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EXHIBIT 99.1
LYONDELL CONTRIBUTED BUSINESS
AUDITED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF NOVEMBER 30, 1997
AND FOR THE ELEVEN MONTHS THEN ENDED
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LYONDELL CONTRIBUTED BUSINESS
INDEX TO FINANCIAL STATEMENTS
PAGE
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Report of Independent Accountants 2
Financial Statements:
Balance Sheet 3
Statement of Income and Invested Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Lyondell Petrochemical Company
In our opinion, the accompanying balance sheet and the related statements of
income and invested capital and of cash flows present fairly, in all material
respects, the financial position of the contributed petrochemicals and polymers
businesses of Lyondell Petrochemical Company ("Lyondell Contributed Business")
at November 30, 1997, and the results of its operations and its cash flows for
the eleven month period then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Lyondell Contributed Business's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 7, 1998
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LYONDELL CONTRIBUTED BUSINESS
BALANCE SHEET
(IN MILLIONS)
NOVEMBER 30
1997
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ASSETS
Current assets:
Cash and cash equivalents $ 1
Accounts receivable:
Trade 350
Related parties 31
Inventories 233
Prepaid expenses and other current assets 7
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Total current assets 622
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Property, plant and equipment 1,974
Less accumulated depreciation and amortization (1,148)
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826
Deferred charges and other assets 84
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Total assets $1,532
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LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Accounts payable:
Trade $ 153
Related parties 7
Current maturities of long-term debt 32
Other accrued liabilities 78
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Total current liabilities 270
Long-term debt 713
Other liabilities and deferred credits 13
Commitments and contingencies (Note 8)
Total invested capital 536
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Total liabilities and invested capital $1,532
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See notes to financial statements.
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LYONDELL CONTRIBUTED BUSINESS
STATEMENT OF INCOME AND INVESTED CAPITAL
(IN MILLIONS)
FOR THE ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
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SALES AND OTHER OPERATING REVENUES:
Unrelated parties $2,183
Related parties 532
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2,715
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 1,662
Related parties 423
Depreciation and amortization 68
Selling, general and administrative expenses 166
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2,319
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Operating income 396
Interest expense, net 50
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Income before income taxes 346
Provision for income taxes 127
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NET INCOME 219
Invested capital at beginning of period 423
Net transactions with Lyondell (106)
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INVESTED CAPITAL AT END OF PERIOD $ 536
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See notes to financial statements.
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LYONDELL CONTRIBUTED BUSINESS
STATEMENT OF CASH FLOWS
(IN MILLIONS)
FOR THE ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 219
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 68
Increase in accounts receivable (26)
Increase in inventories (37)
Decrease in accounts payable (70)
Net change in other working capital accounts 19
Other (17)
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Net cash provided by operating activities 156
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (49)
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Net cash used in investing activities (49)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with parent (106)
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Net cash used in financing activities (106)
NET CHANGE IN CASH AND CASH EQUIVALENTS 1
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1
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See notes to financial statements.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS)
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF THE CONTRIBUTED BUSINESS
As of December 1, 1997, Lyondell Petrochemical Company ("Lyondell" or the
"Company") and Millennium Chemicals Inc. ("Millennium") formed a new joint
venture company named Equistar Chemicals, LP (the "Partnership") which is being
operated as a partnership. The Partnership owns and operates the existing
olefins and polymers businesses contributed by the two companies. The assets
of the Partnership consist of 13 manufacturing facilities on the US Gulf Coast
and in the US Midwest, producing ethylene, propylene, polyethylene (high-
density, low-density and linear low-density), polypropylene, ethyl alcohol,
butadiene, aromatics, methyl butyl tertiary ether ("MTBE") and other products
for sale to customers throughout the US. The Partnership has $1,745 of debt
including $745 face value of debt assumed from Lyondell and $750 under a new
credit facility, the proceeds of which will be used to repay debt assumed from
Millennium upon completion of the transaction, and a note receivable from
Lyondell of $345.
On March 20, 1998, Lyondell and Millennium announced an agreement to expand the
Partnership with the addition of the ethylene, propylene, and ethylene oxide and
derivative businesses of Occidental Chemical Corporation ("OxyChem"), a
subsidiary of Occidental Petroleum. Following the closing of the agreement on
May 15, 1998, Lyondell's percentage ownership in the Partnership decreased to
41% from 57%, with Millennium and OxyChem each owning a 29.5% share.
