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UNITED STATES
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, 2000
[_] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
Commission File No. 1-10145
LYONDELL CHEMICAL COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 95-4160558
(State or other jurisdiction of (I.R.S. Employee Identification No.)
Incorporation or organization)
1221 McKinney Street,
Suite 700, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 652-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
------------------- ------------------------
Common Stock ($1.00 par value) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
There were 117,563,065 shares of the registrant's common stock outstanding on
March 1, 2001. The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 1, 2001 based on the closing price on the
New York Stock Exchange composite tape on that date, was $1,832,356,978.
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, 2000
(incorporated by reference under Part III).
TABLE OF CONTENTS
PART I...................................................................... 1
Items 1 and 2. Business and Properties.................................... 1
Development of Business.................................................... 1
Strategy................................................................... 2
Summary Description of Business Segments................................... 4
THE COMPANY'S BUSINESS...................................................... 5
INTERMEDIATE CHEMICALS AND DERIVATIVES...................................... 6
Overview................................................................... 6
Raw Materials.............................................................. 8
Marketing and Sales........................................................ 9
Joint Ventures and Other Agreements........................................ 9
Competition and Industry Conditions........................................ 10
Properties................................................................. 11
Research and Technology; Patents and Trademarks............................ 12
Employee Relations......................................................... 12
EQUISTAR CHEMICALS, LP...................................................... 12
Management of Equistar..................................................... 12
Agreements between Lyondell and Equistar................................... 13
EQUISTAR PETROCHEMICALS..................................................... 14
Overview................................................................... 14
Raw Materials and Ethylene Purchases....................................... 16
Marketing and Sales........................................................ 16
Competition and Industry Conditions........................................ 17
EQUISTAR POLYMERS........................................................... 18
Overview................................................................... 18
Raw Materials.............................................................. 20
Marketing and Sales........................................................ 20
Competition and Industry Conditions........................................ 20
EQUISTAR PROPERTIES AND EMPLOYEE RELATIONS.................................. 21
EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS.................... 22
LYONDELL-CITGO REFINING LP.................................................. 23
Overview................................................................... 23
Management of LCR.......................................................... 24
Agreements between Lyondell or CITGO and LCR............................... 24
Agreements between Equistar and LCR........................................ 25
Raw Materials.............................................................. 25
Marketing and Sales........................................................ 26
Competition and Industry Conditions........................................ 26
Properties................................................................. 27
Employee Relations......................................................... 27
LYONDELL METHANOL COMPANY, L.P.............................................. 27
Overview................................................................... 27
Management of Lyondell Methanol............................................ 27
Agreements between Equistar and Lyondell Methanol.......................... 28
Raw Materials.............................................................. 28
Marketing and Sales........................................................ 28
Competition and Industry Conditions........................................ 28
Properties................................................................. 28
Employee Relations......................................................... 28
INDUSTRY CYCLICALITY AND OVERCAPACITY....................................... 28
FOREIGN OPERATIONS AND COUNTRY RISKS........................................ 29
JOINT VENTURE RISKS......................................................... 29
OPERATING HAZARDS........................................................... 30
ENVIRONMENTAL MATTERS....................................................... 30
Item 3. Legal Proceedings................................................. 32
Litigation Matters......................................................... 32
Environmental Proceedings.................................................. 33
EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 34
Item 4. Submission of Matters to a Vote of Security Holders............... 35
PART II..................................................................... 36
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 36
Item 6. Selected Financial Data........................................... 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 37
Item 7a. Disclosure of Market and Regulatory Risk.......................... 52
Item 8. Financial Statements and Supplementary Data....................... 54
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 128
PART III.................................................................... 128
Item 10. Directors and Executive Officers of the Registrant................ 128
Item 11. Executive Compensation............................................ 128
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................... 128
Item 13. Certain Relationships and Related Transactions.................... 128
PART IV..................................................................... 128
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 128
PART I
Items 1 and 2. Business and Properties
Lyondell Chemical Company ("Lyondell" or the "Company") is a global chemical
company with low cost operations and leading producer positions in all of its
major products. Lyondell manufactures and markets a variety of intermediate and
performance chemicals, including propylene oxide ("PO"), propylene glycol
("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene
diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA")
and its derivative, methyl tertiary butyl ether ("MTBE"), which are collectively
known as the Company's intermediate chemicals and derivatives business.
The Company owns 41% of Equistar Chemicals, LP, a Delaware limited partnership
("Equistar"), which operates petrochemicals and polymers businesses. Equistar's
petrochemicals business manufactures and markets olefins, oxygenated products,
aromatics and specialty products. Equistar's olefins are ethylene, propylene and
butadiene and its oxygenated products 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 insulating resins, and polymeric powders.
The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited
partnership ("LCR"), which produces refined petroleum products, including
gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils").
LCR sells its principal refined products primarily to CITGO Petroleum
Corporation ("CITGO").
In addition, the Company owns 75% of Lyondell Methanol Company, L.P., a Texas
limited partnership ("LMC"), which produces methanol.
Development of Business
Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition and strengthen its business
portfolio over the past several years.
In July 1993, the Company contributed to LCR the Company's refining business,
including its Houston, Texas refinery (the "Refinery"), its lube oil blending
and packaging plant in Birmingport, Alabama and working capital. The Company
retained an approximately 86% interest in LCR, while CITGO held the remaining
approximately 14% interest. Following completion of a major upgrade project at
the Refinery in the first quarter of 1997, the Company's interest in LCR was
reduced to 58.75%. On December 31, 1998, LCR converted from a Texas limited
liability company to a Delaware limited partnership.
In May 1995, the Company acquired Occidental Chemical Corporation's
("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this
acquisition included resin production facilities in Matagorda and Victoria,
Texas, related research and development activities and the rights to the
ALATHON(R) trademark.
In December 1996, the Company formed LMC with MCN Investment Corporation
("MCNIC"), a division of MCN Corporation, to own the Company's 248 million
gallons per year methanol plant. Under the terms of the agreement, MCNIC
purchased a 25% interest in the methanol plant. Lyondell retained a 75%
interest and serves as managing partner. Since December 1997, Equistar has
served as the operator of LMC.
In December 1997, 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% interest in Equistar. Equistar also assumed $745 million
of Lyondell's debt. Millennium contributed substantially all of the assets
composing its olefins, ethanol, polyethylene, polypropylene and performance
polymers businesses, which had been held in Millennium Petrochemicals Inc.
("Millennium Petrochemicals"), a wholly
1
owned subsidiary of Millennium. In exchange, Millennium received a 43% interest
in Equistar, Equistar repaid $750 million of debt due to Millennium from its
contributed businesses and Millennium retained $250 million of its accounts
receivable.
In May 1998, Lyondell and Millennium expanded Equistar with the addition of
the ethylene, propylene, EO, EG and other EO derivatives businesses (the
"Occidental Contributed Business") of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition
included two olefins plants, a plant that produces EO and EO derivatives,
including EG, and Occidental's 50% interest in a joint venture with E.I. DuPont
de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental
also contributed more than 950 miles of owned and leased pipelines located on
the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana
olefins plant. Equistar assumed approximately $205 million of Occidental's
debt. Equistar and Occidental also entered into a long-term agreement for
Equistar to supply the ethylene requirements for Occidental's chlorovinyls
business. In June 1998, Equistar borrowed approximately $500 million of
additional debt and distributed cash of approximately $420 million to Occidental
and $75 million to Millennium. Following the May 1998 transaction, Lyondell
owns 41% of Equistar, and Millennium and Occidental each own 29.5%.
In July 1998, Lyondell completed the acquisition (the "ARCO Chemical
Acquisition") of all the outstanding shares of ARCO Chemical Company ("ARCO
Chemical"), the world's largest producer of PO and a leading worldwide producer
of polyether polyols, PG, PGE, TDI, SM, and MTBE. The ARCO Chemical Acquisition
was financed through a bank credit agreement providing for aggregate borrowings
of up to $7 billion (the "Credit Facility"). The acquired business is referred
to as "ARCO Chemical" for actions or events prior to the ARCO Chemical
Acquisition.
On March 31, 2000, Lyondell completed the sale of the polyols business and
ownership interests in its U.S. PO manufacturing operations to Bayer AG and
Bayer Corporation (collectively, "Bayer") for approximately $2.45 billion.
Lyondell used net proceeds of the asset sale to retire a significant portion of
its outstanding debt under the Credit Facility. As part of the transaction,
Lyondell entered into a U.S. PO manufacturing joint venture with Bayer (the "PO
Joint Venture") and a separate joint venture with Bayer for certain related
PO/SM technology (the "PO Technology Joint Venture"). Bayer's ownership
interest in the PO Joint Venture represents ownership of an in kind portion of
the PO production of the PO Joint Venture. Bayer's share of PO production from
the PO Joint Venture will increase from approximately 1.0 billion pounds for the
last nine months of 2000 to approximately 1.6 billion pounds annually in 2004
and thereafter. Lyondell takes in kind the remaining PO production and all of
the co-product (SM and TBA) production from the PO Joint Venture. In addition,
on December 19, 2000, Lyondell and Bayer formed a separate 50/50 joint venture
for the construction of PO-11, a previously announced world-scale PO/SM plant
for which site preparation has begun in Rotterdam, The Netherlands. Lyondell
and Bayer do not share marketing or product sales under either the PO Joint
Venture or PO-11.
