall be assumed by, or replaced with comparable options by, the surviving corporation; and (e) no actions shall be taken under the 1998 LTIP that would make the Change of Control ineligible for pooling of interests accounting treatment if, in the absence of such actions, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 8 Each capitalized term used in this Section 4.2 that is not a defined term under this Plan shall have the meaning ascribed to it under the 1998 LTIP. 4.3 ARCO Chemical Company Value Incentive Plan (the "VIP"). Notwithstanding the terms of the VIP, the following shall occur under the VIP upon the occurrence of a Change of Control: (a) all outstanding phantom stock units granted thereunder shall become immediately and fully vested; (b) all dividend share credits granted thereunder related to outstanding phantom stock units shall become immediately and fully vested; and (c) all dividend share credits that would have been earned through the expiration date of the phantom stock units granted thereunder (as determined in accordance with the formula set forth in Appendix B) shall be credited no later than the date of the Change of Control and be immediately vested. 4.4 Incorporation. The plans referred to in this Article IV are hereby amended to incorporate, or upon their adoption will be deemed to incorporate, the relevant provisions of this Article IV. ARTICLE V PLAN BENEFITS 5.1 Right to Plan Benefit. (a) A Participant shall be entitled to receive from the Company a Plan Benefit in the amount provided in Section 5.2 if (i) a Change of Control has occurred and (ii) within the two (2) year period commencing on the date of the Change of Control, the Participant's employment with the Company and its Affiliates terminates for any reason (including the sale, divestiture or other disposition of an Operating Unit employing the Participant), other than (A) a termination by the Company or any of its Affiliates for Cause, (B) a termination resulting from the Participant's Disability, (C) the Participant's death, or (D) a termination, voluntary resignation or retirement by the Participant without Good Reason. 5.2 Amount of Plan Benefit. If a Participant's employment is terminated under circumstances entitling him or her to a Plan Benefit, such Participant shall be entitled to the following: 9 (a) the Company shall pay to the Participant all Accrued Compensation within thirty (30) days after the Participant's Termination Date; (b) the Company shall pay to the Participant, as severance pay and in lieu of any further salary or bonus for periods subsequent to the Participant's Termination Date, in a single payment (without any discount for accelerated payment, but subject to applicable withholding taxes) within thirty (30) days after the Participant's Termination Date, an amount in cash equal to the amount determined in accordance with Appendix A (the "Salary Separation Payment"); provided, however, that if a Participant's employment is governed by laws, statutes, or regulations outside of the United States that mandate the payment of separation benefits, the Participant shall be paid the greater of the Salary Separation Payment or the statutorily required separation payment. Under no circumstances shall a Participant be entitled to payment of both the Salary Separation Payment and a statutorily required separation payment; (c) the Company shall pay to a Participant who participates in the ARCO Chemical Company Annual Incentive Plan (the "AIP") an amount in cash equal to his or her bonus award as determined by the Compensation Committee under the AIP for the Plan Year in which the Change of Control occurs, pro rated for the number of full months of plan participation during such Plan Year; and (d) for the period commencing on the Participant's Termination Date and continuing for the Participant's Salary Separation Payment Period (as determined in accordance with Appendix A) (the "Continuation Period"), the Company shall continue on behalf of the Participant and his or her dependents and beneficiaries (i) medical and dental benefits, (ii) long-term disability coverage and (iii) life insurance and other death benefits coverage. The coverages and benefits (including deductibles, if any) provided under this Section 5.2(d) during the Continuation Period shall be no less favorable to the Participant and his or her dependents and beneficiaries than the most favorable of such coverages and benefits provided the Participant and his or her dependents and beneficiaries immediately preceding the Change of Control. Any period during which benefits are continued pursuant to this Section 5.2(d) shall be considered to be in satisfaction of the Company's obligation to provide "continuation coverage" pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and the period of coverage required under said Section 4980B shall be reduced by the period during which benefits were provided pursuant to this Section 5.2(d). 5.3 Mitigation. The Participant shall not be required to mitigate the 10 amount of any payment or benefit provided for in this Plan by seeking other employment or otherwise and no such payment or benefit shall be offset or reduced by the amount of any compensation or benefits provided to the Participant in any subsequent employment. 5.4 Other Benefits; Non-Exclusivity of Rights. Nothing in this Plan shall prevent or limit the Participant's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its Affiliates and for which the Participant may qualify, nor shall anything herein limit or reduce such rights as any Participant may have under any other agreements with the Company or any of its Affiliates. Nothing herein shall be deemed to limit, supersede or restrict any rights that any Participant may have to accelerated vesting of any right or benefit under change of control provisions of any plan, program, agreement or otherwise. 5.5 Incorporation. Each employee benefit plan pursuant to which a Plan Benefit shall be provided to a Participant pursuant to this Article V is hereby amended to incorporate, or upon its adoption will be deemed to incorporate, the relevant provisions of this Article V. ARTICLE VI EXCISE TAX PROVISIONS 6.1 Excise Tax Limitation. This Section 6.1 shall apply only to Participants with an Employee Classification of B, C, D or E as set forth in Appendix A. (a) In the event it shall be determined that any payment or distribution of any type to or for the benefit of a Participant, by the Company, any of its Affiliates, any Person (as defined in Section 2.6(a)) who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company's assets (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code")) or any Affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise (the ("Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Payments shall be reduced (but not below zero) if and to the extent that a 11 reduction in the Payments would result in the Participant retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the Excise Tax), than if the Participant received the entire amount of such Payments. Unless the Participant shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid or provided latest in time. Any notice given by the Participant pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Participant's rights and entitlements to any benefits or compensation. (b) The determination of whether the Payments shall be reduced pursuant to Section 6.1(a) and the amount of such reduction shall be made, at the Company's expense, by an independent accounting firm selected by the Company and reasonably acceptable to the Participant which is one of the four largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination, together with detailed supporting calculations and documentation to the Company and the Participant within ten (10) days of the date of the Change of Control or Termination Date, as the case may be. If the Accounting Firm determines that no Excise Tax is payable by the Participant with respect to the Payments, it or the Company shall furnish the Participant with an opinion that no Excise Tax will be imposed with respect to any such Payments. 6.2 Excise Tax Gross-Up. This Section 6.2 shall apply only to Participants with an Employee Classification of A as set forth in Appendix A. (a) In the event it shall be determined that any Payments (as defined in Section 6.1(a)), other than the payment provided for in this Section 6.2(a), would be subject to the Excise Tax (as defined in Section 6.1(a)), then the Participant shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 12 (b) All determinations as to whether any of the Payments are "parachute payments" (within the meaning of Section 280G of the Code), including whether a Gross-Up Payment is required, the amount of such Gross-Up Payment and amounts relevant to the last sentence of this Subsection 6.2(b), shall be made by the Accounting Firm (as defined in Section 6.1(b)), which shall provide its determination (the "Determination"), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matter, both to the Company and the Participant within ten (10) days of the date of the Change of Control or Termination Date, as the case may be, or such earlier time as is requested by the Company or the Participant (if the Participant reasonably believes that any of the Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that he or she has substantial authority not to report any Excise Tax on his or her federal income tax return. If a Gross-Up Payment is determined to be payable, it shall be paid to the Participant within five (5) days after the Determination is delivered to the Company or the Participant. Any determination by the Accounting Firm shall be binding upon the Company and the Participant, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the Company should have been made ("Underpayment"), or that Gross-Up Payments will have been made by the Company which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. In the case of an Overpayment, the Participant shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment; provided, however, that (i) the Participant shall not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a manner consistent with the intent of Subsection 6.2(a), which is to make the Participant whole, on an after-tax basis, from the application of the Excise Tax, it being understood that the correction of an Overpayment may result in the Participant repaying to the Company an amount which is less than the Overpayment. 13 ARTICLE VII SUCCESSORS TO COMPANY 7.1 Successors. (a) This Plan shall be binding upon the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company whether by operation of law or otherwise. (b) Neither this Plan nor any right or interest hereunder shall be assignable or transferable by a Participant or his or her beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Plan shall inure to the benefit of and be enforceable by a Participant's legal personal representative. ARTICLE VIII DURATION, AMENDMENT AND PLAN TERMINATION 8.1 Duration. This Plan shall continue in effect until terminated in accordance with Section 8.2. 8.2 Amendment and Termination. Prior to a Change of Control, the Plan may be amended or modified in any respect, and may be terminated, by resolution adopted by the Board. From and after the occurrence of a Change of Control, the Plan (i) may not be amended or modified in any manner that would in any way adversely affect the benefits or protections provided to any individual hereunder and (ii) may not be terminated until the later of (a) the third anniversary of the Change of Control or (b) the date that all Participants who have become entitled to Plan Benefits hereunder shall have received such payments in full. 14 8.3 Form of Amendment. Any amendment or termination of the Plan shall be effected by a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. ARTICLE IX MISCELLANEOUS 9.1 Administration. This Plan shall be administered by the Compensation Committee. 9.2 Employment Status. This Plan does not constitute a contract of employment or impose on the Company any obligation to retain any Participant as an employee or to change any employment policies of the Company. 9.3 Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.4 Settlement of Claims. The Company's obligation to make the payments provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, defense, recoupment, or other right which the Company may have against a Participant or others. 9.5 Governing Law. The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of the Commonwealth of Pennsylvania, without giving effect to the conflict of law principles thereof. 15 APPENDIX A Employee Classification Members -------------- ------- A CEO and Direct Reports B C3 and C4 Executives C C5 Executives D Key Managers (Grades A, B, C) E Grade D and below A Participant's Employee Classification shall be determined as set forth in the official records of the Company, and shall be based on his or her status as of the date immediately preceding the Participant's termination date, or, if it would entitle the Participant to a greater Salary Separation Payment or longer Salary Separation Period, as of the date immediately preceding the date on which the Change of Control occurs. Salary Separation Payment The Salary Separation Payment to which a Participant is entitled shall be based on the Participant's Employee Classification as of the date immediately preceding the Participant's Termination Date, or, if it would entitle the Participant to a greater Salary Separation Payment, immediately preceding the date on which the Change of Control occurs, and shall equal the amount described in the table below. 16 Employee Classification Salary Separation Payment - -------------- ------------------------- A Three times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. B Two times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. C One and one-half times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. D One times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. E Subject to a minimum of twelve weeks pay (one weeks pay to equal, as the case may be, one fifty-second of the Participant's annual base salary or forty times the Participant's hourly rate) and a maximum of fifty-two weeks pay, two weeks pay per year of service prorated for completed months of service. Employee Salary Separation Classification Payment Period - -------------- ----------------- A 36 months B 24 months C 18 months D 12 months E The number of weeks in respect of which the amount of the Salary Separation Payment is determined. 17 APPENDIX B 1990 LTIP. For purposes of Section 4.1(c) of the Plan, the number of dividend share credits to be issued under the 1990 LTIP shall be determined by compounding the number of dividend share credits issuable through the remainder of the term of the option granted thereunder based on the latest dividend declared by the Company prior to the date of the Change of Control and the fair market value of the Company's common stock as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. Value Incentive Plan. For purposes of Section 4.3(c) of the Plan, the number of dividend share credits to be issued under the VIP shall be determined by compounding the number of dividend share credits issuable through the expiration date of the phantom stock units granted thereunder based on the latest dividend declared by the Company prior to the date of the Change of Control and the fair market value of the Company's common stock as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. EXAMPLE: Assume Change of Control occurs five years after grant, with five years, or twenty quarterly dividends, remaining to expiration. Assume further a $.70 per share per quarter dividend rate and a $50.00 stock price as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. Assume further that Employee A's account balance at Change of Control is 5000 options originally granted at $42.00 per share with 1000 accrued DSC units. DSCs will be projected as if earned to expiration of the grant based upon the dividend rate and stock price in effect on the record date of the quarterly dividend immediately preceding the Change of Control. The computation of projected DSC units is as follows: PROJECTED DSC UNITS: 1000 DSC units (multiplied by) $.70 = $700.00 (divided by) $50.00 per share = 14 DSC units (14 + 1000 = 1014 DSC units upon first quarter projection) (1014 DSC units (multiplied by) $.70 = $709.80 (divided by) $50.00 per share = 14.196 DSC units (14.196 + 1014 = 1028.196 DSC units upon second quarter projection) Repeat the above analysis for 18 additional quarterly payments to expiration. 18 EX-10.18 17 EXECUTIVE SEVERANCE AGMT. FOR JOSEPH M. PUTZ EXHIBIT 10.18 EXECUTIVE SEVERANCE AGREEMENT, Dated as of December 1, 1997, between LYONDELL PETROCHEMICAL COMPANY, a Delaware corporation (the "Company"), and JOSEPH M. PUTZ ("Executive") TABLE OF CONTENTS Section 1. Termination Following Employment by Partnership.............. 1 Section 2. Rights and Benefits upon Termination......................... 2 (a) Stock Options............................................ 2 (b) Salary and Other Payment at Termination.................. 3 (c) Crediting of Additional Pension Benefit.................. 3 (d) Executive Deferral Plan.................................. 4 (e) Insurance and Other Benefits............................. 4 (f) Financial Counseling..................................... 5 (g) Outplacement............................................. 5 (h) No Duty to Mitigate...................................... 5 Section 3. Other Benefit Plans.......................................... 5 Section 4. Payment Obligations Absolute................................. 6 Section 5. Combined Gross-up Payment.................................... 6 Section 6. Confidentiality and Cooperation.............................. 7 (a) Cooperation.............................................. 7 (b) Release of Liability..................................... 7 Section 7. Term of Agreement............................................ 7 Section 8. Arbitration.................................................. 8 (a) Arbitrable Matters....................................... 8 (b) Submission to Arbitration................................ 8 (c) Arbitration Procedures................................... 8 (d) Compliance with Decisions................................ 9 (e) Costs and Expenses....................................... 9 Section 9. Notices...................................................... 9 Section 10. Miscellaneous................................................ 10 (a) Assignment............................................... 10 (b) Construction of Agreement................................ 10 (c) Amendment................................................ 11 (d) Waiver................................................... 11 (e) Severability............................................. 11 (f) Successors............................................... 11 (g) Taxes.................................................... 11 (h) Governing Law............................................ 11 (i) Entire Agreement......................................... 12 2 EXECUTIVE SEVERANCE AGREEMENT THIS EXECUTIVE SEVERANCE AGREEMENT, is made and entered into this 1st day of December, 1997, by and between LYONDELL PETROCHEMICAL COMPANY, a Delaware corporation (hereinafter referred to as "Company"), and JOSEPH M. PUTZ, an individual (hereinafter referred to as "Executive"). WITNESSETH: WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has authorized the Company to enter into a severance agreement in the form hereof with Executive; WHEREAS, Executive has been offered a position, anticipated to be effective on or about January 1, 1998, with Equistar Chemicals L.P. ("Equistar") and it is in the best interest of the Company that Executive accept this position without concern that Executive be distracted by personal uncertainties and risks created by this new assignment; NOW, THEREFORE, to assure the Company that it will have the continued dedication of Executive and the availability to Executive's advice and counsel prior to Executive's employment with Equistar, to induce Executive to remain in the employ of the Company until employment by Equistar, and further, to accept employment with Equistar and for other good and valuable consideration, the parties agree as follows: Section 1. Termination Following Employment by Partnership. Company will provide or cause to be provided to Executive the rights and benefits described in Section 2 of this Agreement in the event Executive's employment with Equistar is terminated by Equistar or at Executive's comtemplated resignation on December 31, 1999. Termination also shall include termination by reason of Executive's death, permanent disability or termination of employment by Executive within ninety (90) days following the occurrence of any event which shall constitute a "Constructive Termination for Good Reason." For purposes of this Agreement, Constructive Termination for Good Reason means: (i) the Executive is assigned to any duties or responsibilities that are not comparable to Executive's position, offices, duties, responsibilities or status with Equistar at the time of Equistar employment, or the Executive's reporting responsibilities or titles are changed and the change results in a reduction of Executive's responsibilities or position at Equistar; (ii) the level of benefits or compensation provided to Executive is reduced below the comparable level of benefits or compensation payable to similarly situated Executives at Equistar; or (iii) the Executive is actually transferred, or offered a proposed transfer, as evidenced in a written communication from Equistar to Executive, to another location other than the location at which he was primarily employed immediately preceding his initial employment with Equistar, unless that new location is a major operating unit or facility of the Company or Equistar that is located within 50 miles of Executive's primary location as of the date immediately preceding a transfer; provided, however, (1) Executive, within thirty (30) days from the date that he is given written notice of such actual or proposed transfer, shall provide the Compensation Committee or the Partnership Governance Committee of Equistar ("Partnership Governance Committee") with written notice that the transfer shall constitute a Constructive Termination for Good Reason, (2) Equistar, within twenty (20) days of receipt of the notice, fails to provide Executive with written notice rescinding the actual or proposed transfer and (3) if the Equistar does not rescind the transfer, Executive must terminate his employment due to Constructive Termination for Good Reason within forty (40) days following expiration of the 20-day period so that in any event Executive shall have terminated his employment with Equistar within 90 days after Executive first receives written notice from Equistar of such actual or proposed transfer. Section 2. Rights and Benefits upon Termination. In the event Executive is entitled to receive the rights and benefits described in this Section as a result of the termination or Constructive Termination for Good Reason of Executive's employment as described in Section 1 (collectively referred to as "Termination"), Company agrees to provide or cause to be provided to Executive these rights or benefits when Executive's employment terminates on or before December 31, 1999. (a) Stock Options. With respect to any stock options granted to Executive under the Company's Executive Long-Term Incentive Plan (the "Stock Option Plan"), notwithstanding any provision of the Stock Option Plan or Executive's associated stock option agreement, if any, to the contrary, all non-vested options shall become 100% vested and fully exercisable as of the last business day immediately preceding Executive's Termination. If Company experiences a Change in Control and no longer offers any publicly traded securities prior to Executive's Termination, Company shall also pay or cause to be paid to Executive a cash lump sum payment for all outstanding dividend share credits associated with stock options granted under the Stock Option Plan. This lump sum payment shall be paid within forty-five (45) calendar days from the date of the Change in control. 2 For purposes of this Section, the value of the outstanding dividend share credits shall be calculated by SCA Consultants, or any other compensation consultant that is mutually agreeable to the parties (the "Compensation Consultant"). In preparing its valuation, the Compensation Consultant in its good faith discretion shall be responsible for designating reasonable and customary parameters for the methodology used in its calculation. Company shall deliver to Executive the determination of the value of his dividend share credits with the payment therefore. All stock options owned by Executive shall be freely exercisable following Termination for the remainder of their existing terms without regard to any earlier date that may be specified therein including, without limitation, an earlier expiration date specified with respect to Executive's termination of employment. (b) Salary and Other Payment at Termination. Company shall pay of shall cause Equistar to pay to Executive not later than thirty (30) days following Termination a lump-sum payment in cash in the amount of three (3) times Executive's "Applicable Annual Earnings" (as defined below). For purposes of this Agreement, "Applicable Annual Earnings" shall mean the sum of Executive's annual base salary in effect on the last day of employment with Company and Executive's Average Award (whether or not paid) for personal services on behalf of the Company prior to Equistar employment. Amounts used to determine Applicable Annual Earnings are shown in Exhibit A, attached. The Average Award shall be the average, determined over the three year period immediately prior to Executive's employment by Equistar, of the cash amount of an Executive's annual award payable under the Company's Value Share Plan (but not deferred cash associated with any grant of restricted stock or any additional amount paid to Executive which represents pro rata awards for outstanding performance cycles). Applicable Annual Earnings shall include Executive's annual base salary and Average Award whether or not paid on a deferred basis, including without limitation, amounts contributed by or on behalf of Executive under a Company-sponsored plan, such as (i) a plan described in Section 125 or 401(k) of the Internal Revenue Code of 1986, as amended, or (ii) the Company's Executive Deferral Plan or an "excess benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended. Notwithstanding the preceding provisions of this paragraph, Applicable Annual Earnings does not include any income attributable to stock options, stock appreciation rights, performance awards other than awards under an executive bonus plan described above, dividend credits, and restricted stock granted under, and dividends on shares acquired pursuant to, any stock option plan, restricted stock plan or performance unit plan. (c) Crediting of Additional Pension Benefit. Company shall cause Executive to be credited with an additional five (5) years of (i) age and (ii) service with the Company, under the Company's Supplementary Executive Retirement Plan (or its successor) for 3 purposes of determining his accrued benefits thereunder. Such benefits shall be determined on the basis of Executive's age and compensation as of his termination date. If the method to calculate a retirement benefit under Company's qualified retirement plan and Supplementary Executive Retirement Plan is changed, then the Executive shall be entitled to an amount under the new plan formula that is the equivalent of the amount that would have been payable if the Executive had been credited as described above. Payments attributable to this enhanced retirement benefit shall be payable under Company's non-qualified retirement plan for executives. (d) Executive Deferral Plan. The provisions of this Section 2(d) shall apply notwithstanding any provisions of the Company's Executive Deferral Plan (the "Deferral Plan") or the initial paragraph of Section 2 hereof to the contrary. If Executive experiences a Termination of employment with Equistar then, notwithstanding any other provision of this Agreement, the full amount of contributions and earnings accrued or credited to Executive's account balances under the Deferral Plan (as of the date immediately preceding the Termination) shall be immediately distributed to Executive in a cash lump-sum payment. Upon distribution of his accounts, Executive shall be entitled to an Income Tax Gross-up on the full amount of contributions plus earnings accrued or credited to Executive's account in the Company's Deferral Plan as of September 1, 1996, which amount is $697,997.40. The Income Tax Gross-up shall be equal to 66% of the amount necessary so that after payment of any federal, state and local income or employment tax by Executive on the distribution of that amount under the Company's Deferral Plan and the Income Tax Gross-up, the net amount Executive retains shall be the full amount accrued to his account balance under the Company's Deferral Plan as of September 1, 1996. For purposes of determining the amount of the Income Tax Gross-up, Executive shall be deemed (i) to pay federal income taxes at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Income Tax Gross-up is to be made and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Income Tax Gross-up is to be made. Any Income Tax Gross-up required hereunder shall be paid by the Company to the Executive at the same time that any payment made under the Deferral Plans which is subject to income tax is paid or deemed received by Executive. (e) Insurance and other Benefits. To the extent that Executive is eligible thereunder, then for a period of twenty-four (24) months following Termination. Executive (and his dependents, as applicable) shall continue to be covered at the Company's expense by Equistar's life insurance, medical, dental, accident and disability plans or any successor to a plan or program in effect at Termination for employees in the 4 same class or category as Executive (hereafter individually and collectively referred to as "Welfare Plan"), subject to the terms of the Welfare Plan and to Executive's making any required contributions thereto which contributions shall not exceed those charged to employees in the same class or category in which Executive was employed by Equistar. In the event that Executive is ineligible to continue to be so covered under the terms of any Welfare Plan, or in the event that Executive is eligible but the benefits applicable to Executive (and his dependents, as applicable) are not substantially equivalent to such benefits immediately prior to Termination, then, for a period of twenty-four (24) months following Termination, Company, at its expense, shall provide to Executive (and his dependents, as applicable) through other sources such benefits as may be necessary to make the benefits applicable to Executive (and his dependents, as applicable) substantially equivalent to those in effect immediately prior to Termination. Continuation coverage provided pursuant to any group health plan maintained by Equistar shall be credited against, and not in addition to, any continuation coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1985 as amended ("COBRA"). Any retiree coverage provided to Executive by Equistar shall be on the same terms and conditions, including bridging of coverage, as that provided to executives in the same class or category in which Equistar employed Executive. (f) Financial Counseling. For a period of one year following Termination, Executive shall continue to be covered at Company's expense under Equistar's financial counseling program, or any successor program, in effect at Termination for employees in the same class or category as Executive, subject to the terms of such program. In the event that benefits available to Executive under that financial counseling program are not substantially equivalent to the benefits available to Executive at Termination, Company, at its expense ,shall provide to Executive through other sources such benefits as may be necessary to make the benefits available to Executive substantially equivalent to those in effect at Termination. (g) Outplacement. Company shall cause Equistar to provide to Executive, at Company's expense but not to exceed $40,000.00, outplacement assistance for Executive from a professional outplacement assistance firm, which is reasonably suitable to Executive. (h) No Duty to Mitigate. Executive's entitlement to benefits hereunder shall not be governed by any duty to mitigate Executive's damages by seeking further employment nor offset by any compensation which Executive may receive from future employment. Section 3. Other Benefit Plans. The specific arrangements referred to in this Agreement are not intended (i) to exclude or limit Executive's participation in other benefit plans or programs in which Executive currently participates or may participate including, without limitation, retiree benefits, or benefits which are available to executive personnel generally in the same class or category as Executive (excluding only the Company's Special Termination Plan and the special supplemental retirement benefit 5 authorized by the Compensation Committee on September 13, 1991) or, (ii) to preclude or limit other compensation or benefits as may be authorized by the Compensation Committee or the Partnership Governance Committee of Equistar ("Partnership Governance Committee") from time to time. To the extent not otherwise paid or provided, Company shall pay or provide or shall cause to be paid or provided to the Executive and/or the Executive's dependents any other amounts or benefits required to be paid or provided or which the Executive or the Executive's dependents are eligible to receive pursuant to this Agreement and under any plan program, policy or practice or contract or agreement of Equistar as in effect and applicable generally to executive personnel in the same class or category of Executive. Section 4. Payment Obligations Absolute. Company's obligation to pay or provide or cause to be paid or provided to Executive the amounts and benefits and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances (including, without limitation, any setoff, claim, counterclaim, recoupment, defense or other right, which the Company may have against Executive or anyone else). All amounts payable by or on behalf of the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder shall be final and the Company and its subsidiaries or affiliates for any reason whatsoever, shall not seek to recover all or any part of such payment from Executive or from whomever shall be entitled thereto. In no event shall an asserted violation of any provision of this Agreement constitute a basis for deferring or withholding any amount payable to, or on behalf of, Executive under this Agreement. Section 5. Combined Gross-up Payment. In the event that any payment under this Agreement, including an increase in pension benefits and vesting of an option or other non-cash benefit or property, is determined to be a "parachute payment" as defined in the Internal Revenue Code and the payment is or becomes subject to the tax imposed by section 4999 of the Internal Revenue Code, as amended, or such similar tax that may be hereafter imposed ("Excise Tax"), Company shall pay to Executive an additional cash amount ("Combined Gross-up Payment") such that the net amount retained Executive after reduction for (i) any Excise Tax on the payment and (ii) any federal, state, and local income or employment tax and Excise Tax payable with respect to the Combined Gross-up Payment, shall equal the payments under this Agreement determined to be parachute payments. For purposes of determining the amount of the Combined Gross-up Payment, Executive shall be deemed (i) to pay federal income tax at the highest stated rate of federal income taxation (including surtaxes, if any) for the calendar year in which the Combined Gross-up Payment is to be made and (ii) to pay any applicable state and local income taxes at the highest stated rate of taxation (including surtaxes, if any) for the calendar year in which the Combined Gross-up Payment is to be made. Any Combined Gross-up Payment required under this Agreement shall be made to Executive at the same time any payment is determined to be subject to the Excise Tax. If, in connection with the examination of Executive's tax return, the Internal Revenue Service asserts that any amount payable or benefit provided hereunder is a 6 "parachute payment" as defined in the Code and such amount or benefit was not treated as a parachute payment for purposes of determining the Combined Gross-up Payment (as defined above), Company at its cost shall assume the defense of any controversy involving such issue and shall indemnify and hold Executive harmless for all liabilities, costs, taxes, interest and penalties attributable to such issue and shall to the extent necessary (without duplication) increase the Combined Gross-up Payment to give effect to any additional amount or benefit determined to be a parachute payment. Executive shall cooperate with Company so that Company will be able to challenge any adverse determination by the Internal Revenue Service through administrative proceedings and, if determined by Company, through litigation. Section 6. Confidentiality and Cooperation. (a) Cooperation. Executive agrees that, at all times following Termination, Executive will furnish such information and render such assistance and cooperation as may reasonably be requested in connection with any litigation or legal proceedings concerning the Company, any of its subsidiaries or affiliates or Equistar (other than any legal proceedings arising out of or concerning Executive's employment or its Termination). In connection with such cooperation, Company will pay or reimburse Executive for reasonable expenses. (b) Release of Liability. Executive hereby represents and covenants that prior to the time he is eligible to receive any payments provided for in Section 2 of this Agreement, he will execute and deliver to the Company, on a form reasonably satisfactory to the Company and the Executive, a separate release and waiver, which, without limiting the generality of the foregoing, shall include a release and discharge of the Company and its subsidiaries and affiliates, and Equistar, and its and their directors, Partnership Governance Committee, officers, employees, owners, agents, successors and assigns from any and all suits, causes of action, demands, claims, charges, complaints, liabilities, costs, losses, damages, injuries, bonds, judgments, attorneys' fees and expenses, in any form whatsoever, in law or in equity, whether known or unknown, whether suspected or unsuspected, arising out of Executive's employment with Company or with Equistar through his Termination, including, without limitation, claims arising under any federal, state or local law for breach of an implied covenant of good faith and fair dealing, breach of contract, defamation, slander, negligent misrepresentation, fraud, intentional or negligent interference with business relations, and employment discrimination, including, but not limited to, claims under the Age Discrimination in Employment Act, the Americans with Disabilities Act and the Texas Commission on Human Rights Act. Section 7. Term of Agreement. This Agreement shall remain in effect until January 1, 2000. It is the Company's intention to provide or cause to be provided to Executive the benefits set forth herein if Executive is terminated from employment by Equistar on or before December 31, 1999 or resigns from Equistar employment on December 31, 1999 and the other applicable conditions are satisfied. 