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1993
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 1-10145
LYONDELL PETROCHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 95-4160558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 McKinney Street, 77010
Suite 1600, Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 652-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock ($1.00 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations-S-K is not contained herein, and will not be contained,
to the best of 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.
X
---
There were 80,000,000 shares of the registrant's common stock
outstanding on December 31, 1993. The aggregate market value of the voting
stock held by non-affiliates of the registrant on March 1, 1994 based on the
closing price on the New York Stock Exchange composite tape on that date, was
$909,464,465.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I
ITEM PAGE
---- ----
1. and 2. Business and Properties........................................ 1
The Company's Business......................................... 1
Summary Description of Business Segments....................... 2
Petrochemical Segment.......................................... 2
Overview....................................................... 2
Feedstocks..................................................... 3
Marketing and Sales............................................ 4
Competition and Industry Conditions............................ 4
Properties..................................................... 5
Capital Program................................................ 5
Employee Relations............................................. 6
Refining Segment............................................... 6
Overview....................................................... 6
Upgrade Project................................................ 7
Management of LYONDELL-CITGO Refining.......................... 8
Feedstocks..................................................... 9
Marketing and Sales............................................ 9
Competition and Industry Conditions............................ 9
Properties..................................................... 10
Capital Program................................................ 10
Employee Relations............................................. 11
Research and Technology; Patents and Trademarks................ 11
Finance Matters................................................ 11
Long-Term Debt and Financing Arrangements...................... 12
Environmental Matters.......................................... 13
3. Legal Proceedings.............................................. 14
4. Submission of Matters to a Vote of Security Holders............ 19
Executive Officers of the Registrant........................... 19
Description of Capital Stock................................... 22
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 23
6. Selected Financial Data........................................ 25
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 25
8. Financial Statements and Supplementary Data.................... 33
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 55
PART III
10. Directors and Executive Officers of the Registrant............. 55
11. Executive Compensation......................................... 58
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 63
13. Certain Relationships and Related Transactions................. 65
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 69
i
PART I
Items 1 and 2. Business and Properties
THE COMPANY'S BUSINESS
Lyondell Petrochemical Company and LYONDELL-CITGO Refining Company Ltd. (LCR)
operate in two business segments: petrochemicals and refining. The Company
manufactures a wide variety of petrochemicals, including olefins (ethylene,
propylene, butadiene, butylenes and certain specialty products), polyolefins
(polypropylene and low density polyethylene), methanol, methyl tertiary butyl
ether (MTBE), and aromatics and, through LCR, a Texas limited liability company,
refined petroleum products, including gasoline, heating oil, jet fuel, fuel oil,
aromatics and lubricants (lube oils). The Company generally sells its
petrochemical products to customers for use primarily in the manufacture of
other chemicals and products, which in turn are used in the production of a wide
variety of consumer and industrial products. LCR sells its principal refined
products primarily to CITGO Petroleum Corporation (CITGO) and to a lesser
extent, to other marketers of petroleum products.
As the context may require, all references hereafter to the "Company" or
"Lyondell" include Lyondell Petrochemical Company and its wholly-owned
subsidiaries.
Development of Business
The Company was incorporated under the laws of the State of Delaware in 1985.
Atlantic Richfield Company (ARCO) originally created a separate division
(Lyondell Division) by the combination of the operations of the Channelview,
Texas petrochemical complex (Channelview Complex), and the full conversion
Houston, Texas refinery (Refinery).
Effective July 1, 1988, ARCO transferred substantially all the assets and
liabilities relating to the integrated petrochemical and petroleum processing
business of the Lyondell Division to the Company. In addition, certain pipeline
assets that were not formerly a part of the Lyondell Division were transferred
to Lyondell. In exchange for the transfer of such assets and liabilities,
Lyondell issued ARCO additional shares of its common stock. On January 25,
1989, ARCO completed an initial public offering of 43,000,000 shares of
Lyondell's common stock.
In February, 1990, the Company acquired a polypropylene plant and a low density
polyethylene plant located in Pasadena, Texas (Polymers Facility).
In July, 1993, pursuant to agreements between the Company and CITGO (and its
affiliates), the Company contributed its refining business (including the lube
oil blending and packaging plant in Birmingport, Alabama) and refining working
capital to LCR and retained an initial 95% participation interest in LCR. At
December 31, 1993, the Company had an approximate 90% interest in LCR. The
results of LCR currently are consolidated into Lyondell's financial statements.
For further discussion of this transaction, see "REFINING SEGMENT - Overview".
LCR is undertaking a major upgrade project at the Refinery to enable the
facility to process substantial additional volumes of very heavy crude oil. LCR
also has entered into a long-term crude supply contract (Crude Supply Contract)
with Lagoven, S.A. (LAGOVEN), an affiliate of CITGO. In addition, under the
terms of a long-term product sales agreement (Products Agreement), CITGO
purchases from LCR a majority of the refined products produced at the Refinery.
Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of
Petroleos de Venezuela, S.A. (PDVSA), the national oil company of Venezuela.
See "REFINING SEGMENT".
1
At March 1, 1994, ARCO owned 39,921,400 shares of Lyondell common stock, which
represent 49.9 percent of the issued and outstanding common stock of the
Company. ARCO officers and directors currently hold five of the eleven
directorships on the Company's Board of Directors. Although officers and
directors of ARCO do not constitute a majority of the Board of Directors, for
certain federal and state securities laws purposes, ARCO could be deemed to be a
"control" person or an "affiliate" of Lyondell.
For additional information relating to certain continuing relationships and
potential conflicts of interest among Lyondell, LCR, ARCO and ARCO Chemical
Company (ARCO Chemical), an 83.3 percent owned subsidiary of ARCO, including
their respective subsidiaries, see Item 13 -- "Certain Relationships and Related
Transactions" included herein.
See Note 19 - Segment Information of Notes to Consolidated Financial Statements.
SUMMARY DESCRIPTION OF BUSINESS SEGMENTS
PETROCHEMICAL SEGMENT
Overview
Channelview Complex -- Lyondell's Channelview Complex, located in Channelview,
Texas, 20 miles east of Houston, includes two large olefins plants, a methanol
plant, a butadiene recovery unit, a product flexibility unit (which has the
capability to convert ethylene and other light hydrocarbon streams into
propylene), an aromatics (benzene and toluene) recovery unit, two MTBE units, an
isoprene recovery unit and other petrochemical processing units. The
Channelview Complex is connected by multiple pipelines to the Refinery, which is
approximately 16 miles away. The Channelview Complex also is connected by a
comprehensive pipeline system to the Company's Mont Belvieu, Texas storage
facility, to leased storage terminals and to Gulf Coast customers. Ethylene and
propylene are shipped or exchanged via this pipeline system. See "Properties".
The Company's olefins plants and related processing units produce ethylene,
propylene, butadiene, butylenes, benzene, toluene, hydrogen and certain
specialty products, such as isoprene, dicyclopentadiene, resin oils and
piperylenes, along with gasoline blendstocks and heavy liquid fuels. The Company
also produces methanol and MTBE. The Company's petrochemical products are used
by its customers to manufacture intermediate chemicals, which are used in a
variety of consumer and industrial products.
Ethylene is used to manufacture polyethylene, which is used in products such as
trash bags, housewares and milk containers. Ethylene also is used to produce
ethylene oxide (used to produce ethylene glycol which is used to produce
antifreeze and polyester fibers), ethylene dichloride (used to produce polyvinyl
chloride for pipe and other vinyl products), ethylbenzene (used to produce
styrene, which in turn is used to produce polystyrene for packaging and
containers) and alpha olefins (used in the manufacture of detergents, as well as
other intermediate chemicals).
Propylene is used to manufacture polypropylene, which is used in products such
as carpets, food packaging, upholstery, automobile parts and plastic bottles.
Propylene is also used to manufacture acrylonitrile (used in clothing and high
impact plastics), propylene oxide (used in polyurethane foams for furniture and
insulation) and oxo products (used in industrial solvents, as well as other
intermediate chemicals).
Butadiene is used to manufacture styrene butadiene rubber and polybutadiene
rubber, both of which are used in the manufacture of tires and other rubber
products. Butadiene is also used in the production of nylon and acrylonitrile-
butadiene-styrene plastics.
Methanol is used to produce MTBE and a variety of chemical intermediates,
including formaldehyde, acetic acid and methyl methacrylate. These
intermediates are used to produce bonding adhesives for plywood, polyester
fibers and plastics. Other end uses include solvents and antifreeze
applications.
2
MTBE is an octane enhancer and clean fuel additive in reformulated gasoline.
All MTBE produced at the Channelview Complex and not blended at the Refinery is
sold to a single customer. See "Properties" and Item 13 - "Certain
Relationships and Related Transactions".
The following table shows the current annual rated capacity for certain of the
Company's principal petrochemical products:
Rated Capacity(a)
at December 31,
1993
-----------------
(Millions)
Petrochemical Product
Ethylene (pounds).................................... 3,600
Propylene (pounds)................................... 2,100 (b)
Butadiene (pounds)................................... 615
Methanol (gallons)................................... 233 (c)
MTBE (gallons)....................................... 167
Aromatics (gallons).................................. 130
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(a) The term "rated capacity," as used in this table and throughout this
report, 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
rated capacity.
(b) Does not include refinery grade material or production from the product
flexibility unit, which has a current rated capacity of 1 billion pounds per
year of propylene. In 1993, the Company completed an expansion project that
more than doubled propylene capacity of the product flexibility unit.
(c) Capacity as shown includes equivalent methanol that could be produced from
reformed gas, an intermediate in the production of methanol.
Bayport Polymers Facility -- The Polymers Facility converts propylene and
ethylene supplied by the Channelview Complex into polypropylene and low density
polyethylene that is sold into the derivative markets and transported by railcar
and truck. The Polymers Facility is connected by pipeline to the Company's Mont
Belvieu, Texas storage facility for feedstock supply. The following table shows
the current annual rated capacity for each of the Company's principal
polyolefins products.
Rated Capacity
at December 31,
1993
---------------
(Millions)
Polyolefins Product
Polypropylene (pounds)................................ 300
Low density polyethylene (pounds)..................... 140
Feedstocks
The Company's olefins plants can process 100 percent heavy petroleum liquids
(naphtha, condensates and gas oils) or up to 90 percent natural gas liquids
(ethane, propane, butane and natural gasoline; collectively, "NGL") feedstocks.