Lyondell was incorporated under the laws of Delaware in 1985. Its principal
executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas
77010 (Telephone: (713) 652-7200).
Strategy
Lyondell believes that its three-prong strategy of Accumulate,
Optimize/Rationalize, Grow will continue to create value for its investors.
This strategy is driven by Lyondell's basic belief that to be a successful
competitor in the chemical industry, the Company must have:
. low total production costs;
. sustainable competitive advantage (driven by technology or market position);
. global reach; and
. scale.
2
Accumulate
Key elements of Lyondell's accumulate strategy to date include:
. the formation of Equistar with Millennium in 1997, and the subsequent
addition of Occidental as an Equistar partner in 1998; and
. the acquisition of ARCO Chemical in 1998.
These actions increased Lyondell's global asset base four-fold, from
approximately $3 billion at the beginning of 1997 to more than $14 billion of
assets currently under management. The value of these actions is reflected in
the nearly three-fold increase in EBITDA (earnings before net interest, taxes,
depreciation and amortization) from approximately $400 million in 1996 to more
than $1 billion in 2000 (including Lyondell's proportionate share of EBITDA from
its joint ventures). In addition, Lyondell acquired considerable intellectual
capital and brought together talented employees through these actions.
Optimize/Rationalize
Lyondell optimizes the financial performance of the businesses that Lyondell
owns and/or operates to extract maximum value and develop a platform for
further, profitable growth. Lyondell has rationalized businesses that either do
not fit the long-term strategic plan or that cannot meet Lyondell's performance
criteria. The optimization/rationalization of Lyondell's assets has included:
. significantly reducing fixed costs by forming Equistar, establishing shared
services arrangements and streamlining staffing;
. improving operational efficiency by shifting production to lower cost, more
efficient sites and simplifying production scheduling, while maintaining or
exceeding Lyondell's current safety and environmental performance;
. continually lowering costs and being more responsive to customer needs,
including through Lyondell's e-business initiatives; and
. divesting non-strategic assets when opportunities arise to receive
appropriate value in exchange.
Lyondell's actions enabled it to reduce long-term debt by more than $2.4
billion in 2000, which improves financial flexibility, including reducing annual
interest expense by more than $200 million.
Grow
Lyondell's growth strategy focuses on those businesses where Lyondell has
long-term sustainable competitive advantages.
Lyondell's core businesses, PO and derivatives, and olefins and polymers,
serve numerous markets that are expected to grow steadily. Lyondell currently
has competitive advantages in each of these businesses due to its size, cost
structure, technology and operating know-how. The major projects that Lyondell
currently is undertaking to maintain and enhance these competitive advantages
include:
. constructing a world-scale PO plant in The Netherlands with an expected
start up in the second quarter of 2003, through a joint venture with Bayer
that links Lyondell with a strong partner in the urethanes market (the major
use for PO);
. constructing a BDO plant in The Netherlands for start up in the second
quarter of 2002 to enable Lyondell to serve the growing needs of BDO
customers in Europe and elsewhere internationally;
. participating with Reliant Energy in the construction of a cogeneration
facility at Equistar's Channelview, Texas complex for startup in 2002, which
will enable Equistar to lower energy costs;
. debottlenecking LDPE capacity and other target polymer expansion projects;
and
. continuing focused research and development programs to strengthen
Lyondell's technology portfolio in its core businesses.
3
Lyondell continues to pursue growth opportunities that are cash flow and
earnings accretive to Lyondell with returns in excess of the cost of capital.
Summary Description of Business Segments
Prior to the ARCO Chemical Acquisition in July 1998, the Company reported its
results of operations in three segments: petrochemicals; polymers; and refining.
Following the acquisition, the Company added intermediate chemicals and
derivatives as a reportable segment, with the operations of the acquired
business forming that segment. The Company's petrochemicals and polymers
segments are conducted through Equistar, and the Company's refining segment is
conducted through LCR. The methanol business conducted through LMC is not a
reportable segment for financial disclosure purposes.
4
THE COMPANY'S BUSINESS
The following chart shows the organization of Lyondell, as well as 2000 sales
revenues for Lyondell, Equistar, LCR and LMC.
[Chart appears here showing: 2000 consolidated sales revenue (excluding revenues
of Equistar, LCR and Lyondell Methanol) of $4.0 billion for Lyondell Chemical
Company and Subsidiaries and the primary products of Lyondell's Intermediate
Chemicals and Derivatives Business Segment; Lyondell's equity investments in
each of Equistar (41%), LCR (58.75%) and Lyondell Methanol (75%); the 2000 sales
revenues of each of Equistar, LCR and Lyondell Methanol, which were $7.5
billion, $4.1 billion and $165 million, respectively; and the primary products
of each of the petrochemicals, polymers, refining and methanol businesses]
5
Sales revenues shown above include sales to affiliates. Sales revenues shown
do not include Bayer's share of production from the PO Joint Venture. For
additional segment information for each of the years in the three-year period
ended December 31, 2000, see Notes 5, 6 and 22 of Notes to Consolidated
Financial Statements.
INTERMEDIATE CHEMICALS AND DERIVATIVES
Overview
Lyondell is a leading global manufacturer and marketer of intermediate
chemicals and performance chemical products used in a broad range of consumer
goods. The segment's core product is PO, which is produced through two distinct
technologies based on indirect oxidation processes that yield co-products. One
process yields TBA as the co-product; the other yields SM as the co-product.
The two technologies are mutually exclusive, necessitating that a manufacturing
facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals
and derivatives segment also manufactures numerous derivatives of PO and TBA.
Among these are PG, PGE and BDO, derivatives of PO, and MTBE, a principal
derivative of TBA. This segment also manufactures and markets TDI.
In North America, the Company produces PO, TBA, PG and PGE at its Bayport,
Texas plants and PO, SM, MTBE and BDO at its Channelview, Texas plants. The
Bayport PO/TBA plants and the Channelview PO/SM I plant are held by the PO Joint
Venture. The Channelview PO/SM II plant is held through a joint venture with
other third parties. The Company also produces 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 and PGE at its Rotterdam
plant. In the Asia Pacific region, the Company has a 50% interest in the joint
venture Nihon Oxirane Co., Ltd. ("Nihon Oxirane"), which operates a PO/SM
plant in Chiba, Japan. In Europe, the Company also currently obtains TDI
through tolling and market-based supply agreements with Rhodia. In the third
quarter of 2000, construction began on a new BDO facility in Rotterdam, with a
planned 275 million pound annual capacity and expected startup in the second
quarter of 2002. Additionally, site preparation of PO-11, a world-scale PO/SM
plant located in Rotterdam, The Netherlands, began in the fourth quarter of
2000. PO-11, which has a planned total capacity of 625 million pounds of PO and
1.4 billion pounds of SM, is operated by Lyondell and owned 50% by Lyondell and
50% by Bayer. PO-11 currently is expected to start up in the second quarter of
2003. Lyondell and Bayer do not share marketing or product sales under either
the PO Joint Venture or PO-11.
The Company estimates, based in part on published data, that worldwide demand
for PO was approximately 9.8 billion pounds in 2000. Approximately 90% of that
volume was consumed in the manufacture of three families of PO derivative
products: polyols, PG and PGE. The remainder was consumed in the manufacture of
a growing segment of performance products, including BDO and its derivatives.
The Company sells less than one billion pounds of its annual capacity of PO in
the merchant market and consumes the rest in the production of derivatives. PG
is principally used to produce unsaturated polyester resins. PG is also used in
certain food, cosmetic and pharmaceutical applications and in automotive
coolants and aircraft deicers. PGE are used as high performance solvents. BDO
and its derivatives are utilized in the production of fibers, engineering
plastics, pharmaceuticals, personal care products and high performance coatings.
TDI is used in the production of urethanes for products such as automotive
seating and home furnishings.
SM is produced and traded worldwide for commodity and specialty polymer
applications, such as polystyrene and unsaturated polyester resins, as well as
various uses in the rubber industry. Based on published data, worldwide demand
for SM in 2000 was approximately 46 billion pounds.
Lyondell converts most of its TBA to isobutylene, which is reacted with
methanol to produce MTBE, an oxygenated gasoline blending component that
increases octane and reduces automotive emissions. Worldwide demand for MTBE in
2000 was approximately 519,000 barrels per day, based on published data. This
demand had increased over the past several years as a result of the Clean Air
Act Amendments of 1990 (the ``Clean Air Act Amendments''), state and local
regulations and the need for incremental octane in gasoline in the United States
and other countries. In the United States, the Clean Air Act Amendments set
minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not
meeting specified air quality standards. However, while studies by federal and
state agencies and other organizations have shown that MTBE is safe for use in
gasoline, is not carcinogenic and is
6
effective in reducing automotive emissions,the presence of MTBE in some water
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, in certain limited circumstances, affect the taste
and odor of drinking water supplies, and thereby lead to possible environmental
issues.
Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, certain states, including California,
have initiated actions, supported by recent legislation, to reduce, limit or
eliminate the use of MTBE. Such actions, to be effective, would require (i) a
waiver of the state's oxygenate mandate, (ii) Congressional action in the form
of an amendment to the Clean Air Act or (iii) replacement of MTBE with another
oxygenate such as ethanol, a more costly, untested, and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999.