7 Section 8. Arbitration. (a) Arbitrable Matters. Any dispute under this Agreement arising between the parties shall be settled by binding arbitration. In the event of any dispute between Executive and the Company or Equistar hereunder, either party shall be entitled to submit the dispute to arbitration. The arbitration proceeding shall be held in Houston, Texas (unless otherwise mutually agreed by the parties), and shall be conducted in accordance with the Center for Public Resources ("CPR") Rules for Non-Administered Arbitration of Business Disputes. The arbitration shall be conducted by a sole arbitrator appointed in accordance with the rules established by CPR (the "Arbitrator"). Any arbitration between Executive and the Company or Equistar pursuant to this Agreement shall be governed by the United States Arbitration Act, 9 U.S.C. (SS)1-16 (or its successor). If the United States Arbitration Act is determined by the Arbitrator not to apply to this type of employer/employee agreement based on precedential legal authority, the parties agree to arbitrate any dispute under the Texas General Arbitration Act, V.A.T.S. Art. 238-6 et. seq. (or its successor). (b) Submission to Arbitration. The party submitting any matter arising out of this Agreement to arbitration (the "demanding party") shall do so by delivering written notice thereof (the "arbitration notice") to the other party (the "noticed party"). In addition to indicating the demanding party's intention to commence arbitration proceedings, the arbitration notice shall state the nature, with reasonable detail, of the dispute and the demanding party's claim or claims, the question or questions to be submitted for decision or award by arbitration and the relief or remedy sought. A copy of the arbitration notice shall be concurrently provided to CPR, along with a copy of this Agreement and a request to appoint an Arbitrator. Either party may bring an action in any court of competent jurisdiction to compel arbitration under the Agreement. (c) Arbitration Procedures. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Texas as applicable to the claim asserted. The Federal Rules of Evidence shall apply. The Arbitrator shall have no authority to change this Agreement unless otherwise agreed by both parties. The Arbitrator shall have no authority to change this Agreement unless otherwise agreed by both parties. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. Any party may be represented by an attorney or other representative selected by the party. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss 8 and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. At any time after the date of receipt of the arbitration notice, each party can make discovery requests of the other in any form permitted under the Federal Rules of Civil Procedure. The recipient of a discovery request shall have 20 days after the receipt of such request to object to any or all portions of such request, and shall respond to any portions of such request not so objected to within 30 days of the receipt of such request. All objections shall be in writing and shall indicate the reasons for such objections. The objecting party shall insure that all objections and responses are received by other parties within the above time periods. Any party seeking to compel discovery following receipt of an objection shall file with the other party and the Arbitrator a motion to compel, including a copy of the initial request and the objection. The Arbitrator shall allow 10 days for responses to the motion to compel before ruling. Claims of privilege and other objections shall be determined as they would in federal court in a case applying Texas law. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert witnesses, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. Either party may arrange for a court reporter to provide a stenographic record of proceedings. The cost of the court reporter will be paid by the Company or Equistar. (d) Compliance with Decisions. To the extent permissible under applicable law, the parties agree that the award of the Arbitrator shall be final and binding and shall be subject only to the judicial review permitted by the United States Arbitration Act or other applicable arbitration law pursuant to Section 10(a) hereof. Judgment on the arbitration award may be entered and enforced in any court having jurisdiction over the parties or their assets. It is the intent of the parties that the arbitration provisions hereof be enforced to the fullest extent permitted by applicable law. (e) Costs and Expenses. Company shall promptly pay or reimburse Executive for all costs and expenses, including, without limitation, attorneys' fees and witnesses' fees, incurred by Executive as a result of any arbitration (regardless of the outcome thereof) arising out of this Agreement. All expenses of such arbitration, including the reasonable fees and expenses of legal counsel for Executive and the costs and expenses incurred by the Arbitrator, shall be borne by the Company. Section 9. Notices. All notices, requests, demands and other communications required or permitted to be given hereunder (hereinafter referred to as "notices") shall be in writing and shall be deemed to have been duly given if delivered by-hand, given by prepaid telecopy, telex or telegram, or mailed via certified or registered U.S. mail, to the 9 party to receive such notice at such party's address set forth below; provided that either party may change its address for notice by giving to the other party written notice of such change. If to Company: Lyondell Petrochemical Company 1221 McKinney, Suite 1600 Houston, Texas 77002 Attn: Chairman of the Board of Directors If to Equistar: Equistar Chemicals, L.P. 1221 McKinney, Suite 1600 Houston, Texas 77002 Attn: Partnership Governance Committee If to Executive: Joseph M. Putz 13435 Belhaven Houston, Texas 77069 Any notice given pursuant to this Agreement shall be deemed received (i) if delivered by-hand, when delivered; (ii) if sent by telecopy, telex or telegram, 24 hours after sending; and (iii) if mailed, when delivered. Section 10. Miscellaneous. (a) Assignment. No right, benefit or interest hereunder shall be subject to assignment, anticipation, alienation, sale, encumbrance, charge, pledge, hypothecation or set-off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process; provided, however, that Executive may assign any right, benefit or interest hereunder if such assignment is permitted under the terms of any plan or policy of insurance, or annuity contract governing such right, benefit or interest. (b) Construction of Agreement. Nothing in this Agreement shall be construed to amend any provision of any plan or policy of the Company or Equistar except as otherwise expressly noted herein. This Agreement is not, and nothing herein shall be deemed to create, a commitment of continued employment of Executive by the Company or any of its subsidiaries or by Equistar. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Whenever the context of this Agreement so requires, the masculine gender includes the feminine gender, and words used in the singular or plural will include the other. The words "herein" "hereunder," 10 and other similar compounds of the word "here" refer to the entire Agreement and not to any particular, section or provision. (c) Amendment. This Agreement may not be amended, modified or canceled except by written agreement of the parties or their respective successors and legal representatives. (d) Waiver. No provision of this Agreement may be waived except by a writing signed by the party to be bound thereby. (e) Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) Successors. This Agreement is personal to Executive and without the prior written consent of the Company or Equistar shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall be binding upon and inure to the benefit of the Company, Equistar and any successor organization or organizations which shall succeed to substantially all of the business and/or assets of the Company (whether direct or indirect by means of merger, consolidation, acquisition of substantially all the assets of the Company, or otherwise, including by operation of law). (g) Taxes. Any payment or delivery required under this Agreement shall be subject to all requirements of the law with regard to withholding of taxes, filing, making of reports and the like. (h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW PRINCIPLES. 11 (i) Entire Agreement. Except as otherwise provided in Section 4 or Section 12(b) hereof, this Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the 28 day of January, 1998. LYONDELL PETROCHEMICAL COMPANY By: /s/ Dan F. Smith ----------------------------------- Name: Dan F. Smith Title: President and Chief Executive Officer EXECUTIVE By: /s/ Joseph M. Putz ----------------------------------- Name: Joseph M. Putz Title: Vice President and Controller EXHIBIT A Applicable Annual Earnings VSP Annual Cash Award: March, 1996 $ 83,433 March, 1997 54,435 December, 1997 109,670 ------- 247,538 ------- Average Award 82,513 Annual Base Salary 201,188 ------- Applicable Annual Earnings $283,701 ======= EX-10.19 18 1998 EXECUTIVE INCENTIVE PLAN EXHIBIT 10.19 Description of 1998 Executive Incentive Plan For 1998, Lyondell executives (other than those executives, including Mr. Morris Gelb, who were executives of ARCO Chemical prior to its acquisition by Lyondell) participated in the 1998 executive incentive plan (the "1998 Incentive Plan"). The 1998 Incentive Plan was designed to focus participants on key measures of value creation for the Company's shareholders and on operating measures that lead to the creation of value, encourage a long-term management perspective, reward for sustained long-term performance; and encourage significant ownership of Company stock. Pursuant to the 1998 Incentive Plan, financial measures were established, based 50% on Lyondell's Market Value Added ("MVA"), 25% on Lyondell's Economic Value Added ("EVA") and 25% on certain operating targets. MVA measures changes in the market value of the Company's equity based on average share price for the year, plus dividends as if they had been reinvested in the Company's stock. EVA measures the Company's cash flow performance (which exceeds the cost of capital) and is calculated by multiplying the capital invested in the Company by the Company's weighted average cost of capital. The operating targets focus on critical benchmarks related to such items as attainment of synergies with Equistar, attainment of cost savings for Lyondell-CITGO Refining LP, and selected financial results. The Compensation Committee established an objective formula for determining the resulting Performance Percentage corresponding with attained levels of performance under these financial measures. The Compensation Committee assigned each participant a Target Bonus Percentage of base salary commensurate with his or her position and other considerations the Compensation Committee deemed appropriate. Based on attainment of the established financial targets, the Compensation Committee determined the Performance Percentage for 1998 performance. Each participant's award was determined by multiplying the (a) participant's base salary for 1998 by (b) the Target Bonus Percentage, by (c) the Performance Percentage. Awards paid under the 1998 Incentive Plan have an up-front cash portion, which amounts will be included under the "Bonus" heading in the Summary Compensation Table of the Company's Proxy Statement prepared in connection with its 1999 Annual Meeting of Shareholders, as well as a long-term portion. The long-term portion consists of restricted stock that vests over a three-year period, accompanied by an equivalent amount of deferred cash that is paid out as the restricted shares vest. The restricted stock awards were made pursuant to the Company's Restricted Stock Plan. 1998 Incentive Plan--Awards in Last Fiscal Year
Period Until Number Maturation Name of Shares(a) or Payout ---- ------------ ------------ Mr. Smith....................................... 76,772 (b) Mr. Pendergraft................................. 22,947 (b) Mr. Gelb........................................ -- (b) Ms. Starnes..................................... 14,105 (b) Mr. Putz........................................ 10,877 (b)
- -------- (a) Represents the number of shares of Common Stock as to which the deferred cash portion of the awards made under the 1998 Incentive Plan is equivalent. (b) These awards vest in annual one-third increments, beginning on December 15, 2000. 20 EX-10.22 19 LIMITED PARTNERSHIP AGREEMENT OF LCR EXHIBIT 10.22 CONFIDENTIAL LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP - -------------------------------------------------------------------------------- UNDER THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT - -------------------------------------------------------------------------------- DATED DECEMBER 31, 1998 TABLE OF CONTENTS 1. DEFINITIONS............................................................ 1 2. ORGANIZATION MATTERS................................................... 1 2.1. Name....................................................... 1 2.2. Conversion to Partnership and Partners..................... 1 2.3. Purpose and Business....................................... 2 2.4. Principal Office........................................... 3 2.5. Term....................................................... 3 2.6. Filings.................................................... 3 2.7. Power of Attorney.......................................... 3 3. MANAGEMENT............................................................. 4 3.1. Partnership Governance Committee.......................... 4 3.2. Partnership Governance Committee Composition.............. 4 3.3. Partnership Governance Committee: Duties, Powers and Authority................................................. 6 3.4. Partnership Governance Committee: Meetings............... 6 3.5. Compensation of Representatives........................... 8 3.6. Partnership Governance Committee Action................... 8 3.7. Partnership Governance Committee: Quorum and Voting...... 8 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary............................... 9 3.9. Majority Approval......................................... 11 3.10. Auxiliary Committees...................................... 11 4. OFFICERS AND EMPLOYEES................................................. 12 4.1. Partnership Officers...................................... 12 4.2. Selection; Term; Qualification............................ 12 4.3. Removal and Vacancies..................................... 12 4.4. Duties.................................................... 13 4.5. CEO....................................................... 14 4.6. Vice Presidents........................................... 14 4.7. Secretary................................................. 14 4.8. Assistant Officers........................................ 14 4.9. Other Officers............................................ 15 4.10. Salaries.................................................. 15 4.11. Bonds of Officers......................................... 15 4.12. Delegation................................................ 15 4.13. Loaned Employees.......................................... 15 4.14. Employee Transfers........................................ 16 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS............................... 16 5.1. Delegation................................................ 16 5.2. General Authority......................................... 16 (ii) 5.3. Nature of Partner Obligations.............................. 17 5.4. Limited Partners........................................... 17 5.5. Partner Not Agent of Other Partners........................ 17 5.6. Transactions with the Partnership.......................... 17 5.7. Control of Certain Claims and Certain Transactions......... 18 5.8. Partnership Interest....................................... 19 5.9. Access to and Copies of Records and Documents.............. 19 5.10. Partner Covenants.......................................... 19 5.11. Indemnification............................................ 20 6. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE..................... 22 6.1. Prior Capital Contributions................................ 22 6.2. Capital Contributions...................................... 22 6.3. Partner Loans.............................................. 23 6.4. Participation Percentages.................................. 23 6.5. Capital Expenditure Funding................................ 24 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage................................... 24 6.7. Return of Capital Contributions............................ 26 6.8. Administration and Investment of Funds..................... 26 7. ALLOCATIONS AND DISTRIBUTIONS.......................................... 26 7.1. Capital Accounts........................................... 26 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances................................ 27 7.3. Distributable Cash......................................... 28 7.4. Distributions.............................................. 29 7.5. Interim Loans.............................................. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes.......................................... 30 7.7. Tax Allocations............................................ 31 7.8. Transfers of Interest...................................... 33 8. BOOKS OF ACCOUNT AND TAX MATTERS....................................... 33 8.1. Books of Account........................................... 33 8.2. Tax Treatment.............................................. 34 8.3. Tax Returns................................................ 34 8.4. Tax Controversies.......................................... 35 8.5. Tax Rulings................................................ 36 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS.................... 36 9.1. Fiscal Year................................................ 36 9.2. Annual Budgets............................................. 36 9.3. Approval of Budgets........................................ 37 9.4. Funding of Budgets......................................... 37 (iii) 9.5. Implementation of Budgets and Discretionary Expenditures by CEO.................................................... 37 9.6. Five Year Plan............................................. 38 9.7. Commercial Loans........................................... 38 9.8. Insurance and Risk Management.............................. 38 10. TRANSFERS AND PLEDGES................................................. 38 10.1. Prohibition of Transfer.................................... 38 10.2. Transfers Prior to the Option Date......................... 39 10.3. Transfers After the Option Date............................ 39 10.4. Transferees................................................ 41 10.5. Pledge of Interest......................................... 41 11. REMEDIES AND DISSOLUTION.............................................. 42 11.1. Security for Performance.................................. 42 11.2. Default................................................... 43 11.3. Remedies for Default...................................... 45 11.4. Consequences of Default................................... 46 11.5. Purchase of Defaulting Partners' Interest................. 46 11.6. Liquidation............................................... 47 11.7. Closing of Purchase Rights................................ 47 11.8. Recision.................................................. 47 11.9. Dissolution............................................... 48 11.10. Reconstitution of Partnership............................. 48 11.11. Liquidation; Winding Up and Distributions upon Dissolution.............................................. 48 11.12. Enforcement............................................... 49 12. MISCELLANEOUS......................................................... 49 12.1. Confidentiality and Use of Information.................... 49 12.2. Auditors.................................................. 50 12.3. Indemnification of Officers............................... 50 12.4. Waivers, Modifications and Amendments..................... 52 12.5. Further Assurances........................................ 52 12.6. Successors and Assigns.................................... 52 12.7. Benefits of Agreement Restricted to the Parties........... 52 12.8. Expenses.................................................. 52 12.9. Currency Conversions...................................... 52 12.10. Payment Terms and Interest Calculations................... 52 12.11. Usury Savings Clause...................................... 53 12.12. Notices................................................... 53 12.13. Waiver of Immunity........................................ 54 12.14. Governing Law............................................. 55 12.15. Jurisdiction; Consent to Service of Process; Waiver....... 55 12.16. Entire Agreement.......................................... 56 12.17. Severability.............................................. 56 12.18. Construction.............................................. 56 12.19. Counterparts.............................................. 57 (iv) EXHIBITS. Exhibit 1 Definition of Terms in Agreement Exhibit 1A Related Agreements Exhibit 6.1(B) Working Capital Valuation Exhibit 6.4 Qualified Capital Contributions; Participation Percentages Exhibit 6.6(E) Form of Note for Portion of Option Date Payment (v) LIMITED PARTNERSHIP AGREEMENT OF LYONDELL-CITGO REFINING LP (THE "PARTNERSHIP") 1. DEFINITIONS The definitions of the capitalized defined terms used in this Limited Partnership Agreement (the "Agreement"), including the Exhibits hereto other than Exhibit 1, and not elsewhere defined herein or therein, as well as cross- references to all capitalized defined terms, are set forth in Exhibit 1 to this Agreement. 2. ORGANIZATION MATTERS 2.1. Name. The name of the limited partnership is "LYONDELL-CITGO Refining LP" (the "Partnership"). The Partnership Business may be conducted under such name or any other name or names deemed advisable by the Partnership Governance Committee. The General Partners will comply or cause the Partnership to comply with all applicable laws and other requirements relating to fictitious or assumed names. 2.2. Conversion to Partnership and Partners. The Partnership converted from LYONDELL-CITGO Refining Company Ltd., a limited liability company formed under the laws of the State of Texas (the "Company"), effective as of the date of this Agreement (the "Conversion Date"), pursuant to Articles of Conversion filed pursuant to the Texas Limited Liability Company Act, and a Certificate of Conversion and a Certificate of Limited Partnership, each filed pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Act"). In connection with such conversion, the Amended and Restated Regulations of the Company dated July 1, 1993 (the "Closing Date"), as amended (the "Regulations"), were superseded by this Agreement. On the Conversion Date, the limited liability company interests in the Company were converted into partnership interests in the Partnership held by (i) Lyondell Refining LP, LLC, a Delaware limited liability company ("Lyondell LP"), a Wholly Owned Subsidiary of Lyondell Chemical Company (formerly known as Lyondell Petrochemical Company), a Delaware corporation ("LParent"), (ii) CITGO Refining Investment Company, an Oklahoma corporation ("CITGO LP"), a Wholly Owned Subsidiary of CITGO Petroleum Corporation, a Delaware corporation ("CParent"), (iii) Lyondell Refining Company, a Delaware corporation ("Lyondell GP"), a Wholly Owned Subsidiary of LParent, and (iv) CITGO Gulf Coast Refining, Inc., a Delaware corporation ("CITGO GP"), a Wholly Owned Subsidiary of CParent. Upon the Conversion Date, the percentage ownership of the Partnership was as follows: Lyondell GP 10.10% CITGO GP 1.00% Lyondell LP 48.65% CITGO LP 40.25% 1 Upon the Conversion Date, Lyondell GP's 10.10% interest consists of a 1.00% general partnership interest and a 9.10% limited partnership interest; provided, however, that for all other purposes under this Agreement, Lyondell GP shall be considered only a General Partner (as defined herein) and not a Limited Partner (as defined herein). Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. Without the need for the consent of any other Person, upon the execution of this Agreement: (i) each of Lyondell GP and CITGO GP is hereby admitted to the Partnership as a general partner of the Partnership (together, the "General Partners"), and (ii) each of Lyondell LP and CITGO LP is hereby admitted to the Partnership as a limited partner of the Partnership (together, the "Limited Partners"). Subject to the restrictions set forth in this Agreement, the Partnership shall have the power to exercise all the powers and privileges granted by this Agreement and by the Act, together with any powers incidental thereto, so far as such powers and privileges are necessary, appropriate, convenient or incidental for the conduct, promotion or attainment of the purposes of the Partnership. As of the Conversion Date, the Regulations (i) are superseded by this Agreement except to the extent of their ongoing relevance in governing matters relating to the Company and (ii) shall no longer have any force or effect except to the extent of their ongoing relevance in governing matters relating to the Company, provided, however, that all prior acts of Lyondell Refining Company, a Delaware corporation, and CITGO Refining Investment Company, an Oklahoma corporation, as members, or acts of or on behalf of the Company, under the Regulations shall remain in effect until modified or rescinded by Partnership Governance Committee Action. 2.3. Purpose and Business. The business of the Partnership (the "Partnership Business") shall be as follows: (i) to own and operate the Refinery Business, (ii) to carry out any Capital Enhancement Projects, (iii) to purchase, sell, exchange and refine crude oil and other feedstocks, (iv) to market the products produced by the Partnership, (v) to engage in the refining business generally, and (vi) to do all things necessary or incidental in connection with the foregoing as are permitted under the Act, all such business being managed, subject to then existing contractual obligations, with the objectives of (a) operating the Refinery, as modified by any Capital Enhancement Projects, and any other refinery or refining business owned or operated by the Partnership so as to maximize long-term Partnership value as measured by cash flow and earnings and (b) achieving the highest levels of efficiency, productivity and profitability consistent with good safety and environmental practices and performance. The Partnership shall be strictly limited to the Partnership Business, and the Partnership Business shall not be extended by implication or otherwise, except by express written amendment to this Agreement or by Unanimous Partnership Governance Committee Action pursuant to Section 3.8.(A). 2 2.4. Principal Office. The principal business office of the Partnership shall be at 12000 Lawndale, Houston, Texas 77017 or such other place as may be designated from time to time by the Partnership Governance Committee. The registered agent of the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. 2.5. Term. The Partnership shall continue until dissolved as described in Section 11.9. 2.6. Filings. The General Partners shall, or shall cause the Partnership to, execute, swear to, acknowledge, deliver, file or record in public offices and publish all such certificates, notices, statements or other instruments, and take all such other actions, as may be required by law for the formation, reformation, qualification, registration, operation or continuation of the Partnership in any jurisdiction, to maintain the limited liability of the Limited Partners, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law. Upon request of the General Partners, the Limited Partners shall execute all such certificates and other documents as may be necessary, in the sole judgment of the General Partners, in order for the General Partners to accomplish all such executions, swearings, acknowledgments, deliveries, filings, recordings in public offices, publishings and other acts. Each General Partner hereby agrees and covenants that it will execute any appropriate amendment to the Certificate of Limited Partnership of the Partnership pursuant to Section 17-204 of the Act to reflect any admission of a Substitute General Partner in accordance with this Agreement. 2.7. Power of Attorney. Each Limited Partner hereby irrevocably makes, constitutes and appoints its Affiliated General Partner and any successor thereto permitted as provided herein, with full power of substitution and resubstitution, as the true and lawful agent and attorney-in-fact of such Limited Partner, with full power and authority in the name, place and stead of such Limited Partner to execute, swear, acknowledge, deliver, file or record in public offices and publish: (i) all certificates and other instruments (including counterparts thereof) which such General Partner deems appropriate to reflect any amendment, change or modification of or supplement to this Agreement in accordance with and as permitted by the terms of this Agreement; (ii) all certificates and other instruments and all amendments thereto which such General Partner deems appropriate or necessary to form, qualify or continue the Partnership in any jurisdiction, to maintain the limited liability of such Limited Partner, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law; and (iii) all conveyances and other instruments or documents which such General Partner deems appropriate or necessary to reflect the transfers or assignments of interests in, to or under this Agreement, including the Interests, the dissolution, liquidation and termination of the Partnership, and the distribution of assets of the Partnership in connection therewith, in accordance with and as permitted by the terms of this Agreement. Each Limited Partner hereby agrees to execute and deliver to its Affiliated General Partner within five (5) Business Days after receipt of a written request therefor such other further statements of interest and holdings, designations, 3 powers of attorney and other instruments as such General Partner deems necessary. The power of attorney granted herein is hereby declared irrevocable and a power coupled with an interest, shall survive the bankruptcy, dissolution or termination of such Limited Partner and shall extend to and be binding upon such Limited Partner's successors and permitted assigns. Each Limited Partner hereby (i) agrees to be bound by any representations made by the agent and attorney-in-fact acting in good faith pursuant to such power of attorney; and (ii) waives any and all defenses which may be available to contest, negate, or disaffirm any action of the agent and attorney-in-fact taken in accordance with such power of attorney. 3. MANAGEMENT. 3.1. Partnership Governance Committee. (A) To facilitate the management of the Partnership by the General Partners, the General Partners hereby establish a committee (the "Partnership Governance Committee") to manage and control the business, property and affairs of the Partnership, including the determination and implementation of the Partnership's strategic direction. Except to the extent expressly set forth in this Agreement, each General Partner agrees to exercise its authority to manage the affairs of the Partnership only through Partnership Governance Committee Action. Further, each General Partner agrees not to exercise, or purport or attempt to exercise, its authority (notwithstanding that each General Partner may have such authority pursuant to the Act) (i) to act for or incur, create or assume any obligation, liability or responsibility on behalf of the Partnership or any other General Partner, or (ii) to execute any documents on behalf of, or otherwise bind, or purport or attempt to bind, the Partnership, or (iii) to otherwise transact any business in the Partnership's name, in each case except pursuant to Partnership Governance Committee Action or except as provided in Section 5.7. (B) Except as expressly set forth in this Agreement, no Person or Persons other than (i) the General Partners, acting through the Partnership Governance Committee, and (ii) the officers of the Partnership appointed in accordance with this Agreement and acting as agents or employees, as applicable, of the Partnership in conformity with this Agreement and any applicable Partnership Governance Committee Action, shall be authorized (a) to exercise the powers of the Partnership, (b) to manage the business, property and affairs of the Partnership or (c) to contract for, or incur on behalf of, the Partnership any debts, liabilities or other obligations. 3.2. Partnership Governance Committee Composition. (A) The Partnership Governance Committee shall consist of six representatives (each a "Representative") and each General Partner shall designate three Representatives. All the Representatives of both 4 General Partners shall together constitute the Partnership Governance Committee. Representatives shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., a Representative may also serve as a member of an Auxiliary Committee. (B) Each General Partner may designate one or more individuals (each an "Alternate") who (i) shall be authorized, in the event a Representative is absent from any meeting of the Partnership Governance Committee (and in the order of succession designated by the General Partner so designating the Alternates), to attend such meeting in the place of, and as substitute for, such Representative and (ii) shall be vested with all the powers to cast votes on behalf of such General Partner which the absent Representative could have exercised at such meeting. Alternates shall not be employees of the Partnership or otherwise serve the Partnership in any capacity except that, as provided in Section 3.10., an Alternate may also serve as a member of an Auxiliary Committee. The term "Representative," when used herein with reference to any Representative who is absent from a meeting of the Partnership Governance Committee, shall mean and refer to any Alternate attending such meeting in place of such absent Representative. (C) Each General Partner may, by written notice delivered to the other General Partner and the CEO, at any time or from time to time, remove or replace one or more of its Representatives or Auxiliary Committee members or change one or more of its Alternates. If a Representative, Auxiliary Committee member or Alternate dies, resigns, or becomes disabled or incapacitated, the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be, shall promptly designate a replacement. Each Representative, each Auxiliary Committee member and each Alternate shall serve until replaced by the General Partner that designated such Representative, Auxiliary Committee member or Alternate, as the case may be. The Owners Committee Representatives, the Auxiliary Committee members and the Alternates representing Lyondell GP and CITGO LP, respectively (in their capacities as members of the Company), who are serving in such capacities in respect of the Company as of the Conversion Date will continue to hold such positions representing Lyondell GP and CITGO GP, respectively (in their capacities as General Partners), following the Conversion Date until removed or replaced in accordance with the terms of this Section 3.2.(C). (D) Copies of all written notices designating Representatives, Auxiliary Committee members and Alternates shall be delivered to the Secretary and shall be placed in the Partnership minute books, but the failure to deliver a copy of any such notice to the Secretary shall not affect the validity or effectiveness of such notice or the designation described therein. 