The Company's olefins plants use approximately 125,000 to 160,000 barrels per
day of NGLs and/or heavy liquids feedstocks. The Company obtains a portion of
its olefins feedstock requirements from LCR (NGLs, naphtha and gas oil) and
additional olefins feedstock in the form of petroleum condensates pursuant to a
contract with a producing country. The remainder of its heavy liquids
requirements are obtained under short-term
3
contracts or on the spot market from a variety of foreign and domestic
sources. The Company purchases NGLs from a wide variety of domestic sources,
many of which have pipeline connections to the Company's facilities.
The Company's methanol plant generally processes natural gas feedstocks but also
has the ability to process NGL feedstocks (other than natural gasoline). The
Company purchases natural gas from a variety of domestic sources for use as fuel
at its facilities and as feedstock for the methanol plant.
The Channelview Complex is currently the sole supplier of propylene and ethylene
feedstocks to the Polymers Facility, which uses them to make polypropylene and
low density polyethylene.
Marketing and Sales
Lyondell sells a majority of its olefins products to customers with whom it has
long-standing relationships. Sales generally are made pursuant to written
agreements, which typically provide for monthly negotiation of price based upon
current market prices for products sold under contract. The parties are
contractually committed to use their best efforts to agree monthly on price
terms. Nonetheless, if the parties fail to agree on a monthly price, in some
cases deliveries may be suspended for the month. The term of these contracts is
typically three to five years with automatic one year term extension provisions
which cause the contract to remain in effect after the initial term unless
expressly terminated by one of the parties. Some of these contracts are subject
to early termination if deliveries have been suspended for several months. The
contracts typically require the customer to purchase a specified minimum
quantity while establishing a quantity range whereby the customer has the right
to purchase additional quantities up to a specified maximum.
The Company sells substantially all of its methanol output and most of its
aromatics output under contracts that have initial terms ranging from two to
three years and that typically contain automatic one year term extension
provisions which cause the contracts to remain in effect after the initial term
expires unless expressly terminated by one of the parties. These contracts
generally provide for monthly or quarterly price adjustments based upon current
market prices. Aromatics produced at the Refinery are marketed by Lyondell for
LCR under contracts with similar terms to its own with the exception of benzene
which is sold directly to Lyondell at market-related prices.
Competition and Industry Conditions
The basis for competition in all of Lyondell's petrochemical products is price,
product quality and product deliverability. Lyondell competes with other large
domestic producers of olefins, including, but not limited to, Amoco Chemical
Company, Chevron Chemical Company, Exxon Chemical Company, Occidental Chemical
Corporation, Phillips Petroleum Company, Shell Chemical Company and Texaco
Chemical Company.
The combined rated capacity of the Company's olefins units at January 1, 1994
was approximately 3.6 billion pounds of ethylene per year or approximately 7.7
percent of total domestic production capacity. Based on published rated
production capacities, the Company believes it is one of the five largest
producers of ethylene in the United States. Of the total ethylene production
capacity in the United States, approximately 93 percent is located along the
Gulf Coast, and approximately 77 percent is owned by ten manufacturers.
During the period from January 1, 1991 to December 31, 1993, domestic industry
ethylene capacity increased by approximately 4.9 billion pounds. This increase
significantly outpaced demand and resulted in declining product margins.
Domestic industry ethylene rated capacity at January 1, 1994 was approximately
46.6 billion pounds per year. New plants coming on-line and debottlenecking of
existing plants are expected to add an additional 2.5 billion pounds of capacity
in 1994 and an additional 1.5 billion pounds of capacity in 1995, which
additional capacity is expected to be relatively in balance with domestic demand
growth. There are no additional capacity expansions currently announced for the
U. S. after 1995. Although the demand for ethylene is expected to continue
growing during the 1990's, there is no assurance that recent and anticipated
ethylene capacity increases, or other factors, will not adversely affect the
industry's supply and demand balance.
The Company's principal competitors in polypropylene production include Amoco
Chemical Company, Aristech Chemical Corporation, Texas Eastman Division of
Eastman Chemical, FINA Oil & Chemical Company, and Himont Incorporated. The
Company's principal competitors in low density polyethylene production include
4
Chevron Corporation, Dow Chemical Company, Mobil Chemical Company, Quantum
Chemical Corporation and Westlake Polymers Corporation.
The provisions of the Clean Air Act Amendments of 1990 will require the
manufacture and sale of alternative fuels, including reformulated gasoline.
Management believes the Company is well positioned currently to respond to
increased demand for reformulated gasoline due to its ability to manufacture
MTBE (and its primary ingredients) and its ability to extract aromatics.
Lyondell has entered into a joint development and licensing arrangement to
accelerate commercialization of two isomerization processes that produce
feedstocks for MTBE and tertiary amyl methyl ether (TAME) which are blending
components for reformulated gasoline. Proposed regulations by the EPA could
mandate that 30 percent of the gasoline sold in the reformulated gasoline
program be derived from renewable sources such as ethanol by 1995. These
regulations may have a negative impact on the market for MTBE and methanol.
Historically, petrochemical industry profitability has been heavily influenced
by price competition, which may intensify due to, among other things, new
domestic and foreign industry capacity. In general, weak economic conditions
either in the United States or in world markets also tend to reduce demand and
put pressure on margins. Petrochemical profitability also is expected to be
affected by reduced derivative exports as a result of weak worldwide economic
conditions and more balanced regional production throughout the world. Because
of the uncertainties inherent in these businesses, it is not possible to predict
accurately how changes in feedstock costs, market conditions or other factors
will affect petrochemical industry margins in the future.
Properties
The Company owns all of the plant and equipment that comprise its two olefins
plants at its Channelview Complex and owns the approximately 2,875 acre parcel
on which the complex is situated. The Company also owns the methanol plant and
other petrochemical processing units which are located at the Channelview
Complex. These include the product flexibility unit, two MTBE units, the benzene
and toluene recovery unit, the butadiene recovery unit, the isoprene recovery
unit and an isopropyl alcohol unit. One of the MTBE units and the isopropyl
alcohol unit are used exclusively to process products for ARCO Chemical. The
Company also operates a styrene maleic anhydride unit (SMA) and a polybutadiene
unit which are owned by a third party and are located on property leased from
the Company within the Channelview Complex. A third party owns and operates a
facility on land leased from the Company that is used to upgrade hydrogen from
the Company's methanol plant. The Company owns the real property, plant and
equipment which comprise the Polymers Facility, located on approximately 187
acres in Pasadena, Texas. Lyondell owns several pipelines connecting the
Channelview Complex, the Refinery and the Mont Belvieu storage facility,
including six lines used to transport heavy liquid feedstocks, butylenes,
benzene, hydrogen, butane, MTBE and unfinished gasolines between the Channelview
Complex and the Refinery.
Lyondell also owns a storage facility, a brine pond facility and a tract of
vacant land at Mont Belvieu, Texas, located approximately 15 miles east of the
Channelview Complex. Storage capacity for up to 10 million barrels of NGL
feedstocks, ethylene and propylene is provided in salt domes at the Mont Belvieu
facility. The Company also owns an approximate 10 percent undivided joint
interest in much of the real property surrounding the Mont Belvieu site. This
property, which is owned jointly with several other companies that operate
storage or processing facilities at Mont Belvieu, is maintained as a greenbelt
for these facilities. The Company has a long-term lease on product pipelines
from Mont Belvieu to most olefins customers.
Lyondell leases its executive offices and corporate headquarters in downtown
Houston. In addition, the Company leases storage facilities for the handling of
its products from various third parties, primarily in the Gulf Coast area.
Capital Program
The petrochemical segment's fixed asset capital expenditures totaled $15 million
in 1993. The petrochemical segment's capital budget for 1994 is $30 million, of
which approximately $3 million is for environmentally-
5
related capital projects. See "ENVIRONMENTAL MATTERS" for a discussion of
these environmentally-related capital projects.
As part of its ongoing operations, the Company periodically conducts maintenance
turnarounds on its facilities. When conducting a maintenance turnaround on a
principal facility, capital expenditures and maintenance expenses as well as
lost operating income are typically incurred. Unscheduled shutdowns were
necessary on the two olefins units at the Channelview Complex during 1993. In
addition to the required repairs, other work was performed during the shutdowns
which is expected to postpone the next scheduled turnaround on the olefins
units. Although turnarounds on principal facilities are usually scheduled well
in advance, the timing of such turnarounds can be accelerated or delayed because
of numerous factors, many of which are beyond the Company's control.
Effective January 1, 1993, the Company changed its method of accounting for
turnarounds. Under the new method, repair and maintenance expenses associated
with turnarounds exceeding $5 million are capitalized when incurred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all repair and maintenance expenses
associated with turnarounds were expensed as incurred. The Company believes
that the new method of accounting is preferable in that it provides for a better
matching of repair and maintenance expenses associated with turnarounds with
future product revenues. See Note 4 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS".
In the last several years, there have been several mergers, acquisitions and
spin-offs in the chemical industry. The Company believes that the end result of
this activity will be an industry with fewer, but more competitive,
participants. The Company further believes that the current industry economic
environment creates potential opportunities for expansion or diversification by
the Company. The Company continually evaluates opportunities that are intended
to enhance cash flow and total return to stockholders. This ongoing evaluation
process involves both potential expansion and debottlenecking projects for the
Company's existing facilities, as well as potential acquisition, joint venture
and other opportunities involving third parties. The Company expects that its
efficient, low-cost operation of petrochemical assets could be a leveraging
factor in enhancing the value to the Company of any external opportunities.
Potential funding sources for long-term capital projects, whether involving
transactions with third parties or otherwise, could include, without limitation,
the Company's current financial resources, potential earnings growth, future
borrowings and future issuance of equity securities, as well as possible
contractual arrangements such as joint ventures or partnerships. Both the
Company's ability to undertake and fund the particular strategies described
above, and the general level of the Company's capital commitments and
expenditures from period to period, will be affected by a variety of factors
including, without limitation, the general business environment, as well as
changes in applicable government regulations and tax laws.
Employee Relations
At year end, Lyondell employed 1,083 full-time employees. The Company also uses
the services of approximately 443 employees of independent contractors in the
routine conduct of its business.