Lyondell contributed to the Partnership substantially all of the net assets and
operations comprising its petrochemicals and polymers segments. Lyondell
retained ownership of its 58.75% interest in LYONDELL-CITGO Refining Company
Ltd. ("LYONDELL-CITGO Refining") and its 75% interest in Lyondell Methanol
Company, L.P. ("Lyondell Methanol").
The accompanying financial statements include the results of operations, assets
and liabilities of the petrochemicals and polymers businesses currently owned by
Lyondell that will be contributed to the Partnership ("Contributed Business").
These financial statements are presented on a going concern basis and include
only the historical net assets and results of operations that are directly
related to the Contributed Business. Consequently, the financial position,
results of operations and cash flows may not be indicative of what would have
been reported if the Contributed Business had been a separate, stand-alone
entity or had been operated as a part of the Partnership.
Lyondell provided certain corporate, general and administrative services to the
Contributed Business, including legal, tax, treasury, risk management and other
services. The Contributed Business provided certain general and administrative
services to Lyondell, including computer, office lease and employee benefits
services. Charges for the services are believed to be reasonable and
substantially offset each other for the periods presented. In addition, Lyondell
has controlled, on a centralized basis, all cash receipts and disbursements
received or made by the Contributed Business. The net results of such
transactions are included in the balance sheet as invested capital.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition Revenue from product sales is generally recognized upon
delivery of product to the customer.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts purchased with an original maturity date of three months or less.
Accounts Receivable The Contributed Business sells its products primarily to
companies in the petrochemicals and polymers industries. The Contributed
Business performs ongoing credit evaluations of its customers' financial
condition and in certain circumstances requires letters of credit from them. The
Contributed Business's allowance for doubtful accounts, which is reflected in
the balance sheet as a reduction of accounts receivable, totaled $3 at November
30, 1997.
Inventories Inventories are stated at the lower of cost or market value. Cost is
determined on the last-in, first-out ("LIFO") basis, except for materials and
supplies, which are valued at average cost. Inventories valued on a LIFO basis
were approximately $44 less than the amount of such inventories valued at
current cost at November 30, 1997.
Inventories consist of the following:
NOVEMBER 30
1997
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Petrochemicals $ 136
Polymers 74
Materials and supplies 23
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$ 233
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Property, Plant and Equipment Property, plant and equipment are recorded at
cost. Depreciation of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the assets, generally 5
to 30 years for manufacturing facilities and equipment. Interest cost incurred
on debt during the construction of major projects that exceed one year is
capitalized. No interest was capitalized during the periods presented. Property,
plant and equipment consist of the following:
NOVEMBER 30
1997
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Manufacturing facilities and equipment $ 1,868
Construction projects in progress 79
Land 27
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$ 1,974
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Turnaround Maintenance and Repair Expenses The costs of repairs and maintenance
incurred in connection with turnarounds of major units at the Contributed
Business's manufacturing facilities exceeding $5 are deferred as incurred and
amortized on a straight-line basis until the next planned turnaround, which is
generally four to six years.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Other Accrued Liabilities Other accrued liabilities consist of the following:
NOVEMBER 30
1997
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Payroll $ 24
Interest 19
Taxes other than income 24
Other 11
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$ 78
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Accounts payable and certain accrued expenses were not contributed to the
Partnership at its formation.
Environmental Remediation Costs Expenditures related to investigation and
remediation of contaminated sites, which include operating facilities and waste
disposal sites, are accrued when it is probable a liability has been incurred
and the amount of the liability can reasonably be estimated. Accrued liabilities
are exclusive of claims against third parties (except where payment has been
received or the amount of liability or contribution by such other parties,
including insurance companies, has been agreed) and are not discounted. In
general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
Exchanges Finished product exchange transactions, which are of a homogeneous
nature of commodities in the same line of business and do not involve the
payment or receipt of cash, are not accounted for as purchases and sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the normal LIFO valuation policy. Exchanges settled through
payment and receipt of cash are accounted for as purchases and sales.
