Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Millions of dollars, except per share data | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Sales and other operating revenues: | ||||||||||||||||
Trade | $ | 7,135 | $ | 5,495 | $ | 20,057 | $ | 13,780 | ||||||||
Related parties | 250 | 320 | 599 | 1,168 | ||||||||||||
7,385 | 5,815 | 20,656 | 14,948 | |||||||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of sales | 6,736 | 5,172 | 18,853 | 13,321 | ||||||||||||
Asset impairments | - - | 106 | - - | 106 | ||||||||||||
Selling, general and administrative expenses | 188 | 132 | 527 | 376 | ||||||||||||
Research and development expenses | 18 | 17 | 55 | 54 | ||||||||||||
6,942 | 5,427 | 19,435 | 13,857 | |||||||||||||
Operating income | 443 | 388 | 1,221 | 1,091 | ||||||||||||
Interest expense | (144 | ) | (164 | ) | (499 | ) | (459 | ) | ||||||||
Interest income | 6 | 8 | 26 | 27 | ||||||||||||
Other income (expense), net | 24 | (18 | ) | (16 | ) | 60 | ||||||||||
Income from continuing operations before equity investments and income taxes | 329 | 214 | 732 | 719 | ||||||||||||
Income (loss) from equity investments: | ||||||||||||||||
Houston Refining LP | - - | (104 | ) | - - | 73 | |||||||||||
Other | - - | 2 | 2 | 4 | ||||||||||||
- - | (102 | ) | 2 | 77 | ||||||||||||
Income from continuing operations before income taxes | 329 | 112 | 734 | 796 | ||||||||||||
Provision for income taxes | 123 | 51 | 251 | 320 | ||||||||||||
Income from continuing operations | 206 | 61 | 483 | 476 | ||||||||||||
Income (loss) from discontinued operations, net of tax | - - | (4 | ) | (82 | ) | 31 | ||||||||||
Net income | $ | 206 | $ | 57 | $ | 401 | $ | 507 | ||||||||
Earnings per share: | ||||||||||||||||
Income from continuing operations: | ||||||||||||||||
Basic | $ | 0.81 | $ | 0.24 | $ | 1.91 | $ | 1.92 | ||||||||
Diluted | $ | 0.78 | $ | 0.23 | $ | 1.83 | $ | 1.84 | ||||||||
Net income: | ||||||||||||||||
Basic | $ | 0.81 | $ | 0.23 | $ | 1.59 | $ | 2.05 | ||||||||
Diluted | $ | 0.78 | $ | 0.22 | $ | 1.52 | $ | 1.96 |
See Notes to the Consolidated Financial Statements.
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
Millions, except shares and par value data | September 30, 2007 | December 31, 2006 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 303 | $ | 401 | ||||
Accounts receivable: | ||||||||
Trade, net | 2,367 | 1,837 | ||||||
Related parties | 118 | 95 | ||||||
Inventories | 1,906 | 1,877 | ||||||
Prepaid expenses and other current assets | 155 | 147 | ||||||
Deferred tax assets | 50 | 102 | ||||||
Current assets held for sale | - - | 687 | ||||||
Total current assets | 4,899 | 5,146 | ||||||
Property, plant and equipment, net | 8,491 | 8,542 | ||||||
Investments and long-term receivables: | ||||||||
Investment in PO joint ventures | 799 | 778 | ||||||
Other | 100 | 115 | ||||||
Goodwill, net | 1,373 | 1,332 | ||||||
Other assets, net | 878 | 864 | ||||||
Long-term assets held for sale | - - | 1,069 | ||||||
Total assets | $ | 16,540 | $ | 17,846 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 423 | $ | 18 | ||||
Accounts payable: | ||||||||
Trade | 2,262 | 1,785 | ||||||
Related parties | 77 | 83 | ||||||
Accrued liabilities | 965 | 980 | ||||||
Current liabilities associated with assets held for sale | - - | 341 | ||||||
Total current liabilities | 3,727 | 3,207 | ||||||
Long-term debt | 6,226 | 7,936 | ||||||
Other liabilities | 1,258 | 1,453 | ||||||
Deferred income taxes | 1,678 | 1,537 | ||||||
Long-term liabilities associated with assets held for sale | - - | 391 | ||||||
Commitments and contingencies | ||||||||
Minority interests | 121 | 134 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $1.00 par value, 420,000,000 shares authorized, 254,354,550 and 249,764,306 shares issued, respectively | 254 | 250 | ||||||
Additional paid-in capital | 3,335 | 3,248 | ||||||
Retained deficit | (103 | ) | (330 | ) | ||||
Accumulated other comprehensive income | 66 | 42 | ||||||
Treasury stock, at cost, 739,186 and 793,736 shares, respectively | (22 | ) | (22 | ) | ||||
Total stockholders’ equity | 3,530 | 3,188 | ||||||
Total liabilities and stockholders’ equity | $ | 16,540 | $ | 17,846 |
See Notes to the Consolidated Financial Statements.
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended | ||||||||
September 30, | ||||||||
Millions of dollars | 2007 | 2006 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 401 | $ | 507 | ||||
Loss (income) from discontinued operations, net of tax | 82 | (31 | ) | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 662 | 495 | ||||||
Asset impairments | - - | 106 | ||||||
Equity investments – | ||||||||
Amounts included in net income | (2 | ) | (77 | ) | ||||
Distributions of earnings | 1 | 73 | ||||||
Deferred income taxes | 184 | 115 | ||||||
Debt prepayment premiums and charges | 47 | 21 | ||||||
Changes in assets and liabilities that provided (used) cash: | ||||||||
Accounts receivable | (489 | ) | (210 | ) | ||||
Inventories | (12 | ) | (175 | ) | ||||
Accounts payable | 396 | (120 | ) | |||||
Other, net | (424 | ) | (123 | ) | ||||
Net cash provided by operating activities – continuing operations | 846 | 581 | ||||||
Net cash provided by (used in) operating activities – discontinued operations | (113 | ) | 38 | |||||
Net cash provided by operating activities | 733 | 619 | ||||||
Cash flows from investing activities: | ||||||||
Expenditures for property, plant and equipment | (360 | ) | (197 | ) | ||||
Payments to discontinued operations | (97 | ) | (12 | ) | ||||
Acquisition of Houston Refining LP and related payments, net of cash acquired | (94 | ) | (2,413 | ) | ||||
Distributions from affiliates in excess of earnings | 2 | 117 | ||||||
Contributions and advances to affiliates | (34 | ) | (82 | ) | ||||
Other | 12 | 6 | ||||||
Net cash used in investing activities – continuing operations | (571 | ) | (2,581 | ) | ||||
Net proceeds from sale of discontinued operations before required repayment of debt | 1,089 | - - | ||||||
Other net cash provided by (used in) investing activities – discontinued operations | 82 | (30 | ) | |||||
Net cash provided by (used in) investing activities | 600 | (2,611 | ) | |||||
Cash flows from financing activities: | ||||||||
Repayment of long-term debt | (1,831 | ) | (2,095 | ) | ||||
Issuance of long-term debt | 510 | 4,356 | ||||||
Dividends paid | (171 | ) | (167 | ) | ||||
Proceeds from and tax benefits of stock option exercises | 81 | 18 | ||||||
Other, net | 7 | (3 | ) | |||||
Net cash provided by (used in) financing activities – continuing operations | (1,404 | ) | 2,109 | |||||
Debt required to be repaid upon sale of discontinued operations | (99 | ) | - - | |||||
Other net cash provided by (used in) financing activities – discontinued operations | 23 | (13 | ) | |||||
Net cash provided by (used in) financing activities | (1,480 | ) | 2,096 | |||||
Effect of exchange rate changes on cash | 4 | 4 | ||||||
Increase (decrease) in cash and cash equivalents | (143 | ) | 108 | |||||
Cash and cash equivalents at beginning of period | 446 | 593 | ||||||
Cash and cash equivalents at end of period | 303 | 701 | ||||||
Less: Cash and cash equivalents at end of period – discontinued operations | - - | 45 | ||||||
Cash and cash equivalents at end of period – continuing operations | $ | 303 | $ | 656 |
See Notes to the Consolidated Financial Statements
1. | 5 | |
2. | 5 | |
3. | 6 | |
4. | 6 | |
5. | 8 | |
6. | 9 | |
7. | 10 | |
8. | 11 | |
9. | 11 | |
10. | 11 | |
11. | 12 | |
12. | 12 | |
13. | 14 | |
14. | 15 | |
15. | 16 | |
16. | 20 | |
17. | 20 | |
18. | 22 | |
19. | 22 | |
20. | 24 |
4
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. Basis of Preparation
Lyondell Chemical Company, together with its consolidated subsidiaries (collectively, “Lyondell” or “the Company”), is a global manufacturer of chemicals and plastics, a refiner of heavy, high-sulfur crude oil and a significant producer of fuel products. As a result of Lyondell’s purchase of its partner’s 41.25% equity interest in, and Lyondell’s resulting 100% ownership of, Houston Refining LP (“Houston Refining”), the operations of Houston Refining are consolidated prospectively from August 16, 2006. Prior to August 16, 2006, Lyondell accounted for its investment in Houston Refining using the equity method (see Note 5 for additional information).
The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and notes thereto included in the Lyondell Chemical Company Current Report on Form 8-K dated May 29, 2007.