That report recommended, among other things, reducing the use of MTBE in
gasoline. During 2000, the EPA announced its intent to seek legislative changes
from Congress to give the EPA authority to ban MTBE over a three-year period.
Such action would only be granted through amendments to the Clean Air Act.
Additionally, the EPA is seeking a ban of MTBE utilizing rulemaking authority
contained in the Toxic Substance Control Act. It would take at least three
years for such a rule to issue. Recently, however, senior policy analysts at
the U.S. Department of Energy presented a study stating that banning MTBE would
create significant economic risk. The presentation did not identify any
benefits from banning MTBE. The EPA initiatives mentioned above or other
governmental actions could result in a significant reduction in Lyondell's MTBE
sales. The Company has developed technologies to convert TBA into alternate
gasoline blending components should it be necessary to reduce MTBE production in
the future.
In Europe, MTBE is expected to benefit from new legislation in the 15-nation
European Union. The so-called "Auto/Oil Legislation" aimed at reducing air
pollution from vehicle emissions was enacted in 1998, and refineries have
increased consumption of MTBE to meet the new blending requirements. In
addition, the European Union recently completed a risk-benefit analysis
regarding MTBE, and determined that MTBE use in gasoline does not have a
significant negative impact on either the environment or the health of the
community at large. Although the European Union continues to monitor
governmental findings and actions in the United States, no restrictive action
with respect to MTBE is currently planned.
7
The following table outlines the intermediate chemicals and derivatives
segment's primary products, annual processing capacities as of January 1, 2001,
and the primary uses for such products. Unless otherwise specified, annual
processing capacities were calculated by estimating the number of days in a
typical year that a production unit of a plant is expected to operate, after
allowing downtime for regular maintenance, and multiplying that number by an
amount equal to the unit's optimal daily output based on the design raw material
mix. Because the processing capacity of a production unit is an estimated
amount, actual production volumes may be more or less than capacities set forth
below. Capacities shown include 100% of the capacity of joint venture
facilities.
Product Annual Capacity Primary Uses
- ------------------------------------------ ------------------------ -------------------------------------------------------
Propylene Oxide (PO) 3.87 billion pounds (a) PO is a key component of polyols, PG, PGE and BDO.
Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for
bathroom fixtures and boat hulls; lower toxicity
antifreeze, coolants and aircraft deicers; and
cosmetics and cleaners.
Propylene Glycol Ethers (PGE) 300 million pounds PGE are used as lower toxicity solvents for paints,
coatings and cleaners.
Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins,
films, personal care products, pharmaceuticals,
coatings, solvents and adhesives.
Toluene Diisocyanate (TDI) 564 million pounds(b) TDI is combined with polyols to produce flexible foam
for automotive seating and home furnishings.
Styrene Monomer (SM) 3.65 billion pounds(c) SM is used to produce plastics, such as expandable
polystyrene for packaging, foam cups and containers,
insulation products and durables and engineering
resins.
Methyl Tertiary Butyl 897 million gallons MTBE is a gasoline component for reducing emissions in
Ether (MTBE) (58,500 barrels/day) reformulated gasolines and enhancing octane value.
_________________
(a) Includes approximately 1.0 billion pounds in the last nine months of 2000
and approximately 1.5 billion pounds in 2001, which represents Bayer's share
under the PO Joint Venture, and 100% of the 360 million pounds of capacity
of Nihon Oxirane, of which the Company owns 50%. See "Joint Ventures and
Other Agreements."
(b) Includes approximately 264 million pounds of average annual TDI capacity
processed by Rhodia at its plants in Lille and Pont de Claix, France.
Pursuant to a tolling agreement and a resale agreement, Lyondell currently
is required to purchase an average minimum of 212 million pounds of TDI per
year from Rhodia. As discussed in "Joint Ventures and Other Agreements"
below, in the second quarter of 2000, Lyondell entered into a series of
arrangements with Rhodia to expand the capacity at the Pont de Claix plant.
(c) Includes 1.1 billion pounds committed to third party investors under long-
term processing agreements and 100% of the 830 million pounds of capacity of
Nihon Oxirane, of which the Company owns 50%. See "Joint Ventures and Other
Agreements."
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 received 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.
8
The Company's raw material suppliers include Equistar, which is a leading
producer of propylene, ethylene and benzene and is expected to be the major
supplier of these raw materials to Lyondell's U.S. business in 2001. See Note 5
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 2000, most of the segment's revenues were derived from sales to, or
processing agreements with, unrelated third parties. Over the past three years,
no single unrelated third party customer, nor any related party customer,
accounted for more than 10% of total revenues in any one year.
The intermediate chemicals and derivatives segment delivers products through
sales agreements, processing agreements and spot sales as well as product swaps.
It purchases SM, MTBE and limited amounts of BDO 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 relative market
economics of the co-products.
The segment has a number of multi-year PO processing (or tolling) and sales
agreements. This reflects an effort to mitigate the adverse impact of
competitive factors and economic business cycles on demand for the segment's PO.
In addition, Bayer's ownership interest in the PO Joint Venture represents
ownership of an in kind portion of the PO production of the PO Joint Venture.
See "Joint Ventures and Other Agreements."
Lyondell sells most of its SM production into the United States merchant
market and to selected export markets through sales or tolling agreements. The
segment is a party to a number of multi-year SM sales and processing agreements.
See "Joint Ventures and Other Agreements."
The Company has a take-or-pay MTBE sales contract with Atlantic Richfield
Company ("ARCO"), now wholly owned by BP Amoco p.l.c. ("BP"). The contract has
an initial term expiring December 31, 2002 and provides for formula-based
prices. In addition, the Company also sells its MTBE production under market-
based sales agreements, including multi-year agreements, and in the spot market.
The majority of the segment's PO derivatives are sold through market-based
sales contracts under annual or multi-year arrangements.
The segment's sales are made by Company marketing and sales personnel and
through distributors and independent agents located in the Americas, Europe and
the Asia Pacific region. Through centralization of certain sales and order
fulfillment functions in regional customer service centers located in Houston,
Texas and Rotterdam, The Netherlands, the Company has reduced its sales office
infrastructure for this segment around the world, while providing superior
service to its worldwide customer base. Lyondell also has long-term contracts
for distribution and logistics to ensure reliable supply to its customers.
For data relating to foreign operations, see Note 22 of Notes to Consolidated
Financial Statements.
Joint Ventures and Other Agreements
On March 31, 2000, Lyondell contributed its Channelview, Texas PO/SM I plant
and its Bayport, Texas PO/TBA plants to the PO Joint Venture. Bayer's ownership
interest in the PO Joint Venture represents ownership
9
of an in kind portion of the PO production of the PO Joint Venture. Bayer's
share of PO production from the PO Joint Venture will increase from
approximately 1.0 billion pounds for the last nine months of 2000 to
approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell takes
in kind the remaining PO production and all co-product (SM and TBA) production
from the PO Joint Venture. As part of the transaction, Lyondell and Bayer also
formed the separate PO Technology Joint Venture through which Bayer was granted
a non-exclusive and non-transferable right to use certain PO/SM technology in
the PO Joint Venture. Under the terms of the operating and logistics agreements,
Lyondell operates the PO Joint Venture plants and arranges and coordinates the
logistics of PO delivery. Lyondell and Bayer also have formed a separate joint
venture for the construction of PO-11 in Rotterdam, The Netherlands with an
expected startup date in the second quarter of 2003. Lyondell and Bayer each
have a 50% share in the PO-11 joint venture, pursuant to which they each take in
kind 50% of the PO and SM production of PO-11. Lyondell and Bayer do not share
marketing or product sales under either the PO Joint Venture or PO-11.
Lyondell's PO/SM II plant at the Channelview, Texas complex is owned by the
Company together with third-party equity investors. The Company retains a
majority interest in the PO/SM II plant and is the operator of the plant. A
portion of the SM output of the PO/SM II plant is committed to the third-party
investors under long-term processing agreements. As of December 31, 2000, the
Company had over 1.1 billion pounds of SM capacity, or 30% of its worldwide
capacity, committed to third party investors under long-term processing
arrangements.
The Company has a 50% equity interest in Nihon Oxirane, a joint venture with
Sumitomo Chemical Co., Ltd. ("Sumitomo") and Showa Denko K.K. Since 1976,
Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. Lyondell and Sumitomo
conduct joint research and development programs under various agreements
originally entered into in connection with the Nihon Oxirane joint venture.
In January 1995, ARCO Chemical entered into a tolling agreement and a resale
agreement with Rhodia covering the entire TDI output of Rhodia's two plants in
France, which have a combined average annual capacity of approximately 264
million pounds. Lyondell is currently required to purchase an average minimum
of 212 million pounds of TDI per year under the agreements. The aggregate
purchase price is a combination based on plant cost and market price. In the
second quarter 2000, Lyondell entered into a series of arrangements with Rhodia
to expand the capacity at the Pont de Claix plant, which provides TDI to
Lyondell under the tolling agreement. The expansion will add approximately 105
million pounds of average annual capacity at the Pont de Claix plant, resulting
in a total average annual capacity of approximately 269 million pounds, which is
scheduled to be available in the fourth quarter of 2001. After the completion
of the expansion, all of the TDI that Lyondell receives from Rhodia will come
from the Pont de Claix plant, which is designed to have a more efficient cost
structure. Lyondell's average minimum TDI purchase commitment under the revised
tolling agreement will be 197 million pounds of TDI per year and will be
extended through 2016. The resale agreement, which covered output at the Lille
plant, will expire December 31, 2001. The TDI Lyondell purchases from Rhodia is
marketed principally in Europe, the Middle East, Africa and Asia.