REFINING SEGMENT
Overview
LCR's Refinery, located adjacent to the Houston Ship Channel, includes a coker,
a fluid catalytic cracking unit, three reformers, four crude distillation units,
two sulfur recovery plants and several hydrodesulfurization units, as well as
lube oil manufacturing and packaging facilities and an aromatics recovery unit.
It is connected by multiple pipelines to the Channelview Complex and provides
feedstocks to and receives by-products from that facility.
Products manufactured at the Refinery include gasoline, heating oil, jet fuel,
aromatics (benzene, toluene, paraxylene and orthoxylene), lubricants (industrial
lubricants, motor oils, white oils, process oils and base oils) carbon black
oil, sulfur and petroleum coke. The aromatics recovery unit at the Refinery
produces benzene, toluene, paraxylene and orthoxylene. Aromatics are used to
manufacture a variety of intermediate chemicals,
6
including ethylbenzene, cumene, urethane foam components and polyester
intermediates for films, fibers and resins. End uses of these products include
packaging and containers, furniture, apparel and flooring.
Although the Refinery is currently processing primarily heavy Venezuelan crude
oil, the Refinery does have the capability (known as "full conversion") to
process West Texas Sour (WTS) - type crude oil feedstocks into a product output
mix that consists of a significant percentage of high value products, such as
gasoline, heating oil, jet fuel, aromatics and lube oils and olefins feedstocks
(which are used by the Channelview Complex). It currently has a capacity rating
of 265,000 barrels per day of crude oil and related feedstocks which is based on
running WTS or equivalent crude oil in a full conversion mode. The actual
operating capability varies with the type of crude oil it processes. See
"Feedstocks".
On July 1, 1993, the Company contributed its refining assets (including the lube
oil blending and packaging plant in Birmingport, Alabama) and refining working
capital to LCR and retained an approximate 95 percent interest in LCR. CITGO
contributed $50 million for future capital projects of LCR and in exchange
received an approximate five percent interest in LCR. CITGO also made an
additional $50 million contribution for future capital projects of LCR on
December 31, 1993. As a result of this additional contribution, CITGO had an
approximate 10 percent interest in LCR at December 31, 1993. In addition to the
funding related to the upgrade project described below, CITGO has one additional
contribution commitment of $30 million to be made upon completion of the upgrade
project and it has an option to make an additional equity contribution
sufficient to increase its interest in LCR to 50 percent.
The Company believes that the principal benefit from its participation in LCR
will be stabilized earnings and cash flow from the refining business. The
expected stabilization of earnings and cash flows resulting from the agreement
with CITGO will not be fully realized until the projected completion of the
Refinery upgrade project described below. During 1993, the Refinery increased
the volumes of heavy Venezuelan crude oil processed and it is anticipated that
the Refinery will continue to achieve increased benefits from processing heavy
Venezuelan crude oil as it achieves improved operating efficiency. The
Refinery also has obtained a long-term crude oil supply. See "Feedstocks" and
"Marketing and Sales" for further discussion of the Crude Supply Contract and
Product Agreement.
Effective July 1, 1993, LCR and Lyondell entered into multiple agreements for
feedstock and product sales designed to preserve much of the synergy between the
Refinery and the Company's petrochemical business. Under the terms of these
agreements, various feedstock and product streams will be transferred between
the Refinery and Lyondell's Channelview Complex at market-related prices. LCR
and Lyondell also have entered into tolling agreements, pursuant to which
alkylate and MTBE attributable to Refinery feedstocks will be produced for LCR
at Lyondell's Channelview Complex.
Also effective July 1, 1993, the majority of the employees formerly employed by
Lyondell in its refining business became employees of LCR. Pursuant to the
terms of a number of service agreements, Lyondell has contracted with LCR to
continue to perform services in certain areas, including employee services,
administrative services and marketing services. Lyondell and LCR also have
entered into a variety of contracts providing for the assignment or licensing of
intellectual property rights associated with the refining business.
Upgrade Project
LCR is undertaking a major upgrade project at the Refinery to enable the
facility to process substantial additional volumes of very heavy crude oil.
CITGO will provide a major portion of the funds for the upgrade project, as well
as funds for certain capital projects. Project engineering for the upgrade is
currently underway and at the present time, LCR management anticipates the cost
over the next three to four years will be approximately $800 million. The
upgrade project is subject to regulatory approvals and resolution of certain
other matters. The upgrade project is intended to increase the heavy crude oil
processing capability of the Refinery from 130,000 barrels per day of 22 degree
API gravity crude oil to 200,000 barrels per day of 17 degree API gravity
Venezuelan BCF-17 crude oil. The upgrade is not intended to increase the total
throughput of the Refinery, but rather its ability to process heavier, higher
margin, crude oils. The project also will include expansion of the Refinery's
7
reformulated gasoline and low sulfur diesel production capability. Major
components of the upgrade include new coking, hydrotreating and sulfur recovery
units; a new crude distillation unit and modifications to the Refinery's largest
existing crude distillation unit and various hydrodesulfurization units.
Funding for the upgrade project will occur in three phases. The first phase,
the initial $300 million, will be funded by CITGO. The second phase will be
funded by an LCR borrowing of approximately $200 million. The third phase,
which is expected to occur toward the end of the upgrade project, will be a
combination of LCR borrowing and contributions from CITGO and the Company.
Prior to completion of the upgrade project, the financing costs for the upgrade
project loans will be funded by CITGO. The timing of the third phase and the
level of contributions from the Company and CITGO will be dependent upon the
total cost of the upgrade project. The Company will contribute, in the form of a
subordinated loan, 25 percent of the cost of the upgrade project in excess of
$500 million. Following completion of the upgrade project, CITGO's participation
interest is expected to be approximately 35 percent. Following the upgrade
project, CITGO has a one-time option to make an additional equity contribution
sufficient to increase its participation interest in LCR to 50 percent.
Following the upgrade, the earnings potential of the Refinery is expected to be
improved, because of the higher margins expected to be associated with the
resulting heavier crude oil mix, increased coking capability and other yield
improvements.
Management of LYONDELL-CITGO Refining
LCR is a limited liability company organized under the laws of the state of
Texas. The Company owns its interest in LCR through a wholly-owned subsidiary,
Lyondell Refining Company. CITGO holds its interest through CITGO Refining
Investment Company, a wholly-owned subsidiary of CITGO (together with Lyondell
Refining Company, Owners). The operative agreement with respect to the rights of
each of the Owners and their parent companies is the Amended and Restated
Limited Liability Company Regulations (Regulations) of LCR. The Regulations
govern ownership and cash distribution rights. CITGO has committed to reinvest
its share of operating cash flow during the upgrade project which will increase
its participation percentage, while the Company has unrestricted access to its
share of operating cash flow from LCR. The initial term of the Regulations is 25
years, although they may be terminated under certain circumstances, including
insolvency of LCR or either Owner, uncured material breaches by either Owner and
failure to obtain permits for the upgrade project. Under the terms of a
reciprocal "Performance Guarantee and Control Agreement" (Performance
Guarantee), Lyondell and CITGO each unconditionally guarantee the obligations
and performance of their respective subsidiary-Owner under the terms of the
Regulations.
There are risks associated with enforcing the provisions of contracts with an
affiliate of a foreign government such as LAGOVEN, including the risks
associated with enforcing judgments of United States courts against entities
whose assets may be located outside of the United States and whose management
are not residents of the United States. However, the Company believes that this
transaction holds substantial economic and other incentives for all parties to
perform their obligations, including the obligations of LAGOVEN pursuant to the
Crude Supply Contract. Lyondell believes that PDVSA has a strategic interest in
expanding its crude oil refining operations in the United States in order to
increase the markets for its heavy, sour crude oil. Depending on then current
market conditions, breach or termination of the Crude Supply Contract could
adversely affect the Company; provided, however, that the impact of any such
event is likely to be less significant for Lyondell after the completion of the
upgrade project. In addition, the financial commitments of CITGO should provide
an economic incentive for all PDVSA affiliates to perform their obligations
under the various agreements. The parties have negotiated alternative
arrangements in the event of certain force majeure conditions, including
governmental or other actions restricting or otherwise limiting LAGOVEN's
ability to perform. However, LCR bears the risk that such alternative
arrangements will not fully provide LCR with the benefits of the Crude Supply
Contract.
The Regulations provide that LCR is managed by an Owners Committee, which has
three representatives (Representatives) from each Owner. Certain actions
require unanimous consent of the Representatives, including, without limitation,
amendment of the Regulations, borrowing money in excess of LCR's existing credit
facility, delegation of authority to committees, certain purchase commitments
and capital expenditures in excess of designated amounts and budgetary approval.
All actions not requiring unanimous consent can be determined by
8
Lyondell as majority owner. The day-to-day operations of the Refinery are
managed by the executive officers of LCR, including former Lyondell officers
with responsibility for manufacturing and refining operations and refined
products marketing. The results of LCR's operations are consolidated into
Lyondell's financial statements.
Feedstocks
The following table sets forth the Refinery's runs of blended crude oils (which
include crude oil and other petroleum liquids, unfinished oils and other
hydrocarbons) and unfinished stock.
Year Ended December 31
----------------------
1993 1992 1991
---- ---- ----
(Thousand barrels per day)
Refinery Runs
Blended crude oils.............. 234 236 255
Unfinished stock................ 50 50 50
--- --- ---
Total............................. 284 286 305
=== === ===
The Refinery can process a wide variety of domestic and foreign crude oil
feedstocks, including heavy (low API gravity, high viscosity) and sour (high
sulfur content) crude oils. The Refinery can process up to approximately
220,000 barrels per day (83 percent of rated capacity) of light sour crude
oils, or approximately 130,000 barrels per day of heavy sour crude oils
(22(degrees) API gravity) plus 80,000 barrels per day of light sour crude oil.
The upgrade project is intended to increase the Refinery's processing
capability to 200,000 barrels per day of very heavy Venezuelan crude oil
(17(degrees) API gravity).
The Crude Supply Contract requires LAGOVEN to supply and LCR to purchase minimum
quantities of crude oil for 25 years. The contract incorporates a formula price
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, including crude transportation costs, adjustable for inflation; (ii)
certain actual costs, including import duties and taxes; and (iii) a deemed
margin, which varies according to the grade of crude oil or other feedstock
delivered and which is adjustable for inflation. Because deemed operating costs
and the slate of refined products deemed to be produced for a given barrel of
crude oil or other feedstock do not necessarily reflect the actual costs and
yields in any period, the actual refining margin earned by LCR under the
contract will vary depending on, among other things, the efficiency with which
LCR conducts its operations during such period. The contract is designed to
reduce the inherent earnings and cash flow volatility of the refining
operations of LCR.