Certain previously reported amounts have been reclassified to present Lyondell’s inorganic chemicals business operations as discontinued operations. Unless otherwise indicated, information presented in the notes to the financial statements relates only to Lyondell’s continuing operations. Information related to Lyondell’s discontinued operations is presented in Note 4.
2. Accounting and Reporting Changes
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115, which permits election of fair value to measure many financial instruments and certain other items. SFAS No. 159 is effective for Lyondell beginning in 2008. Lyondell is currently evaluating whether it will elect the fair value option for any of its eligible financial instruments and other items.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The new standard defines fair value, establishes a framework for its measurement and expands disclosures about such measurements. For Lyondell, the standard will be effective beginning in 2008. Lyondell does not expect the application of SFAS No. 157 to have a material effect on its consolidated financial statements.
Lyondell adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN No. 48, Lyondell recognized a $47 million increase in the liability related to uncertain income tax positions, which was accounted for as a $41 million increase in goodwill related to the acquisition of Millennium Chemicals, Inc. (together with its consolidated subsidiaries “Millennium”), a $4 million increase in deferred tax assets and a $2 million increase of the January 1, 2007 balance of retained deficit (see Note 14).
5
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Agreement and Plan of Merger
On July 16, 2007, Lyondell, Basell AF, a Luxembourg company (“Basell”), and BIL Acquisition Holdings Limited, a Delaware corporation and a wholly owned subsidiary of Basell (“Merger Sub”), entered into an agreement and plan of merger pursuant to which Merger Sub will be merged with and into Lyondell with Lyondell continuing as the surviving corporation and a wholly owned subsidiary of Basell. Pursuant to the merger, each outstanding share of Lyondell's common stock will be converted into the right to receive $48 per share in cash.
The proposed merger is subject to approval by Lyondell’s shareholders and other customary closing conditions. The antitrust approvals required by the merger agreement as a condition to closing have been received and/or any associated waiting periods have expired. A special meeting of Lyondell’s shareholders has been scheduled for November 20, 2007 to vote on the proposed merger, which is expected to close in the fourth quarter 2007.
The merger agreement restricts Lyondell’s ability to take specified actions without Basell’s approval including, among other things, making significant acquisitions, dispositions or investments, making certain significant capital expenditures not contemplated by Lyondell’s current capital plan, and entering into certain material contracts. The merger agreement also contains certain termination rights, and provides that, upon termination of the merger agreement under specified circumstances, Lyondell would be required to pay to Basell a termination fee of $385 million.
As a result of the proposed merger, the debt and accounts receivable sales facilities of Lyondell Chemical Company, Equistar and Millennium will be affected to varying degrees. If not amended, the credit facilities and accounts receivable sales facilities of Lyondell Chemical Company and Equistar would be terminated at the closing. The indentures governing all of Lyondell Chemical Company’s and Equistar’s debt, with the exception of Lyondell Chemical Company’s Debentures due 2010 and 2020 and Equistar’s Notes due 2009 and Debentures due 2026, contain put rights, which may be available to the debt holders as a result of the merger. Millennium’s Notes due 2026 do not contain a put right. Millennium’s 4% convertible debentures would be convertible at the conversion rate into the $48 cash per share merger consideration.
4. Discontinued Operations
On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business in a transaction valued at $1.3 billion, including the acquisition of working capital and assumption of certain liabilities directly related to the business.
The following represent the elements of cash flow for the nine months ended September 30, 2007 related to the sale of the inorganic chemicals business:
Millions of dollars | ||||
Gross sales proceeds | $ | 1,143 | ||
Cash and cash equivalents sold | (37 | ) | ||
Costs related to the sale | (17 | ) | ||
Net proceeds from sale of discontinued operations before required repayment of debt | 1,089 | |||
Debt required to be repaid | (99 | ) | ||
Net proceeds from sale of discontinued operations | $ | 990 |
6
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Discontinued Operations – (Continued)
The operations of the inorganic chemicals business are classified as discontinued operations in the consolidated statements of income and cash flows, and the assets and associated liabilities have been classified as held for sale in the consolidated balance sheets.
Amounts included in income from discontinued operations are summarized as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
Millions of dollars | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Sales and other operating revenues | $ | - - | $ | 339 | $ | 514 | $ | 1,035 | ||||||||
Loss on sale of discontinued operations | $ | - - | $ | - - | $ | (21 | ) | $ | - - | |||||||
Other income (loss) from discontinued operations | - - | (7 | ) | 18 | 35 | |||||||||||
Provision for (benefit from) income taxes | - - | (3 | ) | 79 | 4 | |||||||||||
Income (loss) from discontinued operations, net of tax | $ | - - | $ | (4 | ) | $ | (82 | ) | $ | 31 |
The final amount that Lyondell will receive in compensation for working capital has not been determined. Unresolved amounts totaling less than $30 million are subject to possible arbitration proceedings.
The provision for income taxes in the nine months ended September 30, 2007 primarily reflects the unfavorable effect of nondeductible capital losses resulting from the sale. Income taxes payable related to the sale were $88 million.
The assets and liabilities of the inorganic chemicals business classified as held for sale are summarized as follows:
Millions of dollars | December 31, 2006 | |||
Cash | $ | 45 | ||
Inventories | 381 | |||
Other current assets | 261 | |||
Total current assets | 687 | |||
Property, plant and equipment, net | 604 | |||
Goodwill, net | 316 | |||
Other noncurrent assets, net | 149 | |||
Total long-term assets | 1,069 | |||
Total assets | $ | 1,756 | ||
Current maturities of long-term debt | $ | 4 | ||
Other current liabilities | 337 | |||
Total current liabilities | 341 | |||
Long-term debt | 82 | |||
Other noncurrent liabilities | 269 | |||
Minority interest | 40 | |||
Total long-term liabilities | 391 | |||
Total liabilities | $ | 732 |
7
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Discontinued Operations – (Continued)
Additionally, stockholders’ equity at December 31, 2006 included accumulated other comprehensive income of $55 million associated with discontinued operations.
5. Equity Interest and Acquisition of Houston Refining LP
During the third quarter 2007, Houston Refining settled its remaining insurance claims related to business interruption from Hurricane Rita for $50 million and Lyondell recognized a benefit of $30 million for its 58.75% pro rata share of the settlement. The remainder was remitted to CITGO Petroleum Corporation (“CITGO”).
On August 16, 2006, Lyondell purchased CITGO’s 41.25% ownership interest in Houston Refining to, among other things, take advantage of market conditions in refining and Houston Refining’s cash flows. Prior to the acquisition, Lyondell held a 58.75% equity-basis investment in Houston Refining and, as a result of the acquisition, Houston Refining became a wholly owned, consolidated subsidiary of Lyondell from August 16, 2006. Houston Refining owns and operates a full conversion refinery located in Houston, Texas, which has the ability to process approximately 268,000 barrels per day of lower cost, heavy, high sulfur crude oil.
Lyondell’s acquisition of CITGO’s 41.25% interest was financed using $2,509 million of the proceeds of a $2.65 billion seven-year term loan (see Note 12). The $2,509 million consisted of $43 million of debt issue costs and $2,466 million of cash payments at closing consisting of: $1,629 million for acquisition of the 41.25% interest in Houston Refining, the acquisition of estimated working capital of $53 million, $445 million to repay and terminate Houston Refining’s $450 million term loan facility, including accrued interest of $4 million, $39 million to repay a loan payable to CITGO, including $4 million of accrued interest, and $300 million related to the termination of the previous crude supply agreement. As part of the transaction, Houston Refining and PDVSA Petróleo, S.A. terminated the previous crude supply agreement and entered into a new crude oil contract for 230,000 barrels per day of heavy crude oil, which runs through 2011 and year to year thereafter. In the fourth quarter 2006, additional payments totaling $92 million, including accrued interest, were made to CITGO, representing adjustment of the estimated working capital.
The following represent the elements of cash flow in the nine months ended September 30, 2006 for the transactions related to the acquisition of Houston Refining:
Millions of dollars | ||||
Purchase of CITGO’s 41.25% interest in Houston Refining | $ | 1,629 | ||
Acquisition of estimated working capital | 53 | |||
Total cash purchase price of 41.25% interest in Houston Refining | 1,682 | |||
Related payments - advances to Houston Refining: | ||||
To fund termination of crude supply agreement | 300 | |||
To fund repayment of bank loan and accrued interest | 445 | |||
To fund repayment of CITGO partner loan and accrued interest | 39 | |||
Cash payments at closing | 2,466 | |||
Cash and cash equivalents acquired | (53 | ) | ||
Acquisition of Houston Refining and related payments, net of cash acquired | $ | 2,413 |
During the nine months ended September 30, 2007, Lyondell reimbursed CITGO, as provided for in the transaction agreement, for $94 million of taxes, which Lyondell previously estimated at $97 million, resulting in a $3 million reduction to the purchase price allocated to property, plant and equipment.
8
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Equity Interest and Acquisition of Houston Refining LP – (Continued)
Prior to the acquisition, Lyondell held a 58.75% equity-basis investment in Houston Refining and, because the partners jointly controlled certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of debt and the appointment of executive management of the partnership, Lyondell accounted for its investment in Houston Refining using the equity method.