5 (E) Each Representative, in his capacity as such, shall be the agent of the General Partner that designated such Representative. Accordingly, (i) each Representative, as such, shall act (or refrain from acting) with respect to the business, property and affairs of the Partnership solely in accordance with the wishes of the General Partner that designated such Representative and (ii) no Representative, as such, shall owe (or be deemed to owe) any duty (fiduciary or otherwise) to the Partnership, to any General Partner (other than the General Partner that designated such Representative), or to any Limited Partner; provided, however, that nothing in this Agreement is intended to or shall relieve or discharge any Representative or General Partner from liability to the Partnership or the Partners on account of any fraudulent or intentional misconduct of such Representative; and provided further, that each Representative shall not disclose any material information regarding the business of the Partnership and shall not use any such information, in either case, in any manner not related to the Partnership Business. 3.3. Partnership Governance Committee: Duties, Powers and Authority. (A) Except as otherwise provided by this Agreement, the Partnership Governance Committee (on behalf of the General Partners) shall have (i) the full authority of the General Partners to exercise all of the powers of the Partnership and (ii) full control (on behalf of the General Partners) over the business, property and affairs of the Partnership. (B) The Partnership Governance Committee shall adopt policies and procedures, not inconsistent with this Agreement (including Section 3.8.) or the Act, governing financial controls and legal compliance, including delegations of authority (and limitations thereon) to the officers of the Partnership as described in Section 4. Such policies and procedures may be revised or revoked (in a manner consistent with this Agreement and the Act) from time to time as determined by the Partnership Governance Committee. Without limiting the generality of the foregoing, the General Partners intend that the Partnership's policies and procedures will address such matters as conflicts of interest, political contributions, illegal or unethical business practices, antitrust compliance, anti-boycott compliance, Foreign Corrupt Practices Act compliance, employee practices, agreements with employees relating to inventions, contractual obligations, purchasing and advertising. To the extent any authority is not delegated to officers of the Partnership in this Agreement or in accordance with Partnership Governance Committee Action, it shall remain with the Partnership Governance Committee. 3.4. Partnership Governance Committee: Meetings. (A) Regular meetings of the Partnership Governance Committee shall be held at such times (no less frequently than quarterly) and at such places (within the States of Texas or Oklahoma or any other state designated 6 by the Partnership Governance Committee) as shall from time to time be determined by the Partnership Governance Committee. The first regular meeting of the Partnership Governance Committee during each fiscal year of the Partnership shall be deemed to be the "Annual Meeting." No notice need be given with respect to any regular meeting of the Partnership Governance Committee; however, the Secretary following receipt of comments thereto from each General Partner shall deliver, by messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), an agenda for such meeting to each of the Representatives at least five (5) Business Days prior to such meeting. At any regular meeting of the Partnership Governance Committee at which a quorum is present, any and all business of the Partnership may be transacted. (B) Special meetings of the Partnership Governance Committee may be called by any Representative or the CEO by delivering, via messenger or other hand delivery or by facsimile transmission (with proof of confirmation from the transmitting machine), written notice to each of the other Representatives, or, in the case of a meeting called by the CEO, each of the Representatives, at least three (3) Business Days before such meeting. Each notice of a special meeting shall specify, to a reasonable degree, the business to be transacted at, or the purpose of, such meeting; provided, however, that additional business may be transacted at any special meeting as agreed by all the Representatives present at such meeting. Special meetings of the Partnership Governance Committee shall be held at such times and at such places within the State of Texas or Oklahoma as may be stated in the notice of such meeting or in a duly executed waiver of notice thereof. Any Representative may waive notice of any special meeting (whether before or after the time of such meeting) but only if the waiver is in writing. Attendance of any Representative at any special meeting shall constitute a waiver of notice of such meeting by such Representative, unless the Representative states at the beginning of the meeting his objection to the transaction of business because the meeting was not lawfully called or convened. (C) One Representative shall serve as chair of each meeting (regular or special) of the Partnership Governance Committee. The right to designate the chair of meetings of the Partnership Governance Committee shall rotate between the respective General Partners every calendar year. The Representative who on the Conversion Date is serving as chair of the meetings shall continue to so serve until December 31, 1998, which is the next rotation date. (D) Following each meeting of the Partnership Governance Committee, the Secretary shall promptly draft and distribute minutes of such meeting to the Representatives for approval at the next meeting, and after such approval shall retain the minutes in the Partnership minute books. 7 (E) Representatives may participate in or hold regular or special meetings of the Partnership Governance Committee by means of a telephone conference or any comparable device or technology by which all individuals participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting. (F) Any action required or permitted to be taken at a meeting of the Partnership Governance Committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by at least two (2) Representatives (or their Alternates) of each General Partner, and such consent shall have the same force and effect as a duly conducted vote of the Partnership Governance Committee. A counterpart of each such consent to action shall be delivered to the Secretary for placement in the minute books of the Partnership, but the failure to deliver a counterpart of any such consent to action to the Secretary shall not affect the validity or effectiveness of such consent to action. 3.5. Compensation of Representatives. Representatives shall not receive from the Partnership any compensation for their service or any reimbursement for attendance at meetings of the Partnership Governance Committee. 3.6. Partnership Governance Committee Action. (A) The Partnership Governance Committee shall act exclusively by means of Partnership Governance Committee Action. As used in this Agreement, "Partnership Governance Committee Action" means any action which the Partnership Governance Committee is authorized and empowered to take in accordance with this Agreement and the Act and which is taken by the Partnership Governance Committee either (i) by votes cast at a meeting of the Partnership Governance Committee duly called and held in accordance with this Agreement or (ii) by a formal written consent complying with the requirements of Section 3.4.(F). In no event shall the Partnership Governance Committee be authorized to act other than by Partnership Governance Committee Action, and any action or purported action by the Partnership Governance Committee (including any authorization, consent, approval, waiver, decision or vote) not constituting a Partnership Governance Committee Action shall be null and void and of no force and effect. (B) Each Partnership Governance Committee Action shall be binding on the Partnership. 3.7. Partnership Governance Committee: Quorum and Voting. (A) The presence of one Representative (including any duly present Alternates) from each General Partner shall constitute a quorum of the Partnership Governance Committee for the transaction of business and 8 the taking of any Partnership Governance Committee Action at any meeting, except that no quorum of the Partnership Governance Committee will be deemed to exist (i) with respect to any regular meeting of the Partnership Governance Committee unless an agenda for such meeting is delivered in accordance with Section 3.4.(A) or (ii) with respect to any special meeting of the Partnership Governance Committee unless a notice of such meeting is given or waived in accordance with Section 3.4.(B). No Partnership Governance Committee Action may be taken at any meeting at which a quorum is not present. (B) All actions of the Partnership Governance Committee shall be determined by vote of the Representatives. Collectively, the Representatives shall have 100 votes. The Representatives of a General Partner shall have, in the aggregate, such number of votes as is equal to the product of 100 and the sum of the Participation Percentages of such General Partner and its Affiliated Limited Partner. The Representatives of each General Partner present at the meeting shall together and by joint action cast all of the votes held by all of the Representatives of such General Partner. 3.8. Partnership Governance Committee Actions for Which Unanimous Consent Necessary. Subject to Section 5.7., Section 11.4. and Section 11.11.(A), no Partnership Governance Committee Action will be deemed for any purpose to have been taken at any Partnership Governance Committee meeting unless and until 100 votes (constituting all the outstanding votes) are duly cast at such meeting in favor of such Partnership Governance Committee Action which would cause or permit the Partnership (or any Person acting in the name or on behalf of the Partnership), directly or indirectly, to take (or commit to take) any of the actions (each a "Unanimous Partnership Governance Committee Action") described below in this Section 3.8. (whether in a single transaction or series of related transactions): (A) to engage, participate or invest in any business outside the scope of the Partnership Business; (B) to make any acquisition or divestiture of any other entity or of any material line of business or business unit, or to merge or consolidate the Partnership with any other entity; (C) to amend or alter this Agreement or the Certificate of Limited Partnership; (D) to issue, redeem or acquire any Interests (or rights to acquire, or any securities convertible into, Interests) in the Partnership; (E) to borrow money or to engage in other financing activities, including the grant or use of credit and the pledge of any assets or the granting of a security interest in any asset; 9 (F) to file a petition in bankruptcy or seeking any reorganization, liquidation or similar relief on behalf of the Partnership; or to consent to the filing of a petition in bankruptcy against the Partnership; or to consent to the appointment of a receiver, custodian, liquidator or trustee for the Partnership or for all or any substantial portion of its property; (G) to approve the entry into of, amendments to, or termination or modification of, any material permit, government approval or other right; (H) to approve any Capital Enhancement Project or any expenditures pursuant to a Capital Budget pursuant to Section 9.2.(B), or to increase the amount below which a capital expenditure would not require Partnership Governance Committee Action regarding an "authority for commitment" as contemplated by Section 9.5.(A); (I) to make distributions other than those expressly provided for in Section 7.; (J) to enter into, amend, terminate or modify any product sales agreement or any raw materials purchase agreement pursuant to which the Partnership's commitments can reasonably be expected to exceed $50 million annually or that is for a term in excess of 18 months; (K) to enter into, amend, terminate or modify any agreement other than as described in Section 3.8.(J) pursuant to which the Partnership's commitments can reasonably be expected to exceed $25 million; (L) to commence or settle any litigation or arbitration proceeding by or on behalf of, or in the name or right of, the Partnership involving any claims or payments in excess of $1 million; (M) to make determinations with respect to the Partnership's commercial insurance program in accordance with Section 9.8.; (N) to designate or disband Auxiliary Committees and to establish the purposes thereof in all cases as described in Section 3.10.; (O) to delegate to any Auxiliary Committee powers or authority to take any action that would otherwise require unanimous approval by the Partnership Governance Committee, or to delegate to any officer powers or authority to take any action that would otherwise require approval by the Partnership Governance Committee; (P) to adopt or amend, as the Partnership Governance Committee, the policies and procedures referred to in Section 3.3.(B); (Q) to enter into, materially amend or terminate any employee benefit plan; 10 (R) to fix the salary and other compensation of Executive Officers in accordance with Section 4.10.; (S) to consent to the loan of an employee to the Partnership by a Partner as provided in Section 4.13. or to consent to the hiring of employees of the Partnership by a General Partner (or a General Partner's Affiliate) as anticipated by Section 4.14.; (T) to make any determinations concerning indemnification of officers pursuant to Section 1.23.; (U) to adopt or effect any change in the Partnership's accounting policies or practices in regards to Maintenance Capital; (V) to approve, amend or supplement either annual budget referred to in Section 9.2., including any Financing Plan thereunder; (W) to change at any time the Cash Balance Amount as provided for in Section 7.5; (X) to appoint the CEO or to designate an officer as an Executive Officer; or (Y) to change the Partnership's method of accounting for inventory as provided in Section 8.2.(C). 3.9. Majority Approval. Except as otherwise expressly provided in this Agreement, the approval of Representatives representing a majority of the total 100 votes will be sufficient for the Partnership Governance Committee to take any Partnership Governance Committee Action. 3.10. Auxiliary Committees. (A) The Partnership Governance Committee shall, by Partnership Governance Committee Action, designate an (i) Operating Committee, (ii) a Finance and Control Committee and (iii) a Compensation Committee. Each such committee shall be a standing committee. (B) From time to time, the Partnership Governance Committee may, by resolution adopted by the Partnership Governance Committee, designate one or more additional committees or disband any committee. (C) Each committee designated by the Partnership Governance Committee pursuant to this Section 3.10. (each an "Auxiliary Committee") shall (i) operate under the auspices of the Partnership Governance Committee for the purpose of assisting the Partnership Governance Committee in managing (on behalf of the General Partners) the 11 business and affairs of the Partnership and (ii) report to the Partnership Governance Committee. (D) Each Auxiliary Committee shall consist of two or more members and each General Partner shall have the right to appoint one member. The remaining members, if any, of each Auxiliary Committee shall be appointed by the Partnership Governance Committee. (E) Auxiliary Committee members may (but need not) be members of the Partnership Governance Committee or employees of the Partnership. No Auxiliary Committee member shall be compensated by the Partnership for service as a member of such Auxiliary Committee. (F) Each resolution adopted by the Partnership Governance Committee for the purpose of designating an Auxiliary Committee shall set forth (i) the size, name and rotation and designation of a chairman of such Auxiliary Committee and (ii) in such detail as the Partnership Governance Committee deems appropriate, the purposes, powers and authorities of such Auxiliary Committee; provided, however, that in no event shall any Auxiliary Committee have any powers or authority not permitted by this Agreement or the Act. 4. OFFICERS AND EMPLOYEES 4.1. Partnership Officers. The officers of the Partnership shall consist of a President and Chief Executive Officer ("CEO"), one or more Vice Presidents, a Secretary and such other officers and assistant officers and agents as may be deemed necessary or desirable by the Partnership Governance Committee. Officers shall be elected or appointed pursuant to Partnership Governance Committee Action (subject to Section 3.8.(X)) and shall have such authority and shall perform such duties in the management of the Partnership as may be provided in this Agreement or as may be determined by resolution of the Partnership Governance Committee (consistent with Section 3.8.(O)). In its discretion, the Partnership Governance Committee may leave unfilled any office or offices, except those of CEO and Secretary. Two or more offices may be held by the same person. The officers of the Company on the Conversion Date shall remain in office until such officers are changed by Partnership Governance Committee Action. 4.2. Selection; Term; Qualification. All officers shall be chosen by the Partnership Governance Committee annually at the Annual Meeting of the Partnership Governance Committee. Prior to each Annual Meeting the CEO shall present the Partnership Governance Committee with a list of nominees, but the Partnership Governance Committee shall not be bound to select officers solely from such list. The CEO and each other officer shall hold office until a successor has been chosen and qualified, or until the officer's death, resignation, or removal. 4.3. Removal and Vacancies. Any officer or agent may be removed by Partnership Governance Committee Action, with or without cause, whenever in the judgment of the Partnership Governance Committee the best interests of the Partnership 12 would be served thereby. Any vacancy in any office may be filled by the Partnership Governance Committee at any time. The CEO may, at any time, recommend to the Partnership Governance Committee the appointment or removal of any officer. 4.4. Duties. (A) Each officer or employee of the Partnership shall owe to the Partnership, but not to any Partner, all such duties (fiduciary or otherwise) as are imposed upon such an officer or employee of a Delaware corporation. Without limitation of the foregoing, each officer and employee in any dealings with a Partner shall have a duty to act in good faith and to deal fairly. (B) The policies and procedures of the Partnership adopted by the Partnership Governance Committee may set forth the powers and duties of the officers of the Partnership to the extent not set forth in or inconsistent with this Agreement. The officers of the Partnership shall have such powers and duties, except as modified by the Partnership Governance Committee, as generally pertain to their respective offices in the case of a Delaware corporation, as well as such powers and duties as from time to time may be conferred by the Partnership Governance Committee and by this Agreement. The CEO and the other officers and employees of the Partnership shall develop and implement management and other Partnership policies and procedures consistent with this Agreement and the general policies and procedures established by the Partnership Governance Committee. The duties of each officer shall include the obligation to notify the Partnership Governance Committee of any facts or circumstances of which such officer becomes aware that indicate a Partner or any of its Affiliates is or may be in breach of its obligations under this Agreement or under any of the Related Agreements. (C) Notwithstanding any other provision of this Agreement, no Partner, Representative, officer, employee or agent of the Partnership shall have the power or authority, without specific authorization from the Partnership Governance Committee, to undertake any of the following: (i) to do any act which contravenes (or otherwise is inconsistent with) this Agreement or which would make it impossible to carry on the Partnership Business; (ii) to confess a judgment against the Partnership; (iii) to possess Partnership property other than in the ordinary conduct of the Partnership Business; or 13 (iv) to take, or cause to be taken, any of the actions described in Section 3.8. 4.5. CEO. The CEO shall be the chief executive and chief operating officer of the Partnership, shall have general authority for direction of the business and affairs of the Partnership and general supervision over its several officers, subject, however, to the control of the Partnership Governance Committee and shall see that all orders and resolutions of the Partnership Governance Committee or, as applicable, any Auxiliary Committee(s) are carried into effect. The CEO shall be authorized to execute and deliver, in the name and on behalf of the Partnership, (i) contracts or other instruments authorized by Partnership Governance Committee Action and (ii) contracts or instruments in the usual and regular course of business, except in cases when the execution and delivery thereof shall be expressly delegated by the Partnership Governance Committee to some other officer or agent of the Partnership, and, in general, shall perform all duties incident to the office of CEO and such other duties as from time to time may be assigned to him or her by the Partnership Governance Committee (consistent with Section 3.8.(O)) or as are prescribed by this Agreement. Unless otherwise requested by a Representative, the CEO shall attend all meetings of the Partnership Governance Committee. 4.6. Vice Presidents. The Vice Presidents shall perform such duties as may, from time to time, be assigned to them by the Partnership Governance Committee (consistent with Section 3.8.(O)). In addition, at the request of the CEO, or in the absence or disability of the CEO, the Vice Presidents, or any of them, in the order of their election or in any other order determined by the Partnership Governance Committee, temporarily shall perform all (or if limited through the scope of the delegation, some of) the duties of the CEO, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the CEO. 4.7. Secretary. The Secretary shall keep the minutes of all meetings (and copies of written records of action taken without a meeting) of the Partnership Governance Committee and the Auxiliary Committees in minute books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of this Agreement. The Secretary shall be the custodian of the records. The Secretary shall have general charge of books and papers of the Partnership as the Partnership Governance Committee may direct and, in general, shall perform all duties and exercise all powers incident to the office of Secretary and such other duties and powers as the Partnership Governance Committee (consistent with Section 3.8.(O)) or the CEO from time to time may assign to or confer upon the Secretary. 4.8. Assistant Officers. Any assistant officer appointed by the Partnership Governance Committee shall have power to perform, and shall perform, all duties incumbent upon the officer he or she is assisting, subject to the general direction of such officer, and shall perform such other duties as this Agreement may require or the Partnership Governance Committee (consistent with Section 3.8.(O)) may prescribe. 14 4.9. Other Officers. The Partnership Governance Committee may appoint such other officers and delegate (consistent with Section 3.8.(O)) to them such duties as it sees fit. 4.10. Salaries. The salaries or other compensation of the Executive Officers of the Partnership shall be fixed from time to time by the Partnership Governance Committee. Except for previously granted stock options, stock appreciation rights, deferred compensation and other similar arrangements, the benefits of which might be realized subsequent to the officer becoming an employee of the Partnership, no officer or employee (other than an employee of a Partner or an Affiliate of a Partner) of the Partnership shall receive any fees or compensation from any Partner or any Affiliate of any Partner. Further, all fees and compensation of the officers and employees of the Partnership with respect to their services as such officers and employees shall be payable solely by the Partnership and no Partner or its Affiliates shall pay (or offer to pay) any such fees or compensation to any officer or employee, except to the extent permitted by Section 4.13. in the case of loaned employees or that the Partnership shall have agreed with a Partner or one of its Affiliates pursuant to a separate agreement that a portion of the compensation of such officer or employee shall be paid by such Partner or Affiliate. 4.11. Bonds of Officers. The Partnership Governance Committee may (but shall have no obligation to) secure the fidelity of any officer of the Partnership by bond or otherwise, on such terms and with such surety or sureties, conditions, penalties or securities as shall be deemed proper by the Partnership Governance Committee. 4.12. Delegation. The Partnership Governance Committee may delegate temporarily the powers and duties of any officer of the Partnership, in case of absence or for any other reason, to any other officer of the Partnership, and may authorize the delegation by any officer of the Partnership of any of such officer's powers and duties to any other officer or employee of the Partnership, subject to the general supervision of such officer. 4.13. Loaned Employees. If there is a vacancy in a job position above a certain grade (but below the level of the Executive Officers) in the Partnership (such grade to be established by the Partnership Governance Committee), either General Partner shall be entitled to nominate one of its (or its Affiliate's) own employees to fill such vacancy for a fixed period of up to three years, subject to renewal or extension by the CEO with the consent of each General Partner. The selection of a nominating General Partner's (or its Affiliate's) employee to fill a Partnership vacancy and all of the terms of such selection and the nominated employee's service shall be subject to the approval and control of the CEO; provided, however, that the selection and appointment of a nominating General Partner's (or its Affiliate's) employee to fill a vacancy shall be confirmed by Partnership Governance Committee Action. A nominating General Partner's (or its Affiliate's) employee who fills a Partnership vacancy shall in all respects perform as an employee of the Partnership and, as such, shall have the duties to the Partnership and the General Partners set forth or referred to in Section 4.4. (and each General Partner shall at all times cause all of its (or its Affiliate's) employees 15 on loan to the Partnership to perform in a manner consistent with the requirements of Section 4.4.); provided, however, that such employees shall continue to participate in the compensation and benefit plans of the nominating General Partner or its Affiliate. Each General Partner shall at any one time have no more than 10 of its (or its Affiliate's) employees filling Partnership vacancies. The Partnership shall compensate the nominating General Partner (or its Affiliate) for the services of the employee in accordance with terms determined by the nominating General Partner and the CEO prior to the employee's commencing work for the Partnership. 4.14. Employee Transfers. With the prior approval of the Partnership Governance Committee, which approval shall not be unreasonably withheld, either General Partner (or its Affiliates) shall be entitled to hire specific employees of the Partnership to fill vacancies with such General Partner or its Affiliate. With the prior approval of the relevant General Partner, which approval shall not be unreasonably withheld, the Partnership shall be entitled to hire specific employees of either General Partner (or its Affiliates) to fill vacancies with the Partnership. The granting of credit for past service with the prior employer for purposes of the hired employee's compensation and benefit plans shall be within the discretion of the General Partner who is hiring such employee, or in the case of the Partnership, shall be determined in accordance with an appropriate Partnership policy or procedure. 4.15. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the officers as set forth in this Agreement. No Person dealing with any officer with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with. No Person dealing with the Partnership shall be required to investigate or inquire as to the authority of the officers of the Partnership to execute contracts, agreements, deeds, mortgages, security agreements, promissory notes or other instruments or documents with respect to any business or property of the Partnership or to take actions on behalf of the Partnership. 5. RIGHTS, DUTIES AND COVENANTS OF PARTNERS 5.1. Delegation. The Partners acknowledge that the General Partners (acting through the Partnership Governance Committee) are permitted to delegate responsibility for day-to-day operations of the Partnership to officers and employees of the Partnership. 5.2. General Authority. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the General Partners as set forth in this Agreement or as specifically authorized by Partnership Governance Committee Action. No Person dealing with either General Partner or such General Partner's agents or representatives with respect to any business or property of the Partnership shall be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of a General Partner or a General Partner's 16 representatives. Nothing in this Section 5.2. shall be deemed to be a waiver or release of any General Partner's obligations to the other Partners as set forth elsewhere in this Agreement. 5.3. Nature of Partner Obligations. Each Partner (directly or through its Affiliates) is a sophisticated party possessing extensive knowledge of and experience relating to, and is actively engaged in, significant businesses, in addition to the Refinery Business, has been represented by legal counsel, is capable of evaluating and has thoroughly considered the merits, risks and consequences of the provisions of this Section 5.3. and is agreeing to such provisions knowingly and advisedly. The liability of each of the General Partners (including any liability of its Affiliates or its and their respective officers, directors, agents and employees), either to the Partnership or to any other Partner, for any act or omission by such Partner in its capacity as a partner of the Partnership that is imposed by such Partner's status as a "general partner" or "limited partner" (as such terms are used in the Act) of a limited partnership is hereby eliminated, waived and limited to the fullest extent permitted by law. Nothing in this subsection shall relieve any Partner from liability for any breach of this Agreement and each General Partner shall at all times owe to the other General Partner a duty to act in good faith with respect to all matters involving the Partnership; provided, however, that the duty of a Nonconflicted General Partner in exercising the authority described in Section 5.7. shall be as set forth in Section 5.7.(B). 5.4. Limited Partners. (A) No Limited Partner shall take part in the management or control of the Partnership Business, transact any business in the Partnership's name or have the power to sign documents for or otherwise to bind the Partnership. (B) Each Limited Partner shall have the rights with respect to the Partnership's books and records as set forth in Section 5.9. 5.5. Partner Not Agent of Other Partners. Except as expressly provided in Section 2.7., Section 5.7., Section 10.5. or Section 11.1., nothing in this Agreement shall be deemed to constitute a Partner as an agent or legal representative of any other Partner. 5.6. Transactions with the Partnership. Subject to any required approval of the Nonconflicted General Partner in accordance with Section 5.7., each Partner and its Affiliates shall be entitled without restriction to enter into contracts and transactions with the Partnership. Upon receipt of any required approval by the Nonconflicted General Partner Representatives, all contracts and transactions between the Partnership and a Partner or its Affiliates shall be deemed to be entered into on an arm's-length basis and to be subject to ordinary contract and commercial law. 17 5.7. Control of Certain Claims and Certain Transactions. (A) With respect to each Conflict Circumstance, the Nonconflicted General Partner (through its Representatives) shall have the sole and exclusive power and right for and on behalf, and at the sole expense, of the Partnership (i) to control (including the right from time to time, in its discretion, to make delegations to officers or employees of the Partnership as to) all decisions, elections, notifications, actions, exercises or nonexercises and waivers of all rights, privileges and remedies provided to, or possessed by, the Partnership with respect to a Conflict Circumstance and (ii) in the event of any potential, threatened or asserted claim, dispute or action with respect to such Conflict Circumstance, to retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all such claims, disputes and actions. Accordingly, Partnership Governance Committee Action with respect to a Conflict Circumstance shall require only the approval of the Representatives of the Nonconflicted General Partner. As used herein, the term "Conflict Circumstance" shall mean any transaction, dealing or agreement between the Partnership, on the one hand, and a General Partner (the "Conflicted General Partner") or any of its Affiliates, on the other hand, including each of the Related Agreements to which the Partnership is a party and each transaction thereunder; provided, however, that a Conflict Circumstance shall cease to exist (i) upon the Conflicted General Partner ceasing to be a Partner or (ii) upon the third party with which the transaction, dealing or agreement exists, ceasing to be an Affiliate of a General Partner. As used herein the term "Nonconflicted General Partner" shall mean the General Partner that is not the Conflicted General Partner. Each General Partner shall, and shall cause its Affiliates to, take all such actions, execute all such documents and enter into all such agreements as may be necessary or appropriate to facilitate or further assure the accomplishment of this Section 5.7. (B) The Nonconflicted General Partner, in exercising its control, power and rights pursuant to this Section 5.7., shall act in good faith and in a manner it reasonably believes to be in the best interests of the Partnership. The Conflicted General Partner (or its Affiliate) that is the other party to such negotiation, contract, transaction, claim, dispute or action shall have the right to deal with the Partnership and with the Nonconflicted General Partner on an arm's-length basis and in its own best interests, but in any event in good faith. (C) This Section 5.7. shall not apply to: (i) any sale by the Partnership of a product or service that the Partnership also sells to unrelated third parties; provided, however, that any agreement for such sales by the Partnership to a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such sales shall be at market-based 18 prices that are not less than the prices the Partnership charges third parties for such products or services; or (ii) any purchase by the Partnership of a product or service that the Partnership also purchases from unrelated third parties; provided, however, that any agreement for such purchases by the Partnership from a Partner or one of its Affiliates shall, to the extent not previously performed, be terminable without penalty upon not more than sixty (60) days notice and such purchases shall be at market-based prices that are not more than the prices the Partnership pays third parties for such products or services. 5.8. Partnership Interest. All assets contributed to or acquired by the Partnership shall be owned by the Partnership. Each Partner shall have a right only to its "partnership interest" (as such term is used in the Act) in the Partnership (an "Interest"), and to the maximum extent permitted by applicable law each Partner waives any right to partition of the Partnership's assets and agrees that it will not seek or be entitled to partition any such assets, whether by way of physical partition, judicial sale or otherwise, prior to the termination of the Partnership. 5.9. Access to and Copies of Records and Documents. (A) Except as otherwise required by law, any Partner may examine and copy, in person or by representative, at any reasonable time, all records and other information of the Partnership. (B) Upon request by any Partner, the Partnership shall provide without charge true copies of the Certificate of Limited Partnership, this Agreement, all amendments or restatements thereto, and copies of all federal, state, and local information or income tax returns for each of the Partnership's six most recent tax years. 5.10. Partner Covenants. Except to the extent it takes action pursuant to its rights as a Nondefaulting Partner under Section 11., each Partner covenants and agrees with the Partnership and with each other Partner as follows: (A) It shall not exercise, or purport or attempt to exercise, its authority (i) to withdraw, retire, resign, or assert that it has been expelled from the Partnership, or (ii) to dissolve or enter into any proceeding seeking any dissolution of such Partner, or (iii) to make any application for judicial dissolution of the Partnership; (B) It shall not do any act that would make it impossible or impracticable to carry on the Partnership Business; (C) It shall not, directly or indirectly through any entity, conduct or engage in any business other than the holding of its Interest and the doing of things necessary or incidental in connection therewith, the exercise of its authority as a Partner, the exercise of its authority pursuant to Section 5.7., and the performance and enforcement of its obligations and rights pursuant to this Agreement; and 19 (D) It shall not act or purport or attempt to act in a manner inconsistent with any Partnership Governance Committee Action or in a manner contrary to the agreements of the Partners set forth in this Agreement. 