Competition and Industry Conditions
Competition within the intermediate chemicals and derivatives segment of the
chemical industry is significant and is based on a variety of factors, including
quality, product price, reliability of supply, technical support, customer
service and potential substitute materials. Profitability in this segment is
affected by the worldwide level of demand along with vigorous price competition
which may intensify due to, among other things, new industry capacity. Demand
is a function of economic growth in the United States and elsewhere in the
world, which fluctuates. It is not possible to predict accurately the changes
in raw material costs, market conditions and other factors that will affect
industry margins in the future. Capacity share figures for the segment and its
competitors, discussed below, are based on completed production facilities and,
where appropriate, include the full capacity of joint-venture facilities and
certain long-term supply agreements.
The Company's major worldwide PO competitors are The Dow Chemical Company
("Dow") and Shell Chemical Company ("Shell"). Dow's operations are based on
chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based
on published data relating to the PO market, including the PO Joint Venture's
total capacity, the Company believes it owns and/or operates approximately 31%
of the total worldwide capacity for PO.
10
As part of the Bayer transaction, Lyondell and Bayer have formed a separate
joint venture for the construction of PO-11 in Rotterdam, The Netherlands with
an expected startup in the second quarter of 2003. The Company is also
cooperating with Sumitomo on the commercialization of new PO technology, which
is scheduled to be available in 2003. Shell and BASF AG ("BASF"), through
their joint venture, ELLBA, commenced operation in October 1999 of a PO/SM plant
in The Netherlands, using Shell technology. Shell and BASF, as 50-50 partners,
have also broken ground for the construction of a PO/SM plant in Singapore,
which is scheduled for start up in the last half of 2002. In addition, Repsol
Quimica, S.A. started up a PO/SM plant in Spain in 2000, using technology
originally licensed from ARCO Chemical. The Company believes that a significant
amount of this additional capacity already has been absorbed by the market. The
Company also expects increasing integration to occur as current merchant-market
buyers establish their own sources of PO supply.
The Company both manufactures and has long-term tolling agreements for TDI.
The Company competes with many TDI producers worldwide, including BASF, Bayer
and Dow. Based on published data regarding TDI capacity, the Company believes
it is the second largest producer of TDI worldwide and has approximately 16% of
total worldwide capacity.
The Company competes with many MTBE producers worldwide, the most significant
of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data
regarding MTBE capacity, the Company believes that, combined with Equistar, it
is one of the largest producers of MTBE worldwide. 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 which are
BASF, Chevron Phillips, Mitsubishi, Samsung and Shell. Based on published data
regarding SM capacity, the Company believes that it is one of the largest
producers of SM worldwide.
Properties
The Company leases its corporate offices located in Houston, Texas. As part
of the ARCO Chemical Acquisition, Lyondell acquired ARCO Chemical's research
facility in Newtown Square, Pennsylvania, which is leased from a third party.
The Company's European headquarters are located in leased facilities in
Maidenhead, England, and its Asia Pacific headquarters are located in leased
facilities in Hong Kong. The non-U.S. regional customer service center is
located in leased facilities in Rotterdam, The Netherlands.
Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, railcar, truck, barge or ship and
can deliver finished products in drums or by pipeline, railcar, truck, barge,
isotank or ship. The Company charters ships, owns and charters barges and
leases isotanks and railcars for the dedicated movement of products between
plants, products to customers or terminals, or raw materials to plants, as
necessary. The Company leases liquid and bulk storage and warehouse facilities
at terminals in the Americas, Europe and the Asia Pacific region. In the
Rotterdam outer harbor area, the Company owns and operates an on-site butane
storage tank, propylene spheres, pipeline connections and a jetty that
accommodates deep-draft vessels.
The principal manufacturing facilities of the segment are set forth below.
These facilities are wholly-owned by Lyondell unless otherwise noted.
Location Principal Products
- --------------------------------------------------------------- -----------------------------------
Bayport (Pasadena), Texas (a)............................. PO, PG, PGE, TBA, isobutylene
Channelview, Texas(a)(b).................................. PO, BDO, SM, MTBE
Lake Charles, Louisiana................................... TDI
Fos-sur-Mer, France....................................... PO, PG, TBA, MTBE
Botlek, Rotterdam, The Netherlands........................ PO, PG, PGE, TBA, MTBE, isobutylene
Chiba, Japan(c)........................................... PO, SM
________
(a) The Bayport PO/TBA plants and the Channelview PO/SM I plant are held by
the PO Joint Venture.
(b) Third-party investors hold a minority ownership interest in the PO/SM II
plant at the Channelview facility.
11
(c) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint
venture in which the Company holds a 50% interest through a subsidiary.
Research and Technology; Patents and Trademarks
The Company possesses a body of patented and unpatented technologies and trade
secrets relating to its products, processes and the design and operation of its
plants, all of which are valuable to the intermediate chemicals and derivatives
segment. Lyondell has several patents and patent applications pending for
inventions resulting from its research relating to new PO processes for
producing propylene oxide without co-products. Lyondell believes that
utilization of this technology would reduce the cost of manufacturing PO and
eliminate the production of less valuable co-products.
The Company does not believe that the loss of any individual patent or trade
secret would have a material adverse effect on its intermediate chemicals and
derivatives business. The basic patents relating to the Company's PO/SM and
PO/TBA co-product technologies have expired. However, the technology is not
readily licensable, and Lyondell's experience and know-how in this area provide
it with a significant competitive advantage over others trying to replicate the
technology.
The principal research and development facility for the segment is located in
Newtown Square, Pennsylvania, with a technical center in Villers Saint Paul,
France. The Company's research and development expenditures for 2000, 1999 and
1998 were $35 million, $58 million, and $65 million, respectively. The decrease
in the Company's research and development expenditures in 2000 is a result of
the sale of the polyols business to Bayer on March 31, 2000. The 1998
expenditures are on a pro forma basis for the ARCO Chemical Acquisition.
Lyondell and Sumitomo conduct joint research and development programs under
various agreements originally entered into in connection with the Nihon Oxirane
joint venture.
Employee Relations
On December 31, 2000, Lyondell had approximately 3,200 full-time employees,
with approximately 23% of the U.S. employees represented by labor unions.
Lyondell's employees include approximately 460 persons who became Lyondell
employees effective January 1, 2000 in connection with a November 1999 agreement
with Equistar to expand the scope of shared administrative services provided by
Lyondell to Equistar. These persons had been employed by Equistar in the areas
of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services and legal.
Lyondell also uses the services of independent contractors in the routine
conduct of its business. The Company believes its relations with its employees
are good.
EQUISTAR CHEMICALS, LP
Management of Equistar
Equistar is a limited partnership organized under the laws of the State of
Delaware. Lyondell owns its interest in Equistar through two wholly owned
subsidiaries, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. Similarly, Millennium owns its interest in
Equistar through two wholly owned subsidiaries, one a general partner and one a
limited partner. Occidental owns its interest in Equistar through three wholly
owned subsidiaries, one a general partner and two limited partners. Lyondell
holds a 41% interest, and Millennium and Occidental each hold a 29.5% interest
in Equistar. The Amended and Restated Partnership Agreement of Equistar (the
"Equistar Partnership Agreement") governs, among other things, ownership, cash
distributions, capital contributions and management of Equistar. In September
2000, Millennium publicly announced that it had terminated the January 2000
announced active marketing of its 29.5% interest in Equistar. However, there
can be no assurance that Millennium will not sell its interest in Equistar at
some point. The Company does not expect any such sale to affect Equistar's
operations or results.
The Equistar Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee, consisting of nine representatives, three
appointed by each general partner. Matters requiring
12
unanimous agreement by the representatives of Lyondell, Millennium and
Occidental include changes in the scope of Equistar's business, the five-year
strategic plan (and annual updates thereof), the sale or purchase of assets or
capital expenditures of more than $30 million not contemplated by the strategic
plan, investments by Equistar's partners over certain amounts, merging or
combining with another business and certain other matters. All decisions of the
Partnership Governance Committee that do not require unanimity among Lyondell,
Millennium and Occidental may be made by Lyondell's representatives alone. The
day-to-day operations of Equistar are managed by the executive officers of
Equistar. Dan F. 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 in July 1998.
If Lyondell, Millennium or Occidental or any of their affiliates desire to
initiate or pursue an opportunity to undertake, engage in, acquire or invest in
a business or activity or operation within the scope of the business of
Equistar, such opportunity must first be offered to Equistar. Equistar has
certain options to participate in the opportunity, but if it determines not to
participate, the party offering the opportunity is free to pursue it on its own.