Summarized financial information for Houston Refining follows for certain periods prior to the consolidation of Houston Refining:
Millions of dollars | For the period July 1 through August 15, 2006 | For the period January 1 through August 15, 2006 | ||||||
STATEMENTS OF INCOME | ||||||||
Sales and other operating revenues | $ | 1,205 | $ | 5,710 | ||||
Cost of sales | 1,076 | 5,223 | ||||||
Termination of crude supply agreement | 300 | 300 | ||||||
Selling, general and administrative expenses | 9 | 42 | ||||||
Operating income (loss) | (180 | ) | 145 | |||||
Interest expense, net | (8 | ) | (31 | ) | ||||
Benefit from income taxes | (8 | ) | - - | |||||
Net income (loss) | $ | (180 | ) | $ | 114 |
As a partnership, Houston Refining is not subject to federal income taxes. Houston Refining’s selling, general and administrative expenses for the nine months ended September 30, 2006 included an $8 million charge representing reimbursement to Lyondell of legal fees and expenses paid by Lyondell on behalf of Houston Refining in connection with the settlement discussed below.
Lyondell’s income from its investment in Houston Refining prior to August 16, 2006 consisted of Lyondell’s share of Houston Refining’s net income and accretion of Lyondell’s investment in Houston Refining up to its underlying equity in Houston Refining’s net assets.
Lyondell’s results for the three and nine months ended September 30, 2006 were reduced by a $176 million charge representing its 58.75% share of the $300 million cost to terminate Houston Refining’s previous crude supply agreement. For the nine months ended September 30, 2006, Lyondell’s income also included $74 million in “Other income (expense), net” representing the net payments received by Lyondell, including reimbursement of legal fees and expenses from Houston Refining referred to above, in settlement of all disputes among Lyondell, CITGO and Petróleos de Venezuela, S.A. and their respective affiliates.
6. Charges Related to Toluene Diisocyanate Plant and Asset Impairment
Lyondell ceased production of toluene diisocyanate (“TDI”) at the Lake Charles, Louisiana TDI plant in the third quarter of 2005. Results of operations in the first nine months of 2007 reflect charges totaling $64 million, relating to resolution of commercial arrangements associated with the facility under which payments will be made over the next four years. Any additional costs that may be incurred with respect to the facility are not expected to be material to Lyondell’s results of operations.
9
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Charges Related to Toluene Diisocyanate Plant and Asset Impairment – (Continued)
Lyondell’s third quarter and first nine months 2006 earnings reflect a pretax charge of $106 million for impairment of the net book value of its idled Lake Charles, Louisiana ethylene facility. In the third quarter of 2006, Lyondell undertook a study of the feasibility, cost and time required to restart the Lake Charles ethylene facility. As a result, management determined that restarting the facility would not be justified. The remaining net book value of the related assets of $10 million represents an estimate, based on probabilities, of alternative-use value. Lyondell does not expect to incur any significant future costs with respect to the facility.
7. Investment in PO Joint Ventures
Lyondell, together with Bayer AG and Bayer Corporation (collectively “Bayer”), share ownership in a U.S. propylene oxide (“PO”) manufacturing joint venture (the “U.S. PO Joint Venture”) and a separate joint venture for certain related PO technology. Bayer’s ownership interest represents ownership of 1.6 billion pounds of annual in-kind PO production of the U.S. PO Joint Venture. Lyondell takes in kind the remaining PO production and all co-product styrene monomer (“SM”) and tertiary butyl alcohol (“TBA”) production from the U.S. PO Joint Venture.
In addition, Lyondell and Bayer each have a 50% interest in a separate manufacturing joint venture (the “European PO Joint Venture”), which includes a world-scale PO/SM plant at Maasvlakte near Rotterdam, The Netherlands. Lyondell and Bayer each are entitled to 50% of the PO and SM production of the European PO Joint Venture.
Changes in Lyondell’s investment in the U.S. and European PO joint ventures for the nine-month periods ended September 30, 2006 and 2007 are summarized as follows:
Millions of dollars | U.S. PO Joint Venture | European PO Joint Venture | Total PO Joint Ventures | |||||||||
Investment in PO joint ventures – January 1, 2006 | $ | 518 | $ | 258 | $ | 776 | ||||||
Cash contributions | 12 | 6 | 18 | |||||||||
Depreciation and amortization | (25 | ) | (10 | ) | (35 | ) | ||||||
Effect of exchange rate changes | - - | 18 | 18 | |||||||||
Investment in PO joint ventures – September 30, 2006 | $ | 505 | $ | 272 | $ | 777 | ||||||
Investment in PO joint ventures – January 1, 2007 | $ | 504 | $ | 274 | $ | 778 | ||||||
Cash contributions | 13 | 21 | 34 | |||||||||
Depreciation and amortization | (25 | ) | (11 | ) | (36 | ) | ||||||
Effect of exchange rate changes | - - | 23 | 23 | |||||||||
Investment in PO joint ventures – September 30, 2007 | $ | 492 | $ | 307 | $ | 799 |
10
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Accounts Receivable
Lyondell has two accounts receivable sales facilities totaling $750 million, which mature in November 2010, maintained by its wholly owned subsidiary, Equistar Chemicals, LP (together with its consolidated subsidiaries, “Equistar”), and by Lyondell Chemical Company. Pursuant to these facilities, Lyondell sells, through two wholly owned bankruptcy-remote subsidiaries, on an ongoing basis and without recourse, interests in pools of domestic accounts receivable to financial institutions participating in the facilities. Lyondell is responsible for servicing the receivables. As of September 30, 2007 and December 31, 2006, the aggregate amounts of outstanding receivables sold under the facilities were $40 million and $100 million, respectively.
9. Inventories
Inventories consisted of the following components:
Millions of dollars | September 30, 2007 | December 31, 2006 | ||||||
Finished goods | $ | 1,075 | $ | 1,093 | ||||
Work-in-process | 178 | 156 | ||||||
Raw materials | 447 | 445 | ||||||
Materials and supplies | 206 | 183 | ||||||
Total inventories | $ | 1,906 | $ | 1,877 |
10. Property, Plant and Equipment and Goodwill
The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:
Millions of dollars | September 30, 2007 | December 31, 2006 | ||||||
Land | $ | 103 | $ | 104 | ||||
Manufacturing facilities and equipment | 12,579 | 12,124 | ||||||
Construction in progress | 373 | 362 | ||||||
Total property, plant and equipment | 13,055 | 12,590 | ||||||
Less accumulated depreciation | (4,564 | ) | (4,048 | ) | ||||
Property, plant and equipment, net | $ | 8,491 | $ | 8,542 |
Depreciation and amortization expense is summarized as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
Millions of dollars | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Property, plant and equipment | $ | 170 | $ | 135 | $ | 509 | $ | 365 | ||||||||
Investment in PO joint ventures | 12 | 12 | 36 | 35 | ||||||||||||
Turnaround costs | 24 | 16 | 64 | 44 | ||||||||||||
Patent and license costs | 1 | 1 | 4 | 5 | ||||||||||||
Software costs | 2 | 8 | 17 | 22 | ||||||||||||
Other | 14 | 10 | 32 | 24 | ||||||||||||
Total depreciation and amortization | $ | 223 | $ | 182 | $ | 662 | $ | 495 |
11
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Property, Plant and Equipment and Goodwill – (Continued)
Lyondell believes that there are asset retirement obligations associated with some of its facilities, but that the present value of those obligations normally is not material in the context of an indefinite expected life of the facilities. Lyondell continually reviews the optimal future alternatives for its facilities. Any decision to retire one or more facilities would result in an increase in the present value of such obligations. At September 30, 2007 and December 31, 2006, the liabilities that had been recognized for all asset retirement obligations were $16 million and $12 million, respectively.
Lyondell’s goodwill increased from $1,332 million at December 31, 2006 to $1,373 million at September 30, 2007 as a result of the adoption of FIN No. 48 (see Note 2).
11. Accounts Payable
Accounts payable at September 30, 2007 and December 31, 2006 included liabilities in the amounts of $17 million and $19 million, respectively, for checks issued in excess of associated bank balances but not yet presented for collection.
12. Long-Term Debt
Lyondell’s long-term debt includes credit facilities and debt obligations maintained by Lyondell’s wholly owned subsidiaries, Equistar and Millennium, and by Lyondell Chemical Company without its consolidated subsidiaries (“LCC”). In some situations, such as references to financial ratios, the context may require that “LCC” refer to Lyondell Chemical Company and its consolidated subsidiaries other than Equistar and Millennium. LCC has not guaranteed the subsidiaries’ credit facilities or debt obligations, except for Equistar’s 7.55% Debentures due 2026 in the principal amount of $150 million.