The Refinery began processing Venezuelan crude oil in the third quarter of 1992.
Since that time, the Company and LCR have identified and overcome obstacles
inherent in processing high rates of heavy Venezuelan crude oil, including
making modifications to the coker and one of the crude distillation units. The
improved unit reliability and increased unit processing capability has increased
the Refinery's capability of running high volumes of heavy Venezuelan crude oil
and raised the capacity to 130,000 barrels per day. The remainder of the
Refinery's capacity is used to process lighter crude oils and feedstocks.
LCR utilizes its Select Refinery Feedstock program to recycle used lubricating
oil purchased from third parties by processing it into gasoline and other
refined products. During 1993 approximately 3 million gallons of used oil were
processed by the Refinery. When the program is fully implemented, the Refinery
will have the capability to process significantly more used oil.
Marketing and Sales
Lyondell was formerly a merchant marketer of gasoline, heating oil and jet fuel.
LCR currently sells a majority of these light refined products to CITGO under
the Products Agreement and sells the remainder into the merchant market. Lube
oils are manufactured and sold by LCR directly to industrial consumers and to
distributors throughout the United States and international markets. LCR's
branded lubricants include both paraffinic and naphthenic oils, rubber process
oils, base oils used to blend into finished lubricant products, food-grade white
oils and an extensive variety of engine oils and industrial lubricants. Lyondell
is the sole marketing agent for LCR's aromatics (see "PETROCHEMICAL SEGMENT -
Marketing and Sales") with the exception of benzene which is sold directly to
Lyondell at market-related prices.
Competition and Industry Conditions
The Company formerly competed with many other refiners for sales of gasoline,
heating oil, and jet fuel in the domestic and international merchant market.
With the formation of LCR, the majority of these products are sold to CITGO
under the Products Agreement. LCR continues to sell lube oils directly to major
industrial consumers and through several hundred distributors in domestic and
international markets.
9
Many of the domestic refiners are owned by or affiliated with major integrated
oil companies. Based on published industry data, as of January 1, 1993, there
were 177 crude oil refineries in operation in the United States and total
domestic refinery capacity was approximately 15.1 million barrels per day.
During 1993, Lyondell and LCR processed an average of 234,000 barrels per day of
crude oil and other petroleum liquids, or less than two percent of domestic
capacity.
Profitability of the refining industry is affected by, among other things,
market conditions, volatility in world oil markets, capital expenditures
required to meet increasing environmental standards, repair and maintenance
costs and downtime of manufacturing units. However, management believes that
the combination of the Crude Supply Contract and the Products Agreement will
stabilize future earnings and cash flows and reduce the market driven aspects of
such volatility.
Prior to the completion of the upgrade, the keys to operational success for LCR
will be to maximize the amount of heavy Venezuelan crude oil processed in the
coking mode, to optimize the efficient utilization of the remaining cracking
capacity, and to maintain an overall focus on low cost operations.
In 1992, the U.S. Coast Guard proposed rules to implement the Oil Pollution Act
of 1990. Although Lyondell or LCR neither owns nor operates vessels covered by
the proposed regulations, Lyondell and LCR are major users of charter services
to deliver petroleum feedstocks to their facilities. The financial
responsibility requirements imposed by the proposed rules will limit the choice
of potential carriers and are expected to increase costs for transporting
feedstock and refined products.
Properties
LCR owns the real property, plant and equipment which comprise the Refinery,
located on an approximately 700-acre site in Houston, Texas. Units include the
fluid catalytic cracking unit, the coker, three reformers, four crude
distillation units, two sulfur recovery plants, several hydrodesulfurization
units, as well as lube oil manufacturing and packaging facilities and an
aromatics recovery unit. LCR also owns the real property, plant and equipment
which comprise a lube oil blending and packaging plant in Birmingport, Alabama.
Lyondell owns several pipelines connecting the Channelview Complex, the Refinery
and the Mont Belvieu storage facility, including six lines used to transport
heavy liquid feedstocks, butylenes, benzene, hydrogen, butane, MTBE and
unfinished gasolines between the Channelview Complex and the Refinery. LCR owns
a pipeline used to transport refined products (gasoline, kerosene, and heating
oil) from the Refinery to the GATX Terminal to interconnect with common carrier
pipelines.
Capital Program
The refining segment's capital expenditures for additions to fixed assets
(excluding spending on the upgrade project) totaled $45 million in 1993. The
refining segment's capital budget (excluding the upgrade project) for 1994 is
approximately $60 million. Of the total 1994 capital budget, approximately $48
million is expected to be spent on environmentally-related capital projects. The
funds contributed by CITGO (see "Overview") are required to be used for capital
spending by LCR and other expenditures as determined by the Owners, and will
substantially reduce the total capital spending that the Company otherwise would
be required to make in connection with Refinery operations over approximately
the next three to four years. See "ENVIRONMENTAL MATTERS" for further
discussion of these capital projects.
As part of its ongoing operations, LCR periodically conducts maintenance
turnarounds on its facilities. When conducting a maintenance turnaround on a
principal facility, capital expenditures as well as maintenance expenses and
lost operating income are typically incurred. Although turnarounds on principal
facilities are usually scheduled well in advance, the timing of such turnarounds
can be accelerated or delayed because of numerous factors, many of which are
beyond LCR's control. Unscheduled shutdowns were necessary on two principal
units at the Refinery during the year. Turnarounds on two principal units at the
Refinery are currently scheduled for late 1994, although it is possible that
they may be delayed.
10
Effective January 1, 1993, the Company changed its method of accounting for
turnarounds. Under the new method, repair and maintenance expenses associated
with turnarounds exceeding $5 million are capitalized when incurred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all repair and maintenance expenses
associated with turnarounds were expensed as incurred. The Company believes
that the new method of accounting is preferable in that it provides for a better
matching of repair and maintenance expenses associated with turnarounds with
future product revenues. See Note 4 of "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS".
The Company remains obligated to fund certain Refinery environmental projects
initiated prior to the creation of LCR as well as its share of a base level of
Refinery capital improvements; the total of these obligations is estimated to be
$50-75 million through the completion of the upgrade project. The level and
timing of these anticipated capital commitments and expenditures will be
affected by changes in applicable governmental regulations, including
environmental and tax laws.
Employee Relations
At year end, LCR employed 1,200 full time employees. LCR also uses the services
of approximately 200 employees of independent contractors in the routine conduct
of its business. Certain hourly workers at the Refinery are covered by
collective bargaining agreements between LCR and the Oil, Chemical and Atomic
Workers Union (approximately 700 employees).
RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS
The Company, including LCR, uses numerous patents in its operations, many of
which are licensed from third parties, including ARCO. See Item 13 -- "Certain
Relationships and Related Transactions". Although the Company's licenses from
ARCO and others are significant to its operations, the Company is not dependent
upon any particular patent, trade secret or the like, and it believes that the
loss of any individual patent, trade secret, or similar proprietary right would
not have a material adverse effect on the operations of the Company. The
Company submitted several new patent applications during 1993 to protect new
processes it developed.
Lyondell Licensing, Inc., a wholly-owned subsidiary of the Company, has entered
into a joint development and licensing relationship with CDTECH, a leading
supplier of ethers technologies used in reformulated fuels production, to
commercialize two isomerization processes that produce blending agents for
cleaner burning gasolines. This alliance is aimed at improving these
technologies through a joint development effort. If successful, the alliance is
expected to accelerate worldwide commercialization of Lyondell's butene
isomerization process and Lyondell's or CDTECH's pentene isomerization process.
The Company, including LCR, uses numerous trademarks in its marketing
operations, a portion of which are licensed from third parties, including ARCO.
The Company 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. The Company submitted several new trademark applications during
1993 to protect product line names and to foster its marketing position.
FINANCE MATTERS
The Company generally intends to use its cash position and cash flows to enhance
total return to stockholders. In addition, the Company's strategy is to
maintain a suitable rating on its debt securities. Any proposed action
affecting the Company's cash position or cash flow is evaluated in competition
with other available investments and other alternatives. This allows the
Company to take advantage of opportunities intended to maximize total return to
stockholders. See "PETROCHEMICAL SEGMENT - Capital Program" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
11
Long-Term Debt and Financing Arrangements
As of December 31, 1993, the Company had $725 million of long-term debt
consisting of $300 million of notes due 1996 and 1999, $200 million of notes due
1997 and 2002 and $225 million of medium-term notes due from 1994 to 2005.
The Notes due 1996 and 1999 and the medium-term notes contain provisions that
would allow the holders to require the Company to repurchase the debt upon the
occurrence of certain events combined with specified declines in public ratings
on the Notes due 1996 and 1999 (Put Rights). Events which may trigger the Put
Rights include, among other things, acquisitions by persons other than ARCO or
the Company of more than 20 percent of the Company's common stock, any merger or
transfer of substantially all of the Company's assets in connection with which
the Company's common stock is changed into or exchanged for cash, securities or
other property and payment of "special" dividends. See Item 5 - Market for
Registrant's Common Equity and Related Stockholder Matters. The foregoing
summary of the Put Rights is not intended to be complete and it is subject to,
and qualified in its entirety by reference to, the terms of the Indenture for
the Notes due 1996 and 1999 which has been filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated
herein by reference.
LYONDELL-CITGO Unsecured Revolving Credit Facility- Effective July 1, 1993, LCR
entered into a 364 day unsecured $100 million revolving credit facility with a
group of banks with Continental Bank, N.A., as agent. Under terms of the credit
facility, LCR may borrow with interest based on prime, LIBOR or CD rates at
LCR's option or have letters of credit issued on its behalf. The credit
facility may be extended at the request of LCR upon consent of the bank group.
The credit facility contains covenants that limit LCR's ability to modify
certain significant contracts, dispose of assets or merge or consolidate with
other entities. At December 31, 1993, no amounts were outstanding under this
credit facility.
Company Unsecured Revolving Credit Facility- During December, 1993, the Company
finalized a five year, $400 million unsecured revolving credit facility
(Facility) which replaced its existing $300 million credit facility which was
due to expire in July, 1994. At December 31, 1993, no amounts were outstanding
under the Facility. At the present time the Company views the Facility as a
back-up source of liquidity. The Company does not believe that the covenants or
the other terms of the Facility described below are reasonably likely to
materially affect or restrict the future operation of the Company's business or
its ability to pay dividends on its common stock.