If the opportunity within Equistar's scope of business constitutes less than 25%
of an acquisition that is otherwise not within the scope of its business,
Lyondell, Millennium or Occidental, as the case may be, may make such
acquisition, provided that the portion within the scope of Equistar's business
is offered to Equistar pursuant to the foregoing provisions.
During 1998 and 1999, Lyondell provided certain administrative services to
Equistar, including certain legal, risk management and treasury services, tax
services and employee benefit plan administration, and Equistar provided
services to Lyondell in the areas of health, safety and environmental, human
resources, information technology and legal. As a consequence of these services,
Equistar made a monthly payment to Lyondell as described in Note 5 of Notes to
Consolidated Financial Statements. In November 1999, Lyondell and Equistar
announced an agreement to utilize shared services over a broader range,
including information technology, human resources, materials management and raw
material supply, customer supply chain, health, safety and environmental,
engineering and research and development, facility services, legal, accounting,
treasury, internal audit, and tax (the "Shared Services Agreement"). Beginning
January 1, 2000, employee-related and indirect costs were allocated between the
two companies in the manner prescribed in the Shared Services Agreement while
direct third party costs, incurred exclusively for either Lyondell or Equistar,
were charged directly to that entity. Equistar and Millennium Petrochemicals are
also parties to a number of agreements for the provision of services, utilities
and materials from one party to the other at common locations, principally
LaPorte, Texas and Cincinnati, Ohio. 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.
13
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.
EQUISTAR PETROCHEMICALS
Overview
Petrochemicals are fundamental to many segments of the economy, including the
production of consumer products, housing components, automotive products and
other durable and nondurable goods. Equistar produces a variety of
petrochemicals, including olefins, oxygenated products, aromatics and specialty
products, at twelve facilities located in six states. Olefins include ethylene,
propylene and butadiene. Oxygenated products 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. With the strong growth of end-use products derived from ethylene
during the past several decades, especially as plastics have developed into low-
cost, high-performance substitutes for a wide range of materials such as metals,
paper and glass, U.S. ethylene consumption has grown by an average annual rate
of approximately 4%.
The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants
use petroleum liquids, including naphtha, condensates and gas oils (collectively
"Petroleum Liquids"), to produce ethylene. Assuming the co-products are
recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquids, including ethane, propane and butane (collectively, "NGLs"). The use
of Petroleum Liquids results in the production of a significant amount of co-
products such as propylene, butadiene, benzene and toluene, and specialty
products, such as dicyclopentadiene ("DCPD"), isoprene, resin oil, piperylenes
and hydrogen. Based upon independent third-party surveys, management believes
that its Channelview facility is the lowest production cost olefins facility in
the United States. Equistar's Morris, Illinois; Clinton, Iowa; Lake Charles,
Louisiana; and LaPorte, Texas plants are designed to primarily use NGLs, which
primarily produce ethylene with some co-products such as propylene. A
comprehensive pipeline system connects the Gulf Coast plants with major olefins
customers. Raw materials are sourced both internationally and domestically and
are shipped via vessel and pipeline.
Equistar produces EO and its primary derivative, EG, at facilities located at
Pasadena, Texas and through a 50/50 joint venture with DuPont in Beaumont,
Texas. The Pasadena facility also produces other derivatives of EO, principally
ethers and ethanolamines. EG is used in antifreeze and in polyester fibers,
resins and films. Ethylene oxide and its derivatives are used in many consumer
and industrial end uses, such as detergents and surfactants, brake fluids and
polyurethane foams for seating and bedding.
Equistar produces synthetic ethanol 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
ethanol by the addition of certain chemicals. In addition, it produces small
volumes of diethyl ether, a by-product of its ethanol production, at Tuscola.
These ethanol products are ingredients in various consumer and industrial
products as described more fully in the table below.
The following table outlines Equistar's primary petrochemical products, annual
processing capacity as of January 1, 2001, and the primary uses for such
products. Unless otherwise specified, annual processing capacity was calculated
by estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.
Capacities shown represent 100% of the capacity of Equistar, of which the
Company owns 41%.
14
Product Annual Capacity Primary Uses
- --------------------------- ---------------------------------- -----------------------------------------------------------------
OLEFINS:
- --------
Ethylene 11.6 billion pounds Ethylene is used as a raw material to manufacture polyethylene,
EO, ethanol, ethylene dichloride and ethylbenzene.
Propylene 5.0 billion pounds (a) Propylene is used to produce polypropylene, acrylonitrile and
propylene oxide.
Butadiene 1.2 billion pounds Butadiene is used to manufacture styrene-butadiene rubber and
polybutadiene rubber, which are used in the manufacture of
tires, hoses, gaskets and other rubber products. Butadiene is
also used in the production of paints, adhesives, nylon
clothing, carpets and engineered plastics.
OXYGENATED PRODUCTS:
- --------------------
Ethylene Oxide (EO) 1.1 billion pounds ethylene oxide EO is used to produce surfactants, industrial cleaners,
equivalents; 400 million pounds cosmetics, emulsifiers, paint, heat transfer fluids and ethylene
as pure ethylene oxide glycol.
Ethylene Glycol (EG) 1 billion pounds EG is used to produce polyester fibers and film, polyethylene
terephthalate ("PET") resin, heat transfer fluids and automobile
antifreeze.
Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and coatings, polishes,
Derivatives solvents and chemical intermediates.
Ethanol 50 million gallons Ethanol is used in the production of solvents as well as
household, medicinal and personal care products.
MTBE 284 million gallons MTBE is a gasoline component for reducing emissions in
(18,500 barrels/day)(b) reformulated gasolines and enhancing octane value.
AROMATICS:
- ----------
Benzene 310 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 used in urethane production.
SPECIALTY PRODUCTS:
- -------------------
Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for
(DCPD) molded parts such as tub and shower stalls and boat hulls.
Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and
other rubber products.
Resin Oil 150 million pounds Resin oil is used in the production of hot-melt-adhesives, inks,
sealants, paints and varnishes.
Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and
sealants.
Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas
in heavy crude oil.
Alkylate 337 million gallons(c) Alkylate is a premium gasoline blending component used by
refiners to meet Clean Air Act standards for reformulated
gasoline.
Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and
diesel engine starting fluid, liniments, analgesics and
smokeless gunpowder.
__________
(a) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current annual processing capacity of one billion pounds per year of
propylene.
(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LCR.
(c) Includes up to 172 million gallons/year of capacity operated for the
benefit of LCR.
15
Raw Materials and Ethylene Purchases
The raw materials cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with
the flexibility to consume a wide range of raw materials generally are able to
maintain higher profitability during periods of changing energy and
petrochemicals prices than olefins plants that are restricted in their raw
material processing capability, assuming the co-products are recovered and sold.
The primary raw materials used in the production of olefins are Petroleum
Liquids (also referred to as "heavy raw materials") and NGLs (also referred to
as "light raw materials"). Petroleum Liquids have had a historical cost
advantage over NGLs such as ethane and propane, assuming the co-products are
recovered and sold. For example, using Petroleum Liquids typically generates
between one and four cents additional margin per pound of ethylene produced
compared to using ethane. Equistar has the capability to realize this margin
advantage at the Channelview, Corpus Christi and Chocolate Bayou facilities.
This cost advantage is expected to continue due to the significantly higher
capital cost for new plants with the capability to process both heavy raw
materials (Petroleum Liquids) and their resulting co-products in contrast to
processing light raw materials (NGLs).
The Channelview facility is uniquely flexible in that it can process 100%
Petroleum Liquids or up to 80% NGLs. The Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs, subject to the availability of NGLs.
The Chocolate Bayou facility processes 100% Petroleum Liquids. Equistar's four
other olefins facilities currently process only NGLs. Equistar's LaPorte
facility can process heavier NGLs, such as butane and natural gasoline.
The majority of Equistar's Petroleum Liquids requirements are purchased via
contractual arrangement from a variety of third-party domestic and foreign
sources. Equistar also purchases Petroleum Liquids on the spot market from
third-party domestic and foreign sources. Equistar purchases NGLs from a wide
variety of domestic and international sources. Equistar obtains a portion of
its olefins raw material requirements from LCR at market-related prices.
In addition to producing its own ethylene, Equistar assumed certain agreements
of an affiliate of Millennium for the purchase of ethylene from Gulf Coast
producers at market prices. Ethylene purchase obligations under the Millennium
contracts terminated at the end of 2000.
Marketing and Sales
Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as raw material by the polymers operations at those sites, except for
the ethylene produced at LaPorte and sold to Millennium. Ethylene and propylene
produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake Charles
olefins plants are generally distributed by pipeline or via exchange agreements
to Equistar's Gulf Coast polymer and ethylene oxide and glycol facilities as
well as to Equistar's affiliates and third parties. As of January 1, 2001,
approximately 80% of the ethylene produced by Equistar was consumed internally
or sold to Equistar's affiliates at market-related prices.
With respect to sales to third parties, Equistar sells a majority of its
olefins products to customers with whom Lyondell and Occidental have had long-
standing relationships. Sales to third parties generally are made under written
agreements that typically provide for monthly negotiation of price; customer
purchase of a specified minimum quantity; and three- to six-year terms with
automatic one- or two-year term extension provisions. Some contracts may be
terminated early if deliveries have been suspended for several months. No
single unrelated third party customer accounted for more than 10% of total
segment revenues in 2000.