12
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Long-Term Debt – (Continued)
Long-term debt consisted of the following:
Millions of dollars | September 30, 2007 | December 31, 2006 | ||||||
Bank credit facilities: | ||||||||
LCC senior secured credit facility: | ||||||||
Term loan due 2013 | $ | 1,758 | $ | 1,771 | ||||
$1,055 million revolving credit facility | - - | - - | ||||||
Equistar $400 million inventory-based revolving credit facility | - - | - - | ||||||
LCC notes and debentures: | ||||||||
Senior Secured Notes due 2012, 11.125% | - - | 277 | ||||||
Senior Secured Notes due 2013, 10.5% | 325 | 325 | ||||||
Debentures due 2010, 10.25% | 100 | 100 | ||||||
Debentures due 2020, 9.8% ($1 million of discount) | 224 | 224 | ||||||
Senior Unsecured Notes due 2014, 8% | 875 | 875 | ||||||
Senior Unsecured Notes due 2016, 8.25% | 900 | 900 | ||||||
Senior Unsecured Notes due 2017, 6.875% | 510 | - - | ||||||
Senior Subordinated Notes due 2009, 10.875% | - - | 500 | ||||||
Equistar notes and debentures: | ||||||||
Senior Notes due 2008, 10.125% ($5 million of premium) | 405 | 716 | ||||||
Senior Notes due 2011, 10.625% ($12 million of premium) | 412 | 727 | ||||||
Debentures due 2026, 7.55% ($14 million of discount) | 136 | 135 | ||||||
Notes due 2009, 8.75% | 600 | 599 | ||||||
Millennium notes and debentures: | ||||||||
Senior Notes due 2008, 9.25% | - - | 393 | ||||||
Senior Debentures due 2026, 7.625% ($3 million of premium) | 244 | 249 | ||||||
Convertible Senior Debentures due 2023, 4% ($10 million of premium) | 160 | 163 | ||||||
Total | 6,649 | 7,954 | ||||||
Less current maturities | (423 | ) | (18 | ) | ||||
Long-term debt | $ | 6,226 | $ | 7,936 |
During the first nine months of 2007, Lyondell repaid the $278 million outstanding principal amount of LCC’s 11.125% Senior Secured Notes due 2012, paying premiums totaling $18 million. LCC also obtained consents to a proposed amendment of a restrictive provision of the indenture related to its 10.5% Senior Secured Notes due 2013, which required LCC to refinance subordinated debt with new subordinated debt. The amendment permits the refinancing of subordinated debt with senior debt. As a result, Lyondell issued $510 million of LCC 6.875% Senior Unsecured Notes due 2017, paying debt issuance costs of $8 million, and repaid, at par, the outstanding $500 million principal amount of LCC’s 10.875% Senior Subordinated Notes due 2009.
Also during the first nine months of 2007, LCC obtained an amendment to its senior secured credit facility reducing the then-current interest rate from LIBOR plus 1.75% to LIBOR plus 1.50% and removing the financial ratio maintenance covenants from the term loan. In addition, LCC repaid $13 million principal amount of its term loan due 2013 and Millennium repaid $4 million principal amount of its 7.625% Senior Debentures due 2026.
13
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Long-Term Debt – (Continued)
During the first nine months of 2007, Equistar repaid $300 million of its 10.125% Senior Notes due 2008 and $300 million of its 10.625% Senior Notes due 2011, paying premiums totaling $32 million, and Millennium repaid the remaining $373 million of its 9.25% Senior Notes due 2008, paying a premium of $13 million. As a result of the repayment of the 9.25% Senior Notes, Millennium is no longer prohibited from making certain restricted payments, including cash dividends to Lyondell, nor is it required to maintain financial ratios.
As of September 30, 2007, based on a quarterly test related to the price of Lyondell common stock, Millennium’s 4% Convertible Senior Debentures were convertible into Lyondell common stock at a conversion rate of 75.763 Lyondell shares per one thousand dollar principal amount of the Debentures. The principal amount of Debentures that had been converted into shares of Lyondell common stock as of September 30, 2007 was not significant.
Current maturities of long-term debt at September 30, 2007 included $400 million principal amount of Equistar’s 10.125% Senior Notes due 2008 and $18 million of LCC’s term loan due 2013. At December 31, 2006, current maturities of long-term debt included $18 million of LCC’s term loan due 2013.
Amortization of debt premiums, including adjustments to fair values included in accounting for the acquisition of Millennium, debt discounts and debt issuance costs resulted in net expense of $1 million for the three months ended September 30, 2007, a net credit of $3 million for the three months ended September 30, 2006 and net credits of $6 million and $13 million for the nine months ended September 30, 2007 and 2006, respectively, that were included in interest expense in the Consolidated Statements of Income.
Foreign exchange gains on intercompany loans totaled $26 million and $24 million, respectively, in the three months and nine months ended September 30, 2007 and less than $1 million in each of the three and nine months ended September 30, 2006. The gains in 2007 reflected the significant increase in value of the euro compared to the U.S. dollar in the three months ended September 30, 2007 and the determination that certain outstanding intercompany debt will be repaid in the foreseeable future.
14
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. Pension and Other Postretirement Benefits
Net periodic pension benefits included the following cost components:
For the three months ended September 30, 2007 | For the nine months ended September 30, 2007 | |||||||||||||||
Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
Service cost | $ | 13 | $ | 3 | $ | 39 | $ | 8 | ||||||||
Interest cost | 22 | 3 | 66 | 8 | ||||||||||||
Recognized return on plan assets | (26 | ) | (4 | ) | (74 | ) | (10 | ) | ||||||||
Amortization | 5 | - - | 10 | 1 | ||||||||||||
Net periodic pension benefit cost | $ | 14 | $ | 2 | $ | 41 | $ | 7 |
For the three months ended September 30, 2006 | For the nine months ended September 30, 2006 | |||||||||||||||
Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
Service cost | $ | 11 | $ | 4 | $ | 33 | $ | 11 | ||||||||
Interest cost | 20 | 3 | 59 | 9 | ||||||||||||
Recognized return on plan assets | (19 | ) | (4 | ) | (56 | ) | (11 | ) | ||||||||
Amortization | 6 | 1 | 17 | 3 | ||||||||||||
Net periodic pension benefit cost | $ | 18 | $ | 4 | $ | 53 | $ | 12 |
Net periodic other postretirement benefits, which are provided to U.S. employees, included the following cost components:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
Millions of dollars | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 4 | $ | 3 | ||||||||
Interest cost | 4 | 3 | 11 | 9 | ||||||||||||
Amortization | (1 | ) | (1 | ) | (5 | ) | (2 | ) | ||||||||
Net periodic other postretirement benefit cost | $ | 4 | $ | 3 | $ | 10 | $ | 10 |
Lyondell made $147 million of voluntary and required contributions to its pension plans during the nine months ended September 30, 2007, and does not expect to make significant contributions during the last three months of 2007.
14. Income Taxes
Certain income tax returns of Lyondell and various of its subsidiaries are under examination by the Internal Revenue Service (“IRS”) and various non-U.S. and state tax authorities. In many cases, these audits may result in proposed adjustments by the tax authorities. Lyondell believes that its tax positions comply with applicable tax law and intends to defend its positions through appropriate administrative and judicial processes.
15
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. Income Taxes – (Continued)
Tax benefits totaling $179 million relating to uncertain tax positions taken in prior years, including $44 million pertaining to discontinued operations, were unrecognized as of January 1, 2007 (see Note 2). As a result of the sale of the inorganic chemicals business, this amount decreased by the $44 million. There were no other material changes in the amount of unrecognized benefits during the nine months ended September 30, 2007.
A substantial portion of these uncertainties relate to passive foreign income for the years 1997 to 2001 and related capital loss benefits that were subsequently recognized. IRS audit examination and appeal of the matter has been completed, and it is now in the final stages of the administrative review process. It is reasonably possible that the matter may be settled in 2007 and result in a significant reduction of the amount of unrecognized tax benefits with a corresponding adjustment to goodwill. With the exception of the preceding issue, Lyondell is no longer subject to any significant income tax examinations by tax authorities for years prior to 2002.
Lyondell recognizes interest accrued related to uncertain income tax positions in interest expense. Lyondell’s accrued liability for interest as of January 1, 2007 was $86 million. The noncurrent portion of liabilities for uncertain income tax positions and related interest are classified as “Other liabilities” in the consolidated balance sheets.
The effective income tax rate for the first nine months of 2007 was 34% primarily due to a benefit from newly-enacted Texas state legislation, which allows the carryforward of certain tax losses for state income tax purposes. The estimated annual effective income tax rate for 2007, excluding the effect of the Texas state tax benefit, is 36%. The effective income tax rate used for the first nine months of 2006 was 40%, and was higher than the statutory rate primarily due to the effects of non-U.S. operations.
15. Commitments and Contingencies
Environmental Remediation—Lyondell’s accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $175 million and $176 million as of September 30, 2007 and December 31, 2006, respectively. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In the opinion of management, there is no material estimable range of reasonably possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.
The following table summarizes the activity in Lyondell’s accrued environmental liability for the nine months ended September 30:
Millions of dollars | 2007 | 2006 | ||||||
Balance at January 1 | $ | 176 | $ | 171 | ||||
Additional provisions | 12 | 10 | ||||||
Amounts paid | (13 | ) | (9 | ) | ||||
Balance at September 30 | $ | 175 | $ | 172 |
The liabilities for individual sites range from less than $1 million to $109 million. The $109 million liability relates to the Kalamazoo River Superfund Site.
16
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Commitments and Contingencies – (Continued)
A Millennium subsidiary has been identified as a Potential Responsible Party (“PRP”) with respect to the Kalamazoo River Superfund Site. The site involves cleanup of river sediments and floodplain soils contaminated with polychlorinated biphenyls, cleanup of former paper mill operations, and cleanup and closure of landfills associated with the former paper mill operations. In 2000, the Kalamazoo River Study Group (the “KRSG”), of which the Millennium subsidiary and other PRPs are members, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study, which evaluated a number of remedial options for the river. The estimated costs for these remedial options ranged from $0 to $2.5 billion.
