Annual Report (Form 10-K), fiscal year 1994





Item 3 -- Legal Proceedings - "Claims Relating To Waste Disposal Sites", "Other Matters" and "Management's Discussion and Analysis".
ITEM 3. LEGAL PROCEEDINGS
GENERAL
In connection with the transfer of assets and liabilities from ARCO to Lyondell, Lyondell agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemical and petroleum processing business prior to July 1, 1988. At that time, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including liabilities which may arise out of certain of the legal proceedings described in this Item 3. See Item 13 -- "Certain Relationships and Related Transactions". Prior to November 20, 1990, ARCO's insurance carriers had assumed the defense of most of the lawsuits described in this Item 3. Since that date, ARCO's insurance carriers have refused to advance defense costs in those lawsuits relating to certain of the waste disposal sites. See "Claims Relating To Waste Disposal Sites - ARCO Insurance Litigation".
In addition to the proceedings specifically described in this Item 3, ARCO, the Company and its subsidiaries are defendants in other suits, some of which are not covered by insurance. Many of these additional suits involve smaller amounts than the matters described herein, or make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to the litigation described in this Item 3, as well as the other litigation affecting the Company, cannot be ascertained with any degree of certainty, the Company does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it currently is involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on the business or financial statements of the Company, however the adverse resolution in any reporting period of one or more of the matters discussed in this note could have a material impact on the Company's results of operations for that period. See Note 20 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS".
Although Lyondell is involved in numerous and varied legal proceedings, a significant portion of its litigation arises in three contexts: (1) claims for personal injury or death allegedly arising out of exposure to the Company's products; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; and (3) claims for personal injury and/or property damage and air and noise pollution allegedly arising out of the operation of the Company's facilities. The following sections of this Item 3 describe these types of pending proceedings. Lyondell (either directly or through ARCO as its indemnitee) is the real party at interest in these proceedings.
CLAIMS RELATED TO COMPANY PRODUCTS
ARCO and the Company are involved in numerous suits arising in whole or in part from the operation of the Company's petrochemical and petroleum processing businesses and the assets related thereto in which the plaintiffs allege damages arising from exposure to allegedly toxic chemical products, such as benzene and butadiene. Plaintiffs in these cases usually worked at a manufacturing facility as employees of one of Lyondell's customers, were employees of the Company's contractors, or were employees of companies involved in the transportation of the Company's products to its customers. These suits allege toxic effects of exposure to chemicals sold in the ordinary course of business to third parties by various industrial concerns, including ARCO or the Company, or allege toxic chemical exposures at the Company's manufacturing facilities. Issues common to these cases include: (1) whether the plaintiff can identify a specific product to which he was allegedly exposed; (2) whether the Company supplied the identified product to which plaintiff claims he was exposed; (3) whether the plaintiff has a medical condition which, based upon competent scientific and medical evidence, is causally related to the identified product; (4) whether, and under what conditions, the plaintiff was exposed to the identified product; and (5) if the plaintiff was exposed, whether the Company has any legal defenses to the plaintiff's claims and whether there are other parties or defendants to whom the Company can turn for contribution or indemnification. The Company believes that it has always followed a policy of not only complying with all mandated standards related to product warnings and exposure levels but also of complying with Company specific standards that were more strict than those imposed by the law. As a result, the Company believes that it has a basis to avail itself of legal defenses against claims regarding its products due to exposures by employees and by claims of exposures from third parties to whom the Company sold its products.
The vast majority of chemical exposure cases name a large number of industrial concerns, in addition to the Company, as defendants and are at various stages of discovery. Although the Company does not believe that the pending chemical exposure cases will have a material adverse effect on its business or financial statements, it is difficult to determine the potential outcome of this type of case. The majority of the plaintiffs in chemical exposure legal proceedings request relief in the form of unspecified monetary damages. Furthermore, when specific amounts are requested they often bear no objective relation to the merits of the case. It is possible that if one or more of the presently pending chemical exposure cases were resolved against ARCO or the Company, the resulting damage award could be material to the Company without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award.
CLAIMS RELATING TO WASTE DISPOSAL SITES
Wastes generated from products produced by facilities transferred from ARCO and now owned by the Company have, from time to time, been disposed of at third- party landfills. Two of these facilities, known as the "French Ltd." and the "Brio" sites, both of which are located near Houston, Texas, have been classified as "Superfund" sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The EPA has named many potentially responsible parties ("PRPs") at each site from whom wastes were allegedly received. Based on the current law, the Company does not believe that its obligation to ARCO related to ARCO's share of clean-up costs at either of these sites will result in a liability that will have, individually or in the aggregate, a material adverse effect on the business or financial statements of the Company. It is possible, however, that the Company may be involved in future CERCLA and comparable state law investigations and clean-ups. The Superfund law is scheduled for reauthorization during 1995. The proposal has generated strong reactions from business, insurance companies, lenders, municipalities and environmentalists. The Company is not able to determine with specificity what the impact of a revised Superfund law would be on the Company.
French Ltd. Site Remediation -- At the French Ltd. site, ARCO and the other PRPs have entered into a settlement agreement relating to the allocation of clean-up costs. The EPA approved the clean-up plan and a Consent Decree was entered in the Federal District Court for the Southern District of Texas in the first quarter of 1990. An amendment to the Consent Decree relating to natural resource damages has been negotiated and submitted to the court for approval. The total costs associated with the Consent Decree are currently expected to be approximately $90 million and the remediation work is expected to be completed in 1996. The Company believes that its share of
clean-up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no more than five percent of total costs recovered without giving effect to any insurance coverage which may be available to offset these costs.
French Ltd. Site Litigation -- Approximately 2,500 plaintiffs have made claims related to wastes in the French Ltd. site. In each of these cases, ARCO is one of many defendants. These suits generally allege that unspecified chemical waste sent to the site by the defendants caused a decrease in property value, a decrease in plaintiffs' ability to enjoy their property, and unspecified adverse effects on plaintiffs' health. Although some of the lawsuits request relief in the form of unspecified monetary damages, the aggregate amount of actual damages sought in those cases where damages are specified exceeds $5 billion. The aggregate amount of punitive damages sought in those cases where damages are specified exceeds $20 billion. In December 1992, after mediation, ARCO, along with several other defendants, entered into a preliminary agreement to settle claims of approximately 2,200 plaintiffs. The remaining claims are in pretrial discovery. The Company's obligation, if any, under the Cross-Indemnity Agreement, to reimburse ARCO for a portion of its defense costs and settlements related to the French Ltd. site has not been determined.
Brio Site Remediation -- At the Brio site, a definitive agreement allocating these remedial costs among ARCO and the other PRPs was reached. The EPA approved the plan and a Consent Decree between the Department of Justice and a group of PRPs (including ARCO on behalf of its former divisions and subsidiaries) was entered in Federal District Court for the Southern District of Texas, in April 1991. The total clean-up cost under the original consent decree is currently estimated to be approximately $60 million. Various objections have been raised with respect to the provisions of the original remediation plan, and the EPA and the PRPs have agreed to fund a new feasibility study to evaluate alternatives for remediation. The Company believes that its share of the clean- up costs (as allocated pursuant to the Cross-Indemnity Agreement) will be no more than one percent of total costs without giving effect to any insurance coverage which may be available to offset these costs.
Brio Site Litigation -- There currently are eight separate pending legal proceedings filed against ARCO or its affiliates and numerous others in connection with the Brio Superfund site. In these proceedings, there are approximately 600 plaintiffs, many of whom are suing in their capacity as next friend of minor children. In each of these cases, ARCO is one of many defendants. Plaintiffs allege personal injury as a result of exposure to various substances that were disposed of or stored at the Brio site. These suits generally allege that defendants were negligent in sending chemical substances to the site and also contain allegations of nuisance and strict liability. The suits involve: a school district alleging damages as a result of the closing of Weber Elementary; employees of the various entities who operated the refining and reprocessing facilities at the Brio site; and other plaintiffs. All of the lawsuits request relief in the form of unspecified compensatory and exemplary damages. These suits are in pretrial discovery.
ARCO (or its affiliate) is the named defendant in the above proceedings. Under the provisions of the Cross-Indemnity Agreement, Lyondell is not obligated to indemnify ARCO for costs arising out of this litigation for which ARCO is insured. Although ARCO is currently litigating the nature and extent of its coverage with its insurance carriers (see "ARCO Insurance Litigation"), Lyondell believes that the ultimate resolution of the above described lawsuits, ARCO's insurance litigation and related issues will not result in any material obligation on the part of Lyondell to ARCO with respect to the Brio and the French Ltd. sites.