5.11. Indemnification. (A) (1) Indemnification by Partnership. The Partnership shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each Partner, its Affiliates and their respective officers, directors and employees from, against and in respect of any losses, claims, damages, costs and expenses (including costs of investigation, defense and attorneys' fees) and liabilities arising out of or in connection with the business or affairs of the Partnership (collectively, "Indemnified Losses"), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement. The Partnership shall periodically reimburse any Person entitled to indemnity under this Section 5.11.(A)(1) for its legal and other expenses incurred in connection with defending any claim (other than a claim by the Partnership or a Partner) with respect to such Indemnified Losses if such Person shall agree to reimburse promptly the Partnership for such amounts if it is finally judicially determined that such Person was not entitled to indemnity hereunder. (2) Partner's Right of Contribution. Each Affiliated Partner Group hereby agrees to indemnify, defend and hold harmless the other Affiliated Partner Group and their respective officers, directors and employees from and against the indemnifying Affiliated Partner Group's Participation Percentage of any Indemnified Losses (calculated at the time any such Indemnified Loss was incurred), except to the extent that it is finally judicially determined that such Indemnified Losses arose out of or were related to actions or omissions of the indemnified Affiliated Partner Group or any of their respective officers, directors or employees (acting in their capacity as such) constituting (a) bad faith, fraud, violation of law or intentional misconduct or (b) a breach of this Agreement; provided, however, that such indemnified Affiliated Partner Group, and their respective officers, directors and employees shall not be entitled to indemnity under this Section 5.11.(A)(2) unless (i) the indemnified Affiliated Partner Group shall make a written demand for indemnification from the Partnership in accordance with Section 5.11.(D) and the Partnership shall fail to satisfy 20 such demand in a manner reasonably satisfactory to the indemnified Affiliated Partner Group within sixty (60) days of such notice or (ii) the Partnership is Insolvent or otherwise unable to satisfy its obligations. (B) Indemnification by Partners. Each Partner hereby indemnifies and shall hold harmless the Partnership and the other Partners, their Affiliates and each director, officer and employee of such other Partners, its Affiliates and the Partnership without duplication from and against any and all Indemnified Losses arising out of any act of, or any purported assumption of any obligation or responsibility by, such indemnifying Partner or its Affiliates, or any of the directors, officers or employees of such indemnifying Partner or its Affiliates, in violation of this Agreement. (C) Indemnification Under Related Agreements. Notwithstanding any other provision of this Agreement, no Partner or its Affiliates or their respective officers, directors or employees shall be entitled to indemnification under this Section 5.11. in respect of any breach by such Partner or its Affiliates of the Related Agreements or in respect of any matter for which such Partner or its Affiliates is required to indemnify the Partnership under the applicable terms of any of the Related Agreements. (D) Procedures. Promptly after receipt by a person entitled to indemnification under Section 5.11.(A) or Section 5.11.(B) (an "Indemnified Party") of notice of any pending or threatened claim against it (an "Action"), such Indemnified Party shall give notice to the party to whom the Indemnified Party is entitled to look for indemnification (the "Indemnifying Party") of the commencement thereof, but the failure so to notify the Indemnifying Party shall not relieve it of any liability that it may have to any Indemnified Party except to the extent the Indemnifying Party demonstrates that it is prejudiced thereby. In case any Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B) shall be brought against an Indemnified Party and it shall give notice to the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section for any fees of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation. Notwithstanding an Indemnifying Party's election to assume the defense of any such Action that is subject to indemnification under Section 5.11.(A) or Section 5.11.(B), the Indemnified Party shall have the right to employ separate counsel 21 and to participate in the defense of such Action, and the Indemnifying Party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Indemnifying Party to represent the Indemnified Party would present such counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any such Action include both the Indemnifying Party and the Indemnified Party, and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to assume the defense of such Action on the Indemnified Party's behalf); (iii) the Indemnifying Party shall not have employed counsel satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the institution of such Action; or (iv) the Indemnifying Party shall authorize the Indemnified Party to employ separate counsel at the Indemnifying Party's expense. If an Indemnifying Party assumes the defense of such Action, (a) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party's consent (which shall not be unreasonably withheld) unless (I) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claims that may be made against the Indemnified Party and (II) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (b) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent (which shall not be unreasonably withheld). The indemnities contained in this Section 5.11. shall survive the termination and liquidation of the Partnership. 6.1. CAPITAL CONTRIBUTIONS AND PARTICIPATION PERCENTAGE 6.1. Prior Capital Contributions. Upon formation of the Company, LParent on behalf of Lyondell GP and CParent on behalf of CITGO LP, contributed certain Assets to and the Company assumed certain liabilities and obligations, as provided for in the Regulations and the Contribution Agreement. From time to time prior to the Conversion Date, Lyondell GP and CITGO LP, as the two members of the Company, made Capital Contributions and loans to the Company as provided for in the Regulations. Capital Contributions and proceeds of loans made prior to the Conversion Date that were of a specific character or designated for a specific purpose shall retain such character or designation and be subject to the restrictions applicable thereto set forth in the Regulations. 6.2. Capital Contributions. Except as expressly provided in this Section 6., Section 7.1(D) or as determined by the Partnership Governance Committee, the Partners (i) shall have no obligation to contribute any capital to the Partnership for any purpose and (ii) shall not be entitled to contribute any capital to the Partnership. 22 6.3. Partner Loans. A Partner or its Affiliates may loan funds to the Partnership on such terms and conditions as may be approved by the Partnership Governance Committee pursuant to Section 3.8.(E), and, subject to other applicable law, have the same rights and obligations with respect thereto as a Person who is neither a Partner nor an Affiliate of a Partner. The existence of such a relationship and acting in such a capacity will not result in a Limited Partner being deemed to be participating in the control of the business of the Partnership or otherwise affect the limited liability of a Limited Partner. If a Partner or any Affiliate thereof is a lender, in exercising its rights as a lender, including making its decision whether to foreclose on property of the Partnership, such lender will have no duty to consider (i) its status as a Partner or an Affiliate of a Partner, (ii) the interests of the Partnership, or (iii) any duty it may have to any other Partner or the Partnership. 6.4. Participation Percentages. (A) Capital Contributions and Participation Percentages. (1) As of and following the Conversion Date, the Partners' respective Capital Contributions shall be equal to the respective amounts set forth in Exhibit 6.4 hereto plus any adjustments thereto made following the Conversion Date in accordance with the terms of this Section 6.4. (2) Each Partner's respective Capital Contributions shall be adjusted to reflect the Distributions (as hereinafter defined), if any, from any financing by the Partnership from the Conversion Date until the Option Date (the "Refinancing"). As used herein, the term "Distributions" shall mean the net proceeds of the Refinancing after the Partnership (i) repays any existing indebtedness of the Partnership (including any and all indebtedness owed to the Partners) which the Partners have agreed to repay but excluding any repayment of the Partnership's revolving credit facility which may be refinanced subsequent to the Refinancing and (ii) withholds any amount of such Refinancing proceeds which the Partnership Governance Committee determines should be maintained by the Partnership. (3) The Participation Percentage for each Partner shall equal the sum of the Capital Contributions of such Partner divided by the sum of the Capital Contributions of all Partners. (4) For the Calendar Quarter in which the Conversion occurs, the Participation Percentages through the end of that Calendar Quarter shall be as set forth on Exhibit 6.4. For each Calendar Quarter following such Calendar Quarter, the Participation Percentages of the Partners shall be calculated and in effect as of the first day of the Calendar Quarter based on all events 23 which occurred or are deemed to have occurred through the close of business on the last day of the preceding Calendar Quarter. Except as otherwise provided, the Participation Percentages in effect as of the first day of the Calendar Quarter shall be operative for the entire Calendar Quarter and shall not be changed for any reason until the first day of the next succeeding Calendar Quarter. (B) From the Option Date, if any: (i) each of the CITGO Partners' Capital Contributions shall include the amount of the Option Date Payment and shall be adjusted by the CITGO Partners Option Date Amount; and (ii) each of the Lyondell Partners' Capital Contributions shall be adjusted by their respective amounts of the Lyondell Partners Option Date Amount. 6.5. Capital Expenditure Funding. To the extent that the Partnership Governance Committee determines at any time after the Conversion Date that certain capital expenditures will be required and that funds are needed by the Partnership for such capital expenditures, the Partners shall fund the amount needed by the Partnership for such purposes. With respect to the funding required under this Section, the Partnership Governance Committee or the CEO shall inform the Partners as to the aggregate amount required to be funded, the intended use of the funds, and the due date or dates for each Partner's funding obligation. The amount required to be funded by each Partner on any given date shall equal the aggregate amount due on such date multiplied by the Partner's Participation Percentage on such date. The amounts to be funded by the Partners shall be funded with Capital Contributions, if such amounts are funded prorated in accordance with the Partners' Participation Percentage, or may be funded with loans (by unanimous consent of the Partnership Governance Committee). The amounts funded hereunder shall be used solely for the purposes set forth herein as determined by the Partnership Governance Committee. 6.6. CITGO Partners' Option to Increase Their Collective Participation Percentage. (A) CITGO Partners may elect (and in the event of such election shall give the Partnership and Lyondell Partners written notice of CITGO Partners' election), as provided herein, to increase CITGO Partners' Participation Percentage to any Participation Percentage up to fifty percent (50%), in the aggregate (the "Intended Percentage"). The notice shall set forth (i) the Intended Percentage, (ii) CITGO Partners' tentative calculation of the amount it must contribute in order to achieve the Intended Percentage and (iii) the date on which CITGO Partners will make the Capital Contribution to achieve the Intended Percentage, which date ("Option Date") shall be the last date of a calendar quarter, subsequent to January 1, 2000 and not later than September 30, 2000 and must not be less than thirty (30) days following the date of the notice. 24 (B) CITGO Partners shall be permitted to elect to increase their Participation Percentage only one time under the provisions of this Section 6.6. (C) On the Option Date, CITGO Partners shall contribute to the Partnership cash in an amount equal to 50% of the Option Date Payment and a promissory note equal to 50% of the Option Date Payment given to the Partnership in accordance with the terms of Section 6.6.(E). "Option Date Payment" shall mean the amount of a Capital Contribution by CITGO Partners such that on the day following the Option Date, and after giving effect to the CITGO Partners Option Date Amount and the Lyondell Partners Option Date Amount, CITGO Partners Participation Percentage would equal the Intended Percentage. (D) To the extent the exact amount of the Option Date Payment cannot be determined on the Option Date, CITGO Partners shall contribute on the Option Date an amount equal to CITGO Partners' good faith estimate of the amount of cash due hereunder. At least ten (10) Business Days prior to the Option Date, CITGO Partners shall furnish the Partnership and Lyondell Partners with a written determination of CITGO Partners' good faith estimate of the total amount due under Section 6.6.(C). Promptly after the Option Date, the Partnership Governance Committee shall determine such amounts as are necessary to be contributed by CITGO Partners under this Section 6.6. Within five (5) Business Days of the determination by the Partnership Governance Committee of the amount of cash required to be contributed by CITGO Partners under this Section 6.6., CITGO Partners shall contribute to the Partnership (i) the difference between such amount and the amount of cash contributed by CITGO Partners on the Option Date plus (ii) interest on the amount contributed under clause (i) at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date CITGO Partners makes the contribution required herein. If the amount of cash contributed by CITGO Partners on the Option Date is greater than the amount required to have been contributed by CITGO Partners, then within five (5) Business Days of such determination the Partnership shall pay such excess to CITGO Partners with interest at the Agreed Rate (subject to Section 12.11.) from the Option Date through the date the Partnership makes the required payment. For purposes of determining Participation Percentages, only the final net amount of CITGO Partners' contribution under this Section 6.6. shall be taken into account and any interim contributions or distributions or interest payments shall be disregarded. (E) CITGO Partners shall deliver to the Partnership a promissory note equal to 50% of the Option Date Payment. The promissory note shall be delivered to the Partnership as soon as the exact amount of the Option Date Payment is determined pursuant to the procedures set forth in Section 6.6.(D). The promissory note shall be in the form set forth in Exhibit 6.6(E) to this Agreement. All scheduled payments of 25 principal under the promissory note shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2). The Partnership shall have the right to withhold from distributions payable to CITGO Partners any amounts then due under the promissory note and to apply such withheld amounts to the amounts payable by CITGO Partners to the Partnership under the promissory note. (F) The amount contributed by CITGO Partners under Section 6.6.(C) shall be applied, in order of priority, towards repayment of the Initial Construction Loan, the Additional Construction Loan and, to the extent funds are available, any loan from Lyondell Partners. Any such amounts used to repay Lyondell Partners Loans shall be applied in inverse order by reference to the date each such loan was extended, that is the first repayment shall be of the loans most recently made by Lyondell Partners. If no such loans are outstanding on the Option Date, the amount contributed by CITGO Partners under Section 6.6.(C) shall be used or deemed used by the Partnership for capital expenditures incurred by the Partnership subsequent to the Option Date and such payments shall be treated as having been used to acquire property in accordance with Section 7.7.(B)(2) and all depreciation, cost recovery, or amortization deductions associated with said capital expenditures shall be allocated to CITGO Partners in accordance with Section 7.7.(B)(2). 6.7. Return of Capital Contributions. Except as otherwise expressly provided by this Agreement, no Partner shall be entitled to have all or any part of its Capital Contribution returned and no Partner shall be paid interest or any other return on any Capital Contribution or on the balance of its Capital Account, as that term is hereafter defined. 6.8. Administration and Investment of Funds. The administration and investment of Partnership funds shall be in accordance with the procedures and guidelines as shall be adopted by the Partnership Governance Committee. The Partnership may delegate to a third party (which may be a Partner or an Affiliate of one of the Partners) the responsibility for administering and investing Partnership funds pursuant to such guidelines. 7. ALLOCATIONS AND DISTRIBUTIONS 7.1. Capital Accounts. A separate capital account (each a "Capital Account") will be maintained for each Partner. Each Partner's Capital Account shall be credited and debited in accordance with the following provisions: (A) To each Partner's Capital Account there shall be credited such Partner's capital contributions (including the principal amount of any promissory note contributed by a CITGO Partner pursuant to Section 26 6.6.(E) but excluding the payment of principal on such promissory note), such Partner's distributive share of Profits as determined under Section 7.6(A), and the amount of any Partnership liabilities secured by any Partnership properties distributed to such Partner such that the Partner is considered to assume or take subject to such liabilities under Section 752 of the Code; (B) To each Partner's Capital Account there shall be debited the amount of cash and the fair market value of any Partnership properties distributed to such Partner pursuant to any provision of this Agreement and such Partner's distributive share of Losses as determined under Section 7.6(A); (C) On the day following an Option Date Payment, if any, the Capital Accounts of the Partners shall be adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to reflect the Asset Value on such date of (i) the Working Capital, (ii) the Assets and (iii) any capital assets acquired with funds contributed to the Partnership by a Partner so that the balances in such accounts are in the Proper Ratio on the date of such adjustment; provided, however, that for purposes of this Section 7.1.(C), the Asset Value of such assets shall be adjusted to the extent necessary to cause the balances in the Partners' Capital Accounts to be in the Proper Ratio; (D) Any payment made by LParent or the Lyondell Partners to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement shall be considered a Capital Contribution; provided, however, the increase to Lyondell Partners' Capital Accounts as a result of any such Capital Contribution shall occur simultaneously with the corresponding reduction in Lyondell Partners' Capital Accounts due to the reduction in Asset Value of the Assets because of the receipt by the Partnership of any such payment. Subject to the provisions of Section 7.4.(B), to the extent any such payment is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, such amount shall be deposited in the operating fund; and (E) Any adjustment of Capital Accounts under this Section 7.1. shall have no impact upon the determination of Participation Percentages. 7.2. Income and Distribution Determinations; Restriction on Distributions and Advances. Profits and Losses shall be allocated as of the close of business on the last day of each Calendar Quarter. Distributions of Distributable Cash shall be made on a monthly basis and, regardless of the date a distribution is actually paid, distributions shall be treated as having been made on the last day of the calendar month immediately preceding the date of the distribution. Any other provisions of this Agreement to the contrary notwithstanding, however, the Partnership shall not make any distribution of Distributable Cash or any advances for so long as, under the terms of any agreement, contract or instrument evidencing, governing 27 or securing any indebtedness for borrowed money (including loans or capital leases), an event of default exists (or would exist upon the making of such distribution or advance) and such agreement, contract or instrument prohibits the making of such distribution or advance during the continuance of such event of default. 7.3. Distributable Cash. (A) Following the end of each calendar month the amount of Distributable Cash for the immediately preceding calendar month shall be determined, and, subject to the provisions set forth herein, such Distributable Cash amount shall be distributed promptly to the Partners as provided in Section 7.4. Notwithstanding any other provision of this Agreement, the Partnership shall not be required to make any distribution if such distribution is prohibited by Section 17-607 of the Act. (B) The amount of the Partnership's Distributable Cash for any calendar month shall be the Partnership's net cash provided or used by operating activities for such month (determined in accordance with GAAP) less (i) cash used in financing activities for repayment of long term debt (including but not limited to bonds and Partner Loans) and (ii) any capitalized interest. If the resulting Distributable Cash for any calendar month is negative, no distribution of cash will be made to any Partner until after such amount is reserved from future positive amounts. A Partner's Distributable Cash for any calendar month shall be equal to the product of (i) the Partnership's Distributable Cash for such month and (ii) such Partner's Participation Percentage for the Calendar Quarter in which such month occurs. (C) To the extent that the Partnership does not have sufficient cash or remaining capacity under its working capital credit facility to make the distributions as provided in Section 7.4., then, except as otherwise expressly provided, distributions shall be made in proportion to the amounts distributable to each Partner. Any amount which is required to be distributed pursuant to Section 7.3.(A), but which is not distributed for any reason, including, without limitation, by reason of insufficient cash or by virtue of the last sentence of Section 7.2., shall constitute a debt owed by the Partnership to the Partner entitled to such distribution, which debt is to be paid, with interest at the Agreed Rate (subject to Section 12.11.), as quickly as possible, but in all events before any other distributions with respect to subsequent months are paid to the Partners. 28 7.4. Distributions. (A) Except as otherwise expressly provided in this Agreement, each Partner's Distributable Cash for each calendar month shall be distributed to such Partner. If, following the end of a Calendar Quarter, it is determined that the sum of the monthly distributions to a Partner attributable to the Calendar Quarter exceeds the Partner's Distributable Cash for the Calendar Quarter, such Partner shall promptly contribute the excess to the Partnership together with interest thereon at the Agreed Rate (subject to Section 12.11.). Additional distributions shall be made in such amounts as the Partnership Governance Committee shall determine; provided, however, that such distributions shall be made in proportion to the Partners' Participation Percentages for the Calendar Quarter in which the distribution is made. (B) After the earlier of the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6., any cash attributable to a payment described in Section 7.1.(D) but which is not expended by the Partnership to pay costs for which it is being indemnified by LParent or Lyondell Partners, shall be distributed to the Partners in proportion to their Participation Percentages. 7.5. Interim Loans. Distributions under this Section 7.5 may be made, as provided herein, to both Partners of an Affiliated Partner Group at any time. Each Affiliated Partner Group shall be entitled to receive distributions hereunder not more than once during each calendar quarter provided additional distributions can be made with the consent of the General Partner of the other Affiliated Partner Group, which consent shall be granted or withheld in the sole discretion of such other General Partner. Any time the Partnership's cash (excluding cash in the capital fund and any other cash held for a specific project) is greater than the Cash Balance Amount, by written notice to the Partnership both Partners of an Affiliated Partner Group shall be entitled to borrow from the Partnership and the Partnership shall promptly advance to such Partners, their respective Participation Percentages of the Partnership's cash in excess of the Cash Balance Amount. The "Cash Balance Amount" shall initially be $20 million, which amount may be changed from time to time by Unanimous Partnership Governance Committee Action. Any advance hereunder shall (subject to Section 12.11) bear interest at the same rate payable by the Partnership on its working capital facility or if the Partnership has no such facility then at the Agreed Rate. Any advance hereunder shall be repaid by withholding from all distributions otherwise payable to the Partner the amount of the advance plus interest thereon. Amounts withheld shall first be applied to interest and thereafter to principal. Each loan shall have a term of 90 days so that if the amount of the loan plus interest thereon is not repaid from distributions otherwise payable to the Partner within 90 days of the loan, then the Partner shall be required to repay the loan with other funds. 29 7.6. Internal Revenue Code Section 704(b) Book Allocations for Tax Purposes. (A) General. For each Calendar Quarter or portion thereof, except as provided in this Section 7.6., each item comprising Profits or Losses shall be allocated to the Partners in proportion to their Participation Percentages. (B) Internal Revenue Code Section 704(b) Book Depreciation. For each Calendar Quarter or portion thereof, Depreciation shall be allocated to the Partners in proportion to their Participation Percentages. (C) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of Section 7., if there is a net decrease in "partnership minimum gain" (as defined in Treasury Regulation (S)1.704-2(b)(2)) during any Partnership taxable year, each Partner shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and, if necessary, subsequent years) equal to such Partner's share of the net decrease in minimum gain (determined in accordance with Treasury Regulation (S)1.704-2(g)). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "minimum gain chargeback" within the meaning of Treasury Regulation (S)1.704- 2(f). (D) Partner Minimum Gain Chargeback. Notwithstanding any provision of Section 7. except Section 7.6.(C), if there is a net decrease in "partner nonrecourse debt minimum gain" (as defined in Treasury Regulation (S)1.704-2(i)(2)) during any Partnership taxable year, each Partner with a share of that partnership nonrecourse debt minimum gain (determined under Treasury Regulation (S)1.704-2(i)(5)) as of the beginning of the year shall be specifically allocated, before any other allocation is made, items of income and gain for such year (and if necessary, subsequent years) equal to that Partner's share of the net decrease in partner nonrecourse debt minimum gain. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to Partners. This provision shall be applied so that it will constitute a "chargeback of Partner nonrecourse debt minimum gain" as prescribed by Treasury Regulation (S)1.704-2(i)(4). (E) Distribution of Property to Partners. In the event that any property (other than cash) is distributed by the Partnership to a Partner, gain or loss will be allocated to the Partners as if there were a taxable disposition of such property on the date of distribution. (F) Indemnity Payment Expenditure. All deductions attributable to the expenditure of all amounts described in Section 7.1.(D) shall be allocated to Lyondell LP. 30 (G) Qualified Income Offset. Notwithstanding any other provisions of Section 7.6. or 7.7., if a Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation (S)1.704-1(b)(2)(ii)(d)(4), (5) or (6) which would create a deficit balance in its Capital Account (and reduced by the amount described in Treasury Regulation (S)1.704- 1(b)(2)(ii)(d) and the outstanding principal amount of any promissory note(s) contributed by the CITGO Partners to the Partnership pursuant to Section 6.6.(E) such Partner(s) will be allocated gross income and gain in an amount and manner sufficient to eliminate such deficit as quickly as possible. Allocations under this Section 7.6.(G) shall be comprised of a pro rata share of each item of Partnership income and gain for the period. This provision shall be applied so that it will constitute a "qualified income offset" within the meaning of Treasury Regulation (S)1.704-1(b)(2)(ii)(d). (H) Curative Allocations. If items of income, gain, loss or deduction are allocated under Section 7.6.(G), to the extent possible the allocation of any remaining items of income, gain, loss or deduction pursuant to Section 7.6. shall be allocated such that the net amount allocated to each Partner will be the same amount that would have been allocated if no items of income gain, loss or deduction had been allocated under Section 7.6.(G). (I) Gain or Loss in Liquidation. To the extent the Partners' Capital Account balances are not in the Proper Ratio, gain or loss on the sale or distribution of assets under Section 11.11. shall be allocated, to the maximum extent possible, so as to cause the Partners' Capital Account balances to be in the Proper Ratio. 7.7. Tax Allocations. (A) General. Except as otherwise provided in this Section 7.7., for income tax purposes, each item of income, gain, deduction, loss and credit shall be allocated among the Partners in the same manner as the corresponding items are otherwise allocated under Section 7.6. (B) 704(c) Depreciation Allocations. For income tax purposes, pursuant to Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, depreciation, cost recovery and amortization deductions shall be allocated to the Partners as set forth in this Section 7.7.(B) in order to take into account any difference between (x) the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C)) of the assets on the date the assets are contributed to the Partnership or on any date on which the Capital Accounts are adjusted pursuant to Section 7.1.(C) and (y) the Partnership's adjusted tax basis in the assets on each such date. The foregoing allocation shall be implemented through the following provisions: 31 (1) If a Partner contributes property to the Partnership, all depreciation, cost recovery or amortization deductions attributable to the property shall be allocated to the Partner contributing the property; (2) Subject to Section 7.7.(B)(6) below, if a Partner contributes cash (including the amounts described in Section 7.1.(D) and payments made with respect to the promissory note, if any, delivered under Section 6.6.(E)) which is used or deemed to be used to acquire property, all depreciation, cost recovery or amortization deductions attributable to the property acquired with the Partner's contribution shall be allocated to the Partner contributing the cash; (3) All depreciation, cost recovery or amortization deductions attributable to the expenditure of any funds paid by LParent or a Lyondell Partner to the Partnership pursuant to LParent's indemnity obligation to the Partnership under the Contribution Agreement or any Related Agreement shall be allocated to Lyondell Partner LP; (4) Subject to Section 7.7.(B)(5) and Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to property acquired with funds loaned to the Partnership by a third party shall be allocated to the Partners in accordance with their Participation Percentages; (5) Subject to Section 7.7.(B)(6), all depreciation, cost recovery or amortization deductions attributable to funds loaned to the Partnership by a Partner shall be allocated to the Partner loaning such funds; and (6) If a Partner contributes cash to the Partnership which is used to repay a debt of the Partnership, any remaining deductions for depreciation, cost recovery or amortization attributable to the property acquired with the borrowed funds shall be allocated to the Partner contributing the funds used to repay the debt. If the Partnership borrows funds from a third party which are used to repay a debt of the Partnership from a Partner, any remaining deductions from depreciation, cost recovery or amortization attributable to the property acquired with the funds so borrowed from a Partner shall be allocated to the Partners in accordance with their Participation Percentages. (C) 704(c) Gain or Loss Allocations. Solely for income tax purposes, gain or loss resulting from any sale, exchange or disposition of an asset shall be allocated among the Partners, in accordance with Section 704(c) of the Code and the Treasury Regulations promulgated thereunder, so as to take into account any difference between (i) the Asset Value (as 32 adjusted pursuant to the proviso in Section 7.1.(C)) of such asset, adjusted to reflect Depreciation and (ii) the Partnership's adjusted tax basis in such asset. (D) Recapture. Solely for income tax purposes, in the event that a portion of the taxable gain recognized on the sale, exchange or other disposition of a Partnership asset is characterized as ordinary income under the recapture provisions of the Code, each Partner's distributive share of taxable gain from the sale of Partnership assets (to the extent possible) shall include a proportionate share of the recapture income equal to that Partner's share of prior depreciation deductions with respect to the assets that gave rise to the recapture income. (E) Imputed Interest Income. To the extent the Partnership recognizes imputed interest income in connection with any transaction involving a Partner, such interest income shall, for tax purposes, be allocated to the Partner who is a party to the transaction which generated the imputed interest income. (F) Production Expenditures. All "production expenditures", as defined for purposes of Section 263A of the Code, which result from any construction that is financed with funds contributed by a Partner, shall be allocated to the Partner which contributed such funds. (G) Payments. To the extent that the Partnership recognizes income or gain as a result of any payment (other than any interest payments) made by LParent or Lyondell LP to the Partnership pursuant to LParent's obligations to the Partnership under the Contribution Agreement or any Related Agreement, such income or gain shall be allocated to Lyondell LP. 7.8. Transfers of Interest. Each item of income, gain, loss, deduction and credit allocable to any Interest transferred during a quarter shall be allocated between the transferor and transferee in proportion to the number of days during the quarter for which each was the owner of the Interest, without regard to the results of Partnership operations during the portions of the quarter the transferor and transferee owned the Interest. Distributions attributable to the ownership of a transferred Interest shall be paid to the Person who owned the Interest on the last day of the calendar month preceding the date of the distribution. 8. BOOKS OF ACCOUNT AND TAX MATTERS 8.1. Books of Account. The Partnership will maintain at its principal office proper books of account on the accrual method of accounting in accordance with GAAP. The Partnership shall also maintain proper books of account necessary to enable the Partnership to file all required tax returns and reports and to make all determinations required under this Agreement. Financial statements and a list of commitments for expenditures will be delivered to the Partners monthly. The books of account shall be reviewed quarterly and audited annually and certified 33 financial statements in accordance with GAAP will be delivered to each Partner. Further, the Partnership shall keep and maintain books and records at its principal office as required by applicable law. 8.2. Tax Treatment. (A) Amounts reimbursed pursuant to Section 6.6.