Ethylene oxide and ethylene glycol are sold under long-term contracts of three
to five years' duration to third-party customers, with pricing negotiated on a
quarterly basis to reflect market conditions. Glycol ethers are sold primarily
into the solvent and distributor markets under one-year contracts at market
prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to
third-party customers under one-year contracts at market prices.
16
Equistar licenses MTBE technology under a license from an affiliate of
Lyondell and sells a significant portion of MTBE produced at one of its two
Channelview units to Lyondell at market-related prices. The production from the
second unit is consumed by LCR for gasoline blending. MTBE produced at
Chocolate Bayou is sold to third parties at market-related prices.
Equistar sells most of its aromatics production under contracts that have
initial terms ranging from two to three years and that typically contain
automatic one-year term extension provisions. These contracts generally provide
for monthly or quarterly price adjustments based upon current market prices.
Aromatics produced by LCR, with the exception of benzene, are marketed by
Equistar for LCR under contracts with similar terms to Equistar's own. Benzene
produced by LCR is sold directly to Equistar at market-related prices.
Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which is owned and some of
which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port
Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition,
exchange agreements with other olefins producers allow access to customers who
are not directly connected to Equistar's pipeline system. Some ethylene is
shipped by railcar from Clinton, Iowa to Morris, Illinois. Some propylene is
shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its
derivatives are shipped by railcar, truck, isotank or ocean-going vessel.
Butadiene, aromatics and other petrochemicals are distributed by pipeline,
railcar, truck, barge or ocean-going vessel.
Competition and Industry Conditions
The basis for competition in Equistar's petrochemicals products is price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP, Chevron
Phillips Chemical Company LP ("Chevron Phillips"), Dow, Exxon Mobil Corporation
("Exxon Mobil"), Huntsman Chemical Company and Shell. Industry consolidation,
including the combinations of British Petroleum and Amoco, Exxon and Mobil, and
Dow and Union Carbide Corporation and the formation of Chevron Phillips, has
concentrated the industry in fewer, although larger and stronger, competitors.
The combined rated capacity of Equistar's olefins units at January 1, 2001 was
approximately 11.6 billion pounds of ethylene per year or approximately 16% of
total North American production capacity. Based on published rated production
capacities, Equistar believes it is currently the second largest producer of
ethylene in North America. North American ethylene rated capacity at January 1,
2001 was approximately 72 billion pounds per year. Of the total ethylene
production capacity in the United States, approximately 95% is located along the
Gulf Coast.
Petrochemicals profitability is affected by raw materials costs and the level
of demand for petrochemicals and derivatives, along with vigorous price
competition among producers which may intensify due to, among other things, the
addition of new capacity. In general, demand is a function of economic growth
in the United States and elsewhere in the world, which fluctuates. Capacity
additions in excess of annual growth also put pressure on margins. It is not
possible to predict accurately the changes in raw material costs, market
conditions and other factors that will affect petrochemical industry margins in
the future.
The petrochemicals industry historically has experienced significant
volatility in profitability due to capacity utilization. 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 not balanced in comparison to more
integrated competitors, i.e., those with a higher proportion of captive demand
for olefins derivatives production. Equistar currently consumes or sells to its
partners' downstream derivatives facilities approximately 80% of its ethylene
production, which has the effect of reducing volatility.
Equistar's other major commodity chemical products also experience cyclical
market conditions similar to, although not necessarily coincident with, those of
ethylene.
17
EQUISTAR POLYMERS
Overview
Through facilities located at nine plant sites in four states, Equistar's
polymers segment manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.
Equistar currently manufactures polyethylene using a variety of technologies
at five 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 U.S. Midwest and enjoy a freight cost advantage over
Gulf Coast producers in delivering products to customers in the U.S. Midwest and
on the East Coast of the United States. Polyethylene is used in a wide variety
of consumer products, packaging materials and industrial applications.
Equistar produces performance polymer products, which include enhanced grades
of polyethylene and polypropylene, at several of its polymers facilities. The
Company believes that, over a business cycle, average selling prices and profit
margins for performance polymers tend to be higher than average selling prices
and profit margins for higher-volume commodity polyethylenes. Equistar also
produces wire and cable insulating resins and compounds at Morris, Illinois; and
LaPorte, Texas; and wire and cable insulating compounds at Tuscola, Illinois;
and Fairport Harbor, Ohio. Wire and cable insulating resins and compounds are
used to insulate copper and fiber optic wiring in power, telecommunication,
computer and automobile applications. Equistar's Morris, Illinois and Pasadena,
Texas facilities manufacture polypropylene using propylene produced as a co-
product of Equistar's ethylene production as well as propylene purchased from
third parties. Polypropylene is sold for various applications in the
automotive, housewares and appliance industries.
18
The following table outlines Equistar's polymers and performance polymers
products, annual processing capacity at January 1, 2001, and the primary uses
for such products. The table excludes the capacity of Equistar's Port Arthur,
Texas facility, which was permanently shut down February 28, 2001. Unless
otherwise specified, annual processing capacity was calculated by estimating the
number of days in a typical year that a production unit of a plant is expected
to operate, after allowing for downtime for regular maintenance, and multiplying
that number by an amount equal to the unit's optimal daily output based on the
design raw material mix. Because the processing capacity of a production unit
is an estimated amount, actual production volumes may be more or less than the
capacities set forth below. Capacities shown represent 100% of the capacity of
Equistar, of which the Company owns 41%.
Product Annual Capacity Primary Uses
- -------------------------------------- ------------------- ------------------------------------------------------------------
High density polyethylene (HDPE) 3.1 billion pounds HDPE is used to manufacture grocery, merchandise and trash
(a) bags; food containers for items from frozen desserts to
margarine; plastic caps and closures; liners for boxes of
cereal and crackers; plastic drink cups and toys; dairy crates;
bread trays and pails for items from paint to fresh fruits and
vegetables; safety equipment such as hard hats; house wrap for
insulation; bottles for household/industrial chemicals and
motor oil; milk/water/juice bottles; and large (rotomolded)
tanks for storing liquids like agricultural and lawn care
chemicals.
Low density polyethylene (LDPE) 1.5 billion pounds LDPE is used to manufacture food packaging films; plastic
(a) bottles for packaging food and personal care items; dry
cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags
for mulch and potting soil; boil-in-bag bags; coatings on
flexible packaging products; and coatings on paper board such
as milk cartons. Specialized forms of LDPE are Ethyl Methyl
Acrylate (``EMA''), which provides adhesion in a variety of
applications, and Ethylene Vinyl Acetate (``EVA''), which is
used in foamed sheets, bag-in-box bags, vacuum cleaner hoses,
medical tubing, clear sheet protectors and flexible binders.
Linear low density polyethylene 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags;
(LLDPE) 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 Insulating (b) Wire and cable insulating resins and compounds are used to
Resins and Compounds insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications.
Polymeric Powders (b) Polymeric powders are component products in structural and bulk
molding compounds, parting agents and filters for appliance,
automotive and plastics processing industries.
Polymers for Adhesives, Sealants (b) Polymers are components in hot-melt-adhesive formulations for
and Coatings case, carton and beverage package sealing, glue sticks,
automotive sealants, carpet backing and adhesive labels.
Reactive Polyolefins (b) 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 (b) Liquid polyolefins are a diesel fuel additive to inhibit
freezing.
_______________
(a) Excludes capacity of Port Arthur, Texas facility, which was permanently
shut down February 28, 2001.
(b) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.
19
Raw Materials
With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefins pipeline system or from on-site production. The polyethylene plants at
Chocolate Bayou, LaPorte 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 third parties.
Marketing and Sales
Equistar's polymers products are primarily sold to an extensive base of
established customers. Approximately 50% of these customers have term contracts,
typically having a duration of one to three years. The remainder is generally
sold without contractual term commitments. In either case, in most of the
continuous supply relationships, prices are subject to change upon mutual
agreement between Equistar and the customer. No single unrelated third party
customer accounted for more than 10% of total segment revenues in 2000.
Polymers are primarily distributed via railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 8,600 railcars for use
in its polymers business. Equistar sells its polymers products in the United
States and Canada primarily through its own sales organization. It generally
engages sales agents to market its products in the rest of the world.
Competition and Industry Conditions
The basis for competition in Equistar's polymers products is price, product
performance, product quality, product deliverability and customer service.
Equistar competes with other large producers of polymers, including Atofina, BP,
Chevron Phillips, Dow, Eastman Chemical Company, Exxon Mobil, Formosa Plastics,
Huntsman Chemical Company, Solvay Polymers and Westlake Polymers. Industry
consolidation, including the combinations of British Petroleum and Amoco, Exxon
and Mobil, and Dow and Union Carbide Corporation, the formation of Chevron
Phillips, and the pending polymers business combinations between BP and Solvay,
has concentrated the industry in fewer, although larger and stronger,
competitors. Polymers profitability is affected by the worldwide level of demand
for polymers, along with vigorous price competition which may intensify due to,
among other things, new domestic and foreign industry capacity. In general,
demand is a function of economic growth in the United States and elsewhere in
the world, which fluctuates. It is not possible to predict accurately the
changes in raw material costs, market conditions and other factors which will
affect polymers industry margins in the future.