Although the KRSG study identified a broad range of remedial options, not all of those options would represent reasonably possible outcomes. Management does not believe that it can identify a single remedy among those options that would represent the highest-cost reasonably possible outcome. However, in 2004, Lyondell recognized a liability representing Millennium’s interim allocation of 55% of the $73 million total of estimated cost of riverbank stabilization, recommended as the preferred remedy in 2000 by the KRSG study, and of certain other costs.
At the end of 2001, the U.S. Environmental Protection Agency (“EPA”) took lead responsibility for the river portion of the site at the request of the State of Michigan. In 2004, the EPA initiated a confidential process to facilitate discussions among the agency, the Millennium subsidiary, other PRPs, the Michigan Departments of Environmental Quality and Natural Resources, and certain federal natural resource trustees about the need for additional investigation activities and different possible approaches for addressing the contamination in and along the Kalamazoo River.
As a result of these discussions, new information has been obtained about regulatory oversight costs and other remediation costs, including a proposed remedy to be applied to a specific portion of the river. As a result, Lyondell recognized $8 million in the first nine months of 2007 for additional estimated probable future remediation costs. As of September 30, 2007, the probable future remediation spending associated with the river cannot be determined with certainty. The activities related to the specific portion of the river are expected to be completed in 3 to 4 years and may provide Lyondell with a basis for estimating the probable future remediation cost of the Kalamazoo River. At September 30, 2007, the balance of this liability was $62 million.
In addition, in 2004, Lyondell recognized a liability primarily related to Millennium’s estimated share of remediation costs for two former paper mill sites and associated landfills, which are also part of the Kalamazoo River Superfund Site. At September 30, 2007, the balance of the liability was $47 million. Although no final agreement has been reached as to the ultimate remedy for these locations, Millennium has begun remediation activity related to these sites.
Millennium’s ultimate liability for the Kalamazoo River Superfund Site will depend on many factors that have not yet been determined, including the ultimate remedy selected, the determination of natural resource damages, the number and financial viability of the other PRPs, and the determination of the final allocation among the PRPs.
The balance, at September 30, 2007, of Lyondell remediation liabilities related to Millennium sites other than the Kalamazoo River Superfund Site was $39 million.
MTBE—The presence of methyl tertiary butyl ether (“MTBE”) in some water supplies in certain U.S. states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft led to public concern about the use of MTBE and resulted in U.S. federal and state governmental initiatives to reduce or ban the use of MTBE. Substantially all refiners and blenders have discontinued the use of MTBE in the U.S.
17
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Commitments and Contingencies – (Continued)
Accordingly, Lyondell is marketing its U.S.-produced MTBE for use outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside of the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Lyondell’s U.S.-based and European-based MTBE plants generally have the flexibility to produce either MTBE or ethyl tertiary butyl ether (“ETBE”) to accommodate market needs. Lyondell produces and sells ETBE in Europe to address Europe’s growing demand for biofuels. In addition, during the fourth quarter of 2006, Lyondell installed equipment at its Channelview, Texas facility to provide Lyondell with the flexibility to produce an alternative gasoline blending component known as iso-octene (also known as “di-isobutylene” or “DIB”) or either MTBE or ETBE at that facility in the future. The facility began producing iso-octene during the fourth quarter of 2006, but experienced equipment limitations that negatively affected operability and reliability. As a result, the facility has returned to MTBE production while the modifications necessary to ensure reliable iso-octene production are defined. Any decision to return to iso-octene production will depend on the timing and cost of the required modifications, and product decisions will continue to be influenced by regulatory and market developments. The profit contribution related to iso-octene may be lower than that historically realized on MTBE. In addition, iso-octene is a new product without an established history.
Litigation—On April 12, 2005, BASF Corporation (“BASF”) filed a lawsuit in New Jersey against Lyondell asserting various claims relating to alleged breaches of a PO sales contract and seeking damages in excess of $100 million. Lyondell denies it breached the contract. The trial started on June 18, 2007. Lyondell believes the maximum refund due to BASF is $22.5 million on such PO sales and has offered to pay such amount to BASF. On August 13, 2007, the jury returned a verdict in favor of BASF in the amount of approximately $170 million (which includes the above $22.5 million). On October 3, 2007, the judge determined that prejudgment interest on the verdict would be $36 million. Lyondell will appeal this verdict and will post a bond, which will be collateralized by a $200 million letter of credit. Lyondell does not expect the verdict to result in any material adverse effect on its business, financial position, liquidity or results of operations.
Together with alleged past manufacturers of lead-based paint and lead pigments for use in paint, Millennium has been named as a defendant in various legal proceedings alleging personal injury, property damage, and remediation costs allegedly associated with the use of these products. The majority of these legal proceedings assert unspecified monetary damages in excess of the statutory minimum and, in certain cases, equitable relief such as abatement of lead-based paint in buildings. Legal proceedings relating to lead pigment or paint are in various trial stages and post-dismissal settings, some of which are on appeal.
One legal proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, the judge in that case declared a mistrial after the jury declared itself deadlocked. The sole issue before the jury was whether lead pigment in paint in and on Rhode Island buildings constituted a “public nuisance.” The re-trial of this case began on November 1, 2005. On February 22, 2006, a jury returned a verdict in favor of the State of Rhode Island finding that the cumulative presence of lead pigments in paints and coatings on buildings in the state constitutes a public nuisance; that a Millennium subsidiary, Millennium Holdings, LLC, and other defendants either caused or substantially contributed to the creation of the public nuisance; and that those defendants, including the Millennium subsidiary, should be ordered to abate the public nuisance. On February 28, 2006, the judge held that the state could not proceed with its claim for punitive damages. On February 26, 2007, the court issued its decision denying the post-verdict motions of the defendants, including Millennium, for a mistrial or a new trial. The court concluded that it would enter an order of abatement and appoint a special master to assist the court in determining the scope of the abatement remedy. On March 16, 2007, the court entered a final judgment on the jury’s verdict. On March 20, 2007, Millennium filed its notice of appeal with the Rhode Island Supreme Court.
18
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Commitments and Contingencies – (Continued)
Millennium’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. Millennium has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. Millennium’s ability to collect under the indemnity coverage would depend upon, among other things, the resolution of certain potential coverage defenses that the insurers are likely to assert and the solvency of the various insurance carriers that are part of the coverage block at the time of such a request.
While Lyondell believes that Millennium has valid defenses to all the lead-based paint and lead pigment proceedings and is vigorously defending them, litigation is inherently subject to many uncertainties. Any liability that Millennium may ultimately incur, net of any insurance or other recoveries, cannot be estimated at this time.
Indemnification—Lyondell and its joint ventures are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. For example, Lyondell entered into indemnification arrangements in connection with the transfer of assets and liabilities from Atlantic Richfield Company to Lyondell prior to Lyondell’s initial public offering and in connection with Lyondell’s acquisition of the outstanding shares of ARCO Chemical Company; Equistar and its owner companies (including Lyondell and Millennium) entered into indemnification arrangements in connection with the formation of Equistar; and Millennium entered into indemnification arrangements in connection with its demerger from Hanson plc. Pursuant to these arrangements, Lyondell and its joint ventures provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of September 30, 2007, Lyondell has not accrued any significant amounts for such indemnification obligations, and is not aware of other circumstances that would be likely to lead to significant future indemnification claims against Lyondell. Lyondell cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.
Other—Lyondell and its joint ventures are, from time to time, defendants in lawsuits and other commercial disputes, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of any liability and resulting financial impact with respect to any such matters cannot be ascertained with any degree of certainty, management does not believe that any ultimate uninsured liability resulting from these matters in which it, its subsidiaries or its joint ventures currently are involved will, individually or in the aggregate, have a material adverse effect on the financial position, liquidity or results of operations of Lyondell.
General—In the opinion of management, the matters discussed in this note are not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters could have a material impact on Lyondell’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of others, or by any insurance coverage that may be available.
19
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Stockholders’ Equity
In January 2007, Occidental Chemical Holding Corporation, a subsidiary of Occidental (“OCHC”), notified Lyondell that it was exercising the warrant held by OCHC for the purchase of 5 million shares of Lyondell common stock for $25 per share. The terms of the warrant provided that Lyondell could elect to net settle the exercise by delivering that number of shares of Lyondell common stock having a market value equal to the difference between the exercise price and the market price. In February 2007, pursuant to the terms of the warrant, OCHC received a net payment of 682,210 shares of Lyondell common stock, having a value of $20 million. Subsequently, OCHC sold its remaining shares of Lyondell common stock.
The tax benefits of stock options exercised during the nine months ended September 30, 2007 and 2006 were $20 million and $4 million, respectively.
17. Per Share Data
Basic earnings per share for the periods presented is computed based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share also include the effect of outstanding stock options, warrants and restricted stock. Additionally, diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 include the effect of the assumed conversion of Millennium’s 4% Convertible Senior Debentures into Lyondell common stock.