Under the terms of the Facility, the interest rate for borrowings is based on
Euro-Dollar or CD rates, at the Company's option, and also is dependent upon the
Facility utilization rate and the Company's debt ratings. The Facility contains
restrictive covenants regarding the incurrence of additional debt, the
maintenance of certain fixed charge coverage and leverage ratios and the making
of contributions to LCR, as well as the payment of dividends to the extent that
the Company's net income after January 1, 1994 generally does not exceed, over
time, dividends declared or paid after that date.
The Facility's debt incurrence covenant restricts the incurrence by the Company
of additional debt, including debt under the Facility, unless, immediately after
giving effect to the additional borrowing, the ratio of earnings before
depreciation, amortization, interest and income taxes, to interest expense
exceeds the limits set forth in the Facility. However, the debt incurrence
covenant does not become applicable until the debt incurred by the Company after
December 31, 1993 exceeds $75 million.
In addition to other customary events of default, the Facility provides that an
event of default will occur (i) if the Company fails to pay when due (whether by
scheduled maturity, acceleration or otherwise) an aggregate amount of
indebtedness or interest thereon (other than with respect to loans under the
Facility) in excess of $15 million, or (ii) if the Company is determined (upon
exhaustion of all appeals and expiration of all cure periods) to be in default
of a material obligation under the LCR Regulations. The forgoing summary of the
Facility is not intended to be complete and it is subject to, and qualified in
its entirety by reference to, the terms of the Facility which has been filed as
an exhibit to this Annual Report on Form 10-K and incorporated herein by this
reference.
12
For a further discussion of the Company's long-term debt and financing
arrangements, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- FINANCIAL CONDITION" and Note 11 of "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS".
ENVIRONMENTAL MATTERS
The Company's production facilities are generally required to have permits and
licenses regulating air emissions, discharges to water and generation, storage,
treatment and disposal of hazardous wastes. Companies that are permitted to
treat, store or dispose of hazardous waste and maintain underground storage
tanks pursuant to the Resource Conservation and Recovery Act (RCRA) also are
required to meet certain financial responsibility requirements. The Company
believes that it has all permits and licenses generally necessary to conduct its
business or, where necessary, is applying for additional, amended or modified
permits, and that it meets applicable financial responsibility requirements.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is committed to Responsible Care(R), a chemical industry
initiative to enhance the industry's responsible management of chemicals. The
Company (together with the industry in which it operates) is subject to
extensive federal, state and local environmental laws and regulations concerning
emissions to the air, discharges onto land or waters and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
Some of these laws and regulations are subject to varying and conflicting
interpretations. In addition, the Company cannot accurately predict future
developments, such as increasingly strict requirements of environmental laws,
inspection and enforcement policies and compliance costs therefrom, which might
affect the handling, manufacture, use, emission or disposal of products, other
materials or hazardous and non-hazardous waste. For example, a revised testing
procedure under RCRA, the toxicity characteristic leachate procedure (TCLP),
resulted in the reclassification of some wastes at the Company's facilities
which has required changes in the Company's waste management practices. These
changes have caused the Company to make expenditures in 1993 and will cause the
Company to make substantial additional expenditures in 1994. Some risk of
environmental costs and liabilities is inherent in particular operations and
products of the Company, as it is with other companies engaged in similar
businesses, and there is no assurance that material costs and liabilities will
not be incurred. In general, however, with respect to the capital expenditures
and risks described above, the Company does not expect that it will be affected
differentially from the rest of the domestic petrochemical and refining
industry.
In some cases, compliance with environmental, health and safety laws and
regulations can only be achieved by capital expenditures. In the years ended
December 31, 1992 and 1993, the Company spent approximately $57 million and $38
million, respectively, for environmentally related capital expenditures at
existing facilities. For 1994 and 1995, the Company currently estimates that
environmentally related capital expenditures at existing facilities (including
LCR's) will be approximately $51 million and $50 million, respectively. The
timing and amount of these expenditures are subject to the regulatory and other
uncertainties described above as well as obtaining of the necessary permits and
approvals. The Company's 1994 capital budget includes the following
environmentally related projects: (1) work on installation of a wet gas scrubber
that will reduce sulfur dioxide and particulate emissions from the Refinery's
fluid catalytic cracking unit; (2) TCLP-related projects at the Refinery,
including closure of some surface impoundments, source reductions and rerouting
of streams; (3) completion of a number of projects to reduce benzene emissions
in compliance with federal regulations; (4) a marine vapor recovery project at
the Refinery; and (5) compliance costs at the Channelview Complex and the
Refinery related to nitrogen oxide emissions from combustion sources. Additional
projects may be required as a result of various enforcement orders that the
Company is negotiating. For periods beyond 1995, additional environmentally
related capital expenditures will be required, although the Company cannot
accurately predict the levels of such expenditures at this time.
The Refinery contains on-site solid-waste landfills which were used in the past
to dispose of waste generated at these facilities. It is anticipated that
corrective actions will be necessary to comply with federal and state
requirements with respect to this facility. In addition, the Company negotiated
an order with the Texas Water Commission, now the Texas Natural Resource
Conservation Commission (TNRCC), for assessment and remediation of groundwater
and soil contamination at the Refinery. The Company has reserved an amount
13
(without regard to potential insurance recoveries or other third party
reimbursements) it believes to be sufficient to cover current estimates of the
cost for remedial measures at its manufacturing facilities based upon its
interpretation of current environmental standards. Based on the establishment
of such reserves, and the status of discussions with regulatory agencies
described in the preceding paragraph, and although the reserves are subject to
increase, the Company does not anticipate any material adverse effect upon its
earnings, operations or competitive position as a result of compliance with the
laws and regulations described in this or the preceding paragraphs. See also
Item 3 -- "Claims Relating To Waste Disposal Sites".
Item 3. Legal Proceedings
General
In connection with the transfer of assets and liabilities from ARCO to Lyondell,
Lyondell agreed to assume certain liabilities arising out of the operation of
the Company's integrated petrochemical and petroleum processing business prior
to July 1, 1988. At that time, the Company and ARCO entered into an agreement
(Cross-Indemnity Agreement) whereby the Company agreed to defend and indemnify
ARCO against certain uninsured claims and liabilities which ARCO may incur
relating to the operation of the business of the Company prior to July 1, 1988,
including liabilities which may arise out of certain of the legal proceedings
described in this Item 3. See Item 13 -- "Certain Relationships and Related
Transactions". Prior to November 20, 1990, ARCO's insurance carriers had
assumed the defense of most of the lawsuits described in this Item 3. Since
that date, ARCO's insurance carriers have refused to advance defense costs in
those lawsuits relating to certain of the waste disposal sites. See "Claims
Relating To Waste Disposal Sites - ARCO Insurance Litigation".
In addition to the proceedings specifically described in this Item 3, ARCO, the
Company and its subsidiaries are defendants in other suits, some of which are
not covered by insurance. Many of these additional suits involve smaller
amounts than the matters described herein, or make no specific claim for relief.
Although final determination of legal liability and the resulting financial
impact with respect to the litigation described in this Item 3, as well as the
other litigation affecting the Company, cannot be ascertained with any degree of
certainty, the Company does not believe that any ultimate uninsured liability
resulting from the legal proceedings in which it currently is involved (directly
or indirectly) will individually, or in the aggregate, have a material adverse
effect on the business or financial condition of the Company. See Note 18 of
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS".
Although Lyondell is involved in numerous and varied legal proceedings, a
significant portion of its litigation arises in three contexts: (1) claims for
personal injury or death allegedly arising out of exposure to the Company's
products; (2) claims for personal injury or death, and/or property damage
allegedly arising out of the generation and disposal of chemical wastes at
Superfund and other waste disposal sites; and (3) claims for personal injury
and/or property damage and air and noise pollution allegedly arising out of the
operation of the Company's facilities. The following sections of this Item 3
describe these types of pending proceedings. Lyondell (either directly or
through ARCO as its indemnitee) is the real party at interest in these
proceedings.
Claims Related To Company Products
ARCO and the Company are involved in numerous suits arising in whole or in part
from the operation of the Company's, including LCR, petrochemical and petroleum
processing businesses and the assets related thereto in which the plaintiffs
allege damages arising from exposure to allegedly toxic chemical products, such
as benzene and butadiene. Plaintiffs in these cases usually worked at a
manufacturing facility as employees of one of Lyondell's customers, were
employees of the Company's contractors, or were employees of companies involved
in the transportation of the Company's products to its customers. These suits
allege toxic effects of exposure to chemicals sold in the ordinary course of
business to third parties by various industrial concerns, including ARCO or the
Company, or allege toxic chemical exposures at the Company's manufacturing
facilities. Issues common to these cases include: (1) whether the plaintiff can
identify a specific product to which he was allegedly exposed; (2) whether the
Company supplied the identified product to which plaintiff claims he was
exposed; (3) whether the plaintiff has a medical condition which, based upon
competent scientific and medical evidence, is causally related to the identified
product; (4) whether, and under what conditions, the plaintiff was exposed to
the
14
identified product; and (5) if the plaintiff was exposed, whether the
Company has any legal defenses to the plaintiff's claims and whether there are
other parties or defendants to whom the Company can turn for contribution or
indemnification. The Company believes that it has always followed a policy of
not only complying with all mandated standards related to product warnings and
exposure levels but also of complying with Company specific standards that were
more strict than those imposed by the law. As a result, the Company believes
that it has a basis to avail itself of legal defenses against claims regarding
its products due to exposures by employees and by claims of exposures from third
parties to whom the Company sold its products.