Based on published rated industry capacities, Equistar is the third largest
producer of polyethylene in North America and is a leading domestic producer of
polyolefins powders, compounds, wire and cable insulating resins, and polymers
for adhesives. The combined rated capacity of Equistar's polyethylene units as
of January 1, 2001 was approximately 5.7 billion pounds per year or
approximately 14% of total industry capacity in North America. There are
approximately 15 other North American producers of polyethylene, including
Chevron Phillips, Dow, Exxon Mobil, Nova Chemicals and Solvay Polymers.
Equistar's polypropylene capacity, 680 million pounds per year as of January 1,
2001, represents approximately 4.5% of the total North American polypropylene
capacity. There are approximately 15 other North American competitors in the
polypropylene business, including Atofina, Basell, BP, Chevron Phillips, Dow and
Exxon Mobil.
20
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
LaPorte, Texas (e)...................... Ethylene, Propylene, LDPE, LLDPE, HDPE, Liquid Polyolefins,
Wire and Cable Insulating Resins and Compounds
Matagorda, Texas........................ HDPE
Pasadena, Texas(f)...................... EO, EG and Other EO Derivatives
Pasadena, Texas(f)...................... Polypropylene and LDPE
Victoria, Texas(d)...................... HDPE
Lake Charles, Louisiana(g).............. Ethylene, and Propylene
Morris, Illinois........................ Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....................... Ethanol, Diethyl Ether, Wire and Cable Insulating Compounds
and Polymeric Powders
Clinton, Iowa........................... Ethylene, Propylene, LDPE and HDPE
Fairport Harbor, Ohio(g)................ Wire and Cable Insulating Compounds
Anaheim, California..................... Denatured Alcohol
Newark, New Jersey...................... Denatured Alcohol
_____________
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by DuPont.
(b) The Channelview facility has two ethylene processing units. LMC owns a
methanol plant located within the Channelview facility on property LMC
leases from Equistar. A third party owns and operates a facility on land
leased from Equistar that is used to purify hydrogen from LMC'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) All of the HDPE capacity and a portion of the LDPE capacity at the LaPorte
facility has been idled since the first quarter of 2000.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar
operates them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The facilities and land are leased.
Equistar also owns a storage facility, a brine pond and a tract of vacant land
in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGLs,
ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont
Belvieu facility. There are an additional 3 million barrels of ethylene and
propylene storage operated by Equistar on leased property in Markham, Texas.
Equistar uses an extensive olefins pipeline system, some of which it owns and
some of which it leases, extending from Corpus Christi to Mont Belvieu to Port
Arthur and around the Lake Charles area. Equistar owns other pipelines in
connection with its Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus
Christi and LaPorte 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
21
berthing eight barges and related terminal equipment for loading and unloading
raw materials and products. Equistar owns or leases pursuant to long-term lease
arrangements approximately 12,200 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, 2000, Equistar employed approximately 3,700 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 270 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 Chocolate Bayou, Texas. Equistar's research and
development expenditures for 2000, 1999 and 1998 were $38 million, $42 million,
and $40 million, respectively.
The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Consistent with its strategy, Equistar is conducting a research project to
investigate alternative olefin feedstocks for use at the Channelview, Chocolate
Bayou and/or Corpus Christi facilities. These alternative olefin feedstocks
could significantly lower costs and provide an additional competitive advantage
at these facilities.
Recent polymer industry announcements relate to the development of single-site
catalysts. Successful development and commercialization of these catalysts are
expected to result in enhanced polymer properties and higher margin products.
Equistar is conducting research and developing several non-metallocene single-
site catalysts (STAR(TM) catalysts) for use in the production of polyolefin
resins. Equistar has several patents and patent applications pending in
connection with research and development efforts in this area. Equistar does
not believe that the loss of any individual patent or trade secret would have a
material adverse effect on its petrochemicals or polymers businesses.
In August 2000, Equistar and ABB Lummus Global formed a joint venture, Novolen
Technology Holdings C.V., to acquire the Novolen(R) technology business from
Targor GmbH, a subsidiary of BASF AG. The joint venture, owned 80% by ABB and
20% by Equistar, licenses the Novolen(R) technology and supports new catalyst
and process development through joint research and development programs.
Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Equistar and Maruzen Petrochemical Co., Ltd.
jointly own a bi-modal process for the production of HDPE. Equistar uses this
bi-modal process at its Matagorda, Texas facility. Significant licenses held by
Equistar include the Unipol process for the production of LLDPE, and certain
other licenses for the production of EO, EG, polyethylene and polypropylene.
Equistar is not dependent on the retention of any particular license, and it
believes that the loss of any individual license would not have a material
adverse effect on its operations.
Equistar acquired rights to numerous trademarks 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 right to use these trademarks is 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.
22
LYONDELL-CITGO REFINING LP
Overview
Lyondell participates in petroleum refining through an equity interest in LCR.
Lyondell holds a 58.75% interest and CITGO holds a 41.25% interest in LCR. LCR
owns and operates the Refinery, which is located on the Houston Ship Channel in
Houston, Texas. The Refinery is a full conversion refinery designed to run
extra heavy (17 degree API), high sulfur crude oil which is less expensive than
other grades of crude. Processing extra heavy, high sulfur crude oil in
significant quantities requires a refinery with extensive coking, catalytic
cracking, hydrotreating and desulfurization capabilities, i.e., a "complex
refinery." The Refinery's complexity enables it to operate in full conversion
mode producing a slate of products that consists primarily of high value, clean
products (many refineries produce less high value, clean products such as
gasoline and diesel and produce significant quantities of heavy fuel oil due to
a lack of equipment to convert these fuels into premium products). In addition,
the Refinery's complexity allows it to produce most of these clean products as
premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and
aromatics chemicals. The Refinery's products include conventional and
reformulated gasoline, low sulfur diesel, jet fuel, aromatics, lubricants
(industrial lubricants, white oils and process oils), carbon black oil, sulfur,
residual fuel and petroleum coke. The aromatics chemicals produced by the
Refinery are benzene, toluene, orthoxylene and paraxylene. These products are
sold to intermediate chemicals and polyester intermediate manufacturers and are
ultimately used in clothing, soft drink bottles and drink cups, audio and video
tapes, and resins.
LCR was formed in 1993 to upgrade the Refinery's ability to process
substantial additional volumes of lower cost, extra heavy, higher margin crude
oil. An upgrade project completed in 1997 (the "Upgrade Project") increased
the extra heavy crude oil processing capability of the Refinery from 130,000
barrels per day of 22 degree API gravity crude oil to approximately 260,000
barrels per day of 17 degree API gravity crude oil. The 17 degree API gravity
crude oil is more viscous and dense than traditional crude oil and contains
higher concentrations of sulfur and heavy metals, making it more difficult to
refine into gasoline and other high value fuel products but less costly to
purchase. The Upgrade Project also included expansion of the Refinery's
reformulated gasoline and low sulfur diesel production capability.
The Upgrade Project, which cost approximately $1.1 billion, was funded through
a combination of approximately $485 million in capital contributions to LCR by
CITGO (including cash contributions for financing costs and reinvestment of
operating cash distributions), a $450 million construction loan credit facility
(the "Construction Facility") provided by a group of banks, and $166 million
and $16 million in subordinated loans to LCR from Lyondell and CITGO,
respectively. On May 5, 2000, Lyondell and CITGO arranged interim financing for
LCR to repay the $450 million outstanding under the LCR Construction Facility.
On September 15, 2000, Lyondell and CITGO completed the syndication of one-year
credit facilities, including a $450 million term loan to replace the interim
financing and a $70 million revolving credit facility to be used for working
capital and other general business purposes. Lyondell and CITGO have agreed to
pursue a refinancing of the indebtedness, although the final terms have not been
determined. Based on previous experience of refinancing LCR's debt and the
current conditions of the financial markets, the management of LCR, Lyondell and
CITGO anticipate that this debt can be refinanced prior to its maturity.
In exchange for CITGO's Upgrade Project capital contributions, together with
an additional $130 million in equity contributions CITGO had previously made to
LCR, CITGO's participation interest in LCR increased effective April 1, 1997,
and is currently 41.25%. CITGO had a one-time option, which expired unexercised
on September 30, 2000, to increase its participation interest in LCR up to 50%
by making an additional equity contribution.
23
The following table outlines LCR's primary products, annual rated capacity as
of January 1, 2001, and the primary uses for such products. 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 represent 100% of the capacity of LCR, of which the
Company owns 58.75%.
Product Rated Capacity Primary Uses
- ------------------------------- --------------------------- ------------------------------------------------------------------
Gasoline (a)................... 120,000 barrels per day Automotive fuel
Diesel (#2 Distillate)(a)...... 75,000 barrels per day Fuel for diesel cars and trucks
Jet Fuel (a)................... 25,000 barrels per day Aviation fuel
Benzene (b).................... 50 million gallons per year Nylon for clothing and consumer items; polystyrene for
insulation, packaging and drink cups
Toluene (c).................... 46 million gallons per year Gasoline component and chemical feedstock for producing
benzene
Paraxylene (c)................. 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink
bottles and films for audio and video tapes
Orthoxylene (c)................ 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 (a).................. 4,000 barrels per day Automotive and industrial engine and lube oils, railroad
engine additives and white oils for food-grade applications
__________
(a) Produced by LCR and sold to CITGO.