20
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. Per Share Data – (Continued)
Earnings per share data and dividends declared per share of common stock were as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
In millions | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Income from continuing operations | $ | 206 | $ | 61 | $ | 483 | $ | 476 | ||||||||
After-tax interest expense on 4% Convertible Senior Debentures | - - | - - | 1 | 1 | ||||||||||||
Income from continuing operations, assuming conversion of 4% Convertible Senior Debentures | 206 | 61 | 484 | 477 | ||||||||||||
Income (loss) from discontinued operations, net of tax | - - | (4 | ) | (82 | ) | 31 | ||||||||||
Net income assuming conversion of 4% Convertible Senior Debentures | $ | 206 | $ | 57 | $ | 402 | $ | 508 | ||||||||
In millions of shares | ||||||||||||||||
Basic weighted average shares | 253.3 | 247.7 | 252.4 | 247.3 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
4% Convertible Senior Debentures | 11.4 | 11.0 | 11.3 | 11.0 | ||||||||||||
Stock options, warrants and restricted stock | 1.6 | 1.8 | 1.5 | 1.7 | ||||||||||||
Dilutive potential shares | 266.3 | 260.5 | 265.2 | 260.0 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic: | ||||||||||||||||
Continuing operations | $ | 0.81 | $ | 0.24 | $ | 1.91 | $ | 1.92 | ||||||||
Discontinued operations | - - | (0.01 | ) | (0.32 | ) | 0.13 | ||||||||||
$ | 0.81 | $ | 0.23 | $ | 1.59 | $ | 2.05 | |||||||||
Diluted: | ||||||||||||||||
Continuing operations | $ | 0.78 | $ | 0.23 | $ | 1.83 | $ | 1.84 | ||||||||
Discontinued operations | - - | (0.01 | ) | (0.31 | ) | 0.12 | ||||||||||
$ | 0.78 | $ | 0.22 | $ | 1.52 | $ | 1.96 | |||||||||
Antidilutive stock options and warrants in millions | - - | 6.2 | 0.3 | 6.2 | ||||||||||||
Dividends declared per share of common stock | $ | 0.225 | $ | 0.225 | $ | 0.675 | $ | 0.675 |
21
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
18. Comprehensive Income
The components of comprehensive income were as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
Millions of dollars | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Net income | $ | 206 | $ | 57 | $ | 401 | $ | 507 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Continuing operations: | ||||||||||||||||
Foreign currency translation | 39 | 2 | 75 | 84 | ||||||||||||
Amortization of actuarial and investment loss included in net periodic benefit cost | 3 | - - | 4 | - - | ||||||||||||
Discontinued operations: | ||||||||||||||||
Foreign currency translation | - - | (2 | ) | 17 | 24 | |||||||||||
Sale of discontinued operations | - - | - - | (72 | ) | - - | |||||||||||
Total other comprehensive income | 42 | - - | 24 | 108 | ||||||||||||
Comprehensive income | $ | 248 | $ | 57 | $ | 425 | $ | 615 |
19. Segment and Related Information
Lyondell operates in three reportable segments:
· | Ethylene, co-products and derivatives (“EC&D”), primarily manufacturing and marketing of ethylene; its co-products, including propylene, butadiene and aromatics; and derivatives, including ethylene oxide, ethylene glycol, polyethylene and vinyl acetate monomer; |
· | Propylene oxide and related products (“PO&RP”), including manufacturing and marketing of PO; co-products SM and TBA with its derivatives, MTBE, ETBE and isobutylene; PO derivatives, including propylene glycol, propylene glycol ethers and butanediol; and TDI; and |
· | Refining. |
Through August 15, 2006, the refining segment consisted of Lyondell’s equity investment in Houston Refining (see Note 5). The operations of Houston Refining are consolidated prospectively from August 16, 2006, and include the effects of Lyondell’s acquisition from that date.
On May 15, 2007, Lyondell completed the sale of its worldwide inorganic chemicals business (see Note 4).
22
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19. Segment and Related Information – (Continued)
Summarized financial information concerning reportable segments is shown in the following table for the periods presented:
Millions of dollars | EC&D | PO&RP | Refining | Other | Total | |||||||||||||||
For the three months ended September 30, 2007: | ||||||||||||||||||||
Sales and other operating revenues: | ||||||||||||||||||||
Customer | $ | 2,786 | $ | 2,031 | $ | 2,539 | $ | 29 | $ | 7,385 | ||||||||||
Intersegment | 782 | 100 | 260 | (1,142 | ) | - - | ||||||||||||||
3,568 | 2,131 | 2,799 | (1,113 | ) | 7,385 | |||||||||||||||
Operating income (loss) | 83 | 170 | 209 | (19 | ) | 443 | ||||||||||||||
For the three months ended September 30, 2006: | ||||||||||||||||||||
Sales and other operating revenues: | ||||||||||||||||||||
Customer | $ | 3,015 | $ | 1,810 | $ | 954 | $ | 36 | $ | 5,815 | ||||||||||
Intersegment | 588 | 90 | 129 | (807 | ) | - - | ||||||||||||||
3,603 | 1,900 | 1,083 | (771 | ) | 5,815 | |||||||||||||||
Operating income | 173 | 133 | 81 | 1 | 388 | |||||||||||||||
Income (loss) from equity investments | - - | 2 | (104 | ) | - - | (102 | ) | |||||||||||||
For the nine months ended September 30, 2007: | ||||||||||||||||||||
Sales and other operating revenues: | ||||||||||||||||||||
Customer | $ | 8,034 | $ | 5,756 | $ | 6,777 | $ | 89 | $ | 20,656 | ||||||||||
Intersegment | 2,190 | 302 | 699 | (3,191 | ) | - - | ||||||||||||||
10,224 | 6,058 | 7,476 | (3,102 | ) | 20,656 | |||||||||||||||
Operating income (loss) | 255 | 330 | 674 | (38 | ) | 1,221 | ||||||||||||||
Income from equity investments | - - | 2 | - - | - - | 2 | |||||||||||||||
For the nine months ended September 30, 2006: | ||||||||||||||||||||
Sales and other operating revenues: | ||||||||||||||||||||
Customer | $ | 8,833 | $ | 5,067 | $ | 954 | $ | 94 | $ | 14,948 | ||||||||||
Intersegment | 1,323 | 240 | 129 | (1,692 | ) | - - | ||||||||||||||
10,156 | 5,307 | 1,083 | (1,598 | ) | 14,948 | |||||||||||||||
Operating income (loss) | 653 | 358 | 81 | (1 | ) | 1,091 | ||||||||||||||
Income from equity investments | - - | 4 | 73 | - - | 77 |
23
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19. Segment and Related Information – (Continued)
Sales and other operating revenues and operating income in the “Other” column above include elimination of intersegment transactions and businesses that are not reportable segments.
20. Supplemental Guarantor Information
Certain Lyondell entities are guarantors, jointly and severally, of the following LCC debt (see Note 12):
- | Senior Secured Notes due 2013, 10.5% |
- | Senior Unsecured Notes due 2014, 8% |
- | Senior Unsecured Notes due 2016, 8.25%, and |
- | Senior Unsecured Notes due 2017, 6.875%. |
Guarantors include certain Lyondell subsidiaries, which have direct and indirect investments in Lyondell’s chemical production facilities in the U.S., The Netherlands and France; certain Lyondell entities, which hold and license technology to other Lyondell affiliates and to third parties, make loans to other Lyondell affiliates or which own equity interests in Equistar and Houston Refining; and, from August 16, 2006, Houston Refining.
The Guarantors are all 100% owned subsidiaries of Lyondell. The guarantees are joint and several and full and unconditional.
Equistar is the issuer of 7.55% Debentures due 2026, which are guaranteed by LCC.
As a result of Lyondell’s purchase of its partner’s 41.25% equity interest in Houston Refining and Lyondell’s resulting 100% ownership of Houston Refining, the operations of Houston Refining are consolidated prospectively from August 16, 2006. Prior to August 16, 2006, Lyondell accounted for its investment in Houston Refining using the equity method (see Note 5 for additional information).
The following condensed consolidating financial information present supplemental information as of September 30, 2007 and December 31, 2006 and for the three- and nine-month periods ended September 30, 2007 and 2006. In this note, LCC refers to the parent company, Lyondell Chemical Company.
