-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bl8qbM2FKddVzaDmnpYnBNYO3k6RiAsnpUbsKTLqlLxxaIt74Q7OumLe1DKR73W8 2rPv3zxmmYtO+C5Zh2TRjQ== 0000950117-99-000679.txt : 19990402 0000950117-99-000679.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950117-99-000679 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILLENNIUM CHEMICALS INC CENTRAL INDEX KEY: 0001018099 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 223436215 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12091 FILM NUMBER: 99581200 BUSINESS ADDRESS: STREET 1: P.O. BOX 7015 STREET 2: 230 HALF MILE ROAD CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 732-933-5000 MAIL ADDRESS: STREET 1: 99 WOOD AVE SOUTH CITY: ISELIN STATE: NJ ZIP: 08830 10-K 1 MILLENNIUM 10-K ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------ TO ------------ COMMISSION FILE NUMBER: 1-12091 ------------------------ MILLENNIUM CHEMICALS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 22-3436215 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 230 HALF MILE ROAD 07701-7015 P.O. BOX 7015 (ZIP CODE) RED BANK, NEW JERSEY (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 732-933-5000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------------------- -------------------------------------------------- Common Stock, par value New York Stock Exchange $0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant is required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates as of March 15, 1999 (based upon the closing price of $19.00 per common share as quoted on the New York Stock Exchange), is approximately $1.4 billion. For purposes of this computation, the shares of voting stock held by directors, officers and employee benefit plans of the registrant and its wholly-owned subsidiaries were deemed to be stock held by affiliates. The number of shares of common stock outstanding at March 15, 1999, was 77,873,586 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1998, are incorporated by reference into Parts I and II of this Annual Report on Form 10-K as indicated herein. Portions of the Registrant's definitive Proxy Statement relating to the 1999 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein. ________________________________________________________________________________ TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1. Business............................................................................................ 3 2. Properties.......................................................................................... 26 3. Legal Proceedings................................................................................... 27 4. Submission of Matters to a Vote of Security Holders................................................. 27 PART II 5. Market for the Registrant's Common Equity and Related Shareholder Matters........................... 28 6. Selected Financial Data............................................................................. 28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 28 7A. Quantitative and Qualitative Disclosures about Market Risk.......................................... 28 8. Financial Statements and Supplementary Data......................................................... 28 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 29 PART III 10. Directors and Executive Officers of the Registrant.................................................. 29 11. Executive Compensation.............................................................................. 29 12. Security Ownership of Certain Beneficial Owners and Management...................................... 29 13. Certain Relationships and Related Transactions...................................................... 29 PART IV 14. Exhibits, Financial Statement Schedule(s) and Reports on Form 8-K................................... 29
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in the 1998 Annual Report to Shareholders (the 'Annual Report to Shareholders') of Millennium Chemicals Inc. (the 'Company') and in this Annual Report on Form 10-K, including, without limitation, the statements under 'Business -- Strategy' included in this Annual Report on Form 10-K and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' included in the Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K, are, or may be deemed to be, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the 'Exchange Act'). Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ('Cautionary Statements') include: the balance between industry production capacity and operating rates, on the one hand, and demand for the products of the Company and Equistar Chemicals, LP ('Equistar'), including titanium dioxide, ethylene and polyethylene, on the other hand; the economic trends in the United States and other countries which serve as the Company's and Equistar's marketplaces; customer inventory levels; competitive pricing pressures; the cost and availability of the Company's and Equistar's feedstocks and other raw materials, including natural gas and ethylene; operating interruptions (including leaks, explosions, fires, mechanical failures, unscheduled downtime, transportation interruptions, spills, releases and other environmental risks); competitive technology positions; failure to achieve the Company's or Equistar's productivity improvement and cost-reduction targets or to complete construction projects on schedule; difficulties in addressing Year 2000 issues on a timely basis by the Company, Equistar, their suppliers or their customers; and, other unforeseen circumstances. Some of these Cautionary Statements are discussed in more detail under 'Business' in this Annual Report on Form 10-K and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in the Annual Report to Shareholders. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such Cautionary Statements. 2 ITEM 1. BUSINESS Millennium Chemicals Inc. (the 'Company') is a major international chemical company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. The Company has three principal wholly owned operating subsidiaries: Millennium Inorganic Chemicals Inc. (collectively, with its non-United States affiliates, 'Millennium Inorganic Chemicals'); Millennium Petrochemicals Inc. ('Millennium Petrochemicals'); and, Millennium Specialty Chemicals Inc. ('Millennium Specialty Chemicals'). The Company also owns a 29.5% interest in Equistar Chemicals, LP ('Equistar'), a joint venture owned by the Company, Lyondell Chemical Company ('Lyondell') and Occidental Petroleum Corporation ('Occidental'). The Company accounts for its interest in Equistar as an equity investment. The Company has leading market positions in the United States ('U.S.') and the world: Millennium Inorganic Chemicals is the second-largest producer of titanium dioxide ('TiO2') in the world, with manufacturing facilities in the U.S., the United Kingdom ('U.K.'), France, Brazil and Australia. Millennium Inorganic Chemicals is also the largest merchant seller of titanium tetrachloride ('TiCl4') in the U.S. and Europe; Millennium Petrochemicals is the second-largest producer of acetic acid and vinyl acetate monomer ('VAM') in the U.S. and, through its 85% interest in La Porte Methanol Company, L.P. ('La Porte Methanol Company'), a major U.S. producer of methanol; Millennium Specialty Chemicals is the world's largest producer of terpene fragrance chemicals, the world's second-largest manufacturer of cadmium-based pigments and a major producer of silica gel; and Through its 29.5% interest in Equistar, the Company is a partner in the largest producer of ethylene and polyethylene in North America, and a leading producer of performance polymers, oxygenated chemicals, aromatics and specialty chemicals. As of January 18, 1999, the Company owns an 85% interest in La Porte Methanol Company, a Delaware limited partnership that owns a methanol plant located in La Porte, Texas, and certain related facilities that were contributed to the partnership by Millennium Petrochemicals. These operations were wholly owned by Millennium Petrochemicals until they were contributed to the partnership on January 18, 1999. The Company was incorporated in Delaware on April 18, 1996. The Company's U.K. office is located at Laporte Road, Stallingborough, Grimsby, North East Lincolnshire, DN40 2PR, England. Its U.K. telephone number is 0345-662663. The Company's principal executive offices in the U.S. are located at 230 Half Mile Road, P.O. Box 7015, Red Bank, New Jersey 07701-7015. Its U.S. telephone number is (732) 933-5000 and its U.S. fax number is 732-933-5240. DEVELOPMENT OF BUSINESS The Company has been an independent, publicly owned company since its demerger (i.e., spin-off) on October 1, 1996 (the 'Demerger'), from Hanson PLC ('Hanson'). In connection with the Demerger, Hanson transferred its chemical operations to the Company and the Company issued to Hanson's shareholders all of the Company's then outstanding common stock, par value $.01 per share (the 'Common Stock'). For additional information concerning the Demerger, see Note 1 to the Company's Consolidated Financial Statements included in the Company's Annual Report to Shareholders. On December 1, 1997, the Company contributed to Equistar substantially all of the net assets comprising its polyethylene, alcohol and related products business segment, which had been owned by Millennium Petrochemicals. In exchange, the Company received a 43% interest in Equistar, Equistar repaid $750 million of debt due to the Company from its contributed businesses, the Company retained $250 million of certain accounts receivable and Equistar assumed certain liabilities from the Company. A subsidiary of the Company guaranteed $750 million of Equistar's newly issued bank debt. The Company used the $750 million received from Equistar, together with collected proceeds of the retained 3 accounts receivable, to repay debt under its revolving credit facility. Lyondell contributed to Equistar substantially all of the assets comprising its petrochemical and polymer business segments, as well as a $345 million note. In exchange, Lyondell received a 57% interest in Equistar, and Equistar assumed $745 million of Lyondell's debt and certain liabilities from Lyondell. On May 15, 1998, the Company and Lyondell expanded Equistar with the addition of the ethylene, propylene, ethylene oxide, ethylene glycol and other ethylene oxide derivatives businesses of Occidental's chemical subsidiary. Occidental contributed substantially all of the net assets of these businesses (including approximately $205 million of related debt) to Equistar. In exchange, Equistar borrowed an additional $500 million, $420 million of which was distributed to Occidental and $75 million of which was distributed to the Company. Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. Equistar is governed by a Partnership Governance Committee consisting of representatives of each partner. Approval of Equistar's strategic plans and other major decisions requires the consent of the representatives of the three partners. All decisions of Equistar's Governance Committee that do not require the consent of the representatives of the three partners may be made by Lyondell's representatives alone. On December 31, 1997, the Company completed the purchase of the shares of Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse TiO2 and related intermediate and specialty chemical operations in France for $185 million, including assumed debt. The operations in France provide capacity to produce approximately 138,000 metric tons per year of TiO2. On November 27, 1998, the Company entered into an agreement to sell its remaining interests in Suburban Propane Partners, L.P. ('Suburban Propane'), a publicly-traded limited partnership which is the third-largest retail marketer of propane in the U.S., to Suburban Propane and its management for $75 million in cash. As such, Suburban Propane is reflected in the Company's financial statements as a discontinued operation. The Company expects to complete this transaction in the second quarter of 1999. On July 1, 1998, the Company completed the acquisition of 99% of the voting shares and 72% of total shares of Titanio do Brazil S.A. ('Tibras'), Brazil's only integrated TiO2 producer, for $129 million, including assumed debt. The two operations comprising Tibras included a plant which has the capacity to produce approximately 60,000 metric tons per year of TiO2 and a mineral sands mine with over two million metric tons of recoverable reserves. On January 18, 1999, the Company completed certain transactions with Linde AG ('Linde') relating to the Company's synthesis gas ('syngas') unit in La Porte, Texas, and a 15% interest in its methanol business, whereby the Company received $122.5 million in cash. Linde will operate the syngas facility under a long-term lease with a purchase option. The Company has the right to require Linde to purchase the Unit under certain circumstances. In addition, Linde will operate and hold a 15% interest in the methanol facility. Linde has the obligation to purchase an additional 5% interest in the methanol partnership upon the occurrence of certain events. In this Annual Report on Form 10-K: (i) references to the Company are to the Company and its consolidated subsidiaries, except as the context otherwise requires; (ii) references to the activities of, and financial information with respect to, the Company prior to October 1, 1996, are to the historical activities and combined historical financial information of the businesses that were transferred to the Company by Hanson in connection with the Demerger; (iii) references to 'tpa' are to metric tons per annum (a metric ton is equal to 1,000 kilograms or 2,204.6 pounds); and, (iv) references to the Company's and Equistar's annual rated capacity and annual production capacity are based upon engineering assessments made by the Company and Equistar, respectively. Actual production may vary depending on a number of factors including feedstocks, product mix, unscheduled maintenance and demand. 4 STRATEGY The Company's Vision is: 'BE THE MOST VALUE-CREATIVE CHEMICAL COMPANY IN THE WORLD.' Its strategy is to maximize long-term Economic Value Added ('EVA'r'*') and cash flow, through improved efficiency at existing operations, disciplined capital expenditures, selective dispositions, and selective acquisitions of intermediate and specialty chemical businesses. In addition to building upon its leading market positions in its existing lines of business, the Company seeks to increase efficiency and reduce costs at its existing businesses, focus its production on more profitable value-added products, expand its operations worldwide and increase the proportion of its business that is less cyclical in nature. The Company emphasizes stock ownership by management and links a significant portion of management's compensation to the achievement of performance targets, including targets based on EVA'r', as well as the Company's performance relative to its industry peers as measured by total shareholder return. The Company is committed to providing a safe workplace and employing the highest ethical standards in its dealings with customers, suppliers and the communities in which it operates. The following are key elements of the Company's strategy: FOCUS GROWTH ON LESS CYCLICAL, VALUE-CREATIVE BUSINESSES. The Company seeks to capitalize upon the leading market positions of its intermediate and specialty chemical businesses by expanding in domestic and international markets through capital expenditures and, as opportunities permit, selective acquisitions. Millennium Inorganic Chemicals advanced its position through the acquisition on July 1, 1998, of Tibras, South America's only integrated producer of TiO2. In addition, a 41,000 tpa chloride-process TiO2 expansion at Stallingborough, U.K., was substantially completed in the last quarter of 1998 at a cost of approximately $130 million, increasing Millennium Inorganic Chemicals' total global capacity to 712,000 tpa, approximately 16% of global capacity. During 1998, Millennium Petrochemicals increased its acetic acid capacity from 900 million to 1 billion pounds per year utilizing its proprietary low-water technology. Millennium Petrochemicals' transactions with Linde involving its La Porte, Texas, syngas business and a 15% interest in its methanol unit generated $122.5 million in cash and created a value-creative partnership with long-term EVA'r' benefits. At Millennium Specialty Chemicals, debottlenecking and new equipment investments over the past two years have doubled capacity for linalool and geraniol, two major fragrance chemicals. IMPROVE THE COMPANY'S COST STRUCTURE IN COMMODITY, INDUSTRIAL AND PERFORMANCE CHEMICALS. The Company seeks to increase the competitiveness of its commodity, industrial and performance chemical businesses by improving the efficiency of existing operations through the implementation of internally developed and externally benchmarked best practices and ongoing investments in technology, new processes and equipment. During 1997 and 1998, Millennium Inorganic Chemicals reduced the annual cost base of its TiO2 production by approximately $70 million compared to 1996 levels. An additional $100 million of annualized cost savings is targeted by the end of 2000. Beginning in 1998 and continuing through 1999, the Company is implementing an $84 million global SAP software-supported business improvement project, which is designed to make the Company a more efficient, globally integrated operation. All major businesses and plants, with the exception of the Brazilian TiO2 operations, are expected to be utilizing the SAP integrated software in the third quarter of 1999. INCREASE PRODUCTION AND MARKETING OF VALUE-ADDED PRODUCTS. The Company seeks to expand its position as a supplier of less cyclical, value-added intermediate and specialty chemicals, which historically command higher margins than commodity chemicals. Millennium Inorganic Chemicals is constructing a new $18 million research center near Baltimore, Maryland. The new center, which will be opened officially in September of 1999, will improve Millennium Inorganic Chemicals' ability to research, develop and test new products and processes, providing customers with additional value-added products and services. Millennium Inorganic Chemicals has recently established a team to focus on the global marketing and development of its specialty inorganic chemical businesses. Millennium Specialty Chemicals now utilizes a crystallization process to make high-purity anethole, a licorice-like flavor chemical. This process has improved product quality and lowered production costs. EMPHASIZE EMPLOYEE STOCK OWNERSHIP AND PERFORMANCE-BASED COMPENSATION. In order to align the interests of the Company's management and shareholders, the Company has established guidelines - ------------ * EVA'r' is a registered trademark of Stern, Stewart & Co. 5 for significant investment by management in Common Stock. Since October 1, 1996, the Company's top 30 executive officers and senior managers have purchased shares of Common Stock with a market value at March 15, 1999, of over $10 million. These include shares purchased under the Company's Salary and Bonus Deferral Plan, some of which are subject to forfeiture, but do not include restricted Common Stock or other awards under the Company's Long Term Stock Incentive Plan. In addition, management's long-term incentive compensation (including the vesting of 75% of the awards of restricted stock) is dependent upon the achievement of performance goals based on value creation targets and the Company's performance relative to industry peers, as measured by total shareholder return. Information relating to these guidelines and plans is presented under the heading 'Executive Compensation' in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders. To encourage ownership of Common Stock by employees generally, the Company has established a 401(k) plan that partially matches employee contributions with Common Stock, a Long Term Incentive Plan that awards participants with Common Stock based on performance measured by EVA'r', Employee Stock Purchase Plans, a Supplemental Savings and Investment Plan and a Salary and Bonus Deferral Plan. In addition, the Company has established a Save As You Earn (SAYE) program and a Profit Sharing Plan for its U.K. employees, a 'Plan D'Epargne' for its French employees and a Salary Deferral Plan for its Australian employees. PROVIDE A SAFE WORKPLACE AND EMPLOY THE HIGHEST ETHICAL STANDARDS. The Company is committed to providing a safe workplace and employing the highest ethical standards in its dealings with customers, suppliers and the communities in which it operates. 'PEOPLE CREATE THE VALUE' is the basis of the Company's People Policy. The People Policy promotes innovation and value-creativity within the context of the Company's Core Values, which include: 'EMPLOY THE HIGHEST ETHICAL STANDARDS; TREAT EACH OTHER WITH RESPECT, TRUST AND OPENNESS; AND, PROTECT THE ENVIRONMENT AND THE HEALTH AND SAFETY OF OUR EMPLOYEES AND THE PUBLIC.' To mark the tenth anniversary of the Chemical Manufacturers Association's ('CMA') adoption of Responsible Care'r', CMA companies, including the Company, adopted a new set of guiding principles for Responsible Care'r'. The principles include a commitment by each member company to publicly set improvement goals. By focusing on the People Policy, the Core Values, the guiding principles of Responsible Care'r' and EVA'r', the Company and its people are committed to the Company's Vision: 'BE THE MOST VALUE-CREATIVE CHEMICAL COMPANY IN THE WORLD.' BUSINESS SEGMENTS The Company's principal operations are grouped into four business segments: 'titanium dioxide and related products,' which are produced by Millennium Inorganic Chemicals; 'acetyls,' which are produced by Millennium Petrochemicals; 'specialty chemicals,' which are produced by Millennium Specialty Chemicals; and, 'polyethylene, alcohol and related products,' which were produced by Millennium Petrochemicals prior to December 1, 1997. See Note 13 of the Company's Consolidated Financial Statements included in the Annual Report to Shareholders and page 19 of such Annual Report for financial information about the Company's business segments; such information is incorporated herein by reference. On December 1, 1997, the Company contributed the businesses comprising the polyethylene, alcohol and related products segment to Equistar. Results of these businesses for the eleven months ended November 30, 1997, prior to such contribution, are included in the Company's Consolidated Financial Statements. Since December 1, 1997, the Company's interest in Equistar is accounted for as an equity investment. On November 27, 1998, the Company entered into an agreement to sell its 26.4% interest in Suburban Propane to Suburban Propane and its management. As such, Suburban Propane is accounted for as a discontinued operation. See Note 2 to the Company's Consolidated Financial Statements included in the Annual Report to Shareholders for additional information about Equistar and Suburban Propane. See the Financial Statements of Equistar included in this Annual Report on Form 10-K for financial information about Equistar. 6 PRINCIPAL PRODUCTS The following is a description of the principal products of the Company's consolidated subsidiaries:
PRODUCT USES - --------------------------------------------- ------------------------------------------------------------------ Titanium dioxide and related products: Titanium dioxide ('TiO2')............... A non-hazardous white pigment used to provide whiteness, brightness and opacity in coatings and paints, plastics, paper and rubber. Titanium tetrachloride ('TiCl4')........ The intermediate product in making TiO2. TiCl4 is also used for: the manufacture of titanium metal, which is used to make a wide variety of products including eyeglass frames, aerospace parts and golf clubs; the manufacture of catalysts and specialty pigments; and, as a surface treatment for glass. Zirconium-based compounds............... Chemicals used in coloring for ceramics, in pigment surface treatment and to enhance optics. Specialty TiO2.......................... Micropure and ultra-fine products used in optical, electronic, and ultra-violet absorption applications. Acetyls: Vinyl acetate monomer ('VAM')........... A petrochemical product used to produce adhesives, water-based paints, textile coatings, paper coatings and a variety of polymer products. Acetic acid............................. A feedstock used to produce VAM, terephthalic acid (used to produce polyester for textiles and plastic bottles) and industrial solvents. Methanol................................ A feedstock used to produce acetic acid; methyl tertiary butyl ether ('MTBE'), a gasoline additive; and, formaldehyde. The Company is a producer of methanol through its 85% interest in La Porte Methanol Company. Specialty chemicals: Terpene fragrance chemicals............. Components blended together to make fragrances and flavors used in detergents, soaps, personal care items, perfumes and food products. Cadmium-based pigments.................. Inorganic colors used in engineered plastics, artists' colors, ceramics, inks, automotive refinish coatings, coil and extrusion coatings, aerospace coatings and specialty industrial finishes. Silica gel.............................. Inorganic product used to reduce gloss and to control flow in coatings. Also used to stabilize and extend the shelf life of beer, plastic films, powdered food products and pharmaceuticals.
For a description of Equistar's principal products, see 'Equity Interest in Equistar,' below. MILLENNIUM INORGANIC CHEMICALS TITANIUM DIOXIDE Millennium Inorganic Chemicals is the second-largest producer of TiO2 in the world, based on reported production capacities. TiO2 is a white pigment used for imparting whiteness, brightness and opacity in a wide range of products, including paints and coatings, plastics, paper and elastomers. The following table sets forth Millennium Inorganic Chemicals' annual production capacity, as of the date of this report, using the chloride process and the sulfate process discussed below, and the approximate percentage of its total production capacity represented by each such process. 7 MILLENNIUM INORGANIC CHEMICALS' RATED TIO2 CAPACITY (METRIC TONS PER ANNUM)
PROCESS CAPACITY* - ------------------------------------------------------------------ --------- Chloride.......................................................... 470,000 66% Sulfate........................................................... 242,000 34% Total........................................................ 712,000 100%
- ------------ * Includes 138,000 tpa of sulfate-process capacity in France acquired on December 31, 1997; 60,000 tpa of sulfate-process capacity in Brazil acquired on July 1, 1998; and, 41,000 tpa of chloride-process capacity from the 1998 expansion of the Stallingborough, U.K., plant. TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2 is a more tightly packed crystal that has a higher refractive index than anatase TiO2 and, therefore, better opacification and tinting strength in many applications. Some rutile TiO2 products also provide better resistance to the harmful effects of weather. Rutile TiO2 is the preferred form for use in coatings, ink and plastics. Anatase TiO2 has a bluer undertone and is less abrasive than rutile TiO2. It is often preferred for use in paper, ceramics, rubber and man-made fibers. TiO2 producers process titaniferous ores to extract a white pigment using one of two different technologies. The sulfate process is a wet chemical process that uses concentrated sulfuric acid to extract TiO2, in either anatase or rutile form. The sulfate process generates higher volumes of waste materials, including iron sulfate and spent sulfuric acid. The newer chloride process is a high temperature process in which chlorine is used to extract TiO2 in rutile form, with greater purity and higher control over the size distribution of the pigment particles than the sulfate process permits. In general, the chloride process is also less intensive than the sulfate process in terms of capital investment, labor and energy. Because much of the chlorine can be recycled, the chloride process produces less waste subject to environmental regulation. Once an intermediate TiO2 pigment has been produced by either the chloride or sulfate process, it is 'finished' into a product with specific performance characteristics for particular end-use applications through proprietary processes involving surface treatment with various chemicals and combinations of milling and micronizing. Due to customer preferences, as well as economic and environmental factors, the industry's worldwide chloride-process capacity has increased significantly relative to sulfate-process capacity during the last twenty years and currently represents just over half of total industry capacity. Millennium Inorganic Chemicals is the world's second-largest producer of TiO2 by the chloride production process. Millennium Inorganic Chemicals' TiO2 plants are located in the four major world markets for TiO2: North America, South America, Western Europe and the Asia/Pacific region. The North American plants, consisting of two in Baltimore, Maryland, and two in Ashtabula, Ohio, have aggregate production capacities of 241,000 tpa using the chloride process and 44,000 tpa using the sulfate process. The plant in Salvador, Bahia, Brazil, acquired on July 1, 1998, has a capacity to produce approximately 60,000 tpa using the sulfate process. Millennium Inorganic Chemicals also acquired on July 1, 1998, a mineral sands mine located at Mataraca, Paraiba, Brazil, that supplies the Brazilian plant with titanium ores. The mine has over two million metric tons of recoverable reserves and a capacity to produce over 100,000 tpa of titanium ores, which it generally consumes in its own TiO2 operations, and 16,000 tpa of zircon, which it sells to third parties. Millennium Inorganic Chemicals' Stallingborough, U.K., plant has chloride-process production capacity of 150,000 tpa, increased from 109,000 tpa due to the plant expansion which was substantially completed in late 1998. The plants in France at Le Havre, Normandy, and Thann, Alsace, have sulfate-process capacities of 105,000 tpa and 33,000 tpa, respectively. The Kemerton plant in Western Australia has chloride-process production capacity of 79,000 tpa. Millennium Inorganic Chemicals' plants operated at an average of 93% of installed capacity during 1998, 97% during 1997 and 88% during 1996. The Stallingborough, U.K. plant was shut down during the fall of 1998 to complete the expansion of the facility. In addition, consistent with Millennium Inorganic Chemicals' strategy to scale production of TiO2 to match levels of worldwide demand, production at certain other facilities was slowed in December 1998 in response to a seasonal slowdown in demand and price competition in Europe. 8 Titanium-bearing ores used in the TiO2 extraction process (ilmenite, natural rutile and leucoxene) occur as mineral sands and hard rock in many parts of the world. Mining companies increasingly treat these natural ores to extract iron and other minerals and produce slags or synthetic rutiles with higher TiO2 concentrations, resulting in lower rates of waste by-products during the TiO2 production process. Ores are shipped by bulk carriers from terminals in the country of origin to TiO2 production plants, usually located near port facilities. Millennium Inorganic Chemicals obtains ores from a number of suppliers in South Africa, Australia, Canada and Norway, generally pursuant to one- to eight-year supply contracts. Rio Tinto Iron & Titanium Inc. (through its affiliates Richards Bay Iron & Titanium (Proprietary) Limited and QIT-Fer et Titane Inc.) and RGC Mineral Sands Limited are the world's largest producers of titanium ores and upgraded titaniferous raw materials and accounted for approximately 86% of the titanium ores and upgraded titaniferous raw materials purchased by Millennium Inorganic Chemicals in 1998. Other major raw materials used in the production of TiO2 are chlorine, caustic soda, petroleum and metallurgical coke, aluminum, sodium silicate, sulfuric acid, oxygen, nitrogen, natural gas and electricity. The number of sources for and availability of these materials is specific to the particular geographic region in which the facility is located. For Millennium Inorganic Chemicals' Australian plant, chlorine and caustic soda are obtained exclusively from one supplier under a long-term supply agreement. Millennium Inorganic Chemicals has experienced tightness in various raw material markets, but not to an extent requiring curtailed production. There are certain risks related to the utilization of raw materials sourced from less-developed or developing countries. At the present time, the market for chloride-process feedstock is beginning to loosen due to additional new synthetic titanium ore capacity. A number of Millennium Inorganic Chemicals' raw materials are provided by only a few vendors and, accordingly, if one significant supplier or a number of significant suppliers were unable to meet their obligations under present supply arrangements, Millennium Inorganic Chemicals could suffer reduced supplies and/or be forced to incur increased prices for its raw materials. Such an event could have a material adverse effect on the Company's financial condition, results of operations or cash flows. Of the total 582,000 metric tons of TiO2 sold by Millennium Inorganic Chemicals in 1998 (including 32,000 metric tons of TiO2 sold by Millennium Inorganic Chemicals' Brazilian plant from the date of its acquisition on July 1, 1998, to December 31, 1998), approximately 60% was sold to customers in the paint and coatings industry, approximately 19% to customers in the plastics industry, approximately 16% to customers in the paper industry and approximately 5% to other customers. Millennium Inorganic Chemicals' ten largest customers accounted for approximately 30% of its TiO2 sales in 1998. Millennium Inorganic Chemicals experiences some seasonality in its sales because its customers' sales of paints and coatings are greatest in the spring and summer months. TiO2 is sold either directly by Millennium Inorganic Chemicals to its customers or, to a lesser extent, through agents or distributors. TiO2 is distributed by rail, truck and ocean carrier in either dry or slurry form. The global markets in which the Company's TiO2 business operates are all highly competitive. Millennium Inorganic Chemicals competes primarily on the basis of price, product quality and service. Certain of Millennium Inorganic Chemicals' competitors are partially vertically integrated, producing titanium-bearing ores as well as TiO2. Millennium Inorganic Chemicals is vertically integrated at its Brazilian facility, which owns a titanium ore mine that supplies the facility. Millennium Inorganic Chemicals' major competitors are E.I. du Pont de Nemours and Company ('Dupont'); Tioxide Group Limited ('Tioxide'), a unit of Imperial Chemical Industries PLC ('ICI'); Kronos, Inc. ('Kronos'), a unit of NL Industries Inc.; Kemira Pigments Oy ('Kemira'), a unit of Kemira Oy; and, Kerr-McGee Chemical Corporation (both directly and through various joint ventures) ('Kerr-McGee Chemicals'), a unit of Kerr-McGee Corporation. DuPont, Tioxide, Millennium Inorganic Chemicals, Kronos, Kemira and Kerr-McGee Chemicals, collectively, account for approximately three-quarters of the world's production capacity. Kerr-McGee Chemicals and Bayer AG Group ('Bayer') have formed a joint venture business owned 80% by Kerr-McGee Chemicals and 20% by Bayer to operate Bayer's European TiO2 business. TiO2 competes with other whitening agents which are generally less effective but less expensive. Paper manufacturers have, in recent years, developed alternative technologies which reduce the amount 9 of TiO2 used in paper. For example, kaolin and precipitated calcium carbonate are used extensively as fillers by paper manufacturers in medium-and lower-priced products. New plant capacity additions in the TiO2 industry are slow to develop because of the substantial capital expenditure and the significant lead time (three to five years typically for a new plant) needed for planning, obtaining environmental approvals and permits, construction of manufacturing facilities and arranging for raw material supplies. Debottlenecking and other capacity expansions at existing plants require substantially less time and capital and can increase overall industry capacity. RELATED PRODUCTS Titanium Tetrachloride. Millennium Inorganic Chemicals manufactures a metallurgical grade of TiCl4 at its Ashtabula, Ohio, plant, primarily for sale to U.S. titanium metal producers. TiCl4 is produced at Ashtabula as an intermediate product in the chloride process used for manufacturing TiO2. Millennium Inorganic Chemicals also manufactures TiCl4 at its Thann, Alsace, France, facility, primarily for sales to third parties in Europe for use in catalysts and pharmaceuticals and for use by Millennium Inorganic Chemicals and others in the sulfate-process manufacturing of TiO2 in Europe. Millennium Inorganic Chemicals is the largest merchant seller of TiCl4 in the U.S. and Europe. The majority of the Company's U.S. TiCl4 sales consist of metallurgical grade product sold to titanium sponge producers who convert the product into titanium metal. Other customers use TiCl4 to produce catalysts for chemical processes and pearlescent pigments for metallic coatings and cosmetics. Sales are almost exclusively to customers in the U.S. and Europe. TiCl4 is distributed by rail and truck as anhydrous TiCl4 and as titanium oxychloride (an aqueous solution of TiCl4). Specialty Inorganic Chemical Products: The Company's plant in France at Thann, Alsace, produces zirconium-based compounds and specialty TiO2 products. These products are marketed globally for various applications. Zirconium-based compounds are used as a coloring agent for ceramics, in pigment surface treatment and to enhance optics. Specialty TiO2 products are used in environmental applications to eliminate nitrogen oxides from power plant emissions and for sulfur removal in diesel engine exhaust. Micropure TiO2 is used in the treatment of glass, primarily to enhance the optical properties of spectacles. Electronic applications make use of these materials' ultra-purity to miniaturize components in automotive, telephone and television applications. MILLENNIUM PETROCHEMICALS The following table sets forth information concerning the annual production capacity, as of the date of this report, of Millennium Petrochemicals' principal products: MILLENNIUM PETROCHEMICALS' RATED CAPACITY (MILLIONS OF POUNDS PER ANNUM)
PRODUCT CAPACITY - ---------------------------------------------------------------- -------- Acetic Acid..................................................... 1,000 VAM............................................................. 800
In addition, Millennium Petrochemicals owns an 85% interest in La Porte Methanol Company, which owns a methanol plant with an annual production capacity of 207 million gallons per annum. For a description of the plant and La Porte Methanol Company, see 'La Porte Methanol Company,' below. ACETIC ACID Millennium Petrochemicals is the second-largest U.S. producer of acetic acid, and the third-largest producer worldwide, based on reported production capacities. Its acetic acid plant is located at La Porte, Texas, and has an annual production capacity as of December 31, 1998, of one billion pounds, increased from 900 million pounds during 1998. Millennium Petrochemicals uses approximately 60% of its acetic acid production internally to produce VAM at La Porte. 10 The principal raw materials for the production of acetic acid are carbon monoxide and methanol. Millennium Petrochemicals purchases all of its carbon monoxide from Linde pursuant to a long-term contract based primarily on cost of production. Linde produces this carbon monoxide at the syngas plant leased by Linde from Millennium Petrochemicals pursuant to a long-term lease that commenced on January 18, 1999. La Porte Methanol Company, 85% owned by the Company, supplies all of Millennium Petrochemical's requirements for methanol. (See 'La Porte Methanol Company,' below.) The process technology used by Millennium Petrochemicals to produce acetic acid was originally licensed from Monsanto Company, and is now owned by British Petroleum Company P.L.C. ('British Petroleum'). Since inception of the license, Millennium Petrochemicals has developed and implemented technological changes (including the proprietary low-water technology implemented in 1998) to expand production capacity by approximately two-thirds. Acetic acid not consumed internally by Millennium Petrochemicals is sold predominantly under contract. These contracts range in term from one to four years. Export sales constituted approximately 20% of total acetic acid sales in 1998. Acetic acid is shipped by ocean-going vessel, barge, tank car and tank truck. Millennium Petrochemicals' principal competitors in the acetic acid business are Hoechst-Celanese, a unit of Hoechst Aktiengesellschaft ('Hoechst-Celanese'); British Petroleum; Kyodo Sakusan and Acetex Chemie S.A., a subsidiary of Acetex Corporation ('Acetex'). VAM Millennium Petrochemicals is the second-largest U.S. producer of VAM, and the third-largest producer worldwide, based on reported production capacities. Its VAM plant is located at La Porte, Texas, and has an annual production capacity of 800 million pounds as of December 31, 1998. The principal raw materials for the production of VAM are acetic acid and ethylene. Millennium Petrochemicals supplies its entire requirements for acetic acid from its internal production and buys all of its ethylene requirements from Equistar under a long-term supply contract based on market prices. The process used by Millennium Petrochemicals to produce VAM is proprietary to the Company. Millennium Petrochemicals sells VAM under contracts that range in term from one to four years, as well as on a spot basis. Millennium Petrochemicals also sells VAM to Equistar pursuant to a long-term contract at a formula-based price. The majority of sales are completed under contract. Millennium Petrochemicals ships this product by barge, ocean-going vessel, pipeline, tank car and tank truck. Export sales represented approximately 25% of total VAM sales in 1998. Millennium Petrochemicals has bulk storage arrangements for VAM in the Netherlands, the U.K., Italy, Turkey, South Africa, Indonesia, Singapore and Korea, to better serve its customers' requirements in those regions. Millennium Petrochemicals' principal competitors in the VAM business are Hoechst-Celanese, British Petroleum, Union Carbide Corporation, Gantrade Corporation, Acetex and Dairen Chemical Corporation. MILLENNIUM SPECIALTY CHEMICALS TERPENE FRAGRANCE CHEMICALS Millennium Specialty Chemicals is one of the world's leading producers of chemicals derived from crude sulfate turpentine ('CST'), a by-product of the kraft process of papermaking, and is the largest purchaser and distiller of CST in the world. Millennium Specialty Chemicals' primary turpentine-based products are intermediate fragrance chemicals, such as linalool and geraniol, which are used in fragrance compounds and also provide the starting point for the production of a number of other fragrance ingredients. In addition, Millennium Specialty Chemicals supplies chemicals for use as flavors and in a number of other industrial applications. Millennium Specialty Chemicals operates manufacturing facilities for its fragrance chemicals in Jacksonville, Florida, and Brunswick, Georgia. The Jacksonville site has facilities for the fractionation of turpentine into alpha- and beta-pinene, sophisticated equipment to further upgrade fragrance chemical 11 products, as well as manufacturing facilities for synthetic pine oil, anethole, methyl chavicol and a number of other fragrance and flavor chemicals. The Brunswick site produces linalool and geraniol from the alpha-pinene component of CST, utilizing a proprietary and, the Company believes, unique technology. The Company believes that this technology provides Millennium Specialty Chemicals with a significant advantage in raw material availability and quality. The Company's technology also has significant environmental advantages. Linalool and geraniol produced at the Brunswick site are further processed at the Jacksonville site to produce fragrance chemicals, including citral, citronellol and pseudoionone. In addition, Millennium Specialty Chemicals operates the world's largest dihydromyrcenol facility at Brunswick, with a rated annual capacity of over five million pounds. In 1998, Millennium Specialty Chemicals expanded its linalool and geraniol production capacities and began to utilize a crystallization process to make anethole. This process has improved product quality and lowered production costs. In addition, Millennium Specialty Chemicals implemented the SAP software system at its sites in November 1998. CST, which is Millennium Specialty Chemicals' key raw material for producing fragrance chemicals, is a by-product of the kraft pulping process. Millennium Specialty Chemicals purchases CST from approximately 50 pulp mills in North America. Additionally, Millennium Specialty Chemicals purchases quantities of gum turpentine or its derivatives from Asia, Europe and South America, as business conditions dictate. Millennium Specialty Chemicals has experienced tightness in CST supply from time to time, together with corresponding price increases. Generally, Millennium Specialty Chemicals seeks to enter into long-term supply contracts with pulp mills in order to ensure a stable supply of CST. The sale of CST generates relatively insignificant revenues and profits for the pulp mills that serve as Millennium Specialty Chemicals' principal suppliers. Accordingly, Millennium Specialty Chemicals attempts to work closely and cooperatively with its suppliers and provides them with incentives to produce more CST. For example, Millennium Specialty Chemicals employs two full-time employees whose sole responsibility is to work with pulp mills to recover CST more efficiently and economically. Fragrance chemicals are used primarily in the production of perfumes. The major consumers of perfumes worldwide are soap and detergent manufacturers. Millennium Specialty Chemicals sells directly worldwide to major soap, detergent and fabric conditioner manufacturers and fragrance compounders and, to a lesser extent, producers of cosmetics and toiletries. Approximately 89% of Millennium Specialty Chemicals' 1998 terpene fragrance chemical sales were to the fragrance chemicals market, with additional sales to the pine oil cleaner and disinfectant markets. Approximately 67% of Millennium Specialty Chemicals' 1998 terpene fragrance chemical sales were made outside the U.S., to approximately 50 different countries. Sales are made primarily through Millennium Specialty Chemicals' direct sales force, while agents and distributors are used in outlying areas where volume does not justify full-time sales coverage. The markets in which Millennium Specialty Chemicals' terpene fragrance business competes are highly competitive. Millennium Specialty Chemicals competes primarily on the basis of quality, service and the ability to conform its products to the technical and qualitative requirements of its customers. Millennium Specialty Chemicals works closely with many of its customers in developing products to satisfy their specific requirements. Millennium Specialty Chemicals' supply agreements with customers are typically short-term in duration (up to one year). Therefore, its business is substantially dependent on long-term customer relationships based upon quality, innovation and customer service. Customers from time to time change the formulations of an end product in which one of Millennium Specialty Chemicals' fragrance chemicals is used, which may affect demand for such fragrance chemicals. Millennium Specialty Chemicals' ten largest terpene chemical customers accounted for approximately 57% of its total sales in 1998. Millennium Specialty Chemicals' major competitors are BASF AG, Hoffman-LaRoche Inc., Kuraray Co. LTD and Bush Boake Allen Inc. SILICA GEL Millennium Specialty Chemicals produces several grades of fine-particle silica gel at the St. Helena plant in Baltimore, Maryland, and markets them internationally. Fine-particle silica gel is a chemically and biologically inert form of silica with a particle size ranging from three to ten microns. 12 The Company's SiLCRON'r' brand of fine-particle silica is used in coatings as a flatting or matting (gloss reduction) agent and to provide mar-resistance. SiLCRON'r' is also used in food and pharmaceutical applications. SiL-PROOF'r' grades of fine-particle silica gel are chill-proofing agents used to stabilize chilled beer and prevent clouding. Fine-particle silica is distributed in dry form in palletized bags by truck and ocean carrier. CADMIUM-BASED PIGMENTS Millennium Specialty Chemicals manufactures a line of cadmium-selenium based colored pigments at the St. Helena, Maryland, plant and markets them internationally. In addition to their brilliance, cadmium colors are light and heat stable. These properties promote their use in such applications as artists' colors, plastics and glass colors. Due to concern for the toxicity of heavy metals, including cadmium, Millennium Specialty Chemicals has introduced low-leaching cadmium-based pigments that meet all U.S. government requirements for landfill disposal of non-hazardous waste. Colored pigments are distributed in dry form in drums by truck and ocean carrier. RESEARCH AND DEVELOPMENT The Company's expenditures for research and development totaled $21 million, $28 million and $39 million in 1998, 1997 and 1996, respectively. Research and development expenditures at Millennium Petrochemicals decreased by approximately $14 million in 1998 as compared to 1997 as a result of the transfer of the polyethylene, alcohol and related products segment to Equistar on December 1, 1997. Research and development expenditures at Millenium Inorganic Chemicals increased by approximately $7 million from 1997 to 1998 due to the French and Brazilian acquisitions and additional research and development projects. Millennium Inorganic Chemicals has research facilities in Baltimore, Maryland; Stallingborough, U.K.; and, Bunbury, Western Australia. In addition, Millennium Inorganic Chemicals is building a new $18 million research center near Baltimore, Maryland, which is scheduled to be officially opened in September 1999. Millennium Specialty Chemicals has research facilities in Jacksonville, Florida, and Baltimore (St. Helena), Maryland. Millennium Petrochemicals leases laboratory space from Equistar in Cincinnati, Ohio. The Company's research efforts are principally focused on improvements in process technology, product development, technical service to customers, applications research and product quality enhancements. INTERNATIONAL EXPOSURE The Company generates revenue from export sales (i.e., U.S. dollar-denominated sales outside the U.S. by domestic operations), as well as revenue from the Company's operations conducted outside the U.S. Export sales, which are made to over 70 countries, amounted to approximately 10%, 9% and 9% of total revenues in 1998, 1997 and 1996, respectively. Revenue from non-U.S. operations amounted to approximately 38%, 12% and 11% of total revenues in 1998, 1997 and 1996, respectively, principally reflecting the operations of Millennium Inorganic Chemicals in the U.K. and Western Australia and the addition of the French operations on December 31, 1997, and the Brazilian operations on July 1, 1998. Identifiable assets of the non-U.S. operations represented 24% and 17% of total identifiable assets at December 31, 1998 and 1997, respectively, principally reflecting the assets of these operations. In addition, the Company obtains a portion of its principal raw materials from sources outside the U.S. Millennium Inorganic Chemicals obtains ores used in the production of TiO2 under long-term contracts from a number of suppliers in South Africa, Australia, Canada and Norway. Millennium Specialty Chemicals obtains a portion of its requirements of CST and gum turpentine and its derivatives from suppliers in Indonesia and other Asian countries, Europe and South America. The Company's export sales and its non-U.S. manufacturing and sourcing are subject to the usual risks of doing business abroad, such as fluctuations in currency exchange rates, transportation delays and interruptions, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls and changes in governmental policies. The Company's exposure to the risks associated with doing business abroad will increase as the 13 Company expands its worldwide operations. From time to time, the Company utilizes financial derivative instruments to hedge the impact of currency fluctuations in its purchases and sales. The functional currency of each of the Company's non-U.S. operations (principally, the operations of Millennium Inorganic Chemicals in the U.K., France, Brazil and Australia) is the local currency. Historically, the net impact of currency translation has not been material to the Company's consolidated results of operations or financial position. The recent developments in Brazil regarding the devaluation of its currency, the real, are not expected to have a material result on the Company's consolidated operations since approximately two-thirds of its Brazilian sales are referenced to a percentage of U.S. dollar prices. However, as a result of translating the functional currency financial statements into U.S. dollars, consolidated Shareholders' equity would decrease approximately $44 million as a result of this devaluation, using the March 15, 1999 exchange rate. Future events, which may significantly increase or decrease the risk of future movement in the real, cannot be predicted. EQUITY INTEREST IN EQUISTAR Through its 29.5% interest in Equistar, the Company is a partner in the largest producer of ethylene and polyethylene in North America, and a leading producer of performance polymers, oxygenated chemicals, aromatics and specialty chemicals. Equistar commenced operations on December 1, 1997, when the Company contributed substantially all of the assets comprising its polyethylene, alcohol and related products segment to Equistar and Lyondell contributed substantially all the assets comprising its petrochemical and polymer business segments to Equistar. On May 15, 1998, the Company and Lyondell expanded Equistar with the addition of the ethylene, propylene, ethylene oxide, ethylene glycol and other ethylene oxide derivatives businesses of Occidental's chemicals subsidiary. Equistar is functionally divided into two business units, petrochemicals and polymers. Equistar's petrochemical business unit manufactures and markets oxygenated chemicals, olefins, aromatics and specialty chemicals, which are used primarily in the manufacture of other chemicals and products, including the production of polymers by Equistar and its customers. Equistar's primary olefin products are ethylene, propylene and butadiene, which are used to produce polyethylene, polypropylene, rubber and many other chemical and polymer products. Its oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE. Its aromatic products include benzene, which is used in the production of nylon and polystyrene plastics, and toluene, which is used as a component in gasoline and as a feedstock for producing benzene. Equistar's specialty chemical products include dicyclopentadiene, isoprene, resin oil and piperylenes, which are used to make adhesives, sealants and inks. Equistar's polymer business unit manufactures and markets polyolefins, including polyethylene, polypropylene and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. Equistar produces high density polyethylene ('HDPE'), low density polyethylene ('LDPE'), linear low density polyethylene ('LLDPE') and polypropylene. Equistar's performance polymers include enhanced grades of polypropylene and polyethylene, including wire and cable resins, concentrates and compounds and polymeric powders. MANAGEMENT OF EQUISTAR; AGREEMENTS BETWEEN EQUISTAR, LYONDELL, OCCIDENTAL AND THE COMPANY Equistar is a Delaware limited partnership. Millennium Petrochemicals owns its 29.5% interest in Equistar through two wholly owned subsidiaries, one of which serves as a general partner of Equistar and one of which serves as a limited partner. The Amended and Restated Partnership Agreement of Equistar (the 'Equistar Partnership Agreement') governs, among other things, ownership, cash distributions, capital contributions and management of Equistar. The Equistar Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee consisting of nine representatives, three appointed by each general partner. Matters requiring agreement by the representatives of Lyondell, Occidental and Millennium Petrochemicals include changes in the scope of Equistar's business, approval of the five-year Strategic Plan (and annual updates thereof), the sale or purchase of assets or capital expenditures of more than $30 million not contemplated by an approved Strategic Plan, additional investments by Equistar's 14 partners not contemplated by an approved Strategic Plan if the partners are required to contribute more than a total of $100 million in a specific year or $300 million in a five-year period (except in specific circumstances set forth under the Equistar Partnership Agreement), borrowing money under certain circumstances, issuing or repurchasing equity securities of Equistar, hiring and firing executive officers of Equistar (other than Equistar's Chief Executive Officer), approving material compensation and benefit plans for employees, commencing and settling material lawsuits, selecting or changing accountants or accounting methods and merging or combining with another business. All decisions of the Partnership Governance Committee that do not require consent of the representatives of Lyondell, Occidental and Millennium Petrochemicals (including approval of Equistar's annual budget, which must be consistent with the most recently approved Strategic Plan, and selection of Equistar's Chief Executive Officer, who must be reasonably acceptable to Millennium Petrochemicals and Occidental) may be made by Lyondell's representatives alone. The day-to-day operations of Equistar are managed by the executive officers of Equistar. Dan F. Smith, the Chief Executive Officer of Lyondell, also serves as the Chief Executive Officer of Equistar. Millennium Petrochemicals and Equistar entered into an agreement on December 1, 1997, providing for the transfer of assets to Equistar. Among other things, such agreement sets forth representations and warranties by Millennium Petrochemicals with respect to the transferred assets and requires indemnification by Millennium Petrochemicals with respect to such assets. Such agreement also provides for the assumption of certain liabilities by Equistar, subject to specified limitations. Lyondell and affiliates of Occidental entered into a similar agreements with Equistar with respect to the transfer of their respective assets and Equistar's assumption of liabilities. Equistar is party to a number of agreements with Millennium Petrochemicals for the provision of services, utilities and materials from one party to the other at common locations, principally La Porte, Texas, and Cincinnati, Ohio. In general, the goods and services under these agreements, other than the purchase of ethylene by Millennium Petrochemicals from Equistar and the purchase of VAM by Equistar from Millennium Petrochemicals, are provided at cost. Millennium Petrochemicals purchases its ethylene requirements at market-based prices from Equistar pursuant to a long-term contract. Equistar purchases its VAM requirements from Millennium Petrochemicals at a formula-based price pursuant to a long-term contract. Lyondell and affiliates of Occidental also entered into agreements with Equistar for the provision of services. The Company, Lyondell and an affiliate of Occidental have agreed to guarantee the obligations of their respective subsidiaries under each of the agreements discussed above, including the Equistar Partnership Agreement and the asset-transfer agreements. EQUISTAR'S PETROCHEMICAL BUSINESS UNIT Overview: Equistar produces petrochemicals at twelve facilities located in six states. The Chocolate Bayou, Corpus Christi and two Channelview, Texas, olefin plants primarily use petroleum liquid feedstocks, including naphtha, condensates and gas oils (collectively, 'Petroleum Liquids'), to produce ethylene. The cost of ethylene production from Petroleum Liquids historically has been less than the cost of producing ethylene from natural gas liquid feedstocks, including ethane, propane and butane (collectively, 'NGLs'). The use of Petroleum Liquids results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty products such as dicyclopentadiene, isoprene, resin oil, piperylenes, hydrogen and alkylate. Equistar's Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and, La Porte, Texas, plants are designed to use primarily NGLs which produce primarily ethylene with some co-products, such as propylene. The La Porte plant has recently been modified to allow for partial use of Petroleum Liquid feedstocks. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Feedstocks are sourced both internationally and domestically and are shipped via vessel and pipeline. Equistar produces ethylene oxide and its primary derivative, ethylene glycol, at facilities located at Pasadena, Texas, and through a joint venture located in Beaumont, Texas, that is 50% owned by Equistar and 50% owned by DuPont. The Pasadena facility also produces other ethylene oxide derivatives, principally ethers and ethanolamine. Ethylene glycol is used in antifreeze and in polyester fibers, resins and films. The other ethylene oxide derivatives are used in many consumer and industrial 15 end uses, such as detergents and surfactants, brake fluids and polyurethane foams for seating and bedding. Equistar produces synthetic ethyl alcohol at its Tuscola, Illinois, plant by a direct hydration process that combines water and ethylene. Equistar also owns and operates facilities in Newark, New Jersey, and Anaheim, California, for denaturing ethyl alcohol by the addition of certain chemicals. In addition, it produces small volumes of diethyl ether, a by-product of its ethyl alcohol production at Tuscola. These ethyl alcohol products are ingredients in various consumer and industrial products as described more fully in the table below. The following table outlines Equistar's primary petrochemical products, annual rated capacity and the primary uses for such products.
RATED PRODUCT CAPACITY(A) PRIMARY USES - --------------------------- --------------------------- ------------------------------------------------------ Olefins: Ethylene.............. 11.5 billion pounds Ethylene is used as a feedstock to manufacture polyethylene, ethylene oxide, ethylene dichloride, VAM and ethylbenzene. Propylene............. 5.0 billion Propylene is used to produce polypropylene, pounds(b) acrylonitrile and propylene oxide. Butadiene............. 1.2 billion pounds Butadiene is used to manufacture styrene butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets and engineered plastics. Oxygenated Products: Ethylene oxide ('EO') and equivalents ('EOE')............. 1.1 billion pounds EOE; 400 EO is used to produce surfactants, industrial million pounds as pure EO cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol. Ethylene glycol....... 1 billion pounds Ethylene glycol is used to produce polyester fibers and film, PET resin, heat transfer fluids, paint and automobile antifreeze. Ethylene oxide derivatives......... 225 million pounds Ethylene oxide derivatives are used to produce paint and coatings, polishes, solvents and chemical intermediates. MTBE.................. 284 million gallons MTBE is an octane enhancer and clean fuel additive in (18,500 barrels/day)(c) reformulated gasoline. Aromatics: Benzene............... 301 million gallons Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, rubber and polystyrene. Polystyrene is used in life preservers, food packaging and drinking cups. Toluene............... 66 million gallons Toluene is used as an octane enhancer in gasoline and as a chemical feedstock for benzene production.
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RATED PRODUCT CAPACITY(A) PRIMARY USES - --------------------------- --------------------------- ------------------------------------------------------ Specialty Products: Dicyclopentadiene ('DCPD')............ 80 million pounds DCPD is a component of inks, adhesives and polyester resins for molded parts such as tub and shower stalls and boat hulls. Isoprene.............. 105 million pounds Isoprene is a component of premium tires, adhesive sealants and other rubber products. Resin oil............. 120 million pounds Resin oil is used in the production of hot-melt-adhesives, inks, sealants, paints and varnishes. Piperylenes........... 100 million pounds Piperylenes are used in the production of adhesives, inks and sealants. Hydrogen.............. 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas in heavy crude oil. Alkylate.............. 337 million gallons(d) Alkylate is a premium blending component used by refiners to meet Clean Air Act standards for reformulated gasoline. Ethyl alcohol......... 50 million gallons Ethyl alcohol is used in the production of solvents as well as household, medicinal and personal care products. Diethyl ether......... 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and diesel engine starting fluid, liniments, analgesics and smokeless gun powder.
- ------------ (a) Unless otherwise specified, represents rated capacity at January 1, 1999, as determined by Equistar's management. Capacities shown include 100% of the capacity of Equistar. (b) Does not include refinery grade material or production from the product flexibility unit at Equistar's Channelview, Texas, facility, which can convert ethylene and other light petrochemicals into propylene and has a current rated capacity of one billion pounds per year of propylene. (c) Includes up to 44 million gallons per year of capacity which is operated for the benefit of LYONDELL-CITGO Refining LP, a joint venture owned by Lyondell and CITGO Petroleum Corporation ('LCR'). (d) Includes up to 172 million gallons per year of capacity which is operated for the benefit of LCR. Feedstocks: Olefin feedstock cost is generally the largest component of total cost for the petrochemicals business. Olefin plants that have the flexibility to consume a wide range of feedstocks generally are able to maintain higher profitability during periods of changing energy and petrochemical prices than olefin plants that are restricted in their feedstock processing capability. Equistar's Channelview, Texas, facility is unusually flexible in that it can process 100% Petroleum Liquids or up to 80% NGL feedstocks. The Corpus Christi plant can process up to 70% Petroleum Liquids or up to 70% NGLs. The Chocolate Bayou facility processes 100% Petroleum Liquids. Three of Equistar's four other olefin facilities currently process only NGLs. Equistar has recently upgraded the La Porte, Texas, facility to integrate the operations of the La Porte and Channelview facilities to permit the La Porte facility to process 30% to 40% Petroleum Liquids and the Channelview facility to process the co-products resulting from the processing of Petroleum Liquids at La Porte. The majority of Equistar's Petroleum Liquid requirements are obtained under contracts or on the spot market from a variety of third-party domestic and foreign sources. Equistar purchases NGLs from a wide variety of domestic sources. Equistar obtains a portion of its olefin feedstock requirements from LCR at market-based prices. 17 Marketing and Sales: Ethylene produced by the La Porte, Morris and Clinton facilities is generally consumed as feedstock by the polymer operations at those sites, except for the ethylene produced at La Porte and sold to Millennium Petrochemicals for its VAM production. Ethylene and propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake Charles olefin plants are generally distributed by pipeline or via exchange agreements to Equistar's Gulf Coast polymer and ethylene oxide facilities as well as to other third parties. As of December 31, 1998, approximately 75% of the ethylene produced by Equistar was consumed internally or sold to Equistar's affiliates based on current market prices. With respect to sales to third parties, Equistar sells a majority of its olefin products to customers with whom its partners have had long-standing relationships. In any one of the past three years, no single unrelated third-party customer has accounted for more than ten percent of the petrochemical business unit's revenue. Sales to third parties generally are made pursuant to written agreements which typically provide for monthly negotiation of price. The contracts typically require the customer to purchase a specified minimum quantity. Contract terms are typically three to six years, with automatic one- or two-year term extension provisions. Some contracts are subject to early termination if deliveries have been suspended for several months. Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, part of which is owned and part of which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas, as well as around the Lake Charles, Louisiana, area. In addition, exchange agreements with other olefin producers allow access to customers who are not directly connected to Equistar's pipeline system. Some propylene is shipped by ocean-going vessel. Ethylene oxide and its derivatives are shipped by railcar. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge and ocean-going vessel. EQUISTAR'S POLYMER BUSINESS UNIT Overview: Through twelve facilities located in four states, Equistar's polymer business unit manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various performance polymers. Equistar currently manufactures polyethylene using a variety of technologies at six facilities in Texas and at its Morris, Illinois, and Clinton, Iowa, facilities. The Morris and Clinton facilities are the only polyethylene facilities located in the Midwest and enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the Midwest and on the East Coast of the U.S. Equistar's Morris, Illinois, and Pasadena, Texas, facilities manufacture polypropylene using propylene produced as a co-product of Equistar's ethylene production as well as propylene purchased from third parties. Equistar also produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. Equistar produces concentrates and compounds at its facilities in Crockett, Texas, and Heath, Ohio. Concentrates and compounds are polyethylene compounds impregnated with additives and/or pigments and sold to converters who mix the compounds with larger volumes of polymers, including polyethylene, to produce various products. Equistar has announced its intention to sell the concentrates and compounds business. Equistar produces wire and cable resins and compounds at Morris, Illinois; La Porte and Crockett, Texas; Tuscola, Illinois; and, Fairport Harbor, Ohio. Wire and cable resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. 18 The following table outlines Equistar's polymer and performance polymer products, annual rated capacity and the primary uses for such products:
RATED PRIMARY PRODUCT CAPACITY(A) USES - --------------------------- --------------------------- ------------------------------------------------------ High density polyethylene ('HDPE')................. 3.4 billion pounds(b) HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays and pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household/industrial chemicals and motor oil; milk/water/juice bottles; and, large (rotomolded) tanks for storing liquids like agricultural and lawn care chemicals. Low density polyethylene ('LDPE')................. 1.7 billion pounds LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products, and, coatings on paper board such as milk cartons. Specialized forms of LDPE are Ethyl Methyl Acrylate, which provides adhesion in a variety of applications; and, Ethylene Vinyl Acetate, which is used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders. Linear low density polyethylene ('LLDPE')... 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags; housewares; lids for coffee cans and margarine tubs; and, large (rotomolded) toys like outdoor gym sets. Wire and cable resins and compounds................ (c) Wire and cable resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Polymeric powders.......... (c) Polymeric powders are component products in structural and bulk molding compounds, parting agents and filters for appliance, automotive and plastics processing industries.
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RATED PRIMARY PRODUCT CAPACITY(A) USES - --------------------------- --------------------------- ------------------------------------------------------ Concentrates and compounds................ 150 million pounds Concentrates and compounds provide color in film, bottles and foam sheets; the 'slip' that keeps film from sticking together; flame retardancy; resistance to UV radiation; and, the 'gas bubbles' to make foamed plastic products. Polypropylene.............. 680 million pounds Polypropylene is used to manufacture fibers for carpets, rugs and upholstery; housewares; automotive battery cases; automotive fascia, running boards and bumpers; grid-type flooring for sports facilities; fishing tackle boxes; and, bottle caps and closures. Polymers for adhesives, sealants and coatings.... (c) Polymers are components in hot-metal adhesive formulations for case, carton and beverage package sealing; glue sticks; automotive sealants; carpet backing; and, adhesive labels. Reactive polyolefins....... (c) Reactive polyolefin, are functionalized polymers used to bond non-polar and polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications. Liquid polyolefins......... (c) Liquid polyolefins are a diesel fuel additive to inhibit freezing.