Income Taxes Earnings of the Contributed Business have been included in the
consolidated federal income tax return filed by Lyondell. Pursuant to an
informal tax allocation agreement, income taxes have been allocated to the
Contributed Business based on applicable statutory tax rates applied to the
taxable earnings generated by such business. The effective income tax rate was
36.6% for the eleven months ended November 30. State income taxes were the
primary difference between the effective tax rates and the 35% federal statutory
rate. Liabilities for current and deferred income taxes have been and remain
the responsibility of Lyondell, and accordingly, have been included in the
balance sheet as invested capital.
As part of the transactions to consummate the Partnership, Lyondell entered into
tax sharing and indemnification agreements with the Partnership in which
Lyondell generally agreed to indemnify the Partnership for income tax
liabilities attributable to periods when the operations of the Contributed
Business were included in the consolidated tax return of Lyondell.
Research and Development The cost of research and development efforts is
expensed as incurred. Such costs aggregated $12 for the eleven months ended
November 30, 1997.
NOTE 3. FINANCIAL INSTRUMENTS
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable,
accounts payable and notes payable, approximated their carrying value due to
their short maturity. Based on the borrowing rates currently available to the
Contributed Business for debt with terms and average maturities similar to the
Contributed Business's debt portfolio, the fair value of the Contributed
Business's long-term debt, including amounts due within one year, was $701 at
November 30, 1997.
The Contributed Business is party to various unconditional purchase obligation
contracts as a purchaser for product and services. At November 30, 1997,
future minimum payments under these contracts with noncancelable contract
terms in excess of one year were as follows.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
AMOUNT
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1998 $ 14
1999 14
2000 13
2001 11
2002 10
Thereafter 54
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Total minimum contract payments $116
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The Contributed Business's total purchases under these agreements were $15 for
the eleven months ended November 30, 1997.
NOTE 4. RELATED PARTY TRANSACTIONS
Related party transactions with Atlantic Richfield Company ("ARCO") for the nine
months ended September 30, 1997, excluding sales to ARCO Chemical Company, and
LYONDELL-CITGO Refining for the eleven months ended November 30, 1997 are as
follows:
FOR THE
ELEVEN
MONTHS ENDED
NOVEMBER 30
1997
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Sales:
Products $ 319
Other 7
Business interruption recovery --
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$ 326
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Costs:
Product purchases $ 409
Transportation fees 19
Other, net (5)
Business interruption recovery --
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$ 423
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The Company purchased 383,312 shares of common stock held by ARCO after the
conversion of the Exchangeable Notes on September 15, 1997 at a price of $25.66
per share, eliminating ARCO's ownership interest in the Contributed Business.
Therefore, as of September 30, 1997, ARCO is no longer considered a related
party of the Contributed Business.
Sales to ARCO Chemical Company, an ARCO affiliate, consisting primarily of
product sales, were $206 for the nine months ended September 30, 1997.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
NOVEMBER 30
1997
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10.00% Notes due in 1999 $ 150
9.125% Notes due in 2002 100
6.5% Notes due in 2006 150
7.55% Debentures due in 2026 150
Medium-term notes 195
745
Less current portion 32
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$ 713
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Aggregate maturities of long-term debt during the five years subsequent to
November 30, 1997 are as follows: 1998 -- $32; 1999 -- $150, 2000 -- $42;
2001 -- $90; 2002 -- $101. After contribution to the Partnership, Lyondell will
continue to be liable on the above debt until its maturity.
The Notes due in 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 together with specified declines in public ratings
on the Notes due in 1999. Certain events include acquisitions by persons other
than ARCO or the Company of more than 20% 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 certain "special" dividends.
The medium-term notes mature at various dates from 1998 to 2005 and have a
weighted average interest rate at November 30, 1997 of 9.8%.
Interest paid was $59 for the eleven months ended November 30, 1997.
NOTE 6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Pension Plans -- All full-time regular employees of the
Contributed Business are covered by defined benefit pension plans sponsored by
Lyondell. Retirement benefits are based on years of service and the employee's
highest three consecutive years of compensation during the last ten years of
service. The funding policy for these plans is to make periodic contributions as
required by applicable law. The Contributed Business accrues pension costs based
on an actuarial valuation and funds the plans through contributions to the
Company, reflected in invested capital, which then contributes to pension trust
funds separate from Lyondell funds. The Contributed Business also has unfunded
supplemental nonqualified retirement plans which provide pension benefits for
certain employees in excess of the tax qualified plans' limits. The Contributed
Business recorded expense related to participation in these plans of $7 for the
eleven months ended November 30, 1997.