(b) Produced by LCR and sold to Equistar.
(c) Produced by LCR and marketed for LCR by Equistar.
Management of LCR
LCR is a limited partnership organized under the laws of the state of
Delaware. Lyondell owns its interest in LCR through two wholly owned
subsidiaries, one of which serves as a general partner and one of which serves
as a limited partner. Similarly, CITGO, which is an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Republic of Venezuela, owns its interest in LCR through two wholly owned
subsidiaries, a general partner and a limited partner.
LCR is governed by a Limited Partnership Agreement (the "LCR Partnership
Agreement"), which provides for, among other things, the ownership and cash
distribution rights of the partners. The LCR Partnership Agreement also
provides that LCR is managed by a Partnership Governance Committee, which is
composed of six representatives, three appointed by each general partner.
Actions requiring unanimous consent of the representatives include amendment of
the LCR Partnership Agreement, borrowing money, delegations of authority to
committees, certain purchase commitments and capital expenditures. The day-to-
day operations of the Refinery are managed by two general managers, one of which
is a loaned employee of Lyondell and the other of which is a loaned employee of
CITGO.
Agreements between Lyondell or CITGO and LCR
LCR is a party to a number of agreements with Lyondell and CITGO. Under the
terms of a long-term product sales agreement ("Products Agreement"), CITGO
purchases from LCR substantially all of the refined products produced at the
Refinery. Lyondell currently performs administrative services for LCR pursuant
to an Administrative Services Agreement, which is renegotiated annually. Under
the terms of lubricant sales agreements, CITGO purchases all of the lubricant
products manufactured by LCR. In conjunction therewith, CITGO operates LCR's
Birmingport, Alabama lubricants plant.
24
Agreements between Equistar and LCR
Prior to the formation of Equistar, Lyondell was a party with LCR to multiple
agreements designed to preserve many of the synergies between the Refinery and
the Channelview petrochemicals facility. These agreements were assumed by
Equistar from Lyondell effective December 1, 1997. Economic evaluations at the
Channelview facility and the Refinery are made to maximize product utilization,
which may be local use, use at the other site, or third party sales. Certain
Refinery products (propane, butane, low-octane naphthas, heating oils, and gas
oils) can be used as raw materials for olefins production, and certain
Channelview facility olefins by-products can be processed by the Refinery into
gasoline. Butylenes from the Refinery are tolled through the Channelview
facility for the production of alkylate and MTBE for gasoline blending.
Hydrogen from the Channelview facility is used at the Refinery for sulfur
removal and product stabilization. In accordance with a marketing service
agreement scheduled to expire no later than June 2001, Equistar currently serves
as LCR's sole agent to market aromatics products, with the exception of benzene,
produced by LCR. Benzene produced by LCR is sold directly to Equistar at market-
related prices. See Notes 5 and 6 of Notes to Consolidated Financial
Statements.
Raw Materials
In 1993, LCR entered into a long-term crude supply agreement ("Crude Supply
Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA
Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by
LCR as a raw material for the Refinery is purchased under the Crude Supply
Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned
subsidiaries of PDVSA.
Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil, which
constitutes approximately 88% of the Refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce deliveries of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced deliveries of crude
oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in that
month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in the
deliveries of crude oil supplied under the Crude Supply Agreement to 184,000
barrels per day, effective May 1999. On several occasions since then, PDVSA Oil
has further reduced crude oil deliveries, although it has made payments in
partial compensation for such reductions. Subsequently, PDVSA Oil unilaterally
increased deliveries of crude oil to LCR to 195,000 barrels per day effective
April 2000, to 200,000 barrels per day effective July 1, 2000 and to 230,000
barrels per day effective October 1, 2000.
By letter dated February 9, 2001, PDVSA Oil informed LCR that the Venezuelan
government, through the Ministry of Energy and Mines, has instructed that
production of certain grades of crude oil be reduced effective February 1, 2001.
The letter states that PDVSA Oil declares itself in a force majeure situation,
but does not announce any reduction in crude oil deliveries to LCR. Although
some reduction in crude oil delivery may be forthcoming, it is unclear as to the
level of reduction, if any, which may be anticipated. LCR has consistently
contested the validity of PDVSA Oil's and PDVSA's reductions in deliveries under
the Crude Supply Agreement and, on March 12, 2001, Lyondell, on behalf of LCR,
sent a letter to PDVSA Oil and PDVSA disputing the existence and validity of the
purported force majeure situation declared by the February 9 letter.
The Crude Supply Agreement incorporates formula prices to be paid by LCR for
the crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Although the Company believes
that the Crude Supply Agreement reduces the volatility of LCR's earnings and
cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher
margins during periods when the market price of crude oil is low relative to
then current market prices for refined products. In addition, if the actual
yields, costs or volumes of the LCR refinery differ substantially from those
contemplated by the Crude Supply Agreement, the benefits of this agreement to
LCR could be substantially different, and could result in lower earnings and
cash flow for LCR. Furthermore, there may be periods during which LCR's costs
for crude oil under the Crude Supply Agreement may be higher than might
otherwise be available to LCR from other sources. A disparate increase in the
25
price of crude oil relative to the prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.
The Crude Supply Agreement, which expires on December 31, 2017, provides that
Lyondell controls all of LCR's decisions and enforcement rights in connection
with the Crude Supply Agreement so long as PDVSA has a direct or indirect
ownership interest in LCR.
There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are affiliates of a foreign sovereign nation.
All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is
produced in the Republic of Venezuela, which has experienced economic
difficulties and attendant social and political changes in recent years. It is
impossible to predict how governmental policies may change under the current or
any subsequent Venezuelan government. In addition, there are risks associated
with enforcing judgments of United States courts against entities whose assets
are located largely outside of the United States and whose management does not
reside in the United States. Although the parties have negotiated alternative
arrangements in the event of certain force majeure conditions, including
Venezuelan governmental or other actions restricting or otherwise limiting PDVSA
Oil's ability to perform its obligations, any such alternative arrangements may
not be as beneficial to LCR as the Crude Supply Agreement.
PDVSA has announced that it intends to renegotiate the crude supply agreements
that it has with all third parties, including LCR. In light of PDVSA's
announced intent, there can be no assurance that PDVSA Oil will continue to
perform its obligations under the Crude Supply Agreement. However, they have
confirmed that they expect to honor their commitments if a mutually acceptable
restructuring of the Crude Supply Agreement is not achieved. In recent years,
the Company and PDVSA have had discussions covering both a restructuring of the
Crude Supply Agreement and a broader restructuring of the LCR partnership. The
Company is unable to predict whether changes in either arrangement will occur.
If the Crude Supply Agreement is modified or terminated or this source of
crude is otherwise interrupted, LCR could experience significantly lower
earnings and cash flows. Depending on then current market conditions, any
modification, breach or termination of the Crude Supply Agreement could
adversely affect LCR, since LCR would have to purchase all or a portion of its
crude oil feedstocks in the merchant market, which could subject LCR to
significant volatility and price fluctuations. There can be no assurance that
alternative crude oils with similar margins would be available for purchase by
LCR.
Marketing and Sales
The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics,
lubricants and certain industrial products. On a weekly basis, LCR evaluates
and determines the optimal product output mix for the Refinery, based on spot
market prices and conditions. Under the Products Agreement, CITGO is obligated
to purchase and LCR is required to sell 100% of the gasoline, jet fuel, heating
oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases
these products at prices based on industry benchmark indexes. For example, the
price for gasoline is based on prices published by Platts Oilgram, an industry
trade publication. The Products Agreement provides that Lyondell controls all
of LCR's material decisions and enforcement rights in connection with the
Products Agreement so long as CITGO has a direct or indirect ownership interest
in LCR. The Products Agreement expires on December 31, 2017.
Competition and Industry Conditions
All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to
CITGO.
The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well as
by longer term issues such as energy conservation and alternative fuels.
Industry refined products supply is also dependent on industry operating
capabilities and on long-term refining capacity trends. However, management
believes that the combination of the Crude Supply Agreement and the
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Products Agreement has the effect of stabilizing earnings and cash flows and
reducing the market-driven aspects of such volatility.
With a capacity of approximately 260,000 barrels per day, the Company believes
that the Refinery is North America's largest full conversion (i.e., not
producing asphalt or high sulfur heavy fuel) refinery capable of processing 100%
17 API crude oil.
Among LCR's refining competitors are major integrated petroleum companies and
domestic refiners that are owned by or affiliated with major integrated oil
companies. Based on published industry data, as of January 1, 2001, there were
152 crude oil refineries in operation in the United States, and total domestic
refinery capacity was approximately 16.5 million barrels per day. During 2000,
LCR processed an average of 245,000 barrels per day of crude oil or
approximately 1.6% of all U.S. crude runs.
Properties
LCR owns the real property, plant and equipment which comprise the Refinery,
located on approximately 700 acres in Houston, Texas. Units include a fluid
catalytic cracking unit, cokers, reformers, crude distillation units, sulfur
recovery plants and hydrodesulfurization units, as well as a lube oil
manufacturing plant and an aromatics recovery unit. LCR also owns the real
property, plant and equipment which comprise a lube oil blending and packagin