The vast majority of chemical exposure cases name a large number of industrial
concerns, in addition to the Company, as defendants and are at various stages of
discovery. Although the Company does not believe that the pending chemical
exposure cases will have a material adverse effect on its business or financial
condition, it is difficult to determine the potential outcome of this type of
case. The majority of the plaintiffs in chemical exposure legal proceedings
request relief in the form of unspecified monetary damages. Furthermore, when
specific amounts are requested they often bear no objective relation to the
merits of the case. Notwithstanding the foregoing, it is possible that if one
or more of the presently pending chemical exposure cases were resolved against
ARCO or the Company, the resulting damage award could be material to the Company
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
Claims Relating To Waste Disposal Sites
Wastes generated from products produced by facilities transferred from ARCO and
now owned by the Company or LCR have, from time to time, been disposed of at
third-party landfills. Two of these facilities, known as the "French Ltd." and
the "Brio" Sites, both of which are located near Houston, Texas, have been
classified as "Superfund" sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). The Environmental Protection
Agency (EPA) has named many potentially responsible parties (PRPs) at each site
from whom wastes were allegedly received. Based on the current law, the Company
does not believe that its obligation to ARCO related to ARCO's share of clean-up
costs at either of these sites will result in a liability that will have,
individually or in the aggregate, a material adverse effect on the business or
financial condition of the Company. It is possible, however, that the Company
may be involved in future CERCLA and comparable state law investigations and
clean-ups. The current presidential administration recently proposed a plan to
significantly revise the Superfund law which is scheduled for reauthorization
this year. Because the proposal is so recent and because it is expected to
generate strong reactions from business, insurance companies, lenders,
municipalities and environmentalists, the Company is not able to predict whether
the administration's plan will be enacted or to determine with specificity what
the impact would be on the Company.
French Ltd. Site Remediation -- At the French Ltd. site, ARCO and the other PRPs
have entered into a settlement agreement relating to the allocation of clean-up
costs. The EPA approved the clean-up plan and a Consent Decree was entered in
the Federal District Court for the Southern District of Texas in the first
quarter of 1990. An amendment to the Consent Decree relating to natural
resource damage has been negotiated and submitted to the court for approval.
The total costs associated with the Consent Decree are currently estimated to be
approximately $90 million. The Company believes that its share of clean-up
costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no more
than five percent of total costs recovered without giving effect to any
insurance coverage which may be available to offset these costs.
French Ltd. Site Litigation -- Approximately 2,500 plaintiffs have made claims
related to wastes in the French Ltd. Superfund site. In each of these cases,
ARCO is one of many defendants. These suits generally allege that unspecified
chemical waste sent to the site by the defendants caused a decrease in property
value, a decrease in plaintiffs' ability to enjoy their property, and
unspecified adverse effects on plaintiffs' health. Although some of the
lawsuits request relief in the form of unspecified monetary damages, the
aggregate amount of actual damages sought in those cases where damages are
specified exceeds $5 billion. The aggregate amount of punitive damages sought
in those cases where damages are specified exceeds $20 billion. In December,
1992, after mediation, ARCO, along with several other defendants, entered into a
preliminary agreement to settle claims of approximately 2,200 plaintiffs. The
remaining claims are in pretrial discovery. The Company's obligation to
reimburse ARCO for defense costs and settlements related to French Ltd. has not
been determined.
15
Brio Site Remediation -- At the Brio site, a definitive agreement allocating
these remedial costs among ARCO and other PRPs has been reached. The EPA
approved the plan and a Consent Decree between the Department of Justice and a
group of PRPs (including ARCO on behalf of its former divisions and
subsidiaries) was entered in Federal District Court for the Southern District of
Texas, in April, 1991 and remediation work is ongoing. In 1991, various parties
filed an appeal to the entering of the Consent Decree after the denial of their
motions to intervene in the proceedings. This appeal was denied in December,
1991. The total clean-up cost is currently estimated to be approximately $60
million. The Company believes that its share of the clean-up costs (as
allocated pursuant to the Cross-Indemnity Agreement) will be no more than one
percent of total costs without giving effect to any insurance coverage which may
be available to offset these costs.
Brio Site Litigation -- There currently are eight separate pending legal
proceedings filed against ARCO or its affiliates and numerous others in
connection with the Brio Superfund site. In these proceedings, there are
approximately 600 plaintiffs, many of whom are suing in their capacity as next
friend of minor children. In each of these cases, ARCO is one of many
defendants. Plaintiffs allege personal injury as a result of exposure to
various substances that were disposed of or stored at the Brio site. These
suits generally allege that defendants were negligent in sending chemical
substances to the site and also contain allegations of nuisance and strict
liability. The suits involve: a school district alleging damages as a result of
the closing of Weber Elementary; employees of the various entities who operated
the refining and reprocessing facilities at Brio; and other plaintiffs. All of
the lawsuits request relief in the form of unspecified compensatory and
exemplary damages. These suits are in pretrial discovery.
ARCO (or its affiliate) is the named defendant in the above proceedings. Under
the provisions of the Cross-Indemnity Agreement, Lyondell is not obligated to
indemnify ARCO for costs arising out of this litigation for which ARCO is
insured. Although ARCO is currently litigating the nature and extent of its
coverage with its insurance carriers (see "ARCO Insurance Litigation"), Lyondell
believes that the ultimate resolution of the above described lawsuits, ARCO's
insurance litigation and related issues will not result in any material
obligation on the part of Lyondell to ARCO with respect to the Brio and the
French Ltd. Superfund Sites.
Other Waste Disposal Site Litigation -- The Company and ARCO are named
defendants in three of four presently pending lawsuits filed on behalf of 73
plaintiffs in the state district court in Galveston County, Texas involving the
alleged release of toxic and hazardous substances from the Hall's Bayou Ranch.
LCR sends and, prior to July 1, 1993, Lyondell and its predecessor sent surface
water runoff and process waste water from the Refinery to Gulf Coast Waste
Disposal Authority (GCWDA) and a portion of the solids output from GCWDA is sent
for storage to the Hall's Bayou Ranch site. Plaintiffs claim personal injury,
diminution of property value and loss of use and enjoyment of the property.
They are seeking $7 billion in actual damages and $28 billion in punitive
damages. In March 1993, the Company and ARCO entered a preliminary settlement
agreement to resolve these proceedings with all plaintiffs. The proposed
settlement is not expected to have a material adverse effect on the Company's
financial position.
ARCO Insurance Litigation -- On November 21, 1990, ARCO filed suit against
certain of its insurers with respect to insurance policies in effect at times
during past years. This litigation involves claims for reimbursement of defense
costs and environmental expenses incurred by ARCO in connection with ARCO's
activities at sites and locations throughout the United States. ARCO's insurers
had been participating in the defense of the Company and ARCO for the Mont
Belvieu proceedings (see "Claims Related To Company Operations -- Mont Belvieu
Litigation") as well as the litigation involving the French Ltd. and the Brio
Superfund sites; however, subsequent to the filing of ARCO's lawsuit, the
insurers have refused to advance defense costs for these proceedings (and
certain other proceedings relating to the Company's products) until the coverage
dispute has been resolved. ARCO is currently paying the defense costs in these
proceedings, as well as other waste disposal site litigation, pending the
resolution of the coverage dispute. It has not been determined whether or not
the Company has an obligation to reimburse ARCO for defense costs related to the
coverage dispute.
Claims Related To Company Operations
Mont Belvieu Litigation -- Several organizations and groups of citizens who own
property in the vicinity of Mont Belvieu, Texas, have instituted suits for
monetary damages and injunctive relief against ARCO and others who own
underground storage and transportation facilities in the city of Mont Belvieu.
In September, 1980, Warren Petroleum Company (Warren) experienced a leak in one
of its underground hydrocarbon storage wells in Mont Belvieu. On March 18,
1983, suit was brought by 34 plaintiffs, naming
16
Warren, ARCO and other companies with operations in Mont Belvieu as
defendants. These plaintiffs claimed property damage, and, in some instances,
personal injuries allegedly resulting from storage operations in Mont Belvieu.
Later, 83 additional plaintiffs joined the suit. Because of the number of
plaintiffs, the court divided this lawsuit into three separate lawsuits. In
February, 1986, ARCO was granted a directed verdict as to all of the claims of
the plaintiffs in the first of the three lawsuits to be tried which had the
effect of dismissing all the pending claims without the ability to refile.
Thereafter, the plaintiffs in the two remaining cases dropped their claims
against ARCO. ARCO remains in these two cases as a result of cross claims for
contribution filed by other defendants. These suits have not been set for
trial.
In 1986, a number of companies that operated facilities in Mont Belvieu,
including ARCO, instituted a program to make offers to purchase certain
properties in Mont Belvieu. The purpose of the purchase program was to give
persons within a certain area the opportunity to move, if they so desired. A
number of residents and litigants participated in the program.
The implementation of the purchase program described above led to the filing of
a new set of lawsuits. There are two separate legal proceedings which have
resulted from eight lawsuits filed against ARCO, the Company, and a number of
other companies that operate facilities in Mont Belvieu. These claims are made
by persons outside of the area designated by the purchase program and are
pending in state and federal court. The lawsuits name ARCO and the Company as
well as every other company that participated in the purchase program as
defendants. In six of the cases, which involve a total of 94 plaintiffs, the
city of Mont Belvieu also is named as a defendant. These plaintiffs claim that
industry operations, together with incidents that occurred at certain
facilities, and the publicity surrounding those incidents, destroyed the value
of their property. The plaintiffs also assert that they were discriminated
against by the purchase program and that their civil rights were violated since
they did not receive an offer to buy their property. The plaintiffs further
claim that the purchase violated antitrust provisions of state law, and that the
defendants were negligent in their operations and trespassed onto plaintiffs'
properties.
In December, 1991, the trial court in the lawsuit pending in state district
court entered a take nothing summary judgment in favor of ARCO, the Company and
other companies who were named as defendants in that lawsuit. The plaintiff
sought injunctive relief, recovery of more than $9 million in actual damages and
more than $28 million in punitive damages in this case. The plaintiff appealed
the adverse ruling. In July, 1992, the state court of appeals in Houston
reversed and remanded the case for retrial in a different county based on its
interpretation of proper venue. In September, 1993, a summary judgment in the
state district court in the new county was granted in favor of all defendants in
this matter. An appeal is pending.
All other Mont Belvieu cases were consolidated in the Federal District Court in
the Southern District of Texas. In addition to unspecified damages, the
aggregate amount of actual damages sought from all defendants in all of these
Mont Belvieu cases exceeds $241 million. The aggregate amount of punitive
damages sought exceeds $675 million. These lawsuits went to trial on December
1, 1992. On January 11, 1993, after the plaintiffs concluded their offer of
evidence, the trial court granted the defendants' motion for directed verdict
which dismissed plaintiffs' claims without the ability to refile. An appeal is
pending.
ARCO is paying all defense costs in all of the Mont Belvieu litigation and the
Company does not expect that a claim will be made under the Cross-Indemnity
Agreement.