Other Waste Disposal Site Litigation -- The Company and ARCO are named defendants in three of four presently pending lawsuits filed on behalf of 73 plaintiffs in the state district court in Galveston County, Texas involving the alleged release of toxic and hazardous substances from the Hall's Bayou Ranch. LCR sends and, prior to July 1, 1993, Lyondell and its predecessor, ARCO, sent surface water runoff and process waste water from the Refinery to Gulf Coast Waste Disposal Authority ("GCWDA") and a portion of the solids output from GCWDA is sent for storage to the Halls Bayou Ranch site. Plaintiffs claim personal injury, diminution of property value and loss of use and enjoyment of the property. They are seeking $7 billion in actual damages and $28 billion in punitive damages. In March 1994, the Company and ARCO entered a settlement agreement to resolve these proceedings with all but seven of the plaintiffs. While the Company's portion of the settlement and the availability of insurance coverage to offset these costs has not been determined, the settlement and remaining plaintiffs' actions are not expected to have a material adverse effect on the Company's business or financial statements.
ARCO Insurance Litigation -- On November 21, 1990, ARCO filed suit against certain of its insurers with respect to insurance policies in effect at times during past years. This litigation involves claims for reimbursement of defense costs and environmental expenses incurred by ARCO in connection with ARCO's activities at sites and locations throughout the United States. ARCO's insurers had been participating in the defense of the Company and ARCO for the Mont Belvieu proceedings (see "Claims Related To Company Operations -- Mont Belvieu Litigation") as well as the litigation involving the French Ltd. and the Brio sites; however, subsequent to the filing of ARCO's lawsuit, the insurers have refused to advance defense costs for these proceedings (and certain other proceedings relating to the Company's products) until the coverage dispute has been resolved. ARCO is currently paying the defense costs in the Mont Belvieu proceedings, as well as the French Ltd. and Brio Site litigation, pending the resolution of the coverage dispute.
CLAIMS RELATED TO COMPANY OPERATIONS
Mont Belvieu Litigation -- Several organizations and groups of citizens who own property in the vicinity of Mont Belvieu, Texas, have instituted suits for monetary damages and injunctive relief against ARCO and others who own underground storage and transportation facilities in the city of Mont Belvieu.
In September 1980, Warren Petroleum Company ("Warren") experienced a leak in one of its underground hydrocarbon storage wells in Mont Belvieu. On March 18, 1983, suit was brought by 34 plaintiffs, naming Warren, ARCO and other companies with operations in Mont Belvieu as defendants. These plaintiffs claimed property damage, and, in some instances, personal injuries allegedly resulting from storage operations in Mont Belvieu. Later, 83 additional plaintiffs joined the suit. Because of the number of plaintiffs, the court divided this lawsuit into three separate lawsuits. In February 1986, ARCO was granted a directed verdict as to all of the claims of the plaintiffs in the first of the three lawsuits to be tried which had the effect of dismissing all the pending claims without the ability to refile. Thereafter, the plaintiffs in the two remaining cases dropped their claims against ARCO. ARCO remains in these two cases as a result of cross claims for contribution filed by other defendants. These suits have not been set for trial.
In 1986, a number of companies that operated facilities in Mont Belvieu, including ARCO, instituted a program to make offers to purchase certain properties in Mont Belvieu. The purpose of the purchase program was to give persons within a certain area the opportunity to move, if they so desired. A number of residents and litigants participated in the program.
The implementation of the purchase program described above led to the filing of a new set of lawsuits. There are two separate legal proceedings which have resulted from eight lawsuits filed against ARCO, the Company, and a number of other companies that operate facilities in Mont Belvieu. These claims are made by persons outside of the area designated by the purchase program and are pending in state and federal court. The lawsuits name ARCO and the Company as well as every other company that participated in the purchase program as defendants. In six of the cases, which involve a total of 94 plaintiffs, the city of Mont Belvieu also is named as a defendant. These plaintiffs claim that industry operations, together with incidents that occurred at certain facilities, and the publicity surrounding those incidents, destroyed the value of their property. The plaintiffs also assert that they were discriminated against by the purchase program and that their civil rights were violated since they did not receive an offer to buy their property. The plaintiffs further claim that the purchase violated antitrust provisions of state law, and that the defendants were negligent in their operations and trespassed onto plaintiffs' properties.
In December 1991, the District Court in Chambers County entered a take nothing summary judgment in favor of ARCO, the Company and other companies who were named as defendants in that lawsuit. The plaintiff sought injunctive relief, recovery of more than $9 million in actual damages and more than $28 million in punitive damages in this case. The plaintiff appealed the adverse ruling. In July 1992, the State Court of Appeals reversed and remanded the case for retrial in Harris County based on its interpretation of proper venue. In September 1993, a summary judgment in the state district court in the 270th District Court in Harris County was granted in favor of all defendants in this matter. In December 1994 the Texas First District Court of Appeals affirmed the summary judgment.
All other Mont Belvieu cases were consolidated in the Federal District Court in the Southern District of Texas. In addition to unspecified damages, the aggregate amount of actual damages sought from all defendants in all of these
Mont Belvieu cases exceeds $241 million. The aggregate amount of punitive damages sought exceeds $675 million. These lawsuits went to trial on December 1, 1992. On January 11, 1993, after the plaintiffs concluded their offer of evidence, the trial court granted the defendants' motion for directed verdict which dismissed plaintiffs' claims without the ability to refile. An appeal is pending.
ARCO is paying all defense costs in all of the Mont Belvieu litigation and the Company does not expect that a claim for reimbursement will be made under the Cross-Indemnity Agreement.
Channelview Nuisance Litigation -- In 1992 and 1993, the Company, together with Arco Chemical and one other defendant, was named as a defendant in two separate lawsuits that were filed in two state district courts in Harris County, Texas. The consolidated lawsuits generally allege that operations of the defendants' facilities caused diminution in property value, interference with the use and enjoyment of their property and personal injuries and sought unspecified actual damages in excess of $5 million and punitive damages in excess of $20 million. A settlement agreement has been reached with each of the individuals in the consolidated lawsuits. The Company's share of the aggregate settlement amounts will not result in any material adverse effect on the business or financial statements of the Company.
OTHER MATTERS
In July 1994 the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company received a notice of violation from the TNRCC regarding the two streams and consented to pay a fine of $10,200. In addition, the Company incurred approximately $1 million in capital costs in connection with these waste water streams to achieve on-going compliance with the benzene NESHAPS regulations. Although the EPA has not yet made a final determination as to whether it will initiate separate enforcement proceedings, the Company does not believe that any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the Company's business or financial statements.
In the fourth quarter of 1992, the Refinery underwent an EPA multi-media inspection. At this time, the EPA has not formally notified the Company of the enforcement action to be taken, if any. In March 1995, the Occupational Safety and Health Administration ("OSHA") cited LCR for alleged violations at the Refinery. The citations resulted from an investigation conducted in the second half of 1994 and carry proposed fines in the aggregate of $208,500. The alleged violations primarily involve record-keeping, reporting, incident investigation and monitoring procedures. A portion of the citations were settled for $13,000 and LCR intends to contest the remaining $90,500 of citations.
In addition to the matters reported in this Item 3, from time to time the Company receives notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although the Company has not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs). In the opinion of management, there is no material range of loss in excess of the amount recorded.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Registrant as of March 1, 1995.
* The By-Laws of the Company provide that each officer shall hold office until the officer's successor is elected or appointed and qualified or until the officer's death, resignation or removal by the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 250,000,000 shares of Common Stock, par value $1 per share and 80,000,000 shares of preferred stock, par value $.01 per share. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Certificate of Incorporation, as amended and the Amended and Restated By- Laws of the Company, copies of which are filed as exhibits to this Annual Report on Form 10-K.
COMMON STOCK
The Company is currently authorized to issue 250,000,000 shares of Common Stock, of which 80,000,000 shares of Common Stock are outstanding at the date hereof.