- ------------ (a) Unless otherwise specified, represents rated capacity at January 1, 1999. Capacities shown include 100% of the capacity of Equistar. (b) Equistar increased its HDPE capacity by approximately 125 million pounds in 1998. The idling of a portion of the Port Arthur facility effective March 31, 1999, will result in a decrease in the stated capacity by 300 million pounds at the end of the first quarter of 1999. A 480 million pound HDPE resin expansion project at the Matagorda facility has a targeted start-up in the third quarter of 1999. (c) These are enhanced grades of polyethylene and are included in the capacity figures for HDPE, LDPE and LLDPE, above, as appropriate. Feedstocks: With the exception of the Chocolate Bayou polyethylene plant, Equistar's polyethylene and polypropylene production facilities can receive their ethylene and propylene directly from Equistar's petrochemical facilities via Equistar's olefin pipeline system or Equistar's own production at the site. The polyethylene plants at Chocolate Bayou, La Porte, Port Arthur and Pasadena, Texas, are pipeline-connected to third parties and can receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois, also receives propylene from a third party. Marketing and Sales: Equistar's polymer products are primarily sold to an extensive base of established customers, many under term contracts, typically having a duration of one to three years. The remainder is generally sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between Equistar and the customer. Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 10,000 railcars for use in its polymer business. Equistar sells its polymer products in the United States primarily through its own sales organization. It generally engages sales agents to market its products in the rest of the world. 20 LA PORTE METHANOL COMPANY The La Porte Methanol Company is a Delaware limited partnership that owns a methanol plant and certain related facilities in La Porte, Texas. The partnership is owned 85% by Millennium Petrochemicals and 15% by Linde. Linde is also required to purchase, under certain circumstances, an additional 5% interest in the partnership. A wholly-owned subsidiary of Millennium Petrochemicals is the managing general partner of the partnership. A wholly owned subsidiary of Linde is responsible for operating the methanol plant. The partnership commenced operations on January 18, 1999, when the methanol plant and certain related facilities owned by Millennium Petrochemicals were contributed to the partnership and Linde purchased its partnership interest from Millennium Petrochemicals. La Porte Methanol Company's methanol plant had an annual production capacity of 207 million gallons as of December 31, 1998, and the same amount as of the date of this Annual Report on Form 10-K. The plant employs a process supplied by a major engineering and construction firm to produce methanol. Methanol is used primarily as a feedstock to produce acetic acid, MTBE and formaldehyde. Millennium Petrochemicals uses approximately 80 million gallons of La Porte Methanol Company's annual methanol production for the manufacture of acetic acid at Millennium Petrochemicals' La Porte, Texas, acetic acid plant. The methanol produced by La Porte Methanol Company which is not consumed by Millennium Petrochemicals currently is marketed by Millennium Petrochemicals on behalf of Millennium Petrochemicals and Linde. Methanol is sold under contract as well as on a spot basis to large domestic customers. These contracts range in term from one to four years. The product is shipped by barge. The principal raw materials for the production of methanol are carbon monoxide and hydrogen, collectively termed synthesis gas or syngas. These raw materials are largely supplied to La Porte Methanol Company from the syngas plant at La Porte, Texas, owned by Millennium Petrochemicals and leased to Linde pursuant to a long-term lease that commenced January 18, 1999. La Porte Methanol Company also purchases relatively small volumes of hydrogen from time to time from other parties. As a result primarily of the conversion of the syngas plant from a residuum (heavy oil) feedstock to natural gas feedstock in late 1996, the capacity of the methanol plant at La Porte increased from 140 million gallons to 207 million gallons per year and methanol production costs were reduced substantially. La Porte Methanol Company's principal competitors in the methanol business are Methanex Company, Saudi Basic Industries Corporation, Lyondell Methanol Company, L.P., Borden, Inc. and Caribbean Petrochemical Marketing Company Limited. The methanol produced by Lyondell Methanol Company, L.P. is marketed by Equistar. EQUITY INTEREST IN SUBURBAN PROPANE An indirect subsidiary of the Company serves as general partner of Suburban Propane, a Delaware limited partnership whose common units trade on the New York Stock Exchange under the symbol 'SPH.' In March 1996, in connection with its initial public offering, Suburban Propane acquired, through an operating partnership, the propane business and assets of Millennium Petrochemicals' former Suburban Propane division. Suburban Propane is the third-largest retail marketer of propane in the U.S., serving more than 700,000 active residential, commercial, industrial and agricultural customers from more than 340 customer service centers in more than 40 states. Suburban Propane's operations are concentrated in the east and west coast regions of the U.S. The retail propane sales volume of Suburban Propane was approximately 530 million gallons during its fiscal year ended September 26, 1998. Based on industry statistics, Suburban Propane believes that its retail propane sales volume constitutes approximately 6% of the U.S. retail market for propane. For its fiscal year ended September 26, 1998, Suburban Propane reported total revenues of approximately $667 million and net income of approximately $38 million. At September 26, 1998, Suburban Propane reported total assets of approximately $730 million. For the three months ended December 26, 1998, Suburban Propane reported total revenues of approximately $161 million and net income of approximately $16 million. The Company has a 2% general partnership interest and a 24.4% subordinated limited partnership interest, each on a combined basis, in Suburban Propane and the operating partnership. Under the 21 partnership agreement governing Suburban Propane, Suburban Propane is managed by, or under the direction of, a seven-member Board of Supervisors. Two of the supervisors are appointed by the general partner; the holders of the limited partnership interests and subordinated limited partnership interests, voting as a class, elect three of the supervisors; and these five supervisors elect two executive officers of Suburban Propane as the remaining two supervisors. The Company agreed, subject to certain limitations, to contribute up to $43.6 million, on a revolving basis, to Suburban Propane to enhance its ability to make quarterly cash distributions to its limited partners through the quarter ending March 31, 2001. To date, the Company has contributed $22 million of the aforementioned $43.6 million to support distribution payments to the limited partners of Suburban Propane. Suburban Propane paid a distribution of $0.50 per common unit for the quarter ended June 29, 1996, and for each quarter thereafter, but, commencing with the quarter ended December 28, 1996, has not paid a distribution with respect to the subordinated limited partnership units held by the Company. On November 27, 1998, the Company signed definitive agreements to sell its general partnership interests in Suburban Propane and its operating partnership to Suburban Energy Services Group LLC, an entity formed by Suburban Propane's management. In addition, as part of a recapitalization of Suburban Propane, Suburban Propane agreed to redeem the Company's limited partnership interests in Suburban Propane and its operating partnership. Total cash proceeds to the Company will be $75 million. Upon the closing of such transactions, which is expected in the second quarter of 1999, the Company will be relieved of its obligations to make contributions to Suburban Propane, as discussed in the preceding paragraph. The Company accounts for its interest in Suburban Propane as a discontinued operation. EMPLOYEES At December 31, 1998, excluding employees of Equistar, Suburban Propane and La Porte Methanol Company, the Company had approximately 5,300 full and part-time employees and contractors, including approximately 1,200 employees of Tibras, which was acquired by the Company on July 1, 1998. Approximately 4,350 of the Company's employees and contractors were engaged in manufacturing; 600 were engaged in sales, distribution and technology; 285 were engaged in administrative, executive and support functions at the Company's operating subsidiaries; and, 65 were engaged at the corporate level. Approximately 28% of the Company's employees are represented by various labor unions. Of the Company's nine collective bargaining agreements or other required labor negotiations, four must be renegotiated on an annual basis, four must be renegotiated in 2000 and one must be renegotiated in 2001. The annual renegotiations are all outside the U.S. The Company believes that the relations of its operating subsidiaries with employees and unions are generally good. ENVIRONMENTAL MATTERS The Company's businesses are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances concerning, among other things, emissions to the air, discharges and releases to land and water, the generation, handling, storage, transportation, treatment and disposal of wastes and other materials and the remediation of environmental pollution caused by releases of wastes and other materials ('Environmental Laws'). The operation of any chemical manufacturing plant and the distribution of chemical products entail risks under Environmental Laws, many of which provide for substantial fines and criminal sanctions for violations. There can be no assurance that material costs or liabilities will not be incurred with respect to such operations and activities. In particular, the production of TiO2, TiCl4, methanol and certain other chemicals involves the handling, manufacture or use of substances or compounds that may be considered to be toxic or hazardous within the meaning of certain Environmental Laws, and certain operations have the potential to cause environmental or other damage. Potentially significant expenditures could be required in connection with the repair or upgrade of facilities in order to meet existing or new requirements under Environmental Laws as well as in connection with the investigation and remediation of threatened or actual pollution. The Company's costs and operating expenses relating to environmental matters were approximately $29 million, $57 million and $62 million in 1998, 1997 and 1996, respectively. These amounts cover, among other things, the Company's cost of complying with environmental regulations and permit conditions, as well as managing and minimizing its waste. Capital expenditures for environmental 22 compliance and remediation were approximately $8 million, $13 million and $22 million in 1998, 1997 and 1996, respectively. In addition, capital expenditures for projects in the normal course of operations and major expansions include costs associated with the environmental impact of those projects which are inseparable from the overall project cost. Capital expenditures and costs and operating expenses relating to environmental matters for years after 1998 will be subject to evolving regulatory requirements and will depend, to some extent, on the amount of time required to obtain necessary permits and approvals. From time to time, various agencies may serve cease and desist orders or notices of violation on an operating unit or deny its applications for certain licenses or permits, in each case alleging that the practices of the operating unit are not consistent with the regulations or ordinances. In some cases, the relevant operating unit may seek to meet with the agency to determine mutually acceptable methods of modifying or eliminating the practice in question. The Company believes that its operating units should be able to achieve compliance with the applicable regulations and ordinances in a manner which should not have a material adverse effect on its business or results of operations. A citation previously issued by the U.S. Occupational Safety and Health Administration ('OSHA') against Millennium Petrochemicals with proposed penalties of approximately $154,000 for alleged violation of OSHA regulations in connection with a fire at the La Porte, Texas, complex in which two workers were injured, was settled in October 1997 for $50,000. OSHA agreed that the injuries were not related to the alleged violations. In April 1997, the Illinois Attorney General's Office filed a complaint seeking monetary sanctions for releases into the environment at Millennium Petrochemicals' Morris, Illinois, plant (which was contributed to Equistar on December 1, 1997) in alleged violation of state regulations, and a civil penalty in excess of $100,000 could result. Equistar has agreed to indemnify Millennium Petrochemicals for such third party claims, subject to an aggregate limitation of $7 million on the indemnification of certain third party claims, as specified in the Asset Contribution Agreement between Equistar and Millennium Petrochemicals. Certain Company subsidiaries have been named as defendants, potentially responsible parties ('PRPs'), or both, in a number of environmental proceedings associated with waste disposal sites and facilities currently or previously owned, operated or used by the Company's subsidiaries or their predecessors, some of which disposal sites or facilities are on the Superfund National Priorities List of the U.S. Environmental Protection Agency ('EPA') or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage, or both. Certain of these proceedings involve claims for substantial amounts, individually ranging in estimates from less than $300,000 to $45 million. The Company believes that the range of potential liability for environmental and other legal contingencies, collectively, which primarily relate to environmental remediation activities and other environmental proceedings, is between $150 million and $176 million and has accrued $176 million as of December 31, 1998. One potentially significant matter in which a Company subsidiary is a PRP concerns alleged PCB contamination of a section of the Kalamazoo River from Kalamazoo, Michigan, to Lake Michigan for which a remedial investigation/feasibility study is currently being undertaken. Potential remediation costs related to this matter that are reasonably probable have been included in the collective range of potential liability referred to above, as well as in the accrual for environmental matters on the Company's balance sheet. The accrual also reflects the fact that certain Company subsidiaries have contractual obligations to indemnify the purchasers of certain discontinued operations against certain environmental liabilities and that the Company agreed as part of the Demerger transactions to indemnify Hanson and certain of its subsidiaries against certain of such contractual indemnification obligations. No assurance can be given that actual costs will not exceed accrued amounts for the sites and indemnification obligations for which estimates have been made and no assurance can be given that costs will not be incurred with respect to sites and indemnification obligations which are unknown or as to which no estimate presently can be made. Several Company subsidiaries have asserted claims and/or instituted litigation against their insurance carriers alleging that all or a portion of the past and future costs of investigating, monitoring and conducting response actions at previously or currently owned and/or operated properties and off-site landfills are the subject of coverage under various insurance policies. During 1995, a Company subsidiary entered into settlement agreements in one such case with a number of insurance carriers relating to coverage for environmental contamination at present and former plant and landfill sites in 23 the aggregate amount of approximately $60 million, of which approximately $58 million has been received, with the balance of such payments being made over time. During 1998, other Company subsidiaries entered into settlement agreements with a number of insurance carriers relating to coverage for environmental contamination at other present and former plants and landfill sites in the aggregate amount of approximately $25 million, approximately $24 million of which has been received. In addition, several Company subsidiaries have asserted claims and/or instituted litigation against various entities alleging that they are responsible for all or a portion of such costs. Management is unable to predict the outcome of such claims and litigation. Accordingly, for purposes of financial reporting and establishing provisions, the Company has not assumed any such recoveries, except where payment has been received or the amount of liability or contribution by such other parties has been agreed. The Company cannot predict whether future developments in laws and regulations concerning environmental protection will affect its earnings or cash flow in a materially adverse manner or whether its operating units will be successful in meeting future demands of regulatory agencies in a manner which will not materially adversely affect the Company's combined financial condition, results of operations or liquidity. PATENTS, TRADEMARKS AND LICENSES The Company's subsidiaries have numerous U.S. and foreign patents, registered trademarks and trade names, together with applications and licenses therefor. Millennium Petrochemicals has entered into a number of licensing arrangements with respect to the manufacture of VAM. Millennium Petrochemicals is also licensed by others in the application of certain processes and equipment designs. Millennium Petrochemicals holds a license from British Petroleum for its process for producing acetic acid. Generally, upon expiration of the licenses, the licensee continues to be entitled to use the technology without payment of a royalty. Millennium Inorganic Chemicals generally does not license its proprietary processes to third parties or hold licenses from others. While the patents, licenses, proprietary technologies and trademarks of the Company's subsidiaries provide certain competitive advantages and are considered important, particularly with regard to processing technologies such as Millennium Inorganic Chemicals' proprietary chloride-production process, Millennium Petrochemicals' proprietary low-water acetic acid process and Millennium Specialty Chemicals' proprietary terpene chemistry process, the Company does not consider its business, as a whole, to be materially dependent upon any one particular patent, license, proprietary technology or trademark. EXECUTIVE OFFICERS The following individuals serve as executive officers of the Company:
NAME POSITION - ------------------------------------ ------------------------------------------------------- William M. Landuyt.................. Chairman of the Board, President and Chief Executive Officer Robert E. Lee....................... President and Chief Executive Officer of Millennium Inorganic Chemicals George W. Robbins................... President and Chief Executive Officer of Millennium Specialty Chemicals Peter P. Hanik...................... President and Chief Executive Officer of Millennium Petrochemicals George H. Hempstead, III............ Senior Vice President -- Law and Administration and Secretary John E. Lushefski................... Senior Vice President and Chief Financial Officer C. William Carmean.................. Vice President -- Legal Marie S. Dreher..................... Vice President and Corporate Controller A. Mickey Foster.................... Vice President -- Investor Relations Richard A. Lamond................... Vice President -- Human Resources Francis V. Lloyd.................... Vice President -- Tax James A. Lofredo.................... Vice President -- Corporate Development Christine F. Wubbolding............. Vice President and Treasurer
24 Mr. Landuyt, 43, has served as Chairman of the Board and Chief Executive Officer of the Company since the Demerger. He has served as the President of the Company since June 1997. Mr. Landuyt was Director, President and Chief Executive Officer of Hanson Industries (which managed the U.S. operations of Hanson until the Demerger) from June 1995 until the Demerger, a Director of Hanson from 1992 until September 29, 1996, Finance Director of Hanson from 1992 to May 1995, and Vice President and Chief Financial Officer of Hanson Industries from 1988 to 1992. He joined Hanson Industries in 1983. He is a member and a Co-Chairman of the Partnership Governance Committee of Equistar. He is also a director of Bethlehem Steel Corporation and the Chemical Manufacturers Association. Mr. Lee, 42, has served as President and Chief Executive Officer of Millennium Inorganic Chemicals since June 1997. From the Demerger to June 1997, he served as the President and Chief Operating Officer of the Company. He has been a Director of the Company since the Demerger. Mr. Lee was a Director and the Senior Vice President and Chief Operating Officer of Hanson Industries from June 1995 until the Demerger, an Associate Director of Hanson from 1992 until the Demerger, Vice President and Chief Financial Officer of Hanson Industries from 1992 to June 1995, Vice President and Treasurer of Hanson Industries from 1990 to 1992, and Treasurer of Hanson Industries from 1987 to 1990. He joined Hanson Industries in 1982. Mr. Robbins, 58, has served as President and Chief Executive Officer of Millennium Specialty Chemicals since 1986. He was an Associate Director of Hanson from May 1995 until the Demerger and a Director of Hanson Industries from June 1995 until the Demerger. Mr. Robbins joined SCM Corporation in 1982 as Vice President and General Manager of the SCM Organic Chemicals Division. He has been associated with the plastic and chemical industries for almost 30 years. He is a member of the Partnership Governance Committee of Equistar. Mr. Hanik, 52, has served as President and Chief Executive Officer of Millennium Petrochemicals since March 1998. Prior to that time, he was Vice President, Chemicals and Supply Chain, where he was responsible for the Company's acetyls business. Mr. Hanik joined Millennium Petrochemicals in 1974 and has been associated with the plastic and chemical industries for 30 years. Mr. Hempstead, 55, has served as Senior Vice President -- Law and Administration and Secretary of the Company since the Demerger. He was Senior Vice President -- Law and Administration of Hanson Industries from June 1995 until the Demerger, an Associate Director of Hanson from 1990 until the Demerger, and a Director of Hanson Industries from 1986 until the Demerger. Mr. Hempstead was Senior Vice President and General Counsel of Hanson Industries from 1993 to June 1995 and Vice President and General Counsel of Hanson Industries from 1982 to 1993. He initially joined Hanson Industries in 1976. Mr. Hempstead is a member of the Board of Supervisors of Suburban Propane. Mr. Lushefski, 43, has served as Senior Vice President and Chief Financial Officer of the Company since the Demerger. He was a Director and the Senior Vice President and Chief Financial Officer of Hanson Industries from June 1995 until the Demerger. He was Vice President and Chief Financial Officer of Peabody Holding Company, a Hanson subsidiary which held Hanson's coal mining operations, from 1991 to May 1995 and Vice President and Controller of Hanson Industries from 1990 to 1991. Mr. Lushefski initially joined Hanson Industries in 1985. Mr. Lushefski is a member of the Equistar Partnership Governance Committee and the Board of Supervisors of Suburban Propane. Mr. Carmean, 46, has served as Vice President -- Legal of the Company since December 1997. He was Associate General Counsel of the Company from the Demerger to December 1997, Associate General Counsel of Hanson Industries from 1993 to the Demerger, and Corporate Counsel of Quantum Chemical Company from 1990 until its acquisition by Hanson in 1993. Prior to 1990, he was Associate General Counsel of Squibb Corporation. Ms. Dreher, 40, has served as Corporate Controller of the Company since the Demerger and was elected a Vice President in October 1996. She was Director of Planning and Budgeting of Hanson Industries from November 1995 until the Demerger. She joined Hanson Industries in January 1994 as Assistant Corporate Controller with principal responsibilities focused on tax, environmental and financial compliance matters. She is a certified public accountant. Prior to joining Hanson Industries, she was a Senior Manager at Ernst & Young LLP. 25 Mr. Foster, 43, has served as Vice President -- Investor Relations of the Company since the Demerger. He was Vice President -- Investor Relations of Hanson Industries from August 1992 until the Demerger. Mr. Foster held investor relation positions with Atlantic Richfield and Pacific Enterprises from 1983 to 1992. He is a past Chairman of the National Investor Relations Institute. Mr. Lamond, 52, has served as Vice President -- Human Resources of the Company since November 1997. He served as Vice President -- Human Resources for Millennium Inorganic Chemicals from March 1997 to November 1997 and as Vice President -- Human Resources for Grove Worldwide, a subsidiary of Hanson, from September 1994 to March 1997. He served as the Director -- Organization Development and Compensation and Benefits of Millennium Inorganic Chemicals for the balance of the past five years. Mr. Lloyd, 59, has served as Vice President -- Tax of the Company since the Demerger. He was Vice President -- Tax of Hanson Industries from 1993 until the Demerger. Mr. Lloyd joined Hanson Industries in 1987 and was Senior Director of Tax of Hanson Industries from 1987 to 1993. Prior thereto, he was Vice President and Director of Tax of Kidde, Inc., which was acquired by Hanson in 1987. Mr. Lofredo, 43, has served as the Company's Director of Corporate Development since the Demerger and was elected a Vice President in October 1996. He was Director of Corporate Development of Hanson Industries from March 1993 until the Demerger, with his principal responsibilities focused on acquisitions and divestitures. He joined Hanson Industries in June 1992 as Assistant Corporate Controller. Ms. Wubbolding, 46, has served as Vice President and Treasurer of the Company since the Demerger. She served as Vice President of Hanson Industries from January 1996 until the Demerger and as Treasurer of Hanson Industries from June 1994 until the Demerger. She joined Hanson Industries in 1976 and held various financial positions, primarily in the treasury area, prior to 1994. ITEM 2. PROPERTIES Set forth below is a list of the Company's principal manufacturing facilities (other than those of Equistar, Suburban Propane and La Porte Methanol Company), all of which are owned. In addition, the Company owns a mineral sands mine in Mataraca, Paraiba, Brazil, that supplies Millennium Inorganic Chemicals' TiO2 plant in Brazil with titanium ore, and Millennium Petrochemicals owns a syngas plant in La Porte, Texas, which it leases to Linde pursuant to a long-term lease. The Company's operating subsidiaries also lease warehouses and offices, none of which are material to the Company's business or operations.
LOCATION PRODUCTS - -------------------------------------------------------- -------------------------------------------------------- Millennium Inorganic Chemicals Ashtabula, Ohio.................................... TiO2 and TiCl4 Baltimore, Maryland (Hawkins Point)................ TiO2 Kemerton, Western Australia........................ TiO2 Le Havre, Normandy, France......................... TiO2 Stallingborough, U.K. ............................. TiO2 Thann, Alsace, France.............................. TiO2, TiCl4, specialty TiO2 and zirconium-based compounds Salvador, Bahia, Brazil............................ TiO2 Millennium Petrochemicals La Porte, Texas.................................... VAM and acetic acid Millennium Specialty Chemicals Baltimore, Maryland (St. Helena)................... Cadmium-based pigments and silica gel Brunswick, Georgia................................. Fragrance and flavor chemicals Jacksonville, Florida.............................. Fragrance and flavor chemicals
Millennium Inorganic Chemicals has two manufacturing plants located in Baltimore, Maryland (Hawkins Point), one of which uses the chloride process for manufacturing TiO2 and the other of which uses the sulfate process, and two manufacturing plants at Ashtabula, Ohio, both of which use the 26 chloride process. The Company believes that its properties are well maintained and are in good operating condition. ITEM 3. LEGAL PROCEEDINGS The Company and various Company subsidiaries are defendants in a number of pending legal proceedings incidental to present and former operations. These include several proceedings alleging injurious exposure of the plaintiffs to various chemicals and other materials manufactured by the Company's current and former subsidiaries. Typically, such proceedings involve large claims made by many plaintiffs against many defendants in the chemical industry. The Company does not expect that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the Company's consolidated financial position or results of operations. Together with other alleged past manufacturers of lead pigments for use in paint and lead-based paint, a former subsidiary of a discontinued operation has been named as a defendant or third party defendant in various legal proceedings alleging that it and other manufacturers are responsible for personal injury and property damage allegedly associated with the use of lead pigments in paint. These proceedings consist of four cases in the State of New York, one of which has been brought by the New York City Housing Authority, and a class action personal injury case filed on behalf of all purportedly lead-poisoned children in Ohio. There can be no assurance that additional litigation will not be filed. The legal proceedings seek recovery under a variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud and misrepresentation. The plaintiffs in these actions generally seek to impose on the defendants responsibility for alleged damages and health concerns associated with the use of lead-based paints. These cases are in various pre-trial stages. The trial court in the Brenner case cited below recently ruled that a market share theory of recovery was applicable to this type of lead case. The Company and its co-defendants are appealing this decision, which is the first time any court has made such a determination. The Company is vigorously defending such litigation. Although liability, if any, that may result is not reasonably capable of estimation, the Company currently believes that the disposition of such claims in the aggregate should not have a material adverse effect on the Company's combined financial position, results of operations or liquidity. The pending legal proceedings referred to above are as follows: Brenner et al. v. American Cyanamid Company, et al., and Tyrell et al. v. American Cyanamid et al., both commenced in the Supreme Court of the State of New York on November 9, 1993; The City of New York et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of the State of New York on June 8, 1989; Kayla Sabater et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of New York, Bronx County, on November 25, 1998; and, Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio on August 12, 1992. In addition, various laws and administrative regulations have, from time to time, been enacted or proposed at the federal, state and local levels and may be proposed in the future that seek to (i) impose various obligations on present and former manufacturers of lead pigment and lead paint with respect to asserted health concerns associated with the use of such products, and (ii) effectively overturn court decisions in which the Company's former subsidiary and other defendants have been successful. No legislation or regulations have been adopted to date which are expected to have a material adverse effect on the Company's consolidated financial position or results of operations. For information concerning the Company's environmental proceedings, see 'Environmental Matters' in Item 1 of this Annual Report on Form 10-K, which is incorporated by reference herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The data regarding the Company's Common Stock and Shareholders contained under the caption 'Market for Registrant's Common Stock and Related Shareholder Matters' on page 43 of the Annual Report to Shareholders are incorporated into this Annual Report on Form 10-K by reference. The Company paid a dividend of $.12 per share of Common Stock, plus U.K. Advance Corporation Tax of $.03 per share, in each quarter of 1997 and 1998. ITEM 6. SELECTED FINANCIAL DATA The selected financial data of the Company contained on page 18 of the Annual Report to Shareholders are incorporated into this Annual Report on Form 10-K by reference. Such selected financial data were derived from the audited Consolidated Financial Statements of the Company, and should be read in conjunction with such financial statements, including the Notes thereto, and 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' which are incorporated by reference into this Annual Report on Form 10-K from the Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's 'Management's Discussion and Analysis of Financial Condition and Results of Operations' contained on pages 20 through 28 of the Annual Report to Shareholders is incorporated into this Annual Report on Form 10-K by reference. Such information should be read in conjunction with the Company's Consolidated Financial Statements, including the Notes thereto. In connection with the forward-looking statements which appear in 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' the 'Cautionary Statements' which appear immediately after the Table of Contents in this Annual Report on Form 10-K should be reviewed carefully. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The discussions under the captions 'Historical Cyclicality of the Company's Operations' and 'Foreign Currency Matters' in the Company's 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the discussion under the caption 'Off Balance Sheet Risk' in Note 8 to the Company's Consolidated Financial Statements, each of which is included in the Annual Report to Shareholders, are incorporated into this Annual Report on Form 10-K by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company, including the Notes thereto, and the report of PricewaterhouseCoopers LLP thereon, contained on pages 29 through 43 of the Annual Report to Shareholders are incorporated into this Annual Report on Form 10-K by reference. In addition, the Supplemental Financial Information and Financial Statement Schedule listed in Item 14(a)(1)(ii) and (2) of this Annual Report on Form 10-K, including the Report of PricewaterhouseCoopers LLP thereon and the Report of Ernst & Young LLP, are incorporated herein by reference. 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included under the caption 'Executive Officers' in Item 1 of this Annual Report on Form 10-K is incorporated herein by reference. The information to be included under the captions 'Election of Directors' and 'Other Matters -- Section 16(a) Beneficial Ownership Reporting Compliance' in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the Exchange Act in connection with the Annual Meeting of the Company's Shareholders to be held on May 14, 1999 (the 'Proxy Statement'), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information to be included under the captions 'Corporate Governance -- Directors' Remuneration and Attendance at Meetings' and 'Executive Compensation' in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information to be included under the caption 'Ownership of Common Stock' in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1. (i) The Consolidated Financial Statements of the Company, including the Notes thereto, and the Report of PricewaterhouseCoopers LLP thereon, contained on pages 29 through 43 of the Company's Annual Report to Shareholders, consist of the following:
PAGE OF THE COMPANY'S ANNUAL REPORT --------------- -- Report of PricewaterhouseCoopers LLP....................................... 29 -- Consolidated Balance Sheets -- December 31, 1998 and 1997.................. 30 -- Consolidated Statements of Operations -- Years Ended December 31, 1998, 1997 and 1996.............................................................. 31 -- Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996.............................................................. 32 -- Consolidated Statements of Changes in Shareholders' Equity -- Years Ended December 31, 1998, 1997 and 1996........................................... 33 -- Notes to Consolidated Financial Statements................................. 34-43
With the exception of the information listed directly above and the information specifically incorporated by reference into Items 1, 5, 6, 7, 7A and 8 of this Annual Report on Form 10-K, the Annual Report to Shareholders is not to be deemed filed as a part of this Annual Report on Form 10-K. 29 1. (ii) Supplemental Financial Information. The Supplemental Financial Information relating to the Company, Millennium America Inc. ('Millennium America') and Equistar consist of the following:
PAGE OF THIS REPORT ------------ Report of PricewaterhouseCoopers LLP......................................... F-1 Report of Ernst & Young LLP (Cornerstone-Spectrum, Inc.)..................... F-2 Consolidated Financial Statements of Millennium America: Millennium America Consolidated Balance Sheets -- December 31, 1998 and 1997.................................................................. F-3 Millennium America Consolidated Statements of Operations -- Years Ended December 31, 1998, 1997 and 1996...................................... F-4 Financial Statements of Equistar: Report of PricewaterhouseCoopers LLP.................................... F-5 Balance Sheets -- December 31, 1998 and 1997............................ F-6 Statements of Income -- Year ended December 31, 1998 and the Period from December 1, 1997 to December 31, 1997................................. F-7 Statements of Partners' Capital -- Year ended December 31, 1998 and the period from December 1, 1997 to December 31, 1997..................... F-8 Statements of Cash Flows -- Year ended December 1, 1998 and the period from December 31, 1997 to December 31, 1997........................... F-9 Notes to Financial Statements........................................... F-10 to F-24
2. Financial Statement Schedule. Financial Statement Schedule II -- Valuation and Qualifying Accounts, located on page S-1 of this Annual Report on Form 10-K, should be read in conjunction with the Financial Statements included in Item 8 of this Annual Report on Form 10-K. Schedules, other than Schedule II, are omitted because of the absence of the conditions under which they are required or because the information called for is included in the Consolidated Financial Statements of the Company or the Notes thereto. 3. Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------- 3.1 -- Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's Registration Statement on Form 10 (File No. 1-12091) (the 'Form 10'))* 3.2 -- By-laws of the Company (Filed as Exhibit 3.2 to the Form 10)* 4.1(a) -- Form of Indenture, dated as of November 27, 1996, among Millennium America Inc. (formerly Hanson America, Inc.) ('Millennium America'), the Company and The Bank of New York, as Trustee, in respect of the 7% Senior Notes due November 15, 2006 and the 7.625% Senior Debentures due November 15, 2026 (Filed as Exhibit 4.1 to the Registration Statement of the Company and Millennium America on Form S-1 (Registration No. 333-15975) (the 'Form S-1'))* 4.1(b) -- First Supplemental Indenture dated as of November 21, 1997 among Millennium America, the Company and The Bank of New York, as Trustee (Filed as Exhibit 4.1(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the '1997 Form 10-K'))* 10.1 -- Form of Pre-Demerger Stock Purchase Agreement, dated as of September 16, 1996, between Millennium Holdings Inc. (formerly HM Holdings, Inc.) ('Millennium Holdings') and Hanson (including related form of Indemnification Agreement and Tax Sharing and Indemnification Agreement) (Filed as Exhibit 10.1 to the Form 10)*
30
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------- 10.2 -- Form of Pre-Demerger Stock Purchase Agreement, dated as of September 16, 1996, between Millennium Holdings and Hanson relating to Peabody Holding Company, Inc. (including related form of Indemnification Agreement and Tax Sharing and Indemnification Agreement) (Filed as Exhibit 10.2 to the Form 10)* 10.3 -- Form of Pre-Demerger Stock Purchase Agreement, dated as of September 16, 1996, between Millennium Holdings and Hanson relating to certain Canadian subsidiaries (including related form of Indemnification Agreement) (Filed as Exhibit 10.3 to the Form 10)* 10.4 -- Form of Pre-Demerger Stock Purchase Agreement, dated as of September 30, 1996, between Millennium Holdings and Hanson relating to Lynton Group, Inc. (Filed as Exhibit 10.4 to the Form 10)* 10.5 -- Form of Post-Demerger Stock Purchase Agreement, dated as of September 30, 1996, between HMB Holdings Inc. and Hanson (including related form of Indemnification Agreement and Tax Sharing and Indemnification Agreement) (Filed as Exhibit 10.5 to the Form 10)* 10.6 -- Form of Post-Demerger Stock Purchase Agreement, dated as of September 30, 1996, between Hanson and MHC Inc. (including related form of Indemnification Agreement and Tax Sharing and Indemnification Agreement) (Filed as Exhibit 10.6 to the Form 10)* 10.7 -- Demerger Agreement, dated as of September 30, 1996, between Hanson, Millennium Overseas Holdings Ltd. (formerly Hanson Overseas Holdings Ltd.) and the Company (Filed as Exhibit 10.7 to the Form 10)* 10.8 -- Form of Indemnification Agreement, dated as of September 30, 1996, between Hanson and the Company (Filed as Exhibit 10.8 to the Form 10)* 10.9(a) -- Form of Tax Sharing and Indemnification Agreement, dated as of September 30, 1996, between Hanson, Millennium Overseas Holdings Ltd., Millennium America Holdings Inc. (formerly HM Anglo American Ltd.), Hanson North America Inc. and the Company (Filed as Exhibit 10.9(a) to the Form 10)* 10.9(b) -- Deed of Tax Covenant, dated as of September 30, 1996, between Hanson, Millennium Overseas Holdings Ltd., Millennium Inorganic Chemicals Limited (formerly SCM Chemicals Limited), SCMC Holdings B.V. (formerly Hanson SCMC B.V.), Millennium Inorganic Chemicals Ltd. (formerly SCM Chemicals Ltd.), and the Company (the 'Deed of Tax Covenant') (Filed as Exhibit 10.9(b) to the Form 10)* 10.9(c) -- Amendment to the Deed of Tax Covenant dated January 28, 1997 (Filed as Exhibit 10.9(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the '1996 Form 10-K'))* 10.10 -- Form of Corporate Transition Agreement, dated as of September 30,1996, between Hanson North America Inc. and Millennium America Holdings Inc. (Filed as Exhibit 10.10 to the Form 10)* 10.11 -- Form of Joint Ownership Agreement, dated as of September 30, 1996, between Hanson North America Inc. and Millennium America Holdings Inc. (Filed as Exhibit 10.11 to the Form 10)* 10.12 -- Form of Agreement, dated as of October 1, 1996, between Hanson Pacific Limited and Millennium Holdings Inc. (Filed as Exhibit 10.12 to the Form 10)* 10.13 -- Form of Management Agreement, dated as of September 30, 1996, among MHC Inc., Millennium Petrochemicals Inc. (formerly Quantum Chemical Corporation) ('Millennium Petrochemicals'), and Welbeck Management Limited (Filed as Exhibit 10.13(a) to the Form 10)* 10.14(a) -- Credit Agreement ('Credit Agreement'), dated as of July 26, 1996, among Millennium America, the Company, as Guarantor, the borrowing subsidiaries party thereto, the lenders party thereto, The Chase Manhattan Bank, as Documentation Agent, and Bank of America National Trust and Savings Association, as Administration Agent (Filed as Exhibit 10.14 to the Form 10)* 10.14(b) -- Amendment to the Credit Agreement dated as of December 18, 1996 (Filed as Exhibit 10.14(b) to the 1996 Form 10-K)* 10.14(c) -- Second Amendment to the Credit Agreement dated as of October 20, 1997 (Filed as Exhibit 10.14(b) to the 1996 Form 10-K)*
31
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------- 10.15 -- Form of Agreement, dated as of July 24, 1998, between Millennium America Holdings Inc. and William M. Landuyt; Robert E. Lee; George H. Hempstead, III; Richard A. Lamond; and, John E. Lushefski (Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (the 'September 30, 1998 Form 10-Q'))*'D' 10.16 -- Form of Agreement, dated as of July 24, 1998, between Millennium Specialty Chemicals Inc. and George W. Robbins. This form of agreement is identical to the agreements between the Company's operating subsidiaries and certain officers of such subsidiaries who are not executive officers of the Company. (Filed as Exhibit 10.2 to the September 30, 1998 Form 10-Q)*'D' 10.17 -- Form of Agreement, dated as of July 24, 1998, between Millennium Petrochemicals Inc. and each of Peter P. Hanik and Charles F. Daly**'D' 10.18 -- Form of Change-in-Control Agreement, dated as of July 24, 1998, between Millennium America Holdings Inc. and each of C. William Carmean, Marie S. Dreher, A. Mickey Foster, Francis V. Lloyd, James A. Lofredo and Christine F. Wubbolding (Filed as Exhibit 10.22 to the Form 10-Q)*'D' 10.19 -- Form of Change-in-Control Agreement between each of the Company's operating subsidiaries and certain officers of such subsidiaries who are not executive officers of the Company**'D' 10.20(a) -- Millennium Chemicals Inc. Annual Performance Incentive Plan (Filed as Exhibit 10.23 to the Form 10)*'D' 10.20(b) -- Amendment Number 1 dated January 20, 1997, to the Millennium Chemicals Inc. Annual Performance Plan. (Filed as Exhibit 10.23(b) to the 1996 Form 10-K)*'D' 10.20(c) -- Amendment Number 2 dated January 23, 1998, to the Millennium Chemical Inc. Annual Performance Incentive Plan (Filed as Exhibit 10.23(c) to the 1997 Form 10-K)*'D' 10.20(d) -- Amendment Number 3 dated January 22, 1999, to the Millennium Chemicals Inc. Annual Performance Incentive Plan**'D' 10.21(a) -- Millennium Chemicals Inc. 1996 Long Term Incentive Plan (Filed as Exhibit 10.24 to the Form 10)*'D' 10.21(b) -- Termination Amendment dated as of October 23, 1997, to the Millennium Chemicals Inc. 1996 Long Term Incentive Plan (Filed as Exhibit 10.24(b) to the 1997 Form 10-K)*'D' 10.21(c) -- Amendment dated January 23, 1998 to the Millennium Chemicals Inc. 1996 Long Term Incentive Plan (Filed as Exhibit 10.24(c) to the 1997 Form 10-K)*'D' 10.21(d) -- Amendment dated January 22, 1999 to the Millennium Chemicals Inc. 1996 Long Term Incentive Plan**'D' 10.22 -- Millennium Chemicals Inc. Executive Long-Term Incentive Plan, as amended by the Termination Amendment thereto, dated as of October 23, 1997, and as further amended by amendments thereto dated January 23, 1998 and January 22, 1999**'D' 10.23(a) -- Millennium Chemicals Inc. Long Term Stock Incentive Plan (Filed as Exhibit 10.25 to the Form 10)*'D' 10.23(b) -- Amendment Number 1 to the Millennium Chemicals Inc. Long Term Stock Incentive Plan (Filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)*'D' 10.23(c) -- Amendment dated July 24, 1997, to the Millennium Chemicals Inc. Long Term Stock Incentive Plan (Filed as Exhibit 10.25(c) to the 1997 Form 10-K)*'D' 10.23(d) -- Amendments dated January 23, 1998 and December 10, 1998 to the Millennium Chemicals Inc. Long Term Stock Incentive Plan**'D' 10.24 -- Millennium Chemicals Inc. Supplemental Executive Retirement Plan (Filed as Exhibit 10.26 to the Form 10)*'D' 10.25 -- Millennium Petrochemicals Supplemental Executive Retirement Plan (Filed as Exhibit 10.27 to the Form 10)*'D' 10.26 -- Millennium Inorganic Chemicals Supplemental Executive Retirement Plan (Filed as Exhibit 10.28 to the Form 10)*'D'
32
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------- 10.27 -- Millennium Specialty Chemicals Supplemental Executive Retirement Plan (Filed as Exhibit 10.29 to the Form 10)*'D' 10.28(a) -- Millennium Chemicals Inc. Salary and Bonus Deferral Plan (Filed as Exhibit 10.30 to the 1996 Form 10-K)*'D' 10.28(b) -- Amendment Number 1 dated January 23, 1998, to the Millennium Chemicals Inc. Salary and Bonus Deferral Plan (Filed as Exhibit 10.30(b) to the 1997 Form 10-K)*'D' 10.28(c) -- Amendment Number 2 dated January 22, 1999, to the Millennium Chemicals Inc. Salary and Bonus Deferral Plan**'D' 10.29 -- Millennium Chemicals Inc. Supplemental Savings and Investment Plan**'D' 10.30 -- Master Transaction Agreement between the Company and Lyondell (Filed as an Exhibit to the Company's Current Report on Form 8-K dated July 25, 1997)* 10.31 -- First Amendment to Master Transaction Agreement between Lyondell and the Company (Filed as an Exhibit to the Company's Current Report on Form 8-K dated October 17, 1997)* 10.32 -- Limited Partnership Agreement of Equistar (Filed as an Exhibit to the Company's Current Report on Form 8-K dated October 17, 1997)* 10.33 -- Asset Contribution Agreement among Millennium Petrochemicals, Millennium Petrochemicals LP LLC and Equistar (Filed as an Exhibit to the Company's Current Report on Form 8-K dated December 10, 1997)* 10.34 -- Asset Contribution Agreement among Lyondell, Lyondell Petrochemicals L.P. Inc. and Equistar (Filed as an Exhibit to the Company's Current Report on Form 8-K dated December 10, 1997)* 10.35 -- Parent Agreement among Lyondell, the Company and Equistar (Filed as an Exhibit to the Company's Current Report on Form 8-K dated December 10, 1997)* 10.36 -- Amended and Restated Partnership Agreement of Equistar** 10.37 -- Amended and Restated Parent Agreement among Lyondell, the Company, Occidental, Oxy CH Corporation, Occidental Chemical Corporation, and Equistar** 11.1 -- Statement re: computation of per share earnings** 13. -- Information incorporated by reference from the Annual Report to Shareholders and the Company's 1997 Annual Report to Shareholders** 21.1 -- Subsidiaries of the Company** 23.1 -- Consent of PricewaterhouseCoopers LLP** 23.2 -- Consent of PricewaterhouseCoopers LLP** 23.3 -- Consent of Ernst & Young LLP** 27.1 -- Financial Data Schedule** 99.1 -- Form of Letter Agreement, dated July 3, 1996, between Hanson and U.K. Inland Revenue (Filed as Exhibit 99.2 to the Form 10)* In addition, the Company hereby agrees to furnish to the SEC, upon request, a copy of any instrument not listed above which defines the rights of the holders of long-term debt of the Company and its subsidiaries.
----------------- * Incorporated by reference ** Filed herewith 'D' Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). (B) REPORTS ON FORM 8-K None. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. MILLENNIUM CHEMICALS INC. By: /s/ WILLIAM M. LANDUYT ................................... WILLIAM M. LANDUYT CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities indicated, and on the date set forth above.
SIGNATURE TITLE - ------------------------------------------ --------------------------------------------------------------------- /S/ WILLIAM M. LANDUYT Chairman of the Board, President, Chief Executive Officer and ......................................... Director (principal executive officer) (WILLIAM M. LANDUYT) /S/ ROBERT E. LEE President, Chief Executive Officer of Millennium Inorganic Chemicals ......................................... and Director (ROBERT E. LEE) /S/ JOHN E. LUSHEFSKI Senior Vice President and Chief Financial Officer ......................................... (principal financial officer) (JOHN E. LUSHEFSKI) /S/ KENNETH BAKER Director ......................................... (LORD BAKER) /S/ WORLEY H. CLARK, JR. Director ......................................... (WORLEY H. CLARK, JR.) /S/ MARTIN D. GINSBURG Director ......................................... (MARTIN D. GINSBURG) /S/ GLENARTHUR Director ......................................... (LORD GLENARTHUR) /S/ DAVID J. P. MEACHIN Director ......................................... (DAVID J. P. MEACHIN) /S/ MARTIN G. TAYLOR Director ......................................... (MARTIN G. TAYLOR) /S/ MARIE S. DREHER Vice President and Corporate Controller ......................................... (principal accounting officer) (MARIE S. DREHER)
34 REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL FINANCIAL INFORMATION AND THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors of MILLENNIUM CHEMICALS INC. Our audits of the consolidated financial statements referred to in our report dated January 21, 1999, appearing on page 29 of the 1998 Annual Report to Shareholders of Millennium Chemicals Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Supplemental Financial Information relating to Millennium America Inc. and the Financial Statement Schedule listed in Item 14(a) of this Annual Report on Form 10-K. In our opinion, such Supplemental Financial Information relating to Millennium America Inc. and the Financial Statement Schedule present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS LLP FLORHAM PARK, NJ JANUARY 21, 1999 F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholder of CORNERSTONE-SPECTRUM, INC. We have audited the consolidated balance sheet of Cornerstone-Spectrum, Inc. (the 'Company') as of September 28, 1996 and the related consolidated statements of operations, changes in stockholder's equity, and cash flows for the year then ended (not presented separately herein). 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 audit. We conducted our audit 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 audit provides 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 Cornerstone-Spectrum, Inc. at September 28, 1996 and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements of the Company, the Company changed its method of measuring losses for impairment of long-lived assets. ERNST & YOUNG LLP Hackensack, New Jersey November 13, 1996 F-2 MILLENNIUM AMERICA INC. CONSOLIDATED FINANCIAL STATEMENTS Millennium America Inc., a wholly owned indirect subsidiary of Millennium Chemicals Inc. (the 'Company'), is a holding company for all of the Company's operating subsidiaries other than its operations in the United Kingdom, France, Brazil and Australia. Millennium America Inc. is the issuer of the 7% Senior Notes due November 15, 2006, and the 7.625% Senior Debentures due November 15, 2026, and is a borrower under the Company's Revolving Credit Agreement. Accordingly, the Consolidated Balance Sheets and Consolidated Statements of Operations are provided for Millennium America Inc. MILLENNIUM AMERICA INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------ 1998 1997 ------ ------ (IN MILLIONS) ASSETS Current assets: Cash and cash equivalents.............................................................. $ 30 $ 23 Trade receivables, net................................................................. 136 260 Inventories............................................................................ 142 165 Other current assets................................................................... 230 104 ------ ------ Total current assets.............................................................. 538 552 Property, plant and equipment, net.......................................................... 481 473 Investment in Equistar...................................................................... 1,519 1,934 Other assets................................................................................ 167 203 Due from parent and affiliates.............................................................. 491 260 Goodwill.................................................................................... 412 468 ------ ------ Total assets...................................................................... $3,608 $3,890 ------ ------ ------ ------ LIABILITIES AND INVESTED CAPITAL Current liabilities: Notes payable.......................................................................... $ 9 $ -- Current maturities of long-term debt................................................... 2 2 Trade accounts payable................................................................. 55 43 Income taxes payable................................................................... 1 4 Accrued expenses and other liabilities................................................. 144 247 ------ ------ Total current liabilities......................................................... 211 296 Non-current liabilities: Long-term debt......................................................................... 1,013 1,293 Deferred income taxes.................................................................. 274 237 Due to parent and affiliates........................................................... 713 334 Other liabilities...................................................................... 345 783 ------ ------ Total liabilities................................................................. 2,556 2,943 ------ ------ Commitments and contingencies (Note 12 of the Company's 1998 Annual Report to Shareholders) Invested capital............................................................................ 1,052 947 ------ ------ Total liabilities and invested capital............................................ $3,608 $3,890 ------ ------ ------ ------
F-3 MILLENNIUM AMERICA INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ---- ------ ------- (IN MILLIONS) Net sales.......................................................................... $992 $2,714 $ 2,693 Operating costs and expenses: Cost of products sold......................................................... 727 1,915 2,019 Depreciation and amortization................................................. 54 184 180 Selling, development and administrative expense............................... 120 193 191 Impairment of assets and related closure costs................................ -- -- 58 ---- ------ ------- Operating income......................................................... 91 422 245 Interest expense (primarily to a related party in 1996)............................ (69) (128) (253) Interest income (primarily from a related party in 1998)........................... 24 7 28 Equity in earnings of Equistar..................................................... 40 18 -- Other expense, net................................................................. 29 19 5 ---- ------ ------- Income from continuing operations before provision for income taxes................ 115 338 25 Provision for income taxes......................................................... (12) (152) (43) ---- ------ ------- Income from continuing operations.................................................. 103 186 (18) Income (loss) from discontinued operations (net of income taxes of $1, ($2) and ($1,028))........................................................................ 1 (3) (2,734) ---- ------ ------- Net income (loss).................................................................. $104 $ 183 $(2,752) ---- ------ ------- ---- ------ -------
F-4 REPORT OF INDEPENDENT ACCOUNTANTS To the Partnership Governance Committee of EQUISTAR CHEMICALS, LP: In our opinion, the accompanying balance sheets and the related statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the 'Partnership') at December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas February 26, 1999 F-5 EQUISTAR CHEMICALS, LP BALANCE SHEETS
DECEMBER 31, ------------------ 1998 1997 ------ ------ (MILLIONS OF DOLLARS) ASSETS Current assets: Cash and cash equivalents...................................................... $ 66 $ 41 Accounts receivable: Trade, net................................................................ 376 428 Related parties........................................................... 111 36 Receivables from partners...................................................... 3 150 Inventories.................................................................... 549 513 Prepaid expenses and other current assets...................................... 25 24 ------ ------ Total current assets...................................................... 1,130 1,192 ------ ------ Property, plant and equipment....................................................... 5,847 3,690 Less accumulated depreciation and amortization...................................... (1,772) (1,572) ------ ------ 4,075 2,118 Investment in PD Glycol............................................................. 55 -- Goodwill, net....................................................................... 1,151 1,139 Deferred charges and other assets................................................... 257 151 ------ ------ Total assets.............................................................. $6,668 $4,600 ------ ------ ------ ------ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable: Trade..................................................................... $ 264 $ 154 Related parties........................................................... 15 18 Payables to partners........................................................... 9 63 Current maturities of long-term debt........................................... 150 36 Other accrued liabilities...................................................... 200 65 ------ ------ Total current liabilities................................................. 638 336 ------ ------ Obligations under capital leases.................................................... 205 -- Long-term debt...................................................................... 1,865 1,512 Other liabilities and deferred credits.............................................. 75 34 Commitments and contingencies Partners' capital: Partners' capital.............................................................. 3,885 3,063 Note receivable from Lyondell LP............................................... -- (345) ------ ------ Total partners' capital................................................... 3,885 2,718 ------ ------ Total liabilities and partners' capital................................... $6,668 $4,600 ------ ------ ------ ------
See notes to financial statements. F-6 EQUISTAR CHEMICALS, LP STATEMENTS OF INCOME
FOR THE PERIOD FROM FOR THE YEAR DECEMBER 1, 1997 ENDED (INCEPTION) TO DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- (MILLIONS OF DOLLARS) Sales and other operating revenues: Unrelated parties......................................... $ 3,818 $ 338 Related parties........................................... 545 27 ------- ------ 4,363 365 ------- ------ Operating costs and expenses: Cost of sales: Unrelated parties.................................... 3,313 261 Related parties...................................... 460 26 Selling, general and administrative expenses.............. 273 21 Unusual charges........................................... 35 42 ------- ------ 4,081 350 ------- ------ Operating income.......................................... 282 15 Interest expense............................................... (156) (10) Interest income................................................ 17 2 ------- ------ Net income..................................................... $ 143 $ 7 ------- ------ ------- ------
See notes to financial statements. F-7 EQUISTAR CHEMICALS, LP STATEMENTS OF PARTNERS' CAPITAL FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997
LYONDELL MILLENNIUM OCCIDENTAL TOTAL -------- ---------- ---------- ------ (MILLIONS OF DOLLARS) Balance at December 1, 1997 (inception)....................... $ -- $ -- $ -- $ -- Capital contributions at inception: Net assets............................................... 763 2,048 -- 2,811 Note receivable from Lyondell LP......................... 345 -- -- 345 Net income.................................................... 4 3 -- 7 Distributions to partners..................................... (57) (43) -- (100) -------- ---------- ---------- ------ Balance at December 31, 1997.................................. 1,055 2,008 -- 3,063 -------- ---------- ---------- ------ Capital contributions: Net assets............................................... -- -- 2,097 2,097 Other.................................................... (14) 9 8 3 Net income (loss)............................................. 84 64 (5) 143 Distributions to partners..................................... (512) (460) (449) (1,421) -------- ---------- ---------- ------ Balance at December 31, 1998.................................. $ 613 $1,621 $1,651 $3,885 -------- ---------- ---------- ------ -------- ---------- ---------- ------
See notes to financial statements. F-8 EQUISTAR CHEMICALS, LP STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM FOR THE YEAR DECEMBER 1, 1997 ENDED (INCEPTION) TO DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- (MILLIONS OF DOLLARS) Cash flows from operating activities: Net income................................................... $ 143 $ 7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 268 19 Loss on disposition of property, plant and equipment.... 8 -- Equity in losses of investment in PD Glycol............. 3 -- Changes in assets and liabilities, net of the effects of assets contributed: Decrease (increase) in accounts receivable......... 105 (100) Decrease (increase) in receivables from partners... 147 (101) Decrease (increase) in inventories................. 133 (5) Increase in accounts payable....................... 40 188 (Decrease) increase in payables to partners........ (63) 54 Increase in other accrued liabilities.............. 122 48 Net change in other working capital accounts....... 2 (15) Other.............................................. (62) 7 ------- ------ Net cash provided by operating activities..... 846 102 ------- ------ Cash flows from investing activities: Additions to property, plant and equipment................... (200) (12) Proceeds from disposition of property, plant and equipment... 3 -- Contributions and advances to affiliates..................... (15) -- ------- ------ Net cash used in investing activities......... (212) (12) ------- ------ Cash flows from financing activities: Borrowings of long-term debt................................. 757 50 Repayments of long-term debt................................. (290) -- Proceeds from payment of note receivable by Lyondell......... 345 -- Cash contributions from partners............................. -- 1 Distributions to partners.................................... (1,421) (100) ------- ------ Net cash used in financing activities......... (609) (49) ------- ------ Increase in cash and cash equivalents............................. 25 41 Cash and cash equivalents at beginning of period.................. 41 -- ------- ------ Cash and cash equivalents at end of period........................ $ 66 $ 41 ------- ------ ------- ------
See notes to financial statements. F-9 EQUISTAR CHEMICALS, LP NOTES TO FINANCIAL STATEMENTS 1. FORMATION OF EQUISTAR AND OPERATIONS Pursuant to a partnership agreement (the 'Partnership Agreement'), Lyondell Chemical Company ('Lyondell') and Millennium Chemicals Inc. ('Millennium') formed Equistar Chemicals, LP ('Equistar' or the 'Partnership'), a Delaware limited partnership, which commenced operations on December 1, 1997. From December 1, 1997 to May 15, 1998, the Partnership was owned 57 percent by Lyondell and 43 percent by Millennium. Lyondell owns its interest in the Partnership through two wholly-owned subsidiaries, Lyondell Petrochemical G.P. Inc. ('Lyondell GP') and Lyondell Petrochemical L.P. Inc. ('Lyondell LP'). Millennium also owns its interest in the Partnership through two wholly-owned subsidiaries, Millennium Petrochemicals GP LLC ('Millennium GP') and Millennium Petrochemicals LP LLC ('Millennium LP'). On May 15, 1998, the Partnership was expanded with the contribution of certain assets from Occidental Petroleum Corporation ('Occidental') (see Note 3). These assets include the ethylene, propylene and ethylene oxide ('EO') and EO derivatives businesses and certain pipeline assets held by Oxy Petrochemicals Inc. ('Oxy Petrochemicals'), a 50 percent interest in a joint venture between PDG Chemical Inc. ('PDG Chemical') and Du Pont de Nemours and Company ('PD Glycol'), and a lease to the Partnership of the Lake Charles, Louisiana olefins plant and related pipelines held by Occidental Chemical Corporation ('Occidental Chemical') (collectively, the 'Occidental Contributed Business'). Occidental Chemical, Oxy Petrochemicals and PDG Chemical are wholly-owned, indirect subsidiaries of Occidental. The Occidental Contributed Business included olefins plants at Corpus Christi and Chocolate Bayou, Texas, EO/ethylene glycol and EO derivatives businesses located at Bayport, Texas, Occidental's 50 percent ownership of PD Glycol, which operates a polyglycol plant at Beaumont, Texas, 1,430 miles of owned and leased ethylene/propylene pipelines, and the lease to the Partnership of the Lake Charles, Louisiana olefins plant and related pipelines. In exchange for the Occidental Contributed Business, two subsidiaries of Occidental were admitted as limited partners and a third subsidiary was admitted as a general partner in the Partnership for an aggregate partnership interest of 29.5 percent. In addition, the Partnership assumed approximately $205 million of Occidental indebtedness and the Partnership issued a promissory note to an Occidental subsidiary in the amount of $419.7 million, which was subsequently paid in cash in June 1998. In connection with the contribution of the Occidental Contributed Business and the reduction of Millennium's and Lyondell's ownership interests in the Partnership, the Partnership also issued a promissory note to Millennium LP in the amount of $75 million, which was subsequently paid in June 1998. These payments are included in distributions to partners in the accompanying statements of partners' capital and of cash flows. The consideration paid for the Occidental Contributed Business was determined based upon arms-length negotiations between Lyondell, Millennium, and Occidental. In connection with the transaction, the Partnership and Occidental also entered into a long-term agreement for the Partnership to supply the ethylene requirements for Occidental Chemical's U.S. manufacturing plants. After completion of this transaction, the Partnership is owned 41 percent by Lyondell, 29.5 percent by Millennium and 29.5 percent by Occidental, through its wholly-owned subsidiaries Occidental Petrochem Partner GP Inc. ('Occidental GP'), Occidental Petrochem Partner 1, Inc. ('Occidental LP1') and Occidental Petrochem Partner 2, Inc. ('Occidental LP2'). The Partnership owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium, and Occidental (the 'Contributed Businesses') which consist of 20 manufacturing facilities on the U.S. Gulf Coast and in the U.S. Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ('MTBE'). The petrochemicals segment also includes the production and sale of aromatics including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene ('HDPE'), low-density polyethylene ('LDPE'), linear F-10 low-density polyethylene ('LLDPE'), polypropylene, and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable resins, concentrates and compounds, and polymeric powders. The Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee consisting of nine representatives, three appointed by each partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership's Strategic Plan and annual updates thereof. Pursuant to the Partnership Agreement, net income is allocated among the partners on a pro rata basis based on their percentage ownership of the Partnership. Distributions are made to the partners based on their percentage ownership of the Partnership. Additional cash contributions required by the Partnership will also be based on the partners' percentage ownership of the Partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition. Revenue from product sales is generally recognized upon delivery of products to the customer. Cash and Cash Equivalents. Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. The Partnership's policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution. The Partnership performs periodic evaluations of the relative credit standing of these financial institutions which are considered in the Partnership's investment strategy. The Partnership has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership 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 Partnership's discretion. As a result, none of the Partnership's cash is restricted. Accounts Receivable. The Partnership sells its products primarily to companies in the petrochemicals and polymers industries. The Partnership performs ongoing credit evaluations of its customers' financial condition and, in certain circumstances, requires letters of credit from them. The Partnership's allowance for doubtful accounts, which is reflected in the accompanying balance sheet as a reduction of accounts receivable, totaled $3 million at December 31, 1998. The Partnership had no allowance for doubtful accounts recorded at December 31, 1997. 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. Property, Plant and Equipment. Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the related assets, ranging from 5 to 30 years. Upon retirement or sale, the Partnership removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the statement of income. The Partnership's policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. Turnaround Maintenance and Repair Expenses. Cost of major repairs and maintenance incurred in connection with turnarounds of units at the Partnership's manufacturing facilities are deferred and amortized on a straight-line basis until the next planned turnaround, generally five to seven years. Deferred Software Costs. Costs to purchase and develop software for internal use are deferred and amortized on a straight-line basis over 10 years. The Partnership amortized $6 million and less than $1 million of deferred software costs for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. F-11 Goodwill. Goodwill includes goodwill contributed by Millennium and goodwill recorded in connection with the contribution of Occidental's assets. Goodwill is being amortized using the straight-line method over forty years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to the related operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill, and if necessary other related assets, is adjusted. Management believes that no impairment exists at December 31, 1998. The Partnership amortized $31 million and $3 million of goodwill for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Accumulated amortization of goodwill was $166 million and $135 million at December 31, 1998 and 1997, respectively. Investment in PD Glycol. Equistar holds a 50 percent interest in a joint venture with Du Pont de Nemours and Company that owns an ethylene glycol facility in Beaumont, Texas. This investment was contributed by Occidental in 1998. The investment in PD Glycol is accounted for under the equity method. Environmental Remediation Costs. Expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimates have not been discounted to present value. Environmental remediation costs are expensed or capitalized in accordance with generally accepted accounting principles. Pension and Other Postretirement Benefit Plans. During 1998, the Partnership adopted Statement of Financial Accounting Standards ('SFAS') No. 132, Employers' Disclosures about Pensions and Other Retirement Benefits. The provisions of SFAS No. 132 revise employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of these plans. SFAS No. 132 standardizes the disclosure requirements for these plans, to the extent practicable. Exchanges. Finished product exchange transactions, which involve homogeneous commodities in the same line of business and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy. Exchanges settled through payment and receipt of cash are accounted for as purchases and sales. Income Taxes. The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment and Related Information. In 1998, the Partnership adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 supercedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the 'industry segment' approach with the 'management' approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Partnership's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the results of operations or the financial position of the Partnership (see Note 18). Reclassifications. Certain 1997 amounts have been restated to conform to classifications adopted in 1998. F-12 3. ADDITION OF OCCIDENTAL CONTRIBUTED BUSINESS On May 15, 1998, the Partnership was expanded with the contribution of certain assets from Occidental. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations for these assets are included in the accompanying statement of income prospectively from May 15, 1998. The consideration paid for the Occidental Contributed Business was approximately $2.1 billion and was allocated to the assets contributed and liabilities assumed based on the estimated fair values of such assets and liabilities at the date of the contribution. The fair value of the assets contributed and liabilities assumed by the Partnership on May 15, 1998 is as follows:
(MILLIONS OF DOLLARS) Total current assets........................................... $ 281 Property, plant and equipment.................................. 1,964 Investment in PD Glycol........................................ 58 Goodwill....................................................... 43 Deferred charges and other assets.............................. 49 ------- Total assets.............................................. $ 2,395 ------- ------- Other current liabilities...................................... $ 79 Long-term debt................................................. 205 Other liabilities and deferred credits......................... 14 Partners' capital.............................................. 2,097 ------- Total liabilities and partners' capital................... $ 2,395 ------- -------
The unaudited pro forma combined historical results of the Partnership as if the Occidental Contributed Business had been contributed on January 1, 1998 is as follows:
FOR THE YEAR ENDED DECEMBER 31, 1998 --------------------- (MILLIONS OF DOLLARS) Sales and other operating revenues............................. $ 4,869 Unusual charges................................................ 35 Operating income............................................... 320 Net income..................................................... 154
The unaudited pro forma data presented above is not necessarily indicative of the results of operations of the Partnership that would have occurred had such transaction actually been consummated as of January 1, 1998, nor are they necessarily indicative of future results. 4. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997 ---- ---- (MILLIONS OF DOLLARS) Cash paid for interest............................................................ $154 $-- ---- ---- ---- ---- Noncash investing and financing activities: Noncash adjustments to contributed capital................................... $ 3 $-- Inventory transfer from PD Glycol............................................ 15 -- ---- ---- ---- ----
F-13 Historical cost of assets contributed and liabilities assumed by the Partnership in December 1997 (inception): Total current assets........................................... $ 948 Property, plant and equipment, net............................. 2,121 Goodwill, net.................................................. 1,142 Deferred charges and other assets.............................. 158 ------- Total assets.............................................. $ 4,369 ------- ------- Current maturities of long-term debt........................... $ 36 Other current liabilities...................................... 17 Long-term debt................................................. 1,462 Other liabilities and deferred credits......................... 43 Partners' capital.............................................. 3,156 Note receivable from Lyondell LP............................... (345) ------- Total liabilities and partners' capital................... $ 4,369 ------- -------
5. FINANCIAL INSTRUMENTS The fair value of all financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to the Partnership for debt with terms and average maturities similar to the Partnership's debt portfolio, the fair value of the Partnership's long-term debt, including amounts due within one year, was approximately $2.3 billion and $1.5 billion at December 31, 1998 and 1997, respectively. The Partnership had issued letters of credit totaling $2.6 million and $4 million at December 31, 1998 and 1997, respectively. 6. RELATED PARTY TRANSACTIONS Loans to Millennium and Occidental. In connection with Occidental's entry into Equistar in May 1998, Equistar executed promissory notes to Millennium and Occidental in the principal amounts of $75.0 million and $419.7 million, respectively. Each of the notes provides for the annual accrual of interest (based on a year of 360 days and actual days elapsed) at a rate equal to LIBOR plus .6 percent. These notes were paid in full in June 1998. Interest expense incurred on these notes during 1998 was $3 million. Note Receivable from Lyondell LP. Upon formation of the Partnership, Lyondell LP contributed capital to the Partnership in the form of a $345 million promissory note (the 'Lyondell Note'). The Lyondell Note bears interest at LIBOR plus a market spread. The note was repaid in full by Lyondell in July 1998. Interest income accrued on the Lyondell note totaled $12.8 million and $1.75 million during 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Shared Services Agreement with Lyondell. Lyondell provides certain corporate, general and administrative services to the Partnership, including legal, tax, treasury, risk management and other services pursuant to a shared services agreement. During the year ended December 31, 1998, Lyondell charged the Partnership $3 million for these services. During the period December 1, 1997 (inception) to December 31, 1997, charges from Lyondell were less than $1 million. As part of the shared services agreement, the Partnership provides certain general and administrative services to Lyondell, such as health, safety and environmental services, human resource services, information services and legal services. During the year ended December 31, 1998 and during the period December 1, 1997 (inception) to December 31, 1997, the Partnership charged Lyondell less than $1 million for these services. Shared Services and Shared-Site Agreements with Millennium. The Partnership and Millennium have entered into a variety of operating, manufacturing and technical service agreements related to the business of Equistar and the vinyl acetate monomers, acetic acid, synthesis gas and methanol businesses retained by Millennium Petrochemicals. These agreements include the provision by the Partnership to F-14 Millennium Petrochemicals of materials management, certain utilities, administrative office space, health, safety and environmental services and computer services. During the year ended December 31, 1998, the Partnership charged Millennium Petrochemicals $5 million for these services. During the period from December 1, 1997 (inception) to December 31, 1997, charges to Millennium Petrochemicals were less than $1 million. These agreements also include the provision by Millennium Petrochemicals to the Partnership of certain operational services, including waste water treatment and barge dock access. During the year ended December 31, 1998 and during the period December 1, 1997 (inception) to December 31, 1997, Millennium Petrochemicals charged the Partnership less than $1 million for these services. Operating Agreement with Occidental Chemical Corporation. On May 15, 1998, Occidental Chemical and the Partnership entered into an Operating Agreement (the 'Operating Agreement') whereby Occidental Chemical agreed to operate and maintain the Occidental Contributed Business and to cause third-parties to continue to provide equipment, products and commodities to those businesses upon substantially the same terms and conditions as provided prior to the transfer. Under the terms of the Operating Agreement, the Partnership agreed to reimburse Occidental Chemical for its cost in connection with the services provided to the Partnership, and the Partnership agreed to pay Occidental Chemical an administrative fee. The Operating Agreement terminated in accordance with its terms on June 1, 1998. During the term of the Operating Agreement, the Partnership paid Occidental Chemical an administrative fee of $1 million. Transition Services Agreement with Occidental Chemical. On June 1, 1998, Occidental Chemical and the Partnership entered into a Transition Services Agreement (the 'TSA'). Under the terms of the TSA, Occidental Chemical agreed to provide the Partnership certain services in connection with the Occidental Contributed Business, including services related to accounting, payroll, office administration, marketing, transportation, purchasing and procurement, management, human resources, customer service, technical services and others. Between June 1, 1998 and December 31, 1998, the Partnership expensed $6 million in connection with services provided pursuant to the TSA. The TSA expires by its terms on June 1, 1999. Occidental Chemical Ethylene Sales Agreement. The Partnership and Occidental Chemical entered into a Sales Agreement, dated May 15, 1998 (the 'Ethylene Sales Agreement'). Under the terms of the Ethylene Sales Agreement, Occidental Chemical has agreed to purchase an annual minimum amount of ethylene from the Partnership equal to 100 percent of the ethylene feedstock requirements of Occidental Chemical's United States plants (estimated to be 2 billion pounds per year at the time of the signing of the agreement) less any quantities up to 250 million pounds tolled in accordance with the provisions of such agreement. The Partnership's maximum supply obligation in any calendar year under the Ethylene Sales Agreement is 2.55 billion pounds. Upon three years notice from either party to the other, the Partnership's maximum supply obligation in any calendar year under the Ethylene Sales Agreement may be 'phased down' as set forth in the agreement, provided that no phase down may occur prior to January 1, 2009. In accordance with the phase down provisions of the agreement, the annual minimum requirements set forth in the agreement must be phased down over at least a five year period so that the annual required minimum can not decline to zero prior to December 31, 2013 unless certain specified force majeure events occur. The Ethylene Sales Agreement provides for an ethylene sales price that is generally reflective of market prices and will be determined pursuant to a formula using the Partnership's sales price to third parties and several published market price indices. During the period from May 15, 1998 to December 31, 1998, the Partnership charged Occidental Chemical $171 million under the Ethylene Sales Agreement. Product Sales to Millennium. The Partnership sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100 percent of its ethylene requirements for its La Porte, Texas facility (estimated to be 300 million pounds per year), up to a maximum of 330 million pounds per year. Millennium has the option to increase the amount purchased to up to 400 million pounds per year beginning January 1, 2001. The initial term of the contract expires December 1, 2000 and thereafter, the contract automatically renews annually. Either party may terminate on one year's notice, except that if Millennium elects to increase its purchases under the contract, a party must provide two F-15 year's notice of termination. The pricing terms of this agreement are similar to the Ethylene Sales Agreement with Occidental Chemical. The Partnership charged Millennium $41 million and $4 million for ethylene for 1998 and December 1997, respectively. Product Sales to Lyondell. Lyondell acquired its intermediate chemicals and derivatives business through the acquisition of ARCO Chemical Company effective August 1, 1998. Sales to Lyondell, primarily for ethylene, propylene, MTBE, benzene and alkylate, totaled $97 million for the period from August 1, 1998 to December 31, 1998, and were based on price terms generally reflective of market. Transactions with LCR. Lyondell's rights and obligations under the terms of its product sales and feedstock purchase agreements with LYONDELL-CITGO Refining LP ('LCR'), a joint venture investment of Lyondell, were assigned to the Partnership. Accordingly, certain refinery products are sold to the Partnership as feedstocks, and certain olefins by-products are sold to LCR for processing into gasoline. Sales to LCR were $236 million and $27 million and purchases from LCR were $131 million and $10 million for the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997, respectively. The Partnership also assumed certain tolling arrangements as well as terminalling and storage obligations between Lyondell and LCR and performs certain marketing services for LCR. Aggregate charges under these various service agreements of $15 million were made to LCR by the Partnership with respect to 1998. No charges were made during December 1997. All of the agreements between LCR and the Partnership are on terms generally representative of prevailing market prices. The Partnership also has a shared services agreement with LCR to provide LCR with information services, including mainframe processing and maintenance. Net charges to LCR by the Partnership for the shared services agreement were less than $1 million during 1998. No charges were made during December 1997. Transactions with Lyondell Methanol. The Partnership provides operating and other services for Lyondell Methanol Company, L.P. ('Lyondell Methanol') under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to Lyondell Methanol by the Partnership of the real property on which its methanol plant is located. Pursuant to the terms of those agreements, Lyondell Methanol pays the Partnership a management fee and will reimburse certain expenses of the Partnership at cost. Management fees charged by the Partnership to Lyondell Methanol totaled $6 million for the year ending December 31, 1998 and less than $1 million during the period from December 1, 1997 (inception) to December 31, 1997. The Partnership sells natural gas to Lyondell Methanol at prices generally representative of its cost. Purchases by Lyondell Methanol of natural gas feedstock from the Partnership totaled $44 million and $4 million for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. Lyondell Methanol sells all of its products to Equistar. For the year ending December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, purchases from Lyondell Methanol were $103 million and $15 million, respectively. Related Party Leases. As part of their shared services agreement with the Partnership, Millennium subleases from the Partnership certain administrative office space at a monthly rent of $42,000. 7. ACCOUNTS RECEIVABLE In December 1998, the Partnership entered into a purchase agreement with an independent issuer of receivables-backed commercial paper. Under the terms of the agreement, the Partnership agreed to sell on an ongoing basis and without recourse, designated accounts receivable. To maintain the balance of the accounts receivable sold, the Partnership is obligated to sell new receivables as existing receivables are collected. The agreement expires in December 1999. At December 31, 1998, the Partnership's gross accounts receivable that had been sold to the purchasers aggregated $130 million. This amount has been reported as operating cash flows in the statement of cash flows. Costs related to the sale are included in selling, general and administrative expenses in the statement of income. F-16 8. INVENTORIES Inventories at December 31, 1998 and 1997 consisted of the following:
1998 1997 ---- ---- (MILLIONS OF DOLLARS) Raw materials........................................................... $149 $160 Work-in-process......................................................... 11 5 Finished goods.......................................................... 301 282 Materials and supplies.................................................. 88 66 ---- ---- $549 $513 ---- ---- ---- ----
For the year ending December 31, 1998, cost of sales increased by less than $1 million associated with the reduction of LIFO inventories. For the period from December 1, 1997 (inception) to December 31, 1997, cost of sales increased by approximately $1 million associated with the reduction in LIFO inventories. The excess of the current cost of inventories over book value was approximately $103 million at December 31, 1997. 9. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, at cost, and the related accumulated depreciation at December 31, 1998 and 1997 were as follows:
1998 1997 ------ ------ (MILLIONS OF DOLLARS) Manufacturing facilities and equipment............................... $5,344 $3,489 Manufacturing equipment acquired under capital leases................ 236 -- Construction projects in progress.................................... 189 127 Land................................................................. 78 74 ------ ------ Total property, plant and equipment............................. 5,847 3,690 Less accumulated depreciation........................................ 1,772 1,572 ------ ------ Property, plant and equipment, net.............................. $4,075 $2,118 ------ ------ ------ ------
Depreciation expense for the year ending December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997 was $200 million and $15 million, respectively. At December 31, 1998, $10 million of the accumulated depreciation reported in the accompanying balance sheet related to the manufacturing equipment acquired under capital leases that was contributed by Occidental in 1998. In July 1998, the depreciable lives of certain assets were increased from a range of 5 to 25 years to a range of 5 to 30 years. This change was accounted for as a change in accounting estimate and resulted in a $33 million decrease in depreciation expense for 1998. 10. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets at December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- (MILLIONS OF DOLLARS) Deferred turnaround costs, net.......................................... $ 84 $ 66 Deferred software costs, net............................................ 70 44 Deferred pension asset.................................................. 30 23 Other................................................................... 73 18 ---- ---- Total deferred charges and other assets............................ $257 $151 ---- ---- ---- ----
F-17 11. OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- (MILLIONS OF DOLLARS) Accrued property taxes.................................................. $ 76 $ 4 Accrued freight......................................................... 22 8 Accrued payroll costs................................................... 44 19 Accrued interest........................................................ 18 -- Accrued severance and other costs related to formation of the Partnership........................................................... 3 27 Other................................................................... 37 7 ---- ---- Total other accrued liabilities.................................... $200 $ 65 ---- ---- ---- ----
12. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt at December 31, 1998 and 1997 was comprised of the following:
1998 1997 ------ ------ (MILLIONS OF DOLLARS) Bank credit facilities: 5-year term credit facility..................................... $1,150 $ 800 $500 million credit agreement................................... 152 -- Other debt obligations: Medium-term notes (2000 - 2005)................................. 163 194 10.00% Notes due in 1999........................................ 150 150 9.125% Notes due in 2002........................................ 100 100 6.5% Notes due in 2006.......................................... 150 150 7.55% Debentures due in 2026.................................... 150 150 Other........................................................... -- 4 ------ ------ Total long-term debt....................................... 2,015 1,548 Less current maturities.............................................. 150 36 ------ ------ Long-term debt, net............................................. 1,865 1,512 Capital lease obligations (5.89% due in 2000)........................ 205 -- ------ ------ Total long-term debt and lease obligations................. $2,070 $1,512 ------ ------ ------ ------
Aggregate maturities of long-term debt during the five years subsequent to December 31, 1998 are as follows: 1999 - $302 million; 2000 - $247 million; 2001 - $90 million; 2002 - $1.251 billion; 2003 - $29 million. All of the above debt is guaranteed by the partners. The medium-term notes mature at various dates from 2000 to 2005 and have a weighted average interest rate of 9.87 percent and 9.83 percent at December 31, 1998 and 1997, respectively. The Partnership has a five-year, $1.25 billion credit facility (the 'Facility') with a group of banks expiring November 2002. Borrowings under the Facility bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR plus 1/2 of 1 percent, a fixed rate offered by one of the sponsoring banks or interest rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids submitted by the sponsoring banks, depending on the type of borrowing made under the Facility. Borrowings under the Facility had a weighted average interest rate of 5.8 percent and 5.7 percent at December 31, 1998 and 1997, respectively. On June 12, 1998, the Partnership entered into a $500 million credit agreement consisting of a $250 million revolving credit facility and a $250 million one-year term facility. Borrowings under the $500 million credit agreement bear interest at either the Federal Funds rate plus 1/2 of 1 percent, LIBOR plus 0.625 percent, a fixed rate offered by one of the sponsoring banks or interest rates that are based on a competitive auction feature wherein the interest rate can be established by competitive bids F-18 submitted by the sponsoring banks. At December 31, 1998, the weighted average interest rate for borrowings under the $500 million credit agreement was 6.1 percent. The Facility and the $500 million credit agreement (the 'Bank Credit Facilities') are available for working capital and general purposes as needed and contain covenants relating to liens, sale and leaseback transactions, debt incurrence, leverage and interest coverage ratios, sales of assets and mergers and consolidations. In February 1999, the Partnership issued $900 million of debt securities. The debt securities include $300 million of 8.50 percent Notes, which will mature on February 15, 2004, and $600 million of 8.75 percent Notes, which will mature on February 15, 2009. The Partnership intends to use the net proceeds from this offering (i) to repay the $205 million outstanding under a capitalized lease obligation relating to the Partnership's Corpus Christi facility, (ii) to repay the outstanding balance under the $500 million credit agreement, after which the $500 million credit agreement will be terminated, (iii) to repay the outstanding $150 million, 10.0 percent Notes due in June 1999, upon maturity and (iv) to the extent of the remaining net proceeds, reduce outstanding borrowings under the Facility and for Partnership working capital. Outstanding borrowings under the Partnership's $500 million credit agreement that are payable in 1999 are included as long-term obligations of the Partnership in the accompanying balance sheet at December 31, 1998 based on the expectation that these borrowings will be refinanced as described above. 13. UNUSUAL CHARGES In December 1997, the Partnership recorded $42 million of unusual charges related to the formation of the Partnership. These charges included severance and other costs related to a workforce reduction (approximately 430 employees) that resulted from the consolidation of the businesses contributed to the Partnership ($30 million), various closing costs ($6 million), and various other charges ($6 million). Approximately $15 million of these charges were paid in 1997 and $27 million were included in other accrued liabilities at December 31, 1997. During the year ended December 31, 1998, approximately $24 million of these charges were paid and $3 million were included in other accrued liabilities at December 31, 1998. During 1998, the Partnership recorded and paid $35 million of unusual charges related to its initial formation and the addition of Occidental to the Partnership. These charges included transition personnel costs ($14 million), costs associated with the consolidation of certain operations and facilities ($11 million), operating and transition services provided by Occidental Chemical ($7 million), various closing costs ($2 million), and other miscellaneous charges ($1 million). 14. LEASES At December 31, 1998, future minimum lease payments for capital and operating leases with noncancelable lease terms in excess of one year were as follows:
CAPITAL OPERATING ------- --------- (MILLIONS OF DOLLARS) 1999..................................................................... $ 13 $ 101 2000..................................................................... 208 74 2001..................................................................... -- 58 2002..................................................................... -- 44 2003..................................................................... -- 38 Thereafter............................................................... -- 336 ------- --------- Total minimum lease payments........................................ 221 $ 651 --------- --------- Imputed interest......................................................... (16) ------- Present value of minimum lease payments.................................. $ 205 ------- -------
Operating lease net rental expense was $110 million for the year ending December 31, 1998 and $11 million for the period from December 1, 1997 (inception) to December 31, 1997. F-19 The Partnership is party to various unconditional purchase obligation contracts as a purchaser for product and services. At December 31, 1998, future minimum payments under these contracts with noncancelable contract terms in excess of one year were as follows:
AMOUNT --------------------- (MILLIONS OF DOLLARS) 1999..................................................................... $ 29 2000..................................................................... 28 2001..................................................................... 24 2002..................................................................... 23 2003..................................................................... 23 Thereafter............................................................... 142 ------ Total minimum contract payments..................................... $ 269 ------ ------
The Partnership's total purchases under these agreements were $33 million for the year ending December 31, 1998 and $3 million during the period from December 1, 1997 (inception) to December 31, 1997. 15. RETIREMENT PLANS All full-time regular employees of the Partnership are covered by defined benefit pension plans sponsored by the Partnership. The plans became effective on January 1, 1998, except for union represented employees formerly employed by Millennium, whose plans were contributed to the Partnership on December 1, 1997, and union represented employees formerly employed by Occidental, whose plans were contributed to the Partnership on May 15, 1998. In connection with the formation of the Partnership, there were no pension assets or obligations contributed to the Partnership, except for the union represented plans described above. Retirement benefits are based on years of service and the employee's highest three consecutive years of compensation during the last ten years of service. The funding policy for these plans is to make periodic contributions as required by applicable law. The Partnership accrues pension costs based on an actuarial valuation and funds the plans through contributions to pension trust funds. The Partnership also has unfunded supplemental nonqualified retirement plans which provide pension benefits for certain employees in excess of the tax qualified plans' limits. F-20 The following table provides a reconciliation of benefit obligations, plan assets and funded status of the retirement plans at December 31, 1998 and 1997:
1998 1997 ----- ----- (MILLIONS OF DOLLARS) Change in benefit obligation: Benefit obligation, January 1............................................... $ 21 $ -- Benefit obligation contributed at inception of Partnership.................. -- 21 Benefit obligation contributed by Occidental................................ 46 -- Service cost................................................................ 16 -- Interest cost............................................................... 5 -- Actuarial loss (gain)....................................................... 5 -- Benefits paid............................................................... (5) -- ----- ----- Benefit obligation, December 31............................................. $ 88 $ 21 ----- ----- ----- ----- Change in plan assets: Fair value of plan assets, January 1........................................ $ 40 $-- Fair value of plan assets contributed at inception of Partnership........... -- 40 Fair value of plan assets contributed by Occidental......................... 51 -- Actual return of plan assets................................................ 1 -- Partnership contributions................................................... 1 -- Benefits paid............................................................... (5) -- ----- ----- Fair value of plan assets, December 31...................................... $ 88 $ 40 ----- ----- ----- ----- Funded status.................................................................... $-- $ 19 Unrecognized actuarial loss (gain)............................................... 13 4 ----- ----- Net amount recognized....................................................... $ 13 $ 23 ----- ----- ----- ----- Amounts recognized in the Balance Sheets consist of: Prepaid benefit cost........................................................ $ 30 $ 23 Accrued benefit liability................................................... (17) -- ----- ----- Net amount recognized....................................................... $ 13 $ 23 ----- ----- ----- ----- Weighted-average assumptions as of December 31: Discount rate............................................................... 6.75% 7.25% Expected return on plan assets.............................................. 9.50% 9.00% Rate of compensation increase............................................... 4.75% 4.75%
As of December 31, 1998, Equistar had defined benefit pension plans where the accumulated benefit obligation exceeded the fair value of plan assets. The accumulated benefit obligation exceeded the fair value of plan assets by $19 million for these plans as of December 31, 1998. As of December 31, 1998 and 1997, Equistar had defined benefit pension plans where the fair value of plan assets exceeded the accumulated benefit obligation. The fair value of plan assets exceeded the accumulated benefit obligation by $19 million for these plans as of December 31, 1998 and 1997. The Partnership's net periodic pension cost for 1998 included the following components:
1998 --------------------- (MILLIONS OF DOLLARS) Components of net periodic benefit cost: Service cost................................................... $ 16 Interest cost.................................................. 5 Expected return on plan assets................................. (6) ------ Net periodic benefit cost...................................... $ 15 ------ ------
As the non-union plans became effective on January 1, 1998, the Partnership did not recognize any net periodic pension cost during the period from December 1, 1997 (inception) to December 31, 1997. F-21 Effective January 1, 1998, the Partnership also maintains voluntary defined contribution savings plans for eligible employees. Under provisions of the plans, the Partnership contributes an amount equal to 160 percent of employee contributions up to a maximum matching contribution of eight percent of the employee's base salary. Contributions to the plans by the Partnership were $7 million and less than $1 million for the year ended December 31, 1998 and during the period from December 1, 1997 (inception) to December 31, 1997, respectively. 16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Partnership sponsors unfunded postretirement benefit plans other than pensions ('OPEB') 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, the Partnership pays approximately 80 percent of the cost of the health care plans, but reserves the right to modify the cost-sharing provisions at any time. In connection with the formation of the Partnership on December 1, 1997, Lyondell and Millennium contributed $31 million of accrued postretirement benefit liabilities for employees that transferred to the Partnership. Upon joining the Partnership in May 1998, Occidental contributed $14 million of accrued postretirement benefit liabilities for employees that transferred to the Partnership. The following table provides a reconciliation of benefit obligations and funded status of the OPEB plans at December 31, 1998 and 1997:
1998 1997 ----- ----- (MILLIONS OF DOLLARS) Change in benefit obligation: Benefit obligation, January 1............................................... $ 50 $-- Benefit obligation contributed at inception of Partnership.................. -- 50 Benefit obligation contributed by Occidental................................ 14 -- Service cost................................................................ 3 -- Interest cost............................................................... 4 -- Actuarial loss (gain)....................................................... (2) -- ----- ----- Benefit obligation, December 31............................................. $ 69 $ 50 ----- ----- ----- ----- Funded status.................................................................... $ (69) $ (50) Unrecognized actuarial loss (gain).......................................... 16 19 ----- ----- Net amount recognized............................................................ $ (53) $ (31) ----- ----- ----- ----- Amounts recognized in the Balance Sheets consist of: Prepaid benefit cost........................................................ $-- $ -- Accrued benefit liability................................................... (53) (31) ----- ----- Net amount recognized....................................................... $ (53) $ (31) ----- ----- ----- ----- Weighted-average assumptions as of December 31: Discount rate............................................................... 6.75% 7.25% Rate of compensation increase............................................... 4.75% 4.75%
Because the OPEB plans are unfunded, there was no change in the plan assets during the year ended December 31, 1998 and for the period from December 1, 1997 (inception) to December 31, 1997. The Partnership's postretirement benefit costs for 1998 included the following components:
1998 --------------------- (MILLIONS OF DOLLARS) Components of net periodic benefit cost: Service cost.......................................................................... $ 3 Interest cost......................................................................... 4 Expected return of plan assets........................................................ -- ------ Net periodic benefit cost.................................................................... $ 7 ------ ------
F-22 The accrued postretirement benefit liabilities at December 31, 1997 were calculated and contributed as of December 31, 1997; therefore, there was no net periodic postretirement benefit costs for the period from December 1, 1997 (inception) to December 31, 1997. For measurement purposes, the assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 1998 was 7.0 percent for 1999-2001 and 5.0 percent thereafter. The health care cost trend rate assumption does not have 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, 1998 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit liability as of December 31, 1998 by $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. 17. COMMITMENTS AND CONTINGENCIES The Partnership 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. The Partnership 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 financial statements or liquidity of the Partnership. Equistar has agreed to indemnify and defend Lyondell and Millennium, individually, against certain uninsured claims and liabilities which Equistar may incur relating to the operation of the Contributed Business prior to December 1, 1997 up to $7 million each within the first seven years of the Partnership, subject to certain terms of the Asset Contribution Agreements. Equistar has also agreed to indemnify Occidental up to $7 million on a similar basis relating to the operation of the Occidental Contributed Business prior to May 15, 1998. During the year ended December 31, 1998, the Partnership incurred $5 million in expenses for these uninsured claims and liabilities. No expenses were incurred for these uninsured claims and liabilities during the period December 1, 1997 (inception) to December 31, 1997. The Partnership's policy is to be in compliance with all applicable environmental laws. The Partnership 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 Partnership 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. In the opinion of management, any liability arising from the matters discussed in this Note is not expected to have a material adverse effect on the financial statements or liquidity of the Partnership. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Partnership's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 18. SEGMENT INFORMATION Using the guidelines set forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Partnership has identified two segments in which it operates. The reportable segments are petrochemicals and polymers. The petrochemicals segment includes olefins, oxygenated chemicals, aromatics and specialty chemicals. Olefins include ethylene, propylene and butadiene, and the oxygenated chemicals include ethylene oxide, ethylene glycol, ethanol and MTBE. The petrochemicals segment also includes the production and sale of aromatics including benzene and toluene. The polymers segment consists of polyolefins including high-density polyethylene, low-density F-23 polyethylene, linear low-density polyethylene, polypropylene, and performance polymers. The performance polymers include enhanced grades of polyethylene, including wire and cable resins, concentrates and compounds, and polymeric powders. No customer accounted for 10 percent or more of sales. The accounting policies of the segments are the same as those described in 'Summary of Significant Accounting Policies' (see Note 2). Summarized financial information concerning the Partnership's reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were made at prices based on current market values. FOR THE YEAR ENDED DECEMBER 31, 1998
PETROCHEMICALS POLYMERS SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED -------------- --------- ----------- ------------ ------------ (MILLIONS OF DOLLARS) Sales and other operating revenues: Customers................ $2,351 $ 2,012 $-- $ -- $4,363 Intersegment............. 1,112 46 -- (1,158) -- ------- --------- ----------- ------------ ------------ $3,463 $ 2,058 $-- $ (1,158) $4,363 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Unusual charges............... $-- $ -- $ 35 $ -- $ 35 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Operating income.............. $ 319 $ 177 $ (214) $ -- $ 282 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Depreciation and amortization expense..................... $ 152 $ 65 $ 51 $ -- $ 268 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Capital expenditures.......... $ 71 $ 116 $ 13 $ -- $ 200 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Total assets.................. $2,997 $ 2,035 $ 1,636 $ -- $6,668 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------
FOR THE PERIOD FROM DECEMBER 1, 1997 (INCEPTION) TO DECEMBER 31, 1997
PETROCHEMICALS POLYMERS SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED -------------- --------- ----------- ------------ ------------ (MILLIONS OF DOLLARS) Sales and other operating revenues: Customers................ $ 179 $ 186 $-- $-- $ 365 Intersegment............. 105 -- -- (105) -- ------- --------- ----------- ------------ ------------ $ 284 $ 186 $-- $ (105) $ 365 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Unusual charges............... $-- $ -- $ 42 $-- $ 42 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Operating income.............. $ 47 $ 22 $ (54) $-- $ 15 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Depreciation and amortization expense..................... $ 7 $ 7 $ 5 $-- $ 19 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Capital expenditures.......... $ 7 $ 4 $ 1 $-- $ 12 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------ Total assets.................. $1,668 $ 1,504 $ 1,428 $-- $4,600 ------- --------- ----------- ------------ ------------ ------- --------- ----------- ------------ ------------
19. SUBSEQUENT EVENTS In January 1999, the Partnership announced that it was going to shut down and 'mothball' its gas phase HDPE reactor at Port Arthur, Texas, on March 31, 1999, as part of its long-term strategy to maximize value. The shutdown will reduce the Partnership's HDPE capacity by 300 million pounds per year and reduce employment at the unit from 200 to approximately 125. Customers for products from the mothballed unit will be supplied with comparable products produced at the Partnership's Matagorda, Victoria, and La Porte, Texas, facilities. F-24 SCHEDULE II MILLENNIUM CHEMICALS INC. VALUATION AND QUALIFYING ACCOUNTS
CHARGED CHARGED BALANCE AT TO TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS- DEDUCTION END OF OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ----------- --------- ------------- --------- ---------- (IN MILLIONS) DESCRIPTION Year ended December 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts.... $ 16 $ 1 $ -- $ 9(a)(b) $ 8 Valuation Allowance........... -- -- 112(c) -- 112 Year ended December 31, 1997 Deducted from asset accounts: Allowance for doubtful accounts.... 8 2(d) 4(a) 2 Valuation Allowance................ 112 (31)(c) 143 Year ended December 31, 1998 Deducted from asset accounts: Allowance for doubtful accounts.... 2 1 3 Valuation Allowance........... 143 (7) 136
- ------------ (a) Uncollected accounts written off, net of recoveries. (b) Sale of Suburban Propane. (c) Valuation on tax carryforwards arising from demerger transactions. (d) Reclassed to other current assets as net receivable from Equistar. S-1 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as................................. 'SS' The registered trademark symbol shall be expressed as.................... 'r' Characters normally expressed as subscript shall be expressed as baseline characters. EX-10 2 EXHIBIT 10.17 Exhibit 10.17 Form of Agreement, dated as of July 24, 1998, between Millennium Petrochemicals Inc. and each of Peter P. Hanik and Charles F.Daly Millennium Petrochemicals Inc. 11500 Northlake Drive Cincinnati, Ohio 45249 (513) 530-6500 July 24, 1998 Dear : 1. Introduction. Millennium Petrochemicals Inc. (the "Company") believes that the maintenance of a sound and vital management of the Company and of Millennium Chemicals Inc., which is the ultimate parent corporation of the Company ("Millennium"), is essential to the protection and enhancement of the interests of the Company and Millennium and their stockholders. The Company also recognizes that the possibility of a Change in Control of the Company or a Change in Control of Millennium (each as defined in Part II of Exhibit A), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company, Millennium and their shareholders. In light of the possibility of a Change in Control of the Company or Millennium, the Company has determined that it is appropriate to induce key employees to remain with the Company, and to reinforce and encourage their continued attention and dedication. Accordingly, upon your written acceptance of the terms and conditions of this agreement (the "Agreement") evidenced by signing below, the Company intends to provide you the protections set forth herein as of the date first set forth above (the "Effective Date"). Capitalized terms not defined in the body of this Agreement shall have the meanings set forth in Exhibit A hereto, -1- which is incorporated herein and made a part of this Agreement. This Agreement shall replace the prior agreement regarding a change in control of Millennium and the Company dated October 23, 1997, by and between you and the Company, and said prior agreement is hereby rendered null and void and shall no longer have any force and effect. 2. Termination Following a Change in Control. If a Change in Control occurs on or after the Effective Date and your employment is terminated during the Post Change in Control Period (i) by the Company without Cause or due to your Disability, (ii) by you for Good Reason or, subject to Section 3 below, without Good Reason, (iii) due to your death or (iv) due to your Retirement, then you shall be entitled to the amounts and benefits provided in Section 4 herein. Furthermore, if a Change in Control occurs on or after the Effective Date and your employment was terminated within the Pre Change in Control Period (i) by the Company without Cause or due to your Disability, (ii) by you for Good Reason (based on an event that occurred within the Pre Change in Control Period), or (iii) due to your death, you shall be entitled to the amounts and benefits provided in Section 4 herein. [The following sentence is in Mr. Daly's agreement but not in Mr. Hanik's: Finally, if your employment is terminated at any time after the Effective Date and prior to December 1, 1999 (i) by the Company without Cause or due to your Disability, (ii) by you for Good Reason or (iii) due to your death, you shall be entitled to the amounts and benefits provided in Section 4 herein upon such termination, even if a Change in Control has not occurred prior to such termination.] [The following sentence is in Mr. Hanik's agreement but not in Mr. Daly's: Finally, if your employment is terminated at any time after the -2- Effective Date and prior to December 1, 1999 (i) by the Company without Cause other than for Disability, or (ii) by you for Good Reason, then, even if a Change in Control has not occurred prior to such termination, you shall be entitled to the amounts and benefits provided in Section 4 hereof upon such termination, except that, for purposes of determining the amounts and benefits provided to you under this sentence, Section 4 shall be amended by substituting the words "two (2) times" for the words "three (3) times" at the beginning of Section 4(A)(i) and Section 4(A)(ii) and by substituting the words "two (2) years" for the words "three (3) years" in each place such words appear in Section 4(C), (D) and (E).] 3. Direct Pay Letter of Credit. Notwithstanding anything else herein, your right to voluntarily terminate employment without Good Reason after the date of a Change in Control and receive the amounts due under Section 4 hereof shall be delayed until one hundred and eighty (180) days after the Change in Control if, simultaneous with the Change in Control, the Company or the person or entity triggering the Change in Control delivers to you an irrevocable direct pay letter of credit (the "Direct Pay Letter of Credit") satisfying the requirements of this Section 3 and an indemnity agreement covering in a similar manner the provisions of Section 6 with regard to activities after the Change in Control. The Direct Pay Letter of Credit shall be in an amount equal to the aggregate amount you would be entitled to receive under Sections 4(A)(i) and (ii) hereof if you were terminated without Cause immediately upon the Change in Control and shall have an expiration date of no less than two (2) years after the date of such Change in Control. You (or, if applicable, your legal representative) shall be entitled to draw on the Direct Pay Letter of Credit upon presentation to the issuing bank of a demand for -3- payment signed by you (or, if applicable, your legal representative) that states that (i) a Good Reason event has occurred and your employment has terminated during the Post Change in Control Period, or (ii) one-hundred and eighty (180) days have expired since the Change in Control and your employment has terminated during the Post Change in Control Period. There shall be no other requirements (including no requirement that you first make demand upon the Company) with regard to payment of the Direct Pay Letter of Credit. To the extent the Direct Pay Letter of Credit is not adequate to cover the amount owed to you under this Agreement, is not submitted by you or is not paid by the issuing bank, the Company shall remain liable to you for any amounts owed to you pursuant to the terms of this Agreement. To the extent any amount is paid under the Direct Pay Letter of Credit it shall be a credit against any amount the Company then or thereafter would owe to you under Section 4 of this Agreement. The Direct Pay Letter of Credit shall be issued by a national money center bank with a rating of at least A by Standard and Poor's. The Company shall bear the cost of the Direct Pay Letter of Credit. 4. Compensation on Change in Control Termination. If pursuant to Section 2 you are entitled to amounts and benefits under this Section 4, the Company shall, subject to Section 8, pay and provide to you: (A) in a lump sum within five (5) days after such termination (or, if such termination occurred during the Pre Change in Control Period, within five (5) days after the Change in Control) the sum of (i) three (3) times your highest annual base salary in effect within one-hundred and eighty (180) days prior to the Change in Control, computed by including the amount of base salary deferred by you (voluntarily or otherwise pursuant to the Millennium Chemicals Inc. Salary and -4- Bonus Deferral Plan (the "Deferral Plan") or any other agreement or plan that is or may have been in effect at the time of such deferral) as part of the base salary for the year in which it was accrued, (ii) three (3) times the highest annual bonus paid or payable to you for any of the last three (3) completed fiscal years by the Company or its predecessors or any affiliate of the Company or its predecessors (which shall in no event include amounts contributed or allocated by the Company (or its predecessors or affiliates thereof) on your behalf or paid to you under any supplemental executive bonus plans applicable to you (including, without limitation, the 1993 or 1996 HI Long Term Incentive Plans, any other plan commonly referred to by the Company as a "top-hat" plan or any equity plan such as the Millennium Chemicals Inc. Long Term Stock Incentive Plan)), computed by including the amount of any annual bonus deferred by you (voluntarily or otherwise pursuant to the Deferral Plan or any other agreement or plan that is or may have been in effect at the time of such deferral) as part of the annual bonus for the year in which it was accrued, (iii) any unreimbursed business expenses for the period prior to termination payable in accordance with the Company's policies, and (iv) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to you but not yet paid; (B) any other amounts or benefits due under the then applicable employee benefit, equity or incentive plans of the Company applicable to you as shall be determined and paid in accordance with such plans; (C) three (3) years of additional age, service and compensation credit (using, for such purposes, the base salary and (to the extent applicable) annual bonus calculated under Sections 4(A)(i) and (ii), respectively, as your deemed compensation in such years) for pension purposes under -5- any defined benefit type qualified or nonqualified pension plan or arrangement of the Company and its affiliates applicable to you, measured from the date of termination of employment and not credited to the extent that you are otherwise entitled to such credit during such three (3) year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension plan or arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's or its affiliates' defined benefit plan covering you and your actual age on the date of termination of employment); (D) an amount equal to the maximum amount which would be credited to your account balance(s) under any type of qualified 401(k) plan or nonqualified excess 401(k) plan, assuming you deferred the maximum amount and you continued employment for three (3) years after the date of termination of employment at the base salary and, to the extent applicable, the annual bonus calculated under Sections 4(A)(i) and (ii), respectively, to the extent not otherwise contributed to such plans, payable in a lump sum at the same time payment is made under Section 4(A) hereof; and (E) payment by the Company of the premiums for you (except in the case of your death) and your dependents' health coverage for three (3) years from the date of termination of your employment under the Company's health plans which cover the senior executives of the Company or materially similar benefits (to the extent not otherwise provided), provided that in the case of termination within one hundred eighty (180) days prior to a Change in Control, the obligations under this subpart (E) shall only exist to the extent that you or your dependents, as the case may be, had timely elected or timely elect COBRA coverage which continued at the time of the Change in Control and the obligation with -6- regard to the period prior to the Change in Control shall be limited to reimbursement of the COBRA premiums previously paid or due for such period. For the avoidance of doubt, in calculating the amount of annual bonus "paid or payable" to you in a particular year under the Millennium Chemicals Inc. Annual Performance Incentive Plan or any similar plan that contains a "bonus bank" feature, the annual bonus credited to your "bonus bank" account under such plan for such year shall be deemed to be the bonus "paid or payable" to you under such plan for such year. Any amendment or termination of benefits, equity or incentive plans within one-hundred and eighty (180) days prior to, or after, a Change in Control that is detrimental to you shall be ignored with respect to (C), (D) and (E) above. Payments under (E) above may, at the discretion of the Company, be made by continuing your participation in the plan as a terminee, by paying the applicable COBRA premium for you and your dependents, or by covering you and your dependents under substitute arrangements, provided that, to the extent you incur tax that you would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, you shall receive from the Company an additional payment in the amount necessary so that you will have no additional cost for receiving such items or any additional payment. Section 6 hereof shall also continue to apply in all instances. 5. Special Tax Provision. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to you (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by -7- Section 28OG(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or such person) as a result of a change in ownership of Millennium covered by Code Section 28OG(b)(2), but not including the payment provided for in this Section 5 (collectively, the "Covered Payments"), is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties thereon, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to you an additional amount (the "Tax Reimbursement Payment") such that after payment by you of all taxes (including, without limitation, any payroll tax, any income tax, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), you retain an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in your adjusted gross income, and (B) the highest applicable marginal rates of federal, state or local income tax for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 5 is that after paying your federal, state and local income tax and any payroll taxes with respect to the Tax Reimbursement Payment, you will be in the same position as if you were not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 5 and this Section 5 shall be interpreted accordingly. -8- (b) Except as otherwise provided in Section 5(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 28OG(b)(2) of the Code) and such payments in excess of the Code Section 28OG(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 28OG(b)(2) or legal counsel (reasonably acceptable to you) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and you) (the "Accountant"), deliver a written opinion to you, reasonably satisfactory to your legal counsel, that you have a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 28OG(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountant); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 28OG of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed: (i) to pay federal, state and/or local income taxes at the -9- highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those which would be disallowed due to the inclusion of the Tax Reimbursement Payment in your adjusted gross income. (d)(i) (A) In the event that prior to the time you have filed any of your tax returns for the calendar year in which the change in ownership event covered by Code Section 28OG(b)(2) occurred, the Accountant determines, for any reason whatsoever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, you shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by you, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that a determination described in (A) above is made by the Accountant after the filing by you of any of your tax returns for the calendar year in which the change in ownership event covered by Code Section 28OG(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, you shall file at the request of the Company amended tax returns in accordance with the -10- Accountant's determination, but no portion of the Tax Reimbursement Payment otherwise payable to the Company shall be required to be refunded to the Company until actual refund or credit of such portion has been made to you, and interest payable to the Company shall not exceed the interest received or credited to you by such tax authority for the period it held such portion (less any tax you must pay on such interest and which you are unable to deduct as a result of payment of the refund). (C) In the event you receive a refund pursuant to (B) above and repay such amount to the Company, you shall thereafter file for any refunds or credits that may be due to you by reason of the repayments to the Company. You and the Company shall mutually reasonably agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if your claim for such refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountant or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy between you and the Internal Revenue Service (or other taxing authority) that relates to the payment provided for under this Section 5, subject to the second sentence of subpart (i)(C) above, you shall permit the Company to control issues related to this Section 5 (at its expense), provided that such -11- issues do not potentially materially adversely affect you, but you shall control any other issues that you may have with the Internal Revenue Service (or other taxing authority). In the event the issues are interrelated, you and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree you shall make the final determination with regard to the issues that you may have with the Internal Revenue Service (or other taxing authority). In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, you shall permit the representative of the Company to accompany you, and you and your representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 5 (other than by mutual agreement) or, if not required, agreed to by the Company and you, you shall cooperate fully with the Company, and the Company shall bear the expense for the preparation of any such filing or amended tax return, provided that the foregoing shall not apply to actions that are provided herein to be at your sole discretion. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant, and any payment made after such fifth (5th) day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 28OG(b)(2) of the Code, the Company shall pay you the Tax Reimbursement Payment set forth in an opinion from counsel recognized as -12- knowledgeable in the relevant areas selected by you, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. In accordance with Section 15, the Company may withhold from the Tax Reimbursement Payment and deposit with the applicable taxing authorities such amounts as they are required to withhold by applicable law. To the extent that you are required to pay estimated or other taxes on amounts received by you beyond any withheld amounts, you shall promptly make such payments. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and, if Section 5(e) is applicable, the reasonable charges for the opinion given by your counsel. (g) You and the Company shall mutually agree on and promulgate further guidelines in accordance with this Section 5 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 5(d)(i)(C) hereof. 6. Indemnification. (a) The Company and Millennium, jointly and severally, agree that if you are made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that you are or were a director or officer of the Company or Millennium or their predecessors, and/or any other affiliate of any of such companies, or are or were serving at the request of any of such companies or affiliates as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, -13- joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, you shall be indemnified and held harmless by the Company and Millennium to the fullest extent authorized by Virginia law (or, if different, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by you in connection therewith, and such indemnification shall continue as to you even if you have ceased to be an officer, director, member, fiduciary or agent, or are no longer employed by the Company, and shall inure to the benefit of your heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and reasonable costs, reasonable attorneys' fees, reasonable accountants' fees, and reasonable disbursements and costs of attachment or similar bonds, investigations, and any reasonable expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by you in connection with any Proceeding shall be paid by the Company and Millennium in advance upon your request and the giving by you of any undertakings required by applicable law. (d) You shall give the Company and Millennium prompt notice of any claim made against you for which indemnity will or could be sought under this Agreement. In -14- addition, you shall give the Company and Millennium such information and cooperation as it may reasonably require and as shall be within your power and at such times and places as are reasonably convenient for you. (e) With respect to any Proceeding as to which you notify the Company and Millennium of the commencement thereof: (i) the Company will be entitled to participate therein at its own expense; and (ii) except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof. You also shall have the right to employ your own counsel in such Proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company and Millennium shall not be liable to indemnify you under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent. Neither the Company nor Millennium shall settle any Proceeding in any manner which would impose any penalty or limitation on you without your written consent. Neither the Company, Millennium nor you will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 6 shall not be exclusive of any other right which you may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the company, agreement, vote of stockholders or disinterested directors or otherwise. -15- 7. Legal Fees. In the event that a claim for payment or benefits under this Agreement or any other plan or agreement of the Company or its affiliates is disputed as a result of events which occurred on or after a Change in Control, or during the Pre Change in Control Period, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by you in pursuing such claim, unless the claim by you is found to be frivolous by any court or arbitrator. 8. No Duty to Mitigate/Set-off. The Company agrees that if your employment with the Company is terminated during the term of this Agreement, you shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to you by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by you or benefit provided to you as the result of employment by another employer or otherwise. Except as otherwise provided herein and apart from any disagreement between you and the Company concerning interpretation of this Agreement or any term or provision hereof, the Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against you. The amounts due under Section 4 are inclusive, and in lieu of, any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset against the amount due hereunder. -16- 9. Term. This Agreement shall be for a term (the "Term") commencing on the Effective Date and terminating on the Termination Date as defined herein, provided that if a Change in Control has taken place prior to the Termination Date, this Agreement shall continue in full force and effect during the Change in Control Protection Period and further provided that the payment and other obligations hereunder shall survive such termination to the extent a Change in Control has occurred during the Term, and in any event, the obligations under Section 6 hereof shall survive the end of the Term with regard to matters occurring during the Term (even if a claim is made after the Term). The Termination Date shall initially be September 30, 2002 and shall automatically be extended for successive one (1) year periods as of September 30, 2002 and as of each anniversary of the Termination Date, unless notice is given in writing to you by the Company at least 180 days prior to September 30, 2002, or any such anniversary of the Termination Date, of its intention to not extend the Termination Date. 10. Successors; Binding Agreement. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place and this Agreement shall inure to the benefit of such successor. Any such assignment shall not relieve the Company from liability hereunder, for periods prior to such assignment, but shall relieve the Company from liability for periods after such assignment. Reference to the Company herein shall also include any successor to the -17- Company. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If you die while any amount would still by payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to the executors, personal representatives, estate trustees, or administrators of your estate. This Agreement is personal to you and neither this Agreement nor any rights hereunder may be assigned by you. 11. Communications. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid as follows: (i) If to the Company or Millennium, to such entity at: c/o Millennium American Holdings Inc. 230 Half Mile Road P.O. Box 7015 Red Bank, New Jersey 07701 Attention:George H. Hempstead, III Senior Vice President-Law and Administration (ii) If to you, to the last shown address on the books of the Company or Millennium. Any such notice shall be deemed given when so delivered personally, or, if mailed, five (5) days after the date of deposit (in the form of registered or certified mail, return receipt requested, postage prepaid) in the United States postal system. Any -18- party may by notice designate another address or person for receipt of notices hereunder. 12. Not an Agreement of Employment. This is not an agreement assuring employment and the Company reserves the right to terminate your employment at any time with or without Cause, subject to the payment provisions hereof if such termination is during the Change in Control Protection Period. You acknowledge that you are aware that you shall have no claim against the Company hereunder or for deprivation of the right to receive the amounts hereunder as a result of any termination that does not specifically satisfy the requirements hereof. The foregoing shall not affect your rights under any other agreement with the Company. 13. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Company Board (as defined in Part III of Exhibit A). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof and supersedes any prior agreements between the Company and you. For the avoidance of doubt, the Company and you concur that the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997, does not constitute a Change in Control under this Agreement or any other agreement or plan affecting you (including your Restricted Stock Agreement -19- with Millennium); in addition, the sale or disposition of all or any part of Millennium's interests in Equistar shall not be deemed to constitute a Change in Control under this Agreement or any other agreement or plan affecting you. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 14. Independent Representation. You acknowledge that you have been advised by the Company to have the Agreement reviewed by independent counsel and you have been given the opportunity to do so. 15. Withholding Taxes. The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 16. Governing Law. This Agreement shall be construed, interpreted, and governed in accordance with the laws of the State of Virginia without reference to rules relating to conflicts of law. Very truly yours, MILLENNIUM PETROCHEMICALS INC. By:_____________________________ Name: Title: Vice President Agreed and Accepted -20- as of the first date written above: MILLENNIUM CHEMICALS INC. (for purposes of Section 6 only) By__________________________________ __________________________________ Name: Title: Chairman and Chief Executive Officer -21- EXHIBIT A Part I - Cause 1. Subject to compliance with the notification provisions in this Exhibit A, this Agreement shall not prevent the termination of your employment by the Company for Cause. A termination for Cause means a termination by the Company effected by a written notice of termination for Cause. For purposes of this Agreement, the term "Cause" shall be limited to your: (i) willful misconduct with regard to the Company or its affiliates or their businesses which has a material adverse effect on the Company and its affiliates taken as a whole; (ii) refusal to follow the proper written direction of the Company Board provided that the foregoing refusal shall not be "Cause" if in good faith you believe that such direction is illegal, unethical or immoral and you promptly so notify the applicable Company Board; (iii) conviction of a felony (other than a felony involving a motor vehicle) and either (x) exhausting all appeals without a reversal of the conviction or (y) commencing a term of incarceration in a house of detention; (iv) breach of any fiduciary duty owed to the Company or its affiliates which has a material adverse effect on the Company and its affiliates taken as a whole; or (v) your material fraud with regard to the Company or any of its affiliates. 2. A notice of termination for Cause shall mean a notice that shall set forth in reasonable detail the specific basis, facts and circumstances which provide for a basis for termination for Cause and shall include a copy of a resolution duly adopted by at least two-thirds of the directors of the applicable Company at a meeting which was called for the purpose of considering such termination and which you and your representative had the right to attend and address, finding that, in the good faith opinion of the applicable board, you engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a termination for Cause shall be the date indicated in the notice of termination. 3. Notwithstanding anything to the contrary contained in this Agreement, if any purported termination for Cause within the Change in Control Protection Period that occurs on or after the Effective Date is held by a court not to have been based on the grounds set forth in this Agreement, or not to have followed the procedures set forth in this Agreement, such purported termination for Cause shall be deemed a termination by the Company without Cause and you shall be entitled to the amounts and benefits provided in Section 4 to the extent, if any, applicable. -22- Part II - Change in Control 1. For purposes of this Agreement, a "Change in Control" shall mean either a Change in Control of Millennium or a Change in Control of the Company. Only one (1) Change in Control may occur under this Agreement. 2. Change in Control of Millennium. For purposes of this Agreement, the term "Change in Control of Millennium" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than Millennium, any trustee or other fiduciary holding securities under any employee benefit plan of Millennium or any company owned, directly or indirectly, by the stockholders of Millennium in substantially the same proportions as their ownership of Common Stock of Millennium), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of Millennium representing twenty-five percent (25%) or more of the combined voting power of Millennium's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to October 1, 1996), individuals who at the beginning of such period constitute the Board of Directors of Millennium, and any new director (other than a director designated by a person who has entered into an agreement with Millennium to effect a transaction described in clause (i), (iii), or (iv) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of Millennium) whose election by the Board of Directors of Millennium or nomination for election by Millennium's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors of Millennium; (iii) the merger or consolidation of Millennium with any other corporation, other than a merger or consolidation which would result in the voting securities of Millennium outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Millennium or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of Millennium (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than twenty-five percent (25%) of the combined voting power of Millennium's then outstanding securities shall not constitute a Change in Control of Millennium; or (iv) approval by the stockholders of Millennium of a plan of complete liquidation of Millennium or the closing of the sale or disposition by Millennium of all or substantially all of Millennium's assets other than the sale of all or substantially all of the assets of Millennium to one or more Subsidiaries (as defined below) of Millennium or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of Millennium at the time of the sale. -23- 3. For purposes of this Agreement, unless the Board of Directors of Millennium shall determine prior to the occurrence of an event set forth in Section (i) or (ii) of this paragraph 3 that such event is not a Change in Control of the Company, the term "Change in Control of the Company" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Act (other than Millennium or a Subsidiary (as defined below) of Millennium) becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities entitled to vote in a general election for directors; or (ii) all or substantially all of the Company's assets are sold other than to Millennium or a Subsidiary of Millennium. "Subsidiary" shall have the meaning set forth in Section 424 of the Code and the term shall also include any partnership, limited liability company or other business entity if Millennium owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. 4. Change in Control Protection Period. For purposes of this Agreement, the term "Change in Control Protection Period" shall mean the Pre Change in Control Period and the Post Change in Control Period as defined below. 5. Pre Change in Control Period. For purposes of this Agreement, Pre Change in Control Period shall mean the one hundred and eighty (180) day period prior to the date of a Change in Control that occurs on or after the Effective Date. 6. Post Change in Control Period. For purposes of this Agreement, Post Change in Control Period shall mean the period commencing on the date of a Change in Control that occurs on or after the Effective Date and ending the day immediately prior to the second anniversary of the Change in Control. Part III - Company Board For purposes of this Agreement, the term "Company Board" shall be deemed to refer to the Board of Directors of the Company and Millennium. Part IV - Disability For purposes of this Agreement, the term "Disability" shall mean your inability to perform your material duties and responsibilities hereunder due to the same or related physical or mental reasons for more than one hundred eighty (180) consecutive days in any twelve (12) consecutive month period. A termination for Disability shall be deemed to occur when you are terminated by the Company by written notice after you incur a Disability and while you remain disabled. -24- Part V - Good Reason 1. For purposes of this Agreement, a termination for "Good Reason" shall mean a termination by you effected by a written notice of termination for Good Reason given within ninety (90) days after the occurrence of the Good Reason event. Subject to subsection 3 below, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without your express written consent, of (i) any material diminution of your positions, duties or responsibilities with the Company from the highest position held within the Pre Change in Control Period (except in each case in connection with the termination of your employment for Cause, Disability or as a result of your death, or in the case of a material diminution of duties or responsibilities, temporarily as a result of your illness or other absence) or the assignment to you of duties or responsibilities that are inconsistent with your aforementioned highest position; (ii) your removal from, or the nonreelection to, your positions as an officer with the Company or Millennium held during the Pre Change in Control Period; (iii) a relocation of the Company's principal United States executive offices to a location more than twenty-five (25) miles from where they are at the time of the Change in Control, or a relocation by the Company of your principal office away from such principal United States executive offices; (iv) a failure by the Company or Millennium (A) to continue any bonus plan, program or arrangement in which you were entitled to participate during the Pre Change in Control Period (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification or (y) if plans providing you with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue you as a participant in the Bonus Plans or Substitute Plans on not less than the same maximum level of award and not more than the same level of difficulty for achievability thereof as was applicable to you immediately prior to any change in such plans, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company or Millennium of any provision of this Agreement; (vi) if on the Company Board during the Pre Change in Control Period, your removal from or failure to be reelected to the Company Board; (vii) a reduction by the Company of your rate of annual base salary to a level below your highest rate of base salary within one-hundred and eighty (180) days prior to the Change in Control; or (viii) failure of any successor of the Company to assume in a writing delivered to you upon the assignee becoming such, the obligations of the Company hereunder. 2. A notice of termination for Good Reason shall indicate the specific basis for termination relied upon and set forth in reasonable detail the facts and circumstances claimed to provide a basis for a termination for Good Reason. The failure by you to set forth in the notice of termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder. The notice of termination for Good Reason shall provide for a date of termination neither less than ten (10) nor more than sixty (60) days after the date such notice of termination for Good Reason is given. -25- 3. In the event that a Direct Pay Letter of Credit is delivered in accordance with Section 3 of this Agreement at the time of a Change in Control, the definition of Good Reason shall not include the events set forth in subsections 1 (i), (ii) and (vi) above so long as during such period you are maintained in a senior advisory capacity (without any line or other staff responsibilities) to assist in the orderly transition to new management. Part VI - Retirement For purposes of this Agreement, the term "Retirement" shall mean your retirement by the Company at or after your sixty-fifth (65th) birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. -26- EX-10 3 EXHIBIT 10.19 EXHIBIT 10.19 FORM OF CHANGE-IN-CONTROL AGREEMENT BETWEEN EACH OF THE COMPANY'S OPERATING SUBSIDIARIES AND CERTAIN OFFICERS OF SUCH SUBSIDIARIES WHO ARE NOT EXECUTIVE OFFICERS OF THE COMPANY [Name and Address of Relevant Subsidiary Employer] [Date] Name Address Dear ________: 1. INTRODUCTION. [Name of Employee's Subsidiary Employer] (the "Company") believes that the maintenance of a sound and vital management of the Company and of Millennium Chemicals Inc., which is the ultimate parent corporation of the Company ("Millennium"), is essential to the protection and enhancement of the interests of the Company and Millennium and their stockholders. The Company also recognizes that the possibility of a Change in Control of the Company or a Change in Control of Millennium (each as defined in Part II of Exhibit A), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company, Millennium and their shareholders. In light of the possibility of a Change in Control of the Company or Millennium, the Company has determined that it is appropriate to induce key employees to remain with the Company, and to reinforce and encourage their continued attention and dedication. Accordingly, upon your written acceptance of the terms and conditions of this agreement (the "Agreement") evidenced by signing below, the Company intends to provide you the protections set forth herein as of the date first set forth above (the "Effective Date"). Capitalized terms not defined in the body of this Agreement shall have the meanings set forth in Exhibit A hereto, which is incorporated herein and made a part of this Agreement. This Agreement shall replace the prior agreement regarding a change in control of Millennium and the Company dated July 24, 1998 by and between you and the Company, and said prior agreement is hereby rendered null and void and shall no longer have any force and effect. 2. TERMINATION FOLLOWING A CHANGE IN CONTROL. If a Change in Control occurs on or after the Effective Date and your employment is terminated during the Post Change in Control Period (i) by the Company without Cause or due to your Disability, (ii) by you for Good Reason or, subject to Section 3 below, without Good Reason, (iii) due to your -1- death or (iv) due to your Retirement, then you shall be entitled to the amounts and benefits provided in Section 4 herein. Furthermore, if a Change in Control occurs on or after the Effective Date and your employment was terminated within the Pre Change in Control Period (i) by the Company without Cause or due to your Disability, (ii) by you for Good Reason (based on an event that occurred within the Pre Change in Control Period), or (iii) due to your death, you shall be entitled to the amounts and benefits provided in Section 4 herein. 3. DIRECT PAY LETTER OF CREDIT. Notwithstanding anything else herein, your right to voluntarily terminate employment without Good Reason after the date of a Change in Control and receive the amounts due under Section 4 hereof shall be delayed until one hundred and eighty (180) days after the Change in Control if, simultaneous with the Change in Control, the Company or the person or entity triggering the Change in Control delivers to you an irrevocable direct pay letter of credit (the "Direct Pay Letter of Credit") satisfying the requirements of this Section 3 and an indemnity agreement covering in a similar manner the provisions of Section 6 with regard to activities after the Change in Control. The Direct Pay Letter of Credit shall be in an amount equal to the aggregate amount you would be entitled to receive under Sections 4(A)(i) and (ii) hereof if you were terminated without Cause immediately upon the Change in Control and shall have an expiration date of no less than two (2) years after the date of such Change in Control. You (or, if applicable, your legal representative) shall be entitled to draw on the Direct Pay Letter of Credit upon presentation to the issuing bank of a demand for payment signed by you (or, if applicable, your legal representative) that states that (i) a Good Reason event has occurred and your employment has terminated during the Post Change in Control Period, or (ii) one-hundred and eighty (180) days have expired since the Change in Control and your employment has terminated during the Post Change in Control Period. There shall be no other requirements (including no requirement that you first make demand upon the Company) with regard to payment of the Direct Pay Letter of Credit. To the extent the Direct Pay Letter of Credit is not adequate to cover the amount owed to you under this Agreement, is not submitted by you or is not paid by the issuing bank, the Company shall remain liable to you for any amounts owed to you pursuant to the terms of this Agreement. To the extent any amount is paid under the Direct Pay Letter of Credit it shall be a credit against any amount the Company then or thereafter would owe to you under Section 4 of this Agreement. The Direct Pay Letter of Credit shall be issued by a national money center bank with a rating of at least A by Standard and Poor's. The Company shall bear the cost of the Direct Pay Letter of Credit. 4. COMPENSATION ON CHANGE IN CONTROL TERMINATION. If pursuant to Section 2 you are entitled to amounts and benefits under this Section 4, the Company shall, subject to Section 8, pay and provide to you: (A) in a lump sum within five (5) days after such termination (or, if such termination occurred during the Pre Change in Control Period, within five (5) days after the Change in Control) the sum of (i) three (3) times your highest annual base salary in effect within one-hundred and eighty (180) days prior to the Change in Control, computed by including the amount of base salary deferred by you (voluntarily or otherwise pursuant to the Millennium Chemicals Inc. Salary and Bonus Deferral Plan (the "Deferral Plan") or any other agreement or plan that is or may -2- have been in effect at the time of such deferral) as part of the base salary for the year in which it was accrued, (ii) three (3) times the highest annual bonus paid or payable to you for any of the last three (3) completed fiscal years by the Company or its predecessors or any affiliate of the Company or its predecessors (which shall in no event include amounts contributed or allocated by the Company (or its predecessors or affiliates thereof) on your behalf or paid to you under any supplemental executive bonus plans applicable to you (including, without limitation, the 1993 or 1996 HI Long Term Incentive Plans, any other plan commonly referred to by the Company as a "top-hat" plan or any equity plan such as the Millennium Chemicals Inc. Long Term Stock Incentive Plan)), computed by including the amount of any annual bonus deferred by you (voluntarily or otherwise pursuant to the Deferral Plan or any other agreement or plan that is or may have been in effect at the time of such deferral) as part of the annual bonus for the year in which it was accrued, (iii) any unreimbursed business expenses for the period prior to termination payable in accordance with the Company's policies, and (iv) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to you but not yet paid; (B) any other amounts or benefits due under the then applicable employee benefit, equity or incentive plans of the Company applicable to you as shall be determined and paid in accordance with such plans; (C) three (3) years of additional age, service and compensation credit (using, for such purposes, the base salary and (to the extent applicable) annual bonus calculated under Sections 4(A)(i) and (ii), respectively, as your deemed compensation in such years) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company and its affiliates applicable to you, measured from the date of termination of employment and not credited to the extent that you are otherwise entitled to such credit during such three (3) year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension plan or arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's or its affiliates' defined benefit plan covering you and your actual age on the date of termination of employment); (D) an amount equal to the maximum amount which would be contributed by the Company to your account balance(s) (as Company matching contributions) under any type of qualified 401(k) plan or nonqualified excess 401(k) plan, assuming you deferred the maximum amount and you continued employment for three (3) years after the date of termination of employment at the base salary and, to the extent applicable, the annual bonus calculated under Sections 4(A)(i) and (ii), respectively, to the extent not otherwise contributed to such plans, payable in a lump sum at the same time payment is made under Section 4(A) hereof; and (E) payment by the Company of the premiums for you (except in the case of your death) and your dependents' health coverage for three (3) years from the date of termination of your employment under the Company's health plans which cover the senior executives of the Company or materially similar benefits (to the extent not otherwise provided), provided that in the case of termination within one hundred eighty (180) days prior to a Change in Control, the obligations under this subpart (E) shall only exist to the extent that you or your dependents, as the case may be, had timely elected or timely elect COBRA coverage which continued at the time of the Change in Control and the obligation with regard to the period prior to the Change in -3- Control shall be limited to reimbursement of the COBRA premiums previously paid or due for such period. For the avoidance of doubt, in calculating the amount of annual bonus "paid or payable" to you in a particular year under the Millennium Chemicals Inc. Annual Performance Incentive Plan or any similar plan that contains a "bonus bank" feature, the annual bonus credited to your "bonus bank" account under such plan for such year shall be deemed to be the bonus "paid or payable" to you under such plan for such year. Any amendment or termination of benefits, equity or incentive plans within one-hundred and eighty (180) days prior to, or after, a Change in Control that is detrimental to you shall be ignored with respect to (C), (D) and (E) above. Payments under (E) above may, at the discretion of the Company, be made by continuing your participation in the plan as a terminee, by paying the applicable COBRA premium for you and your dependents, or by covering you and your dependents under substitute arrangements, provided that, to the extent you incur tax that you would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, you shall receive from the Company an additional payment in the amount necessary so that you will have no additional cost for receiving such items or any additional payment. Section 6 hereof shall also continue to apply in all instances. 5. SPECIAL TAX PROVISION. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to you (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 28OG(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or such person) as a result of a change in ownership of Millennium covered by Code Section 28OG(b)(2), but not including the payment provided for in this Section 5 (collectively, the "Covered Payments"), is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar tax that may hereafter be imposed), and/or any interest or penalties with respect to such excise tax (such excise tax, together with such interest and penalties thereon, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to you an additional amount (the "Tax Reimbursement Payment") such that after payment by you of all taxes (including, without limitation, any payroll tax, any income tax, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), you retain an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in your adjusted gross income, and (B) the highest applicable marginal rates of federal, state or local income tax for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 5 is that after paying your federal, state and local income tax and any payroll taxes with respect to the Tax Reimbursement Payment, you will be in the same position as if you were not subject to the Excise Tax under Section 4999 of the Code and did not receive the extra payments pursuant to this Section 5 and this Section 5 shall be interpreted accordingly. -4- (b) Except as otherwise provided in Section 5(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 28OG(b)(2) of the Code) and such payments in excess of the Code Section 28OG(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 28OG(b)(2) or legal counsel (reasonably acceptable to you) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and you) (the "Accountant"), deliver a written opinion to you, reasonably satisfactory to your legal counsel, that you have a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 28OG(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountant); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 28OG of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, you shall be deemed: (i) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those which would be disallowed due to the inclusion of the Tax Reimbursement Payment in your adjusted gross income. (d)(i) (A) In the event that prior to the time you have filed any of your tax returns for the calendar year in which the change in ownership event covered by Code Section 28OG(b)(2) occurred, the Accountant determines, for any reason whatsoever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, you shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income and payroll tax imposed on the portion of the Tax Reimbursement Payment being repaid by you, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that a determination described in (A) above is made by the Accountant after the filing by you of any of your tax returns for the calendar year in which the change in ownership event covered by Code Section 28OG(b)(2) occurred -5- but prior to one (1) year after the occurrence of such change in ownership, you shall file at the request of the Company amended tax returns in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment otherwise payable to the Company shall be required to be refunded to the Company until actual refund or credit of such portion has been made to you, and interest payable to the Company shall not exceed the interest received or credited to you by such tax authority for the period it held such portion (less any tax you must pay on such interest and which you are unable to deduct as a result of payment of the refund). (C) In the event you receive a refund pursuant to (B) above and repay such amount to the Company, you shall thereafter file for any refunds or credits that may be due to you by reason of the repayments to the Company. You and the Company shall mutually reasonably agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if your claim for such refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountant or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy between you and the Internal Revenue Service (or other taxing authority) that relates to the payment provided for under this Section 5, subject to the second sentence of subpart (i)(C) above, you shall permit the Company to control issues related to this Section 5 (at its expense), provided that such issues do not potentially materially adversely affect you, but you shall control any other issues that you may have with the Internal Revenue Service (or other taxing authority). In the event the issues are interrelated, you and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree you shall make the final determination with regard to the issues that you may have with the Internal Revenue Service (or other taxing authority). In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, you shall permit the representative of the Company to accompany you, and you and your representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 5 (other than by mutual agreement) or, if not required, agreed to by the Company and you, you shall cooperate fully with the Company, and the Company shall bear the expense for the preparation of any such filing or amended tax return, provided that the foregoing shall not apply to actions that are provided herein to be at your sole discretion. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth (5th) day following the determination by the Accountant, and any payment made after such fifth (5th) day shall bear interest at -6- the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 28OG(b)(2) of the Code, the Company shall pay you the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by you, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. In accordance with Section 15, the Company may withhold from the Tax Reimbursement Payment and deposit with the applicable taxing authorities such amounts as they are required to withhold by applicable law. To the extent that you are required to pay estimated or other taxes on amounts received by you beyond any withheld amounts, you shall promptly make such payments. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and, if Section 5(e) is applicable, the reasonable charges for the opinion given by your counsel. (g) You and the Company shall mutually agree on and promulgate further guidelines in accordance with this Section 5 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 5(d)(i)(C) hereof. 6. INDEMNIFICATION. (a) The Company and Millennium, jointly and severally, agree that if you are made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that you are or were a director or officer of the Company or Millennium or their predecessors, and/or any other affiliate of any of such companies, or are or were serving at the request of any of such companies or affiliates as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, you shall be indemnified and held harmless by the Company and Millennium to the fullest extent authorized by Delaware law (or, if different, the law applicable to such company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by you in connection therewith, and such indemnification shall continue as to you even if you have ceased to be an officer, director, member, fiduciary or agent, or are no longer employed by the Company, and shall inure to the benefit of your heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and reasonable costs, reasonable attorneys' fees, reasonable accountants' fees, and reasonable disbursements and costs of attachment or similar bonds, -7- investigations, and any reasonable expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by you in connection with any Proceeding shall be paid by the Company and Millennium in advance upon your request and the giving by you of any undertakings required by applicable law. (d) You shall give the Company and Millennium prompt notice of any claim made against you for which indemnity will or could be sought under this Agreement. In addition, you shall give the Company and Millennium such information and cooperation as it may reasonably require and as shall be within your power and at such times and places as are reasonably convenient for you. (e) With respect to any Proceeding as to which you notify the Company and Millennium of the commencement thereof: (i) the Company will be entitled to participate therein at its own expense; and (ii) except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof. You also shall have the right to employ your own counsel in such Proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company and Millennium shall not be liable to indemnify you under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent. Neither the Company nor Millennium shall settle any Proceeding in any manner which would impose any penalty or limitation on you without your written consent. Neither the Company, Millennium nor you will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 6 shall not be exclusive of any other right which you may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the company, agreement, vote of stockholders or disinterested directors or otherwise. 7. LEGAL FEES. In the event that a claim for payment or benefits under this Agreement or any other plan or agreement of the Company or its affiliates is disputed as a result of events which occurred on or after a Change in Control, or during the Pre Change in Control Period, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by you in pursuing such claim, unless the claim by you is found to be frivolous by any court or arbitrator. 8. NO DUTY TO MITIGATE/SET-OFF. The Company agrees that if your employment with the Company is terminated during the term of this Agreement, you shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to you by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by you or benefit provided to you as the result of employment by another -8- employer or otherwise. Except as otherwise provided herein and apart from any disagreement between you and the Company concerning interpretation of this Agreement or any term or provision hereof, the Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against you. The amounts due under Section 4 are inclusive, and in lieu of, any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset against the amount due hereunder. 9. TERM. This Agreement shall be for a term (the "Term") commencing on the Effective Date and terminating on the Termination Date as defined herein, provided that if a Change in Control has taken place prior to the Termination Date, this Agreement shall continue in full force and effect during the Change in Control Protection Period and further provided that the payment and other obligations hereunder shall survive such termination to the extent a Change in Control has occurred during the Term, and in any event, the obligations under Section 6 hereof shall survive the end of the Term with regard to matters occurring during the Term (even if a claim is made after the Term). The Termination Date shall initially be September 30, 2002 and shall automatically be extended for successive one (1) year periods as of September 30, 2002 and as of each anniversary of the Termination Date, unless notice is given in writing to you by the Company at least 180 days prior to September 30, 2002, or any such anniversary of the Termination Date, of its intention to not extend the Termination Date. 10. SUCCESSORS; BINDING AGREEMENT. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place and this Agreement shall inure to the benefit of such successor. Any such assignment shall not relieve the Company from liability hereunder, for periods prior to such assignment, but shall relieve the Company from liability for periods after such assignment. Reference to the Company herein shall also include any successor to the Company. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If you die while any amount would still by payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to the executors, personal representatives, estate trustees, or administrators of your estate. This Agreement is personal to you and neither this Agreement nor any rights hereunder may be assigned by you. 11. COMMUNICATIONS. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid as follows: -9- (i) If to the Company or Millennium, to such entity at: c/o Millennium American Holdings Inc. 230 Half Mile Road P.O. Box 7015 Red Bank, New Jersey 07701 Attention: George H. Hempstead, III Senior Vice President-Law and Administration (ii) If to you, to the last shown address on the books of the Company or Millennium. Any such notice shall be deemed given when so delivered personally, or, if mailed, five (5) days after the date of deposit (in the form of registered or certified mail, return receipt requested, postage prepaid) in the United States postal system. Any party may by notice designate another address or person for receipt of notices hereunder. 12. NOT AN AGREEMENT OF EMPLOYMENT. This is not an agreement assuring employment and the Company reserves the right to terminate your employment at any time with or without Cause, subject to the payment provisions hereof if such termination is during the Change in Control Protection Period. You acknowledge that you are aware that you shall have no claim against the Company hereunder or for deprivation of the right to receive the amounts hereunder as a result of any termination that does not specifically satisfy the requirements hereof. The foregoing shall not affect your rights under any other agreement with the Company. 13. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Company Board (as defined in Part III of Exhibit A). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof and supersedes any prior agreements between the Company and you. For the avoidance of doubt, the Company and you concur that the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997, does not constitute a Change in Control under this Agreement or any other agreement or plan affecting you (including your Restricted Stock Agreement with Millennium); in addition, the sale or disposition of all or any part of Millennium's interests in Equistar shall not be deemed to constitute a Change in Control under this Agreement or any other agreement or plan affecting you. No agreements or -10- representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 14. INDEPENDENT REPRESENTATION. You acknowledge that you have been advised by the Company to have the Agreement reviewed by independent counsel and you have been given the opportunity to do so. 15. WITHHOLDING TAXES. The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. -11- 16. GOVERNING LAW. This Agreement shall be construed, interpreted, and governed in accordance with the laws of the State of Delaware without reference to rules relating to conflicts of law. Very truly yours, [Name of Employee's Subsidiary Employer] By:________________________________ Name: Title: Vice President Agreed and Accepted as of the first date written above: MILLENNIUM CHEMICALS INC. (for purposes of Section 6 only) By___________________________ __________________________ Name: Name: Title: Chairman and Chief Executive Officer -12- EXHIBIT A Part I - Cause 1. Subject to compliance with the notification provisions in this Exhibit A, this Agreement shall not prevent the termination of your employment by the Company for Cause. A termination for Cause means a termination by the Company effected by a written notice of termination for Cause. For purposes of this Agreement, the term "Cause" shall be limited to your: (i) willful misconduct with regard to the Company or its affiliates or their businesses which has a material adverse effect on the Company and its affiliates taken as a whole; (ii) refusal to follow the proper written direction of the Company Board provided that the foregoing refusal shall not be "Cause" if in good faith you believe that such direction is illegal, unethical or immoral and you promptly so notify the applicable Company Board; (iii) conviction of a felony (other than a felony involving a motor vehicle) and either (x) exhausting all appeals without a reversal of the conviction or (y) commencing a term of incarceration in a house of detention; (iv) breach of any fiduciary duty owed to the Company or its affiliates which has a material adverse effect on the Company and its affiliates taken as a whole; or (v) your material fraud with regard to the Company or any of its affiliates. 2. A notice of termination for Cause shall mean a notice that shall set forth in reasonable detail the specific basis, facts and circumstances which provide for a basis for termination for Cause and shall include a copy of a resolution duly adopted by at least two-thirds of the directors of the applicable Company at a meeting which was called for the purpose of considering such termination and which you and your representative had the right to attend and address, finding that, in the good faith opinion of the applicable board, you engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a termination for Cause shall be the date indicated in the notice of termination. 3. Notwithstanding anything to the contrary contained in this Agreement, if any purported termination for Cause within the Change in Control Protection Period that occurs on or after the Effective Date is held by a court not to have been based on the grounds set forth in this Agreement, or not to have followed the procedures set forth in this Agreement, such purported termination for Cause shall be deemed a termination by the Company without Cause and you shall be entitled to the amounts and benefits provided in Section 4 to the extent, if any, applicable. -1- Part II - Change in Control 1. For purposes of this Agreement, a "Change in Control" shall mean either a Change in Control of Millennium or a Change in Control of the Company. Only one (1) Change in Control may occur under this Agreement. 2. Change in Control of Millennium. For purposes of this Agreement, the term "Change in Control of Millennium" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than Millennium, any trustee or other fiduciary holding securities under any employee benefit plan of Millennium or any company owned, directly or indirectly, by the stockholders of Millennium in substantially the same proportions as their ownership of Common Stock of Millennium), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of Millennium representing twenty-five percent (25%) or more of the combined voting power of Millennium's then outstanding securities; (ii) during any period of two (2) consecutive years (not including any period prior to October 1, 1996), individuals who at the beginning of such period constitute the Board of Directors of Millennium, and any new director (other than a director designated by a person who has entered into an agreement with Millennium to effect a transaction described in clause (i), (iii), or (iv) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of Millennium) whose election by the Board of Directors of Millennium or nomination for election by Millennium's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors of Millennium; (iii) the merger or consolidation of Millennium with any other corporation, other than a merger or consolidation which would result in the voting securities of Millennium outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Millennium or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of Millennium (or similar transaction) in which no person (other than those covered by the exceptions in (i) above) acquires more than twenty-five percent (25%) of the combined voting power of Millennium's then outstanding securities shall not constitute a Change in Control of Millennium; or (iv) approval by the stockholders of Millennium of a plan of complete liquidation of Millennium or the closing of the sale or disposition by Millennium of all or substantially all of Millennium's assets other than the sale or disposition of all or substantially all of the assets of Millennium to one or more Subsidiaries (as defined below) of Millennium or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of Millennium at the time of the sale. -2- 3. For purposes of this Agreement, unless the Board of Directors of Millennium shall determine prior to the occurrence of an event set forth in Section (i) or (ii) of this paragraph 3 that such event is not a Change in Control of the Company, the term "Change in Control of the Company" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Act (other than Millennium or a Subsidiary (as defined below) of Millennium) becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities entitled to vote in a general election for directors; or (ii) all or substantially all of the Company's assets are sold other than to Millennium or a Subsidiary of Millennium. "Subsidiary" shall have the meaning set forth in Section 424 of the Code and the term shall also include any partnership, limited liability company or other business entity if Millennium owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. 4. Change in Control Protection Period. For purposes of this Agreement, the term "Change in Control Protection Period" shall mean the Pre Change in Control Period and the Post Change in Control Period as defined below. 5. Pre Change in Control Period. For purposes of this Agreement, Pre Change in Control Period shall mean the one hundred and eighty (180) day period prior to the date of a Change in Control that occurs on or after the Effective Date. 6. Post Change in Control Period. For purposes of this Agreement, Post Change in Control Period shall mean the period commencing on the date of a Change in Control that occurs on or after the Effective Date and ending the day immediately prior to the second anniversary of the Change in Control. Part III - Company Board For purposes of this Agreement, the term "Company Board" shall be deemed to refer to the Board of Directors of the Company and Millennium. Part IV - Disability For purposes of this Agreement, the term "Disability" shall mean your inability to perform your material duties and responsibilities hereunder due to the same or related physical or mental reasons for more than one hundred eighty (180) consecutive days in any twelve (12) consecutive month period. A termination for Disability shall be deemed to occur when you are terminated by the Company by written notice after you incur a Disability and while you remain disabled. -3- Part V - Good Reason 1. For purposes of this Agreement, a termination for "Good Reason" shall mean a termination by you effected by a written notice of termination for Good Reason given within ninety (90) days after the occurrence of the Good Reason event. Subject to subsection 3 below, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without your express written consent, of (i) any material diminution of your positions, duties or responsibilities with the Company from the highest position held within the Pre Change in Control Period (except in each case in connection with the termination of your employment for Cause, Disability or as a result of your death, or in the case of a material diminution of duties or responsibilities, temporarily as a result of your illness or other absence) or the assignment to you of duties or responsibilities that are inconsistent with your aforementioned highest position; (ii) your removal from, or the nonreelection to, your positions as an officer with the Company or Millennium held during the Pre Change in Control Period; (iii) a relocation of the Company's principal United States executive offices to a location more than twenty-five (25) miles from where they are at the time of the Change in Control, or a relocation by the Company of your principal office away from such principal United States executive offices; (iv) a failure by the Company or Millennium (A) to continue any bonus plan, program or arrangement in which you were entitled to participate during the Pre Change in Control Period (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification or (y) if plans providing you with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue you as a participant in the Bonus Plans or Substitute Plans on not less than the same maximum level of award and not more than the same level of difficulty for achievability thereof as was applicable to you immediately prior to any change in such plans, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company or Millennium of any provision of this Agreement; (vi) if on the Company Board during the Pre Change in Control Period, your removal from or failure to be reelected to the Company Board; (vii) a reduction by the Company of your rate of annual base salary to a level below your highest rate of base salary within one-hundred and eighty (180) days prior to the Change in Control; or (viii) failure of any successor of the Company to assume in a writing delivered to you upon the assignee becoming such, the obligations of the Company hereunder. 2. A notice of termination for Good Reason shall indicate the specific basis for termination relied upon and set forth in reasonable detail the facts and circumstances claimed to provide a basis for a termination for Good Reason. The failure by you to set forth in the notice of termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder. The notice of termination for Good Reason shall provide for a date of termination neither less than ten (10) nor more than sixty (60) days after the date such notice of termination for Good Reason is given. -4- 3. In the event that a Direct Pay Letter of Credit is delivered in accordance with Section 3 of this Agreement at the time of a Change in Control, the definition of Good Reason shall not include the events set forth in subsections 1 (i), (ii) and (vi) above so long as during such period you are maintained in a senior advisory capacity (without any line or other staff responsibilities) to assist in the order transition to new management. Part VI - Retirement For purposes of this Agreement, the term "Retirement" shall mean your retirement by the Company at or after your sixty-fifth (65th) birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. -5- EX-10 4 EXHIBIT 10.20(D) EXHIBIT 10.20(d) AMENDMENT NUMBER 3 DATED JANUARY 22, 1999 TO THE MILLENNIUM CHEMICALS INC. 1996 LONG TERM INCENTIVE PLAN AMENDMENT NUMBER THREE TO THE ANNUAL PERFORMANCE INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Annual Performance Incentive Plan, effective as of October 1, 1996 (the "Plan"); WHEREAS, pursuant to Section 10 of the Plan, the Board of Directors of the Company (the "Board") reserved the right to amend the Plan; and WHEREAS, the Board desires to amend the Plan. NOW, THEREFORE, effective as of January 1, 1999, the Plan is amended as follows: 1. The definition of "Change in Control" in Exhibit A to the Plan is amended by deleting Subsection (iv) of such definition in its entirety and substituting the following in lieu thereof: (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Code and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 2. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed this 22nd day of January, 1999. MILLENNIUM CHEMICALS INC. By:________________________ George H. Hempstead, III Senior Vice President EX-10 5 EXHIBIT 10.21(D) EXHIBIT 10.21(d) AMENDMENT DATED JANUARY 22, 1999 TO THE MILLENNIUM CHEMICALS INC. 1996 LONG TERM INCENTIVE PLAN AMENDMENT TO THE MILLENNIUM CHEMICALS INC. LONG-TERM INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Long-Term Incentive Plan (effective as of October 1, 1995) (the "Plan"); WHEREAS, pursuant to Section 22 of the Plan, the Board of Directors of the Company (the "Board") reserves the right to amend the Plan; WHEREAS, the Board previously approved the "Termination Amendment" to the Plan effective as of October 23, 1997 and subsequently amended Section 3 of such Termination Amendment effective as of January 1, 1998, and WHEREAS, the Board desires to amend the Plan; NOW, THEREFORE, effective as of January 1, 1999, the Plan is amended as follows: 1. Section 13(b) of the Plan is amended and restated in its entirely as follows: For purposes of this Section 13 Agreement, the term "Change in Control" shall mean: (1) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (2) during any period of two consecutive years (not including any period prior to October 1, 1996), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3), or (4) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (3) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (1) above) acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (4) the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Internal Revenue Code of 1986, as amended or superceded, and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 2. Section 3(e) is hereby amended and restated in its entirety to read: "Company means Millennium Chemicals Inc." The parenthetical clause in Section 3(g) shall be amended to refer to the operating companies of Millennium Chemicals Inc., and all references to Hanson PLC shall be amended to refer to Millennium Chemical Inc. 3. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed the 22nd day of January, 1999. MILLENNIUM CHEMICALS INC. By: _____________________ George H. Hempstead, III EX-10 6 EXHIBIT 10.22 EXHIBIT 10.22 MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN, AS AMENDED BY THE TERMINATION AMENDMENT THERETO, DATED AS OF OCTOBER 23, 1997, AND AS FURTHER AMENDED BY AMENDMENTS THERETO DATED JANUARY 23, 1998 AND JANUARY 22, 1999 MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN (Effective as of January 1, 1997) Section 1. Establishment. Millennium Chemicals Inc., a Delaware corporation ("Millennium"), hereby establishes, effective as of January 1, 1997, an unfunded incentive compensation plan to be known as the "MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN" (hereinafter referred to as "the Plan"). Section 2. Purpose. The purpose of this Plan is to retain and reward key policy making and senior managerial employees for achieving long-term performance goals designed to enhance shareholder value. Section 3. Definitions. Whenever used herein, the following terms shall have the meanings set forth below: (a) Account means the account established under Section 6. (b) Award means an opportunity to earn an amount of incentive compensation granted in an Award Year to a Participant pursuant to Section 7. (c) Award Year means the calendar year in which Awards are granted. (d) Board of Directors means the Board of Directors of the Company, except as otherwise specifically stated. (e) Company means Millennium Chemicals Inc.. (f) Earned Award means that portion of an Award earned by a Participant based on his or her Employer's and/or the Company's performance as measured at the end of each Performance Cycle against targets established by the Compensation Committee of the Board of Directors at the commencement of each Performance Cycle. (g) Employer means the respective operating company (Millennium Inorganic Chemicals Inc., Millennium Petrochemicals Inc. and Millennium Specialty Chemicals Inc. or an operating subsidiary of any such company, as the case may be) with whom a Participant is employed. (h) Participant means an executive or senior manager (or a former executive or senior manager) of an Employer who has been credited with one or more Awards under this Plan and whose Account has not been fully depleted by distributions or forfeitures. (i) Performance Cycle means a three-year period over which an Employer's performance shall be measured for purposes of determining the amount of an Earned Award by a Participant. A new Performance Cycle shall commence each January 1. (j) Retirement Age means the age at which a Participant attains normal retirement age for an unreduced benefit under the defined benefit plan in which he or she is a participant. (k) Total and Permanent Disability shall have the same meaning that such term (or similar term) has under the long-term disability plan in which the Participant is covered. Section 4. Eligible Executives. Participation in the Plan shall be limited to key policy making executives and senior managers of the Company or an Employer, as selected and approved by the Compensation Committee of the Board of Directors. Section 5. Period of Participation. An executive or senior manager for whom a grant has been made shall be a Participant under the Plan until his or her entire interest in the Plan either has been distributed or forfeited. Section 6. Account. The Company shall maintain a bookkeeping Account for each Participant, to which is credited annual Awards, and from which is debited distributions of Earned Awards and forfeitures under the Plan. Section 7. Awards. (a) At or shortly following the commencement of each Award Year, the Compensation Committee of the Board of Directors shall designate the senior executives and senior managers of an Employer to be eligible for grants of an Award. All awards shall be in the form of a cash compensation award relating to services to be performed and performance targets to be met in a Performance Cycle. A Participant shall earn the Award or portion thereof, based on his or her Employer's attainment of performance targets established by the Compensation Committee of the Board of Directors for each Performance Cycle. (b) Performance Levels. The amount of an Award which can be earned will depend upon the performance results of a Participant's Employer and/or the Company measured against performance levels which are referred to as : (1) "primary" level performance; and (2) "excess" level performance. The Compensation Committee, in its sole discretion, may also establish "entry" level performance goals which must be met before a participant is eligible to earn any portion of his or her "primary" or "excess" level award. (c) Weighting. Awards may, in the sole discretion of the Compensation Committee, be weighted against the consolidated results of the Company and/or an Employer in such percentages as the Compensation Committee may determine. (d) Calculation. The initial value of each Participants Award shall be expressed as a percentage of a Participant's annual bonus percentage of salary, as determined by the Compensation Committee of the Board of Directors with regard to each Participant, at the commencement of each Performance Cycle (and excluding any "top hat", special or other incentive arrangements which may be in existence or adopted subsequent to the commencement of a Performance Cycle). Section 8. Payment of Awards. Subject to Section 11 herein: (i) for each Performance Cycle in which a Participant earns an Award, he or she shall be paid 50% of the Earned Award within ninety (90) days of the end of each such Performance Cycle and (ii) the remaining 50% of the Earned Award shall be credited to an Account in the Participant's name and, subject to the forfeiture provisions herein, shall be paid or distributed in equal installments over five (5) years on the anniversary date of the last day of the Performance Cycle for which such payments are being made. Section 9. Interest. Simple interest shall be credited to each Earned Award, from and after the last day of each Performance Cycle until paid, at the 2 1/2 year Money Market Rate as reported by Chase Manhattan Bank or its successor at the end of each Performance Cycle. Interest shall be paid only on and in respect of each installment, as and when distributed. Section 10. Vesting in Account. A Participant shall be entitled to receive the remaining 50% of an Earned Award at the rate of 10% per year over the five years following the end of the Performance Cycle. A Participant shall be fully vested in Earned Awards in his or her Account in the event of the Participant's retirement (as defined in Section 3(j)), death, permanent or total disability or termination of employment for reasons other than cause or resignation. Section 11. Forfeitures. In the event that either: (a) the Participant is terminated for cause, a forfeiture under this subsection (a) shall occur even if the Participant has attained his or her Retirement Age; or, (b) the Participant terminates employment (voluntarily or for cause) prior to Retirement Age, the Participant shall forfeit any remaining balance in his or her Account, and nothing shall be payable thereafter to the Participant or any Beneficiary under the Plan. For purposes of this agreement, "cause" shall mean the willful neglect of the performance of duties by the Participant or the charge and ultimate conviction of a felony (or a pleading of nolo contendere) by the Participant or engaging in theft of company property, self dealing, having a conflict of interest and/or being found to have willfully breached Company policy, whether or not during the course of his or her employment. Section 12. Death, Retirement, Disability. Upon termination of employment with the Company on or after the Participant's Retirement Age, or on account of the Participant's Total and Permanent Disability or Death, or for reasons other than cause or resignation, he or she shall be paid the remaining Earned Awards held in the Participant's Account in full in the form of a lump sum. Awards for the Performance Cycles in which such death, retirement or disability occurs shall be paid to a disabled or retired Participant or to the Participant's estate or beneficiary only after the completion of that Performance Cycle and only to the extent such Award becomes an Earned Award, provided the Participant has remained in the employ of the Employer for the entire first year of each such Performance Cycle. Section 13. Change of Control/Sale of an Employer. (a) Unless the Board of Directors otherwise directs by resolution prior to the occurrence of a Change of Control (as hereinafter defined), in the event of a Change of Control: (1) As of the date of the Change of Control, 100% of all outstanding but unearned Awards shall be deemed Earned Awards to the extent of achievement of the "primary" or expected level of performance against the performance goals of the relevant performance cycle. (2) Earned Awards, including unpaid installments of Earned Awards outstanding prior to the Change of Control, shall not be subject to forfeiture for any reason. (3) Earned Awards, including installments of Earned Awards outstanding prior to the Change of Control, shall be distributed and paid in full within 90 days following the Change of Control. (b) For purposes of this Section 13, "Change of Control" shall mean that: (1) in the good faith judgment of the Board of Directors as constituted prior to the Change of Control, 30% or more of the Common Stock of Millennium Chemicals Inc. has been acquired by any person (as defined by Section 3(a)(9) of the Securities Exchange Act of 1934) other than directly from Millennium Chemicals Inc.; (2) the stockholders of Millennium Chemicals Inc. approve a merger or consolidation of Millennium Chemicals Inc. with any other corporation, other than a merger or consolidation which would result in the voting securities of Millennium Chemicals Inc. outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of Millennium Chemicals Inc. or such surviving entity outstanding immediately after such merger or consolidation, except that a merger or consolidation effected to implement a recapitalization of Millennium Chemicals Inc. (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of Millennium Chemicals Inc.'s then outstanding securities shall not constitute a Change of Control of Millennium Chemicals Inc.; or (3) 20% or more of the directors elected by shareholders to the Board of Directors of Millennium Chemicals Inc. are persons who were not nominated or elected at the most recent three annual meetings of the shareholders of Millennium Chemicals Inc.; or (4) the stockholders of Millennium Chemicals Inc. approve a plan of complete liquidation of Millennium Chemicals Inc. or an agreement for the sale or disposition by Millennium Chemicals Inc. of all or substantially all of the Company's or Millennium Chemicals Inc.'s assets. (c) In the event of a sale by the Company or by one of its affiliates of all of the stock or assets of an Employer of a Participant to any person, firm or entity (which is not a direct or indirect subsidiary or affiliate of the Company) and unless the purchaser of such Employer expressly assumes the provisions of this Plan with respect to such Employer, the Compensation Committee of the Board of Directors of the Company may determine and credit Awards for such Participants with respect to the current Performance Cycle(s), concurrent with such sale, as if it were the last day of such Performance Cycle(s) equal to the value of an Award for each such Participant during such Performance Cycle(s) assuming the "primary" or "expected" level of achievement was attained; in which case (1) All Such Participants shall be fully vested in such level of outstanding Awards in their Accounts and with respect to any Earned Awards or portion thereof which have not been distributed, and; (2) All such Earned Awards in each such Participant's account, shall be paid in cash to such Participant not later than 90 days following the closing of the sale of such Participant's Employer. For the avoidance of doubt, in the event that the stock of any Employer shall be distributed, directly or indirectly, by way of a dividend, a distribution or otherwise to Millennium Chemicals Inc.'s shareholders, such event shall not be deemed to be a Change-in-Control, and the Employer shall thereupon be responsible to each Participant of such Employer for any outstanding Awards or Earned Awards depending on the Employer's performance for each Performance Cycle in accordance with the provisions of this Plan; provided, however, in the event of any such spin-off, the name of the new parent entity of the Employer shall be substituted for Millennium Chemicals Inc. in the above provisions. Source 14. Source of Payment. Payments under this Plan shall be made out of the Employer's general assets. Source 15. Unsecured Interest. No Participant or Beneficiary shall have any interest whatsoever in any specific asset of the Employer or the Company. The right to receive payments under the Plan shall be no greater than the right of any unsecured general creditor of the Employer or the Company. Section 16. Employment. Nothing in the Plan shall interfere with or limit the right of the Company or the Employer to terminate any Participant's employment at any time. Section 17. Nontransferability. In no event shall the Company make any payment under the Plan to any assignee or creditor of a Participant or Beneficiary. No Participant or Beneficiary shall have the right to alienate, anticipate or otherwise dispose of any interest under the Plan and, to the extent permitted under applicable law, any attempt to charge, garnish, execute upon or levy upon the same shall be void and shall not be recognized or given effect by the Company. Section 18. Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors who may from time to time establish rules for the administration and interpretation of the Plan. The determination of the Compensation Committee of the Company's Board of Directors on all questions of interpretation or construction shall be final, binding and conclusive on all persons. Section 19. Applicable Law. The Plan shall be governed and construed in accordance with the laws of the State of Delaware. Section 20. Withholding. The Company and the Employer shall have the right to deduct from any payments from the Plan the amount of any federal, state or local taxes which, in the Company's sole determination, should be withheld. Section 21. Amendment and Termination. The Company expects the Plan to continue, but since future conditions affecting the Company and Participants cannot be foreseen, the Board of Directors of the Company necessarily must and does hereby reserve the right to amend, modify or terminate the Plan at any time by action of the Board of Directors. Notice of such amendment, modification or termination shall be given in writing to each Participant. As Approved by the Compensation Committee - ------------------------------------- George H. Hempstead, III MILLENNIUM CHEMICALS INC. Termination Amendment To MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN (Effective as of October 23, 1997) (the "Plan") Any term of the Plan to the contrary notwithstanding the Plan shall be, and it hereby is amended as follows: 1. No additional awards shall be made under the plan and all Performance Cycles which have previously commenced shall end December 31, 1997. 2. Awards granted under the Plan for the 1997-1999 performance period shall be deemed earned awards to the extent of the applicable percentage set forth opposite the employing Subsidiary's name on Schedule A attached hereto; provided, however, that any individual who is a participant in both the 1996 and 1997 Millennium Petrochemical Inc. Long Term Incentive Plan shall only be entitled to an earned award equal to the greater of: (i) 1996 "expected" level plus the 1997 "primary" level; or (ii) the 1997 award only at the percentage based on 1997's actual performance results (but excluding two-thirds of the Morris Fire proceeds). 3. Such earned awards calculated under paragraph 2 of this amendment shall be paid to participants in three equal yearly installments of principal on December 15, 1998, December 15, 1999 and December 15, 2000; and, such installments shall bear interest at the rate provided in Section 9 of the Plan which shall be payable with the respective installments of principal; provided however, that participants in the 1997 Millennium Petrochemicals Inc. Plan shall be paid out their earned awards (to the extent being paid under this Plan) on February 15, 1998, without interest provided the joint venture with Lyondell Petrochemical Company shall have closed. 4. A participant or the participant's estate or designated beneficiary will be paid the full remaining balance of the earned awards in his or her account in a single lump sum with interest as provided in Section 9 of the Plan to the date of payment on the occurrence of any of the following events: (a) death, (b) total and permanent disability (as defined in the Plan), (c) retirement (as defined in the retirement plan covering the participant), (d) termination not for cause, and (e) a Change of Control as defined in the Plan, however, the amount payable shall be limited to the sum calculated under Schedule A attached hereto. 5. A participant's account balance will be forfeit in the event of a participant's voluntary separation from employment or termination for cause as defined in the Plan. 6. No payment shall be made from the Plan except as set forth in this amendment and, at the time the last account is paid out from the Plan, the Plan shall terminate. -------------------------- AMENDMENT TO THE MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Long-Term Incentive Plan (effective as of October 1, 1997) (the "Plan"); WHEREAS, pursuant to Section 21 of the Plan, the Board of Directors of the Company (the "Board") reserves the right to amend the Plan; WHEREAS, the Board previously approved the "Termination Amendment" to the Plan effective as of October 23, 1997 (the "Termination Amendment"); and WHEREAS, the Board desires to amend the Plan; NOW, THEREFORE, effective as of January 1, 1998, the Plan is amended as follows: 1. Section 3 of the Termination Amendment to the Plan is amended by adding the following sentence to the end thereof: Other than with respect to any participant in the 1997 Millennium Petrochemicals Inc. Plan, in lieu of any Award being distributed to a Participant pursuant to the previous sentence of this Section 3, a Participant may elect to have all or any part of such Award deferred under the Millennium Chemicals Inc. Salary and Bonus Deferral Plan and be subject to the terms of such plan (the "Deferred Award"); provided, however, that such Deferred Award shall continue to be subject to the forfeiture provisions of Section 11 of the Plan. 2. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed the 23rd day of January 1998. MILLENNIUM CHEMICALS INC. By: _____________________ AMENDMENT TO THE MILLENNIUM CHEMICALS INC. EXECUTIVE LONG-TERM INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Long-Term Incentive Plan (effective as of October 1, 1997) (the "Plan"); WHEREAS, pursuant to Section 21 of the Plan, the Board of Directors of the Company (the "Board") reserves the right to amend the Plan; WHEREAS, the Board previously approved the "Termination Amendment" to the Plan effective as of October 23, 1997 and subsequently amended Section 3 of such termination amendment effective as of January 1, 1998; and WHEREAS, the Board desires to further amend the Plan; NOW, THEREFORE, effective as of January 1, 1999, the Plan is amended as follows: 1. Section 13(b) to the Plan is amended and restated in its entirely as follows: For purposes of this Section 13 Agreement, the term "Change in Control" shall mean: (1) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (2) during any period of two consecutive years (not including any period prior to October 1, 1996), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3), or (4) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (3) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (1) above) acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (4) the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Internal Revenue Code of 1986, as amended or superceded and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 3. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed the 23rd day of January, 1999. MILLENNIUM CHEMICALS INC. By: _____________________ George H. Hempstead, III EX-10 7 EXHIBIT 10.23(D) Exhibit 10.23(d) Amendments dated December 10, 1998 and January 23, 1998 to the Millennium Chemicals Inc. Long Term Stock Incentive Plan AMENDMENT NUMBER THREE TO THE MILLENNIUM CHEMICALS INC. LONG TERM STOCK INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Long Term Stock Incentive Plan (the "Plan"); and WHEREAS, pursuant to Article XIV of the Plan, the Board of Directors of the Company (the "Board") has the right to amend the Plan; and WHEREAS, the Board desires to amend the Plan; NOW, THEREFORE, effective as of December 10, 1998, the Plan is amended as follows: 1. Subsection 13.2(a) of the Plan is amended by deleting the word "owner" in the one place it appears in such subsection and substituting " `beneficial owner'" in lieu thereof. 2. Subsection 13.2(d) is amended and restated to read as follows: the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Code and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 3. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed as of the 10th day of December, 1998. MILLENNIUM CHEMICALS INC. By: ______________________ AMENDMENT TO THE MILLENNIUM CHEMICALS INC. LONG TERM STOCK INCENTIVE PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") maintains the Millennium Chemicals Inc. Long Term Stock Incentive Plan (the "Plan"); and WHEREAS, pursuant to Article XIV of the Plan, the Board of Directors of the Company (the "Board") has the right to amend the Plan; and WHEREAS, the Board desires to amend the Plan; NOW, THEREFORE, effective as of January 23, 1998, the Plan is amended as follows: 1. Subsection 11.1(a)(ii) and Subsection 11.1(a)(iii) of the Plan are amended by (a) deleting the number "$15,000" in each place it appears and (b) substituting the following in lieu thereof: "one-third of the annual directors' retainer fee (as in effect on such date.)" 2. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed the 23rd day of January, 1998. MILLENNIUM CHEMICALS INC. By:________________________ EX-10 8 EXHIBIT 10.28(C) EXHIBIT 10.28(c) AMENDMENT NO. 2 DATED JANUARY 22, 1999, TO THE MILLENNIUM CHEMICALS INC. SALARY AND BONUS DEFERRAL PLAN AMENDMENT NUMBER TWO TO THE MILLENNIUM CHEMICALS INC. SALARY AND BONUS DEFERRAL PLAN WHEREAS, Millennium Chemicals Inc. (the "Company") adopted the Millennium Chemicals Inc. Salary and Bonus Deferral Plan (the "Plan") for the benefit of certain of its employees effective as of October 8, 1995; WHEREAS, pursuant to Section 5.1 of the Plan, the Board of Directors of the Company (the "Board") may wholly or partially amend or modify the Plan; and WHEREAS, the Board desires to amend the plan; NOW, THEREFORE, the Plan is amended as follows with respect to all deferrals of income: 1. The Plan is amended by deleting Subsection 1.4(d) in its entirety and substituting the following in lien thereof: (d) the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially, own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Code and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 2. In all other respects, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, this amendment has been executed the 22nd day of January, 1999. MILLENNIUM CHEMICALS INC. By:_______________________ George H. Hempstead Senior Vice President EX-10 9 EXHIBIT 10.29 EXHIBIT 10.29 MILLENNIUM CHEMICALS INC. SUPPLEMENTAL SAVINGS AND INVESTMENT PLAN THE MILLENNIUM CHEMICALS INC. SUPPLEMENTAL SAVINGS AND INVESTMENT PLAN i TABLE OF CONTENTS (CONTINUED)
Page ---- ARTICLE 1..............................................................PURPOSE 1 ARTICLE 2..........................................................DEFINITIONS 1 2.1 "Affiliate".......................................................1 2.2 "Board of Directors"..............................................1 2.3 "Change in Control"...............................................1 2.4 "Committee".......................................................2 2.5 "Common Stock"....................................................3 2.6 "Compensation"....................................................3 2.7 "Compensation Deferral Account"...................................3 2.8 "Employer"........................................................3 2.9 "Matching Contributions Account"..................................3 2.10 "Person"..........................................................3 2.11 "Plan Year".......................................................3 2.12 "SIP".............................................................3 2.13 "Trustee".........................................................3 ARTICLE 3........................................ELIGIBILITY AND PARTICIPATION 3 ARTICLE 4...................................................DEFERRAL ELECTIONS 4 4.1 Compensation Deferrals............................................4 4.2 Elections.........................................................4 4.3 Investment Alternatives...........................................4 4.4 Vesting...........................................................5 4.5 Relationship to SIP...............................................5 ARTICLE 5...............................................MATCHING CONTRIBUTIONS 5 5.1 Matching Contributions............................................5 5.2 Dividends.........................................................5 5.3 Vesting...........................................................5 5.4 Adjustment Event..................................................5
ii TABLE OF CONTENTS (CONTINUED)
Page ---- 5.5 Relationship to SIP...............................................6 ARTICLE 6........................................................DISTRIBUTIONS 6 6.1 Distribution Events...............................................6 6.2 Form..............................................................6 6.3 Termination of Employment.........................................6 6.4 Retirement........................................................6 ARTICLE 7...................................................MANDATORY DEFERRAL 7 ARTICLE 8....................................................CHANGE IN CONTROL 7 ARTICLE 9.......................................................ADMINISTRATION 7 9.1 Responsibility....................................................7 9.2 Delegation of Authority...........................................7 9.3 Determinations and Interpretations by the Committee...............7 ARTICLE 10..............................................................CLAIMS 7 10.1 Claims Procedure..................................................7 10.2 Claims Review Procedure...........................................8 ARTICLE 11..................................................GENERAL PROVISIONS 8 11.1 Withholding Taxes.................................................8 11.2 Assignability and Transferability.................................8 11.3 Funding...........................................................9 11.4 No Right, Title, or Interest in Company Assets....................9 11.5 No Right to Continued Employment..................................9 11.6 Governing Law.....................................................9 ARTICLE 12..........................................AMENDMENT AND TERMINATION 10 12.1 Right to Amend, Suspend or Terminate.............................10 12.2 Termination......................................................10 12.3 No Impairment....................................................10
iii THE MILLENNIUM CHEMICALS INC. SUPPLEMENTAL SAVINGS AND INVESTMENT PLAN ARTICLE 1 PURPOSE This Millennium Chemicals Inc. Supplemental Savings and Investment Plan (this "Plan") is an unfunded plan for the purpose of providing deferred compensation for a select group of management or highly compensated employees of Millennium Chemicals Inc. (the "Company") and its affiliates in excess of the limitations imposed by Section 415 of the Internal Revenue Code of 1986, as amended (the "Code"). This Plan is intended to be exempt from coverage of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This Plan shall be effective as of February 11, 1999 (the "Effective Date") and shall continue unless terminated by the Company. ARTICLE 2 DEFINITIONS In addition to the terms specifically defined elsewhere in this Plan, the following terms shall have the respective meanings indicated (unless the context indicates otherwise): 2.1 "Affiliate" means any corporation, partnership, limited liability company or other business entity in respect of which the Company owns, directly or indirectly, the outstanding securities or other ownership interests representing fifty percent (50%) or more of the combined voting power, equity or capital interests of such entity. 2.2 "Board of Directors" means the Board of Directors of the Company. 2.3 "Change in Control" means the first to occur with respect to the Company: (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two consecutive years (not including any period prior to October 1, 1996), individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), or (d) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (c) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (a) above) acquires more than twenty-five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale or disposition of all or substantially all of the assets of the Company to one or more Subsidiaries (as defined below) of the Company or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale or disposition. "Subsidiary" shall have the meaning set forth in Section 424 of the Internal Revenue Code of 1986, as amended or superseded, and the term shall also include any partnership, limited liability company or other business entity if the Company owns, directly or indirectly, securities or other ownership interests representing at least fifty percent (50%) of the ordinary voting power or equity or capital interests of such entity. Notwithstanding any of the foregoing, the formation of Equistar Chemicals, LP ("Equistar") and the contribution of assets by Millennium Petrochemicals Inc. to Equistar on December 1, 1997 shall not constitute a Change in Control, and the sale or disposition of all or any part of the Company's interests in Equistar shall not constitute a Change in Control. 2.4 "Committee" means the Company's Pension and Benefits Administration Committee, or such other committee as may be designated by the Board of Directors to administer this Plan from time to time. 2 2.5 "Common Stock" means the common stock, $.01 par value, of the Company, subject to adjustment as provided in Section 5.4. 2.6 "Compensation" means, in respect of a Plan Year, the sum of the amount reported by the Company to the Internal Revenue Service on Form W-2 as the participant's compensation for such calendar year, the amount of any Compensation Deferral Contributions (as defined in the SIP) made on such participant's behalf to the SIP, and the amount, if any, contributed to a cafeteria plan that is excluded from gross income pursuant to Section 125 of the Code; provided, however, that Compensation shall not include termination or severance pay, prizes, awards, grievance settlements, overseas cost of living allowances, relocation allowances, mortgage assistance, executive perquisites, stock options and such other extraordinary items or remuneration as the Committee shall determine from time to time. 2.7 "Compensation Deferral Account" means the bookkeeping account established under Section 4.1 on behalf of a participant and includes, in addition to the amounts stated in Section 4.1, any investment return credited thereon pursuant to Section 4.3. 2.8 "Employer" means the Company, Millennium Inorganic Chemicals Inc., Millennium Petrochemicals Inc., Millennium Pigments Inc., Millennium Specialty Chemicals Inc. and any other Affiliate authorized by the Board of Directors to participate in this Plan. 2.9 "Matching Contributions Account" means the bookkeeping account established under Section 5.1 on behalf of a participant and includes, in addition to the amounts stated in Section 5.1, any dividend reinvestment return credited thereon pursuant to Section 5.2. 2.10 "Person" means any person or entity of any nature whatsoever, including but not limited to an individual, firm, company, corporation, partnership or trust. 2.11 "Plan Year" means the calendar year. 2.12 "SIP" means the Millennium Savings and Investment Plan. 2.13 "Trustee" means the corporate trustee appointed from time to time by the Company to administer any grantor trust established in accordance with Section 11.3. ARTICLE 3 ELIGIBILITY AND PARTICIPATION Participation in this Plan in respect of each Plan Year shall be determined by the Committee in its discretion and shall be limited to any individual who is an employee of an Employer, who is a participant in the SIP, whose Compensation is likely to exceed $160,000 (as thereafter adjusted for inflation in accordance with Section 401(a)(17)(B) of the Code), and who, prior to such Plan Year, has elected to make the maximum elective deferrals under the SIP as determined pursuant to Section 402(g) of 3 the Code (subject to any cost-of-living adjustment in accordance with Section 415(d) of the Code). ARTICLE 4 DEFERRAL ELECTIONS 4.1 Compensation Deferrals. A participant may elect to defer from one percent to six percent (1% to 6%) (or such greater or lesser percentage as the Committee may from time to time prescribe), in whole percentages, of his or her Compensation, and such amounts shall be credited to such participant's Compensation Deferral Account as of each payroll date to which it pertains; provided, however, that the amount of any Compensation Deferral Contributions (as defined in the SIP) made by an Employer on behalf of a participant to the SIP shall reduce the amount of any compensation deferrals made on behalf of such participant under this Plan. 4.2 Elections. Any deferral election by a participant in respect of any Plan Year shall be made no later than June 30 of the prior Plan Year on forms to be furnished by the Committee and, once made, cannot be changed or revoked during such Plan Year; provided, however, that in the case of an individual who first becomes eligible to participate in this Plan after the deferral election deadline in respect of a Plan Year, any deferral election by such individual must be made within thirty (30) days following the date such individual first becomes a participant; and provided, further, that such deferral election shall apply only to amounts that are both paid and earned for services performed, in each case after the date the election is made. Notwithstanding the preceding sentence, deferral elections for the 1999 Plan Year shall be made no later than November 30, 1998. 4.3 Investment Alternatives. (a) A participant may select the investment return to be applied to the amounts credited to his or her Compensation Deferral Account by reference to the return earned by the investment alternatives offered by the Company from time to time. Any selection of investment return in respect of a participant's Compensation Deferral Account shall be in made in whole percentages on forms to be furnished by the Committee or by contacting the Millennium Chemicals Savings and Investment Plan Service Center. (b) A participant may change the investment return to be applied to the amounts credited to his or her Compensation Deferral Account on forms to be furnished by the Committee or by contacting the Millennium Chemicals Savings and Investment Plan Service Center; provided, however, that any such investment return change shall apply prospectively in respect of future compensation deferrals or existing amounts credited to such account. (c) The Committee may in its discretion apply the investment return to the amounts credited to a participant's Compensation Deferral Account in accordance with such participant's selection under this Section 4.3. 4 4.4 Vesting. A participant shall be fully vested in the amounts credited to his or her Compensation Deferral Account at all times. 4.5 Relationship to SIP. Whenever the Committee shall prescribe such greater or lesser percentages in respect of the amount of Compensation Deferral Contributions (as defined in the SIP) that may be elected in any payroll period in respect of the SIP, such prescription shall automatically apply to the compensation deferrals under this Plan, unless such prescription expressly provides otherwise. ARTICLE 5 MATCHING CONTRIBUTIONS 5.1 Matching Contributions. The Company shall make matching contributions to this Plan, in respect of each payroll period, equal to seventy-five percent (75%) (or such greater or lesser percentage, not exceeding one hundred percent (100%), as the Board of Directors may from time to time authorize) of that portion of a participant's compensation deferrals which do not exceed six percent (6%) (or such other percentage as the Board of Directors may from time to time authorize); provided, however, that the amount of any Employer Matching Contributions (as defined in the SIP) made by an Employer on behalf of a participant in the SIP shall reduce the amount of any matching contributions made on behalf of such participant under this Plan. The amount of such matching contributions shall be credited in the form of Common Stock to a participant's Matching Contributions Account as soon as practicable following each payroll date in substantially the same manner as Employer Matching Contributions (as defined in the SIP) are credited to participants' accounts under Sections 8.4 and 8.6 of the SIP (or any section of the SIP which amends or supersedes such sections). 5.2 Dividends. Whenever the Company shall declare a dividend on its Common Stock, each participant's Matching Contributions Account will be adjusted in substantially the same manner as in the SIP. 5.3 Vesting. A participant shall be fully vested in the amounts credited to his or her Matching Contribution Account at all times. 5.4 Adjustment Event. Subject to Article 8, in the event there is any change in the Common Stock, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or cash dividends to stockholders of the Company (an "Adjustment Event"), the number of shares of Common Stock credited to a participant's Matching Contributions Account shall be appropriately adjusted (rounded down to the nearest one hundredth of a share) by the Committee in its sole judgment so as to give appropriate effect to such Adjustment Event such that the participant's Matching Contributions Account reflects the same equity percentage in the Company after such Adjustment Event as was the case before such Adjustment Event. 5 5.5 Relationship to SIP. Whenever the Board of Directors shall authorize such greater percentage in respect of the amount of Employer Matching Contributions (as defined in the SIP) that may be made in any payroll period in respect of the SIP, such authorization shall automatically apply to the matching contributions under this Plan, unless such authorization expressly provides otherwise. ARTICLE 6 DISTRIBUTIONS 6.1 Distribution Events. No payment shall be made under this Plan to a participant until the earliest to occur of the following events with respect to such participant: (a) Except as provided in Section 6.3, termination of employment with the Employer; (b) Retirement (as defined in the SIP) from the Employer; (c) Death; or (d) Disability (as determined under the Employer's long term disability plan applicable to the participants). 6.2 Form. Distributions under this Plan shall be payable in cash unless, with respect to a participant's Matching Contributions Account, a participant elects to have the amount credited to such account paid in Common Stock. 6.3 Termination of Employment. In the case of a participant's termination of employment (other than for retirement) with the Employer, including as a result of death or disability, the accrued balance in such participant's Compensation Deferral Account and Matching Contribution Account shall be paid in lump sum to the participant or his or her beneficiary, as applicable, as soon as practicable following such event; provided, however, that in the event of the sale of all or any substantial portion of the stock or assets of an Employer to an entity which (i) does not assume and maintain the obligations of the Company under this Plan with respect to participants of such Employer who are subsequently employed by such entity, the Company, in its discretion, may allow such participant to continue participation in this Plan until the earlier of any distribution event set forth in Section 6.1 (except that the term Employer shall be replaced by such entity) or (ii) does assume and maintain the obligations of the Company under this Plan with respect to participants of such Employer who are subsequently employed by such entity, such sale shall not be treated as resulting in a termination of employment with the Employer until the participant actually terminates employment with such entity. 6.4 Retirement. In the case of a participant's retirement (as defined in the SIP) from the Employer, the accrued balance in such participant's Compensation Deferral Account and Matching Contribution Account shall be paid (a) in lump sum in the January following the year of retirement or (b) if elected at least one full intervening Plan Year in 6 advance, (i) in a lump sum on the date of retirement or (ii) prorated annual distributions for up to ten (10) years commencing in the January following the year of retirement. ARTICLE 7 MANDATORY DEFERRAL Notwithstanding Article 6, the Compensation Committee of the Board of Directors may require a participant to defer all or a portion of any payment from his or her Compensation Deferral Account or Matching Contributions Account in any case where the Company anticipates that such payment or portion thereof would be nondeductible pursuant to Section 162(m) of the Code. ARTICLE 8 CHANGE IN CONTROL Notwithstanding any other provision of this Plan, in the event of a Change in Control, the amount of a participant's Compensation Deferral Account and Matching Contribution Account shall be distributed in lump sum to such participant as soon as practicable thereafter. ARTICLE 9 ADMINISTRATION 9.1 Responsibility. The Committee shall be the administrator of this Plan. The Committee shall have the responsibility, in its sole discretion, to control, operate, manage and administer this Plan in accordance with its terms and shall have all the discretionary authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to this Plan. 9.2 Delegation of Authority. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable; provided, however, that any such delegation shall be in writing. In addition, the Committee or any such delegate may employ one or more Persons to render advice with respect to any responsibility the Committee or such delegate may have under this Plan. The Committee or any such delegate may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of this Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. 9.3 Determinations and Interpretations by the Committee. All determinations and interpretations made by the Committee in good faith shall be binding and conclusive on all Participants and their heirs, successors and legal representatives. ARTICLE 10 CLAIMS 10.1 Claims Procedure. If any participant or his or her designated beneficiary has a claim for amounts which are not being paid, such claimant may file with the 7 Committee a written claim, in such form as is provided or approved by the Committee, setting forth the amount and nature of the claim, supporting facts, and the claimant's address. The Committee shall notify each claimant of its decision in writing by registered or certified mail within ninety (90) days after its receipt of a claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial ninety (90) day period, which notice shall specify the special circumstances requiring an extension and the date by which a final decision will be reached (which date shall not be later than one hundred eighty (180) days after the date on which the claim was filed). If a claim is denied, the written notice of denial shall set forth the reasons for such denial, refer to pertinent Plan provisions on which the denial is based, describe any additional material or information necessary for the claimant to realize the claim, and explain the claim review procedure under this Plan. 10.2 Claims Review Procedure. A claimant whose claim has been denied or such claimant's duly authorized representative may file, within sixty (60) days after notice of such denial is received by the claimant, a written request for review of such claim by the Committee. If a request is so filed, the Committee shall review the claim and notify the claimant in writing of its decision within sixty (60) days after receipt of such request. In special circumstances, the Committee may extend for up to sixty (60) additional days the deadline for its decision. The notice of the final decision of the Committee shall include the reasons for its decision and specific references to the provisions of this Plan on which the decision is based. The decision of the Committee shall be final and binding on all parties. ARTICLE 11 GENERAL PROVISIONS 11.1 Withholding Taxes. By participation in this Plan, each participant shall be deemed to (a) agree to reimburse the Company for any taxes required by any governmental regulatory authority to be withheld or otherwise deducted by such entity in respect of the payment of any amounts hereunder, and (b) authorize the Company to withhold the amount from any Compensation paid to the participant or on the participant's behalf, an amount sufficient to discharge such taxes and which otherwise has not been reimbursed by the participant, in respect of the payment of any amounts hereunder.(a) 11.2 Assignability and Transferability. (a) No interest in this Plan shall be assignable or transferable by a participant other than by will or the laws of descent and distribution. Any purported assignment or transfer of an interest in this Plan to a creditor of a participant shall be null and void, and such interest may be forfeited at the discretion of the Committee. (b) The Company may assign its obligations under this Plan with respect to participants whose employment is terminated and who are employed by a successor entity pursuant to Section 6.3, provided that such successor entity agrees to assume such obligations with respect to such participants. 8 11.3 Funding. (a) The Company shall make no provision for the funding of any Deferral Compensation Accounts or Matching Contribution Accounts payable under this Plan that would cause this Plan to be a funded plan for purposes of Section 404(a)(5) of the Code or Title I of ERISA, or would cause this Plan to be other than an "unfunded and unsecured promise to pay money or other property in the future" under Treasury Regulations 'SS' 1.83-3(e). Except following a Change in Control, the Company shall have no obligation to make any arrangement for the accumulation of funds to pay any amounts under this Plan. Subject to the preceding sentence, the Company, in its sole discretion, may establish one or more grantor trusts described in subpart E, part I, subchapter J, chapter 1, subtitle A of the Code to accumulate shares of Common Stock or other amounts to pay amounts under this Plan, provided that the assets of such trusts shall be required to be used to satisfy the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. (b) In the event that the Company shall decide to establish an advance accrual reserve on its books against the future expense of payments under the Compensation Deferral Accounts and Matching Contributions Accounts, such reserve shall not under any circumstances be deemed any asset of this Plan but, at all times, shall remain a part of the general assets of the Company subject to the claims of the Company's general creditors. 11.4 No Right, Title, or Interest in Company Assets. Participants shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create a trust of any kind, or a fiduciary relationship between the Company and any participant, beneficiary, legal representative or any other Person. To the extent that any Person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, including any grantor trust described in Section 11.3. This Plan is not intended to be subject to ERISA. 11.5 No Right to Continued Employment. The participant's rights, if any, to continue in the employ of the Company shall not be enlarged or otherwise affected by his or her participation in this Plan, and the Company reserves the right to terminate the employment of any participant at any time, subject to any limitations or procedures as may be set forth in a separate employment or retention agreement between the Company and such participant. 11.6 Governing Law. This Plan, all awards granted hereunder, and all actions taken in connection herewith shall be governed by and construed in accordance with the laws of the State of New Jersey without reference to principles of conflict of laws, except as superseded by applicable federal law. 9 ARTICLE 12 AMENDMENT AND TERMINATION 12.1 Right to Amend, Suspend or Terminate. The Board of Directors may amend, suspend or terminate this Plan at any time with or without prior notice, provided, however, that no action authorized by this Article 12 shall impair any rights or benefits which theretofore accrued hereunder without the written consent of the affected participants. 12.2 Termination. Upon a termination of this Plan, the Committee may, but is not required to, pay out all amounts under this Plan. 12.3 No Impairment. The following events shall not constitute an impairment of any rights or benefits under this Plan: (a) any payout of amounts under this Plan pursuant to Section 12.2, (b) any change to the investment alternatives offered by the Company from time to time pursuant to Section 4.3 or (c) any amendment of the term Change in Control, provided such amendment shall not be effective for at least six (6) months following its adoption. 10 EX-10 10 EXHIBIT 10.36 EXHIBIT 10.36 AMENDED AND RESTATED PARTNERSHIP AGREEMENT OF EQUISTAR EXECUTION COPY AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF EQUISTAR CHEMICALS, LP ORGANIZED UNDER THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT TABLE OF CONTENTS
PAGE APPENDICES APPENDIX A - Defined Terms APPENDIX B - Partnership Financial Statements and Reports APPENDIX C - Executive Officers APPENDIX D - Dispute Resolution Procedures APPENDIX E - Division of Partnership Business SCHEDULES Schedule 2.3(d) - Capital Accounts
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF EQUISTAR CHEMICALS, LP This Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP dated May 15, 1998 is entered into by and among Lyondell Petrochemical G.P. Inc., a Delaware corporation ("Lyondell GP"), Lyondell Petrochemical L.P. Inc., a Delaware corporation ("Lyondell LP"), Millennium Petrochemicals GP LLC, a Delaware limited liability company ("Millennium GP"), Millennium Petrochemicals LP LLC, a Delaware limited liability company ("Millennium LP"), PDG Chemical Inc., a Delaware corporation ("Occidental GP"), Occidental Petrochem Partner 1, Inc., a Delaware corporation ____ ("Occidental LP1"), and Occidental Petrochem Partner 2, Inc., a Delaware corporation ("Occidental LP2," and together with Occidental LP1, "Occidental LP"). The definitions of capitalized terms used in this Agreement, including the appendices hereto, are set forth in Appendix A hereto. WHEREAS, Lyondell GP, Lyondell LP, Millennium GP and Millennium LP (together, the "Initial Partners") entered into the Limited Partnership Agreement of Equistar Chemicals, LP dated October 10, 1997 (the "Initial Agreement"), pursuant to the Initial Master Transaction Agreement between Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), the ultimate parent entity of each of Lyondell GP and Lyondell LP, and Millennium Chemicals Inc., a Delaware corporation ("Millennium"), the ultimate parent entity of each of Millennium GP and Millennium LP; WHEREAS, the Initial Partners contributed their Initial Assets to the Partnership on the Initial Closing Date and the Initial Related Agreements relating to the Partnership and their Contributed Businesses were entered into, all as provided in the Initial Master Transaction Agreement; WHEREAS, the Partnership, Occidental Petroleum Corporation , a Delaware corporation ("Occidental"), the ultimate parent entity of each of Occidental GP, Occidental LP1 and Occidental LP2 (together, the "Occidental Partners"), Lyondell and Millennium have entered into the Master Transaction Agreement dated May 15, 1998 (the "Second Master Transaction Agreement"), which provides, among other things, for the admission of Occidental GP as a general partner of the Partnership and of each of Occidental LP1 and Occidental LP2 as a limited partner of the Partnership, subject to and upon the terms and conditions set forth therein; and WHEREAS, simultaneous with the execution and delivery of this Agreement, (i) the Occidental Partners are contributing to the Partnership their Initial Assets and Contributed Business in accordance with the Occidental Contribution Agreement (which involves, in the case of Occidental LP2, the merger of Oxy Petrochemicals and the Partnership, with the Partnership as the surviving entity); (ii) Lyondell, Millennium, Occidental and certain Occidental Affiliates are entering into the Amended and Restated Parent Agreement and (iii) the Additional Related Agreements are being entered into; NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto, it is hereby agreed as follows: The Certificate of Limited Partnership was filed with the Secretary of State of the State of Delaware on October 17, 1997. The Initial Agreement was entered into October 10, 1997. The Partners desire to enter into this Agreement which amends and restates the Initial Agreement and constitutes the limited partnership agreement of the Partnership as of the date hereof. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. Without the need for the consent of any other Person, upon the execution of this Agreement by each of the parties hereto, (i) Occidental GP is hereby admitted to the Partnership as a general partner of the Partnership, (ii) Occidental LP1 is hereby admitted to the Partnership as a limited partner of the Partnership and (iii) Occidental LP2 is hereby admitted to the Partnership as a limited partner of the Partnership. Subject to the restrictions set forth in this Agreement, the Partnership shall have the power to exercise all the powers and privileges granted by this Agreement and by the Act, together with any powers incidental thereto, so far as such powers and privileges are necessary, appropriate, convenient or incidental for the conduct, promotion or attainment of the purposes of the Partnership. The name of the Partnership is "Equistar Chemicals, LP" The Partnership's business may be conducted under such name or any other name or names deemed advisable by the Partnership Governance Committee. The General Partners will comply or cause the Partnership to comply with all applicable laws and other requirements relating to fictitious or assumed names. The principal place of business of the Partnership shall be 1221 McKinney Street, Houston, Texas 77010, or such other place as the General Partners may from time to time determine. The registered agent of the Partnership in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The business of the Partnership shall be to, directly or indirectly, (i) engage in the Specified Petrochemicals Businesses, in the United States and internationally, including research and development, purchasing, processing and disposing of feedstocks, and manufacturing, marketing and distributing products, (ii) acquire and dispose of properties and assets used or useful in connection with the foregoing and (iii) do all things necessary, appropriate, convenient or incidental in connection with the ownership, operation or financing of such business and activities, or otherwise in connection with the foregoing, as are permitted under the Act, including the acquisition and operation of the Contributed Businesses. The General Partners shall, or shall cause the Partnership to, execute, swear to, acknowledge, deliver, file or record in public offices and publish all such certificates, notices, statements or other instruments, and take all such other actions, as may be required by law for the formation, reformation, qualification, registration, operation or continuation of the Partnership in any jurisdiction, to maintain the limited liability of the Limited Partners, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law. Upon request of the General Partners, the Limited Partners shall execute all such certificates and other documents as may be necessary, in the sole judgment of the General Partners, in order for the General Partners to accomplish all such executions, swearings, acknowledgments, deliveries, filings, recordings in public offices, publishings and other acts. Each General Partner hereby agrees and covenants that it will execute any appropriate amendment to the Certificate of Limited Partnership of the Partnership pursuant to Section 17-204 of the Act to reflect any admission of a Substitute General Partner and of Occidental GP in accordance with this Agreement. Each Limited Partner hereby irrevocably makes, constitutes and appoints its Affiliated General Partner and any successor thereto permitted as provided herein, with full power of substitution and resubstitution, as the true and lawful agent and attorney-in-fact of such Limited Partner, with full power and authority in the name, place and stead of such Limited Partner to execute, swear, acknowledge, deliver, file or record in public offices and publish: (i) all certificates and other instruments (including counterparts thereof) which such General Partner deems appropriate to reflect any amendment, change or modification of or supplement to this Agreement in accordance with the terms of this Agreement; (ii) all certificates and other instruments and all amendments thereto which such General Partner deems appropriate or necessary to form, qualify or continue the Partnership in any jurisdiction, to maintain the limited liability of such Limited Partner, to preserve the Partnership's status as a partnership for tax purposes or otherwise to comply with applicable law; and (iii) all conveyances and other instruments or documents which such General Partner deems appropriate or necessary to reflect the transfers or assignments of interests in, to or under, this Agreement, including the Units, the dissolution, liquidation and termination of the Partnership, and the distribution of assets of the Partnership in connection therewith, pursuant to the terms of this Agreement. Each Limited Partner hereby agrees to execute and deliver to its Affiliated General Partner within five Business Days after receipt of a written request therefor such other further statements of interest and holdings, designations, powers of attorney and other instruments as such General Partner deems necessary. The power of attorney granted herein is hereby declared irrevocable and a power coupled with an interest, shall survive the bankruptcy, dissolution or termination of such Limited Partner and shall extend to and be binding upon such Limited Partner's successors and permitted assigns. Each Limited Partner hereby (i) agrees to be bound by any representations made by the agent and attorney-in-fact acting in good faith pursuant to such power of attorney; and (ii) waives any and all defenses which may be available to contest, negate, or disaffirm any action of the agent and attorney-in-fact taken in accordance with such power of attorney. The term for which the Partnership is to exist as a limited partnership is from the date the Partnership's Certificate of Limited Partnership was filed with the office of the Secretary of State of the State of Delaware through the dissolution of the Partnership in accordance with the provisions of Section 12. In exchange for the contributions provided for in Section 2.3, Occidental LP1, Occidental LP2 and Occidental GP shall receive the Units set forth by their names below, and effective on the date hereof, the Units shall be owned as follows:
PARTNER UNITS Lyondell GP 820 Millennium GP 590 Occidental GP 295 Lyondell LP 40,180 Millennium LP 28,910 Occidental LP1 6,623 Occidental LP2 22,582 TOTAL 100,000 The Units shall entitle the holder to the distributions set forth in Section 3 and to the allocation of Profits, Losses and other items as set forth in Section 4. Units shall not be represented by certificates. If the Partnership is entitled to deductions with respect to costs described in either Section 6.10 of the Initial Master Transaction Agreement or Section 6.10 of the Second Master Transaction Agreement to which a Partner is not entitled to reimbursement, the incurrence of such costs shall not increase the Capital Account of such a Partner, and such Partner shall be entitled to any deductions attributable to such costs. (a) Pursuant to their Contribution Agreement, on the date hereof, Occidental LP1, Occidental LP2 and Occidental GP have contributed or caused to be contributed to the Partnership, the Initial Assets contemplated thereby subject to the Assumed Liabilities contemplated thereby (which involves, in the case of Occidental LP2, the merger of Oxy Petrochemicals and the Partnership, with the Partnership as the surviving entity). (b) The Partners intend that the contribution of assets subject to liabilities heretofore made by the Partners to the Partnership and to be made pursuant to Section 2.3(a) has qualified and will qualify as a tax-free contribution under Section 721 of the Code in which no Partner has recognized or will recognize gain or loss. The Partners agree that the Partnership will so file its tax return, and each Partner agrees to file its tax return on the same basis and to maintain such position consistently at all times thereafter. (c) Immediately after the contributions by Occidental GP, Occidental LP1, and Occidental LP2, the Capital Accounts of the Initial Partners shall be adjusted so that each Partner's Capital Account would be the same per Unit as that of every other Partner on the date hereof if on such date the principal and accrued interest on the Lyondell Note were paid and the special capital distributions accrued interest provided in Sections 3.1(e), (f), and (g) were made. (d) Schedule 2.3(d) sets forth the Capital Accounts of the Partners as if the contributions and distributions referred to in Section 2.3(c) were made. From time to time and subject to the limitations of Section 6.7, if applicable, the Partnership Governance Committee (or the CEO acting pursuant to Section 8.3), on behalf of the Partnership, may issue a written notice ("Funding Notice") to the Limited Partners calling for an additional capital contribution to the Partnership. Any Funding Notice will set forth: (a) the use of funds therefor; (b) the aggregate amount of the capital contribution required, which amount shall be apportioned among the Limited Partners Pro Rata; and (c) the date by which the capital contribution must be received by the Partnership, which date will not be earlier than seven Business Days from the date the Funding Notice is issued. Each Limited Partner shall timely wire transfer its Pro Rata share of the amount set forth in the Funding Notice to the Partnership's bank account. Except as expressly set forth in this Agreement, no Partner shall be permitted or required to make any additional capital contribution to the Partnership. Each Partner's Capital Account shall be determined and maintained in accordance with Regulation 'SS'1.704-1(b)(2)(iv) as reasonably interpreted by the Tax Matters Partner. The Tax Matters Partner shall have the discretion, after consultation with the other General Partners, to make those determinations, valuations, adjustments and allocations with respect to each Partner's Capital Account as it deems appropriate so that the allocations made pursuant to this Agreement will have substantial economic effect as such term is used in Regulation 'SS'1.704-1(b). If any Partner transfers all or a portion of its Units in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent such Capital Account relates to the transferred Units. Except as provided in Sections 3 and 4, no Partner shall receive any interest or other return on its capital contributions or on the balance in its Capital Account and no return of its capital contributions. A Partner or its Affiliates may loan funds to the Partnership on such terms and conditions as may be approved by the Partnership Governance Committee, and, subject to other applicable law, have the same rights and obligations with respect thereto as a Person who is neither a Partner nor an Affiliate of a Partner. The existence of such a relationship and acting in such a capacity will not result in a Limited Partner being deemed to be participating in the control of the business of the Partnership or otherwise affect the limited liability of a Partner. If a Partner or any Affiliate thereof is a lender, in exercising its rights as a lender, including making its decision whether to foreclose on property of the Partnership, such lender will have no duty to consider (i) its status as a Partner or an Affiliate of a Partner, (ii) the interests of the Partnership, or (iii) any duty it may have to any other Partner or the Partnership. The administration and investment of Partnership funds shall be in accordance with the procedures and guidelines as shall be adopted by the Partnership Governance Committee. The Partnership may delegate to a third party (which may be an Affiliate of one of the Partners) the responsibility for administering and investing Partnership funds pursuant to such guidelines. Subject to Section 17-607 of the Act and other applicable law, Available Net Operating Cash shall be distributed as soon as practicable following the end of each month to the Partners as follows: (a) General. On a cumulative basis from the date of the admission of Occidental GP, Occidental LP1 and Occidental LP2, (i) distributions are to be made to the Partners Pro Rata to the extent of cumulative Profits, and (ii) the remaining distributions are to be made to the Limited Partners Pro Rata. For simplicity, however, in the absence of extraordinary transactions, the Partnership may make monthly distributions to the Partners Pro Rata, subject to subsequent adjustments as provided below in this Section 3.1. (b) Return of Excess Distributions. Within 90 days after the end of each year, each General Partner shall return to the Partnership any amount it receives for such year that is in excess of its share of the sum of the cumulative undistributed Profits as of the end of the preceding year and the Profits for such year. (c) Effect of Operating Losses. For any year in which a General Partner's share of a Loss is sustained that exceeds its previously undistributed Profits, no distributions shall be made to such General Partner in any subsequent year until such excess Loss is recouped, and for subsequent years only Profits in excess of such recoupment shall be treated as Profit for purposes of this Section 3.1. (d) Makeup Distributions. If for any reason the Partnership does not make a monthly distribution to all Partners Pro Rata, each General Partner shall be entitled at the end of the year to receive the amount necessary to make its aggregate distributions for the year equal the amount it was entitled to receive and keep pursuant to the preceding criteria. (e) Lyondell Note Proceeds. All principal and interest received on the Lyondell Note shall be distributed among the Initial Partners in the ratio of the Units owned by them prior to the admission of the Occidental Partners. (f) 1998 Credit Facility Proceeds. At such time as the Partnership enters into the 1998 Credit Facility, the Partnership shall make a special distribution to Millennium LP of $75 million, plus interest on such amounts from May 15, 1998, until such distribution at a per annum rate (based on a year of 360 days and the number of days elapsed) equal to the LIBOR Rate plus 60 basis points (.60%). The interest payments shall be treated as payment for the use of capital to which section 707(c) of the Code applies. (g) Bank Credit Agreement Proceeds. At such time as the Partnership enters into the 1998 Credit Facility, the Partnership shall draw down the Bank Credit Agreement Repayment Amount under the 1998 Credit Facility and shall apply the Bank Credit Agreement Repayment Amount to the repayment of the principal amount then outstanding under the Bank Credit Agreement. Two Business Days after such repayment, the Partnership shall draw down $419,700,000 under the Bank Credit Agreement and make a special distribution to Occidental LP2 of the $419,700,000 proceeds of such drawdown plus interest on such $419,700,000 from May 15, 1998 until the date of such distribution at a per annum rate (based on a year of 360 days and the number of days elapsed) equal to the LIBOR Rate plus 60 basis points (.60%), provided that Occidental Chemical Corporation has executed the Amended and Restated Indemnity Agreement. The interest payment shall be treated as payment for the use of capital to which section 707(c) of the Code applies. Distributions to the Partners of cash or property arising from a liquidation of the Partnership shall be made in accordance with the Capital Account balances of the Partners as provided in Section 12.2(d). The Partnership is authorized to withhold from distributions to a Partner and to pay over to a foreign, federal, state or local government, any amounts required to be withheld pursuant to the Code or any provisions of any other foreign, federal, state or local law. Any amounts so withheld shall be treated as distributed to such Partner pursuant to this Section 3 for all purposes of this Agreement, and shall be offset against any amounts otherwise distributable to such Partner. Any amount otherwise distributable to a Partner pursuant to this Section 3 shall, unless otherwise agreed by two Representatives of each of the Nonconflicted General Partners pursuant to Section 6.8, be applied by the Partnership to satisfy any of the following obligations that are owed by such Partner or its Affiliate to the Partnership and that are not paid when due: (a) Lyondell Note and Other Notes. In the case of Lyondell LP, the failure to pay any interest or principal when due on the Lyondell Note or, in the case of any Partner, the failure to pay any interest or principal when due on any indebtedness for borrowed money of such Partner or any Affiliate of such Partner to the Partnership. (b) Contribution Agreement. In the case of any Partner, the failure of such Partner or any Affiliate of such Partner to make any payment pursuant to Section 6 of its Contribution Agreement that has been Finally Determined to be due. (c) Contribution. In the case of any Partner, the failure to make any capital contribution required pursuant to this Agreement (other than pursuant to its Contribution Agreement). This section controls partnership allocations for book purposes. As used herein, "book" means the allocations used to determine debits and credits to the Capital Accounts of the Partners and to determine the amounts distributable to the Partners pursuant to Section 3 and Section 12.2(d). It does not refer to the method in which books are maintained for financial reporting purposes pursuant to Section 5.2. Except as otherwise provided in Sections 4.2 and 4.3, Profits or Losses for book purposes shall be allocated each year among the Partners Pro Rata, subject to the following: (a) If the tax basis in Partnership assets is increased as a result of the distribution of $75 million to Millennium LP as provided in Section 3.1(f), book deductions equal to the tax deductions resulting from such increase shall be allocated to Millennium LP until such time as gain or income is allocable under (c) below. (b) If the tax basis in Partnership assets is increased as a result of the distribution of 43% of the proceeds of the Lyondell Note to Millennium LP, book deductions equal to the tax deductions resulting from such increase shall be allocated among the Initial Partners in the ratio of the Units owned by each prior to the admission of the Occidental Partners until gain or income is allocable under (c) below. (c) If during any 12 month period the Partnership sells, distributes to Partners, or otherwise disposes of more than 50% in value of the assets it owned at the beginning of such period, gain or income recognized in the taxable period of such sale, distribution or other disposition or thereafter recognized from the sale, distribution, or other disposition of property or from the operation of other property shall be allocated to the Partners in the ratio in which the aggregate amount of deductions described in (a) and (b) above were allocated to the Partners until the aggregate amount of such gain and income so allocated equals the aggregate amount of such deductions. (d) Interest accruing on the Lyondell Note shall continue to be allocated among the Initial Partners in the ratio of the Units owned by them prior to the admission of the Occidental Partners. (e) The initial agreed value of the Lease will be amortized ratably over the term of the Lease, and the resulting deductions shall be allocated to Occidental LP1. Any gain recognized on the disposition of the Lease shall be allocated to Occidental LP1. If, prior to such disposition, the Partnership has made capital improvements to such assets that have been borne by the Partners Pro Rata, then upon the disposition of the Lease with such improvements, gain shall be deemed to be attributable to such improvements to the extent of the excess of its depreciated value for GAAP purposes at the time of the disposition over its Book Value at such time, and such gain shall be allocated to the Partners Pro Rata. (f) Deductions attributable to the Book Value of the assets of the Partnership as they exist immediately after the contributions described in Section 2.3(a) other than the Lease will be allocated among the Partners other than Occidental LP1 in the ratio of the Units owned by each, and any gain recognized on the disposition of such contributed assets will be allocated to the Partners other than Occidental LP1 in the ratio of the Units owned by each. If, prior to disposition of such asset sale, the Partnership has made capital improvements to such assets that have been borne by the Partners Pro Rata, then upon the disposition of a contributed asset with such improvements, gain shall be deemed to be attributable to such improvements to the extent of the excess of its depreciated value for GAAP purposes at the time of disposition over its Book Value at such time, and such gain shall be allocated to the Partners Pro Rata. If during a year Units are transferred or new Units issued, allocations among the Partners shall be made in accordance with their interests in the Partnership from time to time during such year in accordance with Section 706 of the Code, using the closing-of-the-books method, except that depreciation and other amortization with respect to each Partnership asset shall be deemed to accrue ratably on a daily basis over the entire period during such year that the asset is owned and in service by the Partnership. The special rules in this Section 4.3 apply in the following order to take into account the possibility of the Partners' having deficit Capital Account balances for which they are not economically responsible and the effect of the Partnership's incurring nonrecourse debt, directly or indirectly. (a) Partnership Minimum Gain Chargeback. If there is a net decrease in "partnership minimum gain" during any year, determined in accordance with the tiered partnership rules of Regulation 'SS'1.704-2(k), each Partner shall be allocated items of income and gain for such year equal to such Partner's share of the net decrease in partnership minimum gain within the meaning of Regulation 'SS'1.704-2(g)(2), except to the extent not required by Regulation 'SS'1.704-2(f). To the extent that this subsection (a) is inconsistent with Regulation 'SS'1.704-2(f) or 'SS'1.704-2(k) or incomplete with respect to such regulations, the minimum gain chargeback provided for herein shall be applied and interpreted in accordance with such regulations. (b) Partner Minimum Gain Chargeback. If there is a net decrease in "partner nonrecourse debt minimum gain" during any year, within the meaning of Regulation 'SS'1.704-2(i)(2), each Partner who has a share of such gain, determined in accordance with Regulation 'SS'1.704-2(i)(5), shall be allocated items of income and gain for such year (and, if necessary, subsequent years) equal to such Partner's share of the net decrease in partner nonrecourse debt minimum gain. To the extent that this subsection (b) is inconsistent with Regulation 'SS'1.704-2(i) or 1.704-2(k) or incomplete with respect to such regulations, the partner nonrecourse debt minimum gain chargeback provided for herein shall be applied and interpreted in accordance with such regulations. (c) Deficit Account Chargeback and Qualified Income. If any Partner has an Adjusted Capital Account Deficit at the end of any year, including an Adjusted Capital Account Deficit for such Partner caused or increased by an adjustment, allocation or distribution described in Regulation 'SS'1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be allocated items of income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain) in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible. This subsection (c) is intended to constitute a "qualified income offset" pursuant to Regulation 'SS'1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. (d) Partner Nonrecourse Deductions. Any partner nonrecourse deductions for any year or other period shall be allocated to the Partner who bears the economic risk of loss with respect to the partner nonrecourse debt to which such partner nonrecourse deductions are attributable in accordance with Regulation 'SS'1.704-2(i) or 'SS'1.704-2(k). (e) Curative Allocations. The Allocations provided by this Section 4.3 may not be consistent with the manner in which the Partners intend to divide Profits, Losses and similar items. Accordingly, Profits, Losses and other items will be reallocated among the Partners (in the same year and to the extent necessary, in subsequent years) in a manner consistent with Regulation 'SS'1.704-1(b) and 1.704-2 so as to prevent such allocations from distorting the manner in which Profits, Losses and other items are intended to be allocated among the Partners pursuant to Sections 4.1 and 4.2. (f) Nonrecourse Debt Sharing. For purposes of this Agreement, nonrecourse deductions, within the meaning of Regulation 'SS'1.704-2(b), shall be deemed to be allocated among the Partners Pro Rata. Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Regulation 'SS'1.752-3(a)(3), Partnership Profits are allocated to the Partners Pro Rata. (a) General Rule. Except as otherwise provided in the following paragraphs of this Section 4.4, allocations for federal income tax purposes of items of income, gain, loss and deduction, and credits and basis therefor, shall be made in the same manner as book allocations are made. (b) Elimination of Book/Tax Disparities. Taxable income and tax deductions shall be shared among the Partners so as to take into account the variation between the Book Value and the adjusted tax basis of each property at the time it is contributed to the Partnership and at each time it is revalued. (i) To account for such variation, effective as of the formation of the Partnership: (A) the depreciation and other deductions attributable to the basis that the contributing Partner had in each property at the time of contribution shall be allocated to such Partner, and (B) upon disposition of a contributed property, the excess of its Book Value at such time over its tax basis at such time shall be allocated to the Partner who contributed the property. (ii) If the Book Value of a Partnership property is revalued as of a date subsequent to the date of its acquisition by the Partnership, the portion of its Book Value at the time of its disposition that is attributable to the increase resulting from such revaluation: (A) shall be disregarded in applying Section 4.4(b)(i)(B) to the partner who contributed such property, and (B) shall be treated for purposes of this Section 4.4(b) as a separate property that was contributed on the revaluation date by the persons who were partners immediately prior to the revaluation date. (iii) The Partners agree that the foregoing allocations constitute a reasonable method for purposes of Reg. 1.704-3(a)(1) and will be so reported and defended by the Partnership and all Partners unless and until the Partners otherwise agree or a court otherwise requires. (c) Allocation of Items Among Partners. Each item of income, gain, loss, deduction and credit and all other items governed by Section 702(a) of the Code shall be allocated among the Partners in proportion to the allocation of Profits, Losses and other items to such Partners hereunder, provided that any gain treated as ordinary income because it is attributable to the recapture of any depreciation or amortization shall be allocated among the Partners in accordance with Prop. Treas. Reg. 'SS''SS'1.1245-1(e)(2) and 1.1250-1(f), or, upon promulgation of final regulations with respect to the matters covered therein, such final regulations. (d) Section 754 Election Allocations. Income and deductions of the Partnership that are attributable to the Section 754 election shall be allocated to the Partners entitled thereto. Items of income, gain, loss, deduction, credit and tax preference for state, local and foreign income tax purposes shall be allocated among the Partners in a manner consistent with the allocation of such items for federal income tax purposes in accordance with the foregoing provisions of this Section. The fiscal year of the Partnership shall be the calendar year. For financial reporting purposes, the Partnership shall adopt a standard set of accounting policies and shall maintain separate books of account, all in accordance with GAAP. The Partnership's financial reports shall comply with requirements of the SEC to the extent applicable to the Partnership and any Partner or any controlling Person of such Partner, to the extent such information is necessary, in conjunction with the financial reporting obligations of such Person under applicable SEC requirements. (a) Proper and complete records and books of account of the Partnership's business, including all such transactions and other matters as are usually entered into records and books of account maintained by businesses of like character or as are required by law, shall be kept by the Partnership at the Partnership's principal place of business. None of the Partnership's funds shall be commingled with the funds of any Partner. (b) Each Partner and its internal and independent auditors, at the expense of such Partner, shall have full and complete access to the internal and independent auditors of the Partnership and shall have the right to inspect such books and records and the physical properties of the Partnership during normal business hours and, at its own expense, to cause an independent audit thereof. The Partnership shall make all books and records of the Partnership available to such Partner and its internal and independent auditors in connection with such audit and shall cooperate with such Partner and auditors and to provide any assistance reasonably necessary in connection with such audit. The Partnership shall prepare and deliver to the Partners the Partnership financial statements and reports described on Appendix B as soon as reasonably practicable and in any event on or prior to the due date indicated on Appendix B. For purposes of making allocations and distributions hereunder (including distributions in liquidation of the Partnership in accordance with Capital Account balances as required by Section 12.3), Capital Accounts and Profits, Losses and other items described in Section 4.1 shall be determined in accordance with federal income tax accounting principles utilizing the accrual method of accounting, with the adjustments required by Regulation 'SS'1.704-1(b) to properly maintain Capital Accounts. (a) Status of the Partnership. The Partners acknowledge that the Partnership is a partnership for federal, foreign and state income tax purposes, and hereby agree not to elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state statute. (b) Tax Elections and Reporting. (i) Generally. The Partnership has made or shall make the following elections under the Code and the Regulations and any similar state statutes: (A) Adopt the calendar year as the annual accounting period; (B) Adopt the accrual method of accounting; (C) Elect to deduct organization costs ratably over a 60-month period as provided in Section 709 of the Code; (D) Adopt the LIFO method of accounting for inventory; and (E) Make any other elections available under the Code that the Partnership Governance Committee determine are appropriate, with the determination of whether an election is appropriate to be made pursuant to the principle that each Partner shall be treated equally (i.e., no Partner will receive preferential tax treatment to the disadvantage of another Partner). (ii) Section 754 Election. The Partnership shall, upon the written request of any Partner benefitted thereby, cause the Partnership to file an election under Section 754 of the Code and the Regulations thereunder to adjust the basis of the Partnership assets under Section 734(b) or 743(b) of the Code, and a corresponding election under the applicable sections of state and local law. (c) Tax Returns. The Tax Matters Partner, on behalf of the Partnership, shall prepare and file the necessary tax and information returns. Each Partner shall timely provide such information, if any, as may be needed by the Partnership for purposes of preparing such tax and information returns. At least 75 days before the due date (as extended) for the Partnership's federal income tax return, the Tax Matters Partner shall deliver a draft of such return to each Partner. Each Partner shall have 15 Business Days after receipt of the draft in which to furnish any objections or comments on the draft to the Tax Matters Partner. The Tax Matters Partner shall make its best efforts to finalize the Partnership's federal income tax return at least 30 days before the due date for filing (as extended) of such return A Partner may not report its share of any Partnership tax item in a manner inconsistent with the Partnership's reporting of such item unless the Partner has timely furnished its objection to the Tax Matters Partner as provided in the immediately preceding sentence. If a Partner reports its share of any Partnership tax item in a manner inconsistent with the Partnership's reporting of such item, such Partner shall promptly notify the Partnership in writing at least 20 Business Days prior to the filing of any statement with the IRS in which such inconsistent position is reported. The Partnership shall promptly deliver to each Partner a copy of the federal income tax return for the Partnership as filed with the appropriate taxing authorities and a copy of any material state and local income tax return as filed. (d) Tax Audits. (i) Federal Tax Matters. The Partnership is authorized to make such filings with the IRS as may be required to designate Lyondell GP as the Tax Matters Partner. The Tax Matters Partner, as an authorized representative of the Partnership, shall direct the defense of any claims made by the IRS to the extent that such claims relate to the adjustment of Partnership items at the Partnership level. The Tax Matters Partner shall promptly deliver to each Partner a copy of all notices, communications, reports or writings of any kind (including, without limitation, any notice of beginning of administrative proceedings or any report explaining the reasons for a proposed adjustment) received from the IRS relating to or potentially resulting in an adjustment of Partnership items, as well as any other information requested by a Partner that is commercially reasonable to request. The Tax Matters Partner shall be diligent and act in good faith in deciding whether to contest at the administrative and judicial level any proposed adjustment of a Partnership item and whether to appeal any adverse judicial decision. The Tax Matters Partner shall keep each Partner advised of all material developments with respect to any proposed adjustment that comes to its attention. All costs incurred by the Tax Matters Partner in performing under this subsection (d) shall be paid by the Partnership. The Tax Matters Partner shall have sole authority to represent the Partnership in connection with all tax audits, including the power to extend the statute of limitations, to enter in any settlement, and to litigate any proposed partnership adjustment, subject to the following: (A) No settlement will be entered into with respect to an item that would materially affect any Partner adversely unless each Partner is first notified of the terms of the settlement; and no Partner will be bound by any settlement unless it consents thereto; (B) If a Partner does not consent to a settlement, the settlement will nevertheless be binding on all partners who do consent; and the non-consenting Partner may, at its sole cost, pursue such administrative or judicial remedies as it deems appropriate; (C) If the Tax Matters Partner brings an action in any court, each Partner, at its sole cost, shall have the right to intervene in the preceding to the extent permitted by the court; and (D) If a settlement or litigation causes Partners to be treated differently for tax purposes with respect to certain tax issues of the Partnership, the income and deductions of the Partnership thereafter arising will be allocated among the Partners to reflect the varying manner in which the issues were resolved. (ii) State and Local Tax Matters. The Partnership shall promptly deliver to each Partner a copy of all notices, communications, reports or writings of any kind with respect to income or similar taxes received from any state or local taxing authority relating to the Partnership which might, in the judgment of the Tax Matters Partner, materially and adversely affect any Partner, and shall keep each Partner advised of all material developments with respect to any proposed adjustment of Partnership items which come to its attention. (iii) Continuation of Rights. Each Partner shall continue to have the rights described in this subsection (d) with respect to tax matters relating to any period during which it was a Partner, whether or not it is a Partner at the time of the tax audit or contest. (e) Tax Rulings. No Person other than the Tax Matters Partner shall request an administrative ruling (or similar administrative procedures) from any taxing authority with respect to any tax issue relating to the Partnership or affecting the taxation of any other Partner unless such Person shall have received written authorization from the Tax Matters Partner and any such other Partner to make such request. (f) Tax Information. At the request of any Partner, the Tax Matters Partner shall timely furnish all reasonably obtainable information required to prepare annual earnings and profits computations (as defined in Section 312 of the Code) with respect to that Partner's share of Partnership income. The Partners agree that all of the tasks to be performed under this Section (other than serving as Tax Matters Partner) may be delegated to employees and consultants of the Partnership. (a) The General Partners hereby establish a committee (the "Partnership Governance Committee") to manage and control the business, property and affairs of the Partnership, including the determination and implementation of the Partnership's strategic direction. The Partnership Governance Committee (on behalf of the Partners) shall have (i) the full authority of the General Partners to exercise all of the powers of the Partnership and (ii) full control over the business, property and affairs of the Partnership. Except to the extent set forth in this Agreement, the Partnership Governance Committee shall have full, exclusive and complete discretion to manage and control the business, property and affairs of the Partnership, to make all decisions affecting the business, property and affairs of the Partnership and to take all such actions as it deems necessary, appropriate, convenient or incidental to accomplish the purpose of the Partnership as set forth in Section 1.4 (as such purpose may be expanded in accordance with Section 6.7(i)). (b) The Partnership Governance Committee shall act exclusively by means of Partnership Governance Committee Action. As used in this Agreement, "Partnership Governance Committee Action" means any action which the Partnership Governance Committee is authorized and empowered to take in accordance with this Agreement and the Act and which is taken by the Partnership Governance Committee either (i) by action taken at a meeting of the Partnership Governance Committee duly called and held in accordance with this Agreement or (ii) by a formal written consent complying with the requirements of Section 6.5(f). In no event shall the Partnership Governance Committee be authorized to act other than by Partnership Governance Committee Action, and any action or purported action by the Partnership Governance Committee (including any authorization, consent, approval, waiver, decision or vote) not constituting a Partnership Governance Committee Action shall be null and void and of no force and effect. Each Partnership Governance Committee Action shall be binding on the Partnership. (c) The Partnership Governance Committee shall adopt policies and procedures, not inconsistent with this Agreement (including Section 6.7) or the Act, governing financial controls and legal compliance, including delegations of authority (and limitations thereon) to the officers of the Partnership as permitted hereby. Such policies and procedures may be revised or revoked (in a manner consistent with this Agreement and the Act) from time to time as determined by the Partnership Governance Committee. To the extent any authority is not delegated to officers of the Partnership in this Agreement or in accordance with Partnership Governance Committee Action, it shall remain with the Partnership Governance Committee. Except as expressly set forth in this Agreement, each General Partner agrees to exercise its authority to manage and control the Partnership only through Partnership Governance Committee Action. Each General Partner agrees not to exercise, or purport or attempt to exercise any authority (i) to act for or incur, create or assume any obligation, liability or responsibility on behalf of the Partnership or any other Partner, (ii) to execute any documents on behalf of, or otherwise bind, or purport or attempt to bind, the Partnership or (iii) to otherwise transact any business in the Partnership's name, in each case except pursuant to Partnership Governance Committee Action. Except as expressly set forth in this Agreement, no Person or Persons other than (i) the General Partners, acting through the Partnership Governance Committee, and (ii) the officers of the Partnership appointed in accordance with this Agreement and acting as agents or employees, as applicable, of the Partnership in conformity with this Agreement and any applicable Partnership Governance Committee Action, shall be authorized (a) to exercise the powers of the Partnership, (b) to manage the business, property and affairs of the Partnership or (c) to contract for, or incur on behalf of, the Partnership any debts, liabilities or other obligations. (a) The Partnership Governance Committee shall consist of nine Representatives and each General Partner shall designate three Representatives (each a "Representative"). All the Representatives of all three General Partners shall together constitute the Partnership Governance Committee. (b) Each General Partner may designate one or more individuals (each an "Alternate") who (i) shall be authorized, in the event a Representative is absent from any meeting of the Partnership Governance Committee (and in the order of succession designated by the General Partner so designating the Alternates), to attend such meeting in the place of, and as substitute for, such Representative and (ii) shall be vested with all the powers to take action on behalf of such General Partner which the absent Representative could have exercised at such meeting. The term "Representative," when used herein with reference to any Representative who is absent from a meeting of the Partnership Governance Committee, shall mean and refer to any Alternate attending such meeting in place of such absent Representative. (c) On or before the date hereof, each General Partner shall have delivered to the other General Partners a written notice (i) designating the three persons to serve as such General Partner's initial Representatives and (ii) designating the person or persons, if any, who are to serve as initial Alternates and their order of succession. (d) Each General Partner may, in its sole discretion and by written notice delivered to the other General Partners and the Partnership at any time or from time to time, remove or replace one or more of its Representatives or change one or more of its Alternates. If a Representative or Alternate dies, resigns or becomes disabled or incapacitated, the General Partner that designated such Representative or Alternate, as the case may be, shall promptly designate a replacement. Each Representative and each Alternate shall serve until replaced by the General Partner that designated such Representative or Alternate, as the case may be. (e) Copies of all written notices designating Representatives and Alternates shall be delivered to the Secretary and shall be placed in the Partnership minute books, but the failure to deliver a copy of any such notice to the Secretary shall not affect the validity or effectiveness of such notice or the designation described therein. (f) Each Representative, in his capacity as such, shall be the agent of the General Partner that designated such Representative. Accordingly, (i) each Representative, as such, shall act (or refrain from acting) with respect to the business, property and affairs of the Partnership solely in accordance with the wishes of the General Partner that designated such Representative and (ii) no Representative, as such, shall owe (or be deemed to owe) any duty (fiduciary or otherwise) to the Partnership or to any General Partner other than the General Partner that designated such Representative; provided, however, that nothing in this Agreement is intended to or shall relieve or discharge any Representative or General Partner from liability to the Partnership or the Partners on account of any fraudulent or intentional misconduct of such Representative. Nothing in this Section 6.4(f) shall limit the duty owed to the Partnership by any person acting in his capacity as an officer of the Partnership (including any such officer who is also a Representative). (g) Representatives shall not receive from the Partnership any compensation for their service or any reimbursement of expenses for attendance at meetings of the Partnership Governance Committee. (a) Regular meetings of the Partnership Governance Committee shall be held at such times and at such places as shall from time to time be determined in advance and committed to a written schedule by the Partnership Governance Committee. The first regular meeting of the Partnership Governance Committee during January of each fiscal year shall be deemed to be the "Annual Meeting." The Secretary shall deliver by commercial courier service or other hand delivery or transmit by facsimile transmission (with proof of confirmation from the transmitting machine), an agenda for each regular meeting to the Representatives at least five Business Days prior to such meeting. Each agenda for a regular meeting shall specify, to a reasonable degree, the business to be transacted at such meeting. Subject to Section 6.6, at any regular meeting of the Partnership Governance Committee at which a quorum is present, any and all business of the Partnership may be transacted. (b) Special meetings of the Partnership Governance Committee may be called by any Representative by delivering by commercial courier service or other hand delivery or transmitting by facsimile transmission (with proof of confirmation from the transmitting machine), written notice of a special meeting to each of the other Representatives at least two Business Days before such meeting. Each notice of a special meeting shall specify, to a reasonable degree, the business to be transacted at, or the purpose of, such meeting. Notice of any special meeting may be waived before or after the meeting by a written waiver of notice signed by the Representative entitled to notice. A Representative's attendance at a special meeting shall constitute a waiver of notice unless the Representative states at the beginning of the meeting his objection to the transaction of business because the meeting was not lawfully called or convened. Special meetings of the Partnership Governance Committee shall be held at the Partnership's offices (or at such other place or in such other manner as the Representatives shall agree) at such time as may be stated in the notice of such meeting. (c) One Representative of each General Partner shall serve as a co-chair of each meeting (regular and special) of the Partnership Governance Committee. Any co-chair may instruct the Secretary to include one or more items on a meeting agenda and none of the co-chairs nor the Secretary may delete or exclude an agenda item proposed by any other co-chair. (d) Following each meeting of the Partnership Governance Committee, the Secretary shall promptly draft and distribute minutes of such meeting to the Representatives for approval at the next meeting, and after such approval shall retain the minutes in the Partnership minute books. (e) Representatives, at their discretion, may participate in or hold regular or special meetings of the Partnership Governance Committee by means of a telephone conference or any comparable device or technology by which all individuals participating in the meeting may hear each other, and participation in such a meeting shall constitute presence in person at such meeting. (f) Any action required or permitted to be taken at a meeting of the Partnership Governance Committee may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by at least two Representatives of each General Partner, and such consent shall have the same force and effect as a duly conducted vote of the Partnership Governance Committee. A counterpart of each such consent to action shall be delivered promptly to each of the Representatives and to the Secretary for placement in the minute books of the Partnership, but the failure to deliver a counterpart of any such consent to action to the Secretary shall not affect the validity or effectiveness of such consent to action. (a) The presence of at least two Representatives (including any duly present Alternates) of Lyondell GP shall constitute a quorum of the Partnership Governance Committee for the transaction of business and the taking of appropriate Partnership Governance Committee Actions at any meeting; provided, however, that the presence at such meeting of at least two Representatives (including any duly present Alternates) from each General Partner shall be necessary for the taking of any action described in Section 6.7; and provided, further, that no Partnership Governance Committee Actions can be taken at any meeting with respect to any matter that was not reflected, with a reasonable level of specificity, on an agenda for such meeting that was delivered in accordance with Section 6.5 unless at least one Representative of each General Partner is present. No Partnership Governance Committee Action may be taken at any meeting at which a quorum is not present. (b) Except as otherwise provided in Section 6.7 or elsewhere in this Agreement, the approval of two or more Representatives acting for Lyondell GP will be sufficient for the Partnership Governance Committee to take any Partnership Governance Committee Action and in such case the Partnership shall be authorized to take such action without the consent of any other Person. Unless and until two or more Representatives of Lyondell GP, two or more Representatives of Millennium GP and two or more Representatives of Occidental GP have given their approval (in which event a Partnership Governance Committee Action is hereby authorized without the need for the consent of any other Person), no Partnership Governance Committee Action will be deemed for any purpose to have been taken at any Partnership Governance Committee meeting that would cause or permit the Partnership or any subsidiary thereof (or any Person acting in the name or on behalf of any of them) directly or indirectly to take (or commit to take), and neither the Partnership nor any subsidiary thereof nor any person acting in the name or on behalf of any of them directly or indirectly may take or commit to take, any of the actions described below in this subsection (whether in a single transaction or series of related transactions): (i) to cause the Partnership, directly or indirectly, to engage, participate or invest in any business outside the scope of its business as described in Section 1.4; (ii) to approve any Strategic Plan, as well as any amendments or updates thereto (including the annual updates provided for in Section 8.1); (iii) to authorize any disposition of assets having a fair market value exceeding $30 million in any one transaction or a series of related transactions not contemplated in an approved Strategic Plan; (iv) to authorize any acquisition of assets or any capital expenditure exceeding $30 million that is not contemplated in an approved Strategic Plan; (v) to require capital contributions to the Partnership (other than contributions contemplated by the Contribution Agreements or an approved Strategic Plan or to achieve or maintain compliance with any HSE Law) within any fiscal year if the total of such contributions required from the Partners within that year would exceed $100 million or the total of such contributions required from the Partners within that year and the immediately preceding four years would exceed $300 million; (vi) to authorize the incurrence of debt for borrowed money unless (x) such debt is contemplated by clause (vii) (b) below, (y) after giving effect to the incurrence of such debt (and any related transactions) and the maximum amount of borrowings permitted under clause (vii) below, the Partnership would be expected to have an "investment grade" debt rating by Moody's Investor Services Inc. and Standard & Poor's Corporation or (z) such debt is incurred to refinance the public, bank or other debt assumed or incurred by the Partnership as contemplated by the Initial Master Transaction Agreement or the Second Master Transaction Agreement or to refinance indebtedness under the 1998 Credit Facility or to refinance any such debt, and in the case of each of (x), (y) and (z), the agreement relating to such debt does not provide that the Transfer by a Partner of its Units (or a change of control with respect to any Partner or any of its Affiliates) would constitute a default thereunder, otherwise accelerate the maturity thereof or give the lender or holder any "put rights" or similar rights with respect thereto; provided, however, that notwithstanding the foregoing, the provisions of Sections 6.7(xxi) and 6.7(xxii), if applicable, must be satisfied with respect to any refinancing; (vii) (a) to enter into the 1998 Credit Facility or (b) to make borrowings under one or more of the Partnership's bank credit facility or facilities, its uncommitted lines of credit or any credit facility or debt instrument of the Partnership of any kind that refinances all or any portion of the Partnership's credit facility or facilities, at any time, if as a result of any such borrowing the aggregate principal amount of all such borrowings outstanding at such time would exceed the sum of $1.25 billion and the amount which becomes available for borrowing under the 1998 Credit Facility. (viii) to enter into interest rate protection or other hedging agreements (other than hydrocarbon hedging agreements in the ordinary course); (ix) to enter into any capitalized lease or similar off-balance sheet financing arrangements involving payments (individually or in the aggregate) by it in excess of $30 million in any fiscal year; (x) to cause the Partnership or any subsidiary of the Partnership to issue, sell, redeem or acquire any Units or other equity securities (or any rights to acquire, or any securities convertible into or exchangeable for, Units or other equity securities); (xi) to make Partnership cash distributions in excess of Available Net Operating Cash or to make non-cash distributions (except as contemplated by Section 12); (xii) to appoint or discharge Executive Officers (other than the CEO), based on the recommendation of the CEO; (xiii) to approve material compensation and benefit plans and policies, material employee policies and material collective bargaining agreements for the Partnership's employees; (xiv) to initiate or settle any litigation or governmental proceedings if the effect thereof would be material to the financial condition of the Partnership; (xv) to change the independent accountants for the Partnership; (xvi) to change the Partnership's method of accounting as adopted pursuant to Section 5.2 or to change the Partnership's method of accounting as provided in Section 5.5 or to make the elections referred to in Section 5.6(b)(i)(E); (xvii) to create or change the authority of any Auxiliary Committee; (xviii) to merge, consolidate or convert the Partnership or any subsidiary thereof with or into any other entity (other than a Wholly Owned Subsidiary of the Partnership); (xix) to file a petition in bankruptcy or seeking any reorganization, liquidation or similar relief on behalf of the Partnership or any subsidiary; or to consent to the filing of a petition in bankruptcy against the Partnership or any subsidiary; or to consent to the appointment of a receiver, custodian, liquidator or trustee for the Partnership or any subsidiary or for all or any substantial portion of their property; (xx) to exercise any power or right described in Section 6.8(a)(i) or (ii) with respect to a Conflict Circumstance involving (a) LYONDELL-CITGO Refining Company Ltd., its successors or assigns, (b) Lyondell Methanol Company, L.P., its successors or assigns or (c) any other Affiliate of Lyondell GP, Millennium GP or Occidental GP if such Affiliate's actions with respect to such Conflict Circumstance are not controlled by Lyondell, Millennium or Occidental respectively, other than a Conflict Circumstance involving the exercise of any rights and remedies with respect to a default under any agreement that is the subject of such Conflict Circumstance; (xxi) (a) prior to the seventh anniversary of the Initial Closing Date, to repay any Millennium America Guaranteed Debt, other than through refinancing or (b) to refinance any Millennium America Guaranteed Debt prior to the seventh anniversary of the Initial Closing Date if any of the principal of the debt refinancing such Millennium America Guaranteed Debt would be due and payable after the seventh anniversary of the Initial Closing Date; provided, however, that if the Millennium America Guaranteed Debt continues to be guaranteed by Millennium America or its successors after the seventh anniversary of the Initial Closing Date, then the term of such debt shall not exceed 365 days; and (xxii) (a) prior to 30 days after the seventh anniversary of the date of this Agreement, to repay any Oxy Guaranteed Debt, other than through refinancing or (b) to refinance any Oxy Guaranteed Debt prior to 30 days after the seventh anniversary of the date of this Agreement if any of the principal of the debt refinancing such Oxy Guaranteed Debt would be due and payable after 30 days after the seventh anniversary of the date of this Agreement; provided, however, that if the Oxy Guaranteed Debt continues to be guaranteed by Occidental Chemical Corporation or its successors after 30 days after the seventh anniversary of the date of this Agreement, then the term of such debt shall not exceed 365 days. (a) Notwithstanding anything to the contrary contained in this Agreement, with respect to any Conflict Circumstance (other than a Conflict Circumstance described in Section 6.7(xx), which shall be governed by Section 6.7), the Nonconflicted General Partners acting jointly (through their respective Representatives) shall, subject to Section 6.8(b), have the sole and exclusive power and right for and on behalf, and at the sole expense, of the Partnership (i) to control all decisions, elections, notifications, actions, exercises or nonexercises and waivers of all rights, privileges and remedies provided to, or possessed by, the Partnership with respect to a Conflict Circumstance and (ii) in the event of any potential, threatened or asserted claim, dispute or action with respect to a Conflict Circumstance, to retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all such claims, disputes and actions. Accordingly, Partnership Governance Committee Action with respect to a Conflict Circumstance (other than a Conflict Circumstance described in Section 6.7(xx), which shall be governed by Section 6.7) shall require the approval of two Representatives of each of the Nonconflicted General Partners. Each General Partner shall, and shall cause its Affiliates to, take all such actions, execute all such documents and enter into all such agreements as may be necessary or appropriate to facilitate or further assure the accomplishment of this Section. (b) Each Nonconflicted General Partner, in exercising its control, power and rights pursuant to this Section, shall act in good faith and in a manner it believes to be in the best interests of the Partnership; provided that it shall never be deemed to be in the best interests of the Partnership not to pay, perform and observe all of the obligations to be paid, performed or observed by or on the part of the Partnership under the terms of any of the Other Agreements (as defined in the Amended and Restated Parent Agreement). Each Nonconflicted General Partner shall act through its Representatives, and the approval of two Representatives acting for each of the Nonconflicted General Partners will be sufficient for the Nonconflicted General Partners (and therefore the Partnership Governance Committee on behalf of the Partnership) to take any action in respect of the relevant Conflict Circumstance. The Conflicted General Partner (or its Affiliates) shall have the right to deal with the Partnership and with each Nonconflicted General Partner on an arm's-length basis and in a manner it believes to be in its own best interests, but in any event must deal with them in good faith. (a) From time to time, the Partnership Governance Committee may, by Partnership Governance Committee Action, designate one or more committees ("Auxiliary Committees") or disband any Auxiliary Committee. Each Auxiliary Committee shall (i) operate under the specific authority delegated to it by the Partnership Governance Committee (consistent with Section 6.7) for the purpose of assisting the Partnership Governance Committee in managing (on behalf of the General Partners) the business, property and affairs of the Partnership and (ii) report to the Partnership Governance Committee. (b) Each General Partner shall have the right to appoint an equal number of members on each Auxiliary Committee. Auxiliary Committee members may (but need not) be members of the Partnership Governance Committee. No Auxiliary Committee member shall be compensated or reimbursed by the Partnership for service as a member of such Auxiliary Committee. (c) Each Partnership Governance Committee Action designating an Auxiliary Committee shall be in writing and shall set forth (i) the name of such Auxiliary Committee, (ii) the number of members and (iii) in such detail as the Partnership Governance Committee deems appropriate, the purposes, powers and authorities (consistent with Section 6.7) of such Auxiliary Committee; provided, however, that in no event shall any Auxiliary Committee have any powers or authority in reference to amending this Agreement, adopting an agreement of merger, consolidation or conversion of the Partnership, authorizing the sale, lease or exchange of all or substantially all of the property and assets of the Partnership, authorizing a dissolution of the Partnership or declaring a distribution. Each Auxiliary Committee shall keep regular minutes of its meetings and promptly deliver the same to the Partnership Governance Committee. No Representative or Alternate of a Partner who, as an officer, director or employee of such Partner or any of its Affiliates, participates in material operational decisions by such Partner or Affiliate regarding a business or operation of such Partner or Affiliate that competes with a business or operation of the Partnership or of the other Partner or its Affiliates, or that competes with a Business Opportunity offered pursuant to Section 9.3(c) or (d), shall receive or have access to any competitively sensitive information regarding the competing business of the Partnership or of the other Partner or its Affiliates or such Business Opportunity, nor shall such Representative or Affiliate participate in any decision of the Partnership Governance Committee relating to such business or operation of the Partnership or the other Partner or its Affiliates or such Business Opportunity. (a) The Partnership Governance Committee may select natural persons who are (or upon becoming an officer will be) agents or employees of the Partnership to be designated as officers of the Partnership, with such titles as the Partnership Governance Committee shall determine. (b) The executive officers of the Partnership shall consist of a Chief Executive Officer ("CEO"), and others as determined from time to time by Partnership Governance Committee (collectively, the "Executive Officers"). (c) The Partnership Governance Committee also shall appoint a Secretary and may appoint such other officers and assistant officers and agents as may be deemed necessary or desirable and such persons shall perform such duties in the management of the Partnership as may be provided in this Agreement or as may be determined by Partnership Governance Committee Action. (d) The Partnership Governance Committee may leave unfilled any offices except those of CEO and Secretary. Two or more offices may be held by the same person except that the same person may not hold the offices of CEO and Secretary. (a) The Executive Officers as of the date of this Agreement are listed on Appendix C. (b) The CEO shall hold office for a five-year term, subject to the CEO's earlier death, resignation or removal. Upon the expiration of such term or earlier vacancy, Lyondell GP shall designate the CEO, provided that such person shall be reasonably acceptable to both of Millennium GP and Occidental GP. The CEO shall not be required to be an employee of the Partnership. (c) Each Executive Officer (other than the CEO) shall hold office until his or her death, resignation or removal. Upon the death, resignation or removal of an Executive Officer, or the creation of a new Executive Officer position, the CEO may nominate a person to fill the vacancy, which shall be subject to Partnership Governance Committee approval. Executive Officers shall not be required to be employees of the Partnership. Any Executive Officer also may serve as an officer or employee of any Partner or Affiliate of a Partner. (a) The CEO may be removed, at any time, by Partnership Governance Committee Action taken pursuant to Section 6.6, with or without cause, whenever in the judgment of the Partnership Governance Committee the best interests of the Partnership would be served thereby. (b) Any Executive Officer (other than the CEO), or any other officer or agent may be removed, at any time, by Partnership Governance Committee Action taken pursuant to Section 6.7(xii), with or without cause, upon the recommendation of the CEO, whenever in the judgment of the Partnership Governance Committee the best interests of the Partnership would be served thereby. (c) Notwithstanding anything to the contrary in Sections 6.7(xii), 7.3(a) and 7.3(b), any General Partner may, by action of two or more of its Representatives, remove from office any Executive Officer who takes or causes the Partnership to take any action described in Section 6.7 that has not been approved by two or more Representatives of Lyondell GP, two or more Representatives of Millennium GP and two or more Representatives of Occidental GP as contemplated by Section 6.7. Any such removal shall be effected by delivery by such Representatives of written notice of such removal (i) to such Executive Officer and (ii) to the Representatives of the other General Partners; provided that such removal shall not be effective if such action is rescinded or cured (to the reasonable satisfaction of the General Partner who has delivered such notice) promptly after such notice is delivered. (a) Each officer or employee of the Partnership shall owe to the Partnership, but not to any Partner, all such duties (fiduciary or otherwise) as are imposed upon such an officer or employee of a Delaware corporation. Without limitation of the foregoing, each officer and employee in any dealings with a Partner shall have a duty to act in good faith and to deal fairly; provided, that, no officer shall be liable to the Partnership or to any Partner for his or her good faith reliance on the provisions of this Agreement. Notwithstanding the foregoing, it is understood that any officer or employee of the Partnership who is also a Representative of a General Partner shall, in his capacity as a Representative, owe no duty (fiduciary or otherwise) to any Person other than such General Partner. (b) The policies and procedures of the Partnership adopted by the Partnership Governance Committee may set forth the powers and duties of the officers of the Partnership to the extent not set forth in or inconsistent with this Agreement. The officers of the Partnership shall have such powers and duties, except as modified by the Partnership Governance Committee, as generally pertain to their respective offices in the case of a publicly held Delaware corporation, as well as other such powers and duties as from time to time may be conferred by the Partnership Governance Committee and by this Agreement. The CEO and the other officers and employees of the Partnership shall develop and implement management and other policies and procedures consistent with this Agreement and the general policies and procedures established by the Partnership Governance Committee. (c) Notwithstanding any other provision of this Agreement, no Partner, Representative, officer, employee or agent of the Partnership shall have the power or authority, without specific authorization from the Partnership Governance Committee, to undertake any of the following: (i) to do any act which contravenes (or otherwise is inconsistent with) this Agreement or which would make it impracticable or impossible to carry on the Partnership's business; (ii) to confess a judgment against the Partnership; (iii) to possess Partnership property other than in the ordinary conduct of the Partnership's business; or (iv) to take, or cause to be taken, any of the actions described in Section 6.7. Subject to the terms of this Agreement, the CEO shall have general authority and discretion comparable to that of a chief executive officer of a publicly held Delaware corporation of similar size to direct and control the business and affairs of the Partnership, including without limitation its day-to-day operations in a manner consistent with the Annual Budget and the most recently approved Strategic Plan. The CEO shall take steps to implement all orders and resolutions of the Partnership Governance Committee or, as applicable, any Auxiliary Committee. The CEO shall be authorized to execute and deliver, in the name and on behalf of the Partnership, (i) contracts or other instru-ments authorized by Partnership Governance Committee Action and (ii) contracts or instruments in the usual and regular course of business (not otherwise requiring Partnership Governance Committee Action), except in cases when the execution and delivery thereof shall be expressly delegated by the Partnership Governance Committee to some other officer or agent of the Partnership, and, in general, shall perform all duties incident to the office of CEO as well as such other duties as from time to time may be assigned to him or her by the Partnership Governance Committee or as are prescribed by this Agreement. The President (if any) and the Vice Presidents shall perform such duties as may, from time to time, be assigned to them by the Partnership Governance Committee or by the CEO. In addition, at the request of the CEO, or in the absence or disability of the CEO, the President (if any) or any Vice President, in any order determined by the Partnership Governance Committee, temporarily shall perform all (or if limited through the scope of the delegation, some of) the duties of the CEO, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the CEO. The Secretary shall keep the minutes of all meetings (and copies of written records of action taken without a meeting) of the Partnership Governance Committee in minute books provided for such purpose and shall see that all notices are duly given in accordance with the provisions of this Agreement. The Secretary shall be the custodian of the records and of the seal, if any. The Secretary shall have general charge of books and papers of the Partnership as the Partnership Governance Committee may direct and, in general, shall perform all duties and exercise all powers incident to the office of Secretary and such other duties and powers as the Partnership Governance Committee or the CEO from time to time may assign to or confer upon the Secretary. Salaries or other compensation of the other Executive Officers of the Partnership shall be established by the CEO consistent with plans approved by the Partnership Governance Committee. Except as approved by the Partnership Governance Committee, all fees and compensation of the officers and employees of the Partnership other than the CEO with respect to their services as such officers and employees shall be payable solely by the Partnership and no Partner or its Affiliates shall pay (or offer to pay) any such fees or compensation to any officer or employee, except to the extent that the Partnership shall have agreed with a Partner or one of its Affiliates pursuant to a separate agreement that a portion of the compensation of such officer or employee shall be paid by such Partner or Affiliate. The Partnership Governance Committee may delegate temporarily the powers and duties of any officer of the Partnership, in case of absence or for any other reason, to any other officer of the Partnership, and may authorize the delegation by any officer of the Partnership of any of such officer's powers and duties to any other officer or employee of the Partnership, subject to the general super-vision of such officer. Without the prior approval of the two other General Partners, which approval shall not be unreasonably withheld, a General Partner (or its Affiliates) shall not be entitled to hire employees of the Partnership who at the time of such employment are eligible to participate in the incentive compensation programs available to senior managers or executives or to hire specific individuals who had been employed by the Partnership within the previous year and who prior to the termination of their employment were eligible to participate in the incentive compensation programs available to senior managers or executives. Without the prior approval of the relevant General Partner, which approval shall not be unreasonably withheld, the Partnership shall not be entitled to hire employees of such General Partner (or its Affiliates) who at the time of such employment are eligible to participate in the incentive compensation programs available to senior managers or executives or to hire specific individuals who had been employed by such General Partner (or its Affiliates) within the previous year and who prior to the termination of their employment were eligible to participate in the incentive compensation programs available to senior managers or executives. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the officers as set forth in this Agreement. In no event shall any Person dealing with any officer with respect to any business or property of the Partnership be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of the officer; and every contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the officer with respect to any business or property of the Partnership shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and/or delivery thereof, this Agreement was in full force and effect, (ii) the instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership, and (iii) the officer was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership. (a) The Partnership shall be managed in accordance with a five-year strategic business plan (the "Strategic Plan") which shall be updated annually under the direction of the CEO and presented for approval by the Partnership Governance Committee pursuant to Section 6.7 no later than 90 days prior to the start of the first fiscal year covered by the updated plan. (b) The Strategic Plan shall establish the strategic direction of the Partnership, including plans relating to capital maintenance and enhancement, geographic expansion, acquisitions and dispositions, new product lines, technology, long-term supply and customer arrangements, internal and external financing, environmental and legal compliance, and plans, programs and policies relating to compensation and industrial relations. The Strategic Plan shall include projected income statements, balance sheets and cash flow statements, including the expected timing and amounts of capital contributions and cash distributions. The format and level of detail of each Strategic Plan shall be consistent with that of the initial Strategic Plan agreed to by the Initial Partners on or prior to the Initial Closing Date or the Strategic Plan most recently approved pursuant to Section 6.7. (a) The Executive Officers of the Partnership shall prepare an Annual Budget (each, an "Annual Budget") for each fiscal year, including an Operating Budget and Capital Expenditure Budget; provided that each Annual Budget shall be consistent with the information for such fiscal year included in the Strategic Plan most recently approved pursuant to Section 6.7; and provided, further, that unless provided otherwise in the most recently approved Strategic Plan, the Annual Budget (including any Annual Budget prepared under Section 8.2(b)) shall utilize a format and provide a level of detail consistent with the Partnership's initial Annual Budget. The Annual Budget for each year shall be submitted to the Partnership Governance Committee for approval at least 60 days prior to the start of the fiscal year covered by such budget. Each Annual Budget shall incorporate (i) a projected income statement, balance sheet and a cash flow statement, (ii) the amount of any corresponding cash deficiency or surplus and (iii) the estimated amount, if any, and expected timing for all required capital contributions. Each proposed Annual Budget shall be prepared on a basis consistent with the Partnership's financial statements. (b) If for any fiscal year the Partnership Governance Committee has failed to approve an updated Strategic Plan, then, subject to Section 8.5, for such year and each subsequent year prior to approval of an updated Strategic Plan, the Executive Officers of the Partnership shall prepare (and promptly furnish to the Partnership Governance Committee) the Annual Budget consistent with the projections and other information for that year included in the Strategic Plan most recently approved pursuant to Section 6.7; provided, however, that the CEO, acting in good faith, shall be entitled to modify any such Annual Budget in order to satisfy current contractual and compliance obligations and to account for other changes in circumstances resulting from the passage of time or the occurrence of events beyond the control of the Partnership; provided, further, that the CEO shall not be authorized to cause the Partnership to proceed with capital expenditures to accomplish capital enhancement projects except to the extent that such expenditures would enable the Partnership to continue or complete any such capital project reflected in the last Strategic Plan that was approved by the Partnership Governance Committee pursuant to Section 6.7. (c) Each "Operating Budget" shall constitute an estimate for each applicable period of all operating income, which shall include expenses required to maintain, repair and restore to good and usable condition the Partnership's assets. (d) Each "Capital Expenditure Budget" shall constitute an estimate for the applicable period of the capital expenditures required to (i) accomplish capital enhancement projects included in the most recently approved Strategic Plan, (ii) maintain and preserve the Partnership's assets in good operating condition and repair and (iii) achieve or maintain compliance with any HSE Law. All Partnership expenses (both operating and capital expenses), regardless of whether included in any Strategic Plan or Annual Budget, shall be funded from operating cash flows or authorized borrowings under available lines of credit, unless otherwise agreed by the Partnership Governance Committee. Subject to the limitations of Sections 2.4 and 6.7(v), if applicable, to the extent that the CEO determines at any time that funds are needed to fund Partnership operations, the CEO may issue a Funding Notice to the Limited Partners calling for an additional capital contribution. The Limited Partners will take all steps necessary to cause compliance with such Funding Notice. (a) After a Strategic Plan and an Annual Budget have been approved by the Partnership Governance Committee (or an Annual Budget has been developed in accordance with Section 8.2(b)), the CEO will be authorized, without further action by the Partnership Governance Committee, to cause the Partnership to make expenditures consistent with such Strategic Plan and Annual Budget; provided, however, that all internal control policies and procedures, including those regarding the required authority for certain expenditures, shall have been followed. (b) In any emergency, the CEO or the CEO's designee shall be authorized to take such actions and to make such expenditures as may be reasonably necessary to react to the emergency, regardless of whether such expenditures have been included in an approved Strategic Plan or Annual Budget. Promptly after learning of an emergency, the CEO or such designee shall notify the Representatives of the nature of the emergency and the response that has been made, or is committed or proposed to be made, with respect to the emergency. If the Partnership Governance Committee has not agreed upon and approved an updated Strategic Plan, as contemplated by Sections 6.7 and 8.1, by such date as is 12 months after the beginning of the first fiscal year that would have been covered by such plan, then the General Partners shall submit their disagreements to non-binding mediation by a Neutral. If the General Partners are unable to agree upon a mutually acceptable Neutral within 30 days after a nomination of a Neutral is made by one General Partner to the other General Partners, then such Neutral shall upon the application of any General Partner be appointed within 70 days of such nomination by the Center for Public Resources, or if such appointment is not so made promptly then promptly thereafter by the American Arbitration Association in Philadelphia, Pennsylvania, or if such appointment is not so made promptly then promptly thereafter by the senior United States District Court judge sitting in Wilmington, Delaware. The fees of the Neutral shall be paid equally by the General Partners. Within 20 days of selection of the Neutral, two persons having decision-making authority on behalf of each General Partner shall meet with the Neutral and agree upon procedures and a schedule for attempting to resolve the differences between the General Partners. They shall continue to meet thereafter on a regular basis until (i) agreement is reached by the General Partners (acting through their Representatives) on an updated Strategic Plan or (ii) at least 24 months have elapsed since the beginning of the first fiscal year that was to be covered by the first updated plan for which agreement was not reached and one General Partner shall determine and notify the other General Partners and the Neutral in writing (a "Deadlock Notice") that no agreement resolving the dispute is likely to be reached. (a) 1998 Credit Facility. Each General Partner agrees that it will use its reasonable best efforts to cause the Partnership to enter into a credit facility or facilities (whether one or more, the "1998 Credit Facility") on or prior to December 15, 1998, which 1998 Credit Facility would allow the Partnership to borrow at least $500 million aggregate principal amount (inclusive of the Bank Credit Agreement Repayment Amount but exclusive of any other portion of the 1998 Credit Facility which may be dedicated to the satisfaction of working capital needs or used for refinancing any indebtedness of the Partnership existing at such time) thereunder, notwithstanding the amount ($1.25 billion) that may be borrowed by the Partnership under its bank credit facility in existence as of the date of this Agreement. Each General Partner further agrees to cause the Partnership to draw down the Bank Credit Agreement Repayment Amount under the 1998 Credit Facility and to apply the Bank Credit Agreement Repayment Amount to the repayment of any principal amount outstanding under the Bank Credit Agreement on or prior to December 15, 1998, and two Business Days after such repayment to cause the Partnership to draw down $419,700,000 under the Bank Credit Agreement for distribution to Occidental LP2 as provided in Section 3.1(g). (b) Other Loans. The Partnership Governance Committee may by Partnership Governance Committee Action authorize the CEO to cause the Partnership to borrow funds from third party lenders. No Partner shall be required, and the Partnership Governance Committee shall not be authorized to require any Partner, to guarantee or to provide other credit or financial support for any loan. Any Partner may, at its sole discretion, guarantee or provide other credit or financial support for all or any portion of any debt, including any refinancing of the Bank Credit Agreement or any uncommitted lines of credit of the Partnership, for such period of time and on such other terms as the Partner shall determine. (c) Millennium Guarantee. Millennium America, an Affiliate of Millennium GP and Millennium LP, issued a full and unconditional guarantee (the "Millennium America Guarantee") in respect of $750 million of principal owed by the Partnership pursuant to the Bank Credit Agreement, together with interest thereon, as set forth in the Bank Credit Agreement. Millennium America (or its successors or assigns) shall maintain the Millennium America Guarantee in full force and effect in respect of $750 million of principal, together with interest thereon, under the Bank Credit Agreement or any refinancings thereof (including, without limitation, any further refinancings of such refinancings) indefinitely; provided, however, that Millennium America may terminate the Millennium America Guarantee at any time on or after the seventh anniversary of the Initial Closing Date if, and only if: (i) the Partnership's ratio of Total Indebtedness to Total Capitalization is, as of the end of the most recently completed fiscal quarter of the Partnership lower than such ratio as of December 31, 1998, (ii) the Partnership's ratio of EBITDA to Net Interest for the most recent 12 month period is at least 105% of such ratio for the 12 month period ending December 31, 1998, (iii) the Partnership is not then in default in the payment of principal of, or interest on, any indebtedness for borrowed money in excess of $15 million and (iv) the Partnership is not then in default in respect of any covenants relating to any indebtedness for borrowed money if the effect of any such default shall be to accelerate, or to permit the holder or obligee of such indebtedness (or any trustee on behalf of such holder or obligee) to accelerate (with or without the giving of notice or lapse of time or both), such indebtedness in an aggregate amount in excess of $50 million; provided, further, that if Millennium GP and Millennium LP sell all of their respective interests in the Partnership, or if Millennium Petrochemicals Inc. sells all of its equity interests in both Millennium GP and Millennium LP, in each case to an unaffiliated third party (or parties) at any time in accordance with the terms of this Agreement, Millennium America may terminate the Millennium America Guarantee if, at the time of such sale or at the time of such termination, (A) the Partnership has an "investment grade" credit rating issued by Moody's Investor Service Inc. or Standard & Poor's Corporation (or, if the Partnership has no rated indebtedness outstanding at such time, Millennium America demonstrates to the reasonable satisfaction of the Partnership that the Partnership could obtain such an "investment grade" credit rating), or (B) the fair market value of the Partnership's assets is at least 140% of the gross amount of its liabilities. For purposes of this paragraph (c), "EBITDA" means, with respect to any period, operating income before interest, taxes, depreciation and amortization, as determined in accordance with GAAP; "Net Interest" means, with respect to any period, (i) the amount which, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated income statement of the Partnership and all other Persons with which the Partnership's financial statements are to be consolidated in accordance with GAAP for the relevant period ended on such date less (ii) the amount which, in conformity with GAAP, would be set forth opposite the caption "interest income" (or any like caption) on such consolidated income statement; "Total Indebtedness" means at the time of determination all indebtedness of the Partnership and its subsidiaries on a consolidated basis, as determined in accordance with GAAP; "Total Capitalization" means, at the time of determination, the sum of Total Indebtedness plus the partner's equity reflected on a balance sheet of the Partnership prepared in accordance with GAAP. (a) The Partners acknowledge that the General Partners (acting through the Partnership Governance Committee) are permitted to delegate responsibility for day-to-day operations of the Partnership to officers and employees of the Partnership. (b) Upon receipt of any required approval by the Partnership Governance Committee (including, as applicable, any approval required by Section 6.8), all contracts and transactions between the Partnership and a Partner or its Affiliates shall be deemed to be entered into on an arm's-length basis and to be subject to ordinary contract and commercial law, without any other duties or rights being implied by reason of a Partner being a Partner or by reason of any provision of this Agreement or the existence of the Partnership. Persons dealing with the Partnership are entitled to rely conclusively on the power and authority of each of the General Partners as set forth in this Agreement. In no event shall any Person dealing with any General Partner or such General Partner's representatives with respect to any business or property of the Partnership be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act or action of the General Partner or the General Partner's representatives; and every contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the General Partner or the General Partner's representatives with respect to any business or property of the Partnership shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and/or delivery thereof, this Agreement was in full force and effect, (ii) the instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership, and (iii) the General Partner or the General Partner's representative was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership. Nothing in this Section 9.2 shall be deemed to be a waiver or release of any General Partner's obligations to the other Partners as set forth elsewhere in this Agreement. ; Right of First Opportunity. (a) Each Partner (directly or through its Affiliates) is a sophisticated party possessing extensive knowledge of and experience relating to, and is actively engaged in, significant businesses in addition to its Contributed Businesses, has been represented by legal counsel, is capable of evaluating and has thoroughly considered the merits, risks and consequences of the provisions of this Section 9.3 and is agreeing to such provision knowingly and advisedly. The liability of each of the General Partners (including any liability of its Affiliates or its and their respective officers, directors, agents and employees) or of any Limited Partner (including any liability of its Affiliates or its and their respective officers, agents, directors and employees), either to the Partnership or to any other Partner, for any act or omission by such Partner in its capacity as a partner of the Partnership that is imposed by such Partner's status as a "general partner" or "limited partner" (as such terms are used in the Act) of a limited partnership is hereby eliminated, waived and limited to the fullest extent permitted by law; provided, however, that each General Partner shall at all times owe to the other General Partners a fiduciary duty in observing the requirement described in Section 6.7 that two or more Representatives of Lyondell GP, two or more Representatives of Millennium GP and two or more Representatives of Occidental GP shall be required to give their approval before the Partnership may undertake any of the actions listed in Section 6.7. Nothing in this subsection shall relieve any Partner from liability for any breach of this Agreement and each General Partner shall at all times owe to the other General Partners a duty to act in good faith with respect to all matters involving the Partnership. (b) Except as set forth in Section 9.3(c), each Partner's Affiliates shall be free to engage in or possess an interest in any other business of any type, including any business in direct competition with the Partnership, and to avail itself of any business opportunity available to it without having to offer the Partnership or any Partner the opportunity to participate in such business. Except as set forth in Section 9.3(c), it is expressly agreed that the legal doctrine of "corporate or business opportunities" sometimes applied to a Person deemed to be subject to fiduciary or other similar duties so as to prevent such Persons from engaging in or enjoying the benefits of certain additional business opportunities shall not be applied in the case of any investment, acquisition, business, activity or operation of any Partner's Affiliates. (c) (i) If a Partner's Affiliate desires to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a Related Business by investing in or acquiring a Person whose business is a Related Business, acquiring assets of a Related Business, or otherwise engaging in or undertaking a Related Business (a "Business Opportunity"), such Partner or its Affiliate (such Partner, together with its Affiliates, being called the "Proposing Partner") shall offer the Partnership the Business Opportunity on the terms set forth in Section 9.3(c)(ii). (ii) When a Proposing Partner offers a Business Opportunity to the Partnership, the Partnership shall elect to do one of the following within a reasonably prompt period: (A) acquire or undertake the Business Opportunity for the benefit of the Partnership as a whole, at the cost, expense and benefit of the Partnership; provided, however, that, if the Partnership ceases to actively pursue such opportunity for any reason, then the Proposing Partner will be entitled to proceed under clause (B) below; or (B) permit the Proposing Partner to acquire or undertake the Business Opportunity for its own benefit and account without any duty to the Partnership or the other Partners with respect thereto; provided, however, that if the Business Opportunity is in direct competition with the then existing business of the Partnership (a "Competing Opportunity"), then the Proposing Partner and the Partnership shall, if either so elects, seek to negotiate and implement an arrangement whereby the Partnership would either (i) acquire or undertake the Competing Opportunity at the sole cost, expense and benefit of the Proposing Partner under a mutually acceptable arrangement whereby the Competing Opportunity is treated as a separate business within the Partnership with the costs, expenses and benefits related thereto being borne and enjoyed solely by the Proposing Partner, or (ii) enter into a management agreement with the Proposing Partner to manage the Competing Opportunity on behalf of the Proposing Partner on terms and conditions mutually acceptable to the Proposing Partner and the Partnership. If the Partnership and the Proposing Partner do not reach agreement as to such arrangement, the Proposing Partner may acquire or undertake the Competing Opportunity for its own benefit and account without any duty to the Partnership or the other Partners with respect thereto. (d) Notwithstanding the provisions of Section 9.3(c)(ii), (i) if the Business Opportunity constitutes less than 25% (based on annual revenues for the most recently completed fiscal year) of an acquisition of or investment in assets, activities, operations or businesses that is not otherwise a Related Business, then a Proposing Partner may acquire or invest in such Business Opportunity without first offering it to the Partnership; provided, that, after completion of the acquisition or investment thereof, such Proposing Partner must offer the Business Opportunity to the Partnership pursuant to the terms of Section 9.3(c)(ii); and if the Partnership elects option (A) of Section 9.3(c)(ii) with respect thereto, the Business Opportunity shall be acquired by the Partnership at its fair market value as of the date of such acquisition and (ii) if the Business Opportunity is (A) part of an integrated project, a substantial element of which is the development, exploration, production and/or sale of oil or gas reserves and (B) located in a country other than the United States, Canada or Mexico then such Partner or its Affiliate may acquire or invest in such Business Opportunity without first offering it to the Partnership; provided, that subject to any requisite consents and approvals from third parties or governmental authorities, the Partner or its Affiliate will use commercially reasonable efforts to include the Partnership to the maximum extent practicable in such integrated project with respect to the Business Opportunity portion of the project. (e) Notwithstanding the provisions of Section 9.3(c), any direct or indirect expansion by LYONDELL-CITGO Refining Company Ltd. of its aromatics business shall not be deemed to constitute a Business Opportunity for purposes of Section 9.3(c). (f) If (i) the Partnership is presented with an opportunity to acquire or undertake a Business Opportunity (other than pursuant to Section 9.3(c)) that it determines not to acquire or undertake and (ii) the Representatives of one or two General Partners, but not the other General Partner(s), desire that the Partnership acquire or undertake such Business Opportunity, then the Partnership shall permit such General Partner(s) and its or their respective Affiliates to acquire or undertake such Business Opportunity (or in the event two of the General Partners desire to so undertake, then, as between those two General Partners and their respective Affiliates, the Business Opportunity may be pursued or acquired either jointly or independently and Section 9.3(c)(ii)(B) shall be deemed to be applicable thereto to the same extent as if such General Partner(s) and its or their respective Affiliates were a Proposing Partner with respect to such Business Opportunity. (a) No Limited Partner shall take part in the management or control of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise to bind the Partnership. (b) Each Limited Partner shall have the rights with respect to the Partnership's books and records as set forth in Section 5.3. Each Partner covenants and agrees with the Partnership and with the other Partners as follows: (i) It shall not exercise, or purport or attempt to exercise, its authority to withdraw, retire, resign, or assert that it has been expelled from the Partnership; (ii) It shall not do any act that would make it impossible or impracticable to carry on the Partnership's business; and (iii) It shall not act or purport or attempt to act in a manner inconsistent with any act of a General Partner acting pursuant to the Partnership Governance Committee or in a manner contrary to the agreements of the Partners set forth in this Agreement; provided, that, nothing in this Section 9.5 shall be deemed to waive its rights under Sections 10, 11 or 12. Each Partner covenants and agrees that (i) its business shall be restricted solely to the holding of its Units and the doing of things necessary or incidental in connection therewith (including, without limitation, the exercise of its rights and powers under this Agreement), and (ii) it shall not own any assets, incur any liabilities or engage, participate or invest in any business outside the scope of such business; provided, however, that this Section 9.6 shall not be binding upon (a) Millennium Petrochemicals Inc., a Virginia corporation, or its successors by operation of law to the extent that any Units shall be Transferred to it in accordance with Section 10.6 or (b) at its option, any Wholly Owned Affiliate of any Partner to whom Units shall be Transferred pursuant to Section 10.6 if, at the date of such Transfer, such Wholly Owned Affiliate shall have a consolidated net worth, as determined in accordance with GAAP, of at least $50 million. Notwithstanding the foregoing provisions of this Section 9.6, this Section 9.6 shall not prohibit any Partner from incurring debt payable to its Parent or an Affiliate so long such debt is permitted under Section 2.4 of the Parent Agreement. Except pursuant to Section 11 or the procedures described below in this Section, a Partner shall not, in any transaction or series of transactions, directly or indirectly Transfer all or any part of its Units. A Partner shall not, in any transaction or series of transactions, directly or indirectly Pledge all or any part of its Units or its interest in the Partnership. Neither the term "Transfer" nor the term "Pledge," however, shall include an assignment by a Partner of such Partner's right to receive distributions from the Partnership so long as such assignment does not purport to assign any right of such Partner to participate in or manage the affairs of the Partnership, to receive any information or accounting of the affairs of the Partnership, or to inspect the books or records of the Partnership or any other right of a Partner pursuant to this Agreement or the Act. Any attempt by a Partner to Transfer or Pledge all or a portion of its Units in violation of this Agreement shall be void ab initio and shall not be effective to Transfer or Pledge such Units or any portion thereof. Subject to any applicable restrictions imposed by the Amended and Restated Parent Agreement, nothing in this Agreement shall prevent the Transfer or Pledge by the owner thereof of any capital stock, equity ownership interests or other security of a Partner or any Affiliate of a Partner. (a) Except as set forth in Section 10.6, without the consent of all of the General Partners, no Partner may Transfer less than all of its Units and no Partner may Transfer its Units for consideration other than cash. Any Limited Partner (or Limited Partners, if there are Affiliated Limited Partners) and its (or their) Affiliated General Partner desiring to Transfer all of their Units (together, the "Selling Partners") shall give written notice (the "Initial Notice") to the Partnership and the other Partners (the "Offeree Partners") stating that the Selling Partners desire to Transfer their Units and stating the cash purchase price and all other terms on which they are willing to sell (the "Offer Terms"). Delivery of an Initial Notice shall constitute the irrevocable offer of the Selling Partners to sell their Units to the Offeree Partners hereunder. (b) The Offeree Partners shall have the option, exercisable by delivering written notice (the "Acceptance Notice") of such exercise to the Selling Partners within 45 days of the date of the Initial Notice, to elect to purchase all of the Units of the Selling Partners on the Offer Terms described in the Initial Notice. If all of the Offeree Partners deliver an Acceptance Notice, then all of the Units shall be transferred to the Offeree Partners on a pro rata basis (based on the ratio of the number of Units owned by each Offeree Partner delivering an Acceptance Notice to the number of Units owned by all Offeree Partners delivering an Acceptance Notice or on any other basis that shall be mutually agreed upon between the Offeree Partners delivering an Acceptance Notice). If less than all of the Offeree Partners deliver an Acceptance Notice, the Selling Partners shall give written notice thereof (the "Additional Notice") to the Offeree Partners electing to purchase, and such Offeree Partners shall have the option, exercisable by delivery of an Acceptance Notice of such exercise to the Selling Partners within 15 days of such Additional Notice, to purchase all of the Units, including the Units it had not previously elected to purchase; provided, however, that any election by an Offeree Partner not to purchase all such Units shall be deemed a rescission of such Offeree Partner's original Acceptance Notice and an election not to purchase any of the Units of the Selling Partners. The Acceptance Notice shall set a date for closing the purchase, such date to be not less than 30 nor more than 90 days after delivery of the Acceptance Notice; provided that such time period shall be subject to extension as reasonably necessary (up to a maximum of an additional 120 days after such 90 day period) in order to comply with any applicable filing and waiting period requirements under the Hart-Scott- Rodino Antitrust Improvements Act. The closing shall be held at the Partnership's offices. The purchase price for the Selling Partners' Units shall be paid in cash delivered at the closing. The purchase shall be consummated by appropriate and customary documentation (including the giving of representations and warranties substantially similar to those set forth in Sections 2.1 through 2.3 of the Second Master Transaction Agreement). (c) If none of the Offeree Partners elect to purchase the Selling Partners' Units within 45 days after the receipt of the Initial Notice, the Selling Partners shall have a further 180 days during which they may, subject to Sections 10.2(d) and (e), consummate the sale of their Units to a third party purchaser at a purchase price and on such other terms that are no more favorable to such purchaser than the Offer Terms. If the sale is not completed within such further 180-day period, the Initial Notice shall be deemed to have expired and a new notice and offer shall be required before the Selling Partners may make any Transfer of their Units. (d) Before the Selling Partners may consummate a Transfer of their Units to a third party in accordance with this Agreement, the Selling Partners shall demonstrate to the Offeree Partners that the Person willing to serve as the proposed purchaser's guarantor under the agreement contemplated by Section 10.2(e)(vi) has outstanding indebtedness that is rated investment grade by Moody's Investors Service, Inc. and Standard & Poor's Corporation, or if such Person has no rated indebtedness outstanding, such Person shall provide an opinion from a nationally recognized investment banking firm that such Person could be reasonably expected to obtain such ratings. (e) Notwithstanding the foregoing provisions of this Section 10.2, a Partner may Transfer its Units (other than pursuant to Section 10.6) only if all of the following occur: (i) The Transfer is accomplished in a non-public offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations. (ii) The Transfer does not cause a default under any material contract to which the Partnership is a party or by which the Partnership or any of its properties is bound. (iii) The transferee executes an appropriate agreement to be bound by this Agreement. (iv) The transferor and/or transferee bears all reasonable costs incurred by the Partnership in connection with the Transfer. (v) The business and activities of the transferee comply with Section 9.6. (vi) The guarantor of the transferee satisfies the criteria set forth in Section 10.2(d) and delivers an agreement to the ultimate parent entity of the Offeree Partners and to the Partnership, substantially in the form of the Amended and Restated Parent Agreement. (vii) The proposed transferor is not in default in the timely performance of any of its material obligations to the Partnership. (viii) The provisions of Section 10.3 are satisfied. No Limited Partner may Transfer its Units to any Person (other than in accordance with Section 10.6) unless the Units of its General Partner Affiliate and its Limited Partner Affiliate or Affiliates (if any) are simultaneously transferred to such Person or a Wholly Owned Affiliate of such Person. No General Partner may transfer its Units to any Person (other than a Wholly Owned Affiliate of such Partner) unless the Units of its Affiliated Limited Partner (or Limited Partners, if more than one) are simultaneously transferred to such Person or a Wholly Owned Subsidiary of such Person. Upon consummation of a Transfer in accordance with Section 10.2, the transferee or transferees shall immediately, and without any further action of any Person, become (i) a Substitute Limited Partner if and to the extent Limited Partner Units are transferred and (ii) a Substitute General Partner, if and to the extent General Partner Units are transferred. Each Transfer shall become effective as of the first day of the calendar month following the calendar month during which the Partnership Governance Committee approves such Transfer and receives a copy of the instrument of assignment and all such certificates and documents of the character described in Section 10.2, which the Partnership Governance Committee may reasonably request. Without the need for the consent of any Person (subject to the provisions contained in this Section 10.6): (a) any Partner may Transfer its Units to any Wholly Owned Affiliate of such Partner (other than the Partner that is its Affiliate), provided the transferee executes an instrument reasonably satisfactory to all of the General Partners accepting the terms and provisions of this Agreement (except as may be provided in Section 9.6). Upon consummation of a Transfer in accordance with this Section 10.6(a), the transferee shall immediately, and without any further action of any Person, become (i) a Substitute Limited Partner if and to the extent Limited Partner Units are transferred and (ii) a Substitute General Partner, if and to the extent General Partner Units are transferred; and (b) any Limited Partner may, at its option and at any time, (i) Transfer up to 99% of its Limited Partner Units to its Affiliated General Partner, whereupon such Limited Partner Units shall, without any further action, become General Partner Units or (ii) Transfer all of the Limited Partner Units held by such Limited Partner to its Affiliated Limited Partner. Promptly following any Transfer of Limited Partner Units in accordance with this Section 10.6(b), each Partner shall take such actions and execute such instruments or documents (including, without limitation, amendments to this Agreement or supplemental agreements hereto) as may be reasonably necessary to ensure that each Affiliated Partner Group shall, taken as a whole and following such Transfer, maintain all of its rights under this Agreement as in effect immediately prior to such Transfer (including, without limitation, the portion of Available Net Operating Cash distributable to such Affiliated Partner Group). No Transfer of Units which is in violation of this Section 10 shall be valid or effective, and the Partnership shall not recognize the same for the purposes of making any allocation or distribution. (a) Each of the following events shall constitute a "Default" and create the rights provided for in this Section 11 in favor of the Partnership and the Non-Defaulting Partners against the Defaulting Partners: (i) the failure by a Partner to make any contribution to the Partnership as required pursuant to this Agreement (other than pursuant to the Contribution Agreement), which failure continues for at least five Business Days from the date that the Partner is notified such contribution is overdue; (ii) in the case of each of Lyondell GP and Lyondell LP, the failure to pay principal, when due, on the Lyondell Note, which failure continues for at least five Business Days from the date such payment is due; or (iii) the withdrawal, retirement, resignation or dissolution of a Partner (other than in connection with a Transfer of all of a Partner's Units in accordance with this Agreement); or the Bankruptcy of a Partner or its Guarantor. (b) The day upon which the Default commences or occurs (or if the Default is subject to a cure period and is not timely cured, then the day following the end of the applicable cure period) shall be the "Default Date." Without prejudice to a Partner's (or any of its Affiliates') rights to seek temporary or preliminary judicial relief, prior to any such Default Date all rights and obligations of the Partners under this Agreement shall remain in full force and effect. Provided that there shall be no duplication of remedies, without prejudice to any right to pursue independently and at any time, including simultaneously, any other remedy it may have under law, including the right to seek to recover Damages, or equity, each Non-Defaulting Affiliated Partner Group in its sole discretion may elect to pursue the following remedies: (a) At any time prior to the expiration of 60 days from the Default Date, each Non-Defaulting Affiliated Partner Group may elect to purchase its pro rata share (based on the ratio of the number of Units owned by such Partners to the number of Units owned by all Non-Defaulting Partners electing to purchase) of the Units of the Defaulting Partners as described in Section 11.3; provided, however, that within 10 days after the determination of the Fair Market Value, either Non-Defaulting Affiliated Partner Group may withdraw its election. If a Non-Defaulting Affiliated Partner Group withdraws its election to purchase after the determination of Fair Market Value, and the other Non-Defaulting Affiliated Partner Group has elected and not so withdrawn, the withdrawing Affiliated Partner Group shall provide notice within 5 days of its withdrawal to such other Affiliated Partner Group. At any time prior to the expiration of 10 days from receipt of such notice, the Affiliated Partner Group receiving such notice may elect to purchase the Units as to which the election to purchase has been withdrawn. If on the later to occur of (i) a Non-Defaulting Affiliated Partner Group's withdrawal of its election to purchase or (ii) the expiration of 10 days from receipt of the notice provided for in the foregoing sentence, no election to purchase is in effect with respect to all of the Units of the Defaulting Partners, then each Non-Defaulting Partner Affiliated Partner Group shall have an additional 30 days from such time to elect an alternative remedy under Section 11.2(b) below; and (b) At any time prior to the expiration of 60 days from the Default Date (or if any