(D) shall be treated as distributions described in Treasury Regulation 1.707-4(d). (B) The Partnership will be taxed as a partnership and no Partner will elect to be excluded from the application of any of the provisions of Subchapter K, Chapter 1 of Subtitle A of the Code or any similar provision of any applicable state law. (C) The Partnership will use the LIFO method of accounting for inventory unless the Partnership Governance Committee unanimously decides to use an alternative method. (D) The Partnership will file an election under Section 754 of the Code to cause the tax basis of Partnership property to be adjusted for federal income tax purposes as provided in Sections 734, 743 and 754 of the Code. 8.3. Tax Returns. (A) Lyondell GP shall be the Tax Matters Partner as defined in Section 6231(a)(7) of the Code ("TMP") for all taxable years of the Partnership through the earlier of the taxable year that includes the Option Date or the expiration of the period during which CITGO Partners may exercise its option to increase its Participation Percentage under Section 6.6. Thereafter, at any time during the first sixty (60) days of a taxable year, CITGO GP, by written notice to Lyondell GP, may elect to be the TMP for the current taxable year and the next two succeeding taxable years; provided, however, that CITGO GP shall serve as TMP at no cost to the Partnership. Thereafter, the Partnership Governance Committee shall select one of the General Partners to serve as TMP for a specified term. If the Partnership Governance Committee cannot agree as to which General Partner shall be the TMP, the General Partners shall alternate serving as TMP for a term of three taxable years each, beginning with the General Partner that has not served as TMP for the most recent taxable year; provided, however, that any General Partner serving as TMP shall serve at no cost to the Partnership. In the event of any change of TMP, the General Partner serving as TMP for a given taxable year shall (unless such General Partner ceases to be a General Partner) continue as TMP with respect to all matters concerning that year. The TMP shall use its best efforts to cause the Partnership to file all tax returns and reports by the due date thereof (after taking into account any extensions thereof). At least twelve (12) weeks prior to the filing of the Partnership's U.S. 34 Partnership Return of Income, a draft of such return shall be circulated to the other Partners for their review. The TMP shall circulate to the other Partners a draft of any state income tax return promptly after it is available, and, in any event, at least four (4) weeks prior to the filing of any such return. Prior to the filing of any other federal, state or local tax return, the TMP shall cause a draft of such tax return to be circulated to the other Partners for their review promptly after it is available. (B) If a Partner objects to the tax treatment of an item on any income tax return, such Partner shall promptly inform the TMP of its objection and the grounds upon which the objection is based and shall in any event use its best efforts to inform the TMP of such objection and the grounds upon which such objection is based at least two (2) weeks (eight (8) weeks as to any U.S. Partnership Return of Income) prior to the date on which the tax return is required to be filed. However, if the TMP, after due consideration of a Partner's objection, is of the view that the tax treatment of the item in question on the return as originally submitted is reasonable, then the TMP shall cause the Partnership to file the return reporting the item in question in the manner originally submitted. A Partner may treat the item in question (but no other item) in a manner different from that reported on the return and file a statement of inconsistent treatment with its tax return. If any Partner files a statement of inconsistent treatment of a Partnership item, the Partner filing the statement shall use its best efforts to inform the Partnership at least two (2) weeks prior to filing the statement. 8.4. Tax Controversies. The Partners shall comply with the responsibilities outlined in this Section 8.4. and in Sections 6222 through 6231 and 6050K of the Code (including any Treasury Regulations promulgated thereunder) and in doing so shall incur no liability to any other Partner. The TMP shall not agree to any extension of the statute of limitations for making assessments of tax on behalf of any other Partner without first obtaining the written consent of such other Partner. The TMP shall not bind any other Partner to a settlement agreement in respect of taxes without obtaining the written consent of such other Partner. If a notice or assessment for any tax (Federal or State) is agreed to by the TMP, the TMP shall notify each other partner of such agreement within 30 days from the date such notice or assessment is agreed to. Any Partner who enters into a settlement agreement with the Secretary of the Treasury with respect to any "partnership items", as defined by Section 6231(a)(3) of the Code, shall notify each other Partner of such settlement agreement and its terms within ninety (90) days from the date of settlement. No Partner shall file a request pursuant to Section 6227 of the Code for an administrative adjustment of partnership items for any partnership taxable year without first notifying each other Partner. If each of the other Partners agrees with a requested adjustment, the TMP shall file the request for administrative adjustment on behalf of the Partnership. If any other Partner does not agree with the requested adjustment within thirty (30) days from such notice, or, if shorter, within the period required to timely file the request for administrative adjustment, then the requesting Partner may file a request for 35 administrative adjustment on its own behalf. The TMP shall not, in its capacity as TMP, file a petition under Code Sections 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, without the consent of each Partner. A Partner intending to file a petition under Section 6226, 6228 or any other Code Sections with respect to any Partnership item, or other tax matters involving the Partnership, will notify each of the other Partners of that intention and the nature of the contemplated proceeding. If any Partner intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this Section 8.4., that Partner will notify the other Partners of that intended action. The provisions of this Section 8.4. will survive the termination of the Partnership and the transfer of any Partner's Interest and will remain binding on the Partners for a period of time necessary to resolve any and all matters regarding the federal and, if applicable, state income taxation of the Partnership. The Partnership shall retain its records with respect to each fiscal year until the expiration of ninety (90) days after the period within which additional federal or state income tax may be assessed for such year. 8.5. Tax Rulings. No Person other than the TMP shall request an administrative ruling (or similar administrative procedures) from any taxing authority with respect to any tax issue relating to the Partnership or affecting the taxation of any other Partner. The TMP shall not request such a ruling (or similar procedure) without the consent of each General Partner. 9. ANNUAL BUDGETS, FIVE YEAR PLAN AND COMMERCIAL LOANS 9.1. Fiscal Year. The fiscal year of the Partnership shall be the calendar year. 9.2. Annual Budgets. The Partnership will operate on the basis of the following annual budgets: (A) "Operating Budget," which shall be an estimate for a fiscal year of all of the Partnership's operating revenues and expenses, including expenses required to maintain, repair and restore to good and usable condition the Partnership's assets; and (B) "Capital Budget", which shall be an estimate for a fiscal year of the capital expenditures (i) necessary to maintain the Partnership's assets; (ii) necessary to achieve or maintain compliance with any Environmental Law; (iii) necessary to accomplish capital enhancement projects approved by the Partnership Governance Committee ("Capital Enhancement Projects"); and (iv) permitted, pursuant to Partnership Governance Committee Action, to be undertaken by the CEO in his or her discretion (the funding and overrun provisions with respect to such expenditures being set forth in such budget). 36 9.3. Approval of Budgets. (A) Each budget shall be approved by Partnership Governance Committee Action. Prior to November 15 of each fiscal year, the CEO shall prepare and submit to the Partnership Governance Committee for approval each of the budgets for the ensuing fiscal year (and, as appropriate, for subsequent periods), and on or before December 1, the Partnership Governance Committee shall by Partnership Governance Committee Action approve, with such modifications as it considers appropriate, each such budget. (B) If the Partnership Governance Committee does not approve the Operating Budget for the next fiscal year by December 1, pending approval of such budget by Partnership Governance Committee Action, the preceding fiscal year's Operating Budget shall, to the extent practicable, guide the operation of the Partnership. The failure to approve an Operating Budget shall in no way limit or restrain the authority of the Partnership or its officers to conduct operations. (C) The Partnership Governance Committee may, by Partnership Governance Committee Action, amend or supplement any previously approved budget at any time. 9.4. Funding of Budgets. The Operating Budget and all operating expenses regardless of whether included in any such budget shall be funded from operating cash flows. The Capital Budget shall be funded in accordance with Section 6.5. and no other additional Capital Contributions by the Partners shall be required with respect thereto unless otherwise agreed by the Partnership Governance Committee. 9.5. Implementation of Budgets and Discretionary Expenditures by CEO. (A) After the Capital Budget has been approved, the Partnership will be authorized, without further action by the Partnership Governance Committee, to make any expenditures specifically identified within such budget; provided, however, that all internal control policies and procedures, including those regarding the required authority for certain expenditures, shall have been followed and that with respect to each capital expenditure above an amount established from time to time by Unanimous Partnership Governance Committee Action there shall have been a Partnership Governance Committee Action approval of the "authority for commitment." (B) In any emergency, the CEO or the CEO's designee shall be authorized to take such actions and to make such expenditures as may be reasonably necessary to react to the emergency, regardless of whether such expenditures have been included in an approved budget. As soon as practical after the commencement of an emergency, the CEO or such designee shall notify the Representatives of the response that has been 37 made, or is committed or proposed to be made, with respect to the emergency. 9.6. Five Year Plan. The CEO of the Partnership shall prepare and furnish annually to the Partnership Governance Committee a projected five year business plan. 9.7. Commercial Loans. (A) Other Loans. The Partnership Governance Committee may by Partnership Governance Committee Action, authorize the CEO to cause the Partnership to borrow funds from third party lenders. No Partner shall be required, and the Partnership Governance Committee shall not be authorized to require any Partner, to guarantee or to provide other credit or financial support for any loan. (B) Partner Loans. The Partnership Governance Committee may by unanimous Partnership Governance Committee Action, subject to Section 3.8., authorize the CEO to cause the Partnership to borrow money from a Partner. 9.8. Insurance and Risk Management. The Company is either an additional named insured under LParent's insurance program or has its own policy of insurance under LParent's insurance program and as of the Conversion Date, LParent shall substitute the Partnership for the Company, making the Partnership an additional named insured, if applicable, under LParent's insurance program. As such coverages become subject to renewal or otherwise expire, the Partnership, by Partnership Governance Committee Action, shall approve any material change in the amount and scope of such coverages (including the extent to which the Partnership will continue to be included as an additional named insured under LParent's insurance program), or in the portion of the premium charges for such coverages allocable to the Partnership. 10. TRANSFERS AND PLEDGES 10.1. Prohibition of Transfer. Except pursuant to Section 11. or as described below in this Section 10., a Partner shall not, in any transaction or series of transactions, directly or indirectly, (i) sell, assign or otherwise in any manner dispose of all or any part of its Interest (such term, as used in this Section 10.1., including any Profits Interest), whether by act, deed, merger or otherwise (any of the foregoing, as referred to in this Section 10., a "transfer"), or (ii) mortgage, pledge or create a lien or security interest upon all or any part of its Interest; provided, however, that notwithstanding this Section 10.1., a General Partner may transfer all or any portion of its Interest to its Affiliated Limited Partner and a Limited Partner may transfer all or any portion of its Interest to its Affiliated General Partner. Any attempt by a Partner to transfer all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to transfer such Interest or any portion thereof. 38 10.2. Transfers Prior to the Option Date. No Partner shall transfer all or any part of its Interest or Profits Interest prior to the Option Date; provided, however, that in any event this restriction shall cease upon the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6. 10.3. Transfers After the Option Date. (A) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., an Affiliated Partner Group (the "transferring Partners") may transfer all (but not less than all) of its Profits Interests; provided, however, that it complies with all of the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F). (B) After the earlier of the Option Date or the expiration of the period during which the CITGO Partners may exercise their option to increase their Participation Percentages under Section 6.6., any Affiliated Partner Group may transfer all (but not less than all) of its Interests, collectively, but only if: (i) it obtains the prior written consent of the other Affiliated Partner Group (the "nontransferring Partners"), which consent may be withheld in the sole discretion of such other Affiliated Partner Group; (ii) it complies with the provisions of Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F); and (iii) the purchaser or transferee of such Interests executes a written agreement to be bound by this Agreement (including the encumbrance of such Interest pursuant to this Agreement including Section 11.1.), to assume and satisfy all the liabilities and pay and perform all the obligations and duties of the transferring Partners and, subject to the consent of the nontransferring Partners as provided in Section 10.4., to become substituted Partners in place of the transferring Partners. (C) Any Affiliated Partner Group desiring to transfer its Interest (such term, as used in Sections 10.3.(C), 10.3.(D), 10.3.(E) and 10.3.(F), meaning either its Interest or its Profits Interest, as applicable) shall deliver a written notice to the other Affiliated Partner Group, which notice shall specify the Interests desired to be transferred and shall constitute an offer to sell all (but not less than all) of the transferring Partners' Interests (the "Purchase Offer"). The Purchase Offer shall specify the price (which shall be cash payable in same-day funds in Houston, Texas) and other terms (e.g., provisions for the elimination of loans to or from the Partners, the release of any guarantees, the procedure for closing the books on the effective date of the sale and the treatment of Partnership distributions payable to the transferring Partners) upon which the transferring Partners are willing to sell all (but not less than all) of their Interests to the nontransferring Partners. The nontransferring Partners shall have sixty (60) days from the date of receipt of the Purchase Offer within which to accept the Purchase Offer and shall have the right to assign their rights with respect to the 39 Purchase Offer in whole or in part to an Affiliate or to any other person or entity. If the nontransferring Partners or their assignee accept the Purchase Offer, the closing shall take place within sixty (60) days of such acceptance. (D) If the nontransferring Partners do not accept a Purchase Offer pursuant to Section 10.3.(C), the transferring Partners shall, as provided herein, have one hundred eighty (180) days after expiration of the first 60-day period described in Section 10.3.(C) (or after the earlier express written rejection of the Purchase Offer by the nontransferring Partners) within which, subject to the provisions of this Section 10.3.(D), Section 10.1., Section 10.3.(B) and Section 10.4., the transferring Partners may attempt to sell all of their Interests, subject to Section 10.3.(F), to a single (and only a single) third party at a price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer. If during this 180-day period, the transferring Partners identify a proposed purchaser (i) that is a single entity that is organized under the laws of the United States, (ii) that is not insolvent prior to or immediately upon consummation of the proposed transfer, and (iii) that makes a bona fide offer (not subject to due diligence, financing or any other similar contingencies) to purchase the transferring Partners' Interests at a cash price and on terms and conditions that are identical to (or more favorable in all respects to the transferring Partners than) the cash price, terms and conditions contained in the Purchase Offer, the transferring Partners shall notify the nontransferring Partners of the identity of the proposed purchaser and the terms of the proposed sale (the "Second Notice"). The nontransferring Partners or their assignee then shall have thirty (30) days from the Second Notice within which to elect to purchase the transferring Partner's Interests at the cash price and on the terms and conditions contained in the Second Notice. If the nontransferring Partners elect to make the purchase, the closing shall take place within sixty (60) days of its election to purchase. (E) If the nontransferring Partners or their assignee do not elect to purchase the transferring Partners' Interest after receiving the Second Notice, then subject to Section 10.1., Section 10.3.(B) and Section 10.4. the transferring Partners may then sell such Interest to the third party at the cash price and on the terms and conditions specified in the Second Notice; provided, however, that if the transferring Partners do not dispose of their Interest at the cash price and on the terms and conditions specified in the Second Notice, and in all events within sixty (60) days after expiration of the 30-day period described in the penultimate sentence of Section 10.3.(D) (or after the earlier express written rejection by the nontransferring Partners after receiving the Second Notice), the transferring Partners' Interest shall not be transferred and shall again be subject to the restrictions contained in Section 10.3. 40 (F) Inclusion of General or Limited Partner Interest. No Limited Partner may transfer its Interest to any Person unless the Interest of its Affiliated General Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. No General Partner may transfer its Interest to any Person unless the Interest of its Affiliated Limited Partner is simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. 10.4. Transferees. The purchaser or transferee of a Partner's Interest pursuant to Section 10.3. or Section 10.5. shall not become a Partner without the consent of the nontransferring Partners as provided for in clause (i) of Section 10.3.(B) A transferee who acquires an Interest pursuant to Section 10.3. or Section 10.5. but who does not receive such consent shall be entitled only to allocations of income and loss and distributions with respect to such Interest in accordance with this Agreement and shall not be or become entitled to exercise the rights or powers of a Partner. However, the nontransferring Partners may, in the exercise of their sole discretion, at any time thereafter consent to such purchaser or transferee becoming a Partner or withhold such consent. A purchaser or transferee as to whom the nontransferring Partners at any time grants such consent shall be deemed to become a substituted Partner in place of the transferring Partners when and as provided in such consent. 10.5. Pledge of Interest. (A) Except as contemplated by Section 10.5.(B) and Section 11.1., no Partner shall mortgage, pledge, encumber or create or suffer to exist any pledge, lien or encumbrance upon, or security interest in ("pledge"), all or any part of its Interest (such term, as used in this Section 10.5., including any Profits Interest). Any attempt by a Partner to pledge all or a portion of its Interest in violation of this Agreement shall be void ab initio and shall not be effective to pledge such Interest. (B) Any Affiliated Partner Group (the "pledging Partners") may pledge its Interest; provided, however, that (i) any such pledge, shall expressly be subject and fully subordinated, on terms reasonably acceptable to the other Affiliated Partner Group (the "nonpledging Partners"), to the encumbrance of the pledging Partners' Interests pursuant to this Agreement including Section 11.1. and (ii) no such pledge shall give any right to the pledgee as a Partner (as such term is used in the Act) with respect to the Partnership or the nonpledging Partners or create any duty to the pledgee on the part of the Partnership or the nonpledging Partners other than the payment to the extent pledged of distributions from the Partnership under Section 7. (C) Prior to any pledge under Section 10.5.(B), (i) the pledging Partners shall submit to the nonpledging Partners all documentation relating to the proposed pledge for the approval of the nonpledging Partners and shall not effect such pledge without the prior written approval of the nonpledging Partners (such approval not to be unreasonably withheld); 41 (ii) the proposed pledgee shall deliver a written agreement of such pledgee (which shall be binding upon any of its successors or assigns) to the Partnership and the nonpledging Partners, providing that (a) the right to foreclose upon the pledging Partners' Interests pursuant to the pledge shall be conditioned upon delivery to the nonpledging Partners of an opinion of counsel satisfactory to the nonpledging Partners that such foreclosure would not cause the Partnership to be treated as an association taxable as a corporation and that any "termination" of the Partnership within the meaning of Section 708 of the Code caused by such foreclosure would not create any adverse consequences for the nonpledging Partners and (b) the pledgee's right to receive any distributions that are pledged is subject to being reduced pursuant to the provisions of this Agreement; and (iii) the proposed pledgee and the pledging Partners shall deliver to the nonpledging Partners a written agreement, in form reasonably satisfactory to the nonpledging Partners, providing that (a) the pledgee shall notify the nonpledging Partners in writing at least one hundred twenty (120) days prior to initiation of foreclosure proceedings, (b) the nonpledging Partners shall have the right during such 120-day period to purchase the debt owed by the pledging Partners to the pledgee, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, for an amount equal to the outstanding principal amount of such debt plus the interest due and payable on and any cost of collection associated with such debt, (c) immediately upon the purchase of the debt, together with all rights of the pledgee in, to and with respect to the pledged Partners' Interests, by the nonpledging Partners pursuant to clause (iii)(b) of this Section 10.5.(C), the pledgee shall (1) deliver to the nonpledging Partners a written acknowledgment that its debt has been satisfied in full and (2) take any action necessary to transfer to the nonpledging Partners possession of a perfected first priority security interest in the pledging Partners' Interest and (d) the pledging Partners appoint the nonpledging Partners as its attorney-in-fact authorized to take on the pledging Partners' behalf all actions required to effect any purchase of the pledgee's debt and any transfer of the pledging Partners' Interest pursuant to this clause (iii) of this Section 10.5.(C). 11. REMEDIES AND DISSOLUTION 11.1. Security for Performance. Each Affiliated Partner Group (the "Pledgor Group") shall and hereby does pledge and grant to the other Affiliated Partner Group (the "Pledgee Group") a first priority lien on and security interest in the Pledgor Group's Interests in the Partnership as security for the satisfaction of all the Pledgor Group's liabilities and the payment and performance of all the Pledgor Group's obligations and duties under this Agreement. At any time and from time to time, the Pledgor Group also will promptly execute and deliver all such further agreements, instruments and documents and take all such further action that may be necessary or desirable or that the Pledgee Group may reasonably request in order (i) to perfect and protect the lien and security interest created hereby, including the execution and filing of appropriate financing statements and 42 directing the Partnership to register, on the Partnership's books and records, the pledge of the Pledgor Group's Interest to the Pledgee Group; (ii) to enable the Pledgee Group to exercise and enforce its rights and remedies under this Agreement in respect to the Pledgor Group's Interest; or (iii) otherwise to effect the purposes of this Section 11.1. The Pledgor Group hereby authorizes the Pledgee Group to file, without the signature of such Pledgor Group granting the security interest provided for herein, where permitted by applicable law, at any time the Pledgee Group acting as a secured party deems necessary or appropriate to protect its lien and security interest under this Agreement, one or more financing or continuation statements, and amendments thereto, relating to such lien and security interest. If the Pledgor Group fails to perform any agreement or obligation contained in this Section 11.1., the Pledgee Group may perform, or cause performance of, such agreement or obligation, and the expenses of the Pledgee Group so performing incurred in connection therewith shall be payable to the Pledgee Group, on demand, by the Pledgor Group that has failed to so perform. The Pledgee Group shall not, without the prior written consent of the Pledgor Group, sell, assign, transfer, mortgage, pledge or otherwise encumber any of its rights in the Pledgor Group's Interests as pledged to the Pledgee Group under this Section 11.1. except with regard to a failure by the Pledgor Group to satisfy the Pledgor Group's liabilities, and the payment and performance of all its obligations and duties under this Agreement. 11.2. Default. (A) Each of the following events shall, upon determination of the existence thereof as provided in Section 11.2.(B), constitute a "Default" and create the rights provided for in this Agreement in favor of the Nondefaulting Partners against the Defaulting Partners: (1) the failure by a Partner to make any contribution, including, without limitation, a Partner's failure to make when due any contribution for capital expenditures as determined by Partnership Governance Committee Action to be due form the Partners, or loan to the Partnership as required by this Agreement, which failure continues for at least three (3) Business Days from the date such contribution should have been received; (2) other than as described in item (1) above, a material breach or violation under this Agreement by a Partner, which breach or violation continues unremedied for at least ninety (90) days after the Nondefaulting Partners have given written notice of such breach or violation to the Defaulting Partners; (3) as to Lyondell Partners, a material breach or default by LParent under the terms of the Contribution Agreement, which breach or default continues unremedied or uncured for at least 90 days after the Partnership or the CITGO GP has given written notice of such breach or default to LParent; 43 (4) as to CITGO Partners, a material breach or default by CParent under the terms of the Product Purchase Agreement, which breach or default continues unremedied or uncured for at least ninety (90) days after the Partnership or Lyondell GP has given written notice of such breach or default to CParent; or (5) the withdrawal, retirement, resignation or dissolution of a Partner; or the bankruptcy of a Partner or its Parent (including the filing against a Partner or its Parent of a petition in bankruptcy or seeking any reorganization, liquidation or similar relief, which petition shall remain undismissed or unstayed for an aggregate of ninety (90) days; the adjudication of a Partner or its Parent as Insolvent, or the institution by a Partner or its Parent of proceedings to be adjudicated as a voluntary bankrupt, or the consent by a Partner or its Parent to the filing of a bankruptcy proceeding against it, or the failure of a Partner or its Parent to contest a bankruptcy proceeding against it; or the appointment, or any consent by a Partner or its Parent to the appointment, of a receiver, custodian, liquidator or trustee for the Partner or its Parent or for all or any substantial portion of its property, which appointment remains undismissed or unstayed for a period of ninety (90) days). (B) The existence of a Default shall be determined either by written agreement among the Partners or by resort to an appropriate court. Once such Default has been determined to exist (including, as appropriate, exhausting all appeals), then the Defaulting Partners shall have thirty (30) days from the determination date to cure such Default; provided, however, that there shall not be a cure period for a Default described in Section 11.2.(A)(5) and that the cure period for a Default described in Section 11.2.(A)(1) shall be limited to three (3) Business Days. (C) The day upon which the Default is determined to exist (or if the Default is subject to a cure period and is not timely cured, then the day following the end of the applicable cure period) shall be the "Default Date." Without prejudice to a Partner's (or any of its Affiliates') rights to seek temporary or preliminary judicial relief, prior to any such Default Date all rights and obligations of the Partners under this Agreement shall remain in full force and effect. (D) With respect to any Default, the term "Damages" shall mean (in each case to the extent reasonably and necessarily incurred) any and all obligations (including all obligations to take an affirmative or curative act), liabilities, damages (including, damages arising out of any breach of any representation or warranty, damages related to investigations, proceedings, audits, the interruption of the Partnership's Business, restrictions upon the use of, or adverse impact on, the assets or the Partnership's Business, or the interruption, breach or termination of 44 any Related Agreements, including any lost profits attributable thereto), fines, penalties, deficiencies, losses, judgments, settlements, costs and expenses (including costs and expenses incurred in connection with performing obligations, bonding and appellate costs and attorneys', accountants', engineers', health, safety, environmental and other consultants' and investigators' fees and disbursements, liquidating, selling or offering for sale the Partnership Business and assets or winding up the Partnership Business, or other payments in respect of such payments) arising out of or incurred in connection with such Default, regardless of whether any of the foregoing are foreseeable, unforeseeable, matured or unmatured, existing or contingent as of the date of such Default. "Damages" also shall include, if and to the extent interest is not already included therein under applicable law or other provisions hereof and subject to Section 12.11., interest on amounts actually due until payment thereof is made at a rate per annum equal to the rate set forth in Section 12.10.(B). 11.3. Remedies for Default. Provided that there shall be no duplication of remedies, without prejudice to the Nondefaulting Partners' right to foreclose upon the Defaulting Partners' Interest pursuant to the lien and security interest created in Section 11.1. or to pursue independently and at any time, including simultaneously, any other remedy it may have under law, including the right to seek to recover Damages, or equity, upon determination (either judicially or otherwise) of a Default and the related Damages, and the failure of the Defaulting Partners to cure such Default as provided in Section 11.2.(B), the Nondefaulting Partners in their sole discretion may elect to pursue the following remedies: (A) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages), the Nondefaulting Partners may elect to exercise their purchase right for the Defaulting Partners' Interest as described in Section 11.5. and thereby cause the Partnership to dissolve under Section 11.9(D); provided, however, that within ten (10) days after the determination of the Fair Market Value, the Nondefaulting Partners may elect not to proceed with a purchase of the Defaulting Partners' Interest, in which case the Nondefaulting Partners shall have an additional thirty (30) days from its determination not to proceed to elect as an alternative remedy Section 11.3.(B) below; and (B) At any time prior to the expiration of sixty (60) days from the Default Date (or if later, from the judicial or other determination of the Default Date and the related Damages) (or if the Nondefaulting Partners initially elected to pursue its remedy under Section 11.3.(A) above, then at any time prior to the expiration of the 30-day extension period), the Nondefaulting Partners may elect to effect a liquidation of the Partnership under Section 11.6. and thereby cause the Partnership to dissolve under Section 11.9.(E). 45 11.4. Consequences of Default. Notwithstanding any other provision of this Agreement, commencing on the Default Date and (i) prior to the Nondefaulting Partners' collection of Damages through the exercise of its legal remedies or otherwise, or (ii) while the Nondefaulting Partners are pursuing its remedies under Section 11.5. or Section 11.6., the Defaulting Partners' Representatives on the Partnership Governance Committee shall not have any voting rights and all matters requiring Partnership Governance Committee Action shall be determined solely by the Nondefaulting Partners' Representatives; provided, however, that the foregoing loss of voting rights shall not occur as a result of a Default caused solely by the insolvency, bankruptcy or similar proceedings of a Partner or a Parent described in the second through final clauses of Section 11.2.(A)(5); and provided further, that the foregoing loss of voting rights shall not apply to those voting rights contained in Sections 3.8.(A), 3.8.(B), 3.8.(C), 3.8.(D), 3.8.(F), and 3.8.(Y), which voting rights shall continue in full force and effect at all times. 11.5. Purchase of Defaulting Partners' Interest (A) The Nondefaulting Partners shall have the right to elect to purchase the Interest of the Defaulting Partners by delivering notice of such election in writing to the Partnership Governance Committee and the Defaulting Partners (the "Purchase Notice"). The purchase of such Interest shall be consummated prior to the expiration of thirty (30) days from the determination of the purchase price as provided herein. (B) The purchase price that the Nondefaulting Partners shall pay to the Defaulting Partners for the Defaulting Partners' Interest shall be an amount equal to (i) the amount that the Defaulting Partners would receive in a Liquidation (assuming that the sale under Section 11.11.(B)(1) is for an amount equal to the Fair Market Value) reduced by (ii) the Damages incurred by the Partnership. (C) "Fair Market Value" shall be the fair market value of all of the Partnership Business and assets (including tangible and intangible assets) as of the date of the Purchase Notice, without giving effect to the Damages, determined as follows: (1) The Defaulting Partners and the Nondefaulting Partners shall first attempt to agree on such value, which if agreed to shall be the Fair Market Value; (2) If the Partners are unable to agree within twenty (20) days of the Purchase Notice, then the Defaulting Partners, on the one hand, and the Nondefaulting Partners, on the other hand, shall (at their own cost) cause an independent, qualified appraiser to deliver a written appraisal of such value within fifty (50) days of the Purchase Notice. If the lower appraised value is greater than or equal to ninety percent (90%) of the higher appraised value, then the average of the two appraised values shall be the Fair Market Value; and 46 (3) If the lower appraised value is less than ninety percent (90%) of the higher appraised value, then the Partners shall jointly appoint a mutually acceptable neutral person or entity (the "Neutral") not affiliated with either of the Partners within seventy (70) days of the Purchase Notice (and if the Partners have been unable to agree upon such appointment within sixty (60) days of the Purchase Notice, then such Neutral shall upon the application of either the Defaulting Partners or the Nondefaulting Partners be appointed within seventy (70) days of the Purchase Notice by the Center for Public Resources, or if such appointment is not so made then promptly thereafter by the American Arbitration Association in New York, New York, or if such appointment is not so made then promptly thereafter by the senior United States District Court judge sitting in the Borough of Manhattan, in New York, New York), and the Neutral shall within ninety (90) days of the Purchase Notice or, if later, within twenty (20) days of the appointment of the Neutral determine which of the two appraised values is closest to the fair market value of the Partnership's assets as determined by the Neutral, and that appraised value shall be the Fair Market Value. 11.6. Liquidation. The Nondefaulting Partners shall have the right to elect to dissolve and liquidate the Partnership pursuant to the procedures in Section 11.11. (such procedures constituting a "Liquidation"); provided, however, that any amount payable to the Defaulting Partners in such Liquidation pursuant to Section 11.11.(B)(7) shall be reduced by the Nondefaulting Partners' Participation Percentage of the Damages incurred by the Partnership. The Nondefaulting Partners shall deliver notice of such election to dissolve and liquidate in writing to the Partnership Governance Committee and the Defaulting Partners. 