Holders of Common Stock ("Stockholders") are entitled (i) to receive such dividends as may from time to time be declared by the Board of Directors of the Company; (ii) to one vote per share on all matters on which the Stockholders are entitled to vote; (iii) to act by written consent in lieu of voting at a meeting of Stockholders; and (iv) to share ratably in all assets of the Company available for distribution to the Stockholders, in the event of liquidation, dissolution or winding up of the Company. For additional information regarding the Company's dividend policy, see Item 5

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the New York Stock Exchange. ARCO has advised the Company that, as of March 1, 1995, ARCO owned 39,921,400 shares of the Common Stock, which represented 49.9 percent of the outstanding shares.
The reported high and low sale prices of the Common Stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from January 1, 1993 through December 31, 1994, inclusive, were:
On March 1, 1995, the closing price of the Common Stock was $23.375, and there were approximately 3,000 holders of record of the Common Stock.
During the last two years, Lyondell has declared per share quarterly cash dividends (which were paid in the subsequent quarter) as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- -----------
1993............. $0.45 $0.225* $0.225 $0.225 1994............. $0.225 $0.225 $0.225 $0.225
* On July 23, 1993, the Board of Directors decreased the amount of the regular quarterly dividend from $0.45 to $0.225 per share.
The declaration and payment of dividends is at the discretion of the Board of Directors. The future declaration and payment of dividends and the amount thereof will be dependent upon the Company's results of operations, financial condition, cash position and requirements, investment opportunities, future prospects and other factors deemed relevant by the Board of Directors.
Subject to these considerations and to the legal considerations discussed in the following paragraph, the Company currently intends to distribute to its Stockholders cash dividends on its Common Stock at a quarterly rate of $0.225 per share.
In order to declare and pay dividends in the future, the Board of Directors will have to make the determination that for purposes of the General Corporation Law of the State of Delaware ("Delaware Law") there is a sufficient amount of surplus (the amount by which its assets exceed its liabilities and capital) at that time or sufficient net profits. In determining the amount of surplus of the Company for purposes of Delaware Law, the Company's assets, including the stock of any of its subsidiaries, may be valued by the Board of Directors at their current market value. In connection with each dividend declaration, the Board of Directors makes a determination that,
based upon its familiarity with the Company's business, prospects and financial condition, the Company's recent earnings history and forecast, an appraisal of the Company's assets and discussions with the Company's executive officers, attorneys and accountants, the dividend is a permitted dividend under Delaware Law.
As detailed on page 15 herein, certain of the Company's debt instruments contain provisions that generally provide that the holders of such debt may, under certain limited circumstances, require the Company to repurchase the debt ("Put Rights"). In addition to the occurrences described on page 15 herein, the Put Rights may be triggered by the making of certain unearned distributions to Stockholders, other than regular dividends, that are followed by a specified decline in public ratings on such debt. Regular dividends are those quarterly cash dividends determined in good faith by the Board of Directors (whose determination is conclusive) to be appropriate in light of the Company's results of operations and capable of being sustained.
The determinations described in the paragraphs above were made prior to the declaration of $0.225 per share dividend to be made on March 15, 1995.
The Companys $400 million Facility also could limit the Company's ability to pay dividends under certain circumstances. See "Items 1 and 2 -- FINANCE MATTERS".
During 1994, the Company paid $72 million in dividends. All regular dividend payments in 1994 represent taxable income and not a return of capital as has occurred in prior years.
The operation of certain of the Company's employee benefit plans may result in the issuance of Common Stock upon the exercise of options granted to employees of the Company, including its officers. Although the terms of these plans provide that additional shares may be issued to satisfy the Company's obligations under the options, the Company from time to time may cause Common Stock to be repurchased in the market in order to satisfy these obligations.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company:
(*) The 1993 amount includes an increase in net income from the cumulative effect of the accounting change for turnarounds of $22 million, or $0.27 per share. The 1992 amount includes a net decrease in net income of $10 million, or $.12 per share related to the cumulative effect of accounting changes for postretirement benefits other than pensions and income taxes. See Note 4 of Notes to Consolidated Financial Statements.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As discussed in Note 3 of Notes to Consolidated Financial Statements, on July 1, 1993, Lyondell Petrochemical Company (the "Company" or "Lyondell") and CITGO Petroleum Corporation ("CITGO") announced the commencement of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR"), a new entity owned by subsidiaries of the Company and CITGO. LCR owns and operates the refining business formerly owned by the Company, including the full-conversion refinery ("Refinery"). LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. CITGO is providing a major portion of the funds for the upgrade project and has provided in excess of $100 million for funding other capital projects. Definitive cost engineering for the upgrade is substantially complete and at the present time, LCR management anticipates the cost for the project, which is scheduled to be completed in late 1996, will be approximately $955 million, including an allowance for contingency costs.
On July 1, 1993, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with LAGOVEN, S.A., an affiliate of CITGO. In addition, under terms of a long-term product sales agreement ("Products Agreement"), CITGO is purchasing approximately 80 to 85 percent of the refined products produced at the Refinery. Both LAGOVEN and CITGO are subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela.
Prior to completion of the upgrade project, the Crude Supply Contract requires LCR to purchase and LAGOVEN to supply a minimum of the Refinery's coking capacity, 125,000 barrels per day of heavy Venezuelan crude oil. The contract incorporates a formula price based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation; (ii) certain actual costs, including crude transportation costs, import duties and taxes; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed costs are adjusted periodically based on inflation rates for specific deemed cost components. Adjustments to margins track, but are less than, inflation rates. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and also because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Contract will vary depending on, among other things, the efficiency with which LCR conducts its operations during such period.
Notwithstanding the limitations discussed above, however, the Crude Supply Contract is designed to reduce the inherent earnings and cash flow volatility of the refining operations of LCR irrespective of market fluctuations of either crude oil or refined products. Specifically, should the market value of refined products "deemed" to be produced from the Venezuelan crude oil increase, the "deemed" cost of crude oil to LCR will also increase. Alternatively, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil decreases, the deemed cost of crude oil to LCR will also decrease. This results in relatively stable "deemed" margins regardless of refined products market volatility. If the actual yields, costs or volumes differ substantially from those contemplated by the Crude Supply Contract, the benefits of this agreement to LCR could be substantially different than anticipated.
Prior to commencement of LCR operations on July 1, 1993, the petrochemical and refining operations of the Company were considered to be a single segment due to the integrated nature of their operations. However, these operations are now considered to be separate segments due to the formation of LCR and the related separate management and operations of that entity. See Note 21 - Segment Information, of Notes to Consolidated Financial Statements.
The petrochemical segment consists of olefins including ethylene, propylene, butadiene, butylenes and specialty products; polyolefins including polypropylene and low density polyethylene; aromatics produced at the Channelview petrochemical complex ("Channelview Complex") including benzene and toluene; methanol and refinery blending stocks.
The refining segment consists of refined petroleum products, including gasoline, heating oil and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial and motor oils; olefins feedstocks and crude oil resales.
The following table sets forth sales volumes for the Company's major products for the periods indicated. Sales volumes include production, purchases of products for resale, propylene production from the product flexibility unit and draws from inventory.
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* Due to a change in a sales contract with a customer effective January 1, 1994, these products are now consumed in the manufacture of methyl tertiary butyl ether ("MTBE"). The 1993 sales volumes, if restated in a manner consistent with 1994, would be 797 million pounds and 195 million gallons for Other Olefins and Methanol, respectively and the 1992 sales volumes would be 802 million pounds and 178 million gallons for Other Olefins and Methanol, respectively.
The following table sets forth the Company's sales and other revenues for the periods indicated:
====== ====== ======
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(a) Due to a change in a sales contract with a customer effective January 1, 1994, these products are now consumed in the manufacture of MTBE. The 1993 sales values, if restated in a manner consistent with 1994, would be $126 million and $77 million for Other Olefins and Methanol, respectively and the 1992 sales value would be $128 million and $64 million for Other Olefins and Methanol, respectively.
(b) Crude oil resales consist of revenues from the resale of previously purchased crude oil and from locational exchanges of crude oil that are settled on a cash basis. Crude oil exchanges and resales facilitate the operation of the refining segment by allowing the Company to optimize the crude oil feedstock mix in response to market conditions and refinery maintenance turnarounds and also to reduce transportation costs.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1994 was $223 million or $2.78 per share compared with $26 million or $.33 per share in 1993 and $16 million or $.20 per share in 1992. Earnings for 1993 included a $22 million after-tax benefit for the cumulative effect related to prior periods associated with a change in accounting for major maintenance turnarounds. Earnings for 1992 reflect a net after-tax charge of $10 million for the cumulative effect related to prior periods of adopting Financial Accounting Standards Board mandated accounting standards for postretirement benefits and income taxes. Excluding the effect of these accounting changes, the $219 million earnings increase in 1994 versus 1993 was due primarily to higher petrochemical margins and higher olefins sales volumes, partially offset by lower refining margins. The $22 million earnings decline in 1993 versus 1992 was due primarily to lower ethylene sales volumes and polyolefins margins, partially offset by higher refined products margins.