Channelview Nuisance Litigation -- In 1992 and 1993, the Company, together with
two other corporate defendants, was named as a defendant in two separate
lawsuits that were filed in two state district courts in Harris County, Texas.
In the first suit, the 15 plaintiffs allege that one or all of the named
defendants' facilities emit loud noises, bright lights and noxious fumes in
proximity to the plaintiffs' homes. The 15 plaintiffs in the second lawsuit
make these same allegations. Some of these latter plaintiffs also allege a
diminished quality of the water in their water wells. The two lawsuits have
been consolidated. The plaintiffs are claiming, among other things, diminution
in property value, interference with the use and enjoyment of their property and
personal injuries. The consolidated lawsuits seek unspecified actual damages in
excess of $5 million and punitive damages in excess of $20 million.
17
Arceneaux Litigation -- In November, 1993, multiple lawsuits were filed in state
district court on behalf of approximately 70,000 plaintiffs residing or doing
business in the vicinity of the lower San Jacinto River against hundreds of
named businesses, including the Company, owning or operating facilities situated
in the vicinity of the Houston Ship Channel alleging, among other things,
pollution to the San Jacinto River watershed below the Ship Channel and
requesting damages in the aggregate in excess of $1.5 trillion. In January,
1994, one of the suits against a single defendant was non-suited and the three
remaining suits were dismissed on the defendants' motion without the ability to
refile.
Other Matters
In April, 1993 the City of Houston, Texas (joining the Texas Air Control Board
as a necessary party) filed suit in the state district court of Harris County,
Texas against the Company, alleging violations of the Texas Clean Air Act and
the Texas Administrative Code and seeking maximum civil penalties and
appropriate injunctive relief. In July, 1993 the City of Houston filed an
amended and restated petition which added as causes of action certain
allegations made by the Texas Air Control Board, now the TNRCC, following its
April, 1993 state inspection plan (SIP) inspection. The Company filed a general
denial to all allegations of the lawsuit in July, 1993 and is engaged in
settlement negotiations with the City and the State. In the fourth quarter of
1992, the Refinery underwent an EPA multi-media inspection and an Occupational
Safety and Health Administration (OSHA) Process Quality Verification Audit. The
OSHA inspection of the Refinery was resolved in an informal settlement agreement
in April, 1993. At this time, the EPA has not formally notified the Company of
the enforcement action to be taken, if any.
In addition to the matters reported herein, from time to time the Company
receives notices from federal, state or local governmental entities of alleged
violations of environmental laws and regulations pertaining to, among other
things, the disposal, emission and storage of chemical and petroleum substances,
including hazardous wastes. Although the Company has not been the subject of
significant penalties to date, such alleged violations may become the subject of
enforcement actions or other legal proceedings and may (individually or in the
aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest
and costs).
18
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of March 1, 1994.
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
- ---------------------- ------------------------------------------
John R. Beard, 41................. Mr. Beard became Vice President Quality,
Vice President, Supply and Planning on July 1, 1993.
Quality, Supply and Planning Mr. Beard was appointed Vice President,
Planning and Evaluations in May, 1992.
He served as the Site Manager of Lyondell's
Houston Refinery from 1988 until April,
1992. From 1985 until 1988, he served in
management assignments in evaluations,
marketing and manufacturing. Prior to 1985,
he served in various management positions
for ARCO Products Company and the ARCO
Chemical Division. He originally joined
ARCO in 1974.
Bob G. Gower, 56.................. Mr. Gower was elected Chief Executive Officer
Chief Executive Officer, of the Company on October 24, 1988 and
President and Director Director and President of the Company on
June 27, 1988. He has been President of
Lyondell and its predecessor, the Lyondell
Division, since formation of the Lyondell
Division in April, 1985. Mr. Gower was a
Senior Vice President of ARCO from June, 1984
until his resignation as an officer of ARCO
in January, 1989. Prior to 1984, he served in
various capacities with the then ARCO
Chemical Division. He originally joined ARCO
in 1963.
Robert H. Ise, 59................. Mr. Ise was appointed Vice President,
Vice President, Marketing, Supply and Evaluations of
Lyondell Petrochemical Company LYONDELL-CITGO Refining Company Ltd. on
Vice President, July 1, 1993. He previously served Lyondell
Marketing, Supply and Evaluations as Vice President, Marketing and Sales,
LYONDELL-CITGO Refining Polymers and Petroleum Products from April,
Company Ltd. 1992 until June, 1993 and continues to
serve as a Vice President of Lyondell. He
served as Vice President, Marketing and
Sales, Petroleum Products, from December,
1988 until April, 1992. He served as Vice
President of Industrial Products Marketing
of the Lyondell Division from June, 1987 to
December, 1988. From May, 1985 to June,
1987 he served as Director, Industrial
Products Marketing for the Lyondell
Division. Prior thereto, he served in
various marketing capacities for the ARCO
Products Division. He originally joined
ARCO in 1959.
Richard W. Park, 54............... Mr. Park was elected Vice President, Human
Vice President, Resources on June 27, 1988. He previously
Human Resources served as Vice President of Employee
Relations of the Lyondell Division since
February, 1987. From 1985 to 1987 he served
as Manager of Personnel for the then ARCO
Chemical Division's Specialty Chemicals and
International Units. Prior to 1985 he held
other employee relations positions with
divisions of ARCO. He originally joined
ARCO in 1965.
19
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
- ---------------------- ------------------------------------------
Jeffrey R. Pendergraft, 45........ Mr. Pendergraft was named Senior Vice
Senior Vice President, President on May 6, 1993. Mr. Pendergraft
Secretary and General Counsel was elected Vice President and General
Counsel on June 27, 1988 and Secretary on
October 24, 1988. From September, 1985 to
June, 1988, he served as General Attorney
of the Lyondell Division. Prior to
September, 1985, he served as an attorney
for various operating divisions and
corporate units of ARCO at increasing
levels of responsibility. He originally
joined ARCO in 1972.
W. Norman Phillips, Jr., 39....... Mr. Phillips was elected Vice President,
Vice President, Channelview Operations on May 6, 1993. From
Channelview Operations May 22, 1992 until May 6, 1993, he served
as Site Manager of Channelview Operations.
He previously served as Manager, Planning
from August, 1991 until May, 1992. Prior to
August, 1991, he served in various
positions in manufacturing and marketing
for ARCO and Lyondell, including Sales
Manager in the Petroleum Products Marketing
Department from September, 1987 until
August, 1991. He originally joined ARCO in
1977.
Joseph M. Putz, 53................ Mr. Putz was elected Vice President and
Vice President Controller on October 24, 1988. Previously
and Controller he was Vice President, Control and
Administration of Lyondell, and its
predecessor, the Lyondell Division, from
June, 1987 to October, 1988. From 1986 to
1987 he served as Director, Internal
Control of ARCO. From 1985 to 1986 he
served as Manager of Special Projects for
ARCO. Prior to 1985, he held various
financial positions with divisions of ARCO.
He originally joined ARCO in 1965.
Dan F. Smith, 47.................. Mr. Smith was elected a Director of the
Executive Vice President and Company on October 24, 1988. He was elected
Chief Operating Officer Executive Vice President and Chief
Operating Officer on May 6, 1993. He served
as Vice President Corporate Planning of
ARCO from October, 1991 until May, 1993. He
previously served as Executive Vice
President and Chief Financial Officer of
the Company from October, 1988 to October,
1991 and as Senior Vice President of
Manufacturing of Lyondell, and its
predecessor, the Lyondell Division, from
June, 1986 to October 1988. From August,
1985 to June, 1986, Mr. Smith served as
Vice President of Manufacturing for the
Lyondell Division. He joined the Lyondell
division in April, 1985 as Vice President,
Control and Administration. Prior to 1985,
he served in various financial, planning
and manufacturing positions with ARCO. He
originally joined ARCO in 1968.
20
Name, Age and Present Business Experience During Past
Position with Lyondell Five Years and Period Served as Officer(s)
---------------------- ------------------------------------------
Debra L. Starnes, 41.............. Ms. Starnes was appointed Vice President,
Vice President, Petrochemicals Business Management and
Petrochemicals Business Management Marketing on July 1, 1993. She previously
and Marketing served as Vice President, Petrochemicals
Business Management from May 22, 1992 to
July, 1993. She served as Vice President,
Corporate Planning from September, 1991
until May, 1992. From January, 1989 to
September, 1991, she served as Director,
Planning. Prior to 1989, she held various
manufacturing, marketing and planning
positions with ARCO and Lyondell. She
originally joined ARCO in 1975.
Russell S. Young, 45.............. Mr. Young was elected Senior Vice President,
Senior Vice President, Chief Financial Officer and Treasurer on
Chief Financial Officer May 7, 1992. He previously served as Vice
and Treasurer President and Treasurer from November, 1988
until May, 1992. Mr. Young served as
Controller of the ARCO Products Division
from September, 1986 to January, 1989. From
July, 1984 to September, 1986 he served as
Assistant Treasurer of ARCO. Prior thereto
he served in corporate finance positions for
ARCO. He originally joined ARCO in 1980.
(a) The By-Laws of the Company provide that each officer shall hold office
until the officer's successor is elected or appointed and qualified or
until the officer's death, resignation or removal by the Board of
Directors.
21
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 250,000,000
shares of common stock, par value $1 per share. The following summary
description of the capital stock of the Company is qualified in its entirety by
reference to the Certificate of Incorporation and By-Laws of the Company, copies
of which are filed as exhibits to the Company's Registration Statement on Form
S-1 (No. 33-25407) and incorporated herein by reference.
Common Stock
The Company is currently authorized to issue 250,000,000 shares of common stock,
of which 80,000,000 shares of common stock are outstanding at the date hereof.
Holders of common stock (Stockholders) are entitled (i) to receive such
dividends as may from time to time be declared by the Board of Directors of the
Company; (ii) to one vote per share on all matters on which the Stockholders are
entitled to vote; (iii) to act by written consent in lieu of voting at a meeting
of stockholders; and (iv) to share ratably in all assets of the Company
available for distribution to the Stockholders, in the event of liquidation,
dissolution or winding up of the Company. For additional information regarding
the Company's dividend policy, see Item 5 of this Annual Report on Form 10-K.
The holders of a majority of the shares of Common Stock represented at a meeting
can elect all of the directors. See Item 12 -- "Security Ownership of Certain
Beneficial Owners and Management" which is included herein.