11.7. Closing of Purchase Rights. In the event of the exercise of purchase rights pursuant to Section 11.5. (any such event a "Purchase"), the Purchase shall be consummated by appropriate and customary documentation (including customary representations and warranties) as soon as practicable and in any event within the applicable time period specified in Section 11.5 or Section 11.8. The Partners entitled or obligated to Purchase shall have the right to transfer or assign, in whole or in part, its right or obligation to Purchase to an Affiliate or to a third party. 11.8. Recision. In the event that the Partnership is rendered Insolvent by reason of a breach, default or failure of an agreement, covenant, indemnity, representation or warranty made by LParent in the Contribution Agreement (including the exhibits and schedules thereto) and such breach, default or failure has not been cured as provided in the Contribution Agreement (a "Recision Event"), then CITGO GP shall deliver a notice to Lyondell GP specifying in reasonable detail the particulars of such Recision Event (a "Recision Event Notice"). Within 60 days after the earlier to occur of agreement between the Partners or final judicial determination that a Recision Event has occurred, Lyondell Partners shall purchase CITGO Partners' Interest (a "Recision Purchase") for an amount of cash 47 (the "Recision Purchase Price") equal to the sum, without duplication, of the following amounts, each calculated or determined from the Closing Date to the date of purchase: (i) CITGO Partners' capital contributions made pursuant to Section 6., plus (ii) all Profits allocated to CITGO Partners, minus (iii) all Losses allocated to CITGO Partners and minus (iv) the amount of all distributions actually made to CITGO Partners pursuant to Section 7.4. In the event of a Recision Purchase, CITGO Partners shall execute and deliver to Lyondell Partners such documents as Lyondell Partners shall reasonably require to evidence and effect the Recision Purchase against receipt by CITGO Partners of the Recision Purchase Price. The amount of any debt to CITGO Partners under Section 7.3.(C) shall be deemed to be paid upon payment of the Recision Purchase Price. 11.9. Dissolution. The Partnership shall be dissolved within the meaning of the Act upon the first to occur of the following: (A) the written determination of all General Partners to dissolve the Partnership; (B) the bankruptcy (including the matters referred to in Section 11.2.(A)(5) of the Partnership; (C) the withdrawal, retirement, resignation, dissolution or bankruptcy (including the matters referred to in Section 11.2.(A)(5)) of a Partner; (D) the closing of a Purchase as the result of a Default; (E) the election of the Nondefaulting Partners to effect a dissolution of the Partnership under Section 11.6.; or (F) any other act or event which results in the dissolution of a limited partnership under the Act. 11.10. Reconstitution of Partnership. If the Partnership dissolves pursuant to Section 11.9.(C) or Section 11.9(D) (even if other dissolution provisions also are invoked), it may be reconstituted and continued upon the written consent of all remaining Partners other than the former Partner that sold its Interest. 11.11. Liquidation; Winding Up and Distributions upon Dissolution. (A) Upon a dissolution, absent a reconstitution and continuation of the Partnership under Section 11.10., the Partnership shall commence to wind up its affairs and the Partners shall file appropriate documents of dissolution and proceed to effect the Liquidation of the Partnership pursuant to the procedures set forth in this Section 11.11.; provided, however, that in the event of a dissolution resulting from an event described in Section 11.9.(D), sufficient time shall be allowed prior to any liquidation or winding up of the Partnership to give effect to the remedies provided by Section 11.5. and Section 11.6. Notwithstanding any other provision of this Agreement, during the period of the 48 winding up, the Nondefaulting Partners (or the Partnership Governance Committee if the Partners have agreed to terminate the Partnership or there are otherwise not Nondefaulting Partners) shall make all decisions relating to the conduct of any business or operations, and the sale or disposition of the Partnership's assets. (B) Upon dissolution of the Partnership, the following shall occur unless the Partners agree otherwise: (1) The Partnership's assets shall be collected and sold to unaffiliated third parties in arm's-length transactions; provided, however, that any Partner or its Affiliates shall have the right to participate in any public sale or auction of the Partnership's property or any other reasonable competitive bid process (such as a private sale pursuant to a "data room" process conducted by an independent investment banking firm); (2) Gain or loss with respect to the Partnership's sale or distribution of assets shall be allocated to the Partners' Capital Accounts as provided in Section 7.6.; (3) Any liabilities owed to third parties shall be paid in full; (4) Appropriate reserves for contingencies shall be established; (5) Any outstanding loans that have been made to the Partnership by any Partner shall be repaid in full; (6) CITGO Partners' Capital Accounts shall be reduced by the amount of the outstanding principal of any promissory note contributed to the Partnership pursuant to Section 6.6.; and (7) Any remaining cash or non-cash assets that cannot be sold for cash shall be distributed to the Partners in accordance with their positive Capital Account balances. No Partner shall have any obligation to contribute capital to restore any negative balance in its Capital Account. 11.12. Enforcement. Only a General Partner shall have the ability to enforce the provisions of this Section 11. 12. MISCELLANEOUS 12.1. Confidentiality and Use of Information. Each Partner will keep confidential all information regarding the business of the Partnership and will not use any such information in any manner not related to the business of the Partnership; provided, however, that the term "information" as used in this Section does not include any information that (i) is or becomes generally available to and known by the public 49 or the petroleum refining industry (other than as a result of an unpermitted disclosure directly or indirectly by the Partnership or a Partner), (ii) is or becomes available to a Partner on a nonconfidential basis from a source other than the Partnership or a Partner; provided, however, that such source is not and was not bound by a confidentiality agreement with, or other obligation of secrecy to, the Partnership or any other Partner, (iii) has already been or is hereafter independently acquired or developed by a Partner without violating any confidentiality agreement with or other obligation of secrecy to the Partnership or another Partner or (iv) is generated by the Partnership with the intention that it not be held as confidential. 12.2. Auditors. Selection of the Partnership's auditors will be delegated to the Finance-Control Committee. The Partnership Governance Committee will have final authority to select, appoint and establish the terms of the engagement of the Partnership's auditors. The Partnership Governance Committee shall, in consultation with the Finance and Control Committee, establish the accounting policies for the Partnership, including the policy for determining whether an expenditure should be capitalized or expensed. 12.3. Indemnification of Officers. (A) The Partnership shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a named defendant or respondent to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal to such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (collectively, such actions, suits, proceedings, appeals, inquiries and investigations are referred to collectively as "Proceedings" and individually as "Proceeding") by reason of the fact that such person either is or was an officer of the Partnership, or, while an officer of the Partnership, is or was serving at the request of the Partnership as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another domestic or foreign corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by such person in connection with such Proceeding if it is determined that such person conducted himself in good faith, and if such conduct was in such person's official capacity as an officer of the Partnership, in a manner he reasonably believed to be in the best interests of the Partnership and, in all other cases, in a manner he reasonably believed was not opposed to the best interests of the Partnership, and, in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful; provided, however, that if a person is found liable to the Partnership or is found liable on the basis that personal benefit was improperly received by him, the indemnification shall not be available. The Partnership may pay or reimburse expenses incurred by an officer 50 in connection with such person's appearance as a witness or other participation in a Proceeding at a time when such person is not a named defendant or respondent in such Proceeding. (B) The determination to be made in the preceding subsection (A) shall be made (i) by the Partnership Governance Committee; or (ii) by special legal counsel selected by the Partnership Governance Committee. A determination as to the reasonableness of expenses (including court costs and attorneys' fees) shall be made in the same manner as the determination that indemnification is permissible. (C) Reasonable expenses incurred by an officer in connection with a Proceeding may be paid by the Partnership in advance of the final disposition of such Proceeding and without any of the determinations specified in the preceding subsection (B) upon receipt by the Partnership of a written affirmation by the officer of his good faith belief that he has met the standard of conduct necessary for indemnification under this Section 12.3. and a written undertaking by or on behalf of the officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Partnership as authorized in this Section 12.3., which undertaking shall be an unlimited general obligation of such officer and may be unsecured. (D) The right to indemnification conferred in this Section 12.3. shall be a contract right and shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any other law, agreement, Partnership Governance Committee Action, or otherwise, both as to action in their official capacities and as to action in another capacity while acting as an officer and shall continue as to a person who has ceased to be an officer and shall inure to the benefit of the heirs, executors and administrators of such person. Any indemnification of or advance of expenses to an officer in accordance with this Section 12.3. shall be reported in writing to the Partnership Governance Committee. (E) The Partnership may purchase and maintain insurance on behalf of any person who is or was an officer or employee of the Partnership, or who is or was serving at the request of the Partnership as a manager, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, limited partnership, partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against or incurred by that person in such a capacity or arising out of his status as such a person, whether or not the Partnership would have the power to indemnify such person against such liability under this Section 12.3. (F) Except as indicated in the proviso in Section 12.3.(A), the Partnership intends that the indemnification provided hereunder shall indemnify its 51 officers to the fullest extent possible under the Act; and if any indemnification which would otherwise be granted by this Section 12.3. shall be disallowed by any competent court or administrative body as illegal, then any officer with respect to whom such adjudication was made, and any other officer, shall be indemnified to the fullest extent permitted under the Act. 12.4. Waivers, Modifications and Amendments. All modifications or amendments of this Agreement or the Certificate of Limited Partnership shall require the approval of Representatives representing 100 percent of the total votes as provided in Section 3.8.(C). 12.5. Further Assurances. From time to time, each Partner agrees to execute and deliver such additional documents, and will provide such additional information and assistance as the Partnership may reasonably require to carry out the terms of this Agreement and to accomplish the Partnership's Business. 12.6. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors of the Partners, but, except as expressly provided herein, no Limited Partner or its Affiliated General Partner may assign or delegate any of their rights or obligations under this Agreement without the prior written consent of the other Partners, which consent shall be in the sole and absolute discretion of such other Partners. Any purported assignment or delegation without such consent shall be void and ineffective. 12.7. Benefits of Agreement Restricted to the Parties. This Agreement is made solely for the benefit of the Partnership and the Partners, and no other person or entity shall have any right, claim or cause of action under or by virtue of this Agreement. 12.8. Expenses. Except as otherwise provided herein, each party hereto shall be responsible for its own expenses incurred in connection with this Agreement. 12.9. Currency Conversions. All contributions, allocations, distributions and other payments shall be made, and all calculations performed and books and records kept, in United States currency, without any reference to foreign currency exchange rates or other conversion calculations. 12.10. Payment Terms and Interest Calculations (A) If the payment due date for any payment hereunder (including Capital Contributions and Damages) falls on a Saturday or a bank or federal holiday, other than a Monday, the payment shall be due on the past preceding business day. If the payment due date falls on a Sunday or Monday bank or federal holiday, the payment shall be due on the following business day. (B) Interest shall accrue on any unpaid and outstanding amount from the time such amount is due and payable through the date upon which such amount, together with accrued interest thereon, is paid in full. Interest 52 shall, subject to the provisions of Section 12.11., accrue at a per annum rate equal to the lesser of (i) 125 percent of the Agreed Rate, compounded quarterly, to the extent permitted by law or (ii) the Highest Lawful Rate. (C) A wire transfer or delivery of a check shall not operate to discharge any payment under this Agreement and shall be accepted subject to collection. 12.11. Usury Savings Clause. Notwithstanding any other provision of this Agreement, it is the intention of the parties hereto to conform strictly to applicable usury laws regarding the use, forbearance or detention of any indebtedness arising under this Agreement whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Agreement (the "Applicable Usury Laws"). Accordingly, if any payments made pursuant to this Agreement result in any person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this Section 12.11. shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Agreement shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the payor by the recipient hereof; (iii) no person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of any interest payable under this Agreement shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Agreement immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to any person pursuant to this Agreement for the use, forbearance or detention of any indebtedness arising hereunder shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of any such indebtedness so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest that may be lawfully contracted for, charged or received by any person in connection with any indebtedness arising under this Agreement under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged to any person under all Applicable Usury Laws on any principal balance from time to time outstanding pursuant to this Agreement. 12.12. Notices. All notices, requests, demands and other communications that are required or may be given under this Agreement shall, unless otherwise provided for elsewhere in this Agreement, be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile, (ii) delivered 53 personally or (iii) mailed, first class mail, postage prepaid, return receipt requested, as follows: (a) if to CITGO LP, CITGO GP or its Representatives: CITGO Refining Investment Company P. O. Box 3758 Tulsa, Oklahoma 74556 Attention: Treasurer Telecopy: 918-495-4511 with a copy to: Vice President and General Counsel CITGO Petroleum Corporation P. O. Box 3758 Tulsa, Oklahoma 74556 Telecopy: 918-495-5559 (b) if to Lyondell LP, Lyondell GP or its Representatives: Lyondell Refining Company P. O. Box 3646 Houston, Texas 77253-3646 Attention: Vice President, General Counsel & Secretary with a copy to: Lyondell Refining LP, LLC 300 Delaware Avenue Wilmington, Delaware 19801-1622 Attention: Vice President, General Counsel & Secretary (c) if to the Partnership: LYONDELL-CITGO Refining LP P. O. Box 2451 Houston, Texas 77252-2451 Attention: President & CEO Telecopy: 713-321-6900 Any changes to the addresses set forth above shall be made by written notice delivered to the Secretary of the Partnership who shall maintain such addresses. 12.13. Waiver of Immunity. EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM FOR ITSELF OR 54 WITH RESPECT TO ITS REVENUES, ASSETS OR PROPERTIES IMMUNITY FROM THE JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS. TO THE EXTENT ANY JURISDICTION WOULD ATTRIBUTE SUCH IMMUNITY TO EITHER OR BOTH OF THE CITGO PARTNERS, EACH OF THE CITGO PARTNERS HEREBY WAIVES ANY RIGHT TO CLAIM SUCH IMMUNITY AND TO ANY DEFENSES AVAILABLE TO IT UNDER THE FOREIGN SOVEREIGN IMMUNITIES ACT, AND ANY DEFENSE BASED ON IMMUNITY ARISING UNDER U.S. FEDERAL OR STATE LAW, OR UNDER ANY INTERNATIONAL, FOREIGN OR OTHER APPLICABLE LAW. 12.14. Governing Law. THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, AND ALL MATTERS RELATING HERETO, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAW. 12.15. Jurisdiction; Consent to Service of Process; Waiver. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY OF THE PARTNERS OR THE PARTNERSHIP OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTNERS AND THE PARTNERSHIP ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTNERS AND THE PARTNERSHIP SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF NEW YORK BY ENTERING INTO AN AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTNER AND THE PARTNERSHIP SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF EXISTENCE OF THE PARTNERSHIP. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTNERSHIP AND THE PARTNERS. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE 55 RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE PARTNERSHIP TO ASSERT A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1(II)(A) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE PARTNERSHIP TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE PARTNERSHIP FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. 12.16. Entire Agreement. This Agreement, together with the Certificate of Limited Partnership, the Master Transaction Agreement, the Confidentiality Agreements (as defined in the Master Transaction Agreement) and the Related Agreements constitute the entire agreement between the parties and supersedes all prior agreements and understandings, oral and written, between the parties with respect to the subject matter hereof, with the exception of those matters which will continue to be governed under the Regulations. 12.17. Severability. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any Partner, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. 12.18. Construction. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumptions that any Partner had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to 56 include the singular, and vice versa; (vi) each gender shall be deemed to include the other genders; and (vii) each exhibit, attachment and schedule to this Agreement is a part of this Agreement. 12.19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. [signature page follows] 57 IN WITNESS WHEREOF, this Limited Partnership Agreement has been executed on behalf of each Partner, by their respective officers thereunto duly authorized, effective as of the 31st day of December, 1998. LYONDELL REFINING LP, LLC a Delaware limited liability company (Lyondell LP) By: /s/ T. Kevin DeNicola --------------------------------- Name: T. Kevin DeNicola Title: Executive Vice President CITGO GULF COAST REFINING, INC. a Delaware corporation (CITGO GP) By: /s/ Ezra C. Hunt --------------------------------- Name: Ezra C. Hunt Title: Vice President LYONDELL REFINING COMPANY, a Delaware corporation (Lyondell GP) By: /s/ T. Ken DeNicola --------------------------------- Name: T. Ken DeNicola Title: Executive Vice President CITGO REFINING INVESTMENT COMPANY an Oklahoma corporation (CITGO LP) By: /s/ Ezra C. Hunt --------------------------------- Name: Ezra C. Hunt Title: Vice President 58 EXHIBIT 1 TO PARTNERSHIP AGREEMENT DEFINITION OF TERMS IN PARTNERSHIP AGREEMENT Act. The Delaware Revised Uniform Limited Partnership Act, as amended and in effect from time to time. See Section 2.2. Action. See Section 5.11.(D). Additional Construction Loan. As defined in the Regulations. Affiliate. As to any specified Person, any other Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person; provided, however, that for purposes of this Agreement and regardless of whether the specified Person would otherwise be deemed an Affiliate for any other purpose or under any other agreement, the Partnership or any entities controlled by the Partnership shall not be deemed to be an Affiliate of LParent, Lyondell GP or Lyondell LP or any entities controlled by LParent, Lyondell GP or Lyondell LP or of CParent, CITGO GP or CITGO LP or any entities controlled by CParent, or CITGO GP or CITGO LP. For purposes of this definition the term "control" shall have the meaning set forth in 17 CFR 230.405. Affiliated General Partner. In the case of Lyondell LP, the "Affiliated General Partner" shall mean Lyondell GP. In the case of CITGO LP, the "Affiliated General Partner" shall mean CITGO GP. Affiliated Limited Partner. In the case of Lyondell GP, the "Affiliated Limited Partner" shall mean Lyondell LP. In the case of CITGO GP, the "Affiliated Limited Partner" shall mean CITGO LP. Affiliated Partner Group. A General Partner and its Affiliated Limited Partner. Agent. See Section 12.15. Agreed Rate. With respect to any period for which interest is to be calculated, the Citibank, N.A. "base rate" from time to time in effect for each day in such period, calculated by multiplying the Citibank, N.A. "base rate" by the number of days such "base rate" is in effect, determining the sum of the products obtained thereby and dividing such sum by the number of days in such period. Alternate. See Section 3.2.(B). Annual Meeting. See Section 3.4.(A). Applicable Usury Laws. See Section 12.11. Assets. The assets defined as such in the Contribution Agreement together with all assets provided to the Partnership pursuant to the Related Agreements. Exhibit 1, Page 1 Asset Value. With respect to any asset, the asset's adjusted basis for federal income tax purposes, except that the Asset Value of any asset contributed by a Partner to the Partnership or acquired with funds contributed by a Partner shall be the fair market value of such asset on the date of contribution or on any date on which the asset is revalued pursuant to Section 7.1.(C) hereof; provided, however, that the fair market value of the Assets (net of the Assumed Liabilities) on each such date shall be deemed to be $825 million, reduced, without duplication, (i) by the amount of any payment described in Section 7.1.(D) and (ii) by the amount of any indemnification forgone by the Partnership pursuant to the proviso of Section 5.2 of the Contribution Agreement; and provided further (a) that the fair market value of the Working Capital on each such date shall be the amount determined pursuant to Exhibit 6.1(B) and (b) that the fair market value of the assets which are acquired with funds contributed by a Partner in each such date shall be the original cost of such assets. Any such adjustments shall be effective on a prospective basis only. Auxiliary Committee. See Section 3.10. Average Participation Percentage. The mathematical average of a Partner's Participation Percentages, by Calendar Quarter, for any applicable period. Blended Rate. For any Calendar Quarter or portion thereof, a fraction (i) the numerator of which is equal to the aggregate federal income tax depreciation, amortization or other cost recovery deductions for such period with respect to all assets and (ii) the denominator of which is equal to the aggregate adjusted tax basis of the assets on the date such assets were contributed to the Partnership or, if any adjustment to the Capital Accounts has occurred pursuant to Section 7.1.(C), the date of the most recent such adjustment. Business Day. Any day other than a Saturday, Sunday or other day on which banks are closed in New York City, New York. Calendar Quarter. In each year, each calendar quarter. Capital Account. See Section 7.1. Capital Budget. See Section 9.2.(B). Capital Contribution. See Section 6.4. Capital Enhancement Projects. See Section 9.2.(B). Cash Balance Amount. See Section 7.5. CEO. The President and Chief Executive Officer of the Partnership. See Section 4.5. CERCLA shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Chemical Substance shall mean (i) any chemical substance, pollutant, contaminant, constituent, chemical, mixture, raw material, intermediate, product or byproduct that is regulated (including any requirement for the reporting of any Release thereof) under any Environmental Law, as now or hereafter in effect, or defined or listed as an industrial, toxic, deleterious, harmful, Exhibit 1, Page 2 radioactive, infectious, disease-causing or hazardous substance, material or Waste under any Environmental Law, as now or hereafter in effect, and (ii) petroleum or any fraction thereof, asbestos or asbestos-containing material or polychlorinated biphenyls. CITGO GP. CITGO Gulf Coast Refining, Inc., a Delaware corporation, the General Partner that is an Affiliate of CParent. See Section 2.2. CITGO LP. CITGO Refining Investment Company, an Oklahoma corporation, the Limited Partner that is an Affiliate of CParent. See Section 2.2. CITGO Partners. CITGO GP and CITGO LP. CITGO Partners Option Date Amount. The product of (i) CITGO Partners Average Participation Percentage for the period beginning on the day following the In-Service Date and ending on the Option Date times (ii) the remainder of Option Date Working Capital minus In-Service Date Working Capital. Closing Date. See Section 2.2. Code. The Internal Revenue Code of 1986, as amended and in effect from time to time and any successor thereto. Company. LYONDELL-CITGO Refining Company Ltd., a Texas limited liability company, which was converted into the Partnership as of the date of this Agreement. Compensation Committee. See Section 3.10.(A). Conflict Circumstance. See Section 5.7. Conflicted General Partner. See Section 5.7. Contribution Agreement. The agreement dated July 1, 1993 between the Company and LParent pursuant to which the Refinery Business and certain other Assets and Working Capital were contributed to the Company by LParent on behalf of Lyondell Refining Company n/k/a Lyondell GP. Conversion Date. See Section 2.2. CParent. CITGO Petroleum Corporation, a Delaware corporation. See Section 2.2. Damages. See Section 11.2.(D). Default. See Section 11.2.(A). Default Date. See Section 11.2.(C). Defaulting Partners. Lyondell GP and Lyondell LP, in the case of a Default by Lyondell GP or Lyondell LP; and CITGO GP and CITGO LP, in the case of a Default by CITGO GP or CITGO LP. Exhibit 1, Page 3 Depreciation. For each Calendar Quarter or portion thereof, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such period. Notwithstanding the preceding sentence, if the Asset Value (after taking into account any adjustment pursuant to the proviso of Section 7.1.(C)) of an asset differs from its adjusted tax basis on the date such asset is contributed or, if applicable, on the date of any adjustment to Capital Accounts which has taken place pursuant to Section 7.1.(C), Depreciation for any period shall be an amount which bears the same ratio to such Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) as the federal income tax depreciation, amortization or other cost recovery deduction for such period bears to such adjusted tax basis, except that in the case of any asset that has a zero adjusted tax basis on either the date of its contribution to the Partnership or on the date of any adjustment pursuant to Section 7.1.(C), Depreciation for any period shall be an amount equal to the product of (i) the Asset Value (as adjusted pursuant to the proviso of Section 7.1.(C)) of such asset on the date of contribution, or, if applicable, the date of the most recent adjustment to Capital Accounts pursuant to Section 7.1.(C) and (ii) the Blended Rate. Distributable Cash. The amount of cash distributable to the Partners as determined under Section 7.3., and in regard to each Partner. Distributions. See 6.4.(A)(2). Environment shall mean any ambient air, surface water, drinking water, groundwater, land surface, subsurface strata, river sediment, natural resources or real property and the physical buildings, structures and fixtures thereon, including sewer, septic and waste treatment, storage or disposal systems. Environmental Law shall mean any legal requirement or permit relating to (i) the Environment, including pollution, contamination, cleanup, preservation, protection and reclamation of the Environment; (ii) health or safety, including the exposure of employees and other Persons to any Chemical Substance; (iii) the Release or threatened Release of any Chemical Substance, noxious noise or odor, including investigation, study, assessment, testing, monitoring, containment, removal, remediation, response, cleanup and abatement of such Release or threatened Release; and (iv) the management of any Chemical Substance, including the manufacture, generation, formulation, processing, labeling, use, treatment, handling, storage, disposal, transportation, distribution, re-use, recycling or reclamation of any Chemical Substance. Executive Officers. Those officers of the Partnership then designated as Executive Officers by Partnership Governance Committee Action. Fair Market Value. See Section 11.5.(C). Finance-Control Committee. See Section 3.10(A). Financing Plan. Certain Partnership plans, as approved by unanimous actions of the Partnership Governance Committee, setting forth the Partnership's funding requirements for the Capital Budget and the sources of funds to finance such requirements. GAAP. Generally accepted accounting principles. Exhibit 1, Page 4 General Partners. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a general partner of the Partnership, unless such General Partner ceases to be a General Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute General Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute General Partner, if any, of the Partnership as provided herein, in such Person's capacity as a general partner of the Partnership. Highest Lawful Rate. See Section 12.11. Indemnified Losses. See Section 5.11.(A)(1). Indemnified Party. See Section 5.11.(D). Indemnifying Party. See Section 5.11.(D). Initial Construction Loan. As defined in the Regulations. In-Service Date. February 28, 1997, except for the Working Capital Valuation for which the In-Service Date is March 31, 1997. In-Service Date Working Capital. The value of the Working Capital on the In-Service Date determined pursuant to Exhibit 6.1(B). Insolvent and Insolvency. The Partnership is insolvent if it has ceased to pay its debts in the ordinary course of business or cannot pay its debts as they become due or is insolvent within the meaning of the federal bankruptcy law. Intended Percentage. See Section 6.6.(A). Interest. At any point in time, the entire ownership interest of a Partner in the Partnership at such time. See Section 5.8. Limited Partner. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a limited partner of the Partnership, unless such Limited Partner ceases to be a Limited Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Interest and is replaced by a Substitute Limited Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute Limited Partner, if any, of the Partnership as provided herein, in such Person's capacity as a limited partner of the Partnership. Liquidation. See Section 11.6. LParent. Lyondell Chemical Company, a Delaware corporation, formerly known as Lyondell Petrochemical Company. See Section 2.2. Lyondell GP. Lyondell Refining Company, a Delaware corporation, the General Partner that is an Affiliate of LParent. Lyondell LP. Lyondell Refining LP, LLC, a Delaware limited liability company, the Limited Partner that is an Affiliate of LParent. Exhibit 1, Page 5 Lyondell Partners. Lyondell GP and Lyondell LP. Lyondell Partners Option Date Amount. The product of (i) Lyondell Partners Average Participation Percentage for the period beginning on the first day following the In-Service Date and ending on the Option Date times (ii) the remainder of the Option Date Working Capital minus In-Service Date Working Capital. Maintenance Capital. Those capital expenditures reasonably required to fund capital expenditures that are necessary to maintain the Refinery in substantially the same condition existing on the Closing Date. Master Transaction Agreement. The agreement so named, dated as of May 5, 1993, among LParent, CParent, Lyondell GP and CITGO LP. Maximum Amount. See Section 12.11. Neutral. See Section 11.5.(C)(3). Nonconflicted General Partner. See Section 5.7. Nondefaulting Partners. The Partners other than the Defaulting Partners. See Section 11.2. Operating Budget. See Section 9.2.(A). Operating Committee. See Section 3.10.(A). Option Date. See Section 6.6.(A). Option Date Payment. See Section 6.6.(C). Option Date Working Capital. The value of Working Capital on the Option Date determined pursuant to Section 6.6. Owners. Lyondell GP and CITGO LP in their capacity as members of the Company. Parents. LParent and CParent. Partners. The General Partners and the Limited Partners on the date of this Agreement until such Person ceases to be a partner of the Partnership. Partnership Business. See Section 2.3. Partnership Governance Committee. The committee of six Representatives through which the General Partners manage the Partnership. See Section 3.1.(A). Partnership Governance Committee Action. The formal actions taken by vote of the Partnership Governance Committee, which is the exclusive method by which the General Partners manage the Partnership. See Section 3.6.(A). Exhibit 1, Page 6 Participation Percentage. The percentage calculated for each Partner, from time to time, pursuant to Section 6.4. Person. Any natural person or any corporation, limited liability company, partnership, group, joint venture, trust or other entity. Pledgee Group. See Section 11.1. Pledgor Group. See Section 11.1. Product Sales Agreement. The Product Sales Agreement-Refined Products dated July 1, 1993 between the Company and CITGO Petroleum Corporation, as amended from time to time. Profits and/or Losses. For each Calendar Quarterly period or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined for federal income tax purposes in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, deduction or credit required to be stated separately pursuant to Code Section 703(a)(1) shall be included in Profits or Losses), with the following adjustments: (i) any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such Profits or subtracted from such Losses; (ii) any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition, shall be subtracted from such Profits or added to such Losses; (iii) gain or loss resulting from any disposition of an asset with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Asset Value (as adjusted pursuant to the proviso in Section 7.1.(C), adjusted to reflect Depreciation; and (iv) in lieu of the depreciation, amortization, and other cost recovery deductions otherwise required to be taken into account in computing such Profits or Losses, there shall be taken into account Depreciation. Profits Interest. The right of any Partner to receive Profits allocated or cash distributed to such Partner pursuant to Section 7, but not including the right to participate in or manage the affairs of the Partnership as a Partner, the right to receive any information or accounting of the affairs of the Partnership, the right to inspect the books or records of the Partnership or any other right of a Partner pursuant to this Agreement. Proper Ratio. With respect to the Capital Account balances of the Partners at any time, the ratio of the Partners' Participation Percentages at such time. Purchase. See Section 11.7. Exhibit 1, Page 7 Purchase Notice. Notice given by the Nondefaulting Partners exercising their purchase rights. See Section 11.5.(A). Purchase Offer. See Section 10.3.(C). Recision Event. See Section 11.8. Recision Event Notice. See Section 11.8. Refinery. The Refinery located at 12000 Lawndale in Houston, Texas. Refinery Business. The Refinery and lube blending facility located in Birmingport, Alabama and all related assets (of every kind, nature, character and description, tangible and intangible, real, personal or mixed, wherever located), businesses, contracts and permits, that are used solely in the operations of such Refinery and lube blending facility, and all activities reasonably related or incidental thereto. Regulations. See Section 2.2. Related Agreements. Those agreements defined as such in Exhibit 1A to this Agreement. Release shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, dumping, discharge, dispersal, leaching, escaping, emanation or migration of any Chemical Substance in, into or onto the Environment of any kind whatsoever, including the movement of any Chemical Substance through or in the Environment, exposure of any type in any workplace, any release as defined under CERCLA or any other Environmental Law and any noxious noise or odor emission. Representatives. Those persons designated by each General Partner to serve as such General Partner's representatives on the Partnership Governance Committee. See Section 3.2.(A). Second Notice. See Section 10.3.(D). Secretary. See Section 4.7. Substitute General Partner. A Person who is admitted as a General Partner to the Partnership in place of and with the rights of a General Partner. Substitute Limited Partner. A Person who is admitted as a Limited Partner to the Partnership in place of and with the rights of a Limited Partner. TMP. The "tax matters partner" as defined in Section 6231(a)(7) of the Code. See Section 8.3.(A). Treasury Regulations. The income tax regulations promulgated by the Department of Treasury, as amended from time to time. Treasury Regulations include final and temporary regulations. Unanimous Partnership Governance Committee Action. See Section 3.8. Exhibit 1, Page 8 U.S. Partnership Return of Income. See Section 8.3.(A). Vice President. See Section 4.6. Wholly Owned Subsidiary. As to any Person, a subsidiary of such Person all of the equity interests of which are owned, directly or indirectly, by such Person. Working Capital. The Partnership's current assets minus current liabilities (excluding the current portion of long-term debt and capital leases). Current assets and current liabilities will be determined in accordance with current accounting principles under GAAP as in effect at the Conversion Date, except (i) that any cash, cash equivalents and short-term investments included in the capital fund will be excluded and (ii) that inventory will be carried at its Fair Market Value. The inventory value on the Conversion Date will be its actual Fair Market Value as determined by Exhibit 6.1.(B) and on other valuation dates will be valued in accordance with Exhibit 6.1.(B). Exhibit 1, Page 9 EXHIBIT 1A RELATED AGREEMENTS TIER 1 RELATED AGREEMENTS 1. Amended and Restated Regulations 2. Performance Guaranty and Control Agreement 3. Contribution Agreement, including the following exhibits: 3.1 General Warranty Deed (relating to Houston Land) (Exhibit A-1) 3.2 General Warranty Deed (relating to Birmingport Land) (Exhibit A-2) 3.3 Assignment of Real Property Interests (relating to the "Ballpark") (Exhibit A-3) 3.4 Pipeline Deed, Bill of Sale and Assignment of Easements (relating to the Company Pipelines) (Exhibit A-4) 3.5 Assignment and Assumption Agreement (between Lyondell and the Company relating to Assets other than real property) (Exhibit A-5) 3.6 Grants of Easements for Pipelines and Meter Sites (Exhibit B) 4. Crude Supply Agreement 5. Supplemental Supply Agreement 6. Product Sales Agreement Refined Products -- CITGO 7. Inter-Plant Agreements: 7.1 Company Feedstock Purchase Agreements: (A) Heavy Pyrolysis Gasoline (B) Light Pyrolysis Gasoline (C) C5 Raffinate (D) OP Hydrogen (E) MeOH Hydrogen (F) Pyrolysis Gas Oil (G) Toluene (H) Methanol Exhibit 1A, Page 1 (I) RAFF II (J) RAFF II Isomerate (K) MTBE (L) Isopentane/Heavy Py Mix (M) Ethylene 7.2. Company Product Sales Agreement -- Lyondell: (A) OP -- 400 (B) OP -- 700 (C) Mixed Propylene (D) Refinery Normal Butane (E) Refinery Propane (F) Alkylation Normal Butane (G) Alkylation Propane (H) Benzene (I) Toluene 7.3. Tolling Agreement TIER 2 RELATED AGREEMENTS 1. Employee Transfer and Benefits Agreement 2. Intellectual Property Rights Agreement 3. Trademark Assignment Agreement 4. Trademark License Agreement 5. Tradename Licensing Agreement 6. Software Agreement 7. Terminal and Storage Agreement 8. Mont Belvieu Storage and Pipeline Agreement 9. Marketing Services Agreement -- Aromatics 10. Paraffinic Lubricants Base Oil Sales Agreement 11. Naphthenic Lubricants, White Mineral Oils and Specialty Oils Sales Agreement Exhibit 1A, Page 2 12. Lubricant Facility Operating Agreement 13. Manufacturing Services Agreement 14. Employee Services Agreement 15. Administrative Services Agreement 16. Product Sales Agreement MTBE -- Lyondell and CITGO 17. Refinery Office Lease 18. Exchange Agreement 19. Assignment and Assumption Agreement - CITGO and LCR (Lubricants) EXHIBIT 6.1(B) LYONDELL-CITGO Refining Company Ltd. In-Service Date Working Capital Valuation 3/31/97