The Company implemented a cost reduction program in 1993 at the trough of the petrochemical cycle with the goal of reducing period costs by approximately $30 million to $50 million annually from 1992 levels, assuming continued depressed petrochemical industry conditions. After the program was implemented, a change in industry conditions and therefore in the Company's operating and maintenance plans and other factors reduced the realized savings of the cost reduction program. For example, during the latter half of 1993 and first half of 1994, the Company chose to extend the run lengths of several of its major production units by performing incremental preventive maintenance work. The cost of this unscheduled maintenance totaled approximately $13 million. Also, during 1994, the petrochemical industry experienced a significant upturn which caused the Company's net income to significantly exceed the budgeted amount. This improved profit performance triggered the accrual of various employee incentive and profit sharing plan expenses and salary and wage increases all of which were based, in part, on the Company's profit performance and totaled approximately $23 million. In addition to the above, other unbudgeted expenses were incurred during 1994 which were required to capture the opportunities presented by the economic upturn in the petrochemical industry.
PETROCHEMICAL SEGMENT
REVENUES Sales and other operating revenues, including intersegment sales, were $2.0 billion in 1994 compared to $1.5 billion in 1993 and $1.7 billion in 1992. The 1994 increase of $467 million compared to 1993 was primarily caused by higher petrochemical sales prices and volumes. Higher demand for olefins and polyolefins was caused by an improved worldwide economy, particularly in the U.S. automotive and construction sectors, which has created better market conditions for petrochemicals generally. Methanol sales prices were higher due to higher demand caused by the improvement in the worldwide economy and increased use of MTBE, of which methanol is a significant component, as well as industry supply disruptions.
The 1993 decrease in sales and other operating revenues of $169 million compared to 1992 was primarily due to lower olefins and polyolefins sales volumes and prices caused by continued poor worldwide industry conditions and higher industry production due to reduced maintenance downtime during 1993.
COST OF SALES Cost of sales was $1.5 billion in 1994 compared to $1.4 billion in 1993 and $1.5 billion in 1992. The 1994 increase of $108 million compared to 1993 was principally due to higher olefins feedstock costs resulting from higher production rates, partially offset by lower feedstock prices.
The 1993 decrease in cost of goods sold of $124 million compared to 1992 was due principally to lower olefins feedstock costs caused by the curtailment of production resulting from the poor economic conditions and to a lesser extent to lower feedstock prices.
Cost of sales was reduced in 1993 and 1992 by $5 million and $2 million, respectively associated with a reduction in inventories accounted for under the LIFO method of accounting.
SELLING EXPENSES Selling expenses amounted to $40 million in 1994 compared to $37 million in 1993 and $37 million in 1992. The $3 million increase in selling expenses in 1994 compared to 1993 was primarily due to higher terminal and freight expenses caused by higher petrochemical sales volumes.
OPERATING INCOME Operating income amounted to $413 million in 1994 compared to $57 million in 1993 and $102 million in 1992. The $356 million operating income increase in 1994 compared to 1993 was primarily due to higher petrochemical sales margins and higher olefins sales volumes. Improved olefins sales margins resulted primarily from higher sales prices and to a lesser extent lower feedstock prices. Olefins sales prices and volumes were higher due to higher industry-wide demand caused by the improved worldwide economies. Contributing to the improved operating income during 1994 compared to 1993 were higher methanol sales margins, partially offset by lower methanol sales volumes. Methanol sales margins were higher primarily due to higher sales prices caused in part by the improved worldwide economy. Methanol sales volumes were lower due to scheduled and unscheduled downtime of the methanol unit.
The $45 million operating income decrease in 1993 compared to 1992 was primarily due to lower ethylene sales volumes and polyolefins margins. Ethylene sales volumes and polyolefins margins were lower primarily due to poor industry and economic conditions.
REFINING SEGMENT
REVENUES Sales and other operating revenues, including intersegment sales, were $2.3 billion in 1994 compared to $2.8 billion in 1993 and $3.7 billion in 1992. The 1994 decrease of $489 million compared to 1993 was due primarily to lower resale volumes of purchased light products, lower sales prices for refined products and lower crude oil resale volumes. The purchase and resale activity for light refined products conducted for logistic and other reasons was curtailed because, effective with the beginning of LCR operations on July 1, 1993, a majority of the refined products produced at the refinery are now sold to CITGO under the Products Agreement. Refined products sales prices were lower due primarily to lower industry crude oil prices. Lower crude oil resale volumes resulted from reduced logistical purchases required to meet refinery feedstock requirements which was caused by a change in crude oil market supply factors.
The 1993 decrease in sales and other operating revenues of $973 million versus 1992 was due to lower crude oil resale volumes, lower sales prices for refined products and lower resale volumes of purchased light products. Crude oil resale volumes were lower due to reduced logistical purchases required to meet refinery feedstock requirements resulting from higher Venezuelan crude oil volumes purchased under the Crude Supply Contract. Refined products sales prices were negatively affected by additions to industry supply which exceeded demand growth. The increase in industry supply resulted from additions of larger volumes of oxygenates, primarily MTBE, to gasoline to meet stricter environmental standards, as well as new industry conversion capacity. The purchase and resale activity for light refined products conducted for logistic and other reasons was curtailed during the current period because, effective with the beginning of LCR operations on July 1, 1993, a majority of the refined products produced at the Refinery are now sold to CITGO under the Products Agreement.
COST OF SALES Cost of sales was $2.2 billion in 1994 compared to $2.6 billion in 1993 and $3.6 billion in 1992. The 1994 decrease compared to 1993 of $468 million was principally due to lower purchases for resale of light
refined products, lower feedstock costs primarily due to lower crude oil prices and lower logistical purchases of crude oil that were resold. Cost of sales was increased by $1 million in 1994 associated with a reduction in LIFO inventories.
The 1993 decrease compared to 1992 of $1 billion was principally due to lower quantities of purchased crude oil and light refined products and lower crude oil prices. Crude oil purchases were lower due to the reduced logistical purchases. Purchases of light refined products were lower due primarily to lower purchases for resale activity. Lower crude oil prices were due to generally lower industry-wide crude oil prices and to the processing of higher volumes of lower priced, heavy Venezuelan crude oil purchased under the Crude Supply Contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $54 million in 1994 compared to $48 million in 1993 and $43 million in 1992. The $6 million increase in 1994 compared to 1993 and the $5 million increase in 1993 compared to 1992 resulted primarily from higher general and administrative expenses for personnel and realignment expenses associated with ongoing operations of LCR starting on July 1, 1993.
OPERATING INCOME Operating income amounted to $54 million in 1994 compared to $81 million in 1993 and $49 million in 1992. The $27 million decrease in 1994 compared to 1993 was due primarily to lower refined products margins and sales volumes and higher general and administrative expenses, partially offset by improved profitability for aromatics. Refined products earnings were negatively affected in 1994 by poor industry conditions as well as lower volumes of heavy Venezuelan crude oil processed in the coking mode which was caused by downtime for turnarounds on the coker and largest crude distillation unit and operating problems prior to the turnarounds. Aromatics earnings were higher in 1994 compared to 1993 due primarily to higher sales prices.
The $32 million increase in 1993 compared to 1992 was due primarily to improved refined products margins, partially offset by higher selling, general and administrative expenses. Refined products margins were higher due to processing higher volumes of heavy, low cost Venezuelan crude oil purchased under the Crude Supply Contract.
UNALLOCATED
INTEREST EXPENSE AND INTEREST INCOME Interest expense was $74 million in 1994 compared to $74 million in 1993 and $79 million in 1992. The $5 million reduction in interest expense in 1993 compared to 1992 was caused primarily by a reduction of outstanding debt due to the prepayment of amounts due under capitalized leases during April 1992.