Non-Defaulting Affiliated Partner Group initially elected to pursue its remedy under Section 11.2(a) above and no elections to purchase all Units of the Defaulting Partners are made and not withdrawn, at any time within the 30 days following the last applicable waiting period under Section 11.2(a)), any Non-Defaulting Affiliated Partner Group may elect to effect a liquidation of the Partnership under Section 11.4 and thereby cause the Partnership to dissolve under Section 12.1(iv). (a) Upon any election pursuant to Section 11.2(a), the purchase price that such Non-Defaulting Partners shall pay, in the aggregate, to the Defaulting Partners for their Units shall be an amount equal to (i) the amount that the Defaulting Partners would receive in a liquidation (assuming that any sale under Section 12.2 were for an amount equal to the Fair Market Value, without giving effect to any Damages) reduced by (ii) the unrecovered Damages attributable to the Default by the Defaulting Partners. (b) If the Non-Defaulting Partners have a right to purchase the Units of the Defaulting Partners, any Non-Defaulting Partner may first seek a determination of Fair Market Value by delivering notice in writing to the Defaulting Partners. Each such Non-Defaulting Affiliated Partner Group shall have 10 days from the final determination of Fair Market Value (or if purchasing pursuant to the withdrawal of election to purchase, 10 days from receipt of notice as provided in Section 11.2(b)) to elect to purchase its share of the Defaulting Partner Units by delivering notice of such election in writing, and the purchase shall be consummated prior to the expiration of 60 days from the date such notice is delivered; provided that, such time period shall be subject to extension as reasonably necessary (up to a maximum of an additional 120 days after such 60 day period) in order to comply with any applicable filing and waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act. (c) The purchase price so determined shall be payable in cash at a closing held at the Partnership's offices. The purchase shall be consummated by appropriate and customary documentation (including the giving of representations and warranties substantially similar to those set forth in Sections 2.1 through 2.4 of the Second Master Transaction Agreement) as soon as practicable and in any event within the applicable time period specified in subsection (b). (d) The Non-Defaulting Partners may assign, in whole or in part, their right to purchase the Units of the Defaulting Partners to one or more third parties without the consent of any Partner hereunder. (e) If Units are transferred in accordance with this Section 11.3, whether to the Non-Defaulting Partners or a third party (under subsection (d) above), upon the consummation of such Transfer, each such transferee shall immediately, and without any further action on the part of any Person, become (i) a Substitute Limited Partner if and to the extent that Limited Partner Units were transferred to such Person and (ii) a Substitute General Partner if and to the extent that General Partner Units were transferred to such Person. Upon any election pursuant to Section 11.2(b), any Non-Defaulting Partner shall have the right to elect to dissolve and liquidate the Partnership pursuant to the procedures in Section 12.1(iv) (such procedures constituting a "Liquidation"); provided, however, that any amount payable to the Defaulting Partners in such Liquidation pursuant to Section 12.2 shall be reduced by, without duplication, any unrecovered Damages incurred by the Non-Defaulting Partners and the Non-Defaulting Partners' Percentage Interest of any unrecovered Damages incurred by the Partnership in connection with the Default. The Non-Defaulting Partner shall deliver notice of such election to dissolve and liquidate in writing to the Partnership and the other Partners. Notwithstanding any other provision of this Agreement, commencing on the Default Date and (i) prior to the Non-Defaulting Partners' collection of Damages through the exercise of its legal remedies or otherwise, or (ii) while the Non-Defaulting Partners are pursuing their remedies under Section 11.2(a) or (b), the Representatives of the Defaulting General Partner shall not have any voting or decisional rights with respect to matters requiring Partnership Governance Committee Action, and such matters shall be determined solely by the Representatives of the Non-Defaulting General Partners; provided, however, that the foregoing loss of voting and decisional rights shall not occur as a result of a Default caused solely by the Bankruptcy of a Partner or a Guarantor described in Section 11.1(a)(iii); and provided further, that in the case of a Default under Section 11.1(a)(i) or (ii), the foregoing loss of voting and decisional rights shall not apply to those voting and decisional rights contained in Sections 6.7(i), (x), (xvi) or (xviii) of this Agreement, which rights shall continue in full force and effect at all times. As long as there is at least one other General Partner (who is hereby authorized in such event to conduct the business of the Partnership without dissolution), the withdrawal, retirement, resignation, dissolution or Bankruptcy of a General Partner shall not dissolve the Partnership, but rather shall be a Default covered by Section 11. The Partnership shall be dissolved upon the happening of any one of the following events: (i) the written determination of all General Partners to dissolve the Partnership; (ii) the entry of a judicial decree of dissolution; (iii) any other act or event which results in the dissolution of a limited partnership under the Act (except as provided in the first sentence of this Section 12.1); (iv) the election of a Non-Defaulting Affiliated Partner Group to effect a dissolution of the Partnership under Section 11.4; or (v) after the delivery of a Deadlock Notice by a General Partner pursuant to Section 8.5, the written determination by any General Partner to dissolve the Partnership. (a) General. If the Partnership dissolves, it shall commence winding up pursuant to the appropriate provisions of the Act and the procedures set forth in this Section 12. Notwithstanding the dissolution of the Partnership, prior to the termination of the Partnership, the business of the Partnership and the affairs of the Partners, as such, shall continue to be governed by this Agreement. (b) Control of Winding Up. The winding up of the Partnership shall be conducted under the direction of the Partnership Governance Committee; provided, however, that if the dissolution is caused by entry of a decree of judicial dissolution, the winding up shall be carried out in accordance with such decree. (c) Manner of Winding Up. Unless the provisions of Section 12.2(e) apply, the Partnership shall attempt to sell all property and apply the proceeds therefrom in accordance with this Section 12.2(c) and Section 12.2(d) below. Upon dissolution of the Partnership, the Partnership Governance Committee shall determine the time, manner and terms of any sale or sales of Partnership property pursuant to such winding up, consistent with its duties and having due regard to the activity and condition of the relevant market and general financial and economic conditions. Except as otherwise agreed by the Partners, no distributions will be made in kind to any Partner without the consent of each Partner. (d) Application of Assets. In the case of a dissolution and winding-up of the Partnership, the Partnership's assets shall be applied as follows: (i) First, to satisfaction of the liabilities of the Partnership owing to creditors (including Partners and Affiliates of Partners who are creditors), whether by payment or reasonable provision for payment. Any reserves created to make any such provision for payment may be paid over by the Partnership to an independent escrow holder or trustee, to be held in escrow or trust for the purpose of paying any such contingent, conditional or unmatured liabilities or obligations, and, at the expiration of such period as the Partnership Governance Committee may deem advisable, such reserves shall be distributed to the Partners or their assigns in the manner set forth in subsection (d)(ii) below. (ii) Second, after all allocations of Profits or Losses and other items pursuant to Section 4, to the Partners in accordance with the balances in their Capital Accounts. Any Partner that then has a deficit in its Capital Account shall contribute cash in the amount necessary to eliminate such deficit. Such contributions shall be made within 90 days after the date in which all undistributed assets of the Partnership have been converted to cash. (iii) Notwithstanding the foregoing, if any Partner shall be indebted to the Partnership, then until payment in full of the principal of and accrued but unpaid interest on such indebtedness, regardless of the stated maturity or maturities thereof, the Partnership shall retain such Partner's distributive share of Partnership property and apply such sums to the liquidation of such indebtedness and the cost of operation of such Partnership property during the period of such liquidation. (e) Division of Assets upon Deadlock. If dissolution occurs pursuant to Section 12.1(v), then the provisions of this Section 12.2(e) shall, if elected by any Partner, apply in lieu of the provisions of Section 12.2(c), but subject to the provisions of Section 12.2(d)(ii). In such event, the Partnership properties shall be divided and distributed in kind to the Partners in accordance with the provisions of Appendix E. Upon the completion of the liquidation of the Partnership and the distribution of all Partnership assets, the Partnership's affairs shall terminate and the Partnership shall cause to be executed and filed a Certificate of Cancellation of the Partnership's Certificate of Limited Partnership pursuant to the Act, as well as any and all other documents required to effectuate the termination of the Partnership. Within a reasonable time following the completion of the winding-up and liquidation of the Partnership's business, the Partnership Governance Committee shall supply to each of the Partners a statement (which may be unaudited) which shall set forth the assets and the liabilities of the Partnership as of the date of complete liquidation, and each Partner's pro rata portion of distributions pursuant to Section 12.2. (a) Except as provided in subsection (c) or (d) hereof, each Partner shall, and shall cause each of its Affiliates and its and their respective partners, shareholders, directors, officers, employees and agents (collectively, "Related Persons") to, keep secret, retain in strictest confidence, and not distribute, disseminate or disclose any and all Confidential Information except to (i) the Partnership and its officers and employees, (ii) any lender to the Partnership or (iii) any Partner or any of their respective Affiliates or other Related Persons on a "need to know" basis in connection with the transactions leading up to and contemplated by this Agreement and the operation of the Partnership, and such Partner disclosing Confidential Information pursuant to this Section 13.1(a) shall use, and shall cause its Affiliates and other Related Persons to use, such Confidential Information only for the benefit of the Partnership in conducting the Partnership's business or for any other specific purposes for which it was disclosed to such party; provided that the disclosure of financial statements of, or other information relating to the Partnership shall not be deemed to be the disclosure of Confidential Information (y) to the extent that any Partner (or its ultimate parent entity) deems it necessary, appropriate or customary pursuant to law, regulation or stock exchange rule (in the reasonable good faith judgment of such parent entity) to disclose such information in or in connection with filings with the SEC, press releases disseminated to the financial community, presentations to lenders, presentations to ratings agencies or information disclosed to similar audiences or (z) to the extent that in order to sustain a position taken for tax purposes, any Partner deems it necessary and appropriate to disclose such financial statements or other information. All Confidential Information disclosed in connection with the Partnership or pursuant to this Agreement shall remain the property of the Person whose property it was prior to such disclosure unless such property has been transferred to the Partnership pursuant to a Contribution Agreement. (b) No Confidential Information regarding the plans or operations of any Partner or any Affiliate thereof received or acquired by or disclosed to any unaffiliated Partner or Affiliate thereof in the course of the conduct of Partnership business, or otherwise as a result of the existence of the Partnership, may be used by such unaffiliated Partner or Affiliate thereof for any purpose other than for the benefit of the Partnership in conducting the Partnership Business. The Partnership and each Partner shall have the affirmative obligation to take all necessary steps to prevent the disclosure to any Partner or Affiliate thereof of information regarding the plans or operations of such Partner and its Affiliates in markets and areas unrelated to the business of the Partnership in which any other Partner and their respective Affiliates compete. (c) In the event that any Partner is legally required (by interrogatories, discovery requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, it is agreed that such Partner prior to disclosure will provide the Partnership Governance Committee (and, if such Confidential Information concerns another Partner, such Partner) with prompt notice of such request(s) so that the Partnership Governance Committee (or such other Partner) may seek an appropriate protective order or other appropriate remedy and/or waive the Partner's compliance with the provisions of this Section. In the event that such protective order or other remedy is not obtained, or that the Partnership Governance Committee (and, if such Confidential Information concerns another Partner, such Partner) grants a waiver hereunder, the Partner required to furnish Confidential Information may furnish that portion (and only that portion) of the Confidential Information which, in the opinion of such Partner's counsel, such Partner is legally compelled to disclose, and such Partner will exercise its commercially reasonable best efforts to obtain reliable assurance that confidential treatment will be accorded any Confidential Information so furnished. (d) Any Partner may disclose Confidential Information to a third party who requires such Confidential Information for the purpose of evaluating a possible purchase of such Partner's Units in accordance with Section 10; provided, however, that such third party shall be informed by such Partner of the confidential nature of the information and the existence of this Section 13.1 and prior to any disclosure shall execute a written confidentiality agreement with such Partner substantially identical in scope to this Section and providing that such confidentiality agreement is also made for the benefit of the Partnership and each of the other Partners. (e) The Partners and their Affiliates shall consult with each other on an ongoing basis with respect to disclosures regarding the Partnership and its business and affairs permitted under Section 13.1(a)(y). (a) Indemnification by Partnership. The Partnership agrees, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless each Partner, its Affiliates and their respective officers, directors and employees from, against and in respect of any Liability which such Indemnified Person may sustain, incur or assume as a result of, or relative to, a Third Party Claim arising out of or in connection with the business, property or affairs of the Partnership, except to the extent that it is Finally Determined that such Third Party Claim arose out of or was related to actions or omissions of the indemnified Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) constituting a breach of this Agreement or any Related Agreement. The Partnership shall periodically reimburse or advance to any Person entitled to indemnity under this subsection (a) its legal and other expenses incurred in connection with defending any claim with respect to such Liability if such Person shall agree to reimburse promptly the Partnership for such amounts if it is finally determined that such Person was not entitled to indemnity hereunder. Nothing in this Section 13.2(a) is intended to, nor shall it, affect or take precedence over the indemnity provisions contained in any Related Agreement. (b) Partner's Right of Contribution. Each Partner hereby agrees, to the fullest extent permitted by law, to indemnify, defend and hold harmless the other Partners, their Affiliates and their respective officers, directors and employees from and against the indemnifying Partner's Percentage Interest (calculated at the time any such Liability was incurred) of any Liability that such Indemnified Person may sustain, incur or assume as a result of or relating to any Third Party Claim arising out of or in connection with the business, property or affairs of the Partnership; provided, however, that such indemnified Partner, its Affiliates and their respective officers, directors and employees shall not be entitled to indemnity under this subsection (b) to the extent that it is Finally Determined that such Third Party Claim arose out of or was related to actions or omissions of the indemnified Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) constituting a breach of this Agreement or any Related Agreement; provided, further, that such indemnified Partner, its Affiliates and their respective officers, directors and employees shall not be entitled to indemnity under this subsection (b) unless (x) the indemnified Partner shall first make a written demand for indemnification from the Partnership in accordance with subsection (a) above and subsection (c) below and the Partnership shall fail to satisfy such demand in a manner reasonably satisfactory to the indemnified Partner within 60 days of such notice or (y) the Partnership is insolvent or otherwise unable to satisfy its obligations. The indemnifying Partner shall periodically reimburse any Person entitled to indemnity under this subsection (b) for its legal and other expenses incurred in connection with defending any claim with respect to such Liability if such Person shall agree to reimburse promptly the indemnifying Partner for such amounts if it is Finally Determined that such Person was not entitled to indemnity hereunder. (c) Procedures. Promptly after receipt by a Person entitled to indemnification under subsection (a) or (b) (an "Indemnified Party") of notice of any pending or threatened claim against it (a "Claim"), such Indemnified Party shall give prompt written notice (including copies of all papers served with respect to such claim) to the party to whom the Indemnified Party is entitled to look for indemnification (the "Indemnifying Party") of the commencement thereof, which notice shall describe in reasonable detail the nature of the Third Party Claim, an estimate of the amount of damages attributable to the Third Party Claim to the extent feasible and the basis of the Indemnified Party's request for indemnification under this Agreement; provided that the failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party except to the extent the Indemnifying Party demonstrates that it is prejudiced thereby. In case any Claim that is subject to indemnification under subsection (a) shall be brought against an Indemnified Party and it shall give notice to the Indemnifying Party of the commencement thereof, the Indemnifying Party may, and at the request of the Indemnified Party shall, participate in and control the defense of the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party failed to assume the defense and employ counsel or failed to diligently prosecute or settle the Third Party Claim or (iii) there shall exist or develop a conflict that would ethically prohibit counsel to the Indemnifying Party from representing the Indemnified Party. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest, including, without limitation, by making any counterclaim against the Person asserting the Third Party Claim or any cross-complaint against any Person, in each case only if and to the extent that any such counterclaim or cross-complaint arises from the same actions or facts giving rise to the Third Party Claim. The Indemnifying Party shall be the sole judge of the acceptability of any compromise or settlement of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder, provided that the Indemnifying Party will give the Indemnified Party reasonable prior written notice of any such proposed settlement or compromise and will not consent to the entry of any judgment or enter into any settlement with respect to any Third Party Claim without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld. The Indemnifying Party (if the Indemnified Party is entitled to indemnification hereunder) shall reimburse the Indemnified Party for its reasonable out of pocket costs incurred with respect to such cooperation. If the Indemnifying Party fails to assume the defense of a Third Party Claim within a reasonable period after receipt of written notice pursuant to the first sentence of this subparagraph (c), or if the Indemnifying Party assumes the defense of the Indemnified Party pursuant to this subparagraph (c) but fails diligently to prosecute or settle the Third Party Claim, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party (if the Indemnified Party is entitled to indemnification hereunder), the Third Party Claim by all appropriate proceedings, which proceedings shall be promptly and vigorously prosecuted by the Indemnified Party to a final conclusion or settled. The Indemnified Party shall have full control of such defense and proceedings; provided that the Indemnified Party shall not settle such Third Party Claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section, and the Indemnifying Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the other provisions of this Section 13.2, if the Indemnifying Party disputes its potential liability to the Indemnified Party under this Section 13.2 and if such dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party shall not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 13.2 or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all costs and expenses of the litigation concerning such dispute. If a dispute over potential liability is resolved in favor of the Indemnified Party, the Indemnifying Party shall reimburse the Indemnified Party in full for all costs of the litigation concerning such dispute. After it has been determined, by acknowledgment, agreement, or ruling of court of Legal Requirements, that an Indemnifying Party is liable to the Indemnified Party under this Section 13.2(c), the Indemnifying Party shall pay or cause to be paid to the Indemnified Party the amount of the Liability within ten business days of receipt by the Indemnifying Party of a notice reasonably itemizing the amount of the Liability but only to the extent actually paid or suffered by the Indemnified Party. (d) Survival. The indemnities contained in this Section shall survive the termination and liquidation of the Partnership. (e) Subrogation. In the event of any payment by or on behalf of an Indemnifying Party to an Indemnified Party in connection with any Liability, the Indemnifying Party (or any guarantor who made such payment) shall be subrogated to and shall stand in the place of the Indemnified Party as to any events or circumstances in respect of which the Indemnified Party may have any right or claim against any third party (not including the Partnership) relating to such event or indemnification. The Indemnified Party shall cooperate with the Indemnifying Party (or such guarantor) in any reasonable manner in prosecuting any subrogated claim. (f) Nothing in this Agreement shall be deemed to limit the Partnership's power to indemnify its officers, employees, agents or any other person, to the fullest extent permitted by law. (a) In the case of a Liability relating to a Third Party Claim and caused by the Fault of a General Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) against whom reimbursement is being sought, such General Partner hereby agrees to reimburse the Partnership for such Liability to the extent that: (i) the Liability relates to a Third Party Claim that has been finally resolved and that the Partnership has actually paid (an "Expense"); (ii) the Expense is not covered by insurance carried by the Partnership (excluding any amounts relating to insured claims to the extent that they fall within deductibles or self-insured retentions or are above applicable coverage limits); and (iii) the Expense is not offset by third party indemnification or otherwise; provided, however, that such General Partner shall reimburse the Partnership for the Expense only to the extent and in proportion to its Fault. (b) Any claim by the Partnership for reimbursement under this Section may be initiated upon written notice from a Nonconflicted General Partner to the General Partner to whom the Partnership is entitled to look for indemnification, and the General Partners shall have a period of 60 days during which to reach unanimous agreement as to the terms on which any reimbursement shall be made. If the General Partners are unable to agree or there are any disputes over Fault and reimbursement under this Section, such matters shall be resolved pursuant to the Dispute Procedures. Except as otherwise provided for herein, all controversies or disputes arising under this Agreement shall be resolved pursuant to the provisions set forth on Appendix D (the "Dispute Procedures"). TO THE FULLEST EXTENT PERMITTED BY LAW AND WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE LIMITATION OF LIABILITY, INDEMNIFICATION, RELEASE AND ASSUMPTION OBLIGATIONS SET FORTH HEREIN, A PARTY SHALL BE ENTITLED TO INDEMNIFICATION OR RELEASE HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS GIVING RISE TO ANY SUCH INDEMNIFICATION OR RELEASE IS THE RESULT OF THE SOLE, GROSS, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF ANY LAW OF OR BY ANY SUCH PARTY. THE PARTIES AGREE THAT THIS STATEMENT CONSTITUTES A CONSPICUOUS LEGEND. From time to time, each Partner agrees to execute and deliver such additional documents, and will provide such additional information and assistance, as the Partnership may reasonably require to carry out the terms of this Agreement and to accomplish the Partnership's business. Except as may be expressly provided herein, this Agreement shall be binding upon and inure to the benefit of the successors of the Partners, but no Partner may assign or delegate any of its rights or obligations under this Agreement. Except as expressly provided herein, any purported assignment or delegation shall be void and ineffective. This Agreement is made solely for the benefit of the Partnership and the Partners, and no other Person, including any officer or employee of the Partnership or any Partner, shall have any right, claim or cause of action under or by virtue of this Agreement. All notices, requests and other communications that are required or may be given under this Agreement shall, unless otherwise provided for elsewhere in this Agreement, be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile with proof of confirmation from the transmitting machine or (ii) delivered by commercial courier or other hand delivery, as follows:
Lyondell Petrochemical Company Millennium Chemicals Inc. 1221 McKinney Street 99 Wood Avenue South Houston, Texas 77010 Iselin, New Jersey 08830 Attention: Kerry A. Galvin Attention: George H. Hempstead, III Telecopy Number: (713) 309-4718 Telecopy Number: (908) 603-6857 Occidental Petroleum Corporation Equistar Chemicals, LP 10889 Wilshire Blvd. P.O. Box 2583 Los Angeles, CA 90004 1221 McKinney Street Attention: President Houston, Texas 77252-2583 Telecopy Number: (310) 443-6333 Attention: Gerald A. O'Brien Telecopy Number: (713) 309-4718
With a copy to: Occidental Petroleum Corporation 10889 Wilshire Boulevard Los Angeles, California 90024 Attention: General Counsel Telecopy Number: (310) 443-6333 In the event that any provisions of this Agreement shall be Finally Determined to be unenforceable, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any Partner, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumption that any Partner had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to include the singular, and vice versa; (vi) each gender shall be deemed to include the other gender; and (vii) each appendix, exhibit, attachment and schedule to this Agreement is a part of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. Except as provided in Section 12.2(e), each Person who now or hereafter is a party hereto or who has any right herein or hereunder irrevocably waives during the term of the Partnership any right to maintain any action for partition with respect to Partnership property. The laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement without giving effect to any conflicts of law principles. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY PARTY TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF DELAWARE, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES TO THIS AGREEMENT SHALL APPOINT THE CORPORATION TRUST COMPANY, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF DELAWARE. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF DELAWARE FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTIES HERETO. Except as otherwise provided herein or in the Second Master Transaction Agreement, each party hereto shall be responsible for its own expenses incurred in connection with this Agreement. EACH PARTY HEREBY KNOWINGLY AND INTENTIONALLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. (a) If the payment due date for any payment hereunder (including capital contributions and Damages) falls on a Saturday or a bank or federal holiday, other than a Monday, the payment shall be due on the past preceding business day. If the payment due date falls on a Sunday or Monday bank or federal holiday, the payment shall be due on the following business day. (b) Interest shall accrue on any unpaid and outstanding amount from the time such amount is due and payable through the date upon which such amount, together with accrued interest thereon, is paid in full. Interest shall, subject to the provisions of Section 13.20, accrue at a per annum rate equal to the lesser of (i) the Agreed Rate plus 2%, compounded quarterly, to the extent permitted by law or (ii) the Highest Lawful Rate. (c) A wire transfer or delivery of a check shall not operate to discharge any payment under this Agreement and shall be accepted subject to collection. Notwithstanding any other provision of this Agreement, it is the intention of the parties hereto to conform strictly to Applicable Usury Laws, in each case to the extent they are applicable to this Agreement. Accordingly, if any payment made pursuant to this Agreement results in any Person having paid any interest in excess of the Maximum Amount, or if any transaction contemplated hereby would otherwise be usurious under any Applicable Usury Laws, then, in that event, it is agreed as follows: (i) the provisions of this Section 13.20 shall govern and control; (ii) the aggregate of all interest under Applicable Usury Laws that is contracted for, charged or received under this Agreement shall under no circumstances exceed the Maximum Amount, and any excess shall be promptly refunded to the payor by the recipient hereof; (iii) no Person shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Amount; and (iv) the effective rate of any interest payable under this Agreement shall be ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the provisions of this Agreement immediately shall be deemed reformed, without the necessity of the execution of any new document or instrument, so as to comply with all Applicable Usury Laws. All sums paid, or agreed to be paid, to any person pursuant to this Agreement for the use, forbearance or detention of any indebtedness arising hereunder shall, to the fullest extent permitted by the Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout the full term of any such indebtedness so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. EACH PARTY HEREBY WAIVES ANY OBJECTION IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON-CONVENIENS. Millennium America is a party to this Agreement for the sole purpose of evidencing its agreement to be bound by the provisions set forth in Section 8.6(c) and is not a partner of the Partnership and shall not have any rights under this Agreement or any other obligations under this Agreement. All waivers, modifications, amendments or alterations of this Agreement shall require the written approval of each of the General Partners and each of the Limited Partners. At any such time as the Lease is terminated, expires or is otherwise not in force and effect (other than a No Rebuilding Termination), the following shall occur: (a) The number of Units held by Occidental LP1 shall be reduced from 6,623 Units to 2,541 Units. (b) The Partnership and Occidental LP1 shall form a general partnership (the "LC Partnership") by entering into a partnership agreement having the provisions described in Section 14.2 (the "GPA"). (c) The Partnership shall distribute to Occidental LP1 the balance in its Capital Account. (d) Occidental LP1 shall cause the Lake Charles Facility to be contributed to the LC Partnership and shall contribute to the LC Partnership the amount received pursuant to Section 14.1(c), plus an amount equal to any proceeds of a partial condemnation of the Lake Charles Facility received by OCC under the terms of the Lease, and the Partnership shall contribute to the LC Partnership the amount received pursuant to Section 26(b) of the Lease in connection with such termination of the Lease. (e) Immediately after and as a result of the foregoing transactions, the capital account of each of Occidental LP1 and the Partnership in the LC Partnership shall be pro rata in accordance with the partners' equity ownership interests, and Occidental LP1's Capital Account shall be the same per Unit as the Capital Accounts of the other Partners (determined without regard to the special allocations in Sections 4.1(a) through (c)). (f) Sections 4.1(e) and (f) shall terminate. The GPA shall include provisions to the following effect, as well as other customary provisions: (a) The LC Partnership shall be formed under the laws of Delaware. The two partners shall be the Partnership and Occidental LP1. The Partnership shall have an equity ownership interest of 49.9%, and Occidental LP1 shall have an equity ownership interest of 50.1%. (b) The term of the GPA shall be the same as the term of this Agreement. (c) All issues relating to the LC Partnership must be decided by mutual agreement of both partners, except that the LC Partnership shall enter into an operating agreement with the Partnership (in its individual capacity), as operator, that shall delegate to the operator the right and obligation to make all day-to-day decisions of the LC Partnership, which day-to-day decisions shall for this purpose be deemed to be all decisions of the LC Partnership other than issues comparable to those issues set forth in Section 6.7 hereof (which issues must be decided by the partners of the LC Partnership). Such operating agreement shall provide for the LC Partnership to pay and reimburse the operator for all costs whatsoever incurred or paid by the operator in performing its obligations under the operating agreement. The term of such operating agreement shall be the same as the term of the LC Partnership. (d) All contributions and distributions will be made, and all book income and deductions will be allocated, in accordance with the partners' equity ownership interests. Tax items will be allocated between the partners in a manner similar to that set forth in this Agreement. (e) No partner in the LC Partnership may transfer (except a transfer to a Wholly Owned Affiliate) or encumber its equity ownership without the consent of the other partner. Upon a No Rebuilding Termination, Occidental LP1 shall have the option to contribute to the Partnership within 30 days following the No Rebuilding Termination an amount (the "Payment Amount") equal to the excess, if any, of (a) the Proceeds plus the book value (determined in accordance with GAAP) as recorded on the books of OCC for that portion and aspect of the Lake Charles Facility that consititutes land, over (b) the payment made pursuant to Section 26(b) of the Lease in connection with such No Rebuilding Termination. If within such 30-day period Occidental LP1 contributes the Payment Amount to the Partnership, (i) Occidental LP1's 6,623 Units shall remain outstanding, (ii) its Capital Account shall be credited with the Payment Amount, (iii) the assets of the Partnership shall be revalued so that the Capital Account of each Partner is the same per Unit (determined without regard to the special allocations in Sections 4.1(a) through (c)), and (iv) Sections 4.1(e) and (f) shall terminate. If Occidental LP1 does not contribute the Payment Amount to the Partnership within such 30-day period, (A) Occidental LP1's 6,623 Units shall be redeemed and canceled and of no further force and effect and (B) an amount equal to the balance in Occidental LP1's Capital Account shall be distributed by the Partnership to Occidental LP1, or if there is a deficit in Occidental LP1's Capital Account, Occidental LP1 shall contribute to the Partnership an amount of cash necessary to eliminate such deficit. Upon completion of the steps in clauses (A) and (B), Occidental LP1's entire interest in the Partnership shall terminate. If Occidental LP1 breaches any of its obligations under Section 14.1, (a) Occidental LP1's 6,623 Units shall be redeemed and canceled and of no further force and effect and (b) an amount equal to the balance in Occidental LP1's Capital Account shall be distributed by the Partnership to Occidental LP1, or if there is a deficit in Occidental LP1's Capital Account, Occidental LP1 shall contribute to the Partnership an amount of cash necessary to eliminate such deficit. Upon completion of the steps in clauses (a) and (b), Occidental LP1's entire interest in the Partnership shall terminate. IN WITNESS WHEREOF, this Agreement has been executed on behalf of each of the parties hereto, by their respective officers thereunto duly authorized, effective as of the date first written above. GENERAL PARTNERS LYONDELL PETROCHEMICAL G.P. INC. By: /s/ Dan F. Smith -------------------------------------------- Name: Dan F. Smith Title: President and Chief Executive Officer MILLENNIUM PETROCHEMICALS GP LLC By: Millennium Petrochemicals Inc., its Manager By: /s/ George H. Hempstead III --------------------------------------------- Name: George H. Hempstead III. Title: Senior Vice President PDG CHEMICAL INC. By: /s/ R.J. Schuh --------------------------------------------- Name: R.J. Schuh Title: President [Signature Page 1 of 3 for Amended and Restated Limited Partnership Agreement] LIMITED PARTNERS LYONDELL PETROCHEMICAL L.P. INC. By: -------------------------------------------- Name: Title: MILLENNIUM PETROCHEMICALS LP LLC By: Millennium Petrochemicals Inc., its Manager By: /s/ George H. Hempstead, III ------------------------------------------- Name: George H. Hempstead, III Title: Senior Vice President OCCIDENTAL PETROCHEM PARTNER 1, INC. By: /s/ John W. Morgan ------------------------------------------- Name:John W. Morgan Title: Vice President OCCIDENTAL PETROCHEM PARTNER 2, INC. By: /s/ John W. Morgan ------------------------------------------- Name: John W. Morgan Title: Vice President [Signature Page 2 of 3 for Amended and Restated Limited Partnership Agreement] SPECIAL JOINDER PURSUANT TO SECTION 13.22 MILLENNIUM AMERICA INC. By: /s/ George H. Hempstead, III ------------------------------------------- Name: George H. Hempstead, III Title: Senior Vice President [Signature Page 3 of 3 for Amended and Restated Limited Partnership Agreement] APPENDIX A TO LIMITED PARTNERSHIP AGREEMENT -------------------------------- DEFINED TERMS ------------- 1998 Credit Facility. See Section 8.6(a). AAA. See Appendix D. Acceptance Notice. See Section 10.2(b). Act. The Delaware Revised Uniform Limited Partnership Act, as amended and in effect from time to time. Additional Related Agreements. The agreements defined as "Related Agreements" in the Second Master Transaction Agreement (other than this Agreement), as such agreements may be amended from time to time after the date hereof. Adjusted Capital Account Deficit. With respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (i) Such Capital Account shall be deemed to be increased by any amounts which such Partner is obligated to restore to the Partnership (pursuant to this Agreement or otherwise) or is deemed to be obligated to restore pursuant to the second to last sentence of Regulation 'SS'1.704-2(g)(1) and 'SS'1.704-2(i)(5) (relating to allocations attributable to nonrecourse debt). (ii) Such Capital Account shall be deemed to be decreased by the items described in Regulation 'SS'1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Deficit is intended to comply with the provisions of Regulation 'SS'1.704-1(b)(2)(ii)(d) and shall be interpreted and applied consistently therewith. Additional Notice. See Section 10.2(b). Affiliate. As to any specified Person, any other Person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the specified Person; provided, however, that for purposes of this Agreement such term shall not include (i) the Partnership or any entities controlled by it, (ii) in the case of Millennium GP and Millennium LP shall not include Suburban Propane Partners, L.P. and any entities controlled by it and (iii) in the case of Occidental GP, Occidental LP1 and Occidental LP2, shall not include Canadian Occidental Petroleum Ltd. and any entities controlled by it. For purposes of this definition the term "control" shall have the meaning set forth in 17 CFR 230.405, as in effect on the date hereof. Affiliated General Partner. In the case of Lyondell LP, the "Affiliated General Partner" shall mean Lyondell GP. In the case of Millennium LP, the "Affiliated General Partner" shall mean Millennium GP. In the case of each of Occidental LP1 and Occidental LP2, the "Affiliated General Partner" shall mean Occidental GP. Affiliated Limited Partner. In the case of Lyondell GP, the "Affiliated Limited Partner" shall mean Lyondell LP. In the case of Millennium GP, the "Affiliated Limited Partner" shall mean Millennium LP. In the case of Occidental GP, each of Occidental LP1 and Occidental LP2 shall be "Affiliated Limited Partner". Affiliated Partner Group. A General Partner and its Affiliated Limited Partner or Affiliated Limited Partners, if more than one. Agreed Rate. The base commercial lending rate announced by Citibank, N.A. (or its successor) at its principal office, in effect from time to time, such interest rate to change automatically, effective as of the date of each change in such base rate. Agreement. This Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP, as amended from time to time. Alternate. See Section 6.4(b). Amended and Restated Indemnity Agreement. The Amended and Restated Indemnity Agreement dated as of the date of this Agreement among Lyondell GP, Lyondell LP, Millennium GP, Millennium LP, Millennium America, Occidental GP, Occidental LP1, Occidental LP2 and OCC. Amended and Restated Parent Agreement. The Amended and Restated Parent Agreement dated as of the date of this Agreement between the Partnership, Lyondell, Millennium, Occidental, Occidental Chemical Corporation and Oxy CH Corporation. Annual Budget. See Section 8.2. Applicable Usury Laws. Laws regarding the use, forbearance or detention of any indebtedness arising under this Agreement whether such laws are now or hereafter in effect, including the laws of the United States of America or any other jurisdiction whose laws are applicable, and including any subsequent revisions to or judicial interpretations of those laws. Arbitrator. See Appendix D. Asset Fair Market Value. With respect to any asset, as of the date of determination, the cash price at which a willing seller would sell, and a willing buyer would buy, each being apprised of all relevant facts and neither acting under compulsion, such as in an arm's-length negotiated transaction with an unaffiliated third party without time constraints. Assumed Liabilities. In the case of Lyondell LP and Lyondell GP, Assumed Liabilities means the "Assumed Liabilities" as defined in the Contribution Agreement of Lyondell. In the case of Millennium LP and Millennium GP, Assumed Liabilities shall mean the "Assumed Liabilities" as defined in the Contribution Agreement of Millennium Petrochemicals. In the case of Occidental LP1, Occidental LP2 and Occidental GP, Assumed Liabilities means the "Assumed Liabilities" as defined in the Contribution Agreement of Occidental. Auxiliary Committee. See Section 6.9. Available Net Operating Cash. At the time of determination, (a) all cash and cash equivalents on hand in the Partnership as of the most recent month end, plus the excess, if any, of the Partnership Target Debt over the Partnership's actual indebtedness (as determined in accordance with GAAP) as of such month end, less (b) the Projected Cash Requirements, if any, of the Partnership as of such month end, as determined by the Executive Officers of the Partnership. For purposes of this definition, "Projected Cash Requirements" means, for the 12-month period following any such month end, the excess, if any, of the sum of (a) forecast capital expenditures, plus (b) forecast cash payments for Taxes, debt service including principal and interest requirements and other non-cash credits to income, plus (c) forecast cash reserves for future operations or other requirements, over the sum of (1) forecast net income of the Partnership, plus (2) the sum of forecast depreciation, amortization, other non-cash charges to income, interest expenses, and Tax expenses, in each case to the extent deducted in determining net income, plus or minus (3) forecast decreases or increases, respectively, in working capital, plus (4) the forecast cash proceeds of dispositions of assets (net of expenses) plus (5) an amount equal to the forecast net proceeds of debt financings, contributions and payments of the Lyondell Note. For purposes of this definition, "Partnership Target Debt" means for such month end, the level of indebtedness (as determined in accordance with GAAP) projected for the Partnership in the most recently approved Strategic Plan, except to the extent the Executive Officers of the Partnership determine that changes in the financial condition, results of operations, assets, business or prospects of the Partnership make a change advisable, in which case the Partnership shall advise the General Partners promptly regarding the basis for the change. Projected Cash Requirements shall be calculated consistent with the most recently approved Strategic Plan, except to the extent the Executive Officers of the Partnership determine that changes in the financial condition, results of operations, assets, business or prospects of the Partnership make a change advisable, in which case the Partnership shall advise the General Partners promptly regarding the basis for the change. Bank Credit Agreement. The Credit Agreement dated as of November 25, 1997 among the Partnership, as Borrower, Millennium America, as Guarantor and the lenders party thereto. Bank Credit Agreement Repayment Amount. An amount equal to (i) $419,700,000 less (ii) the Bank Credit Agreement Available Amount, but in no event shall the Bank Credit Agreement Repayment Amount be less than zero. The "Bank Credit Agreement Available Amount" shall equal (i) $1.25 billion less (ii) the total principal amount outstanding under the Bank Credit Agreement at the date of calculation. Bankruptcy. The occurrence of any of the following: (i) a Partner or its Guarantor shall file a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file any petition or answer or consent seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future applicable federal, state or other statute or law relating to bankruptcy, insolvency, or other relief for debtors, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, conservator or liquidator of such Partner or its Guarantor or of all or any substantial part of its properties or its Units (the term "acquiesce," as used in this definition, includes the failure to file a petition or motion to vacate or discharge any order, judgment or decree within ten Business Days after entry of such order, judgment or decree); (ii) a court of competent jurisdiction shall enter an order, judgment or decree approving a petition filed against any Partner or its Guarantor seeking a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act, or any other present or future applicable federal, state or other statute or law relating to bankruptcy, insolvency, or other relief for debtors, and such Partner or its Guarantor shall acquiesce in the entry of such order, judgment or decree or such other order, judgment or decree shall remain unvacated and unstayed for an aggregate of 60 days (whether or not consecutive) from the date of entry thereof, or any trustee, receiver, conservator or liquidator of such Partner or its Guarantor or of all or any substantial part of its property or its Units shall be appointed without the consent or acquiescence of such Partner or its Guarantor and such appointment shall remain unvacated and unstayed for an aggregate of 60 days (whether or not consecutive); (iii) a Partner or its Guarantor shall admit in writing its inability to pay its debts as they mature; (iv) a Partner or its Guarantor shall give notice to any governmental body of insolvency or pending insolvency, or suspension or pending suspension of operations; or (v) a Partner or its Guarantor shall make an assignment for the benefit of creditors or take any other similar action for the protection or benefit of creditors. Book Value. With respect to any asset of the Partnership, the asset's adjusted basis as of the relevant date for federal income tax purposes, except as follows: (i) The initial aggregate Book Value of all of the assets of the Partnership as of the Initial Closing Date shall be equal to the sum of (A) the beginning aggregate Capital Accounts of the Partners immediately after the Initial Closing Date, and (B) the aggregate amount of all liabilities of the Partnership for federal income tax purposes immediately after the Initial Closing Date. (ii) The initial Book Value of any asset contributed by a Partner to the Partnership after the Initial Closing Date shall be the gross fair market value of such asset, which shall be equal to the amount credited to such Partner's Capital Account for such contribution (increased by the amount of any liabilities which the Partnership assumes or takes subject to). (iii) The Book Values of all Partnership assets (including intangible assets such as goodwill) shall be adjusted (at the election of the Partnership Governance Committee) to equal their respective gross fair market values upon the occurrence of any of the events described in Regulation 'SS'1.704-1(b)(2)(iv)(f)(5). (iv) The Book Value of any asset distributed by the Partnership to a Partner shall be equal to the gross fair market value of such asset on the date of the distribution. (v) The Book Value of any Partnership asset with respect to which an adjustment to tax basis has occurred by reason of the application of Section 734(b) or 754(b) of the Code shall be adjusted to the extent such adjustment to tax basis is taken into account pursuant to Regulation 'SS'1.704-1(b)(2)(iv)(m). (vi) If the Book Value of an asset is not equal to its adjusted tax basis for federal income tax purposes, such Book Value shall be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses and other items allocated pursuant to Section 4.1. The foregoing definition of Book Value is intended to comply with the provisions of Regulation 'SS'1.704-1(b)(2)(iv) and shall be interpreted and applied consistently therewith. Any determinations of "gross fair market value" in this definition of Book Value shall be made by the Partnership Governance Committee. Business Day. Any day other than a Saturday, Sunday or other day on which banks are closed in New York City, New York; provided, however, that for purposes of the definitions of "Interest Period" and "LIBOR Rate," "Business Day" shall mean a day of the year on which banks are not required or authorized to close in Houston, Texas and on which commercial banks are open for international business (including dealings for dollar deposits) in the London interbank market. Business Opportunity. See Section 9.3(c). Capital Account. The separate capital account established and maintained by the Partnership for each Partner, as contemplated by Section 2. Capital Expenditure Budget. See Section 8.2(d). CEO. See Section 7.1(b). Claim. See Section 13.2(c). Code. The Internal Revenue Code of 1986, as amended and in effect from time to time and any successor thereto. Competing Opportunity. See Section 9.3(c). Confidential Information. All confidential documents and information (including, without limitation, confidential commercial information and information with respect to customers, trade secrets and proprietary technologies or processes and the design and development of new products or services) concerning the Partnership, the Partners or their Affiliates, furnished to a Partner in connection with the transactions leading up to and contemplated by this Agreement and the operation of the Partnership, except to the extent that such information (i) is or becomes generally available to and known by the public or the petrochemical industry (other than as a result of an unpermitted disclosure directly or indirectly by the Partnership or a Partner), (ii) is or becomes available to a Partner on a nonconfidential basis from a source other than the Partnership or a Partner; provided, however, that such source is not and was not bound by a confidentiality agreement with, or other obligation of secrecy to, the Partnership or the other Partner, (iii) has already been or is hereafter independently acquired or developed by a Partner without violating any confidentiality agreement with or other obligation of secrecy to the Partnership or another Partner or (iv) is otherwise generated by the Partnership with the intention that it not be held as confidential. Conflict Circumstance. Any transaction or dealing between the Partnership (or any Wholly Owned Subsidiary) and a General Partner (the "Conflicted General Partner") or any of its Affiliates pursuant to any agreement (including this Agreement or any other Related Agreements) or otherwise, including action to be taken by the Partnership pursuant to Section 9.3(c) or (d) or 13.3(b); provided, however, that a Conflict Circumstance shall cease to exist if and when the third party with which the transaction or dealing exists shall cease to be an Affiliate of a General Partner. Conflicted General Partner. As defined in the definition of "Conflict Circumstance." Contributed Business. As defined in each of the Contribution Agreements. Contribution Agreement. In the case of Lyondell LP and Lyondell GP, the Contribution Agreement shall mean the Asset Contribution Agreement dated December 1, 1997, between the Partnership, Lyondell and Lyondell LP. In the case of Millennium LP and Millennium GP, the Contribution Agreement shall mean the Asset Contribution Agreement dated December 1, 1997, between the Partnership, Millennium Petrochemicals and Millennium LP. In the case of Occidental LP1, Occidental LP2 and Occidental GP, the Contribution Agreement shall mean the Agreement and Plan of Merger and Asset Contribution dated as of the date of this Agreement between the Partnership, Oxy Petrochemicals, Occidental LP1, Occidental LP2 and Occidental GP. Damages. With respect to a Person in connection with a Default, any and all obligations (including all obligations to take an affirmative or curative act), liabilities, damages (including damages arising out of any breach of any representation or warranty, damages related to investigations, proceedings, audits, the interruption of the Partnership's business, restrictions upon the use of, or adverse impact on, the Assets or the Partnership's business, or the interruption, breach or termination of any Related Agreements or other agreements, including any lost profits attributable thereto), fines, penalties, deficiencies, losses, judgments, settlements, costs and expenses (including costs and expenses incurred in connection with performing obligations, bonding and appellate costs and attorneys', accountants', engineers', health, safety, environmental and other consultants' and investigators' fees and disbursements, liquidating, selling or offering for sale the Partnership's business and assets or winding up the Partnership's business, or other payments in respect of such payments) suffered or incurred by such Person that arise out of or relate to such Default, regardless of whether any of the foregoing are foreseeable, unforeseeable, matured or unmatured, existing or contingent as of the date of such Default. "Damages" also shall include, if and to the extent interest is not already included therein under applicable law or other provisions hereof and subject to Section 13.20, interest on amounts actually due until payment thereof is made at a rate per annum equal to the rate set forth in Section 13.19(b). "Damages" shall not include any punitive, exemplary, special or other similar damages. Deadlock Notice. See Section 8.5. Default. See Section 11.1. Default Date. See Section 11.1. Defaulting Partners. Lyondell GP and Lyondell LP, in the case of a Default by Lyondell GP, Lyondell LP or their Guarantor; Millennium GP and Millennium LP, in the case of a Default by Millennium GP, Millennium LP or their Guarantor; and Occidental GP, Occidental LP1 and Occidental LP2, in the case of a Default by Occidental GP, Occidental LP1, Occidental LP2 or their Guarantor. Depreciation. For each fiscal year or part thereof, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable for federal income tax purposes with respect to an asset for such year or other period, except that if the Book Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year, Depreciation shall be (i) an amount which bears the same ratio to such Book Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year bears to such adjusted tax basis, or, (ii) if the federal income tax depreciation, amortization or other cost recovery deduction for such year is equal to zero, an amount determined with reference to such Book Value using a reasonable method selected by the Tax Matters Partner. Dispute Notice. See Appendix D. Disputing Partner. See Appendix D. Executive Officers. See Section 7.1(b). Expense. See Section 13.3(a). Fair Market Value. "Fair Market Value" with respect to the Partnership shall mean the Asset Fair Market Value of all of the Partnership's assets decreased by the fair value of all its liabilities, as of the most recently ended fiscal quarter. "Fair Market Value" with respect to a Related Business shall mean the Asset Fair Market Value of all the assets of such Related Business decreased by the fair value of all its liabilities, as of the most recently ended fiscal quarter. In either case, the following shall apply to the determination of Fair Market Value: (i) The General Partners shall first attempt to agree on such value, which if agreed to shall be the Fair Market Value. (ii) If the General Partners are unable to agree within 20 days of the first written notice from one General Partner to the others proposing an amount to be the Fair Market Value (the "Notice"), then if requested by any General Partner, each General Partner shall (at its own cost) cause an independent, qualified appraiser to deliver a written appraisal of its determination of the Fair Market Value within 50 days of the Notice. If both of the two lowest appraised values are greater than or equal to 90% of the highest appraised value, then the middle of the three appraised values shall be the Fair Market Value. (iii) If either of the two lowest appraised values are lower than 90% of the highest appraised value, then the General Partners shall jointly appoint a Neutral within 20 days of the delivery of both such appraisals. If the General Partners have been unable to agree upon such appointment within such 20 days, then such Neutral shall upon the application of any General Partner be appointed within 10 days of the filing of such application by the Center for Public Resources, or if such appointment is not so made promptly then promptly thereafter by the American Arbitration Association in Philadelphia, Pennsylvania, or if such appointment is not so made promptly then promptly thereafter by the senior United States District Court judge sitting in Wilmington, Delaware. The fees and expenses of the Neutral shall be paid equally by the Partners. (iv) The Neutral shall, within 30 days of the appointment of the Neutral, determine which of the three appraised values (without in any way modifying or compromising between the three appraised values) is closest to the fair market value of the enterprise's assets as determined by the Neutral, and that appraised value shall be the Fair Market Value. Fault. Any act or omission of a Partner, its Affiliates or any of their respective officers, directors or employees (acting in their capacities as such) that constitutes or results from intentional misconduct, criminal intent or gross negligence. Finally Determined. Determined by any final, nonappealable judicial order or pursuant to a binding alternative dispute resolution procedure. Funding Notice. See Section 2.4. GAAP. United States generally accepted accounting principles, as in effect from time to time. General Partners. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a general partner of the Partnership, unless such General Partner ceases to be a General Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Units and is replaced by a Substitute General Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute General Partner, if any, of the Partnership as provided herein, in such Person's capacity as a general partner of the Partnership. GPA. See Section 14.1(b). Guarantor. Lyondell Petrochemical Company, with respect to Lyondell GP and Lyondell LP; Millennium Chemicals Inc., with respect to Millennium GP and Millennium LP; Occidental Chemical Corporation and Oxy CH Corporation, with respect to Occidental GP, Occidental LP1 and Occidental LP2; and any successor or additional guarantor party to an agreement substantially in the form of the Amended and Restated Parent Agreement and entered into in accordance with Section 10. Highest Lawful Rate. The maximum rate of interest, if any, that may be charged to any person under all Applicable Usury Laws on any principal balance from time to time outstanding pursuant to this Agreement. HSE Law. "HSE Law," as defined in Section 1 of the Contribution Agreement. Indemnified Party. See Section 13.2(c). Indemnifying Party. See Section 13.2(c). Interest Period. The period commencing on the date of this Agreement and ending one month thereafter and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending one month thereafter; provided, however, that whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day. Initial Agreement. See first WHEREAS clause. Initial Assets. "Assets," as defined in Section 1 of the applicable Contribution Agreement. Initial Closing Date. December 1, 1997, the date the closing under the Initial Master Transaction Agreement took place. Initial Master Transaction Agreement. The Master Transaction Agreement, dated July 25, 1997, as amended, between Lyondell and Millennium, providing for the execution of various agreements concerning the Partnership and the Initial Assets. Initial Notice. See Section 10.2(a). Initial Partners. See first WHEREAS clause. Initial Related Agreements. The agreements defined as "Related Agreements" in the Initial Master Transaction Agreement (other than the Partnership Agreement), as such agreements may be amended from time to time after the Initial Closing Date. IRS. Internal Revenue Service. Lake Charles Facility. The property that is the subject of and leased pursuant to the Lease. LC Partnership. See Section 14.1(b). Lease. The Lease Agreement, dated May 15, 1998, between OCC, as lessor, and Occidental LP1, as lessee. Liability. Any loss, claim, damages, fine, penalty, assessment by public agencies, settlement, cost or expense (including costs of investigation, defense and attorneys' fees) or other liability. LIBOR Rate. For any Interest Period, the rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) published in the Wall Street Journal as the London Interbank Offered Rate for a one month period as of two Business Days prior to the first day of such Interest Period; provided if no such rate appears the rate shall be as shown on page 3750 of the Dow Jones & Company Telerate screen or any successor page as the composite offered rate for London interbank deposits with a period equal to one month, as shown under the heading "USD" as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period; provided that if no such rate appears, the rate shall be the rate per annum equal to the arithmetic mean (which shall be rounded upward to the nearest 1/16 of 1% per annum) of which U.S. dollar deposits with an Interest Period equal to one month are displayed on page "LIBO" of the Reuters Monitor Money Rates Service or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks at or about 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. Limited Partner. Each Person who executes this Agreement and who is hereby admitted to the Partnership as a limited partner of the Partnership, unless such Limited Partner ceases to be a Limited Partner hereunder or sells, transfers, forfeits or otherwise disposes of its Units and is replaced by a Substitute Limited Partner in accordance with this Agreement and the Act, and each Person that becomes a Substitute Limited Partner, if any, of the Partnership as provided herein, in such Person's capacity as a limited partner of the Partnership. Limited Partners Pro Rata. From or to the Limited Partners in the ratio of the Units owned by each. Liquidation. See Section 11.4. Losses. See definition of "Profits and Losses." Lyondell. See first WHEREAS clause. Lyondell Assumed Debt. Debt issued by Lyondell having an aggregate principal amount of $745 million, as specified in the Contribution Agreement with respect to Lyondell. Lyondell GP. See introductory paragraph to this Agreement. Lyondell LP. See introductory paragraph to this Agreement. Lyondell Note. The promissory note dated December 1, 1997, in the amount of $345 million payable by Lyondell LP to the Partnership. Maximum Amount. The maximum nonusurious amount of interest that may be lawfully contracted for, charged or received by any person in connection with any indebtedness arising under this Agreement under all Applicable Usury Laws. Millennium. See first WHEREAS clause. Millennium America. Millennium America Inc., a Delaware corporation. Millennium America Guarantee. See Section 8.6(c). Millennium America Guaranteed Debt. The portion, if any, of the debt outstanding under the Bank Credit Agreement and the portion, if any, of any debt that refinances the debt outstanding under the Bank Credit Agreement or any subsequent refinancing thereof (in any case, not to exceed a guarantee of $750 million principal amount), in each case to the extent such debt is guaranteed by Millennium America, or an Affiliate thereof, as contemplated by Section 8.6(c). Millennium GP. See introductory paragraph to this Agreement. Millennium LP. See introductory paragraph to this Agreement. Neutral. A neutral Person acceptable to all of the appointing Partners and not affiliated with any of the Partners, except where otherwise specifically provided. No Rebuilding Termination. A total termination of the Lease pursuant to Section 12(b) or 13 thereof. Nonconflicted General Partner. With respect to any Conflict Circumstance, any General Partner that is not the Conflicted General Partner with respect thereto. Non-Defaulting Partners. The Partners other than the Defaulting Partners. OCC. Occidental Chemical Corporation, a New York corporation. Occidental. See third WHEREAS clause. Occidental GP. See introductory paragraph to this Agreement. Occidental LP1. See introductory paragraph to this Agreement. Occidental LP2. See introductory paragraph to this Agreement. Occidental Partners. See third WHEREAS clause. Offeree Partners. See Section 10.2(a). Operating Budget. See Section 8.2(c). Oxy Guaranteed Debt. The $419,700,000 drawdown under the Bank Credit Agreement pursuant to Section 8.6(a) and the portion, if any, of any debt that refinances the $419,700,000 drawdown under the Bank Credit Agreement or any subsequent refinancing thereof (in any case, not to exceed a guarantee of $419,700,000 principal amount), in each case to the extent such debt is guaranteed by Occidental Chemical Corporation, a New York corporation, or an Affiliate thereof and the proceeds thereof have been distributed to Occidental LP2 pursuant to Section 3.1(g) and, until such amount has been so drawn and distributed, "Oxy Guaranteed Debt" shall mean the Oxy Note to the extent the obligations thereunder are indemnified by OCC pursuant to the Amended and Restated Indemnity Agreement. Oxy Note. The Promissory Note dated May 15, 1998 in the principal amount of $419,700,000 payable by the Partnership to Occidental LP2. Oxy Petrochemicals. Oxy Petrochemicals Inc., a Delaware corporation. Partners. The General Partners and the Limited Partners on the date of this Agreement until such Person ceases to be a partner of the Partnership. Partners Pro Rata. From or to all Partners in the ratio of the Units owned by each. Partnership. Equistar Chemicals, LP, a Delaware limited partnership, the limited partnership formed and continued under the Act and this Agreement. Partnership Governance Committee. See Section 6.1. Partnership Governance Committee Action. See Section 6.1. Payment Amount. See Section 14.3. Proceeds. The Insurance Proceeds, the Self-Insurance Proceeds and the Condemnation Proceeds (each as defined in the Lease), to the extent actually received by the lessor under the Lease pursuant to the Lease. Profits and Losses. For each applicable period, the Partnership's taxable income or loss for such period determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss) with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken in account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss. (ii) Any expenditures of the Partnership described in Section 705(a)(2)(B) of the Code or treated as such pursuant to Regulation 'SS'1.704-1(b)(2)(iv)(i) and not otherwise taken in account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss. (iii) Depreciation for such period shall be taken into account in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss. (iv) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed with reference to the Book Value of the property disposed of, rather than the adjusted tax basis of such property. (v) If any property is distributed in kind to any Partner, the difference between its fair market value and its Book Value at the time of distribution shall be treated as Profit or Loss, as the case may be, recognized by the Partnership. (vi) The amount of any adjustment to the Book Value of any Partnership asset pursuant to clause (iii) of the definition of Book Value herein shall be taken into account as Profit or Loss from the disposition of such asset. Percentage Interest. The percentage determined by dividing the number of Units owned by a Partner by the total number of outstanding Units. Person. Any natural person or any corporation, limited liability company, partnership, joint venture, association, trust or other entity. Pledge. To mortgage, pledge, encumber or create or suffer to exist any pledge, lien or encumbrance upon or security interest in. Such defined term is used in this Agreement as both a noun and a verb. Pro Rata. In the ratio of the Units owned by a Partner to the total number of applicable Units. Proposing Partner. See Section 9.3(c). Reconstituted Basis. As to each Partnership property, the Partnership's basis in such property immediately after it is contributed to the Partnership reduced by any depreciation and other deductions allocated to a Partner pursuant to Section 4.4(b)(i)(a). Regulations. The income tax regulations promulgated by Department of the Treasury and in effect from time to time. Related Agreements. The Initial Related Agreements and the Occidental Related Agreements. Related Business. Any business related to (i) the manufacturing, marketing and distribution of Specified Petrochemicals; (ii) the purchasing, processing and disposing of feedstocks in connection with the manufacturing, marketing and distributing of Specified Petrochemicals; and (iii) any research and development in connection with the foregoing. Related Persons. See Section 13.1. Representative. See Section 6.4(a). SEC. Securities and Exchange Commission. Second Master Transaction Agreement. See third WHEREAS clause. Selling Partners. See Section 10.2(a). Specified Petrochemicals. (i) Olefins and olefins coproducts consisting of: ethylene, propylene, butadiene, and mixed butylenes; aromatics and gasoline blending components (benzene, toluene, MTBE, alkylate, pyrolysis gasolines); mixed C5 hydrocarbons; resin formers (dicyclopentadiene, isoprene, piperylenes, resin oil); pyrolysis liquid fuel products (pyrolysis gas oil, pyrolysis fuel oil); (ii) Polyolefins consisting of: low-density, linear low-density, and high-density polyethylene; polypropylene; ethylene/propylene copolymers; rotomolding and polymeric powders; wire and cable resins; adhesive tie layers; hot melt adhesive resins; colors and concentrates; fuel additives; (iii) Ethyl alcohol and ethyl ether; and (iv) Ethylene oxide, ethylene glycol and derivatives thereof. provided, however that the definition of Specified Petrochemicals shall in no event include polyvinyl chloride or resins derived from phenol compounds or dicyclopentadiene. Specified Petrochemicals Businesses. The businesses related to Specified Petrochemicals. Strategic Plan. See Section 8.1. Substitute General Partner. A Person who is admitted as a General Partner to the Partnership in place of and with all the rights of a General Partner. Substitute Limited Partner. A Person who is admitted as a Limited Partner to the Partnership in place of and with all the rights of a Limited Partner. Taxes. All taxes, charges, fees, levies or other assessments imposed by any taxing authority, including, but not limited to, income, gross receipts, excise, property, sales, use, transfer, payroll, license, ad valorem, value added, withholding, social security, national insurance (or other similar contributions or payments), franchise, severance and stamp taxes (including any interest, fines, penalties or additions attributable to, or imposed on or with respect to, any such taxes, charges, fees, levies or other assessments) and "Tax Return" means any return, report, information return or other document (including any related or supporting information) with respect to Taxes. Tax Matters Partner. Lyondell GP. Third Party Claim. Any allegation, claim, civil, criminal or other action, proceeding, charge or prosecution brought by any Person other than the Partnership, any Partner or any Affiliate of a Partner. Transfer. To sell, assign or otherwise in any manner dispose of, whether by act, deed, merger, consolidation, conversion or otherwise. Such defined term is used in this Agreement as both a noun and a verb. Unit. A unit representing a partnership interest in the Partnership. Wholly Owned Affiliate. As to any Person, an Affiliate of such Person all of the equity interests of which are owned, directly or indirectly, by a Partner, by another Wholly Owned Affiliate of such Person or by the ultimate parent entity thereof. Wholly Owned Subsidiary. As to any Person, a subsidiary of such Person all of the equity interests of which are owned, directly or indirectly, by such Person. APPENDIX B TO LIMITED PARTNERSHIP AGREEMENT -------------------------------- PARTNERSHIP FINANCIAL STATEMENTS AND REPORTS --------------------------------------------
Item & Frequency Due Dates - ---------------- --------- Monthly: - -------- Income Statement - current period and year-to-date 10th work day following month-end Balance Sheet - current period 10th work day following month-end Cash Flow Statement - current period and year-to-date 10th work day following month-end Schedule of Income Allocation - preliminary 5th work day following month-end Schedule of Income Allocation - final 10th work day following month-end Calculation of Distribution of Available Net Operating Cash - final 15th work day following month-end Results of Operations Analysis 10th work day following month-end
Quarterly: - ---------- Analysis for Investor Relations and Form 10-Q disclosures: - Results of Operations 15th work day following quarter-end - Cash Flow 15th work day following quarter-end - Sales Variances 15th work day following quarter-end - Capital Expenditures 15th work day following quarter-end - Intercompany Transactions 15th work day following quarter-end - Volumes 15th work day following quarter-end - Prices 15th work day following quarter-end - Unusual Items 15th work day following quarter-end Income Statement - current quarter and year-to-date 10th work day following quarter-end Balance Sheet - current period 10th work day following quarter-end Cash Flow Statement - current quarter and year-to-date 10th work day following quarter-end Estimate of Each Partner's Regular Taxable Income 10th work day following quarter-end and Alternative Minimum Taxable Income
Item & Frequency Due Dates - ---------------- --------- Annual: - ------- Analysis for Investor Relations and Form 10-K 15th work day following year-end disclosures - Same as quarterly requirements - Plant Capacities Audited Financial Statements 60 days following year-end
APPENDIX C TO LIMITED PARTNERSHIP AGREEMENT -------------------------------- EXECUTIVE OFFICERS ------------------ Dan F. Smith Chief Executive Officer Eugene R. Allspach President and Chief Operating Officer Joseph M. Putz Senior Vice President, Finance and Administration Debra L. Starnes Senior Vice President, Polymers John R. Beard Vice President, Manufacturing Clifton B. Currin, Jr. Vice President, Supply and Optimization J. R. Fontenot Vice President, Engineering Brian A. Gittings Vice President, Oxygenated Chemicals Alan Houlton Vice President, Customer Supply Chain Gerald A. O'Brien Vice President and Secretary
Myra J. Perkinson Vice President, Human Resources W. Norman Phillips, Jr. Vice President, Petrochemicals Kerry F. Williams Vice President, Research and Development Jeffrey L. Hemmer Director, Business Process Improvement
APPENDIX D TO LIMITED PARTNERSHIP AGREEMENT -------------------------------- DISPUTE RESOLUTION PROCEDURES ----------------------------- (1) Binding and Exclusive Means. Except as otherwise provided in the Partnership Agreement, the dispute resolution provisions set forth in this Appendix shall be the binding and exclusive means to resolve all disputes arising under the Agreement (each a "Dispute"). (2) Standards and Criteria. In resolving any Dispute, the standards and criteria for resolving such Dispute shall, unless the Partners involved in the Dispute in their discretion jointly stipulate otherwise, be as set forth in Appendix 1 to this Appendix. (3) ADR and Binding Arbitration Procedures. If a Dispute arises, the following procedures shall be implemented (with references to "Partners" meaning the Partners involved in the Dispute): (a) Any Partner may at any time invoke the dispute resolution procedures set forth in this Appendix as to any Dispute by providing written notice of such action to the Secretary of the Partnership, who within five Business Days after such notice shall schedule a meeting to be held in Houston, Texas between the Partners. The Partners' meeting shall occur within 10 Business Days after notice of the meeting is delivered to the Partners. The meeting shall be attended by representatives of each Partner having decision-making authority regarding the Dispute as well as the dispute resolution process and who shall attempt in a commercially reasonable manner to negotiate a resolution of the Dispute. (b) The representatives of the Partners shall cooperate in a commercially reasonable manner and shall explore whether techniques such as mediation, minitrials, mock trials or other techniques of alternative dispute resolution might be useful. In the event that a technique of alternative dispute resolution is so agreed upon, a specific timetable and completion date for its implementation shall also be agreed upon. The representatives will continue to meet and discuss settlement until the date (the "Interim Decision Date") that is the earliest to occur of the following events: (i) an agreement shall be reached by the Partners resolving the Dispute; (ii) one of the Partners shall determine and notify the other Partners in writing that no agreement resolving the Dispute is likely to be reached; (iii) if a technique of alternative dispute resolution is agreed upon, the completion date therefor shall occur without the Partners having resolved the Dispute; or (iv) if another technique of alternative dispute resolution is not agreed upon, two full meeting days (or such other time period as may be agreed upon) shall expire without the Partners having resolved the Dispute. (c) If, as of the Interim Decision Date, the Partners have not succeeded in negotiating a resolution of the Dispute pursuant to subsection (b), the Partners shall proceed under subsections (d), (e) and (f). (d) After satisfying the requirements above, such Dispute shall be submitted to mandatory and binding arbitration at the election of any Partner involved in the Dispute (the "Disputing Partner"). The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Appendix. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date the notice of arbitration is served, other than as specifically modified herein. In the absence of an agreement to the contrary, the arbitration shall be held in Houston, Texas. The Arbitrator (as defined below) will allow reasonable discovery in the forms permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. During the pendency of the Dispute, each Partner shall make available to the Arbitrator and the other Partners all books, records and other information within its control requested by the other Partners or the Arbitrator subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by law. Recognizing the express desire of the Partners for an expeditious means of dispute resolution, the Arbitrator may limit the scope of discovery between the Partners as may be reasonable under the circumstances. In deciding the substance of the Partners' claims, the laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement (including this Appendix) without giving effect to any conflict of law principles. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each Partner involved in the Dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by the Partners, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration proceeding, and the Arbitrator shall have the right and authority to issue monetary sanctions against any of the Partners if, upon a showing of good cause, that Partner is unreasonably delaying the proceeding. To the fullest extent permitted by law, the arbitration proceedings and award shall be maintained in confidence by the Arbitrator and the Partners. (e) The Disputing Partner shall notify the American Arbitration Association ("AAA") and the other Partners in writing describing in reasonable detail the nature of the Dispute (the "Dispute Notice"). The arbitrator (the "Arbitrator") shall be selected within 15 days of the date of the Dispute Notice by all of the Partners from the members of a panel of arbitrators of the AAA or, if the AAA fails or refuses to provide a list of potential arbitrators, of the Center for Public Resources and shall be experienced in commercial arbitration. In the event that the Partners are unable to agree on the selection of the Arbitrator, the AAA shall select the Arbitrator, using the criteria set forth in this Appendix, within 30 days of the date of the Dispute Notice. In the event that the Arbitrator is unable to serve, his or her replacement will be selected in the same manner as the Arbitrator to be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the authority to assess the costs and expenses of the arbitration proceeding (including the arbitrators', and attorneys' fees and expenses) against any or all Partners. (f) The Arbitrator shall decide all Disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitrator shall have the authority to issue injunctive relief; however, the Arbitrator shall not have any power or authority to (i) award consequential, incidental, indirect or punitive damages or (ii) amend this Agreement. The Arbitrator shall render the arbitration award, in writing, within 20 days following the completion of the arbitration hearing, and shall set forth the reasons for the award. In the event that the Arbitrator awards monetary damages in favor of either party, the Arbitrator must certify in the award that no indirect, consequential, incidental, indirect or punitive damages are included in such award. If the Arbitrator's decision results in a monetary award, the interest to be granted on such award, if any, and the rate of such interest shall be determined by the Arbitrator in his or her discretion. The arbitration award shall be final and binding on the Partners, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act. (4) Continuation of Business. Notwithstanding the existence of any Dispute or the pendency of any procedures pursuant to this Appendix, the Partners agree and undertake that all payments not in dispute shall continue to be made and all obligations not in dispute shall continue to be performed. APPENDIX 1 TO APPENDIX D ------------------------ (a) First priority shall be given to maximizing the consistency of the resolution of the Dispute with the satisfaction of all express obligations of the Partners and their Affiliates as set forth in the Partnership Agreement. (b) Second priority shall be given to resolution of the Dispute in a manner which best achieves the objectives of the business activities and arrangements under the Partnership Agreement and the Related Agreements and permits the Partners to realize the benefits intended to be afforded thereby. (c) Third priority shall be given to such other matters, if any, as the Partners or the Arbitrator shall determine to be appropriate under the circumstances. APPENDIX E TO LIMITED PARTNERSHIP AGREEMENT -------------------------------- DIVISION OF PARTNERSHIP BUSINESS -------------------------------- If the Partnership is dissolved and Section 12.2(e) applies to the winding up of the affairs of the Partnership, the Partnership properties shall, to the extent legally and contractually feasible and, after satisfaction of the liabilities of the Partnership (whether by payment or reasonable provision for payment), be distributed in kind to the Partners in accordance with a division (the "Division") of the properties. The Division shall be implemented by dividing the properties, to the extent feasible, in accordance with the following priorities and principles: A. First priority shall be given to maximizing the consistency of the Division with a division of the Partnership properties that allocates to each Partner (subject to such Partner's Percentage Interest of the Partnership's liabilities) Partnership properties in proportion to the value of such Partner's Percentage Interest in the Partnership's business taking into account the aggregate Asset Fair Market Value of the Partnership's properties and the value and benefits afforded to such Partner under the Partnership Agreement and the other Related Agreements. B. Second priority shall be given to the allocation of the Partnership's various assets and business units between the Partners so as to maximize the aggregate going concern value of the respective assets and business units allocated to each Partner, taking into account, without limitation, the potential synergies and efficiencies that are reasonably achievable in connection with the operation of such allocated assets and business units as an independent business entity. C. Third priority shall be given to maximizing the consistency of the Division with the nature and quality of the Assets and Contributed Business originally transferred to the Partnership by the respective Partners or their Affiliates. Absent an agreement by the Partners or direction by the Neutral as to both (i) how the Partners should allocate Partnership debt and (ii) the process for relieving each Partner of liability for that portion of Partnership debt allocated to the other Partner, the Partners (A) shall be jointly and severally liable to the holders of all Partnership debt and (B) as between the Partners, each Partner shall be obligated to pay to holders of the debt its Percentage Interest of all payments of principal and interest on Partnership Debt. Notwithstanding the foregoing, the Neutral shall be entitled to direct, and any Partner may propose, an alternative allocation of Partnership debt in any circumstance where such alternative allocation is reasonably likely to result in a Division that is more consistent with the priorities outlined above. For purposes of this Appendix E, Lyondell GP and Lyondell LP shall be treated as if they were a single Partner, Millennium GP and Millennium LP shall be treated as if they were a single Partner and Occidental GP, Occidental LP1 and Occidental LP2 shall be treated as if they were a single Partner. The Partners shall attempt to agree on a plan for a mutually acceptable Division. If they are unable to so agree after 60 days following the occurrence of the dissolution, a Neutral shall be appointed in accordance with Appendix D and each Partner shall submit to the Neutral a written proposal for a Division. The Neutral shall decide which of the three proposals (without in any way modifying or compromising between the three proposals) more closely follows the priorities and principles set forth above, and the proposal so chosen shall thereupon be binding upon all Partners and shall be promptly implemented under the direction of the Neutral. The Neutral shall be entitled to employ (at the expense of the Partnership) such financial and accounting advisors and legal counsel as he or she shall select, provided that no such advisor or counsel shall have any affiliation with any Partner. SCHEDULE 2.3(d) Effective Date Capital Account Balances --------------------------------------- Column I reflects Capital Accounts after the contributions of the Occidental Partners on the Effective Date and the Effective Date adjustments to the Capital Accounts of the Initial Partners, but before the other contributions and distributions described in Section 2.3(c). Column II indicates the amount of the contributions and distributions described in 2.3(c) other than accrued interest. Column III reflects the Capital Accounts if such contributions and distributions were made (and accrued interest was paid and distributed) on the Effective Date. Column IV reflects the number of Units owned by each Partner.