Defined Contribution Plans -- Effective July 1, 1995, Lyondell also maintains
voluntary defined contribution savings plans for eligible employees, including
those employed by the Contributed Business. Under provisions of the plans,
Lyondell contributes an amount equal to 160% of employee contributions up to a
maximum matching contribution of eight percent of the employee's base salary.
Prior to July 1, 1995, Lyondell had similar voluntary defined contribution
plans. The Contributed Business recorded expense related to participation in
these voluntary defined contribution savings plans totaled $6 for the eleven
months ended November 30, 1997.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
Other Postretirement Benefit Plans -- Lyondell sponsors unfunded postretirement
benefit plans other than pensions ("OPEB") for both salaried and non-salaried
employees, including those employed by the Contributed Business, which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
Lyondell pays approximately 80% of the cost of the health care plans but
reserves the right to modify the cost-sharing provisions at any time. The
Contributed Business recorded expense related to participation in these plans of
approximately $4 for the eleven months ended November 30, 1997. The actuarially
determined liability associated with the currently active employees of the
Contributed Business based on current plan provisions at November 30, 1997 was
$25.
NOTE 7. LEASES
At November 30, 1997, future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year were as follows:
AMOUNT
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1998 $ 85
1999 69
2000 54
2001 39
2002 29
Thereafter 351
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Total minimum contract payments $ 627
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Operating lease net rental expenses were $42, $44, and $39 for the eleven months
ended November 30, 1997 and the years ended December 31, 1996, and 1995,
respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Contributed Business has various purchase commitments for materials,
supplies and services incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, 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 Company's integrated petrochemicals and petroleum processing
business prior to July 1, 1988, including certain liabilities which may arise
out of pending and future lawsuits. ARCO indemnified the Company under the
Cross-Indemnity Agreement with respect to other claims or liabilities and other
matters of litigation not related to the assets or business included in the
Company's consolidated financial statements. The Company has reached an
agreement-in-principle with ARCO to update the Cross-Indemnity Agreement
("Revised Cross-Indemnity Agreement"). The Cross-Indemnity Agreement and the
Revised Cross-Indemnity Agreement cover operations of the Company included in
the Contributed Business. Subject to the uncertainty inherent in all litigation,
management believes the resolution of the matters pursuant to the Revised
Cross-Indemnity Agreement will not have a material adverse effect upon the
financial statements or liquidity of the Contributed Business.
In addition to lawsuits for which the Company has indemnified ARCO, the Company
is also subject to various lawsuits and proceedings which may involve the
operations of the Contributed Business. Subject to the uncertainty inherent in
all litigation, management believes the resolution of these proceedings will not
have a material adverse effect upon the consolidated financial statements or
liquidity of the Contributed Business.
As part of the transactions to consummate the Partnership, Lyondell agreed to
indemnify the Partnership for any present or future liabilities arising within a
seven-year period after the consummation of the Partnership which are
attributable to the Contributed Business operations prior to the Partnership's
formation in excess of $7.
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LYONDELL CONTRIBUTED BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN MILLIONS)
The Contributed Business's policy is to be in compliance with all applicable
environmental laws. The Contributed Business is subject to extensive
environmental laws and regulations concerning emissions to the air, discharges
to surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials. Some of these laws
and regulations are subject to varying and conflicting interpretations. In
addition, the Contributed Business 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.
As of November 30, 1997, the Contributed Business has accrued $2 related to
future regulatory agency assessment and remediation costs, of which $1 is
included in current liabilities at November 30, 1997 while the remaining amounts
are expected to be incurred over the next two to seven years. In the opinion of
management, there is currently no material range of loss in excess of the amount
recorded. However, it is possible that new information about the sites for which
the reserve has been established, new technology or future developments such as
involvement in other regulatory agency or other comparable state law
investigations could require the Contributed Business to reassess its potential
exposure related to environmental matters.
In the opinion of management, any liability arising from the matters discussed
in this Note will not have a material adverse effect on the consolidated
financial statements or liquidity of the Contributed Business. However, the
adverse resolution in any reporting period of one or more of these matters
discussed in this Note could have a material impact on the Contributed
Business's results of operations for that period without giving effect to
contribution or indemnification obligations of co-defendants or others, or to
the effect of any insurance coverage that may be available to offset the effects
of any such award.
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