Interest income was $5 million in 1994 compared to $2 million in 1993 and $10 million in 1992. The $3 million increase in 1994 compared with 1993 was due principally to higher amounts of cash associated with LCR minority owner cash contributions available for investment. The $8 million decrease in 1993 versus 1992 was due primarily to lower amounts of cash available for investment.
MINORITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. Minority interest was $6 million in 1994 and $5 million in 1993 representing CITGO's allocated share of LCR's income.
INCOME TAX The effective income tax rate during 1994 from continuing operations was 36.2 percent compared to 73.1 percent for 1993 and 27.3 percent for 1992. State income tax was the primary difference between the effective tax rate and the 35 percent federal statutory rate during 1994. The difference for 1993 between the effective tax rate and the federal statutory rate was due primarily to a charge to state deferred taxes related to Texas franchise taxes and the unfavorable impact on federal deferred taxes of the increase in the federal tax rate. The difference for 1992 was due primarily to a state income tax adjustment, tax exempt income related to company owned life insurance and tax exempt interest.
FINANCIAL CONDITION
CASH FLOW FROM OPERATIONS Lyondell's cash flow from operations totaled $155 million during 1994, a strong improvement over the $84 million generated in 1993. This increase was directly attributable to the more than eight-fold increase in net income over 1993. The increase in net income was partially offset by a significant increase in accounts receivable associated with increased sales levels in the fourth quarter of 1994 versus the same period for 1993 and to a lesser extent from an increase in inventory levels over 1993 balances.
INVESTING ACTIVITIES Excluding refinery upgrade expenditures totaling $135 million, the Company made capital expenditures totaling $117 million during 1994, of which $48 million related to environmental projects at the Refinery and Channelview Complex that were required to satisfy applicable environmental laws. Refinery upgrade expenditures during 1994 were funded by the $136 million of contributions from CITGO, the minority owner of LCR.
The 1995 capital expenditures budget, excluding the Refinery upgrade project, has been set at $170 million. The budget provides $60 million for Refinery projects of which $10 million is to be funded by Lyondell and $50 million is to be funded from CITGO's reinvested earnings and the restricted cash balance which was created by CITGO's contributions to LCR. The remaining $110 million is for petrochemical projects. In addition to the capital expenditures budget, $579 million of spending is planned for the Refinery upgrade project designed to increase the Refinery's ability to process larger volumes of very heavy Venezuelan crude oil, of which $211 million is to be funded by CITGO, $56 million is to be funded by Lyondell in the form of subordinated loans to LCR and the remainder is expected to be funded through an LCR external borrowing.
As of December 31, 1994, $42 million of cash was restricted for use in LCR capital projects, including the Refinery upgrade project and other expenditures as determined by the LCR owners.
FINANCING ACTIVITIES Cash flows associated with financing activities during 1994 included $72 million for dividend payments, $8 million and $4 million for scheduled repayments of Medium-Term notes and other borrowings, respectively, and $20 million of proceeds from borrowings under the LCR $70 million working capital facility, discussed below.
The Company has a five-year, $400 million revolving credit facility ("Facility") with a group of banks. Borrowings under the Facility bear interest based on Euro-Dollar, certificate of deposit ("CD") or prime rates, at the Company's option. The Facility is available for working capital and general corporate purposes as needed and contains covenants relating to dividend payments, debt incurrence, liens, disposition of assets, mergers and consolidations, fixed charge and leverage ratios and certain payments to LCR. At December 31, 1994, no amounts were outstanding under this Facility.
Effective July 1, 1994, LCR elected to replace its unsecured $100 million revolving credit facility with an unsecured $70 million revolving credit facility ("LCR Facility") on substantially similar terms. Under terms of the LCR Facility, LCR may borrow with interest based on prime, Euro-Dollar or CD rates at LCR's option or have letters of credit issued on its behalf. The LCR Facility is available for working capital and general corporate purposes as needed. At December 31, 1994, $20 million was outstanding under the LCR Facility.
On January 20, 1995, the Board of Directors declared a regular quarterly dividend in the amount of $.225 per share of common stock, payable March 15, 1995 to stockholders of record on February 24, 1995.
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements upon the operations of the Company. The Company's policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, the Resource Conservation and Recovery Act ("RCRA") and the Clean Air Act and Clean Air Act Amendments of 1990. ARCO, along with many other companies, has been named a potentially responsible party ("PRP") under CERCLA in connection with the past disposal of waste at third party waste sites. The Company has an obligation
to reimburse ARCO for a portion of its uninsured remediation costs for two of those sites pursuant to the Cross-Indemnity Agreement.
The Company reserves for contingencies, including those based upon unasserted claims, that are probable and reasonably estimable. In connection with environmental matters, the Company established reserves based upon known facts and circumstances. Based on current environmental laws and regulations, the Company believes that it has adequately reserved for the matters described above and, based upon such reserves, does not anticipate any material adverse effect upon its earnings, operations or competitive position, although the resolution in any reporting period of one or more of these matters could have a material impact on the Company's results of operations for that period.
The environmental reserve on December 31, 1994 was $17 million. The environmental reserve includes $0.8 million of estimated future payments to ARCO for remediation costs associated with CERCLA waste disposal sites and $16.2 million of estimated remediation costs related to waste disposal sites located within the Company's facilities associated with RCRA. The Company spent $488,000, $627,000 and $593,000 in 1994, 1993 and 1992, respectively, relating to CERCLA matters. The Company also spent $6 million, $2 million and $158,000 in 1994, 1993 and 1992, respectively, in conjunction with RCRA matters. The Company estimates it will pay approximately $1 million in conjunction with CERCLA and RCRA matters in 1995 which is included in the December 31, 1994 environmental reserve.
CURRENT BUSINESS OUTLOOK
Lyondell's 1994 results reflect an improved business environment for petrochemicals. These results were partially offset by lower refining profitability which reflected depressed industry margins and also scheduled and unscheduled downtime at the Refinery for turnarounds and repair and maintenance of two major processing units. The effect of the depressed industry margins on LCR was partially offset by the benefits of the Crude Supply Contract.
Profitability and cash flows for the petrochemical and refining businesses are affected by industry supply and demand, feedstock cost volatility, capital expenditures required to meet more stringent environmental standards, repair and maintenance costs and downtime of production units due to turnarounds. Turnarounds on major units can have significant financial impacts due to the repair and maintenance costs incurred as well as the associated loss of production, resulting in lower profitability during the period of the turnaround. The Company currently intends to perform a turnaround on one of its two olefins units during the second half of 1995. During this turnaround, work will be completed to debottleneck the unit which will increase its capacity by approximately 120 million pounds per year.
Management believes that the low cost, operating flexibility and large production capacity of the Company's petrochemical business position it to capitalize on the current favorable petrochemical business environment. During most of 1994, the domestic olefins industry operated at close to maximum available capacity. However, additional olefins capacity scheduled to come on stream in early 1995 may negatively affect operating rates and margins. This expected increase in supply may be partially offset by higher demand if the worldwide economies continue to expand or by the replenishment of inventories that as of year-end 1994 were close to historical lows.
In 1994, the methanol market benefited from increased product demand, including rapid growth in its use for MTBE, and also from production disruptions which limited supply. This led to unprecedented prices and margins in the methanol business. In early 1995, increased uncertainty about MTBE demand for reformulated gasoline and improving methanol supply began to exert downward pressure on methanol prices. The outlook for methanol in 1995 and future years is uncertain but is less positive than late in 1994.
Management believes the Company has improved its refining business by forming LCR which has entered into the Crude Supply Contract and Products Agreement. These arrangements are designed to diminish the impact of market volatility and stabilize cash flows at attractive levels relative to historic performance, although the remaining portion of LCR's crude oil volume not purchased under the Crude Supply Contract continues to be sensitive to market conditions.
The Company believes that business conditions will be such that cash balances, cash generated from operating activities and existing lines of credit will be adequate to meet future cash requirements for scheduled debt repayments, necessary capital expenditures and to sustain for the reasonably foreseeable future the regular quarterly dividend. However, the Company continually evaluates its cash requirements and allocates cash in order to maximize stockholder returns.
_________________
Management cautions against projecting any future results based on present or prior earnings levels because of the cyclical nature of the refining and petrochemical industries and uncertainties associated with the United States and worldwide economies and current and potential United States governmental regulatory actions.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or related notes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Lyondell Petrochemical Company
We have audited the accompanying consolidated balance sheet of Lyondell Petrochemical Company as of December 31, 1994 and 1993, and the related consolidated statements of income and accumulated deficit and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lyondell Petrochemical Company as of December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, during 1993 the Company changed its method of accounting for the cost of repairs and maintenance incurred in connection with turnarounds of major units at its manufacturing facilities.