24
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
BALANCE SHEET
As of September 30, 2007
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Inventories | $ | 316 | $ | 362 | $ | 679 | $ | 551 | $ | (2 | ) | $ | 1,906 | |||||||||||
Accounts receivable – affiliates | 3,764 | 1,680 | 270 | 920 | (6,634 | ) | - - | |||||||||||||||||
Other current assets | 248 | 453 | 1,231 | 1,061 | - - | 2,993 | ||||||||||||||||||
Property, plant and equipment, net | 571 | 2,790 | 2,814 | 2,316 | - - | 8,491 | ||||||||||||||||||
Investments and long-term receivables | 5,509 | 4,122 | 51 | 2,141 | (10,924 | ) | 899 | |||||||||||||||||
Long-term receivables – affiliates | 2,936 | 2,297 | - - | 625 | (5,858 | ) | - - | |||||||||||||||||
Goodwill, net | 699 | 142 | - - | 532 | - - | 1,373 | ||||||||||||||||||
Other assets, net | 256 | 146 | 273 | 203 | - - | 878 | ||||||||||||||||||
Total assets | $ | 14,299 | $ | 11,992 | $ | 5,318 | $ | 8,349 | $ | (23,418 | ) | $ | 16,540 | |||||||||||
Current maturities of long-term debt | $ | 18 | $ | - - | $ | 400 | $ | 5 | $ | - - | $ | 423 | ||||||||||||
Accounts payable – affiliates | 2,132 | 2,863 | 647 | 992 | (6,634 | ) | - - | |||||||||||||||||
Other current liabilities | 573 | 682 | 1,200 | 849 | - - | 3,304 | ||||||||||||||||||
Long-term debt | 4,674 | - - | 1,153 | 399 | - - | 6,226 | ||||||||||||||||||
Long-term payables – affiliates | 2,022 | 2,988 | - - | 848 | (5,858 | ) | - - | |||||||||||||||||
Other liabilities | 461 | 95 | 370 | 332 | - - | 1,258 | ||||||||||||||||||
Deferred income taxes | 889 | - - | - - | 789 | - - | 1,678 | ||||||||||||||||||
Minority interests | - - | - - | 1 | 120 | - - | 121 | ||||||||||||||||||
Stockholders’ equity | 3,530 | 5,364 | 1,547 | 4,015 | (10,926 | ) | 3,530 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 14,299 | $ | 11,992 | $ | 5,318 | $ | 8,349 | $ | (23,418 | ) | $ | 16,540 |
25
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
BALANCE SHEET
As of December 31, 2006
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Inventories | $ | 246 | $ | 343 | $ | 809 | $ | 486 | $ | (7 | ) | $ | 1,877 | |||||||||||
Accounts receivable – affiliates | 3,223 | 1,644 | 221 | 510 | (5,598 | ) | - - | |||||||||||||||||
Other current assets | 308 | 337 | 1,128 | 809 | - - | 2,582 | ||||||||||||||||||
Current assets held for sale | - - | - - | - - | 687 | - - | 687 | ||||||||||||||||||
Property, plant and equipment, net | 573 | 2,805 | 2,846 | 2,318 | - - | 8,542 | ||||||||||||||||||
Investments and long-term receivables | 5,685 | 3,686 | 59 | 1,299 | (9,836 | ) | 893 | |||||||||||||||||
Long-term receivables – affiliates | 2,816 | 2,054 | - - | 267 | (5,137 | ) | - - | |||||||||||||||||
Goodwill, net | 699 | 142 | - - | 491 | - - | 1,332 | ||||||||||||||||||
Other assets, net | 268 | 118 | 296 | 182 | - - | 864 | ||||||||||||||||||
Long-term assets held for sale | - - | - - | - - | 1,069 | - - | 1,069 | ||||||||||||||||||
Total assets | $ | 13,818 | $ | 11,129 | $ | 5,359 | $ | 8,118 | $ | (20,578 | ) | $ | 17,846 | |||||||||||
Current maturities of long-term debt | $ | 18 | $ | - - | $ | - - | $ | - - | $ | - - | $ | 18 | ||||||||||||
Accounts payable – affiliates | 2,192 | 2,402 | 174 | 830 | (5,598 | ) | - - | |||||||||||||||||
Other current liabilities | 663 | 587 | 1,043 | 555 | - - | 2,848 | ||||||||||||||||||
Current liabilities associated with assets held for sale | - - | - - | - - | 341 | - - | 341 | ||||||||||||||||||
Long-term debt | 4,954 | - - | 2,160 | 822 | - - | 7,936 | ||||||||||||||||||
Long-term payables – affiliates | 1,557 | 2,839 | - - | 741 | (5,137 | ) | - - | |||||||||||||||||
Other liabilities | 456 | 118 | 377 | 502 | - - | 1,453 | ||||||||||||||||||
Deferred income taxes | 790 | - - | - - | 747 | - - | 1,537 | ||||||||||||||||||
Long-term liabilities associated with assets held for sale | - - | - - | - - | 391 | - - | 391 | ||||||||||||||||||
Minority interests | - - | - - | 1 | 133 | - - | 134 | ||||||||||||||||||
Stockholders’ equity | 3,188 | 5,183 | 1,604 | 3,056 | (9,843 | ) | 3,188 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 13,818 | $ | 11,129 | $ | 5,359 | $ | 8,118 | $ | (20,578 | ) | $ | 17,846 |
26
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the Three Months Ended September 30, 2007
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Sales and other operating revenues | $ | 1,169 | $ | 2,801 | $ | 3,464 | $ | 1,344 | $ | (1,393 | ) | $ | 7,385 | |||||||||||
Cost of sales | 1,092 | 2,583 | 3,314 | 1,140 | (1,393 | ) | 6,736 | |||||||||||||||||
Selling, general and administrative expenses | 74 | 6 | 71 | 37 | - - | 188 | ||||||||||||||||||
Research and development expenses | 8 | - - | 10 | - - | - - | 18 | ||||||||||||||||||
Operating income (loss) | (5 | ) | 212 | 69 | 167 | - - | 443 | |||||||||||||||||
Interest income (expense), net | (102 | ) | 2 | (37 | ) | (1 | ) | - - | (138 | ) | ||||||||||||||
Other income (expense), net | (6 | ) | 26 | - - | 4 | - - | 24 | |||||||||||||||||
Income from equity investments | 214 | 145 | - - | 7 | (366 | ) | - - | |||||||||||||||||
Intercompany income (expense), net | 12 | 57 | (10 | ) | (59 | ) | - - | - - | ||||||||||||||||
(Provision for) benefit from income taxes | 93 | (171 | ) | - - | (45 | ) | - - | (123 | ) | |||||||||||||||
Net income | $ | 206 | $ | 271 | $ | 22 | $ | 73 | $ | (366 | ) | $ | 206 |
STATEMENT OF INCOME
For the Three Months Ended September 30, 2006
Non- | |||||||||||||||||||||||||
Millions of dollars | LCC | Guarantors | Equistar | Guarantors | Eliminations | Consolidated | |||||||||||||||||||
Sales and other operating revenues | $ | 1,128 | $ | 1,083 | $ | 3,480 | $ | 1,152 | $ | (1,028 | ) | $ | 5,815 | ||||||||||||
Cost of sales | 1,055 | 997 | 3,151 | 997 | (1,028 | ) | 5,172 | ||||||||||||||||||
Asset impairments | - - | - - | 135 | (29 | ) | - - | 106 | ||||||||||||||||||
Selling, general and administrative expenses | 45 | 7 | 54 | 26 | - - | 132 | |||||||||||||||||||
Research and development expenses | 10 | (3 | ) | 8 | 2 | - - | 17 | ||||||||||||||||||
Operating income | 18 | 82 | 132 | 156 | - - | 388 | |||||||||||||||||||
Interest income (expense), net | (98 | ) | 3 | (55 | ) | (7 | ) | 1 | (156 | ) | |||||||||||||||
Other income (expense), net | (22 | ) | (1 | ) | 1 | 4 | - - | (18 | ) | ||||||||||||||||
Income (loss) from equity investments | 65 | 51 | - - | 25 | (243 | ) | (102 | ) | |||||||||||||||||
Intercompany income (expense), net | 20 | 23 | - - | (43 | ) | - - | - - | ||||||||||||||||||
(Provision for) benefit from income taxes | 74 | (71 | ) | - - | (54 | ) | - - | (51 | ) | ||||||||||||||||
Loss from discontinued operations, net of tax | - - | - - | - - | (4 | ) | - - | (4 | ) | |||||||||||||||||
Net income | $ | 57 | $ | 87 | $ | 78 | $ | 77 | $ | (242 | ) | $ | 57 |
27
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF INCOME
For the Nine Months Ended September 30, 2007
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Sales and other operating revenues | $ | 3,309 | $ | 7,480 | $ | 9,867 | $ | 3,978 | $ | (3,978 | ) | $ | 20,656 | |||||||||||
Cost of sales | 3,206 | 6,782 | 9,414 | 3,429 | (3,978 | ) | 18,853 | |||||||||||||||||
Selling, general and administrative expenses | 195 | 18 | 202 | 112 | - - | 527 | ||||||||||||||||||
Research and development expenses | 25 | - - | 28 | 2 | - - | 55 | ||||||||||||||||||
Operating income (loss) | (117 | ) | 680 | 223 | 435 | - - | 1,221 | |||||||||||||||||
Interest income (expense), net | (324 | ) | 3 | (140 | ) | (12 | ) | - - | (473 | ) | ||||||||||||||
Other income (expense), net | (30 | ) | 24 | (32 | ) | 22 | - - | (16 | ) | |||||||||||||||
Income from equity investments | 595 | 371 | 1 | 14 | (979 | ) | 2 | |||||||||||||||||
Intercompany income (expense), net | 31 | 145 | (10 | ) | (166 | ) | - - | - - | ||||||||||||||||
(Provision for) benefit from income taxes | 268 | (418 | ) | (1 | ) | �� | (100 | ) | - - | (251 | ) | |||||||||||||
Loss from discontinued operations, net of tax | (22 | ) | - - | - - | (60 | ) | - - | (82 | ) | |||||||||||||||
Net income | $ | 401 | $ | 805 | $ | 41 | $ | 133 | $ | (979 | ) | $ | 401 |
STATEMENT OF INCOME
For the Nine Months Ended September 30, 2006