Shares of common stock are not liable to further calls or assessments by the
Company for any liabilities of the Company that may be imposed on its
stockholders under the laws of the State of Delaware, the state of incorporation
of the Company. There are no preemptive rights for the common stock in the
Certificate of Incorporation.
The Transfer Agent, Registrar and Dividend Disbursing Agent for the common stock
is The Bank of New York.
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock is listed on the New York Stock Exchange. ARCO has advised the
Company that, as of March 1, 1994, ARCO owned 39,921,400 shares of the common
stock, which represented 49.9 percent of the outstanding shares.
The reported high and low sale prices of the common stock on the New York Stock
Exchange (New York Stock Exchange Composite Tape) for each quarter from January
1, 1992 through December 31, 1993, inclusive, were:
Period High Low
------ ---- ---
1992
First Quarter 25-3/4 22-1/8
Second Quarter 25-7/8 21-1/8
Third Quarter 25-5/8 21-3/8
Fourth Quarter 25-1/2 23-1/8
1993
First Quarter 29-1/2 23-3/4
Second Quarter 26-5/8 19
Third Quarter 21-5/8 16-3/4
Fourth Quarter 21-1/2 18-3/8
On March 1, 1994 the closing price of the common stock was $22-3/4 and there
were 2,976 record holders of the common stock.
On January 21, 1994 the Board of Directors declared a quarterly dividend in the
amount of $0.225 per share payable on March 15, 1994 to stockholders of record
on February 18, 1994. During the last two years, Lyondell has declared per share
quarterly cash dividends (which were paid in the subsequent quarter) as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1992................. $0.45 $0.45 $0.45 $ 0.45
1993................. $0.45 $0.225* $0.225 $0.225
* On July 23, 1993, the Board of Directors decreased the amount of the
regular quarterly dividend from $0.45 to $0.225 per share.
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company. The future declaration and payment of dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash position and requirements, investment opportunities,
future prospects and other factors deemed relevant by the Board of Directors.
Subject to these considerations and to the legal considerations discussed in the
following paragraph, the Company currently intends to distribute to its
stockholders cash dividends on its common stock at a quarterly rate of $0.225
per share.
In order to declare and pay dividends in the future, the Company's Board of
Directors will have to make the determination that for purposes of the General
Corporation Law of the State of Delaware (Delaware Law) there is a sufficient
amount of surplus (the amount by which its assets exceed its liabilities and
capital) at that time or sufficient net profits. In determining the amount of
surplus of the Company for purposes of Delaware Law, the Company's assets,
including the stock of any of its subsidiaries, may be valued by the Board of
Directors at their
23
current market value. If prior to or as a result of any future dividend the
Company had a negative stockholders' equity, the Company's Board of Directors
would have to make the determination that, based upon its familiarity with the
Company's business, prospects and financial condition, the Company's recent
earnings history and forecast, an appraisal of the Company's assets and
discussions with the Company's executive officers, legal department and
accountants, the dividend was a permitted dividend under Delaware Law.
As detailed on page 12 herein, certain of the Company's debt instruments contain
provisions that generally provide that the holders of such debt may, under
certain limited circumstances, require the Company to repurchase the debt (Put
Rights). In addition to the occurrences described on page 12 herein, the Put
Rights may be triggered by the making of certain unearned distributions to
stockholders, other than regular dividends, that are followed by a specified
decline in public ratings on such debt. Regular dividends are those quarterly
cash dividends determined in good faith by the Company's Board of Directors
(whose determination is conclusive) to be appropriate in light of the Company's
results of operations and capable of being sustained.
The determinations described in the paragraphs above were made prior to the
declaration of $0.225 per share dividend to be made on March 15, 1994.
The Company's $400 million Facility also could limit the Company's ability to
pay dividends under certain circumstances. See "Items 1 and 2 -- Finance
Matters".
During 1993, the Company paid $108 million in dividends. Total dividends paid
during the year exceeded cumulative earnings and profits, as computed for
federal income tax purposes. Subject to final determination by the Internal
Revenue Service, 100 percent of each of the 1993 quarterly dividend payments was
considered a return of capital.
The operation of certain of the Company's employee benefit plans may result in
the issuance of common stock upon the exercise of options granted to employees
of the Company, including its officers. Although the terms of these plans
provide that additional shares may be issued to satisfy the Company's
obligations under the options, the Company from time to time may cause common
stock to be repurchased in the market in order to satisfy these obligations.
24
Item 6. Selected Financial Data
The following table sets forth selected financial information for the Company:
For the year ended December 31
------------------------------------
Millions of dollars, except per share amounts 1993 1992 1991 1990 1989
- --------------------------------------------- ---- ---- ---- ---- ----
Sales and other operating revenues..................... $3,850 $4,809 $5,735 $6,499 $5,361
Income before cumulative effect of accounting
changes............................................... 4 26 222 356 374
Net income (1)......................................... 26 16 222 356 374
Earnings per share before cumulative effect of
accounting changes.................................... .06 .32 2.78 4.45 4.67
Earnings per share..................................... .33 .20 2.78 4.45 4.67
Distributions to ARCO (2).............................. -- -- -- -- 500
Dividends per share.................................... 1.35 1.80 1.75 4.10 1.20
Total assets........................................... 1,231 1,215 1,479 1,372 1,267
Capitalized lease obligations, less current portion.... -- -- 156 187 214
Long-term debt, less current portion................... 717 725 554 471 500
(1) The 1993 increase in net income from the cumulative effect of the
accounting change for turnarounds was $22 million, or $0.27 per share. See
Note 4 to Notes to Consolidated Financial Statements. The 1992 reduction
in net income from the cumulative effect of the accounting change for
postretirement benefits other than pensions was $18 million, or $.22 per
share. See Notes 4 and 16 of Notes to Consolidated Financial Statements.
The 1992 increase in net income from the cumulative effect of the
accounting change for income taxes was $8 million, or $.10 per share. See
Notes 4 and 17 of Notes to Consolidated Financial Statements.
(2) Distributions to ARCO were made prior to the initial public offering of the
Company's common stock on January 25, 1989.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
As discussed in Note 3 of Notes to Consolidated Financial Statements, on July 1,
1993, the Company and CITGO Petroleum Corporation (CITGO) announced the
commencement of operations of LYONDELL-CITGO Refining Company Ltd. (LCR), a new
entity owned by subsidiaries of the Company and CITGO. LCR owns and operates
the refining business, formerly owned by the Company, including the full-
conversion refinery (Refinery). LCR is undertaking a major upgrade project at
the Refinery to enable the facility to process substantial additional volumes of
very heavy crude oil. CITGO will provide a major portion of the funds for the
upgrade project as well as the funding of certain capital projects.
On July 1, 1993, LCR entered into a long-term crude oil supply contract (Crude
Supply Contract) with LAGOVEN, S.A., an affiliate of CITGO. In addition, under
terms of a long-term product sales agreement (Products Agreement), CITGO will
purchase a substantial portion of the refined products produced at the Refinery.
Both LAGOVEN and CITGO are subsidiaries of Petroleos de Venezuela, S.A., the
national oil company of Venezuela.
The Company believes that the principal benefit from its participation in LCR
will be stabilized earnings and cash flow from the refining business. During
1993, the Refinery increased the volumes of heavy Venezuelan crude oil processed
and it is anticipated that the Refinery will continue to achieve increased
benefits from processing heavy Venezuelan crude oil as it achieves improved
operating efficiency.
Prior to July 1, 1993, the petrochemical and refining operations of the Company
were considered to be a single segment due to the integrated nature of their
operations. However, these operations are now considered to be
25
separate segments due to the formation of LCR and the related separate
management and operations of that entity. See Note 19 - Segment Information, of
Notes to Consolidated Financial Statements.
The Petrochemical segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; polyolefins, including
polypropylene and low density polyethylene; aromatics produced at the
Channelview Petrochemical Complex, including benzene and toluene; methanol and
refinery blending stocks.
The Refining segment consists of refined petroleum products, including gasoline,
heating oil and jet fuel; aromatics produced at the Refinery, including benzene,
toluene, paraxylene and orthoxylene; lubricants; olefins feedstocks and crude
oil resales.
The following table sets forth sales volumes for the Company's major products,
excluding intersegment sales volumes, for the periods indicated. Sales volumes
include production, purchases of products for resale, propylene production from
the product flexibility unit and draws from inventory.
For the year ended December 31
------------------------------
1993 1992 1991
---- ---- ----
Selected petrochemical products (millions):
Ethylene, propylene and polymers (pounds).............................. 5,366 5,785 6,000
Other olefins (pounds)................................................. 1,150 1,158 1,112
Methanol (gallons)..................................................... 225 212 224
Aromatics (gallons).................................................... 125 112 108
Refinery products (thousand barrels per day):
Gasoline............................................................... 120 125 131
Heating oil (no. 2 distillate)......................................... 62 60 74
Jet fuel............................................................... 30 38 33
Aromatics.............................................................. 10 11 11
Other refinery products................................................ 41 43 39
----- ----- -----
Total refinery products volumes...................................... 263 277 288
===== ===== =====
The following table sets forth the Company's sales and other revenues, excluding
intersegment sales, for the periods indicated:
26
For the year ended December 31
------------------------------
Millions of dollars 1993 1992 1991
- ------------------- ---- ---- ----
Petrochemical products:
Ethylene, propylene and polymers....................................... $ 808 $ 939 $1,135
Other olefins.......................................................... 169 177 171
Methanol............................................................... 89 77 100
Aromatics.............................................................. 120 121 130
Other petrochemical products and other revenues........................ 140 95 130
------ ------ ------
Total petrochemical products sales.................................. 1,326 1,409 1,666
------ ------ ------
Refinery products:
Gasoline............................................................... 950 1,123 1,289
Heating oil (no. 2 distillate)......................................... 481 510 667
Jet fuel............................................................... 245 342 316
Aromatics.............................................................. 167 193 195
Other refinery products and other revenues............................. 280 339 294
------ ------ ------
Total refinery products sales....................................... 2,123 2,507 2,761
------ ------ ------
Crude oil resales (*).................................................... 401 893 1,308
------ ------ ------
Total............................................................... $3,850 $4,809 $5,735
====== ====== ======
(*) Crude oil resales consist of revenues from the resale of previously
purchased crud