COOPERS & LYBRAND L.L.P.
Houston, Texas February 10, 1995
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
See notes to consolidated financial statements.
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
See notes to consolidated financial statements.
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
See notes to consolidated financial statements.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
Lyondell was formed in 1985 and was operated as a separate division ("Lyondell Division") of Atlantic Richfield Company ("ARCO") until June 1988. Effective July 1, 1988, ARCO transferred substantially all the assets and liabilities relating to the integrated petrochemical and petroleum processing business of the Lyondell Division, along with certain pipeline assets that were not formerly a part of the Lyondell Division, to its wholly- owned subsidiary, Lyondell Petrochemical Company, a Delaware corporation. For financial reporting purposes, the transfer of these assets and liabilities was recorded at the historical net book value of $127 million as of July 1, 1988. As the context may require, all references hereafter to the "Company" or "Lyondell" include Lyondell Petrochemical Company, its wholly-owned subsidiaries and LYONDELL-CITGO Refining Company Ltd. ("LCR").
On January 25, 1989, ARCO completed an initial public offering of 43,000,000 shares of the Company's 80,000,000 shares of common stock owned by ARCO. The Company received none of the proceeds from the sale.
On August 8, 1994, ARCO completed an offering of three-year debt securities ("Exchangeable Notes") exchangeable upon maturity, at ARCO's option, into Lyondell common stock or cash with an equal value ("ARCO Note Offering"). If ARCO elects to deliver shares of Lyondell common stock at the maturity of the Exchangeable Notes, ARCO's equity interest in Lyondell will be substantially reduced or eliminated, depending on the price of Lyondell common stock at such time. In connection with the ARCO Note Offering, the five ARCO officers who were Directors of the Company resigned from the Company's Board of Directors; however, ARCO did not limit its right to nominate and vote for candidates for Lyondell's Board of Directors. Until the maturity of the Exchangeable Notes, ARCO generally intends to vote its shares in proportion to the votes of the non-ARCO stockholders, except under certain limited circumstances. As of December 31, 1994, ARCO owned 39,921,400 shares of Lyondell common stock, representing 49.9 percent of the issued and outstanding common stock of the Company.
The Company operates in two business segments: petrochemicals and refining. The Company generally sells its petrochemical products to customers for use primarily in the manufacture of other chemicals and products, which in turn are used in the production of a wide variety of consumer and end-use products. LCR sells its principal refined products primarily to CITGO Petroleum Corporation ("CITGO") and to a lesser extent, other marketers of petroleum products. See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant transactions between the entities of the Company have been eliminated from the consolidated financial statements. Certain amounts from prior years have been reclassified to conform to current year presentation.
Cash Equivalents and Short-Term Investments - 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. Short-term investments consist of similar investments maturing in more than three months from purchase. The Company's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Companys investment strategy.
The Company has no requirements for compensating balances in a specific amount at a specific point in time. The Company does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at the Company's discretion, so that effectively on any given date, none of the Company's cash is restricted with the exception of cash held for use in connection with LCR capital projects and other expenditures as determined by the LCR owners (see Note 6).
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
All investments in debt and equity securities are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which the Company adopted as of January 1, 1994. Management determines the appropriate classification of investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Accounts Receivable - The Company sells its products primarily to companies in the petrochemical and refining industries. The Company performs ongoing credit evaluations of its customer's financial condition and in certain circumstances requires letters of credit from them. The Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totaled $3 million and $2 million at December 31, 1994 and 1993, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out ("LIFO") basis except for materials and supplies, which are valued at average cost.
Fixed Assets - Fixed assets are recorded at cost. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the related assets as follows:
Manufacturing facilities and equipment - 5 to 30 years Leased assets and improvements - 5 to 20 years
Upon retirement or sale, the Company removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in income.
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 that a liability has been incurred and the amount of that liability can reasonably be estimated. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles.
Exchanges - Crude oil and finished product exchange transactions, which are of a homogeneous nature of commodities in the same line of business, that 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 that are settled through payment and receipt of cash are accounted for as purchases and sales.
Income Taxes - Deferred income taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and are calculated, in accordance with SFAS No. 109, "Accounting for Income Taxes", based upon cumulative book/tax differences in the balance sheet.
3. LYONDELL-CITGO REFINING COMPANY LTD.
The Company and CITGO announced, on July 1, 1993, the commencement of operations of LCR, a new entity formed and owned by subsidiaries of the Company and CITGO in order to own and operate the Company's refining business, including the full- conversion Houston refinery ("Refinery"). LCR is a limited liability company organized under the laws of the state of Texas. At December 31, 1994, CITGO had an approximate 10 percent participation interest in LCR.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LYONDELL-CITGO REFINING COMPANY LTD. - (CONTINUED)
LCR is undertaking a major upgrade project at the Refinery to enable the facility to process substantial additional volumes of very heavy crude oil. LCR also has entered into a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases from LCR a majority of the refined products produced at the Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of Venezuela.
Under the terms of the transaction, CITGO is providing a major portion of the funds for the upgrade project and has provided in excess of $100 million for funding other capital projects. Definitive cost engineering for the upgrade is substantially complete and at the present time, LCR management anticipates the cost for the project, which is scheduled to be completed in late 1996, will be approximately $955 million, including an allowance for contingency costs. CITGO has committed to reinvest its share of operating cash flow during the upgrade project, while the Company has unrestricted access to its share of operating cash flow from LCR.
4. ACCOUNTING CHANGES
In May 1993 the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company adopted the provisions of SFAS No. 115 for investments held as of or acquired after January 1, 1994. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The effect of adopting SFAS No. 115 had no impact on income.
In the first quarter of 1993, effective January 1, 1993, the Company changed its method of accounting for the cost of repairs and maintenance incurred in connection with turnarounds of major units at its manufacturing facilities. Under the new method, turnaround costs exceeding $5 million are deferred and amortized on a straight-line basis until the next planned turnaround, generally four to six years. In prior years, all turnaround costs were expensed as incurred. The Company believes that the new method of accounting is preferable in that it provides for a better matching of turnaround costs with future product revenues. The cumulative effect of this accounting change for years prior to 1993 resulted in a benefit of $33 million ($22 million or $.27 per share after income taxes), and was included in first quarter income.
In the fourth quarter of 1992, the Company adopted, effective January 1, 1992, the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("OPEB"), requiring the accrual of postretirement benefits. The applicable postretirement benefits include medical and life benefit plans. In prior years, expenses for these plans were recognized on a pay-as-you-go basis. The unfavorable effect of this accounting change through December 31, 1991 amounted to $28 million before taxes or $18 million (or $.22 per share) net of tax and was charged against 1992 income.
In the fourth quarter of 1992, the Company adopted, effective January 1, 1992, the provisions of SFAS No. 109, "Accounting for Income Taxes". The Statement requires, among other things, a change from the deferred to the liability method of computing deferred income taxes. The favorable cumulative effect of this accounting change on years prior to 1992 was an $8 million (or $.10 per share) reduction in the Company's deferred tax liability and was included in 1992 income.
Effective January 1, 1992, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". The standard requires companies to accrue the cost of postemployment (prior to retirement) benefits either during the years that the employee renders the necessary service or at the date of the event giving rise to the benefit, depending upon whether certain conditions are met. The effect of adoption did not have a material impact on 1992 net income.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows:
At December 31, 1994, fixed assets included $36 million of non-cash additions which related to accounts payable accruals. As of December 31, 1993, fixed assets included $16 million of non-cash additions of which $14 million related to accounts payable accruals.
6. RESTRICTED FUNDS
At December 31, 1994 and 1993, cash in the amount of $42 million and $73 million, respectively, was restricted for use in connection with LCR capital projects, including the Refinery upgrade project, and other expenditures as determined by the LCR owners. At December 31, 1993, in addition to restricted cash, short-term investments in the amount of $6 million were restricted for use in connection with LCR capital projects, including the Refinery upgrade project, and other expenditures as determined by the LCR owners.