PARTNER I II III IV ------- - -- --- -- Lyondell GP $ 42,451,400 $ 42,451,400 820 Lyondell GP 1,931,768,600 $ 148,350,000 2,080,118,600 40,180 ------ 41,000 Millennium GP 30,544,300 30,544,300 590 Millennium GP 1,720,020,000 (223,350,000) 1,496,670,000 28,910 ------ 29,500 Occidental GP 15,272,150 15,272,150 295 Occidental LP1 342,872,650 342,872,650 6,623 Occidental LP2 1,588,770,000 (419,700,000) 1,169,070,000 22,582 ------------- ------------- ------------- ------ 29,500 $5,671,699,100 $ (494,700,000) $5,176,999,100 ============== =============== ==============
* The difference between Lyondell LP's contribution of $345 million to satisfy the Lyondell Note and the distribution to it of $196,650,000 (57%) of the proceeds from such note. EX-10 11 EXHIBIT 10.37 EXHIBIT 10.37 AMENDED AND RESTATED PARENT AGREEMENT AMONG LYONDELL, THE COMPANY, OCCIDENTAL, OXY CH CORPORATION, OCCIDENTAL CHEMICAL CORPORATION, AND EQUISTAR EXECUTION COPY AMENDED AND RESTATED PARENT AGREEMENT AMONG OCCIDENTAL CHEMICAL CORPORATION, OXY CH CORPORATION, OCCIDENTAL PETROLEUM CORPORATION, LYONDELL PETROCHEMICAL COMPANY, MILLENNIUM CHEMICALS INC. AND EQUISTAR CHEMICALS, LP TABLE OF CONTENTS PAGE APPENDICES Appendix A List of Related Agreements Appendix B Dispute Resolution Procedures AMENDED AND RESTATED PARENT AGREEMENT This Amended and Restated Parent Agreement (this "Agreement") is made as of this 15th day of May, 1998 among Occidental Chemical Corporation, a New York corporation ("OCC"), Oxy CH Corporation, a California corporation ("Oxy CH"), Lyondell Petrochemical Company, a Delaware corporation ("Lyondell"), Millennium Chemicals Inc., a Delaware corporation ("Millennium"), Occidental Petroleum Corporation, a Delaware corporation ("OPC"), and Equistar Chemicals, LP, a Delaware limited partnership (the "Partnership," and together with OCC, Oxy CH, Lyondell, Millennium and OPC, the "Parties"). WHEREAS, except as provided in Section 3, OCC and Oxy CH, taken together and jointly and severally, are the "Occidental Parent" for purposes of this Agreement, and the Occidental Parent (except as provided in Section 3), Lyondell and Millennium are each a "Parent" for purposes of this Agreement. WHEREAS, Lyondell Petrochemical G.P. Inc. ("Lyondell GP") and Lyondell Petrochemical L.P. Inc. ("Lyondell LP" and, together with Lyondell GP, the "Lyondell Partner Subs") are both Delaware corporations and direct or indirect wholly owned subsidiaries of Lyondell. WHEREAS, Millennium Petrochemicals GP LLC ("Millennium GP") and Millennium Petrochemicals LP LLC ("Millennium LP" and, together with Millennium GP, the "Millennium Partner Subs") are both Delaware limited liability companies and direct or indirect wholly owned subsidiaries of Millennium. WHEREAS, PDG Chemical Inc. ("Occidental GP") and Occidental Petrochem Partner 2, Inc. ("Occidental LP2") are both Delaware corporations and direct or indirect wholly owned subsidiaries of Oxy CH; Occidental Petrochem Partner 1, Inc. ("Occidental LP1" and, together with Occidental GP and Occidental LP2, the "Occidental Partner Subs") is a Delaware corporation and a wholly owned subsidiary of OCC; and Oxy CH and OCC are both direct or indirect wholly owned subsidiaries of OPC. WHEREAS, for purposes of this Agreement, the Occidental Partner Subs are the Partner Subs of the Occidental Parent. WHEREAS, pursuant to the terms of the Master Transaction Agreement dated as of July 25, 1997 between Lyondell and Millennium (the "Initial Master Transaction Agreement"), the Partnership was formed under the laws of the State of Delaware pursuant to the Limited Partnership Agreement dated October 10, 1997 (the "Old Partnership Agreement"), with 2 Lyondell GP and Millennium GP as the general partners and Lyondell LP and Millennium LP as the limited partners of the Partnership. WHEREAS, in connection with the closing of the transactions contemplated by the Initial Master Transaction Agreement, Lyondell and Millennium entered into the Parent Agreement with the Partnership dated as of December 1, 1997 (the "Initial Parent Agreement"), providing for, among other things, certain guarantees of performance by their respective Affiliated Obligors (as defined therein) and for certain restrictions on the transfer of their respective Partner Sub Stock (as defined therein); WHEREAS, the Partnership, OPC, Lyondell and Millennium entered into a Master Transaction Agreement dated May 15, 1998 (the "Second Master Transaction Agreement"), providing for, among other things, the admission of the Occidental Partner Subs as partners in the Partnership. The Occidental Partner Subs, together with any other Affiliate of the Occidental Parent that is a party to any of the Related Agreements (as defined herein), are referred to herein as the "Occidental Affiliated Obligors." The Lyondell Partner Subs, together with any other Affiliate of Lyondell that is a party to any of the Related Agreements, are referred to herein as the "Lyondell Affiliated Obligors." The Millennium Partner Subs, together with any other Affiliate of Millennium that is a party to any of the Related Agreements, are referred to herein as the "Millennium Affiliated Obligors." The Occidental Affiliated Obligors, the Lyondell Affiliated Obligors and the Millennium Affiliated Obligors, collectively or individually as the context may require, are referred to herein as the "Affiliated Obligors." The Occidental Partner Subs, the Lyondell Partner Subs and the Millennium Partner Subs, collectively or individually as the context may require, are referred to herein as the "Partner Subs." WHEREAS, in connection with the closing of the transactions effected pursuant to the Initial Master Transaction Agreement and to be effected in connection with the closing of the Second Master Transaction Agreement, the Parents and certain of their respective Affiliates, have entered into or are entering into various agreements and other legal documents, including the Amended and Restated Limited Partnership Agreement of the Partnership dated as of the date of this Agreement (the "Partnership Agreement"), the Agreement and Plan of Merger and Asset Contribution dated as of the date of this Agreement (the "Occidental Contribution Agreement") among the Partnership, the Occidental Partner Subs and Oxy Petrochemicals Inc. ("OPI"), services agreements and other asset contribution agreements, as applicable (including this Agreement, the "Related Agreements"), each of which is integrally related to the capitalization or operations of the Partnership and is listed on Appendix A hereto. The Related Agreements (other than this Agreement) and any additional agreements that may from time to time be added to Appendix A hereto by agreement of the Parents, as they may in the future be amended, supplemented, restated or otherwise modified, are referred to herein as the "Other Agreements". The Other Agreements to be entered into in connection with the Second Master Transaction Agreement are herein called the "Additional Other Agreements". WHEREAS, the Parties desire to amend and restate the Initial Parent Agreement in connection with the admission of the Occidental Partner Subs to the Partnership and the closing of the other transactions contemplated by the Second Master Transaction Agreement. 3 WHEREAS, this Agreement is essential to the consummation of the closing pursuant to the Second Master Transaction Agreement and the entering into and effectiveness of the Additional Other Agreements and each of the parties to such agreements is relying on this Agreement in connection with entering into each of the Additional Other Agreements. WHEREAS, this Agreement provides for the continuation of obligations and restrictions set forth in the Initial Parent Agreement, which were essential to the consummation of the closing pursuant to the Initial Master Transaction Agreement and the entering into and effectiveness of the Other Agreements entered into in connection therewith. WHEREAS, each Parent is willing, solely for the benefit of the Beneficiaries (as defined below in Section 1.11) and their successors and assigns, to guarantee the performance by its Affiliated Obligors of certain of the obligations of such Affiliated Obligors as set forth in this Agreement. WHEREAS, each Parent is willing to subject the Partner Sub Stock (as defined herein) to certain restrictions on transfer, as set forth in this Agreement. WHEREAS, OPC is willing to (i) indemnify the Partnership from certain potential liabilities that the Partnership would not otherwise be subject to but for the merger of OPI with and into the Partnership, and (ii) agree to certain other covenants in connection with the closing of the transactions contemplated by the Second Master Transaction Agreement. NOW THEREFORE, in, consideration of the foregoing and the mutual promises and covenants of the Parties hereto, the Parties hereby agree as follows: Each Parent hereby unconditionally, absolutely and irrevocably guarantees, undertakes and promises to cause, as herein provided, the due and punctual payment and the full and prompt performance by its Affiliated Obligors of all of the amounts to be paid and all of the terms and provisions to be performed or observed by or on the part of its Affiliated Obligors under the Other Agreements in accordance with the terms thereof (all such terms and provisions as now or hereafter in existence being collectively called the "Obligations") as follows: in the event that its Affiliated Obligors shall fail in any manner whatsoever to pay, perform or observe any of their Obligations, when and as the same shall be required to be paid, performed or observed under the terms of the Other Agreements, such Parent will itself duly and punctually pay, or fully and promptly perform or observe, as the case may be, such Obligations, or cause the same to be duly and punctually paid, or fully and promptly performed or observed, in each case as if such Parent were itself the obligor with respect to such Obligations under the Other Agreements. Insofar as this Section 1.1 relates to the obligations of an Affiliated Obligor under the Partnership Agreement, no Parent shall be required to make, or cause a Partner Sub to make, any contribution to the Partnership that such Partner Sub is not otherwise required to make pursuant to the terms of Section 2.3, 2.4, or 12.2(d)(ii) of the Partnership Agreement. Insofar as this Section 1.1 applies to Other Agreements 4 other than the Partnership Agreement, the term "Affiliated Obligors" will not include the Partnership nor any partner in the Partnership in its capacity as such. Notwithstanding the foregoing, this Section 1.1 shall not apply to Obligations that are within the scope of Section 1.2. Each Parent acknowledges that the Partnership Agreement sets forth definitions of "Conflicted General Partner" and "Nonconflicted General Partner," and provides that the Nonconflicted General Partners (whether one or more) have certain exclusive rights to control the Partnership with respect to any Conflict Circumstance (as defined in the Partnership Agreement); and accordingly, without limiting the rights of its Partner Subs under Section 6.8 of the Partnership Agreement, and without prejudice to any rights, remedies or defenses the Partnership may have in respect of any such Other Agreement or Conflict Circumstance, each Parent hereby agrees to cause its Partner Subs (i) to cause the Partnership to pay, perform and observe all of the Obligations to be paid, performed or observed by or on the part of the Partnership under the Other Agreements, in accordance with the terms thereof, to the extent that such Partner Sub is a Nonconflicted General Partner and is thereby entitled to cause the payment, performance and observance of such Obligations and (ii) except to the extent inconsistent with its obligations under Section 1.2(i), to abide by its obligations as a Nonconflicted General Partner with respect to any Conflict Circumstance arising in connection with any Other Agreement in accordance with the terms of the Partnership Agreement applicable thereto; provided, however, that each Parent's responsibility under this Section 1.2 for a failure of the Partnership to pay, perform or observe its Obligations under the Other Agreements shall be limited to the circumstances in which the Partnership's failure to so pay, perform or observe its obligations under the Other Agreements was directly caused by an act or failure to act of its Partner Sub, provided, further, that nothing in this Section 1.2 shall require a Parent to make or cause such Partner Sub (i) to cure or mitigate any inability of the Partnership to make any payment or to perform or observe any Obligations under any Other Agreements, (ii) to cause the Partnership to require from the Partner Subs any cash contributions in respect of any payment, performance or observance involved in such Conflict Circumstance, or (iii) to make any contribution to the Partnership that such Partner Sub is not otherwise required to make pursuant to Section 2.3, 2.4, or 12.2(d)(ii) of the Partnership Agreement. It shall not be a condition to the guarantees and agreements set forth in Sections 1.1 and 1.2 above (together, the "Guarantee") that a Beneficiary shall have first made any request of or demand upon, or given any notice of the occurrence of a default under the Other Agreements or any other notice whatsoever to, any Parent or its Affiliated Obligors or any other Person, or shall have instituted any action or proceeding against any Affiliated Obligor or any other Person in respect thereof, or shall have joined any Affiliated Obligor or the Partnership in any such action or proceeding. A Beneficiary in asserting the benefit of the Guarantee shall give prompt notice to a Parent of any failure by its Affiliated Obligors or the Partnership to pay, perform or observe any Obligation; provided, however, that any failure, delay or defect in the giving of such notice shall not alter or affect the Guarantee under this Agreement. Each Parent further agrees that this Agreement, insofar as it constitutes a guarantee of monetary Obligations, constitutes a guarantee of payment when due and not of collection, and each Parent waives any right to require as a condition to its Guarantee that any resort be had by a Beneficiary to any security held for the payment of any Obligations. 5 The Guarantee is and shall remain absolute and unconditional irrespective of any circumstance that might otherwise constitute a legal or equitable discharge of a surety or guarantor, as the case may be, with respect to its Guarantee. Each Parent hereby waives, with respect to the Guarantee but without prejudice to the rights of the parties to the Other Agreements, any notice of acceptance of this Agreement, grace, presentment, demand, protest, notice of the occurrence of a default under the Other Agreements and any other notice of any kind whatsoever and promptness in making any claim or demand hereunder. The Guarantee shall not be affected by (i) the failure of a Beneficiary to assert any claim or demand or to enforce any right or remedy under the provisions of any of the Other Agreements or any agreement related thereto or otherwise, (ii) any extension or renewal of any of the Other Agreements or any agreement related thereto, (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of any of the Other Agreements or of any agreement related thereto, including, without limitation, any change in the time, manner or place of payment or performance of any of the obligations under the Other Agreements, or (iv) the release of any security held for payment of any Obligations. The Guarantee shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever, except as provided in Section 1.10. Notwithstanding anything herein to the contrary, a Beneficiary may proceed to enforce the Guarantee without first pursuing or exhausting any right or remedy that it or any of its successors or assigns may have against any Affiliated Obligor or any Parent or any other person. The Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation of an Affiliated Obligor is rescinded or must otherwise be restored or returned by the Person receiving such payment upon the insolvency, bankruptcy or reorganization of an Affiliated Obligor, all as though such payment or part thereof had not been made. Nothing herein is intended to deny to any Parent, and it is expressly agreed that each Parent shall have and may assert, any and all of the defenses, set-offs, counterclaims and other rights (other than those relating to insolvency, bankruptcy or reorganization as described in Section 1.9) with regard to any Obligations that its Affiliated Obligors may possess except any defense its Affiliated Obligors may possess relating to lack of validity or enforceability of the Other Agreements or any other agreement or instrument relating thereto as against its Affiliated Obligors arising from the defective incorporation or other defective organization of its Affiliated Obligors, their lack of qualification to do business in any applicable jurisdiction or their defective corporate or other organizational authority to enter into, deliver or perform the Other Agreements. Section 1 of this Agreement shall inure solely to the benefit of the Beneficiaries, each of whom has the right to enforce the Guarantee against the Parents, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. As used in this Agreement, "Beneficiaries" shall mean (i) as to any obligations of the Occidental Parent, except for its 6 obligations pursuant to Section 1.1 hereof with respect to the Partnership Agreement, the Partnership, Lyondell, the Lyondell Affiliated Obligors, Millennium and the Millennium Affiliated Obligors, (ii) as to any obligations of Millennium, except for its obligations pursuant to Section 1.1 hereof with respect to the Partnership Agreement, the Partnership, the Occidental Parent, the Occidental Affiliated Obligors, Lyondell and the Lyondell Affiliated Obligors, (iii) as to any obligations of Lyondell, except for its obligations pursuant to Section 1.1 hereof with respect to the Partnership Agreement, the Partnership, the Occidental Parent, the Occidental Affiliated Obligors, Millennium and the Millennium Affiliated Obligors, and (iv) as to any obligations of any Parent pursuant to Section 1.1 hereof with respect to the Partnership Agreement, the other Parents. As used in this Agreement, the term Parent includes any successor or transferee of the Parent, and the term Affiliated Obligors includes any successor to or transferee of the Affiliated Obligors' interest in the Partnership permitted pursuant to the Partnership Agreement. (a) Each Parent shall at all times maintain a GAAP Net Worth in an amount sufficient to satisfy its known and potential obligations under this Agreement. (b) Each Parent agrees that, as of the end of each fiscal quarter, either (i) the excess of its GAAP Net Worth at such time over its Partnership Investment at such time or (ii) the excess of its Equity Market Capitalization at such time over its Adjusted Partnership Investment at such time, shall be at least $250 million. (c) The term "GAAP Net Worth" means, for a Parent at any time, such Parent's consolidated stockholders equity, determined in accordance with generally accepted accounting principles ("GAAP"), as of the end of its most recent fiscal quarter. The term "Equity Market Capitalization" means, for a Parent at any time, (x) the aggregate market value of such Parent's outstanding publicly traded equity securities, as of the end of its most recent fiscal quarter (based on the average closing price for the most recent 20 trading days on the principal stock exchange on which such securities are traded) plus (y) the amount of stockholders equity, determined in accordance with GAAP, attributable at such time to any equity securities of such Parent that are not publicly traded. The term "Partnership Investment" means, for a Parent at any time, its investment in the Partnership, determined in accordance with GAAP as of the end of the most recent fiscal quarter. The term "Adjusted Partnership Investment" means, for a Parent at any time, (A) Lyondell's investment in the Partnership, determined in accordance with GAAP as of the end of the most recent fiscal quarter, multiplied by (B) a fraction the numerator of which is the aggregate Percentage Interest at such time of the Partner Subs owned by the Parent whose Partnership Investment is being determined and the denominator of which is the aggregate Percentage Interest at such time of the Partner Subs owned by Lyondell. The term "Percentage Interest" is used as defined in the Partnership Agreement. (d) The provisions of Section 1.12(b) shall expire as to a Parent at such time after the seventh anniversary of the Closing Date at which no material Seven Year PCCL Claim (as defined in the Asset Contribution Agreement (as defined in the Partnership Agreement) applicable to such Parent, its Affiliated Obligors or, if applicable, its predecessor Parent or its Affiliated Obligors) is outstanding against such Parent, any of its Affiliated Obligors or, if applicable, its predecessor Parent or its Affiliated Obligors. 7 (a) Each Parent agrees that except as otherwise provided below in this Section 2.1 or Section 2.2 or with the written consent of each of the other Parents, which consent may be granted or withheld in such Parent's sole discretion, it will not, in any transaction or series of transactions, directly or indirectly, (i) sell, assign or otherwise in any manner dispose of, whether by act, deed, merger or otherwise ("Transfer") or (ii) mortgage, pledge, encumber or create or suffer to exist any pledge, lien or encumbrance upon or security interest in ("Pledge"), all or any part of the capital stock (including any securities convertible into or exchangeable for or carrying any rights to purchase, subscribe for or otherwise acquire any such capital stock) of its Partner Subs (collectively, the "Partner Sub Stock"). (Each of the defined terms "Transfer" and "Pledge" is used herein both as a noun and as a verb.) Any attempt by a Parent to Transfer or Pledge all or a portion of its Partner Sub Stock in violation of this Agreement shall be void ab initio and shall not be effective to Transfer such Partner Sub Stock or any portion thereof. The Partnership Agreement contains provisions relating to the Transfer and Pledge of the Partner Subs' direct interests in the Partnership. (b) Each Parent agrees that all certificates representing shares of Partner Sub Stock, whether currently owned or hereafter acquired, shall carry the following legend, which legend each Parent agrees to cause to be placed thereon and to cause to remain thereon as long as such shares are subject to the restrictions of this Agreement: THE SALE, ASSIGNMENT, PLEDGE OR OTHER TRANSFER OR HYPOTHECATION OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO CERTAIN RESTRICTIONS PURSUANT TO AND MAY NOT BE EFFECTED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF AN AGREEMENT BINDING UPON THE OWNER OF THE STOCK REPRESENTED HEREBY. THE OWNER OR ISSUER WILL FURNISH A COPY OF SUCH AGREEMENT TO ANY PROPOSED TRANSFEREE OR PLEDGEE WITHOUT CHARGE UPON REQUEST. (c) Without the need for the consent of any Person, any Parent may Transfer its Partner Sub Stock to any wholly-owned Affiliate of such Parent or of a common parent. (d) Without the need for the consent of any Person, each Parent (other than OCC or Oxy CH) may Transfer all (but not less than all) of its Partner Sub Stock, if such Transfer is in connection with (i) a merger, consolidation, conversion or share exchange of such Parent or (ii) a sale or other disposition of (x) the Partner Sub Stock plus (y) other assets representing at least fifty-percent (50%) of the book value of such Parent's assets excluding the Partner Sub Stock, as reflected on its most recent audited consolidated (or combined) financial statements; provided, however, that the Successor Parent, if any, (A) shall succeed to and be substituted for such Parent, with the same effect as if it had been named herein and (B) shall execute an instrument wherein such Successor Parent shall agree to be bound by the obligations of such Parent under this Agreement, with the same effect as if it had been named herein, whereupon, unless such Parent shall become a direct or indirect subsidiary of such Successor Parent, such Parent shall thereupon be released from all obligations under Sections 1, 2 and 4 of this Agreement. 8 (e) Without the need for the consent of any Person, OCC may Transfer all (but not less than all) of its Partner Sub Stock, if such Transfer is in connection with: (i) a merger, consolidation, conversion or share exchange of OCC, (ii) a sale or other disposition of (x) the Partner Sub Stock plus (y) other assets representing at least fifty percent (50%) of the book value of Oxy CH's assets excluding the Partner Sub Stock, as reflected on its most recently unaudited consolidated (or combined) financial statements, or (iii) any Transfer permitted by Section 2.1(f); and following the consummation of any such transaction, the Partner Sub Stock held directly or indirectly by OCC and Oxy CH on the date hereof shall be held by the same transferee or one or more transferees that are wholly-owned Affiliates of each other or of a common parent entity; provided, however, that the Successor Parent, if any, (A) shall succeed to and be substituted for OCC, with the same effect as if it had been named herein, and (B) shall execute an instrument wherein such Successor Parent shall agree to be bound by the obligations of OCC hereunder, with the same effect as if it had been named herein, whereupon, unless OCC shall become a direct or indirect subsidiary of such Successor Parent, OCC shall thereupon be released from all obligations under Sections 1, 2 and 4 of this Agreement. (f) Without the need for the consent of any Person, Oxy CH may Transfer all (but not less than all) of its Partner Sub Stock, if such Transfer is in connection with: (i) a merger, consolidation, conversion or share exchange of Oxy CH, (ii) a sale or other disposition of (A) the Partner Sub Stock plus (B) other assets representing at least fifty percent (50%) of the book value of Oxy CH's assets excluding the Partner Sub Stock, as reflected on its most recently prepared unaudited consolidated (or combined) financial statements, or (iii) any Transfer permitted by Section 2.1(e) or (g); and following the consummation of any such transaction, the Partner Sub Stock held directly or indirectly by OCC and Oxy CH on the date hereof shall be held by the same transferee or one or more transferees that are wholly-owned Affiliates of each other or of a common parent entity; provided, however, that the Successor Parent, if any, (A) shall succeed to and be substituted for Oxy CH, with the same effect as if it had been named herein, and (B) shall execute an instrument wherein such Successor Parent shall agree to be bound by the obligations of Oxy CH hereunder, with the same effect as if it had been named herein, whereupon, unless Oxy CH shall become a direct or indirect subsidiary of such Successor Parent, Oxy CH shall thereupon be released from all obligations under Sections 1, 2 and 4 of this Agreement. (g) Nothing in this Agreement shall prevent or restrict the Transfer or Pledge of the capital stock, equity ownership interests or other securities of a Parent (or, in the case of the Occidental Parent, either of OCC or Oxy CH), and no such Transfer or Pledge of securities issued by a Parent (or, in the case of the Occidental Parent, either of OCC or Oxy CH) shall be deemed to constitute a Transfer or Pledge of Partner Sub Stock hereunder; provided that, (i) in the event of a Transfer in the form of a transaction described in clause (i) of Section 2.1(d), (e) or 9 (f), the Successor Parent, if any, shall execute an instrument to the effect described in clause (B) of Section 2.1(d), (e) or (f), as applicable, and (ii) following the consummation of any such Transfer or Pledge of securities of a Parent, all the Partner Sub Stock of such Parent shall be held by the same transferee or one or more transferees that are wholly-owned Affiliates of each other or of a common parent entity or shall be Pledged to the same pledgee or pledgees. (h) For purposes of this Section 2.1, the term "Successor Parent" shall mean the acquiring, succeeding or surviving entity in any transaction contemplated by Section 2.1 (d), (e) or (f) that owns the applicable Partner Sub Stock following such transaction, if other than a Parent. (i) Each Parent may Pledge all (but not less than all) of its Partner Sub Stock to any one or more Approved Lenders; provided that the Pledge shall be evidenced by an instrument, reasonably satisfactory to the Partnership, wherein the Approved Lender receiving such Pledge shall agree that in the event such Approved Lender obtains a right of foreclosure on such Parent's Partner Sub Stock, such Approved Lender will foreclose on the Partner Sub Stock of each of such Parent's Partner Subs equally so that such Approved Lender will in all events hold equal portions of Partner Sub Stock of Occidental GP, Occidental LP1 and Occidental LP2, Lyondell GP and Lyondell LP or Millennium GP and Millennium LP, as the case may be. An "Approved Lender" shall be any bank, insurance company, investment bank or other financial institution that is regularly engaged in the business of making loans. (a) Without the consent of each of the other Parents, no Parent may Transfer less than all of its Partner Sub Stock, and unless such Transfer is otherwise permitted by Section 2.1, no Parent may Transfer its Partner Sub Stock for consideration other than cash. Unless such Transfer is otherwise permitted by Section 2.1, any Parent (the "Selling Parent") desiring to Transfer all of its Partner Sub Stock to any person (including another Parent or any Affiliate thereof) shall give written notice (the "Initial Notice") to the Partnership and each of the other Parents (the "Offeree Parents") stating that the Selling Parent desires to Transfer its Partner Sub Stock and stating the cash purchase price and all other terms on which it is willing to sell (the "Offer Terms"). Delivery of an Initial Notice shall constitute the irrevocable offer of the Selling Parent to sell its Partner Sub Stock to the Offeree Parents hereunder. (b) Each Offeree Parent shall have the option, exercisable by delivering written notice (the "Acceptance Notice") of such exercise to the Selling Parent within 45 days of the date of the Initial Notice, to elect to purchase its pro rata share in the case of both of the limited partner and the general partner (based on the ratio of the number of Units held by its Partner Subs to the number of Units held by all of the Partner Subs of the Offeree Parents or on any other basis that shall be mutually agreed upon between the Offeree Parents delivering an Acceptance Notice) of all of the Partner Sub Stock of the Selling Parent on the Offer Terms described in the Initial Notice. If one Offeree Parent, but not the other, elects to so purchase, the Selling Parent shall give written notice thereof (the "Additional Notice") to the Offeree Parent electing to purchase and such Parent shall have the option, exercisable by delivery of an Acceptance Notice, of such exercise to the Selling Parent within 15 days of such notice, to purchase all of the Partner Sub Stock held by the Selling Parent, including the Partner Sub Stock it has not previously elected to 10 purchase; provided, however, that any election by an Offeree Parent not to purchase all such Partner Sub Stock shall be deemed a rescission of such Offeree Parent's original Acceptance Notice and an election not to purchase any of the Partner Sub Stock of the Selling Parent. Each Acceptance Notice shall set a date for closing the purchase, such date to be not less than 30 nor more than 90 days after delivery of the Acceptance Notice; provided that such time period shall be subject to extension as reasonably necessary (up to a maximum of an additional 120 days after such 90 day period) in order to comply with any applicable filing and waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act. The closing shall be held at the Partnership's offices. The purchase price for the Selling Parent's Partner Sub Stock shall be paid in cash delivered at the closing. The purchase shall be consummated by appropriate and customary documentation (including the giving of representations and warranties substantially similar to (i) in the case of Lyondell or Millennium, those set forth in Sections 2.1 through 2.4 of the Initial Master Transaction Agreement, and in the case of the Occidental Parent, those set forth in Section 2.2 of the Second Master Transaction Agreement, and (ii) customary representations and warranties regarding the Selling Parent's title to its Partner Sub Stock). (c) If one or both of the Offeree Parents does not elect to purchase all of the Selling Parent's Partner Sub Stock within 45 days after the receipt of the Initial Notice or within 15 days after the receipt of the Additional Notice, if applicable, the Selling Parent shall have a further 180 days during which it may, subject to Sections 2.2(d) and (e), consummate the sale of its Partner Sub Stock to a third party purchaser at a purchase price and on such other terms that are no more favorable to such purchaser than the Offer Terms. If the sale is not completed within such further 180-day period, the Initial Notice shall be deemed to have expired and a new notice and offer shall be required before the Selling Parent may make any Transfer of its Partner Sub Stock. (d) Before the Selling Parent may consummate a Transfer of its Partner Sub Stock to a third party in accordance with this Agreement, the Selling Parent shall demonstrate to the other two Parents that such proposed purchaser (or the Person willing to serve as its guarantor as contemplated by Section 2.2(e)) has outstanding indebtedness that is rated investment grade by either Moody's Investor Services Inc. or Standard & Poor's Ltd, or if such proposed purchaser (or such other Person) has no rated indebtedness outstanding, such Person shall provide an opinion from one of such entities or from a nationally recognized investment banking firm that it could be reasonably expected to obtain such a rating. (e) Notwithstanding the foregoing provisions of this Section 2.2, a Parent may Transfer its Partner Sub Stock (other than pursuant to Section 2.1) only if all of the following occur: (i) The Transfer is accomplished in a non-public offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations. (ii) The Transfer does not cause a default under any material contract which has been approved unanimously by the Partnership Governance Committee (as defined in the Partnership Agreement) and to which the Partnership is a party or by which the Partnership or any of its properties is bound. 11 (iii) The transferee executes an appropriate agreement to be bound by this Agreement. (iv) The transferor and/or transferee bears all reasonable costs incurred by the Partnership in connection with the Transfer. (v) The transferee (or the guarantor of the obligations of the transferee) satisfies the criteria set forth in Section 2.2(d) and delivers an agreement to each of the other Parents and the Partnership substantially in the form of this Agreement. (vi) The proposed transferor is not in default in the timely performance of any of its material obligations to the Partnership. (vii) The provisions of Section 2.2(f) are satisfied. (f) No Parent may Transfer the Partner Sub Stock of any of its Partner Subs to any Person unless such Parent simultaneously Transfers the Partner Sub Stock of its other Partner Sub or Partner Subs (if the Parent has more than one Partner Sub), to such Person or a wholly-owned Affiliate of such Person or of a common parent. Each Parent hereby agrees that it will not, without the written consent of each of the other Parents, permit any of its Affiliated Obligors (or their successors or assigns) (i) to commence a voluntary action under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or State bankruptcy, insolvency or other similar law, (ii) to institute a proceeding to be adjudicated a voluntary bankrupt, (iii) to consent to the filing of a bankruptcy proceeding against it, (iv) to fail to contest a bankruptcy proceeding against it, (v) to consent to the appointment of a receiver, custodian, liquidator or trustee for it or for all or any substantial portion of its property, (vi) in the case of its Partner Subs, to issue or sell other than to such Parent any of its own Partner Sub Stock or (vii) to effect, recognize or permit any transfer of any of its own Partner Sub Stock other than in accordance with the provisions of Section 2 of this Agreement. Each Parent agrees that (i) the business of its Partner Subs shall be restricted solely to the holding of the respective interests in the Partnership and the doing of things necessary or incidental in connection therewith, and (ii) it will cause its Partner Subs not to own any assets, incur any liabilities or engage, participate or invest in any business outside the scope of their businesses as described in clause (i); provided, however, that this Section 2.4 shall not apply with respect to any wholly-owned Affiliates to whom such Partner Subs shall transfer their respective interests in the Partnership if such wholly-owned Affiliates are not bound by Section 9.6 of the Partnership Agreement. Notwithstanding the foregoing provisions of this Section 2.4, this Section 2.4 shall not prohibit any Partner Sub from incurring debt payable to its Parent or an Affiliate as long as: (i) such debt is not transferable (by contract or operation of law) to any Person other than Parent or an Affiliate of Parent; 12 (ii) no payment on such debt is permitted or required to be made if at the time of such payment such Partner Sub is in Default under (and as defined in) the Partnership Agreement or by making such payment such Partner Sub would not be able to perform its obligations under the Partnership Agreement. Each Parent hereby agrees that it and its Affiliates shall not be entitled to, and that the Partner Sub shall not be required to make, any payments on any such debt payable by its Partner Sub if: (i) at the time of such payment such Partner Sub is in Default under the Partnership Agreement, (ii) by making such payment such Partner Sub would not be able to perform its obligations under the Partnership Agreement, or (iii) such Parent is in default of its obligations under Section 1.12 of this Agreement. For purposes of this Section 3 only, the term "Parent" means and includes OPC, Oxy CH, OCC, Lyondell and Millennium. Each Parent agrees that with respect to each of the other Parents (each a "Subject Parent", provided that no Parent shall be a "Subject Parent" from and after the expiration of 24 months from the date on which such Parent and its Affiliates no longer hold an interest in the Partnership; and provided, further, that none of OPC, Oxy CH or OCC is a Subject Parent with respect to each other), neither it, nor any of its Affiliates shall, without prior written invitation or request of another Subject Parent: (i) in any manner acquire, agree to acquire or make any proposal to acquire, directly or indirectly, any securities, assets or property of such other Subject Parent, whether such agreement or proposal is made with or to such other Subject Parent or a third party; (ii) make any unsolicited proposal to enter into, directly or indirectly, any merger or other business combination involving such other Subject Parent; (iii) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are used in the proxy rules of the Securities and Exchange Commission) to vote, or seek to advise or influence any person with respect to the voting of, any voting securities of such other Subject Parent; (iv) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) with respect to any voting securities of such other Subject Parent; (v) otherwise act, alone or in concert with others, to seek to control the management, Board of Directors or policies of such other Subject Parent; (vi) disclose any intention, plan or arrangement inconsistent with the foregoing; or (vii) advise, encourage, provide assistance (including financial assistance) to or hold discussions with any other persons in connection with any of the foregoing. Each Parent also agrees during such period not to: (i) request that such other Subject Parent (or its respective directors, officers, employees or agents), directly or indirectly, amend or waive any provision of this Section 3.1 (including this sentence); or (ii) take any action which might reasonably be expected to require that such other Subject Parent to make a public announcement regarding the possibility of a business combination or merger. Notwithstanding the provisions of Section 3.1: (a) Any Parent may, by notice to another Parent, terminate the provisions of Section 3.1 (as applied to the relationship between such two Parents, but not as to their respective relationships with the third Parent) at any time within 30 days after the occurrence of any of the following events with respect to such other Parent: (i) a Change of Control (as defined below) of 13 such other Parent shall have occurred, (ii) such other Parent shall have entered into a definitive agreement providing for, or publicly announced its intention to effect, any transaction involving a Change of Control of such other Parent or (iii) a tender offer or exchange offer shall have been commenced or publicly announced that, if consummated, would have the effect with respect to such other Parent described in clause (c) of the definition of "Change of Control." A "Change of Control" of a Parent shall mean the occurrence of any of the following events: (a) there shall be consummated any consolidation, merger or share exchange of such Parent (i) in which such Parent is not the continuing or surviving Person (other than a consolidation, merger or share exchange with a wholly owned subsidiary of such Parent in which all shares of common stock of such Parent outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same number of shares of common stock of such subsidiary) or (ii) pursuant to which the common stock of such Parent is converted into cash, securities or other property, other than, in each case, a consolidation, merger or share exchange of such Parent in which the holders of the common stock immediately prior to the consolidation, merger or share exchange hold, directly or indirectly, at least a majority of the voting power and common equity of the continuing or surviving Person immediately after such consolidation, merger or share exchange; (b) such Parent's properties and assets are sold or otherwise disposed of substantially as an entirety on a consolidated basis to any Person or group of Persons in any one transaction or a series of related transactions, other than as contemplated by the Initial Master Transaction Agreement or the Second Master Transaction Agreement; or (c) any Person or any Persons acting together which would constitute a "group" (as defined in Section 3.1) (other than such Parent, any subsidiary of such Parent, any employee stock purchase plan, stock option plan or other stock incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of such Parent or any subsidiary of such Parent or any Person holding securities of such Parent for or pursuant to the terms of any such employee benefit plan), together with any Affiliates thereof, shall acquire beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 50% or more of the voting stock of such Parent. (b) The terms of the first sentence of Section 3.1 shall not be applicable to the purchase and sale of any securities of a Parent by independent third-party managers of any pension or other related employee benefit plans who are acting as passive investors in such Parent. OPC hereby agrees, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless the Partnership and its Affiliates and their respective officers, directors and employees from, against and in respect of any Liability (as defined in Section 6.2(a) of the Occidental Contribution Agreement) incurred or suffered by the Partnership or any of its Affiliates, arising out of, in connection with, or relating to: (a) all income taxes, and all interest and penalties incurred with respect thereto, that are imposed on OPC or any member of its affiliated group; and (b) any obligation arising under Title IV of ERISA (as defined in the Occidental Contribution Agreement) with respect to any Employee Plan (as defined in the Occidental Contribution Agreement) maintained by any Contributor (as defined in the Occidental Contribution Agreement) or any member of a controlled group (as defined in Section 414 of the Code (as defined in the Occidental Contribution Agreement)) with the Contributor, but excluding obligations arising under the Cain Plan (as defined in the Occidental Contribution Agreement) 14 and obligations under the PDG Plan (as defined in the Occidental Contribution Agreement with respect to funding requirements arising after the Closing Date. (a) From the date hereof through the twenty-fifth anniversary hereof, each of OPC, Lyondell and Millennium (an "Indemnifying Party") hereby agrees, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless the Partnership, its partners, their Affiliates and their respective officers, directors, and employees (collectively, the "Indemnified Parties") from, against and in respect of any Liability incurred by any of the Indemnified Parties arising out of, in connection with, or relating to, any Third Party Claim (as defined in the Occidental Contribution Agreement) (whether in contract, tort, statute or otherwise) arising out of, in connection with, or relating to the failure of the Indemnifying Party or any of its Affiliates to give notice to, obtain any consent of, or obtain any waiver by, or any breach by the Indemnifying Party or any of its Affiliates of any obligation owing to, any Person (as defined in the Occidental Contribution Agreement), in each case with respect to such Indemnifying Party's or its Affiliates' entering into the Related Agreements or performing their respective obligations thereunder; provided, however, that the following limitations shall apply to the indemnification obligations in Sections 3.3 and 3.4 above: (b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED BY LAW, NO INDEMNIFYING PARTY OR ANY OF ITS AFFILIATES OR THEIR RESPECTIVE AGENTS, EMPLOYEES, OR REPRESENTATIVES SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES IN CONNECTION WITH DIRECT CLAIMS BY AN INDEMNIFIED PARTY (I.E., A CLAIM BY AN INDEMNIFIED PARTY THAT DOES NOT SEEK REIMBURSEMENT FOR A THIRD PARTY CLAIM PAID OR PAYABLE BY THE INDEMNIFIED PARTY) WITH RESPECT TO THE INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT UNLESS ANY SUCH CLAIM ARISES OUT OF THE FRAUDULENT ACTIONS OF AN INDEMNIFYING PARTY OR ITS AFFILIATES. IN DETERMINING THE AMOUNT OF ANY LOSS, LIABILITY, OR EXPENSE FOR WHICH ANY INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION UNDER THIS AGREEMENT, THE GROSS AMOUNT THEREOF WILL BE REDUCED (BUT NOT BELOW ZERO) BY THE NET PRESENT VALUE OF ANY CORRELATIVE INSURANCE PROCEEDS ACTUALLY REALIZED BY THE INDEMNIFIED PARTY UNDER POLICIES TO THE EXTENT THAT THE FUTURE PREMIUM RATE WILL NOT BE INCREASED BY CLAIM EXPERIENCE RELATING TO SUCH LOSS, LIABILITY OR EXPENSE. (c) Indemnification pursuant to Sections 3.3 and 3.4 shall be subject to the indemnification provisions set forth in Section 6.3 of the Occidental Contribution Agreement, as if the Indemnified Parties and Indemnifying Party were the "Indemnified Parties" and the "Indemnifying Party" thereunder. 15 (d) The rights provided to each Indemnified Party pursuant to Sections 3.3 and 3.4 of this Agreement and Section 14 of the Partnership Agreement, as limited by and subject to the provisions of this Section 3 shall be such Indemnified Party's sole remedy for any matter arising out of, relating to, or in connection with, the matters described in Section 3.3 and 3.4 of this Agreement and Section 14 of the Partnership and shall be without duplication of any rights provided to such Indemnified Party under the Master Transaction Agreement or any of the Related Agreements. (e) EXTENT OF INDEMNIFICATION. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH HEREIN, TO THE FULLEST EXTENT PERMITTED BY LAW, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE INDEMNIFIABLE LOSS GIVING RISE TO ANY SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, GROSS, ACTIVE, PASSIVE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OR VIOLATION OF ANY LAW OF OR BY ANY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS STATEMENT CONSTITUTES A CONSPICUOUS LEGEND. No failure or delay by a Beneficiary or a Party in exercising any right or power under this Agreement, or any single or partial exercise of any such right or power, shall preclude any other or further exercise thereof or the exercise of any other right or power. Such single or partial exercise of any right or power shall be cumulative and not exclusive of any rights or remedies provided by law. In the event of a dispute between Parties regarding the exercise or enforcement of any of the rights of a Beneficiary under this Agreement or the failure by a Party to perform or observe any of the provisions of this Agreement, the Party that does not ultimately prevail in such dispute shall be liable, and hereby agrees, to reimburse, on demand, each other such Party for any and all costs and expenses, including the fees and expenses of legal counsel and of any other counsel, experts, consultants or agents, that such other Party may incur in connection therewith. The rights of a Parent against its Affiliated Obligors arising from any payment or performance by a Parent hereunder shall be subordinate in all respects to the rights of the Beneficiaries against such Affiliated Obligors, and such Parent shall not compete in any way with a Beneficiary in any winding-up or dissolution of such Affiliated Obligors unless and until all sums due and to become due from such Affiliated Obligors to the Beneficiaries have been paid in full. If any amount shall be paid to a Parent in violation of this Section, such amount shall be held in trust for the benefit of the Beneficiaries and shall forthwith be paid to the Beneficiaries to be credited and applied to any sums owed or to be owed by such Parent's Affiliated Obligors. Subject to the foregoing, upon payment of all sums due or to become due by Affiliated Obligors to the Beneficiaries, the Parent of such Affiliated Obligors shall be subrogated to the rights of the Beneficiary against such Affiliated Obligors, and the Beneficiaries agree to take at such Parent's expense such steps as such Parent may reasonably request to implement such subrogation. 16 (a) Each Parent agrees that it and its Affiliates shall be bound by the terms and conditions of Section 13.1 of the Partnership Agreement as if such Person was a "Partner" as defined in such agreement. (b) Lyondell, Millennium and OPC shall consult with each other on an ongoing basis with respect to disclosures regarding the Partnership and its business and affairs that each is required to make in reports filed from time to time with the Securities and Exchange Commission. (c) The letter agreement regarding confidentiality dated December 11, 1997 between Lyondell and OPC is hereby terminated. If any Parent or an Affiliate thereof desires to initiate or pursue any opportunity to undertake, engage in, acquire or invest in a Business Opportunity (as such term is defined in the Partnership Agreement), such Person shall offer such Business Opportunity to the Partnership under the terms and conditions set forth in Sections 9.3(c) and (d) of the Partnership Agreement as if such Person were the "Proposing Partner" (as defined in the Partnership Agreement) with respect thereto, and in such event the Partnership shall have the rights and obligations with respect thereto set forth in such Sections 9.3(c) and (d). From time to time, each Party agrees to execute and deliver such additional documents and provide such additional information and assistance as the Beneficiaries may reasonably require to carry out the terms of this Agreement. (a) Except as provided in this Agreement and except that a Parent may assign its rights or obligations under this Agreement to a third party in connection with a transfer of direct interests in the Partnership owned by its Partner Subs if such transfer is permitted and consummated in accordance with the Partnership Agreement, no Parent may assign or delegate any of its rights or obligations under this Agreement without the prior written consent of all the Beneficiaries, which consent shall be in the sole and absolute discretion of such Beneficiaries. Any purported assignment or delegation without such consent shall be void and ineffective. (b) Except as may be expressly provided herein, this Agreement shall be binding upon and inure to the benefit of the successors of the Beneficiaries. (c) Within six months after the date of this Agreement, Oxy CH and OCC shall be entitled to assign their respective rights and obligations under Section 1 to Occidental Chemical Holding Corporation, a California corporation and an indirect wholly owned subsidiary of OPC ("OCHC"), provided that OCHC executes an instrument wherein OCHC shall agree to be bound by the obligations of Oxy CH and OCC thereunder and under Section 4 in a form reasonably acceptable to the Partnership. Upon such execution, OCHC shall become the "Occidental Parent" for purposes of Section 1, and Oxy CH and OCC shall thereupon be released from all obligations under Section 1. This Agreement is made solely for the benefit of the Parties and, with respect to Sections 1 and 4 (excluding Sections 4.4 and 4.5), the Beneficiaries (as defined in Section 1.11), and no other Person shall have any right, claim or cause of action under or by virtue of this Agreement. 17 All notices, requests, demands and other communications (collectively, "notices") required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if and when (i) transmitted by telecopier facsimile with proof of confirmation from the transmitting machine or (ii) delivered by commercial courier or other hand delivery, as follows: If to OPC If to OCC, Oxy CH, the Occidental Partner Subs Occidental Petroleum Company Occidental Petroleum Corporation 10889 Wilshire Blvd. 10889 Wilshire Blvd. Los Angeles, CA 90024 Los Angeles, CA 90024 Attention: President Attention: President Telecopy Number: (310) 443-6977 Telecopy Number:(310) 443-6977 With a copy to With a copy to Occidental Petroleum Corporation Occidental Petroleum Corporation 10889 Wilshire Boulevard 10889 Wilshire Boulevard Los Angeles, California 90024 Los Angeles, California 90024 Attention: General Counsel Attention: General Counsel Telecopy Number: (310) 443-6333 Telecopy Number: (310) 443-6333 If to Lyondell If to the Lyondell Partner Subs Lyondell Petrochemical Company Lyondell Petrochemical Company 1221 McKinney Street 1221 McKinney Street Houston, Texas 77010 Houston, Texas 77010 Attention: Kerry A. Galvin Attention: Kerry A. Galvin Telecopy Number: (713) 309-4718 Telecopy Number: (713) 309-4718 If to Millennium If to the Millennium Partner Subs Millennium Chemicals Inc. Millennium Chemicals Inc. 99 Wood Avenue South 99 Wood Avenue South Iselin, New Jersey 08830 Iselin, New Jersey 08830 Attention: George H. Hempstead, III Attention: George H. Hempstead, III Telecopy Number: (908) 603-6857 Telecopy Number: (908) 603-6857 If to the Partnership Equistar Chemicals, LP 1221 McKinney Street Houston, Texas 77010 Attention: Gerald A. O'Brien Telecopy Number: (713) 309-4718
18 Telecopy Number: (713) 309-4718 or to such other address as such Party or Beneficiary shall have specified by notice to the other Parent. In the event that any provisions of this Agreement shall finally be determined to be unlawful, such provision shall, so long as the economic and legal substance of the transactions contemplated hereby is not affected in any materially adverse manner as to any Party, be deemed severed from this Agreement and every other provision of this Agreement shall remain in full force and effect. Except for Sections 3.1, 3.2 and 3.4 (which sections shall terminate only as provided therein), this Agreement shall terminate and be of no further force and effect as to a Parent (i) as and when provided in Section 2.1(d), (e) or (f) or (ii) if and when such Parent Transfers all of its Partner Sub Stock in a transaction permitted by Section 2.2; provided, however, that such termination shall not discharge (x) any accrued Obligations owed by a Parent as of the date of such termination or (y) any Obligations, whether arising before or after such termination, under such Parent's Asset Contribution Agreement (as such term is defined in the Partnership Agreement) or any Related Agreement executed pursuant to such Asset Contribution Agreement. In addition, the Guarantee by a Parent of Obligations of an Affiliated Obligor other than a Partner Sub shall terminate as and when the Parent ceases to be an Affiliate of such Affiliated Obligor, insofar as such Guarantee relates to Obligations arising thereafter. The obligations of OPC and the obligations of each of Lyondell and Millennium to OPC, in each case pursuant to Section 4.4(b), shall terminate and be of no further force and effect at such time as OPC is no longer required to make the disclosures referred to in Section 4.4(b) to the Securities and Exchange Commission. (a) In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in construction; (ii) no consideration shall be given to the fact or presumption that any Party had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactic variants mean "includes, but is not limited to" and corresponding syntactic variant expressions; (v) the plural shall be deemed to include the singular, and vice versa; (vi) each gender shall be deemed to include the other gender; and (vii) each exhibit, attachment and schedule to this Agreement is a part of this Agreement. (b) The term "Affiliate" shall mean any Person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified; provided, however, that, in the case of OPC and its Affiliates, for purposes of this Agreement, such term shall not include Canadian Occidental Petroleum Ltd. For purposes of this definition, the term "control" shall have the meaning set forth in 17 CFR 230.405 as in effect on the date hereof. 19 (c) The term "Person" shall mean any natural person or any corporation, partnership, limited liability company, joint venture, association, trust or other entity or organization. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which when taken together shall constitute one and the same original document. The laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement without giving effect to any conflicts of law principles. ANY JUDICIAL PROCEEDING BROUGHT AGAINST ANY PARTY TO THIS AGREEMENT OR ANY DISPUTE UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE BROUGHT IN THE FEDERAL OR STATE COURTS OF THE STATE OF DELAWARE, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES TO THIS AGREEMENT ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT (AS FINALLY ADJUDICATED) RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES TO THIS AGREEMENT SHALL APPOINT THE CORPORATION TRUST COMPANY, THE PRENTICE-HALL CORPORATION SYSTEM, INC. OR A SIMILAR ENTITY (THE "AGENT") AS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF PROCESS IN ANY PROCEEDING IN ANY SUCH COURT IN THE STATE OF DELAWARE. THE FOREGOING CONSENTS TO JURISDICTION AND APPOINTMENTS OF AGENT TO RECEIVE SERVICE OF PROCESS SHALL NOT CONSTITUTE GENERAL CONSENTS TO SERVICE OF PROCESS IN THE STATE OF DELAWARE FOR ANY PURPOSE EXCEPT AS PROVIDED ABOVE AND SHALL NOT BE DEEMED TO CONFER RIGHTS ON ANY PERSON OTHER THAN THE PARTIES HERETO. EACH PARENT HEREBY WAIVES ANY OBJECTION IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON-CONVENIENS. EACH PARTY HEREBY KNOWINGLY AND INTENTIONALLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. All disputes under this Agreement shall be resolved in accordance with the Dispute Resolution Procedures set forth in Appendix B. Each Parent shall cause its Affiliates (including any person controlling such Parent) to comply with all provisions of this Agreement that apply to Affiliates of such Parent, and each Parent shall be responsible for any failure of any such Affiliate to comply with any such provision. All waivers, modifications, amendments or alterations of this Agreement shall require the execution of a written instrument signed by each of the Parties. IN WITNESS WHEREOF, the Parties have executed and delivered this Amended and Restated Parent Agreement as of the date first above written. 20 OCCIDENTAL CHEMICAL CORPORATION By: ____________________________________________ Name: R.J. Schuh Title: Executive Vice President OXY CH CORPORATION By: ____________________________________________ Name: Keith C. McDole Title: Senior Vice President OCCIDENTAL PETROLEUM CORPORATION By: ____________________________________________ Name: S.P. Dominick, Jr. Title: Vice President and Controller [Signature Page to Amended and Restated Parent Agreement] LYONDELL PETROCHEMICAL COMPANY By: ____________________________________________ Name: Dan. F. Smith Title: President and Chief Executive Officer MILLENNIUM CHEMICALS INC. By: ____________________________________________ Name: George H. Hempstead, III Title: Senior Vice President 21 EQUISTAR CHEMICALS, LP By: ____________________________________________ Name: Eugene R. Allspach Title: President and Chief Operating Officer [Signature Page to Amended and Restated Parent Agreement] APPENDIX A TO PARENT AGREEMENT LIST OF RELATED AGREEMENTS 1. Old Partnership Agreement. 2. $345 million promissory note dated December 1, 1997, of Lyondell LP payable to the Partnership. 3. Asset Contribution Agreement dated as of December 1, 1997, between Lyondell, Lyondell LP and the Partnership. 4. Asset Contribution Agreement dated as of December 1, 1997, between Millennium Petrochemicals, Millennium LP and the Partnership. 5. Bill of Sale and Assignment dated December 1, 1997 from Lyondell to the Partnership with respect to property specified on attached schedule. 6. Assignment of Trademarks dated November 25, 1997 from Lyondell to the Partnership with respect to certain O&P Trademarks as listed on attached schedule. 7. Assignment of Patents dated November 25, 1997 from Lyondell to the Partnership with respect to certain O&P Patents as listed on attached schedule. 8. Assumption Agreement dated December 1, 1997 between Lyondell as Assignor and the Partnership as Assignee pursuant to the Asset Contribution Agreement with respect to the assumption by Assignee of certain liabilities. 9. Master Intellectual Property Agreement dated December 1, 1997 by and between Lyondell and the Partnership. 10. Assignment dated December 1, 1997 between Lyondell as "Assignor" and the Partnership as "Assignee" with respect to the contribution by Assignor of LCR Agreements. 22 11. Assignment dated December 1, 1997 between Lyondell and the Partnership, of Ground Lease (LMC) with respect to certain real property specified therein. 12. Assignment dated December 1, 1997 between Lyondell and the Partnership, of Operating Agreement, Natural Gas Sales and Methanol Supply with respect to Lyondell Methanol Company. 13. Administrative Services Agreement (as amended or otherwise modified from time to time) effective as of December 1, 1997 between the Partnership and Lyondell with respect to the provision of services as described in Appendix A attached. 14. Letter Agreement dated December 1, 1997 between Lyondell and the Partnership with respect to the net payment by the Partnership to Lyondell for certain Administrative Services as described in Attachment 1 thereto. 15. Assignment dated November 25, 1997, but effective December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Channelview, Texas Golf Courses). 16. Assignment dated November 25, 1997, but effective December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Alvin, Texas). 17. Assignment dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Plano, Texas). 18. Assignment dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Chicago, Illinois - CALPERS Lease). 19. Assignment of Sublease dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Chicago, Illinois - MATRIX Partners Sublease). 20. Assignment dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Philadelphia, Pennsylvania). 21. Assignment dated November 25, 1997, but effective December 1, 1997, from Lyondell to the Partnership, of leases specified therein (Victoria, Texas). 22. Sublease Agreement dated November 25, 1997, but effective December 1, 1997, by and between Lyondell and the Partnership with respect to Office Lease Agreement dated December 31, 1985 and amended by 19 Amendments as described on Exhibit A as attached thereto (Administrative Office Space, OHC). 23. General Warranty Deed dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership with respect to certain real property specified therein (Channelview, Texas). 23 24. General Warranty Deed dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership, with respect to certain real property specified therein (Mount Belvieu, Texas). 25. General Warranty Deed dated, November 25, 1997, but effective December 1, 1997, from Lyondell to the Partnership with respect to certain real property specified therein (Bayport, Texas). 26. General Warranty Deed dated November 25, 1997, but effective December 1, 1997, from Lyondell to the Partnership with respect to certain real property specified therein (Matagorda, Texas). 27. Conveyance and Assignment of Easements, Rights of Way, and Licenses dated November 25, 1997, but effective as of December 1, 1997, from Lyondell to the Partnership with respect to certain real property specified therein (Pipeline Right of Way). 28. Bill of Sale and Assignment dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to the property set forth on Schedule A attached. 29. Assignment of Trademarks dated November 21, 1997 between Millennium Petrochemicals as Assignor and the Partnership as Assignee with respect to the transfer of O&P Trademarks as set forth in the schedule attached. 30. Assignment of Patents dated November 21, 1997 between Millennium Petrochemicals as Assignor and the Partnership as Assignee with respect to the transfer of O&P Patents as set forth in the schedule attached. 31. Assumption Agreement effective as of December 1, 1997 between Millennium Petrochemicals as Assignor and the Partnership as Assignee pursuant to the Asset Contribution Agreement with respect to the assumption by the assignee of certain liabilities. 32. Master Intellectual Property Agreement dated December 1, 1997 by and between Millennium Petrochemicals and the Partnership. 33. Shared Services Agreement for Wastewater effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership. 34. Shared Services Agreement for the LaPorte Complex effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership with respect to the services as specified therein and on the attachments and appendix. 35. Shared Services Agreement for Water and Utility Instrument Air effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership with respect to the services as specified therein and on the attachments, exhibits and appendix. 24 36. Shared Services Agreement for the Northlake Office Complex effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership with respect to services as specified therein and on attachments and appendix. 37. Agreement for Interim Study at the LaPorte Complex effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership. 38. Fuel Stream Agreement effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership. 39. Electricity Service Agreement effective as of December 1, 1997 by and between Millennium Petrochemicals and the Partnership. 40. Sales Agreement (Vinyl Acetate Monomer), effective December 1, 1997 between Millennium Petrochemicals as "Seller" and the Partnership as "Buyer". 41. Sales Agreement (Ethylene), effective December 1, 1997 between the Partnership as "Seller" and Millennium Petrochemicals as "Buyer". 42. Sales Agreement (Purified Hydrogen), between the Partnership as "Seller" and Millennium Petrochemicals as "Buyer" effective December 1, 1997. 43. Sales Agreement (Natural Gas), effective December 1, 1997 between the Partnership as "Seller" and Millennium Petrochemicals as "Buyer". 44. Letter Agreement dated December 1, 1997 between Millennium Petrochemicals and the Partnership regarding interim distribution logistics support. 45. Letter Agreement dated December 1, 1997 between Millennium Petrochemicals and the Partnership with respect to the net payment for various shared services. 46. Assignment of Railcar Lease dated December 3, 1997 by and between Millennium Petrochemicals Inc. as "Assignor" and the Partnership as "Assignee" (The Sumitomo Bank Leasing and Finance, Inc. Lease). 47. Assignment of Leasehold dated November 25, 1997 by and between Millennium Petrochemicals and the Partnership with respect to certain real property specified therein (Tuscola, Illinois). 48. Assignment of Leasehold dated December 1, 1997 by and between Millennium Petrochemicals and the Partnership with respect to certain real property specified therein (Fairport Harbor, Ohio). 49. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of lease specified therein (Clinton, Iowa). 50. Quit Claim Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Clinton, Iowa). 25 51. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Credit Union Sublease (Clinton, Iowa). 52. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Appurtenant Easements (Clinton, Iowa). 53. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Dock Lease and Agreement (Clinton, Iowa). 54. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Sub-lease Option to Purchase Agreement (Clinton, Iowa). 55. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Cellular Telephone Sublease (Clinton, Iowa). 56. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Farm Leases (Clinton, Iowa). 57. Assignment dated December 1, 1997 between Millennium Petrochemicals and the Partnership of Eastern Iowa Propane Lease (Clinton, Iowa). 58. Lease Agreement dated December 1, 1997 between Millennium Petrochemicals and the Partnership with respect to certain real property specified therein (Lease for Cincinnati Research Laboratory). 59. Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain Real Property specified therein (Clinton, Iowa). 60. General Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (LaPorte, Texas). 61. Letter agreement dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to Millennium Petrochemicals agreement to provide the Partnership an option on approximately 20+ acres of land (LaPorte Expansion Land). 62. Warranty Deed dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Morris, Illinois). 63. General Warranty Deed dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Port Arthur, Texas). 64. General Warranty Deed dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Chocolate Bayou, Texas). 65. Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Tuscola, Illinois). 26 66. General Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Heath, Ohio) 67. General Warranty Deed dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Crockett, Texas) 68. Deed dated November 24, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Newark, New Jersey). 69. Grant Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Anaheim, California). 70. Limited Warranty Deed dated December 1, 1997 from the Partnership to Millennium Petrochemicals with respect to certain real property specified therein (the Northlake Drive 0.1553 Acre Parcel Cincinnati-Research Center-Northlake, Ohio). 71. General Warranty Deed (Conveyance between Adjoining Lot Owners) dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Cincinnati-Research Center-Northlake, Ohio). 72. General Warranty Deed (Conveyance between Adjoining Lot Owners) dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein, the Northlake Drive 0.0987 Acre Parcel (Cincinnati-Research Center-Northlake, Ohio). 73. General Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein, the East Kemper Road and Northlake Drive 25.0864 Acre Parcel (Cincinnati-Research Center-Northlake). 74. Declaration of Easements and Restrictive Covenants dated December 1, 1997 by Millennium Petrochemicals and the Partnership with respect to certain real property specified therein (Cincinnati-Research Center-Northlake, Ohio). 75. Assignment and Assumption dated December 1, 1997 by and between Millennium Petrochemicals and the Partnership, of Service Agreement (Cincinnati-Research Center-Northlake, Ohio). 76. Letter Agreement dated November 20, 1997 from Millennium Petrochemicals to the Partnership with respect to Fiber-Optic Cable System, Northlake Drive Property, Cincinnati, Ohio (Cincinnati-Research Center-Northlake, Ohio). 77. Parking Agreement dated December 1, 1997 between Millennium Petrochemicals and the Partnership with respect to additional parking at the Northlake Facility (Cincinnati-Research Center-Northlake, Ohio). 78. General Warranty Deed dated December 1, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Fairport Harbor, Ohio). 27 79. Assignment of Easements dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein (Chocolate Bayou, Texas). 80. Easement Agreement dated December 1, 1997 to Millennium Petrochemicals from the Partnership with respect to certain real property specified therein (LaPorte, Texas). 81. Easement Agreement dated December 1, 1997 to the Partnership from Millennium Petrochemicals with respect to certain real property specified therein (LaPorte, Texas). 82. Assignment (Mont Belvieu Pipeline Easements) dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein. 83. General Warranty (Mont Belvieu Pipeline Fee Parcels) dated November 25, 1997 from Millennium Petrochemicals to the Partnership with respect to certain real property specified therein. 84. Partnership Agreement. 85. Agreement and Plan of Merger and Asset Contribution dated as of May 15, 1998, among Occidental GP, Occidental LP1, Occidental LP2, OPI and the Partnership. 86. Sales Agreement (Ethylene) dated as of May 15, 1998 by and between the Partnership and OCC with respect to the sale of Ethylene by the Partnership to OCC. 87. Operating Agreement dated as of May 15, 1998 by and between the Partnership and OCC with respect to OCC providing certain services to the Partnership after May 15, 1998. 88. Toll Processing Agreement dated May 15, 1998 between the Partnership and OCC with respect to Ashtabula EO/EG tolling. 89. Amended and Restated Indemnity Agreement among OCC, Occidental GP, Occidental LP1, Occidental LP2, Lyondell GP, Lyondell LP, Millennium GP, Millennium LP and Millennium America Inc. 90. Letter Agreement dated May 15, 1998 between OCC and the Partnership with respect to OCC providing a guarantee for the collection of $419,700,000 of Partnership debt. 91. Letter Agreement dated May 15, 1998 between OCC and the Partnership with respect to the prepayment or restructuring of the Occidental Assumed Debt. 92. Promissory Note for $419,700,000 dated May 15, 1998 of the Partnership payable to Occidental LP2. 93. Promissory Note for $75 million dated May 15, 1998 of the Partnership payable to Millennium LP. 28 94. Bill of Sale and Assignment dated May 15, 1998 from OCC to Occidental LP1 with respect to property specified on attached schedule. 95. Bill of Sale and Assignment dated May 15, 1998 from Occidental LP1 to the Partnership with respect to property specified on attached schedule. 96. Patent Assignment dated May 15, 1998 from OCC to the Partnership with respect to patents as listed on attached schedule. 97. Assumption Agreement dated May 15, 1998 between Occidental LP1, Occidental LP2 and Occidental GP, as Assignors, and the Partnership, as Assignee, pursuant to the Agreement and Plan of Merger and Asset Contribution with respect to the assumption by Assignee of certain liabilities. 98. Master Intellectual Property Agreement dated May 15, 1998 by and between the Partnership and OCC. 99. Assignment of Partnership Interests dated May 15, 1998 from Occidental GP to the Partnership with respect to interests in PD Glycol, a Texas limited partnership. 100. Assignment of Leases dated May 15, 1998 from OCC to the Occidental LP1 with respect to leases specified therein. 101. Assignment of Lease and Act of Exchange dated May 15, 1998 from Occidental LP1 to the Partnership with respect to the lease specified therein, together with such lease. 102. Assignment of Leases dated May 15, 1998 from Occidental LP1 to the Partnership with respect to leases specified therein. 103. Assumption Agreement dated May 15, 1998 between OPI as Assignor and the Partnership as Assignee with respect to Lease Intended for Security dated December 18, 1991 ($205 million). 104. Termination and Release of Guaranty dated May 15, 1998 between Lyondell and OCC with respect to the termination of Lyondell guaranty of certain Partnership railcar leases. 105. Sublease dated May 15, 1998 from OCC to the Partnership with respect to 1990 railcar lease. 106. Sublease dated May 15, 1998 from OPI to the Partnership with respect to 1995 railcar lease. 107. Tax Indemnity Agreement dated May 15, 1998 between OCC and the Partnership with respect to Sublease of 1990 railcar lease. 108. Tax Indemnity Agreement dated May 15, 1998 between OPI and the Partnership with respect to Sublease of 1998 railcar lease. 29 109. Master Arbitration Amendment to Related Agreements dated May 15, 1998 between the Partnership, Lyondell and Millennium. 110. First Amendment to Lyondell Asset Contribution Agreement dated May 15, 1998 between the Partnership, Lyondell and Lyondell LP. 111. First Amendment to Millennium Asset Contribution Agreement dated May 15, 1998 between the Partnership, Millennium Petrochemicals and Millennium LP. 112. Transition Services Agreement between the Partnership and OCC to be entered into pursuant to the Operating Agreement with respect to OCC providing certain services to the Partnership. 113. Pipeline Acquisition Agreement dated as of May 15, 1998 between OCC and the Partnership with respect to the Cyclohexane pipeline. 114. Trademark License Agreement dated as of May 15, 1998 among OCC, Occidental and the Partnership with respect to the trademarks as set forth on the schedule attached. 115. Assignment of Excluded Assets dated May 14, 1998 between OPI as Assignor and OCC as Assignee with respect to certain assets described therein. 116. Assumption Agreement dated May 14, 1998 between OPI as Assignor and OCC as Assignee with respect to certain liabilities described therein. 117. Termination Agreement and General Release dated May 15, 1998 among Occidental, OPI, Occidental LP2 and Occidental Holding Company with respect to certain intercompany debts. 118. Assumption Agreement dated May 15, 1998 between OPI as Assignor and Occidental LP2 as Assignee with respect to certain intercompany debts. 119. Assignment and Assumption Agreement dated May 15, 1998 between OCC as Assignor and the Partnership as Assignee with respect to Lease intended for security dated March 28, 1994 by and between OCC and Pitney Bowes Credit Corporation. 120. Letter from Lyondell to OCC and the Partnership regarding PVC technology. 121. Agreement regarding provision by the Partnership of certain support facilities associated with the Lake Charles propylene fractionation unit to be entered into pursuant to the Operating Agreement. APPENDIX B TO PARENT AGREEMENT DISPUTE RESOLUTION PROCEDURES 30 (1) (Binding and Exclusive Means. The dispute resolution provisions set forth in this Appendix B shall be the binding and exclusive means to resolve all disputes arising under this Agreement (each a "Dispute"). (2) Standards and Criteria. In resolving any Dispute, the standards and criteria for resolving such dispute shall, unless the Parties involved in the Dispute in their discretion jointly stipulate otherwise, be as set forth in Appendix 1 to this Appendix B. (3) ADR and Binding Arbitration Procedures. If a Dispute arises, the following procedures shall be implemented (with references to "Parties" meaning the Parties involved in the Dispute): (a) Any Party may at any time invoke the dispute resolution procedures set forth in this Appendix B as to any Dispute by providing written notice of such action to the other Parties, and all Parties within five Business Days after such notice shall schedule a meeting to be held in Houston, Texas between the Parties. The meeting shall occur within 10 Business Days after notice of the meeting is delivered to the other Parties. The meeting shall be attended by representatives of each Party having decision-making authority regarding the Dispute as well as the dispute resolution process and who shall attempt in a commercially reasonable manner to negotiate a resolution of the Dispute. (b) The representatives of the Parties shall cooperate in a commercially reasonable manner and shall explore whether techniques such as mediation, minitrials, mock trials or other techniques of alternative dispute resolution might be useful. In the event that a technique of alternative dispute resolution is so agreed upon, a specific timetable and completion date for its implementation shall also be agreed upon. The representatives will continue to meet and discuss settlement until the date (the "Interim Decision Date") that is the earliest to occur of the following events: (i) an agreement shall be reached by the Parties resolving the Dispute; (ii) one of the Parties shall determine and notify the other Parties in writing that no agreement resolving the Dispute is likely to be reached; (iii) if a technique of alternative dispute resolution is agreed upon, the completion date therefor shall occur without the Parties having resolved the Dispute; or (iv) if another technique of alternative dispute resolution is not agreed upon, two full meeting days (or such other time period as may be agreed upon) shall expire without the Parties having resolved the Dispute. (c) If, as of the Interim Decision Date, the Parties have not succeeded in negotiating a resolution of the dispute pursuant to subsection (b), the Parties shall proceed under subsections (d), (e) and (f). (d) After satisfying the requirements above, such Dispute shall be submitted to mandatory and binding arbitration at the election of any Party involved in the Dispute (the "Disputing Party"). The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Appendix B. The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect on the date the notice of arbitration is served, other than as specifically modified herein. In the absence of an agreement to the contrary, the arbitration shall be held in Houston, Texas. The Arbitrator (as defined below) will allow reasonable discovery in the forms permitted by the 31 Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. During the pendency of the Dispute, each Party shall make available to the Arbitrator and the other Parties all books, records and other information within its control requested by the other Parties or the Arbitrator subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by law. Recognizing the express desire of the Parties for an expeditious means of dispute resolution, the Arbitrator may limit the scope of discovery between the Parties as may be reasonable under the circumstances. In deciding the substance of the Parties' claims, the laws of the State of Delaware shall govern the construction, interpretation and effect of this Agreement (including this Appendix B) without giving effect to any conflict of law principles. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each Party involved in the Dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by the Parties, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration proceeding, and the Arbitrator shall have the right and authority to issue monetary sanctions against any of the Parties if, upon a showing of good cause, that Party is unreasonably delaying the proceeding. To the fullest extent permitted by law, the arbitration proceedings and award shall be maintained in confidence by the Arbitrator and the Parties. (e) The Disputing Party shall notify the American Arbitration Association ("AAA") and the other Parties in writing describing in reasonable detail the nature of the Dispute (the "Dispute Notice"). The arbitrator (the "Arbitrator") shall be selected within 15 days of the date of the Dispute Notice by all of the Parties from the members of a panel of arbitrators of the AAA or, if the AAA fails or refuses to provide a list of potential arbitrators, of the Center for Public Resources and shall be experienced in commercial arbitration. In the event that the Parties are unable to agree on the selection of the Arbitrator, the AAA shall select the Arbitrator, using the criteria set forth in this Appendix B, within 30 days of the date of the Dispute Notice. In the event that the Arbitrator is unable to serve, his or her replacement will be selected in the same manner as the Arbitrator to be replaced. The Arbitrator shall be neutral. The Arbitrator shall have the authority to assess the costs and expenses of the arbitration proceeding (including the arbitrators', and attorneys' fees and expenses) against any or all Parties. (f) The Arbitrator shall decide all Disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitrator shall have the authority to issue injunctive relief; however, the Arbitrator shall not have any power or authority to (i) award consequential, incidental, indirect or punitive damages or (ii) amend this Agreement. The Arbitrator shall render the arbitration award, in writing, within 20 days following the completion of the arbitration hearing, and shall set forth the reasons for the award. In the event that the Arbitrator awards monetary damages in favor of any Party, the Arbitrator must certify in the award that no indirect, consequential, incidental, indirect or punitive damages are included in such award. If the Arbitrator's decision results in a monetary award, the interest to be granted on such award, if any, and the rate of such interest shall be determined by the Arbitrator in his or her discretion. The arbitration award shall be final and binding on the Parties, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act. 32 (4) Continuation of Business. Notwithstanding the existence of any Dispute or the pendency of any procedures pursuant to this Appendix B, the Parties agree and undertake that all payments not in dispute shall continue to be made and all obligations not in dispute shall continue to be performed. Appendix 1 (a) (First priority shall be given to maximizing the consistency of the resolution of the Dispute with the satisfaction of all express obligations of the Parties and their Affiliates as set forth in the Agreement. (b) Second priority shall be given to resolution of the Dispute in a manner which best achieves the objectives of the business activities and arrangements under the Agreement and permits the Parties to realize the benefits intended to be afforded thereby. (c) Third priority shall be given to such other matters, if any, as the Parties or the Arbitrator determine to be appropriate under the circumstances. 33 EX-11 12 EXHIBIT 11.1 EXHIBIT 11.1 MILLENNIUM CHEMICALS INC. COMPUTATION OF PER SHARE EARNINGS
WEIGHTED AVERAGE EARNINGS SHARES # OF PER OUTSTANDING SHARES SHARE ----------- ---------- --------------- BASIC Shares of Common Stock outstanding at December 31, 1996.......... 74,412,283 74,412,283 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 33,000,000 --------------- Weighted average shares outstanding......................... 74,412,283 Basic earnings per share.................................... $ 0.44 Net loss.................................................... $(2,701,000,000) --------------- Weighted average shares outstanding......................... 74,412,283 Basic loss per share........................................ $ (36.30) Shares of Common Stock outstanding at December 31, 1996.......... 74,412,283 74,412,283 August, 1997................................................ 56,006 23,335 October, 1997............................................... 4,092 1,023 December, 1997.............................................. 627,267 47,947 ----------- ---------- Shares of Common Stock outstanding at December 31, 1997.......... 75,099,648 74,484,588 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 188,000,000 --------------- --------------- Weighted average shares outstanding......................... 74,484,588 Basic earnings per share.................................... $ 2.52 Net income.................................................. $ 185,000,000 --------------- Weighted average shares outstanding......................... 74,484,588 Basic earnings per share.................................... $ 2.48 Shares of Common Stock outstanding at December 31, 1997.......... 75,099,648 75,099,648 April, 1998................................................. 5,600 4,200 July, 1998.................................................. 36,000 18,000 October, 1998............................................... 11,444 2,861 December, 1998.............................................. 18,000 1,500 ----------- ---------- Shares of Common Stock oustanding at December 31, 1998........... 75,170,692 75,126,209 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 163,000,000 --------------- Weighted average shares outstanding......................... 75,126,209 Basic earnings per share.................................... $ 2.17 Net income.................................................. $ 164,000,000 --------------- Weighted average shares outstanding......................... 75,126,209 Basic earnings per share.................................... $ 2.18
(table continued from previous page)
WEIGHTED AVERAGE EARNINGS SHARES # OF PER OUTSTANDING SHARES SHARE ----------- ---------- --------------- DILUTED Shares of Common Stock outstanding at December 31, 1996.......... 74,412,283 74,412,283 ----------- ---------- Options..................................................... 523,000 -- Performance-based restricted stock.......................... 2,184,242 -- Time-vested restricted stock................................ 728,080 -- ----------- Shares of Common Stock and Common Stock equivalents outstanding at December 31, 1996.......................... 77,847,605 74,412,283 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 33,000,000 --------------- Weighted average shares outstanding......................... 74,412,283 Diluted earnings per share.................................. $ 0.44 Net loss.................................................... $(2,701,000,000) --------------- Weighted average shares outstanding......................... 74,412,283 Diluted earnings per share.................................. $ (36.30) Shares of Common Stock outstanding at December 31, 1996.......... 74,412,283 74,412,283 August, 1997................................................ 56,006 23,335 October, 1997............................................... 4,092 1,023 December, 1997.............................................. 627,267 47,947 Options..................................................... 404,000 31,846 Time-vested restricted stock................................ 544,323 -- Performance-based restricted stock.......................... 1,632,971 130,000 ----------- ---------- Shares of Common Stock and Common Stock equivalents outstanding at December 31, 1997........................................... 77,680,942 74,646,434 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 188,000,000 --------------- Weighted average shares outstanding......................... 74,646,434 Diluted earnings per share.................................. $ 2.52 Net income.................................................. $ 185,000,000 --------------- Weighted average shares outstanding......................... 74,646,434 Diluted earnings per share.................................. $ 2.48 Shares of Common Stock outstanding at December 31, 1997.......... 75,099,648 75,099,648 April, 1998................................................. 5,600 4,200 July, 1998.................................................. 36,000 18,000 October, 1998............................................... 11,444 2,861 December, 1998.............................................. 18,000 1,500 Options..................................................... 505,000 119,939 Time-vested restricted stock................................ 614,327 357,813 Performance-based restricted stock.......................... 1,842,982 92,687 ----------- ---------- Shares of Common Stock and Common Stock equivalents at December 31, 1998....................................................... 78,133,001 75,696,648 ----------- ---------- ----------- ---------- Income from continuing operations........................... $ 163,000,000 --------------- Weighted average shares outstanding......................... 75,696,648 Diluted earnings per share.................................. $ 2.15 Net income.................................................. $ 164,000,000 --------------- Weighted average shares outstanding......................... 75,696,648 Diluted earnings per share.................................. $ 2.17
EX-13 13 EXHIBIT 13 "Exerpts from 1998 Annual Report to Shareholders" MILLENNIUM CHEMICALS INC. --------------- INDEX TO THE FINANCIAL REVIEW 18 Selected and Quarterly Financial Data 19 Segment Information 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Report of Independent Accountants 30 Consolidated Balance Sheets 31 Consolidated Statements of Operations 32 Consolidated Statements of Cash Flows 33 Consolidated Statements of Changes in Shareholders' Equity 34 Notes to Consolidated Financial Statements DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in this annual report to shareholders, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ("Cautionary Statements") include: the balance between industry production capacity and operating rates, on the one hand, and demand for the products of Millennium Chemicals Inc. (the "Company") and Equistar Chemicals, LP ("Equistar"), including titanium dioxide, ethylene and polyethylene, on the other hand; the economic trends in the United States and other countries which serve as the Company's and Equistar's marketplace; customer inventory levels; competitive pricing pressures; the cost and availability of the Company's feedstocks and other raw materials, including natural gas and ethylene; operating interruptions (including leaks, explosions, fires, mechanical failures, unscheduled downtime, transportation interruptions, spills, releases and other environmental risks); competitive technology positions; failure to achieve the Company's or Equistar's productivity improvement and cost-reduction targets or to complete construction projects on schedule; difficulties in addressing Year 2000 issues on a timely basis by the Company, Equistar, their suppliers or their customers; and other unforeseen circumstances. Some of these Cautionary Statements are discussed in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such Cautionary Statements. 17 MILLENNIUM CHEMICALS INC. --------------- SELECTED AND QUARTERLY FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
============================================================================================================================ SELECTED FINANCIAL DATA Three Months Fiscal Year Ended Ended Year Ended December 31 December 31 September 30 -------------------------------------------- ----------- ------------ 1998(1) 1997(2) 1996 1995 1994 1994 - ---------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Net sales $1,597 $3,048 $3,040 $3,156 $ 723 $2,610 Operating income 205 449 283(3) 787 177 268 Income from continuing operations 163 188 83(3) 296 68 34 Basic earnings per share from continuing operations 2.17 2.52 0.44 -- -- -- Net income (loss) 164 185 (2,701)(3)(4) 349 96 94 Dividends declared per share plus United Kingdom Advance Corporation Tax 0.60 0.60 -- -- -- -- BALANCE SHEET DATA (AT PERIOD END) Total assets(5) $4,100 $4,326 $5,601 $9,678 $9,603 $9,268 Total liabilities 2,507 2,862 4,283 4,877 4,745 4,630 Minority interest 15 -- -- -- -- -- Shareholders' equity(5) 1,578 1,464 1,318 4,801 4,858 4,638 OTHER DATA (WITH RESPECT TO CONTINUING OPERATIONS) Depreciation and amortization $ 102 $ 203 $ 201 $ 207 $ 50 $ 213 Capital expenditures 215 152 285 247 23 89
(1) Includes six months of earnings of the Brazilian TiO2 business acquired on July 1, 1998, and twelve months of earnings of the French TiO2 business acquired on December 31, 1997. (2) Includes 11 months of polyethylene, alcohol and related products businesses which were contributed to Equistar on December 1, 1997. Since December 1, 1997, the equity method is used to account for the Company's partnership interest. (3) Includes the effects of non recurring charges of $75 ($48 after tax) to reduce the carrying value of certain facilities employed in the sulfate process manufacturing of TiO2 and to provide for the costs associated with the closure of certain of these facilities, as described in Note 5 to the Consolidated Financial Statements of the Company. (4) Includes the effects of a non cash after tax charge of $3,206 relating to one of the Discontinued Businesses (as defined in Note 5 to the Consolidated Financial Statements of the Company) as a result of the Company's adoption of the long lived asset carrying value methodology prescribed by SFAS 121, as described in Note 5 to the Consolidated Financial Statements of the Company. The Discontinued Businesses were sold to Hanson on October 6, 1996. (5) Includes net assets of the Discontinued Businesses: $3,772 at December 31, 1995; $3,757 at December 31, 1994; and, $3,757 at September 30, 1994.