Non- | ||||||||||||||||||||||||
Millions of dollars | LCC | Guarantors | Equistar | Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Sales and other operating revenues | $ | 3,125 | $ | 1,083 | $ | 9,794 | $ | 3,120 | $ | (2,174 | ) | $ | 14,948 | |||||||||||
Cost of sales | 2,892 | 1,001 | 8,849 | 2,749 | (2,170 | ) | 13,321 | |||||||||||||||||
Asset impairments | - - | - - | 135 | (29 | ) | - - | 106 | |||||||||||||||||
Selling, general and administrative expenses | 123 | 7 | 163 | 83 | - - | 376 | ||||||||||||||||||
Research and development expenses | 29 | (3 | ) | 25 | 3 | - - | 54 | |||||||||||||||||
Operating income | 81 | 78 | 622 | 314 | (4 | ) | 1,091 | |||||||||||||||||
Interest income (expense), net | (240 | ) | 9 | (160 | ) | (42 | ) | 1 | (432 | ) | ||||||||||||||
Other income (expense), net | (27 | ) | 75 | - - | 12 | - - | 60 | |||||||||||||||||
Income from equity investments | 540 | 653 | - - | 141 | (1,257 | ) | 77 | |||||||||||||||||
Intercompany income (expense), net | (34 | ) | 153 | - - | (119 | ) | - - | - - | ||||||||||||||||
(Provision for) benefit from income taxes | 187 | (378 | ) | - - | (129 | ) | - - | (320 | ) | |||||||||||||||
Income from discontinued operations, net of tax | - - | - - | - - | 31 | - - | 31 | ||||||||||||||||||
Net income | $ | 507 | $ | 590 | $ | 462 | $ | 208 | $ | (1,260 | ) | $ | 507 |
28
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2007
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Net cash provided by (used in) operating activities – continuing operations | $ | (232 | ) | $ | 1,562 | $ | 253 | $ | 182 | $ | (919 | ) | $ | 846 | ||||||||||
Net cash used in operating activities – discontinued operations | - - | - - | - - | (113 | ) | - - | (113 | ) | ||||||||||||||||
Net cash provided by (used in) operating activities | (232 | ) | 1,562 | 253 | 69 | (919 | ) | 733 | ||||||||||||||||
Expenditures for property, plant and equipment | (35 | ) | (143 | ) | (152 | ) | (30 | ) | - - | (360 | ) | |||||||||||||
Payments to discontinued operations | - - | - - | - - | (97 | ) | - - | (97 | ) | ||||||||||||||||
Acquisition of Houston Refining LP and related payments, net of cash acquired | (94 | ) | - - | - - | - - | - - | (94 | ) | ||||||||||||||||
Distributions from affiliates in excess of earnings | 297 | - - | - - | 18 | (313 | ) | 2 | |||||||||||||||||
Contributions and advances to affiliates | (34 | ) | - - | - - | - - | - - | (34 | ) | ||||||||||||||||
Loans to affiliates | - - | (255 | ) | - - | (725 | ) | 980 | - - | ||||||||||||||||
Other | - - | 1 | 8 | 3 | - - | 12 | ||||||||||||||||||
Net cash provided by (used in) investing activities – continuing operations | 134 | (397 | ) | (144 | ) | (831 | ) | 667 | (571 | ) | ||||||||||||||
Net proceeds from sale of discontinued operations before required repayment of debt | - - | - - | - - | 1,089 | - - | 1,089 | ||||||||||||||||||
Other net cash provided by investing activities – discontinued operations | - - | - - | - - | 82 | - - | 82 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 134 | (397 | ) | (144 | ) | 340 | 667 | 600 | ||||||||||||||||
Repayment of long-term debt | (809 | ) | - - | (632 | ) | (390 | ) | - - | (1,831 | ) | ||||||||||||||
Issuance of long-term debt | 510 | - - | - - | - - | - - | 510 | ||||||||||||||||||
Proceeds from notes payable to affiliates | 465 | - - | 515 | - - | (980 | ) | - - | |||||||||||||||||
Dividends paid | (171 | ) | (268 | ) | - - | (3 | ) | 271 | (171 | ) | ||||||||||||||
Proceeds from and tax benefits of stock option exercises | 81 | - - | - - | - - | - - | 81 | ||||||||||||||||||
Distributions to owners | - - | (861 | ) | (100 | ) | - - | 961 | - - | ||||||||||||||||
Other, net | 8 | (2 | ) | - - | 1 | - - | 7 | |||||||||||||||||
Net cash provided by (used in) financing activities – continuing operations | 84 | (1,131 | ) | (217 | ) | (392 | ) | 252 | (1,404 | ) | ||||||||||||||
Debt required to be repaid upon sale of discontinued operations | - - | - - | - - | (99 | ) | - - | (99 | ) | ||||||||||||||||
Net cash provided by financing activities – discontinued operations | - - | - - | - - | 23 | - - | 23 | ||||||||||||||||||
Net cash provided by (used in) financing activities | 84 | (1,131 | ) | (217 | ) | (468 | ) | 252 | (1,480 | ) | ||||||||||||||
Effect of exchange rate changes on cash | - - | - - | - - | 4 | - - | 4 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents | (14 | ) | 34 | (108 | ) | (55 | ) | - - | (143 | ) | ||||||||||||||
Cash and cash equivalents at beginning of period | 92 | 80 | 133 | 141 | - - | 446 | ||||||||||||||||||
Cash and cash equivalents at end of period – continuing operations | $ | 78 | $ | 114 | $ | 25 | $ | 86 | $ | - - | $ | 303 |
29
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2006
Millions of dollars | LCC | Guarantors | Equistar | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||
Net cash provided by (used in) operating activities – continuing operations | $ | (77 | ) | $ | 672 | $ | 450 | $ | 403 | $ | (867 | ) | $ | 581 | ||||||||||
Net cash provided by operating activities – discontinued operations | - - | - - | - - | 38 | - - | 38 | ||||||||||||||||||
Net cash provided by (used in) operating activities | (77 | ) | 672 | 450 | 441 | (867 | ) | 619 | ||||||||||||||||
Expenditures for property, plant and equipment | (35 | ) | (29 | ) | (105 | ) | (28 | ) | - - | (197 | ) | |||||||||||||
Payments to discontinued operations | - - | - - | - - | (12 | ) | - - | (12 | ) | ||||||||||||||||
Acquisition of Houston Refining LP and related payments, net of cash acquired | (2,468 | ) | 55 | - - | - - | - - | (2,413 | ) | ||||||||||||||||
Distributions from affiliates in excess of earnings | 117 | - - | - - | - - | - - | 117 | ||||||||||||||||||
Contributions and advances to affiliates | (82 | ) | - - | - - | (6 | ) | 6 | (82 | ) | |||||||||||||||
Loans to affiliates | - - | (99 | ) | - - | (214 | ) | 313 | - - | ||||||||||||||||
Other | 4 | - - | 2 | 1 | (1 | ) | 6 | |||||||||||||||||
Net cash used in investing activities – continuing operations | (2,464 | ) | (73 | ) | (103 | ) | (259 | ) | 318 | (2,581 | ) | |||||||||||||
Other net cash used in investing activities – discontinued operations | - - | - - | - - | (30 | ) | - - | (30 | ) | ||||||||||||||||
Net cash used in investing activities | (2,464 | ) | (73 | ) | (103 | ) | (289 | ) | 318 | (2,611 | ) | |||||||||||||
Repayment of long-term debt | (1,705 | ) | - - | (150 | ) | (240 | ) | - - | (2,095 | ) | ||||||||||||||
Issuance of long-term debt | 4,356 | - - | - - | - - | - - | 4,356 | ||||||||||||||||||
Proceeds from notes payable to affiliates | 313 | - - | - - | - - | (313 | ) | - - | |||||||||||||||||
Dividends paid | (167 | ) | (38 | ) | - - | - - | 38 | (167 | ) | |||||||||||||||
Proceeds from and tax benefits of stock option exercises | 18 | - - | - - | - - | - - | 18 | ||||||||||||||||||
Distributions to owners | - - | (454 | ) | (375 | ) | (1 | ) | 830 | - - | |||||||||||||||
Contributions from owners | - - | - - | - - | 6 | (6 | ) | - - | |||||||||||||||||
Other, net | (6 | ) | 5 | 1 | (3 | ) | - - | (3 | ) | |||||||||||||||
Net cash provided by (used in) financing activities – continuing operations | 2,809 | (487 | ) | (524 | ) | (238 | ) | 549 | 2,109 | |||||||||||||||
Other net cash used in financing activities – discontinued operations | - - | - - | - - | (13 | ) | - - | (13 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities | 2,809 | (487 | ) | (524 | ) | (251 | ) | 549 | 2,096 | |||||||||||||||
Effect of exchange rate changes on cash | - - | - - | - - | 4 | - - | 4 | ||||||||||||||||||
Increase (decrease) in cash and cash equivalents | 268 | 112 | (177 | ) | (95 | ) | - - | 108 | ||||||||||||||||
Cash and cash equivalents at beginning of period | 63 | - - | 215 | 315 | - - | 593 | ||||||||||||||||||
Cash and cash equivalents at end of period | 331 | 112 | 38 | 220 | - - | 701 | ||||||||||||||||||
Less: Cash and cash equivalents at end of period – discontinued operations | - - | - - | - - | 45 | - - | 45 | ||||||||||||||||||
Cash and cash equivalents at end of period – continuing operations | $ | 331 | $ | 112 | $ | 38 | $ | 175 | $ | - - | $ | 656 |
30