Presented below is a reconciliation of changes in restricted funds, including amounts classified as short-term investments, for the year ended December 31, 1994:
7. FINANCIAL INSTRUMENTS
At December 31, 1994, the Company held approximately $65 million of investments in debt securities composed primarily of commercial paper and classified as cash equivalents. As of January 1, 1994, the Company held approximately $70 million of investments in debt securities composed primarily of commercial paper, including $64 million classified as cash equivalents. The cost of securities held at December 31, 1994 and January 1, 1994 approximated their estimated fair value due to their short maturity and were classified as available-for-sale. The Company realized no gains or losses on sales of securities during the year ended December 31, 1994. All securities held by the Company as of December 31, 1994 have remaining maturities of less than one year.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS - (CONTINUED)
The fair value of all other financial instruments included in current assets and current liabilities, including 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 Company for debt with terms and average maturities similar to the Company's debt portfolio, the fair value of the Companys long-term debt, including amounts due within one year, was $689 million at December 31, 1994.
At December 31, 1994, the Company had issued letters of credit totaling $26 million.
The Company is party to various take-or-pay contracts as a purchaser for product and pipeline usage. At December 31, 1994, future minimum payments under these take-or-pay contracts with noncancelable contract terms in excess of one year were as follows:
8. RELATED PARTY TRANSACTIONS
Related party transactions with ARCO are summarized as follows:
In addition, sales to an affiliate, ARCO Chemical Company, consisting of benzene, MTBE, ethylene, propylene, methanol and other products and services, were $310 million, $263 million and $296 million for the years ended December 31, 1994, 1993 and 1992, respectively.
9. INVENTORIES
The categories of inventory and their book values at December 31, 1994 and 1993 were as follows:
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INVENTORIES - (CONTINUED)
For the year ended December 31, 1994, the Company increased cost of sales by approximately $1 million associated with the reduction in LIFO inventories. For the years ended December 31, 1993 and 1992, the Company reduced cost of sales by approximately $6 million and $1 million, respectively, associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $105 million and $56 million at December 31, 1994 and 1993, respectively.
10. FIXED ASSETS
The components of fixed assets at December 31, 1994 and 1993 were as follows:
MILLIONS OF DOLLARS 1994 1993 ------------------- ---- ----- Manufacturing facilities and equipment $2,781 $2,516 Land 26 26 Leased assets and improvements 3 3 ------ ------ $2,810 $2,545 ====== ======
Repair and maintenance expenses for 1994, 1993 and 1992 were $109 million, $101 million and $109 million, respectively. The 1994 and 1993 amounts include amortization of deferred turnaround costs of $12 million and $15 million, respectively.
11. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1994 and 1993 was comprised of the following:
12. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1994 and 1993 were as follows:
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1994 and 1993 was comprised of the following:
Aggregate maturities of long-term debt during the five years subsequent to December 31, 1994 are as follows: 1995-$10 million; 1996-$150 million; 1997-$112 million; 1998-$32 million; 1999-$150 million.
Effective July 1, 1994, LCR elected to replace its $100 million revolving credit facility with a $70 million 364 day unsecured revolving credit facility ("LCR Facility") with substantially similar terms. Under terms of the $70 million LCR Facility, LCR may borrow a maximum of $70 million in the form of cash or letters of credit with interest based on prime, Euro-Dollar or certificate of deposit ("CD") rates at LCR's option. The LCR Facility may be extended at the request of LCR upon consent of the bank group. The LCR Facility contains covenants that limit LCR's ability to modify certain significant contracts, dispose of assets or merge or consolidate with other entities. At December 31, 1994, $20 million was outstanding under the LCR Facility while no amounts were outstanding under the former credit facility at December 31, 1993. The weighted average interest rate of borrowings under the LCR Facility was 5.1 percent and 3.6 percent during the years ended December 31, 1994 and 1993, respectively.
During December 1993, the Company entered into a five year, $400 million unsecured revolving credit facility ("Facility") which replaced its existing $300 million credit facility that was due to expire in July 1994. In connection with the Facility, the Company paid administrative, arrangement and commitment fees totaling $3 million during 1993 and administrative and commitment fees totaling $2 million during 1994. At December 31, 1994 and 1993, no amounts were outstanding under the Facility.
Under the terms of the Facility, the interest rate is based on Euro-Dollar, prime or CD rates, at the Company's option, and also is dependent upon the Facility utilization rate and the Company's debt ratings. The Facility contains restrictive covenants regarding the incurrence of additional debt, the maintenance of certain fixed charge coverage and leverage ratios and the making of contributions to LCR, as well as the payment of dividends to the extent that the Company's net income after January 1, 1994 generally does not exceed, over time, dividends declared or paid after that date.
The Facility's debt incurrence covenant restricts the incurrence by the Company of additional debt, including debt under the Facility, unless, immediately after giving effect to the additional borrowing, the ratio of earnings before depreciation, amortization, interest and income taxes, to interest expense exceeds the limits set forth in the Facility. However, the debt incurrence covenant does not become applicable until the debt incurred by the Company after December 31, 1993 exceeds $75 million.
During March 1992, the Company completed the placement of $200 million of notes ("Notes") consisting of $100 million of 8.25 percent Notes due 1997 and $100 million of 9.125 percent Notes due 2002. A majority of the proceeds was used in April 1992 to prepay amounts due under capitalized leases relating to the olefins plants, which allowed the Company to terminate the leases and acquire ownership of the plants.
The Company retired $8 million of the Medium-Term Notes during 1994 while the remaining Medium-Term Notes mature at various dates from 1995 to 2005 and have a weighted average interest rate at December 31, 1994 and 1993 of 9.85 percent.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT AND FINANCING ARRANGEMENTS - (CONTINUED)
The Notes due 1996 and 1999, and the Medium-Term Notes contain provisions that would allow the holders to require the Company to repurchase the debt upon the occurrence of certain events together with specified declines in public ratings on the Notes due 1996 and 1999. Certain events include acquisitions by persons other than ARCO or the Company of more than 20 percent of the Company's common stock, any merger or transfer of substantially all of the Company's assets, in connection with which the Company's common stock is changed into or exchanged for cash, securities or other property and payment of certain "special" dividends.
14. EARNINGS PER SHARE
Earnings per share were computed based on the weighted average number of shares outstanding of 80,000,000 for the years ended December 31, 1994, 1993 and 1992.
15. STOCKHOLDERS' EQUITY
Dividends - During 1994, the Company paid regular quarterly dividends of $.225 per share. During 1993, the Company paid a regular dividend to stockholders in the amount of $.45 per share during the first and second quarters and a regular dividend to stockholders in the amount of $.225 per share during each of the remaining two quarters. During 1992, the Company paid regular quarterly dividends of $.45 per share.
Preferred Stock - The Company has authorized 80,000,000 shares of preferred stock, $.01 par, of which none were issued or outstanding at December 31, 1994.
Stock Options - The Company's Executive Long-Term Incentive Plan ("LTI Plan") became effective November 7, 1988. The LTI Plan provides, among other things, for the granting to officers and other key management employees of non-qualified stock options for the purchase of up to 1,295,000 shares of the Company's common stock. The number of options exercisable each year is equal to 25 percent of the number granted after each year of continuous service starting one year from the date of grant. The LTI Plan provides that the option price per share will not be less than 100 percent of the fair market value of the stock on the effective date of the grant. As of December 31, 1994, options covering 985,496 shares were outstanding under the LTI Plan of which 430,775 were exercisable at a weighted average price of $22.60 per share. The following summarizes stock option activity for the LTI Plan:
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STOCKHOLDERS' EQUITY - (CONTINUED)
The Company's Incentive Stock Option Plan ("ISO Plan") became effective January 12, 1989. The last stock options granted under the ISO Plan were granted on March 5, 1993. No additional grants will be made under the ISO Plan. The ISO Plan is a tax qualified plan which provided for the granting of stock options for the purchase of up to 550,000 shares of the Company's common stock. All employees of the Company who were not on the executive payroll were eligible to participate in the ISO Plan, subject to certain restrictions. Various restrictions apply as to when and to the number of stock options that may be exercised during any year. As of December 31, 1994, options covering 204,715 shares were outstanding at an average exercise price of $29.31 per share. These options were held by 901 eligible employees. At December 31, 1994, 5,511 stock options were exercisable at an exercise price of $19.44. During 1995, effective July 1, 1993, the stock options held by those participants in the ISO Plan who became employees of LCR on or after July 1, 1993 were canceled. Consequently, the stock option activity for the year 1993 shown in the table below reflects the revised amounts.