(C) (A) (B) In-Service Date $MM $MM Reference Price Pool's value on First Anniversary Date In-Service Date Volume First Anniversary In-Service Date Pool Value of the Pool First Anniversary Date Volume Date Reference Price (A) x (B) x (C) ------ ----------------------- ----------------------------- -------------------- ---------------- Light Crude $42.71 371,038 $20.35 $6.64 ---------- ------ 3,253,402 $14.93 Heavy Crude $25.02 (186,359) $15.41 $(2.99) ---------- ------ 2,433,006 $ 9.88 Very Heavy Crude 3,641,926 $14.36 $52.30 Gasolines $10.34 785,712 $25.32 $20.22 ---------- ------ 631,408 $16.11 Distillates $7.69 688,682 $22.17 $15.55 ---------- ------ 417,720 $18.07 Remainder of Inventory $49.83 3,315,958 $25.32 $91.08 ---------- ------ 2,851,021 $16.11 ------- ------- Total $135.58 $182.80
Note: The very heavy crude pool is valued at the 3/31/97 volume and market price since there was no inventory in this pool at the Closing Date or the First Anniversary Date. Working Capital At March 31, 1997 (after the February 28, 1997 In-Service Date)
Historical Historical Fair Market Contributed In Dollars Debit (Credit) Cost Per Cost Value Working Account Account General Ledger Adjustments Adjustments Capital Number Name 3-31-97 3-31-97 3-31-97 3-31-97 - ------- ------- -------------- ----------- ----------- ----------- 0102 Petty Cash 11,600.00 11,600.00 Cash--Operating Fund 2,330,453.00 2,330,453.00 Cash--Capital Fund 33,965,401.00 (33,965,401.00) 0.00 Cash--Expansion Fund 2,785,164.00 (2,785,164.00) 0.00 0231 Trade A/R 78,434,463.04 78,434,463.04 Various A/R--Affiliates 57,072,313.18 (2,345,458.89) 54,726,854.29 0281 Misc. A/R 339,124.52 339,124.52 0297 Allow.--Doubtful A/R (220,396.54) (220,396.54) 0305 Crude Inventory 74,110,331.00 (18,160,331.00) 55,950,000.00 0301 Unfinished Product Inventory 50,555,155.67 (7,795,155.67) 42,760,000.00 0307 Finished Product Inventory 64,463,910.15 19,626,089.85 84,090,000.00 0317 Allowance for LIFO (125,532,311.47) 125,532,311.47 0.00 0500 Storehouse Stocks 13,035,736.29 (266,595.00) 12,769,141.29 0615 Chemicals 3,160.05 3,160.05 0616 Catalyst 696,872.14 696,872.14 0617 Obsolete M & S Inventory (1,325,352.45) (1,325,352.45) 0618 Product Components 2,804,012.42 2,804,012.42 0739 Prepaid Insurance 2,787,847.65 2,787,847.65 Various Other Prepaid Expenses 720,552.75 720,552.75 0751 Employee Travel Adv. 17,530.00 0.00 17,530.00 Total Current Assets 257,055,566.40 (39,362,618.89) 119,202,914.65 336,895,862.16 2006 Deferred Catalyst 3,343,730.52 (1,400,906.92) 1,942,823.60 2010 Deferred Software 7,399,244.33 0.00 7,399,244.33 2042 Deferred Turnaround Costs 37,462,542.76 (14,620,001.00) (5,710,635.44) 17,131,906.32 2096 Prepaid COLI--Def. Comp. 873,968.41 0.00 873,968.41 2097 Prepaid COLI--SERP 870,558.43 0.00 870,558.43 Cash Pension funding from 7-1-93 5,962,297.00 0.00 (2,981,148.50) 2,981,148.50 1000 Capitalized property taxes 1,434,099.00 806,840.00 2,240,939.00 57,346,440.45 (15,214,067.92) (8,691,783.94) 33,440,588.59 3003 Accrued Payables (65,043,857.09) 3,226,037.66 (61,817,819.43) 3005 Mat. Mgmt. Sys. Receipts (397,650.79) (397,650.79) 3009 A/P Clearing (115,754.75) (115,754.75) 3011 Chemical A/P Clearing (3,058,330.97) (3,058,330.97) 3017 Amts. withheld on Const. (5,518.07) (5,518.07) 3020 Return to Vendors 11,424.73 11,424.73 Various A/P--Affiliates (116,689,950.97) (116,689,950.97) 3130 Working Capital Facility (54,000,000.00) (54,000,000.00) 3330 Interest Payable (1,734,755.82) (1,734,755.82) 3332 Int. Pay.--LOwner Exp. Proj. 0.00 0.00 0.00 3333 Int. Pay.--LOwner Environ. 0.00 0.00 3334 Int. Pay.--LOwner--Profit Gen. 0.00 0.00 3336 Int. Pay.--COwner 0.00 0.00 0.00 Various Taxes Payable (6,319,726.91) (6,319,726.91) Various Accrued Payroll (12,826,507.03) 1,551.20 (12,824,955.83) Various Other Accrued Liab. (4,765,080.89) (4,765,080.89) Total Current Liabilities (264,945,708.56) 3,227,588.86 0.00 (261,718,119.70) Total Working Capital 49,456,298.29 (51,349,097.95) 110,511,130.71 108,618,331.05 (C) (A) (B)
Exhibit 6.1(B), Page 2 Working Capital At March 31, 1997 (after the February 28, 1997 In-Service Date) Check figure (265,291,458.56) (A) Adjustments for current assets and current liabilities attributable to the Refinery Expansion Project and any cash, cash equivalents and short-term investments included in the Capital Fund. In accordance with the definition of Working Capital in Exhibit 1 to the Regulations. (B) This amount should be used in calculating the Participation Percentages at March 31, 1997 which will be used during the second quarter of 1997 for making cash distributions to the owners. (C) Excludes current maturities of capital leases, account 3170, of $345,750.00 in accordance with the definition of Working Capital in the Regulations. Exhibit 6.1(B), Page 3 EXHIBIT 6.4 CONVERSION DATE CAPITAL PARTICIPATION CONTRIBUTION PERCENTAGES Lyondell LP 784,315,812 48.65 Lyondell GP 162,828, 154 10.10 $ 947,143,966 58.75% -------------- ------ CITGO LP 648,866,453 40.25 CITGO GP 16,120,906 1.00 -------------- ------ $ 664,987,359 41.25% -------------- ------ $1,612,131,325 100.00% ============== ====== EXHIBIT 6.6.(E) TO PARTNERSHIP AGREEMENT FORM OF NOTE FOR PORTION OF OPTION PRICE THIS NOTE IS NOT TRANSFERABLE OR ASSIGNABLE PROMISSORY NOTE (TERM) $__________(U.S.) ____________, ___ Houston, Texas FOR VALUE RECEIVED, and intending to be legally bound,___________, a ________________ corporation (the "Maker"), promises to pay to LYONDELL-CITGO Refining LP (the "Payee") at its offices located at 1200 Lawndale, Houston, Texas 77017, in lawful money of the United States of America and in immediately available funds, ______________ AND NO/100 DOLLARS ($_____________), or so much thereof as may be advanced and outstanding hereunder prior to maturity, together with interest thereon at the annual rate specified below. INTEREST RATE The unpaid principal of this Note shall bear interest from the date of advance to maturity during any Interest Period (as defined herein), at a rate per annum that shall be equal to the lesser of (i) LIBOR (as defined herein) plus the Basis Points (as defined herein) or (ii) the Highest Lawful Rate (as defined herein). "Basis Points", for the purposes of this Note, shall mean the percentage points added to LIBOR for purposes of determining the rate of interest this Note shall bear for any Interest Period. "Interest Period", for the purposes of this Note, shall mean any period of 30 days, 180 days or 360 days beginning on the advancement date (in the case of the initial Interest Period) or on the last day of the next preceding Interest Period (in the case of any subsequent Interest Period). For the purposes of this Note, "LIBOR", with respect to any Interest Period, means the rate of interest (expressed as an annual rate), as it appears on the display screen of the Dow Jones Telerate Service or the Reuter Monitor Money Rates Service, at which deposits in United States dollars are offered to major banks in the London interbank market, at approximately __:__ _.m. (New York time) on the second London Banking Day before the first day of that Interest Period in -1- an amount substantially equal to the amount of the unpaid principal scheduled to be outstanding throughout that Interest Period. Not later than two days before the commencement of each Interest Period (including the initial Interest Period), the Payee shall provide the Maker with three Basis Point options for the succeeding Interest Period, with one option being based on interest being reset at 30 days, another at 180 days and the third at 360 days. The Payee shall make a good faith effort to set the Basis Point options that correspond to the Interest Periods in accordance with current market conditions and as if the Maker has a long-term debt rating issued by Standard & Poor's Corporation and its successors of at least BBB+. On the day prior to the commencement of each Interest Period (including the initial Interest Period), the Maker shall, in its sole discretion, select the duration of each successive Interest Period (and thus the Basis Points that correspond to such Interest Period) and shall notify the Payee of its selection. If the Maker does not so notify the Payee, the duration of the succeeding Interest Period shall be 30 days (and the Basis Points shall be those that correspond to such 30 day Interest Period). All past due principal and, to the fullest extent permitted by applicable law, interest shall bear interest after the due date thereof at the rate per annum equal to the lesser of (i) the rate of interest payable under this Note on the date of default plus 3% or (ii) the Highest Lawful Rate. Interest shall be calculated on the basis of a 365-day year for the actual number of days elapsed. TERMS OF REPAYMENT Maker shall make an annual payment of principal, commencing on __________, 19__ and continuing regularly and annually thereafter until maturity, in the amount of $50,000,000.00, in lawful money of the United States of America and in immediately available funds, or such lesser amount (if appropriate) as shall be sufficient to fund the annual capital expenditures of Payee as determined solely in the discretion of Payee. Interest on the unpaid principal amount of this Note shall be due and payable in equal quarterly installments, commencing on _________, 19__, and continuing regularly and quarterly thereafter on the ____ day of each March, June, September and December until maturity. PREPAYMENT The Maker reserves the right to prepay this Note, in whole or in part, at any time, without penalty or notice. All prepayments hereunder, whether designated as payments of principal or interest, shall be applied first to accrued and unpaid interest, if any, and then to principal. All prepayments shall be applied to any installments due hereunder in order of maturity. DEFAULT If any payment provided herein, either of principal or interest, is not paid when due or within five days of delivery by Payee to Maker of written notice of such failure to pay, or in the event of the insolvency or bankruptcy of the Maker hereof or if any proceedings in bankruptcy or for the relief of debtors or readjustment of debts is filed by or against the Maker hereof, then the Payee may, at its option, declare the indebtedness under this Note to be forthwith due and payable. WAIVER; UNCONDITIONAL OBLIGATION All signers and endorsers of this Note are to be regarded as principals as to their respective joint and several liability to any legal holder thereof, and the Maker and each of the guarantors, sureties and endorsers, to the fullest extent permitted by applicable law, hereby expressly and severally waive grace, and all notices, demands, presentments for payment, notice of nonpayment, protest and notice of protest, notice of intent to accelerate, notice of acceleration of the indebtedness due hereunder, and diligence in collecting this Note or enforcing any security rights of the Payee under any document securing this Note, and agree (i) that the Payee may, at any time, and from time to time, extend the date of maturity of all or any part hereof, without notifying or consulting with the Maker or principal hereof, who shall remain fully obligated for the payment hereof; (ii) that it will not be necessary for the Payee, in order to enforce payment of this Note, to first institute or exhaust its remedies against the Maker or other party liable therefor or to enforce its rights against any security for this Note; and (iii) to any substitution, exchange or release of any security now or hereafter given for this Note, or the release of any party primarily or secondarily liable hereon, or any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Maker or any guarantors, sureties and endorses in respect of the obligations of any such party in respect of this Note. SECURITY; LIMITATION AS TO RECOURSE The Maker hereby pledges to the Payee, and hereby grants to the Payee, a lien on and security interest in its share of all cash distributions payable to it by the Payee (including in connection with any liquidation of the Payee) based on its partnership interest in the Payee as security for the payment and performance of all the Maker's obligations and duties hereunder. At any time and from time to time, the Maker will promptly execute and deliver all such further agreements, instruments and documents and take all such further action that may be necessary or desirable or that the Payee or any Payee may reasonably request in order (i) to perfect and protect the lien and security interest created hereby, including the execution and filing of appropriate financing statements and directing the Payee to register, on the Payee's books and records, the pledge of the Maker's share of all cash distributions payable to it by the Payee (including in connection with any liquidation of the Payee) based on its partnership interest to the Payee; (ii) to enable the Payee or any Payee to exercise and enforce its rights and remedies hereunder; or (iii) otherwise to effect the purposes of this paragraph. The Maker hereby authorizes the Payee and each Payee to file, without the signature of the Maker, where permitted by applicable law, at any time the Payee deems it necessary or appropriate to protect -3- the lien and security interest under this paragraph, one or more financing or continuation statements, and amendments thereto, relating to such lien and security interest. If Maker fails to perform any agreement or obligation contained in this paragraph, the Payee or any Payee may itself perform, or cause performance of, such agreement or obligation, and the expenses of the Payee incurred in connection therewith shall be payable to the Payee, on demand. In addition to all of the other rights and remedies given it by this Note (including, without limitation, the right to declare the indebtedness evidenced hereby immediately due and payable as set forth herein), the Payee and any Payee may exercise all those rights and remedies allowed by all applicable laws, including, without limitation, to the fullest extent permitted by applicable law, all of the rights and remedies of a secured party on default under the Uniform Commercial Code as enacted in any jurisdiction in which any of the collateral securing this Note may be located. To the extent that notice of sale or other disposition shall be required by law, the Maker agrees that at least five (5) days notice to the Maker of the time and place of any intended public sale or other disposition or of the time after which any intended private sale or other disposition of any collateral securing this Note is to be made, shall constitute reasonable notice of such sale or other disposition. To the fullest extent permitted by applicable law, the Payee or any Payee also shall have the right to assume all of the rights of the Maker under any or all of the collateral securing this Note, and the Maker will, at the request of the Payee or any Payee, take any action and execute any instrument or other document which the Payee may deem necessary or advisable to permit any such assumption by the Payee. The Maker shall be liable upon the indebtedness evidenced by this Note and all other sums to accrue or to become payable hereunder to the full extent, but only to the extent, of the security for the payment hereof, including, without limitation, the Maker's share of all cash distributions payable to it by the Payee (including in connection with any liquidation of the Payee) based on its partnership interest. In the event of a default hereunder by Maker, any judicial proceedings brought by the Payee or any Payee against the Maker shall be limited to foreclosure of the liens, assignments and security interests created under or granted herein or as may now or at any time hereafter secure the payment hereof, and no attachment, execution or other writ or process shall be sought, issued or levied upon any assets, properties or funds of the Maker other than the above described collateral. In the event of foreclosure of such liens, assignments and security interests securing the payment of such indebtedness, sums or amounts by private power of sale or otherwise, no judgment for any deficiency upon such indebtedness, sums and amounts shall be obtainable by the Payee or any Payee against the Maker, its successors or assigns. Nothing contained in this paragraph shall be deemed to limit or impair the Payee's right of foreclosure of the liens, assignments and security interest created hereunder or the enforcement of rights against any other collateral now or hereafter existing as security for this Note or such other sums or amounts. TERMS OF ISSUANCE This Note is issued pursuant to the terms of the Payee's partnership agreement, as now or hereafter in effect (the "Partnership Agreement"). Reference is hereby made to the Partnership -4- Agreement for the terms and provisions thereof, to which this Note is in all respects subject, including, without limitation, provisions concerning the right of the Payee to apply distributions to be made to the Maker to the indebtedness evidenced hereby. REIMBURSEMENT OF COSTS AND EXPENSES To the fullest extent permitted by applicable law, if this Note is collected by suit or legal proceedings or through bankruptcy proceedings, the Maker agrees to pay the Payee the reasonable costs and reasonable attorney's fees incurred in the collection hereof. NO WAIVER; ELECTION OF REMEDIES No failure by the Payee to exercise, and no delay in exercising, any right or remedy hereunder or under any documents, instruments or agreements executed in connection herewith shall constitute a waiver thereof on the part Payee; nor shall any single or partial exercise of any right or remedy under any documents, instruments or agreements executed in connection herewith preclude any other or further exercise thereof or the exercise of any other right or remedy. The Payee may proceed against any or all of the collateral securing this Note or against any guarantor hereof, or may proceed contemporaneously or in the first instance against the Maker, in such order and at such times following default hereunder as the Payee may determine in its sole discretion. USURY SAVINGS CLAUSE It is the intention of the parties hereto conform strictly to applicable usury laws regarding the use, forbearance or detention of the indebtedness evidenced by this Note whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws, in each case to the extent they are applicable to this Note (the "Applicable Usury Laws"). Accordingly, if any acceleration of the maturity of this Note or any payment by the Maker or any other person results in the Maker or such other person having paid any interest in excess of the Maximum Amount, as hereinafter defined, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this paragraph shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Note shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the Maker by the Payee; (iii) neither the Maker nor any other person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of interest on this Note shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Note immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to the Payee for the use, forbearance or detention of the indebtedness of the Maker to the Payee evidenced by this Note shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and -5- spread throughout the full term of the indebtedness evidenced by this Note so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term hereof. As used herein, the term "Maximum Amount" means the maximum nonusurious amount of interest which may be lawfully contracted for, charged or received by the Payee in connection with the indebtedness evidenced by this Note under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the maximum rate of interest, if any, that may be charged the Maker under all Applicable Usury Laws on the principal balance of this Note from time to time outstanding. GOVERNING LAW THIS NOTE SHALL BE SUBJECT TO AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES. JURISDICTION; AGENT FOR SERVICE OF PROCESS; WAIVER ANY JUDICIAL PROCEEDING BROUGHT AGAINST EITHER OF THE PARTIES TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK, NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGEMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES SHALL APPOINT C T CORPORATION SYSTEM, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT"), AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN A STATE OR FEDERAL COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK BY ENTERING INTO AN AGREEMENT AS OF THE DATE OF THIS AGREEMENT WITH THE AGENT TO SUCH EFFECT, AND EACH PARTY SHALL MAINTAIN SUCH AGREEMENT (OR AN APPROPRIATE SUBSTITUTE TO THE SAME EFFECT WITH THE SAME OR A DIFFERENT AGENT) FOR THE ENTIRE TERM OF THIS AGREEMENT. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE RESPECTIVE PARTIES TO THIS AGREEMENT. IN LIGHT OF THE EXPRESS INTENT OF THE PARTIES TO SUBMIT TO THE JURISDICTION OF NEW YORK COURTS FOR THE RESOLUTION OF ANY AND ALL DISPUTES ARISING UNDER THIS AGREEMENT, THE PARTIES FURTHER HEREBY WAIVE ANY AND ALL AFFIRMATIVE DEFENSES THEY COULD OR MIGHT OTHERWISE BE ABLE TO ASSERT BASED ON AN ALLEGED INCAPACITY OF THE PAYEE TO ASSET A CLAIM OR COUNTER-CLAIM IN EITHER THE FEDERAL OR STATE -6- COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN. THE AFFIRMATIVE DEFENSES AND MOTIONS HEREBY WAIVED INCLUDE BUT ARE NOT LIMITED TO OBJECTIONS TO SUIT PURSUANT TO N.Y. BUSINESS CORPORATION LAW (S) 1312, N.Y. PARTNERSHIP LAW (S) 121-907, N.Y. CLS GENERAL BUSINESS LAW (S) 130 SUBD. 1 (ii)(a) AND N.Y. GENERAL ASSOCIATIONS LAW (S) 18(4). THE PARTIES WAIVE ALL AFFIRMATIVE DEFENSES AND DEFENSIVE MOTIONS PREDICATED ON, BUT NOT LIMITED TO, THE FOREGOING STATUTORY PROVISIONS WITH FULL KNOWLEDGE OF THEIR RIGHTS, IF ANY, UNDER THOSE PROVISIONS. IT IS THE EXPRESS AND KNOWING INTENTION OF THE PARTIES TO WAIVE THE RIGHT TO ASSERT AS AN AFFIRMATIVE DEFENSE THE LEGAL INCAPACITY OF THE PAYEE TO MAINTAIN A CLAIM OR COUNTER-CLAIM ON THE GROUNDS THAT THE PAYEE FAILED TO COMPLY WITH ANY OR ALL REGISTRATION, CERTIFICATION, NOTIFICATION, FILING OR DESIGNATION-OF-AGENT REQUIREMENTS SET FORTH AND ENFORCED BY THE FOREGOING OR ANY SIMILAR STATUTORY PROVISIONS. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed at the place and on the date first above appearing. --------------------------- By: ---------------------------- Name: -------------------------- Title: ------------------------- ATTEST By: ---------------------------- Secretary -7- EX-10.26(A) 20 1ST AMENDMENT TO AMENDED & RESTATED PART. AGMT. EXHIBIT 10.26(a) FIRST AMENDMENT TO AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF EQUISTAR CHEMICALS, LP FIRST AMENDMENT TO AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF EQUISTAR CHEMICALS, LP This First Amendment to the Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated as of June 30, 1998 (the "First Amendment"), is entered into by and among Lyondell Petrochemical G.P. Inc., a Delaware corporation ("Lyondell GP"), Lyondell Petrochemical L.P. Inc., a Delaware corporation ("Lyondell LP"), Millennium Petrochemicals GP LLC, a Delaware limited liability company ("Millennium GP"), Millennium Petrochemicals LP LLC, a Delaware limited liability company ("Millennium LP"), PDG Chemical Inc., a Delaware corporation ("Occidental GP"), Occidental Petrochem Partner 1, Inc., a Delaware corporation ("Occidental LP1"), Occidental Petrochem Partner 2, Inc., a Delaware corporation ("Occidental LP2"), and Occidental Petrochem Partner GP, Inc., a Delaware corporation ("New Oxy GP"). WHEREAS, reference is here made for all purposes to the Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated May 15, 1998 (the "Partnership Agreement"); and WHEREAS, all capitalized terms that are defined in the Partnership Agreement, but are not defined in this First Amendment, shall have the same meanings as defined in the Partnership Agreement; and WHEREAS, Occidental GP wishes to convert 294 of its General Partner Units in the Partnership to Limited Partner Units, and to transfer such Units to Occidental LP2, and each of the other Partners are willing to consent to such conversion and transfer; and WHEREAS, Occidental GP wishes to transfer its remaining General Partner Unit to New Oxy GP, and to withdraw from the Partnership and New Oxy GP wishes to be admitted to the Partnership as a General Partner, and each of the other Partners are willing to consent to such transfer, withdrawal, and admission; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. Transfers and Withdrawal. (a) Occidental GP hereby converts 294 of its 295 General Partner Units in the Partnership into 294 Limited Partner Units in the Partnership. (b) Occidental GP does hereby transfer its 294 Limited Partner Units to Occidental LP2. (c) Occidental GP does hereby transfer its remaining 1 General Partner Unit to New Oxy GP. Concurrently New Oxy GP is hereby admitted into the Partnership as a General Partner of the Partnership. Concurrently, Occidental GP hereby withdraws from the Partnership. (d) New Oxy GP assumes all of the obligations of Occidental GP under or in respect of the Partnership. 2. Amendments. (a) Any reference in the Partnership Agreement to Occidental GP shall hereafter be deemed for all purposes to mean New Oxy GP. (b) As a result of the conversions, the withdrawal and the transfers described herein, Section 2.1 of the Partnership Agreement is restated in its entirety as follows: "2.1 Holdings of Partners. Effective as of the close of business on June 30, 1998, the Units shall be owned as follows: Partner Units ------- ----- Lyondell GP 820 Millennium GP 590 Occidental GP 1 Lyondell LP 40,180 Millennium LP 28,910 Occidental LP1 6,623 Occidental LP2 22,876 TOTAL 100,000 ===== ======= The Units shall entitle the holder to the distributions set forth in Section 3 and to the allocation of Profits, Losses and other items as set forth in Section 4. Units shall not be represented by certificates." 3. References to and Effect on Partnership Agreement. (a) The provisions of the Partnership Agreement (as amended by this First Amendment) shall remain in full force and effect in accordance with their terms following the effectiveness of this First Amendment. Each Partner, by executing this First Amendment, (i) consents to the admission of New Oxy GP into the Partnership and as a General Partner, (ii) consents to the withdrawal of PDG Chemical, Inc. as a General Partner and (iii) ratifies all actions done in comtemplation of items (i) and (ii) herein. (b) On and after the date first written above, each reference in the Partnership Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and -2- any reference to the Partnership Agreement in any certificate or document delivered in connection therewith, shall mean and be a reference to the Partnership Agreement as amended hereby. (c) The General Partners shall, or shall cause the Partnership to, execute, swear to, acknowledge, deliver, file or record in public offices and publish all such certificates, notices, statements or other instruments, and take all such other actions, as may be required by law for the purpose of reflecting the withdrawals and admissions herein, including, but not limited to, an amendment of the Certificate of Limited Partnership of the Partnership pursuant to Section 17-204 of the Act. 4. Representations and Warranties. Each of Occidental GP and New Oxy Gp represent and warrant to the other Partners as follows: (a) Due Organization; Good Standing and Power. New Oxy GP is a corporation duly organized, validly existing and in good standing under the laws of its state of organization. New Oxy GP has all requisite power and authority to enter into this First Amendment and to perform its obligations hereunder. New Oxy GP is duly authorized, qualified or licensed to do business as a foreign corporation and is in good standing in the State of Texas and in each of the other jurisdictions in which its right, title or interest in or to any of its assets or properties requires such authorization, qualification or licensing, except where the failure to so qualify or to be in good standing would not reasonably be expected to have a material adverse effect. (b) Authorization and Validity of Agreements. The execution, delivery and performance of this First Amendment by New Oxy GP and the consummation by it of the transactions contemplated hereby have been duly authorized by the Board of Directors of New Oxy GP. Except to the extent heretofore obtained, no other corporate action or action by stockholders is necessary for the authorization, execution, delivery and performance by New Oxy GP of this First Amendment and the consummation by New Oxy GP of the transactions contemplated hereby. This First Amendment has been duly executed and delivered by New Oxy GP and constitutes a legal, valid and binding obligation of New Oxy GP, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equity principles. (c) No Consents Required; No Conflict with Instruments to which New Oxy GP is a Party. The execution, delivery and performance of this First Amendment by New Oxy GP, the performance by New Oxy GP of its obligations under the Partnership Agreement (as amended by this First Amendment) and the consummation of New Oxy GP of the transactions contemplated hereby or thereby (i) will not require any consent except for such consents the failure of which to be obtained or made, would not in the aggregate reasonably be expected to have a material adverse effect; and (ii) will not violate (with or without the -3- giving of notice or the lapse of time or both) or conflict with, or result in the breach of termination of any provision of, or constitute a default under, or result in the acceleration of the performance of the obligations of New Oxy GP, any agreement or instrument to which New Oxy GP is a party, except for such obligations, conflicts, breaches, terminations, defaults or accelerations or which would not in the aggregate reasonably be expected to have a material adverse effect. 5. Secretary's Certificate. New Oxy GP shall provide to each of the other General Partners and the Partnership a copy of a secretary's certificate in the form attached as Appendix I hereto. 6. Counterparts. This First Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 7. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any conflicts of law principles. [Remainder of this page left blank] -4- IN WITNESS WHEREOF, this First Amendment has been executed on behalf of each of the parties hereto, by their respective officers thereunto duly authorized, effective as of the date first written above. GENERAL PARTNERS: LYONDELL PETROCHEMICAL G.P. INC. By: /s/ Kerry A. Galvin --------------------------------- Name: Title: MILLENNIUM PETROCHEMICALS GP LLC By: Millennium Petrochemicals Inc., its Manager By: /s/ George H. Hempstead, III ----------------------------- Name: George H. Hempstead, III Title: Vice President OCCIDENTAL PETROCHEM PARTNER GP, INC. By: /s/ David C. Yen ----------------------------------- Name: David C. Yen Title: Vice President and Treasurer WITHDRAWING GENERAL PARTNER: PDG CHEMICAL INC. By: /s/ J.R. Havert ----------------------------------- Name: J.R. Havert Title: Vice President and Assistant Treasurer -5- LIMITED PARTNERS: LYONDELL PERTOCHEMICAL L.P. INC. By: /s/ Kerry a. Galvin ----------------------------------- Name: Title: MILLENNIUM PETROCHEMICALS LP LLC By: Millennium Petrochemicals Inc., its Manager By: /s/ George H. Hempstead, III ----------------------------- Name: George H. Hempstead, III Title: Vice President OCCIDENTAL PETROCHEM PARTNER 1, INC. By: /s/ David C. Yen ----------------------------------- Name: David C. Yen Title: Vice President and Treasurer OCCIDENTAL PETROCHEM PARTNER 2, INC. By: /s/ David C. Yen ----------------------------------- Name: David C. Yen Title: Vice President and Treasurer -6- EX-10.27(A) 21 FIRST AMENDMENT TO ASSET CONTRIBUTION AGMT. EXHIBIT 10.27(a) FIRST AMENDMENT TO LYONDELL ASSET CONTRIBUTION AGREEMENT This First Amendment to Lyondell Asset Contribution Agreement (this "First Amendment"), dated as of May 15, 1998, is entered into by and among Lyondell Petrochemical Company, a Delaware corporation (the "Contributor"), Lyondell Petrochemical L.P. Inc., a Delaware corporation (the "Contributing Partner") and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"). RECITALS A. The Contributor, the Contributing Partner and the Partnership are parties to that certain Asset Contribution Agreement dated as of December 1, 1997 (the "1997 Asset Contribution Agreement"); B. Pursuant to that certain Master Transaction Agreement, dated as of May 15, 1998, by and among the Contributor, the Partnership, Occidental Petroleum Corporation ("OPC") and Millennium Chemicals Inc, certain affiliates of OPC shall become partners in the Partnership as of the date hereof; and C. The Contributor, the Contributing Partner and the Partnership desire to amend the 1997 Asset Contribution Agreement on the terms set forth herein. AGREEMENT NOW THEREFORE, in consideration of the premises and of the mutual covenants of the parties hereto, it is hereby agreed that the 1997 Asset Contribution Agreement is amended as follows: A. Capitalized terms used herein and not otherwise defined herein shall have the meanings given such terms in the 1997 Asset Contribution Agreement. B. The following definition shall be added to Section 1 of the 1997 Asset Contribution Agreement: "1998 MTA" shall mean that certain Master Transaction Agreement, dated as of May 15, 1998, by and among the Contributor, the Partnership, Occidental Petroleum Corporation and Millennium Chemicals Inc. C. The definition of "Third Party Claim" as set forth in Section 1 of the 1997 Asset Contribution Agreement shall be amended and restated as follows: "Third Party Claim" means any allegation, claim, civil or criminal action, proceeding, charge or prosecution brought by a Person other than a Contributor, any Affiliate thereof, the Partnership, any member of the Millennium Group (as defined in the 1998 MTA), any member of the Lyondell Group (as defined in the 1998 MTA) or any member of the Occidental Group (as defined in the 1998 MTA). D. Subsection 6.2(a)(i) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (i) Any misrepresentation in or breach of the representations and warranties of the Contributor or any of its Affiliates in this Agreement, the Assignment and Assumption Agreements, the Master Intellectual Property Agreement, or the Master Transaction Agreement, provided that any Liability arising out of, in connection with or relating to any breach of the warranties in any Assignment and Assumption Agreement that is not a breach of the warranties in this Agreement shall not be indemnified against pursuant to this Section 6; E. Subsection 6.2(b) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER THE CONTRIBUTOR NOR ANY OF ITS AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF THE CONTRIBUTOR. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THAT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE. F. Subsection 6.2(e) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (e) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER THE PARTNERSHIP NOR ANY OF ITS AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF THE PARTNERSHIP. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE. G. Appendix A to the 1997 Asset Contribution Agreement shall be amended and restated in its entirety in the form attached hereto as Exhibit A. H. Except as amended by this First Amendment, all the terms and provisions of the 1997 Asset Contribution Agreement shall remain in full force and effect. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have executed and delivered this First Amendment as of the date first above written. LYONDELL PETROCHEMICAL COMPANY, a Delaware corporation. By: /s/ Dan F. Smith --------------------------------- Name: Dan F. Smith Title: President and Chief Executive Officer LYONDELL PETROCHEMICAL L.P. INC., a Delaware corporation. By: /s/ Dan F. Smith --------------------------------- Name: Dan F. Smith ------------------------------- Title: President and Chief Executive Officer EQUISTAR CHEMICALS, LP, a Delaware limited partnership By: /s/ Eugene R. Allspach --------------------------------- Name: Eugene R. Allspach Title: President and Chief Operating Officer [Signature Page to First Amendment to Lyondell Asset Contribution Agreement] EXHIBIT A Appendix A Dispute Resolution Procedures (1) Binding and Exclusive Means. The dispute resolution provisions set forth in this Appendix A shall be the binding and exclusive means to resolve all disputes arising under this Agreement (each a "Dispute"). (2) Standards and Criteria. In resolving any Dispute, the standards and criteria for resolving such dispute shall, unless the Contributors and the Partnership in their discretion jointly stipulate otherwise, be as set forth in Appendix 1 to this Appendix A. (3) ADR and Binding Arbitration Procedures. If a Dispute arises, the following procedures shall be implemented: (a) Any party to this Agreement may at any time invoke the dispute resolution procedures set forth in this Appendix A as to any Dispute by providing written notice of such action to the other party or parties to the Dispute, who within five Business Days after such notice shall schedule a meeting to be held in Houston, Texas between the parties. The meeting shall occur within 10 Business Days after notice of the meeting is delivered to the other party or parties. The meeting shall be attended by representatives of each party having decision-making authority regarding the Dispute as well as the dispute resolution process and who shall attempt in a commercially reasonable manner to negotiate a resolution of the Dispute. (b) The representatives of the parties shall cooperate in a commercially reasonable manner and shall explore whether techniques such as mediation, minitrials, mock trials or other techniques of alternative dispute resolution might be useful. In the event that a technique of alternative dispute resolution is so agreed upon, a specific timetable and completion date for its implementation shall also be agreed upon. The representatives will continue to meet and discuss settlement until the date (the "Interim Decision Date") that is the earliest to occur of the following events: (i) an agreement shall be reached by the parties resolving the Dispute; (ii) one of the parties shall determine and notify the other party in writing that no agreement resolving the Dispute is likely to be reached; (iii) if a technique of alternative dispute resolution is agreed upon, the completion date therefor shall occur without the parties having resolved the Dispute; or (iv) if another technique of alternative dispute resolution is not agreed upon, two full meeting days (or such other time period as may be agreed upon) shall expire without the parties having resolved the Dispute. (c) If, as of the Interim Decision Date, the parties have not succeeded in negotiating a resolution of the dispute pursuant to subsection (b), the parties shall proceed under subsections (d), (e) and (f). (d) After satisfying the requirements above, such Dispute shall be submitted to mandatory and binding arbitration at the election of any party involved in the Dispute (the "Disputing Party"). The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Appendix. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date the notice of arbitration is served, other than as specifically modified herein. In the absence of an agreement to the contrary, the arbitration shall be held in Houston, Texas. The Arbitrator (as defined below) will allow reasonable discovery in the forms permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. During the pendency of the Dispute, each party shall make available to the Arbitrator and the other parties all books, records and other information within its control requested by the other parties or the Arbitrator subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by law. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the Arbitrator may limit the scope of discovery between the parties as may be reasonable under the circumstances. In deciding the substance of the parties' claims, the laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement (including this Appendix) without giving effect to any conflict of law principles. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each party involved in the Dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by the parties, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration proceeding, and the Arbitrator shall have the right and authority to issue monetary sanctions against any of the parties if, upon a showing of good cause, that party is unreasonably delaying the proceeding. To the fullest extent permitted by law, the arbitration proceedings and award shall be maintained in confidence by the Arbitrator and the parties. (e) The Disputing Party shall notify the American Arbitration Association ("AAA") and the other parties involved in the Dispute in writing describing in reasonable detail the nature of the Dispute (the "Dispute Notice"). The arbitrator (the "Arbitrator") shall be selected within 15 days of the date of the Dispute Notice by all of the parties from the members of a panel of arbitrators of the AAA or, if the AAA fails or refuses to provide a list of potential arbitrators, of the Center for Public Resources and shall be experienced in commercial arbitration. In the event that the parties are unable to agree on the selection of the Arbitrator, the AAA shall select the Arbitrator, using the criteria set forth in this Appendix, within 30 days of the date of the Dispute Notice. In the event that the Arbitrator is unable to serve, his or her replacement will be selected in the same manner as the Arbitrator to be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the authority to assess the costs and expenses of the arbitration proceeding (including the arbitrators', and attorneys' fees and expenses) against any or all parties. (f) The Arbitrator shall decide all Disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitrator shall have the authority to issue injunctive relief; however, the Arbitrator shall not have any power or authority to (i) award consequential, incidental, indirect or punitive damages or (ii) amend this Agreement. The Arbitrator shall render the arbitration award, in writing, within 20 days following the completion of the arbitration hearing, and shall set forth the reasons for the award. In the event that the Arbitrator awards monetary damages in favor of either party, the Arbitrator must certify in the award that no indirect, consequential, incidental, indirect or punitive damages are included in such award. If the Arbitrator's decision results in a monetary award, the interest to be granted on such award, if any, and the rate of such interest shall be determined by the Arbitrator in his or her discretion. The arbitration award shall be final and binding on the parties, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act. (4) Continuation of Business. Notwithstanding the existence of any Dispute or the pendency of any procedures pursuant to this Appendix A, the parties agree and undertake that all payments not in dispute shall continue to be made and all obligations not in dispute shall continue to be performed. Appendix 1 (a) First priority shall be given to maximizing the consistency of the resolution of the Dispute with the satisfaction of all express obligations of the parties and their Affiliates as set forth in the Agreement. (b) Second priority shall be given to resolution of the Dispute in a manner which best achieves the objectives of the business activities and arrangements under the Agreement and permits the parties to realize the benefits intended to be afforded thereby. (c) Third priority shall be given to such other matters, if any, as the parties or the Arbitrator shall determine to be appropriate under the circumstances. EX-10.28(A) 22 1ST AMENDMENT TO ASSET CONTRIBUTION AGREEMENT EXHIBIT 10.28(a) FIRST AMENDMENT TO MILLENNIUM ASSET CONTRIBUTION AGREEMENT This First Amendment to Millennium Asset Contribution Agreement (this "First Amendment"), dated as of May 15, 1998, is entered into by and among Millennium Petrochemicals Inc., a Virginia corporation (the "Contributor"), Millennium Petrochemicals LP LLC, a Delaware limited liability company (the "Contributing Partner") and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership"). RECITALS A. The Contributor, the Contributing Partner and the Partnership are parties to that certain Asset Contribution Agreement dated as of December 1, 1997 (the "1997 Asset Contribution Agreement"); B. Pursuant to that certain Master Transaction Agreement, dated as of May 15, 1998, by and among Millennium Chemicals Inc., the Partnership, Occidental Petroleum Corporation ("OPC") and Lyondell Petrochemical Company, certain affiliates of OPC shall become partners in the Partnership as of the date hereof; and C. The Contributor, the Contributing Partner and the Partnership desire to amend the 1997 Asset Contribution Agreement on the terms set forth herein. AGREEMENT NOW THEREFORE, in consideration of the premises and of the mutual covenants of the parties hereto, it is hereby agreed that the 1997 Asset Contribution Agreement is amended as follows: A. Capitalized terms used herein and not otherwise defined herein shall have the meanings given such terms in the 1997 Asset Contribution Agreement. B. The following definition shall be added to Section 1 of the 1997 Asset Contribution Agreement: "1998 MTA" shall mean that certain Master Transaction Agreement, dated as of May 15, 1998, by and among Millennium Chemicals Inc., the Partnership, Occidental Petroleum Corporation and Lyondell Petrochemical Company. C. The definition of "Third Party Claim" as set forth in Section 1 of the 1997 Asset Contribution Agreement shall be amended and restated as follows: "Third Party Claim" means any allegation, claim, civil or criminal action, proceeding, charge or prosecution brought by a Person other than a Contributor, any Affiliate thereof, the Partnership, any member of the Millennium Group (as defined in the 1998 MTA), any member of the Lyondell Group (as defined in the 1998 MTA) or any member of the Occidental Group (as defined in the 1998 MTA). D. Subsection 6.2(a)(i) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (i) Any misrepresentation in or breach of the representations and warranties of the Contributor or any of its Affiliates in this Agreement, the Assignment and Assumption Agreements, the Master Intellectual Property Agreement, or the Master Transaction Agreement, provided that any Liability arising out of, in connection with or relating to any breach of the warranties in any Assignment and Assumption Agreement that is not a breach of the warranties in this Agreement shall not be indemnified against pursuant to this Section 6; E. Subsection 6.2(b) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER THE CONTRIBUTOR NOR ANY OF ITS AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF THE CONTRIBUTOR. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THAT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE. F. Subsection 6.2(e) of the 1997 Asset Contribution Agreement shall be amended and restated as follows: (e) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER THE PARTNERSHIP NOR ANY OF ITS AGENTS, EMPLOYEES, REPRESENTATIVES OR AFFILIATES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY) WITH RESPECT TO THEIR INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF THE PARTNERSHIP. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH AN INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY SUCH INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE. G. Appendix A to the 1997 Asset Contribution Agreement shall be amended and restated in its entirety in the form attached hereto as Exhibit A. H. Except as amended by this First Amendment, all the terms and provisions of the 1997 Asset Contribution Agreement shall remain in full force and effect. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have executed and delivered this First Amendment as of the date first above written. MILLENNIUM PETROCHEMICALS INC., a Virginia corporation. By: /s/ George H. Hempstead ---------------------------------- Name: George H. Hempstead Title: Senior Vice President MILLENNIUM PETROCHEMICALS LP LLC, a Delaware limited liability company. By: /s/ George H. Hempstead ---------------------------------- Name: George H. Hempstead Title: Senior Vice President EQUISTAR CHEMICALS, LP, a Delaware limited partnership By: /s/ Eugene A. Allspach ---------------------------------- Name: Eugene A. Allspach Title: President and Chief Operating Officer [Signature Page to First Amendment To Millennium Asset Contribution Agreement] EXHIBIT A Appendix A Dispute Resolution Procedures (1) Binding and Exclusive Means. The dispute resolution provisions set forth in this Appendix A shall be the binding and exclusive means to resolve all disputes arising under this Agreement (each a "Dispute"). (2) Standards and Criteria. In resolving any Dispute, the standards and criteria for resolving such dispute shall, unless the Contributors and the Partnership in their discretion jointly stipulate otherwise, be as set forth in Appendix 1 to this Appendix A. (3) ADR and Binding Arbitration Procedures. If a Dispute arises, the following procedures shall be implemented: (a) Any party to this Agreement may at any time invoke the dispute resolution procedures set forth in this Appendix A as to any Dispute by providing written notice of such action to the other party or parties to the Dispute, who within five Business Days after such notice shall schedule a meeting to be held in Houston, Texas between the parties. The meeting shall occur within 10 Business Days after notice of the meeting is delivered to the other party or parties. The meeting shall be attended by representatives of each party having decision-making authority regarding the Dispute as well as the dispute resolution process and who shall attempt in a commercially reasonable manner to negotiate a resolution of the Dispute. (b) The representatives of the parties shall cooperate in a commercially reasonable manner and shall explore whether techniques such as mediation, minitrials, mock trials or other techniques of alternative dispute resolution might be useful. In the event that a technique of alternative dispute resolution is so agreed upon, a specific timetable and completion date for its implementation shall also be agreed upon. The representatives will continue to meet and discuss settlement until the date (the "Interim Decision Date") that is the earliest to occur of the following events: (i) an agreement shall be reached by the parties resolving the Dispute; (ii) one of the parties shall determine and notify the other party in writing that no agreement resolving the Dispute is likely to be reached; (iii) if a technique of alternative dispute resolution is agreed upon, the completion date therefor shall occur without the parties having resolved the Dispute; or (iv) if another technique of alternative dispute resolution is not agreed upon, two full meeting days (or such other time period as may be agreed upon) shall expire without the parties having resolved the Dispute. (c) If, as of the Interim Decision Date, the parties have not succeeded in negotiating a resolution of the dispute pursuant to subsection (b), the parties shall proceed under subsections (d), (e) and (f). (d) After satisfying the requirements above, such Dispute shall be submitted to mandatory and binding arbitration at the election of any party involved in the Dispute (the "Disputing Party"). The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Appendix. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date the notice of arbitration is served, other than as specifically modified herein. In the absence of an agreement to the contrary, the arbitration shall be held in Houston, Texas. The Arbitrator (as defined below) will allow reasonable discovery in the forms permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. During the pendency of the Dispute, each party shall make available to the Arbitrator and the other parties all books, records and other information within its control requested by the other parties or the Arbitrator subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by law. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the Arbitrator may limit the scope of discovery between the parties as may be reasonable under the circumstances. In deciding the substance of the parties' claims, the laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement (including this Appendix) without giving effect to any conflict of law principles. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each party involved in the Dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by the parties, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration proceeding, and the Arbitrator shall have the right and authority to issue monetary sanctions against any of the parties if, upon a showing of good cause, that party is unreasonably delaying the proceeding. To the fullest extent permitted by law, the arbitration proceedings and award shall be maintained in confidence by the Arbitrator and the parties. (e) The Disputing Party shall notify the American Arbitration Association ("AAA") and the other parties involved in the Dispute in writing describing in reasonable detail the nature of the Dispute (the "Dispute Notice"). The arbitrator (the "Arbitrator") shall be selected within 15 days of the date of the Dispute Notice by all of the parties from the members of a panel of arbitrators of the AAA or, if the AAA fails or refuses to provide a list of potential arbitrators, of the Center for Public Resources and shall be experienced in commercial arbitration. In the event that the parties are unable to agree on the selection of the Arbitrator, the AAA shall select the Arbitrator, using the criteria set forth in this Appendix, within 30 days of the date of the Dispute Notice. In the event that the Arbitrator is unable to serve, his or her replacement will be selected in the same manner as the Arbitrator to be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the authority to assess the costs and expenses of the arbitration proceeding (including the arbitrators', and attorneys' fees and expenses) against any or all parties. (f) The Arbitrator shall decide all Disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitrator shall have the authority to issue injunctive relief; however, the Arbitrator shall not have any power or authority to (i) award consequential, incidental, indirect or punitive damages or (ii) amend this Agreement. The Arbitrator shall render the arbitration award, in writing, within 20 days following the completion of the arbitration hearing, and shall set forth the reasons for the award. In the event that the Arbitrator awards monetary damages in favor of either party, the Arbitrator must certify in the award that no indirect, consequential, incidental, indirect or punitive damages are included in such award. If the Arbitrator's decision results in a monetary award, the interest to be granted on such award, if any, and the rate of such interest shall be determined by the Arbitrator in his or her discretion. The arbitration award shall be final and binding on the parties, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act. (4) Continuation of Business. Notwithstanding the existence of any Dispute or the pendency of any procedures pursuant to this Appendix A, the parties agree and undertake that all payments not in dispute shall continue to be made and all obligations not in dispute shall continue to be performed. Appendix 1 (a) First priority shall be given to maximizing the consistency of the resolution of the Dispute with the satisfaction of all express obligations of the parties and their Affiliates as set forth in the Agreement. (b) Second priority shall be given to resolution of the Dispute in a manner which best achieves the objectives of the business activities and arrangements under the Agreement and permits the parties to realize the benefits intended to be afforded thereby. (c) Third priority shall be given to such other matters, if any, as the parties or the Arbitrator shall determine to be appropriate under the circumstances. EX-10.29(A) 23 1ST AMENDMENT TO AMENDED & RESTATED PARENT AGMT. EXHIBIT 10.29(a) FIRST AMENDMENT TO AMENDED AND RESTATED PARENT AGREEMENT This First Amendment to the Amended and Restated Parent Agreement, dated as of June 30, 1998 (this "First Amendment"), is entered into by and among Occidental Chemical Corporation, a New York corporation ("OCC"), Oxy CH Corporation, a California corporation ("Oxy CH"), Occidental Petroleum Corporation, a Delaware corporation ("OPC"), Occidental Chemical Holding Corporation, a California corporation ("OCHC"), Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), Millennium Chemicals, Inc., a Delaware corporation ("Millennium"), and Equistar Chemicals, LP, a Delaware limited partnership ("Equistar"). WHEREAS, OCC, Oxy CH, OPC, Lyondell, Millennium and Equistar entered into that certain Amended and Restated Parent Agreement dated as of May 15, 1998 (the "Parent Agreement"); WHEREAS, OCC, Oxy CH and OCHC effected an assignment and assumption of certain guarantees, undertakings, promises, rights, covenants and obligations of OCC and Oxy CH under the Parent Agreement as of June 19, 1998; and WHEREAS, the parties hereto wish to amend the list of Related Agreements set forth in Appendix A to the Parent Agreement. NOW THEREFORE, in consideration of the foregoing and the mutual promises and covenants of the parties hereto, the parties hereto hereby agree as follows: 1. All capitalized terms that are defined in the Parent Agreement, but are not defined in this First Amendment, shall have the same meanings as defined in the Parent Agreement. 2. The following shall be added to the list of Related Agreements in Appendix A to the Parent Agreement: "122. First Amendment to Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, dated as of June 30, 1998, by and among Lyondell LP, Lyondell GP, Millennium LP, Millennium GP, Occidental GP, Occidental LP1, Occidental LP2 and Occidental Petrochem Partner GP, Inc., a Delaware corporation." 3. Except as amended by this First Amendment, all the terms and provisions of the Parent Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed and delivered this First Amendment as of the date first above written. OCCIDENTAL CHEMICAL CORPORATION By: /s/ David C. Yen -------------------------------------- Name: David C. Yen Title: Vice President and Treasurer OXY CH CORPORATION By: /s/ David C. Yen -------------------------------------- Name: David C. Yen Title: Vice President and Treasurer OCCIDENTAL PETROLEUM CORPORATION By: /s/ David C. Yen -------------------------------------- Name: David C. Yen Title: Vice President and Treasurer OCCIDENTAL CHEMICAL HOLDING CORPORATION By: /s/ David C. Yen -------------------------------------- Name: David C. Yen Title: Vice President and Treasurer LYONDELL PETROCHEMICAL COMPANY By: /s/ T. Kevin De Nicola -------------------------------------- Name: Title: MILLENNIUM CHEMICALS INC. By: /s/ George H. Hempstead, III -------------------------------------- Name: George H. Hempstead III Title: Senior Vice President EQUISTAR CHEMICALS, LP By: /s/ Eugene R. Allspach -------------------------------------- Name: Eugene R. Allspach Title: President & Chief Operating Officer EX-10.29(B) 24 ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 10.29(b) ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") is executed as of June 19, 1998, by and among Occidental Chemical Corporation, a New York corporation ("OCC"), Oxy CH Corporation, a California corporation ("Oxy CH", and, together with OCC, "Assignors"), and Occidental Chemical Holding Corporation, a California corporation ("Assignee"): W I T N E S S E T H: Assignors, Occidental Petroleum Corporation, Lyondell Petrochemical Company, Millennium Chemicals Inc. and Equistar Chemicals, LP, have entered into that certain Amended and Restated Parent Agreement dated as of May 15, 1998 (the "Parent Agreement"). Capitalized terms used in this Agreement and not expressly defined herein shall have the meanings set forth in the Parent Agreement. As contemplated by Section 4.7(c) of the Parent Agreement, Assignors and Assignee desire to effect an assignment and assumption of certain guarantees, undertakings, promises, rights, covenants and obligations of Assignors under the Parent Agreement and to release and discharge Assignors of such guarantees, undertakings, promises, rights, covenants and obligations thereunder. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, effective as of the date hereof, Assignors hereby ASSIGN, CONVEY AND TRANSFER unto Assignee, and Assignee hereby assumes and agrees to pay, perform, observe and discharge, fully and timely, all of Assignor's guarantees, undertakings, promises, rights, covenants and obligations under Section 1 of the Parent Agreement. 1. From and after the date hereof: (i) Assignee shall be the "Occidental Parent" and a "Parent" for purposes of Section 1 of the Parent Agreement; (ii) Assignors shall be fully released and discharged from any guarantees, undertakings, promises, rights, covenants and obligations arising under Section 1 of the Parent Agreement; (iii) Assignors shall continue to be the "Occidental Parent" and a "Parent" for purposes of Section 2 of the Parent Agreement; (iv) each of the Assignors shall continue as a "Parent," and Assignee shall become a "Parent" for purposes of Section 3 of the Parent Agreement and none of OPC, Assignee, OCC or Oxy CH will be a "Subject Parent" with respect to each other for purposes of Section 3; (v) each of Assignors and Assignee shall be a "Parent" and a "Party" for purposes of Section 4 of the Parent Agreement; (vi) any notice to be sent to Assignee under the Parent Agreement shall be sent to Assignee at the address for Assignors set forth in Section 4.9 of the Parent Agreement; and (vii) in connection with any Transfer pursuant to Section 2.1(e) or (f) of the Parent Agreement that results in a release of Assignors' rights, covenants and obligations arising under the Parent Agreement as provided therein, Assignee shall be released from its obligations under the Parent Agreement if the Successor Parent also assumes Assignee's obligations under the Parent Agreement as provided herein and therein. 2. This Agreement shall be binding upon Assignee and its successors and assigns, and shall inure to the benefit of Assignors and their respective successors and assigns. 3. This Assumption Agreement shall be governed by the law of the State of Delaware, without regard to conflict of laws principles. 4. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. EXECUTED as of the date first set forth above. OCCIDENTAL CHEMICAL CORPORATION By: /s/ DAVID C. YEN ------------------------------------ Name: David C. Yen ------------------------------- Title: Vice President and Treasurer ------------------------------ OXY CH CORPORATION By: /s/ DAVID C. YEN ------------------------------------ Name: David C. Yen ------------------------------- Title: Vice President and Treasurer ------------------------------ OCCIDENTAL CHEMICAL HOLDING CORPORATION By: /s/ DAVID C. YEN ------------------------------------ Name: David C. Yen ------------------------------- Title: Vice President and Treasurer ------------------------------ Effective as of the date first set forth above, the undersigned join in the execution of this Agreement for purposes of: (i) consenting to the assignment and assumption described herein; (ii) accepting the form and substance of this Agreement for all purposes as required by Section 4.7 of the Parent Agreement and (iii) agreeing to the terms reflected in Section 1 hereof. LYONDELL PETROCHEMICAL COMPANY By: /s/ T. KEVIN DeNICOLA ------------------------------------ Name: T. Kevin DeNicola ------------------------------- Title: Vice President ------------------------------ MILLENNIUM CHEMICALS INC. By: /s/ George H. Hempstead III ------------------------------------ Name: George H. Hempstead III ------------------------------- Title: Senior Vice President ------------------------------ EQUISTAR CHEMICALS, LP By: /s/ Eugene R. Allspach ------------------------------------ Name: Eugene R. Allspach ------------------------------- Title: President and Chief Operating Officer ------------------------------ OCCIDENTAL PETROLEUM CORPORATION By: /s/ A. R. Leach ------------------------------------ Name: A. R. Leach ------------------------------- Title: Executive Vice President and Chief Financial Officer ------------------------------ 3 EX-12 25 STATEMENT FOR COMPUTATION OF RATIO OF EARNINGS STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of dollars)
Year Ended December 31 ------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Income from continuing operations before income taxes............................................. A $ 89 $456 $196 $618 $350 Fixed charges: Interest expense, gross.......................... 385 103 81 80 74 Portion of rentals representative of interest.... 35 19 22 20 17 ---- ---- ---- ---- ---- Total fixed charges before capitalized interest...................................... B 420 122 103 100 91 Capitalized interest............................. 0 5 33 6 0 ---- ---- ---- ---- ---- Total fixed charges including capitalized interest...................................... C 420 127 136 106 91 ---- ---- ---- ---- ---- Earnings (A+B)..................................... D $509 $578 $299 $718 $441 Ratio of earnings to fixed charges (D/C)........... 1.2 4.6 2.2 6.8 4.8 ==== ==== ==== ==== ====
EXHIBIT 12 EX-21 26 LYONDELL CHEMICAL COMPANY SUBSIDIARIES LYONDELL CHEMICAL COMPANY SUBSIDIARIES
Jurisdiction Name Type of Entity of Formation - ---- ------------------- ------------ Equistar Chemicals, LP......................... limited partnership Delaware Lyondell Chemical Nederland, Ltd............... corporation Delaware Lyondell Chemical Worldwide, Inc............... corporation Delaware Lyondell Chimie France SNC..................... partnership France LYONDELL-CITGO Refining LP..................... limited partnership Delaware POSM II Limited Partnership, L.P............... limited partnership Delaware
EXHIBIT 21 EX-23.1 27 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-26867, 33-31564, 33-32683, 33-60785 and 333- 05399) of Lyondell Chemical Company (formerly Lyondell Petrochemical Company) of the following reports which are included in this Annual Report on Form 10- K. . Our report dated February 26, 1999 on our audits of the consolidated financial statements of Lyondell Chemical Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 . Our report dated February 6, 1998 on our audits of the financial statements of LYONDELL-CITGO Refining LP (formerly LYONDELL-CITGO Refining Company, Ltd.) as of December 31, 1997 and for each of the two years in the period ended December 31, 1997 . Our report dated February 26, 1999 on our audits of the financial statements of Equistar Chemicals, LP as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and the period from December 1, 1997 (inception) to December 31, 1997 PRICEWATERHOUSECOOPERS LLP Houston, Texas March 24, 1999 EXHIBIT 23.1 EX-23.2 28 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-26867, 33-31564, 33-32683, 33-60785 and 333-05399 of Lyondell Chemical Company on Form S-8 of our report on Lyondell CITGO-Refining LP dated February 11, 1999, appearing in this Annual Report on Form 10-K of Lyondell Chemical Company for the year ended December 31, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Houston, Texas March 24, 1999 EX-24 29 POWERS OF ATTORNEY EXHIBIT 24 LYONDELL CHEMICAL COMPANY POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Dan F. Smith, Jeffrey R. Pendergraft, Robert J. Millstone, Van Billet, and Edward W. Rich and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, in connection with any outstanding securities of Lyondell Chemical Company (the "Company"), or any public offering or other issuance of any securities of the Company authorized by the Board of Directors of the Company, or by the Executive Committee thereof pursuant to due authorization by such Board, (1) to execute and file, or cause to be filed, with the United States Securities and Exchange Commission (the "Commission"), (A) registration statements and any and all amendments (including post-effective amendments), and exhibits thereto and any and all other documents in connection therewith as required by the Commission in connection with such registration under the Securities Act of 1933, as amended, and (B) any report or other document required to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, (2) to execute and file, or cause to be filed, any application for registration or exemption therefrom, any report or any other document required to be filed by the Company under the Blue Sky or securities law of any state and to furnish any other information required in connection therewith, (3) to execute and file, or cause to be filed, any application for registration or exemption therefrom under the securities laws of any jurisdiction outside the United States of America, including any reports or other documents required to be filed subsequent to the issuance of such securities, and (4) to execute and file, or cause to be filed, any Page 2 of 3 application for listing such securities on the New York Stock Exchange, or any other securities exchange in any other jurisdiction where any such securities are proposed to be sold, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be done as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them, may lawfully do or cause to be done by virtue of this power of attorney. Each person whose signature appears below may at any time revoke this power of attorney as to himself or herself only by an instrument in writing specifying that this power of attorney is revoked as to him or her as of the date of execution of such instrument or at a subsequent specified date. This power of attorney shall be revoked automatically with respect to any person whose signature appears below effective on the date he or she ceases to be a member of the Board of Directors or an officer of the Company. Any revocation hereof shall not void or otherwise affect any acts performed by any attorney-in-fact and agent named herein pursuant to this power of attorney prior to the effective date of such revocation. Dated: March 4, 1999 SIGNATURE TITLE /s/ Dan F. Smith _______________________________ President, Chief Executive Officer and Dan F. Smith Director /s/ Jeffrey R. Pendergraft _______________________________ Executive Vice President and Jeffrey R. Pendergraft Chief Administrative Officer /s/ Robert J. Millstone _______________________________ Vice President, General Counsel and Secretary Robert J. Millstone /s/ Van Billet _______________________________ Vice President and Controller Van Billet Page 3 of 3 SIGNATURE TITLE /s/ Dr. William T. Butler _______________________________ Chairman and Director Dr. William T. Butler /s/ Carol A. Anderson _______________________________ Director Carol A. Anderson /s/ Travis Engen _______________________________ Director Travis Engen /s/ Stephen F. Hinchliffe, Jr. _______________________________ Director Stephen F. Hinchliffe, Jr. /s/ Dudley C. Mecum II _______________________________ Director Dudley C. Mecum II /s/ Frank Savage _______________________________ Director Frank Savage /s/ Paul R. Stanley _______________________________ Director Paul R. Staley EX-27 30 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 233 0 479 0 550 1,326 4,587 76 9,225 2,337 5,391 0 0 80 494 9,225 1,447 1,703 1,089 1,089 0 0 287 89 37 52 0 0 0 52 .67 .67
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