16. LEASES
At December 31, 1994, future minimum rental payments for operating leases with noncancelable lease terms in excess of one year were as follows:
Operating lease net rental expenses for 1994, 1993 and 1992 were $50 million, $43 million and $35 million, respectively.
17. RETIREMENT PLANS
All Lyondell and LCR employees are covered by defined benefit pension plans. Retirement benefits are based on years of service and the employee's highest three 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. Lyondell and LCR accrue pension costs based on an actuarial valuation and fund the plans through contributions to pension trust funds separate from Lyondell or LCR's funds. Lyondell and LCR also have unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. RETIREMENT PLANS - (CONTINUED)
The following table sets forth the funded status of Lyondell and LCR's retirement plans and the amounts recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993:
The Company's net pension cost for 1994, 1993 and 1992 included the following components:
The assumptions used as of December 31, 1994, 1993 and 1992, in determining the pension costs and pension liability shown above were as follows:
Lyondell and LCR also maintain voluntary defined contribution Capital Accumulation and Savings plans for eligible employees. Under provisions of the plans, Lyondell and LCR contribute an amount equal to 150 percent of employee contributions up to a maximum Lyondell or LCR contribution of 6 percent of the employee's base salary for the Capital Accumulation plans and 200 percent of employee contributions up to a maximum Lyondell or LCR contribution of 2 percent of the employees base salary for the Savings plans. Lyondell and LCR contributions to these plans totaled $8 million, $8 million and $7 million during the years ended December 31, 1994, 1993 and 1992, respectively.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Lyondell and LCR sponsor unfunded postretirement plans other than pensions for both salaried and non-salaried employees which provide medical and life insurance benefits. The postretirement health care plans are contributory while the life insurance plans are non-contributory. Currently, Lyondell and LCR pay approximately 80 percent of the cost of the health care plans, but reserve the right to modify the cost-sharing provisions at any time.
The following table sets forth the plans' separate postretirement benefit liabilities as of December 31, 1994 and 1993:
Net periodic postretirement benefit costs for 1994 and 1993 included the following components:
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1994 was 10 percent for 1995-1996, 8 percent for 1997-2001, and 6 percent thereafter. The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1993 was 13 percent for 1994-1996, 9 percent for 1997-2001, and 6 percent thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit liability as of December 31, 1994 by $8 million and the net periodic postretirement benefit cost for the year then ended by $1 million.
The accumulated postretirement benefit obligation was calculated utilizing a weighted-average discount rate of 8.25 percent and 7.25 percent at December 31, 1994 and 1993, respectively, and an average rate of salary progression of 5 percent in each year. Lyondell and LCR's current policy is to fund the postretirement health care and life insurance plans on a pay-as-you-go basis.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. INCOME TAXES
Significant components of the Company's provision for income taxes attributable to continuing operations follow.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1994 and 1993 were as follows:
Pretax income from continuing operations for the years ended December 31, 1994, 1993 and 1992 was taxed by domestic jurisdictions only.
The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to the Company's effective tax rates follows. During 1993, the Company increased its provision for deferred income taxes by $3 million due to an increase in the federal corporate income tax rate from 34 percent to 35 percent effective January 1, 1993.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS AND CONTINGENCIES
The Company 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 agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemical and petroleum processing business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company has agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits.
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 consolidated financial statements. ARCO has also indemnified the Company for all federal taxes which might be assessed upon audit of the operations of the Company included in the consolidated financial statements prior to January 12, 1989, and for all state and local taxes for the period prior to July 1, 1988.
In addition to lawsuits for which the Company has indemnified ARCO, the Company is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the Company's financial statements.
The Company's policy is to be in compliance with all applicable environmental laws. The Company is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict 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.
Subject to the terms of the Cross-Indemnity Agreement, the Company is currently contributing funds to the cleanup of two waste sites (French Ltd. and Brio, both of which are located near Houston, Texas) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. The Company is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC"), formerly the Texas Water Commission, for assessment and remediation of groundwater and soil contamination at the Refinery.
In July 1994 the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste-water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company has received a notice of violation from the TNRCC regarding the two streams and consented to pay a fine of $10,200. The Company incurred approximately $1 million in capital costs in connection with these waste water streams to achieve on-going compliance with the benzene NESHAPS regulations. The EPA has not yet made a final determination as to whether it will initiate separate enforcement proceedings. However, the Company does not believe that any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the Company's business or financial statements.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
The Company has accrued $17 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs, of which $1 million is included in current liabilities while the remaining amounts are expected to be incurred over the next three 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 CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure related to environmental matters.
In the opinion of management, any liability arising from the matters discussed above will not have a material adverse effect on the consolidated financial statements or liquidity of the Company, although the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on the Company's results of operations for that period.
21. SEGMENT INFORMATION
As discussed in Note 3, the refining operations of the Company were contributed to LCR effective July 1, 1993. Prior to July 1, 1993, the petrochemical and refining operations of the Company were considered to be a single segment due to the integrated nature of their operations. However, these operations are now considered to be separate segments due to the formation of LCR and the related separate management and operations of that entity.
The petrochemical segment consists of olefins, including ethylene, propylene, butadiene, butylenes and specialty products; polyolefins, including polypropylene and low density polyethylene; aromatics produced at the Channelview Complex, including benzene and toluene; methanol and refinery blending stocks.
The refining segment, which is primarily composed of LCR operations, consists of refined petroleum products including gasoline, heating oil and jet fuel; aromatics produced at the Refinery, including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial and motor oils; olefins feedstocks and crude oil resales. Crude oil resales consist of revenues from the resale of previously purchased crude oil and from locational exchanges of crude oil that are settled on a cash basis. Crude oil exchanges and resales facilitate the operation of the Company's petroleum processing business by allowing the Company to optimize the crude oil feedstock mix in response to market conditions and refinery maintenance turnarounds and also to reduce transportation costs. Crude oil resales amounted to $296 million, $401 million and $893 million for years ended December 31, 1994, 1993 and 1992, respectively.
Consolidated sales to CITGO totaled $1.1 billion in 1994, $864 million in 1993 and $282 million in 1992. No other customer accounted for 10 percent or more of consolidated sales.
Summarized below is the segment data for the Company which includes certain pro forma adjustments necessary to present the petrochemical and refining operations as individual segments for periods prior to the commencement of LCR operations on July 1, 1993. These adjustments relate principally to allocations of costs and expenses between the two segments and are based on current operating agreements between the Company and LCR. Intersegment sales between the petrochemical and refining segments include olefins feedstocks produced at the Refinery and gasoline blending stocks produced at the Channelview Complex and were made at prices based on current market values.
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. SEGMENT INFORMATION - (CONTINUED)
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. UNAUDITED QUARTERLY RESULTS
(*) The first two quarters of 1993 include certain pro forma adjustments necessary to present the petrochemical and refining operations as individual segments for periods prior to the commencement of LCR operations on July 1, 1993.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part I. For the other information called for by Items 10, 11, 12 and 13, reference is made to the Registrants definitive proxy statement for its Annual Meeting of Stockholders, to be held on June 2, 1995, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1994, and which is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1 and 2 -- Consolidated Financial Statements and Financial Statement Schedules: these documents are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules.
* Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No. 33-25407) and incorporated herein by reference. ** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1989 and incorporated herein by reference. *** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1990 and incorporated herein by reference. **** Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1991 and incorporated herein by reference. +++ Filed as an exhibit to Registrant's Annual Report on Form 10-K Report for the year ended December 31, 1992 and incorporated herein by reference. ++++ Filed as an exhibit to Registrant's Interim Report on Form 8-K dated as of July 1, 1993 and incorporated herein by reference. ++++++ Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. + Filed as an exhibit to Registrants Registration Statement on Form S-3 dated as of May 5, 1994 and incorporated herein by reference. ++ Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference.
(b) Consolidated Financial Statements and Financial Statement Schedules
(1) Consolidated Financial Statements
Consolidated Financial Statements filed as part of this Annual Report on Form 10-K are listed in the Index to Consolidated Financial Statements on page 36.
(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is contained in the Financial Statements or notes thereto.
Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Secretary.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended December 31, 1994 or thereafter through March 29, 1995.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
LYONDELL PETROCHEMICAL COMPANY
By: BOB G. GOWER ------------------------------------------------- Bob G. Gower Chairman of the Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.