============================================================================================================+ QUARTERLY FINANCIAL DATA 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. - ------------------------------------------------------------------------------------------------------------- 1998 Net sales $ 399 $ 408 $ 408 $ 382 Operating income 58 66 58 23 Net income from continuing operations 46 46 32 39 Net income 50 43 32 39 Basic earnings per share from continuing operations $0.61 $0.61 $0.43 $0.52 Basic earnings per share $0.67 $0.57 $0.43 $0.52 Diluted earnings per share from continuing operations $0.61 $0.62 $0.42 $0.52 Diluted earnings per share $0.66 $0.57 $0.42 $0.52 1997 Net sales $ 794 $ 813 $ 816 $ 625 Operating income 66 132 157 94 Net income from continuing operations 17 85 70 16 Net income 20 82 67 16 Basic earnings per share from continuing operations $0.23 $1.14 $0.94 $0.21 Basic earnings per share $0.27 $1.10 $0.90 $0.21 Diluted earnings per share from continuing operations $0.23 $1.14 $0.94 $0.21 Diluted earnings per share $0.27 $1.10 $0.90 $0.21
18 MILLENNIUM CHEMICALS INC. --------------- SEGMENT INFORMATION (DOLLARS IN MILLIONS)
================================================================================================== 1998 1997 1996 - -------------------------------------------------------------------------------------------------- NET SALES Titanium dioxide and related products $1,203 $ 843 $ 868 Acetyls 253 271 240 Specialty chemicals 141 148 127 Polyethylene, alcohol and related products(1) -- 1,786 1,805 ------ ------ ------ Total $1,597 $3,048 $3,040 ====== ====== ====== OPERATING INCOME Titanium dioxide and related products(2) $ 136 $ 60 $ 7 Acetyls 26 39 12 Specialty chemicals 43 42 36 Polyethylene, alcohol and related products(1) -- 308 228 ------ ------ ------ Total $ 205 $ 449 $ 283 ====== ====== ====== DEPRECIATION AND AMORTIZATION Titanium dioxide and related products $ 72 $ 44 $ 46 Acetyls 25 28 24 Specialty chemicals 5 6 4 Polyethylene, alcohol and related products(1) -- 125 127 ------ ------ ------ Total $ 102 $ 203 $ 201 ====== ====== ====== CAPITAL EXPENDITURES Titanium dioxide and related products $ 154 $ 77 $ 81 Acetyls 31 24 65 Specialty chemicals 27 10 12 Polyethylene, alcohol and related products(1) -- 41 127 Corporate 3 -- -- ------ ------ ------ Total $ 215 $ 152 $ 285 ====== ====== ====== IDENTIFIABLE ASSETS Titanium dioxide and related products $1,459 $1,093 Acetyls 792 824 Specialty chemicals 133 108 Corporate(3) 1,716 2,301 ------ ------ Total $4,100 $4,326 ====== ======
(1) The polyethylene, alcohol and related products businesses were contributed to Equistar on December 1, 1997. The Company's partnership interest in Equistar is accounted for using the equity method; accordingly, the Company's underlying interest in the operations of Equistar have been excluded in the segment disclosures above since December 1, 1997. (2) 1996 includes non-recurring charges of $75 ($48 after tax) to reduce the carrying value of certain facilities employed in the sulfate-process manufacturing of TiO2 and to provide for the costs associated with the closure of certain of these facilities, as described in Note 5 to the Consolidated Financial Statements of the Company. (3) Corporate assets consists primarily of cash and cash equivalents, equity investments and other assets. 19 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Millennium Chemicals Inc.'s (the "Company") principal operations are grouped into four business segments: titanium dioxide and related products; acetyls; specialty chemicals; and polyethylene, alcohol and related products. The Company's businesses comprising the polyethylene, alcohol and related products segment were contributed to Equistar Chemicals, LP ("Equistar"), a joint venture partnership formed by the Company and Lyondell Chemical Company ("Lyondell") on December 1, 1997, to own and operate the olefin and polymer businesses of the partners. Results of these businesses prior to the formation of Equistar are consolidated. On May 15, 1998, the Company's 43% interest in Equistar was reduced to 29.5% with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental Petroleum Corporation's ("Occidental") chemical subsidiary. The results of Equistar are accounted for using the equity method. See Note 2 to the Consolidated Financial Statements. The following information should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. In connection with the forward-looking statements that appear in the following information, the Cautionary Statements referred to in "Disclosure Concerning Forward-Looking Statements" should be reviewed carefully. HISTORICAL CYCLICALITY OF THE COMPANY'S OPERATIONS The markets for ethylene and polyethylene, in which the Company participates through its interest in Equistar, are highly cyclical, resulting in volatile profits over the business cycle. The global markets for titanium dioxide ("TiO2") and acetyls are also cyclical, although to a lesser degree. In contrast, the Company believes that, over a business cycle, the markets for specialty chemicals are generally more stable in terms of industry demand, selling prices and operating margins. Demand for ethylene and its derivatives has fluctuated from year to year. However, over the last ten years, demand for ethylene and its primary derivative, polyethylene, has increased an average of approximately 4% per year. The industry is particularly sensitive to capacity additions, and producers have historically experienced alternating periods of inadequate ethylene and/or polyethylene capacity, resulting in increased selling prices and operating margins, followed by periods of large capacity additions, resulting in declining capacity utilization rates, selling prices and operating margins. The cyclicality of petrochemicals' profitability is further influenced by fluctuations in the price of feedstocks for ethylene, which generally follow price trends for crude oil. Producers of ethylene for merchant supply to unaffiliated customers typically experience greater variations in profitability when industry supply and demand relationships are at extremes, in comparison to more integrated competitors. Equistar currently consumes or sells approximately 75% of its ethylene production in its or its partners' downstream derivative facilities, which has the effect of reducing volatility. It is not possible to predict accurately the effect that future changes in feedstock costs, market conditions and other factors will have on this segment's profitability. TiO2 is considered an intermediate, performance chemical, the demand for which is influenced by changes in the gross domestic product of various regions of the world. The worldwide TiO2 industry has experienced cyclical demand, supply and pricing, although to a lesser degree than the petrochemical industry. Demand for TiO2, which has fluctuated from year to year and varies among the regional marketplaces in the world, has increased an average of approximately 3% per year over the last five years. The industry is also sensitive to changes in its customers' marketplaces, which are primarily the paint and coatings, plastics and paper industries. In recent history, consolidations and negative business conditions within certain of those industries have put pressure on TiO2 prices as companies compete to keep volumes placed. Recently, the TiO2 industry has experienced consolidation as producers aim to stay competitive through programs to reduce overall cost structures. TiO2 is manufactured using two different technologies, the environmentally preferred chloride process and the sulfate process, which carry different properties and cost structures. Global TiO2 Prices average price at year end in dollars per metric ton [GRAPH] 20 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TiO2 Capacity Profile In percent [GRAPH] South America Asia/Pacific Europe North America 1998 RESULTS COMPARED TO 1997 AND OUTLOOK FOR 1999 The Company had operating income of $205 million for the year ended December 31, 1998, a decrease of $244 million (54%) from 1997, which included $308 million related to the polyethylene, alcohol and related products businesses contributed to Equistar on December 1, 1997. Excluding these earnings, operating income from the Company's subsidiaries increased $64 million (45%) over 1997. Improved pricing trends and new acquisitions in TiO2 during 1998 resulted in this segment's profits being two and one-quarter times 1997 levels. Income from continuing operations for 1998 of $163 million decreased $25 million (13%), compared to 1997 income from continuing operations of $188 million. Income for 1998 includes $16 million (after tax) from insurance settlements and a $42 million tax benefit relating to previous years. Excluding these items and other non-recurring items, income from continuing operations would have decreased $87 million (46%) from 1997, primarily as a result of the impact of the downturn in the petrochemical cycle on Equistar's earnings. During 1998, the Company announced its intention to dispose of its remaining Suburban Propane partnership interests ("Suburban Propane"), and has entered into an agreement to sell this interest to Suburban Propane and its management for $75 million. It is expected that this transaction will be completed during the first half of 1999 and will result in a pre-tax gain of approximately $50 million ($30 million after tax). Accordingly, the Company's interest in Suburban Propane has been classified as a discontinued operation for all periods presented. TITANIUM DIOXIDE AND RELATED PRODUCTS: Improved profitability from increased selling prices, which began in mid-1997, continued during 1998 for the titanium dioxide and related products segment. Operating income for 1998 increased over two-and-one-quarter times to $136 million, compared to $60 million in 1997. Net sales for 1998 increased 43% to $1.203 billion, compared to $843 million for 1997. Higher average selling prices from worldwide price increases accounted for the majority of the improvement in operating income. Newly acquired operations also contributed to the increased sales and profits of this segment. Fourth-quarter 1998 profits were much lower than the third quarter as seasonal slowness in the United States and price competition in Europe limited volumes sold to these regions. In response to these conditions, production was scaled back. In addition, incremental costs were incurred related to the re-start of the Stallingborough, United Kingdom, facility after its September shutdown to complete an expansion. These events resulted in costs which were $35 million higher than the previous quarter. As the difficulties at Stallingborough are corrected and demand increases during the spring coatings, season, volumes and profitability should return to more normal levels. On December 31, 1997, the Company acquired Rhone-Poulenc Chimie S.A.'s French TiO2 operations, which included two plants providing 138 thousand metric tons per year of TiO2 capacity along with certain specialty and intermediate chemical businesses. On July 1, 1998, the Company acquired 99% of the voting shares and 72% of total shares of Titanio do Brazil S.A. ("Tibras") in Brazil, consisting of a plant having approximately 60 thousand metric tons per year of TiO2 capacity and a mineral sands mine with over two million metric tons of recoverable reserves. While strong demand existed in the North American and European markets for much of 1998, depressed markets in the Asia/Pacific region negatively impacted volumes to that area. Overall sales volumes were 25% higher than 1997, due to sales attributable to the acquired French and Brazilian operations. Excluding such operations, sales volumes were 4% lower than in 1997. Toward the end of the year, increased price competition in Europe limited volumes sold to these markets and seasonal slowness was evident in North America. Worldwide demand is expected to be flat during 1999, with slow recovery in the Asian markets. A full year of operations in Brazil should result in slight incremental sales volumes in 1999 over 1998. Pricing trends continued upward during 1998 as global price increases were implemented despite depressed markets in Asia. The average TiO2 selling price for 1998 was 11% higher than 1997, including the French operations which historically experienced lower pricing than the balance of this segment. Price gains by region were 8% in the Americas, 13% in Europe and 21 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31% in Asia/Pacific, where the previous price declines were the most dramatic. Continued price improvement is expected in 1999 as the price increases announced in September for North America take effect. Price competition increased in Europe toward the end of the year due to economic and seasonal slowness along with competitor actions to increase market share. Europe is expected to remain highly competitive in 1999. The impact of higher prices was partially offset by higher manufacturing costs, as discussed below, and higher functional costs, despite the progress made on cost-reduction initiatives put in place to reduce annual costs by $100 million by the end of 1999. The focus for 1999 is to continue these initiatives and to identify others to reduce the cost structure by an additional $100 million. The TiO2 plants operated at approximately 93% of capacity during 1998, compared to 97% during 1997. The Stallingborough, United Kingdom, plant was shutdown in the fall of 1998 to complete a project to expand capacity by 41 thousand metric tons per year. Some difficulties in its December start-up were experienced, lowering production and increasing costs in December. These difficulties are being vigorously examined and are expected to be resolved in early 1999. In addition, production at certain other facilities was slowed in December in response to the seasonal slowdown in demand and price competition in Europe, increasing costs for the fourth quarter. The outlook for 1999 includes higher average pricing compared to 1998 and relatively stable worldwide demand. Combined with progress in realizing the benefits of cost initiatives, profitability should continue to improve in this segment. ACETYLS: Depressed markets in Asia, combined with overcapacity for some products, resulted in decreased profits in acetyls during 1998. Net sales of acetyls decreased $18 million (7%) to $253 million, while operating income decreased $13 million (33%) to $26 million. These market conditions resulted in declining selling prices for all product offerings with prices down 12%, 14% and 34% for vinyl acetate monomer ("VAM"), acetic acid and methanol, respectively, compared to 1997. VAM pricing during 1998 was adversely affected by high export volumes at low prices and competitive pressures. However, sales volumes were 9% above 1997. Similarly, sales volumes for acetic acid increased 9% over 1997 despite weak Asian markets. A scheduled turnaround of the acetic acid plant was completed during the year with the shutdown extended in light of weak market conditions. Selling prices for methanol were adversely impacted by oversupply due to new competitor facilities and higher imports. While prices fell an average of 34% during 1998, sales volumes were 14% higher than in 1997. The impact of lower prices was partially offset by favorable costs as a result of the 1997 synthesis gas ("syngas") plant conversion to natural gas feedstock. Initial difficulties resulting from this conversion were corrected during 1997, with the full benefit of lower production costs being realized during 1998. On November 16, 1998, the Company entered into agreements with Linde AG relating to the Company's syngas unit in Texas, and a 15% interest in its methanol business whereby the Company would receive $122.5 million in cash. No gain or loss is expected to result from this transaction. Linde AG will operate the syngas facility, under a long-term lease with a purchase option, and will hold a 15% interest in the methanol operation. The VAM market is expected to tighten in 1999; however, conditions are expected to remain depressed for methanol and acetic acid where overcapacity exists. SPECIALTY CHEMICALS: Millennium Specialty Chemicals achieved another record year with operating income of $43 million, $1 million over 1997. Net sales were down $7 million (5%) to $141 million. The continued emphasis on high-margin products during 1998 was partially offset by lower overall volumes and higher crude sulfate turpentine ("CST") costs (the principal raw material for these chemicals). Although CST costs declined during the second half of 1998, the average price for 1998 of $1.97 per gallon was 15% higher than 1997. Effective January 1, 1999, CST prices decreased 25 cents per gallon and are expected to continue downward during the year. While average selling prices were up 8% over 1997 primarily due to favorable product mix, price competition during the second half of the VAM Volume in millions of pounds [GRAPH] 22 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fragrance Chemicals' Selling Price yearly average in dollars per kilogram [graph] year was experienced and is expected to continue into 1999. Business conditions were strong through the first half of the year but became competitive in the third quarter as weakness in the Asian markets, entry into the markets by new competitors and capacity additions made mid-year price negotiations difficult. The outlook for fragrance chemicals, while good, is expected to include some downward pressure on prices, which may dampen profitability growth. EQUISTAR: The Company's polyethylene, alcohol and related products businesses were contributed to Equistar on December 1, 1997. Equity earnings for 1998, which reflect the Company's share of Equistar's post-interest profits, were $40 million. Operating profits of $329 million during 1997 for the Company's contributed businesses compares to the Company's underlying share in Equistar's 1998 operating profits of $84 million, reflecting the dramatic downturn in the petrochemical cycle during the year. Ethylene and ethylene derivative markets started their decline toward the end of the first quarter of 1998 and reached trough conditions during the fourth quarter of 1998. Equistar reported an operating loss (before interest) of $10 million for the fourth quarter of 1998 compared to income of $68 million in the third quarter. While volume was relatively stable during the year, excess industry supply, announced new capacity coming on stream and low feedstock prices put severe pressure on selling prices. By year-end, ethylene prices had dropped 30% from January, 1998. Following this trend, polyethylene prices also dropped over 25% during 1998, as price competition resulted from overcapacity in those markets. Other ethylene derivative products have also experienced declines in prices during 1998, but not as dramatic as polyethylene. Feedstock costs were at relatively low levels during 1998, softening somewhat the impact of declining prices on margins. Prices for crude oil were down 11% in the month of December 1998 alone. Synergies achieved during 1998, in combining the operations contributed by each of Equistar's partners, helped to soften the negative impact of the depressed markets. Through the end of 1998, total synergies achieved since formation and before transition costs, exceeded the target of $100 million by $49 million. Additional synergies are expected through the year 2000, with a cumulative annualized target of $275 million. The severe market conditions currently being experienced by Equistar have resulted in recent losses and uncertain conditions for the future. Actions to reduce operating costs and sell non-core assets are being taken, and production was scaled back through lower operating rates and/or extended shutdowns to limit supply in the market. There are some signs of improvement as ethylene and polyethylene prices rose slightly in early 1999. New polyethylene industry capacity is expected to come on stream in the near-term keeping the timing of the cycle's recovery uncertain. 1997 RESULTS COMPARED TO 1996 The Company had operating income of $449 million for the year ended December 31, 1997, an increase of $166 million (59%) from 1996. These results include the results of operations for the polyethylene, alcohol and related products businesses through November 30, 1997, at which time the Company contributed these businesses to Equistar. During 1997, the Company incurred one-time reorganization and other costs related to the formation of Equistar of $47 million ($37 million after tax), which was principally offset by a one-time gain related to an insurance settlement of $46 million ($28 million after tax). During 1996, the Company recorded non-recurring charges of $75 million ($48 million after tax) to reduce the carrying value and provide for closure costs of certain TiO2 sulfate-process production facilities. Excluding these non-recurring items, the Company's operating income increased $92 million (26%) from the prior year. This increase is due primarily to higher average selling prices for polyethylene and acetyls, the prices of which had dropped dramatically during 1996, combined with lower feedstock costs during 1997. While the pricing trends for TiO2 improved during 1997, reversing the downward slide of prices which began in late 1995, the average selling price for the whole of 1997 was below that of 1996. Accordingly, 1997 operating income for this segment was below 1996 levels. 23 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income from continuing operations for 1997 was $188 million, compared to $33 million in 1996 due principally to improved pricing in the polyethylene and acetyl businesses discussed above. Income in 1997 and 1996 from continuing operations has been restated to reflect the Company's interest in Suburban Propane as a discontinued operation (see Note 2 to the Consolidated Financial Statements). Included in 1996 net income is a one-time after-tax gain from the sale by the Company of a 73.6% interest in Suburban Propane, of $86 million and post-tax earnings relative to Suburban Propane of $22 million. This compares to a net loss in 1997 from the continuing interest in Suburban Propane of $3 million. TITANIUM DIOXIDE AND RELATED PRODUCTS: Titanium dioxide and related products' operating income increased to $60 million from $7 million in 1996. In 1996, operating income included $75 million of non-recurring charges related to the closure of certain sulfate-process production facilities in response to deteriorating market conditions during that period. Excluding these charges, operating income for the year decreased 27% from 1996 as overall average selling prices were lower in 1997 compared to 1996. Net sales for 1997 decreased 3% to $843 million, compared to $868 million for 1996. Strong demand during the spring paint and coating season, the rationalization of some industry capacity and other market factors steadied the marketplace during the year. Overall sales volumes reached record levels in 1997, 4% higher than 1996, despite the loss of some volume from the reduction of sulfate-process production during the year. Pricing trends, which started downward in 1995 and continued to fall through 1996, reversed direction in March 1997 and rose through the balance of 1997. Global price increases were supported by strong demand and tight supply. While the average TiO2 selling price for 1997 was 7% lower than the prior year, the fourth quarter's average price was 5% higher than in the third quarter and 4% above the comparable quarter in 1996. The fourth quarter price gains by region were 3% in the Americas, 8% in Europe and nearly 10% in Asia/Pacific, where the previous price declines were the most dramatic. The lower average prices, combined with unfavorable foreign currency fluctuations in Europe and Australia, adversely impacted 1997 profitability. These effects were largely, but not fully, offset by lower production costs and higher production output as a result of cost-control programs put in place during 1997 to reduce annual production costs by $100 million from 1996 levels by 1999. The TiO2 plants produced at approximately 97% of capacity during 1997, compared to 88% during 1996. This added production not only reduced overall unit costs, but was necessary to meet growing demand during the year. By the end of 1997, inventories had dropped to record low levels. Progress was made in 1997 on a capital project to expand capacity at the Stallingborough, United Kingdom, plant by 41 thousand metric tons per year. On December 31, 1997, the Company acquired Rhone-Poulenc's TiO2 and related intermediate and specialty chemical operations in France, adding 138 thousand metric tons per year of TiO2 capacity. ACETYLS: Net sales of acetyls increased $31 million (13%) to $271 million in 1997, and operating income more than tripled to $39 million. The increase in operating income primarily related to increased selling prices in all three of its product lines over depressed 1996 levels. Average selling prices for 1997 were 10%, 3% and 28% higher than 1996 for VAM, acetic acid and methanol, respectively. In addition, the mechanical difficulties experienced in the 1996 conversion of the syngas unit to natural gas feedstock were resolved early in 1997, significantly improving production output and reducing production costs during the year. Demand for VAM in 1997 was steady, with volumes 1% above 1996. A mid-year price increase and new industry capacity coming on stream were absorbed by higher demand. Weakening Asian markets had a negative impact in the fourth quarter, with prices falling 4% from the previous quarter. Continued reduced demand from these markets during 1998 put further pressure on prices. Acetic acid sales volumes were 17% below prior year, primarily as a result of a planned customer outage during 1997. Prices, which increased earlier in the year, dropped 2% in the fourth quarter as formula-driven prices were impacted by falling feedstock costs. CST Cost yearly average price in dollars per gallon [GRAPH] 24 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ETHYLENE CONTRACT PRICES* yearly average in dollars per pound [GRAPH] *Source: Chemical Data Inc. Methanol sales volumes for 1997 were 57% higher than the prior year, with industry outages during the year keeping supplies tight. Prices, which were up 17% in the fourth quarter over 1996, and equal to the third quarter, fell sharply in early 1998. SPECIALTY CHEMICALS: Another record year was completed by Millennium Specialty Chemicals, with operating income of $42 million increasing $6 million (17%) from 1996. Net sales also increased $21 million (17%) to $148 million. A 6% increase in sales volume for fragrance chemicals was principally responsible for the increased profitability. The cost of CST increased an average of 25% over 1996 levels. These higher costs were offset by strong demand for these products together with tight supplies, keeping prices at premium levels. POLYETHYLENE, ALCOHOL AND RELATED PRODUCTS: Net sales of polyethylene, alcohol and related products (which include sales from these businesses for the eleven months ended November 30, 1997, at which time they were contributed to Equistar) were $1.786 billion for 1997, a decrease of $19 million (1%) from 1996 full-year results. Operating income increased $80 million (35%) to $308 million for 1997, principally as a result of a 15% increase in average selling prices during the 1997 period, coupled with lower feedstock costs, which declined from peak 1996 levels. During 1997, strong demand both domestically and in the export markets, coupled with tight supply, resulted in prices rising through the third quarter. Prices began to slowly weaken thereafter as expectations of new industry capacity coming on stream and normal seasonal slowdowns reduced demand and put pressure on prices. Prices during the fourth quarter were down 5% from the third quarter. Polyethylene unit volumes for the 1997 period were 2% higher than 1996. Feedstock costs were on average 31% lower than 1996's historical highs, as warmer-than-normal winter weather reduced demand for natural gas and natural gas liquids. These costs continued their decline late in 1997 as winter temperatures remained above normal and crude oil inventories began building due to decreased demand from Asian markets. By the end of 1997, and into 1998, feedstock costs continued below expectations, softening the impact of declining prices on margins late in the year. EFFECT OF INFLATION Because of the relatively low level of inflation experienced in both the United States and most other world markets in which the Company participates, inflation did not have a material impact on the Company's results of operations for 1998, 1997 or 1996. FOREIGN CURRENCY MATTERS The functional currency of each of the Company's non-United States operations (principally, the operations of Millennium Inorganic Chemicals in the United Kingdom, France, Brazil and Australia) is the local currency. The impact of currency translation in combining the results of operations and financial position of such operations has not been material to the consolidated financial position of the Company. The recent developments in Brazil, regarding the devaluation of its currency, the real, are not expected to have a material result on the Company's consolidated operations since approximately two-thirds of its Brazilian sales are referenced to a percentage of U.S. dollar prices. However, as a result of translating the functional currency financial statements into U.S. dollars, consolidated Shareholders' equity would decrease approximately $44 million as a result of this devaluation using the March 15, 1999 exchange rate. Future events, which may significantly increase or decrease the risk of future movement in the real, cannot be predicted. In addition, the Company generates revenue from export sales and revenue from operations conducted outside the United States that may be denominated in currencies other than the relevant functional currency. The Company hedges certain revenues and costs to minimize the impact of changes in the exchange rates of those currencies compared to the functional currencies. The Company does not use derivative financial instruments for trading or speculative purposes. Foreign currency losses aggregated $4 million, $4 million and $7 million in 1998, 1997 and 1996, respectively. EURO CONVERSION On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their 25 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS existing sovereign currencies ("legacy currencies") and the European Union's common currency, the euro. As of that date, the euro began trading on currency exchanges and may be used in business transactions. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and at least January 1, 2002 (but not later than July 1, 2002). The Company has begun to identify issues associated with the conversion to the euro, including, among others, the need to adapt computer and financial systems to accommodate euro-denominated transactions and the impact of one common currency on pricing. Since financial systems and processes currently accommodate multiple currencies, the Company does not anticipate system-conversion costs to be material. Since the euro conversion may affect cross-border competition by creating cross-border price transparency, the Company will be assessing its pricing strategies to ensure it remains competitive in a broader European market. LIQUIDITY AND CAPITAL RESOURCES Through September 30, 1996, the Company financed its operations and capital and other expenditures from a combination of cash generated from operations, external borrowings and loans, and invested capital provided by Hanson PLC ("Hanson") or its United States affiliates. Since its demerger from Hanson, the Company has met all of its cash requirements through internally generated funds and external borrowings. The Company's ability to generate cash from operations, and the servicing and repayment of debt, depends upon numerous business factors, some of which are outside the control of the Company, including industry cyclicality, changes in global economic conditions, price volatility of certain raw materials and other conditions. Net cash provided by operating activities was $150 million, $383 million and $372 million in 1998, 1997 and 1996, respectively. The decline in 1998 compared to 1997 reflects the contribution of the polyethylene, alcohol and related products businesses to Equistar on December 1, 1997. Since December 1, 1997, cash distributions received from Equistar are reflected in net cash provided by investing activities, as described below. In addition, increases in TiO2 and ore inventories during 1998 also contributed to the decrease in cash from operating activities. During 1997, cash generated from increased operating income was used primarily for working capital purposes, keeping 1997 levels on par with 1996. Net cash provided by investing activities was $252 million, $474 million and $458 million in 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996, significant transactions were completed which provided cash to the Company: the contribution of the polyethylene, alcohol and related products businesses to Equistar, the subsequent addition of Occidental as a partner in Equistar and the sale of a 73.6% interest in Suburban Propane. These transactions provided cash of $317 million, $768 million and $733 million for 1998, 1997 and 1996, respectively. The Company used funds for the acquisition of certain TiO2 and specialty and intermediate chemical operations in France for $169 million during 1997. Certain TiO2 operations and ore reserves in Brazil were acquired for $85 million during 1998. In addition, the Company spent $215 million in capital expenditures during 1998, compared to $152 million and $285 million in 1997 and 1996, respectively, as a result of substantially completing the TiO2 expansion in the United Kingdom at the end of 1998, among other projects. The Company expects to spend approximately $150 million in 1999 on capital expenditures. Major projects include building a technical research and development center in the United States for TiO2 and completing the implementation of SAP-based business solutions company-wide. In January 1999, the Company received $122.5 million as a result of a transaction involving the syngas and methanol operations of the Company's acetyls business. The Company expects an additional $75 million to be received during 1999 when the sale of its investment in Suburban Propane is completed. The Board of Directors has authorized the Company to spend up to $200 million to repurchase shares of the Company's outstanding common stock ("Common Stock") from time to CAPITAL EXPENDITURES vs. Depreciation $ Millions [GRAPH] Capital expenditure Depreciation 26 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS time, in the open market and in privately negotiated transactions, subject to market conditions. Repurchases will not be made under the program if the Company's net-debt-to-total-capitalization would exceed 55%. The repurchased shares will be available for general corporate purposes. At December 31, 1998, the Company had 77,873,586 shares of Common Stock outstanding. Through March 15, 1999, the Company had repurchased 2.1 million shares at a total cost of $39 million. Net cash used in financing activities was $365 million, $1.198 billion and $834 million in 1998, 1997 and 1996, respectively. The changes from year to year principally related to changes in the level of funding and other transactions between the Company and its affiliates prior to the demerger from Hanson and from external sources since October 1, 1996. At December 31, 1998, the Company had net debt of $979 million, over $1 billion less than at December 31, 1996. The reduction in net debt during 1998 was funded primarily from operations and distributions from Equistar. Net-debt-to-total-capitalization at December 31, 1998, was 50%, including the Company's proportional share of Equistar's debt. A subsidiary of the Company guarantees certain debt obligations of Equistar up to $750 million. At December 31, 1998, the Company had approximately $432 million of unused availability under short-term lines of credit and its credit facility. The Company believes that, during 1999, cash from operations, disposals, expected distributions from Equistar and availability under existing borrowing facilities will provide adequate support for all of the Company's cash needs for working capital, dividends, share repurchases and capital expenditures for its existing businesses. YEAR 2000 Each of the Company's three business units and its corporate headquarters has established a team to address Year 2000 compliance issues. Plans have been established by each team and actions taken toward the goal of Year 2000 compliance are reported, on a regular basis, to the Company's Operations Committee and its Board of Directors. The Company has focused its Year 2000 efforts on three major exposure areas: information systems (which includes application software and technical infrastructure), manufacturing process controls (non-IT systems) and supply chain (which includes the Company's significant suppliers and customers). The project phases common to all exposure areas are: 1) inventory/assessment; 2) remediation; 3) testing; 4) implementation; and 5) designing contingency plans. Key components of each of these phases follows: The inventory/assessment phase involves identifying significant hardware and software that exist throughout the Company. The Company then assigns a business risk to each system and prioritizes each system to determine optimal allocation of resources and funds for Year 2000 remediation work. The remediation phase involves determining whether individual systems will be repaired, replaced or retired and develops plans, schedules and costs for correction. This phase also includes an allocation of resources and execution of a remedial plan. During the testing phase, the performance, functionality and integration of converted or replaced systems are tested. Thereafter, the implementation phase provides for the implementation of fully tested systems into the production environment. Contingency planning safeguards the Company in the event that risk assessments and action plans do not result in Year 2000 compliance or the timetable in which actions are scheduled to be taken is not adequate to ensure compliance by the Year 2000. During 1997, as a part of a separate project to improve the quality of and access to business information, the Company began a company-wide implementation of the SAP R/3 enterprise system software from SAP America, Inc. ("SAP"). This system integrates information, including financial, human resources, customer and supply chain information, in a single database. The Company has received representations from SAP that the SAP R/3 system has been designed to be Year 2000 compliant. As part of the implementation, system interfaces with the SAP R/3 system have been minimized. Two of the Company's three business units completed their SAP implementations during 1998. The third business unit, Millennium Inorganic Chemicals, has recently completed its first regional implementation of SAP and is on schedule to complete the remaining implementations by the third quarter 1999. The Company has also completed modifications to existing business information systems for Millennium Inorganic Chemicals, as a contingency plan, in the unlikely event that the SAP implementation is not completed on schedule. The Company has outsourced the technical infrastructure for the SAP R/3 system to an internationally recognized provider of these services and has received assurances from the provider that all hardware and related system software are Year 2000 compliant. The Company has not deferred any of its currently planned projects as a result of Year 2000 efforts. The Company's three business units have completed the inventory phase of the Year 2000 project for non-IT systems. The assessment phase has been 100% completed at one business unit, 70% completed at the second unit and 75% completed at the third unit. The Company has targeted October 1999 as the completion date for all five phases of the Year 2000 project. The Company has engaged independent consultants at certain locations to monitor remediation programs for certain systems and to provide additional expertise. 27 MILLENNIUM CHEMICALS INC. --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has requested and received Year 2000 compliance information from most of its critical suppliers, customers and other third parties. The Company is in the process of evaluating and assessing these responses. The more significant third-party relationships include suppliers of ores, electrical power, natural gas and industrial gases and providers of transportation such as pipelines, rail and barges. Contingency plans will be developed for significant third-party risks identified by the Company as a result of its evaluations and assessments. Although the Company has planned these actions to address third-party issues and potential impacts to the Company, it often has little direct ability to influence the compliance actions of other parties. The Company estimates that it will spend $84 million related to the company-wide implementation of SAP, consisting of $48 million for consulting costs, $6 million for hardware, $6 million for software, $13 million for internal human resources, and $11 million for training and incidental costs. The Company estimates that it will spend an additional $15 million for required modifications and replacements of non-IT systems to become Year 2000 compliant, excluding internal human resources costs, which the Company does not measure separately. This estimate excludes Year 2000 costs that may be incurred by Equistar. The total amount spent on the Year 2000 project during 1998 was approximately $60 million, of which $54 million was capitalized and $6 million was expensed. The Company owns a 29.5% interest in Equistar. Equistar has formed a steering committee to oversee all Year 2000 remediation efforts. The chairman of the Equistar Year 2000 Steering Committee reports project progress regularly to the Equistar Governance Committee, which includes representatives from the Company's senior management. The Equistar Year 2000 Steering Committee is in the process of completing an assessment of the state of readiness of the information technology and non-IT systems of Equistar. These assessments cover manufacturing systems, including laboratory information systems and field instrumentation, and significant third-party vendor and supplier systems, including employee compensation and benefit plan maintenance systems. The Steering Committee is also in the process of assessing the readiness of significant customers and suppliers. The inventory, assessment and remediation phases for Equistar are nearly complete, with the majority of the testing and final implementation to take place in 1999. In addition, Equistar is in the process of replacing the business information systems for the operations contributed by Millennium and Occidental with SAP-based systems. In November 1998, Equistar completed a system-wide implementation of SAP for its polymer business and a portion of its petrochemical business. Conversion of its remaining businesses is expected to be completed in the first half of 1999. The operations of Millennium Petrochemicals are integrally related to those of Equistar's La Porte, Texas, facility from which materials and utilities are sourced. As a result, any Year 2000-related interruption in Equistar's operations at this location could severely impact Millennium Petrochemicals' ability to manufacture and ship products to customers. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. In particular, if suppliers fail to provide the Company with raw materials necessary to manufacture its products, sufficient electrical power and other utilities to sustain its manufacturing processes, or adequate, reliable means of transporting its products to its customers, then any such failure could result in the temporary inability to manufacture and/or ship products to customers. This risk may be mitigated to some extent at Millennium Inorganic Chemicals, where manufacturing capacity is distributed among seven manufacturing locations. Due to the uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers, the Company is unable to determine at this time whether the consequences of Year 2000 failures, if any, would have a material impact on the Company's results of operations and/or financial condition. The costs of the Company's Year 2000 project and the dates on which the Company believes it will complete such efforts are based on management's current best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources and the continued progression toward the implementation of SAP at various facilities. There can be no assurance that these estimates will prove to be accurate and, therefore, actual results could differ materially from those anticipated. Specific factors that could cause material differences with actual results include, but are not limited to, the results of testing and the timeliness and effectiveness of remediation efforts of third parties. Formal contingency plans for certain Year 2000-related risks have not yet been developed but are expected to include identification of alternate suppliers, allowing for sufficient inventory levels in the event of manufacturing or transportation interruption and replacing electronic applications with manual processes. These plans are expected to be completed by the end of the third quarter of 1999. The Company's Year 2000 project is expected to reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, the Year 2000 readiness of its significant suppliers and customers. The Company believes that the Year 2000 issues will be addressed on a timely basis. However, in the event that the Year 2000 issues of the Company and/or third parties with whom the Company transacts business are not addressed on a timely basis, it is possible that such issues could have an adverse impact on the Company's operations and/or financial condition. 28 MILLENNIUM CHEMICALS INC. --------------- REPORT OF THE INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MILLENNIUM CHEMICALS INC. We have audited the accompanying consolidated financial statements of Millennium Chemicals Inc. (the "Company") as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998. 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 did not audit the financial statements of HMB Holdings Inc. ("Cornerstone") which statements reflect a loss from discontinued operations of $2,877 million for the fiscal year ended September 30, 1996. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Cornerstone, is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Florham Park, New Jersey January 21, 1999 29 MILLENNIUM CHEMICALS INC. --------------- CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
================================================================================== As of December 31 1998 1997 - ---------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 103 $ 64 Trade receivables, net 242 369 Inventories 334 273 Assets of discontinued interests 148 24 Other current assets 109 106 ------ ------ Total current assets 936 836 Property, plant and equipment, net 1,044 851 Investment in Equistar 1,519 1,934 Other assets 189 237 Goodwill 412 468 ------ ------ TOTAL ASSETS $4,100 $4,326 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 29 $ Current maturities of long-term debt 14 20 Trade accounts payable 113 86 Income taxes payable 23 12 Accrued expenses and other liabilities 200 323 ------ ------ Total current liabilities 379 441 Long-term debt 1,039 1,327 Deferred income taxes 334 280 Other liabilities 755 814 ------ ------ Total liabilities 2,507 2,862 ------ ------ Commitments and contingencies (Note 12) Minority interest 15 -- Shareholders' equity Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued and outstanding) -- Common stock (par value $.01 per share, authorized 225,000,000 shares; issued and outstanding 77,873,586 and 77,276,942 shares in 1998 and 1997, respectively) 1 1 Paid in capital 1,333 1,334 Retained earnings 294 177 Unearned restricted shares (35) (42) Cumulative translation adjustment (15) (6) Treasury stock (at cost, 502,572 shares in 1998) (7) -- Deferred compensation 7 ------ ------ Total shareholders' equity 1,578 1,464 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,100 $4,326 ====== ======
See Notes to Consolidated Financial Statements 30 MILLENNIUM CHEMICALS INC. --------------- CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
================================================================================================== Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------------------------- NET SALES $ 1,597 $ 3,048 $ 3,040 Operating costs and expenses Cost of products sold 1,134 2,180 2,264 Depreciation and amortization 102 203 201 Selling, development and administrative expense 156 216 217 Impairment of assets and related closure costs -- -- 75 ------- ------- ------- Operating income 205 449 283 Interest expense (primarily to a related party in 1996) (76) (131) (214) Interest income 4 10 37 Equity in earnings of Equistar 40 18 -- Other income (expense), net 29 1 (23) ------- ------- ------- Income from continuing operations before provision for income taxes and minority interest 202 347 83 Provision for income taxes (37) (159) (50) ------- ------- ------- Income from continuing operations before minority interest 165 188 33 Minority interest (2) -- -- ------- ------- ------- INCOME FROM CONTINUING OPERATIONS 163 188 33 Income (loss) from discontinued operations (net of income taxes of $1, ($2) and ($1,028), respectively) 1 (3) (2,734) ------- ------- ------- NET INCOME (LOSS) $ 164 $ 185 $(2,701) ======= ======= ======= Income per share from continuing operations $ 2.17 $ 2.52 $ 0.44 ======= ======= ======= Income (loss) per share from discontinued operations 0.01 (0.04) (36.74) ======= ======= ======= Net income (loss) per share -- basic $ 2.18 $ 2.48 $(36.30) ======= ======= ======= Net income (loss) per share -- diluted $ 2.17 $ 2.48 $(36.30) ======= ======= ======= Pro forma income from continuing operations (unaudited) $ 168 ======= Pro forma income from continuing operations per share (unaudited) $ 2.26 =======
See Notes to Consolidated Financial Statements 31 MILLENNIUM CHEMICALS INC. --------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
================================================================================================= Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 163 $ 188 $ 33 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 102 203 201 Impairment of assets and related closure costs -- -- 75 Provision for deferred income taxes 54 122 15 Restricted stock amortization 6 23 -- Equity earnings (29) (18) -- Minority interest 2 -- -- Unrealized translation gain -- -- (21) Changes in assets and liabilities (net of acquisitions and dispositions) Decrease in trade receivables 24 141 38 (Increase) decrease in inventories (42) 14 5 (Increase) decrease in other current assets (45) (40) 126 Decrease (increase) in investments and other assets 75 58 (65) Increase (decrease) in trade accounts payable 15 (97) 13 Decrease in accrued expenses and other liabilities and income taxes payable (82) (124) (24) Decrease in other liabilities (93) (87) (24) ----- ------- ------- Cash provided by operating activities 150 383 372 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (215) (152) (285) Acquisition of businesses (85) (169) Proceeds from Equistar -- 750 -- Accounts receivable collection through Equistar 225 25 Distributions from Equistar, net of liabilities paid 317 18 -- Proceeds from sale of business -- 733 Proceeds from sale of fixed assets 10 2 10 ----- ------- ------- Cash provided by investing activities 252 474 458 CASH FLOWS FROM FINANCING ACTIVITIES Dividend to shareholders (47) (46) Contribution to Suburban Propane -- (22) -- Proceeds from long-term debt 172 185 2,335 Repayment of long-term debt (519) (1,217) (3,321) Increase (decrease) in notes payable 29 (98) (15) Net contribution from Hanson PLC and Prior Affiliates -- -- 167 ----- ------- ------- Cash used in financing activities (365) (1,198) (834) Effect of exchange rate changes on cash 2 (3) -- ----- ------- ------- Increase (decrease) in cash and cash equivalents 39 (344) (4) Cash and cash equivalents at beginning of year 64 408 412 ----- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 103 $ 64 $ 408 ===== ======= =======
See Notes to Consolidated Financial Statements 32 MILLENNIUM CHEMICALS INC. --------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN MILLIONS)
============================================================================================================================= COMMON STOCK ---------------------- TREASURY DEFERRED PAID IN RETAINED SHARES AMOUNT STOCK COMPENSATION CAPITAL EARNINGS - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ $ $ $ $ Comprehensive income Net income (loss) 38 Other comprehensive income Currency translation adjustment --- --- --- --- ------ ---- Total comprehensive income -- -- -- -- -- 38 Amortization and adjustment of unearned restricted shares (13) Issuance of stock 74 1 1,267 Issuance of restricted shares 3 65 Net capital contribution from Demerger Net transaction with affiliates --- --- --- --- ------ ---- Balance at December 31, 1996 77 1 -- -- 1,319 38 Comprehensive income Net income 185 Other comprehensive income Currency translation adjustment --- --- --- --- ------ ---- Total comprehensive income 185 Amortization and adjustment of unearned restricted shares (1) 15 Dividend to shareholders (46) --- --- --- --- ------ ---- Balance at December 31, 1997 76 1 1,334 177 Comprehensive income Net income 164 Other comprehensive income Currency translation adjustment --- --- --- --- ------ ---- Total comprehensive income -- -- -- -- -- 164 Amortization and adjustment of unearned restricted shares 1 (1) Shares held by rabbi trust (7) 7 Dividend to shareholders (47) --- --- --- --- ------ ---- BALANCE AT DECEMBER 31, 1998 77 $ 1 $(7) $ 7 $1,333 $294 === === === === ====== ==== Cumulative other comprehensive income -- 1997 Cumulative other comprehensive income -- 1998 ================================================================================================= UNEARNED CUMULATIVE RESTRICTED TRANSLATION INVESTED SHARES ADJUSTMENT CAPITAL TOTAL - ------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $ $ $ 4,801 $ 4,801 Comprehensive income Net income (loss) (2,739) (2,701) Other comprehensive income Currency translation adjustment 10 10 ---- ---- ------- ------- Total comprehensive income -- 10 (2,739) (2,691) Amortization and adjustment of unearned restricted shares 15 2 Issuance of stock (1,268) Issuance of restricted shares (65) -- Net capital contribution from Demerger 443 443 Net transaction with affiliates (1,237) (1,237) ---- ---- ------- ------- Balance at December 31, 1996 (50) 10 0 1,318 Comprehensive income Net income 185 Other comprehensive income Currency translation adjustment (16) (16) ---- ---- ------- ------- Total comprehensive income (16) 169 Amortization and adjustment of unearned restricted shares 8 23 Dividend to shareholders (46) ---- ---- ------- ------- Balance at December 31, 1997 (42) (6) 1,464 Comprehensive income Net income 164 Other comprehensive income Currency translation adjustment (9) (9) ---- ---- ------- ------- Total comprehensive income -- (9) -- 155 Amortization and adjustment of unearned restricted shares 7 6 Shares held by rabbi trust Dividend to shareholders (47) ---- ---- ------- ------- BALANCE AT DECEMBER 31, 1998 $(35) $(15) $ -- $ 1,578 ==== ==== ======= ======= Cumulative other comprehensive income -- 1997 $ (6) $ (6) ==== ======= Cumulative other comprehensive income -- 1998 $(15) $ (15) ==== =======
33 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) NOTE 1--BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY Millennium Chemicals Inc. (the "Company") is a major international chemicals company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals, operating through its subsidiaries: Millennium Inorganic Chemicals Inc. (and its non-United States affiliates), Millennium Petrochemicals Inc., and Millennium Specialty Chemicals Inc.; and, beginning December 1, 1997, through its interest in Equistar Chemicals, LP ("Equistar"), a joint venture formed by the Company and Lyondell Chemical Company ("Lyondell") to jointly own and operate the petrochemical and polymer businesses of the Company and Lyondell. On May 15, 1998, the Company's interest in Equistar was reduced to 29.5% with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental Petroleum Corporation's ("Occidental") chemical subsidiary (see Note 2). The Company was incorporated on April 18, 1996, and has been publicly owned since October 1, 1996, when Hanson PLC ("Hanson") transferred its chemical operations to the Company and, in consideration, all of the then outstanding shares of the Company's common stock ("Common Stock") were distributed pro rata to Hanson's shareholders (the "Demerger"). The consolidated financial statements of operations and cash flows for the year ended December 31, 1996 also include the combined operations of certain non-chemical businesses ("Discontinued Businesses"), which were owned by subsidiaries of Hanson that became subsidiaries of the Company upon the Demerger. The Company sold the Discontinued Businesses to Hanson on October 6, 1996. Since these operations were not a part of the Company upon completion of the Demerger transactions, their historical results of operations have been presented as discontinued operations. Prior to the Demerger, the Company provided certain corporate, general and administrative services to certain other indirect wholly owned subsidiaries of Hanson ("Prior Affiliates"), including legal, finance, tax, risk management and employee benefit services. Charges for these services, which were allocated to the Prior Affiliates based on the respective revenues of the Company and the Prior Affiliates, reduced the Company's selling and administrative expense by $18 for the year ended December 31, 1996. The Company's management believes such method of allocation is reasonable. In addition, prior to the Demerger, a subsidiary of the Company controlled, on a centralized basis, all cash receipts and disbursements received or made by such affiliates. Subsequent to the Demerger, the financial statements are presented on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. NOTE 2--ACQUISITIONS AND DISPOSITIONS On December 1, 1997, the Company and Lyondell completed the formation of Equistar, a joint venture partnership created to own and operate the petrochemical and polymer businesses of the Company and Lyondell. The Company contributed to Equistar substantially all of the net assets of its polyethylene, performance polymer and ethyl alcohol businesses. The Company retained $250 from the proceeds of accounts receivable collections and substantially all the accounts payable and accrued expenses of its contributed businesses existing on December 1, 1997, and received proceeds of $750 from borrowings under a new credit facility entered into by Equistar. The Company used the $750 which it received to repay debt. A subsidiary of the Company guarantees $750 of Equistar's credit facility. Equistar was owned 57% by Lyondell and 43% by the Company until May 15, 1998, when the Company and Lyondell expanded Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental's chemical subsidiary. Occidental contributed the net assets of those businesses (including approximately $205 of related debt) to Equistar. In exchange, Equistar borrowed an additional $500, $420 of which was distributed to Occidental and $75 to the Company. Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. No gain or loss resulted from this transaction. Equistar is managed by a Partnership Governance Committee consisting of representatives of each partner. Approval of Equistar's strategic plans and other major decisions requires the consent of the representatives of the three partners. All decisions of Equistar's Governance Committee that do not require unanimity among the partners may be made by Lyondell's representatives alone. The investment in Equistar at the date of contribution represented the carrying value of the Company's contributed net assets, less cash received, and approximated the fair market value of its interest in Equistar based upon independent valuation. The difference between the carrying value of the Company's investment and its underlying equity in the net assets of Equistar has been reduced from $617 to $404 as a result of adding Occidental as a partner and is being amortized over 25 years. The Company accounts for its interest in Equistar using the equity method. Because of the significance of the Company's interest in Equistar to its total results of operations, the separate financial statements of Equistar are included in the Company's 1998 Annual Report filed on Form 10-K. 34 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) On December 31, 1997, the Company completed the purchase of the shares of Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse titanium dioxide ("TiO2") and related intermediate and specialty chemical operations in France for $185, including assumed debt. The operations in France provide capacity to produce approximately 138 thousand metric tons per year of TiO2. The purchase price was allocated to the net assets acquired, principally property, plant and equipment and working capital, based on their fair value. On July 1, 1998, the Company completed the acquisition of 99% of the voting shares and 72% of total shares of Titanio do Brazil S.A. ("Tibras"), Brazil's only integrated TiO2 producer, for $129, including assumed debt. This acquisition was also accounted for using the purchase method of accounting with the purchase price allocated to the net assets acquired, principally property, plant and equipment and working capital based on their fair value. The two operations comprising Tibras included a plant which has capacity to produce approximately 60 thousand metric tons per year of TiO2 and a mineral sands mine with over 2 million metric tons of recoverable reserves. On November 16, 1998, the Company entered into agreements with Linde AG ("Linde") relating to the Company's synthesis gas ("syngas") unit in La Porte, Texas, and a 15% interest in its methanol business, whereby the Company would receive $122.5 in cash. Linde will operate the syngas facility under a long-term lease with a purchase option. In addition, Linde will operate and hold a 15% interest in the methanol facility. As a result, the assets involved in this transaction, including applicable goodwill of $42, have been classified at December 31, 1998 in the accompanying balance sheet as Assets of discontinued interests. This transaction was subsequently completed on January 18, 1999. No gain or loss resulted from this transaction. In March 1996, the Company sold a 73.6% interest in Suburban Propane, through an initial public offering of 21,562,500 common units in a new master limited partnership, Suburban Propane Partners, L.P., and received aggregate proceeds from the sale of the common units and the issuance of notes of the Suburban Propane operating partnership, Suburban Propane, L.P., of approximately $831, resulting in a pre-tax gain of $210. The Company retained a combined subordinated and general partnership interest of 26.4% in Suburban Propane Partners L.P. and Suburban Propane L.P. (collectively "Suburban Propane"). On November 27, 1998, the Company entered into an agreement to sell its remaining interest to Suburban Propane and its management for $75 in cash, with an expected net after-tax gain of approximately $30. As such, Suburban Propane is reflected as a discontinued operation for all periods presented and the Company's interest at December 31, 1998 is included in Assets of discontinued interests. This transaction is expected to be completed in the second quarter of 1999. NOTE 3--SIGNIFICANT ACCOUNTING POLICIES Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification: Certain prior year balances have been reclassified to conform with the current year presentation. Cash Equivalents: Cash equivalents represent investments in short-term deposits and commercial paper with banks which have original maturities of 90 days or less. In addition, investments and other assets include approximately $31 and $83 in restricted cash at December 31, 1998 and 1997, respectively, which is on deposit to satisfy insurance claims. Inventories: Inventories are stated at the lower of cost or market value. For certain United States operations, cost is determined under the last-in, first-out (LIFO) method. The first-in, first-out (FIFO) method, or methods which approximate FIFO, are used by all other subsidiaries. Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and 5 to 25 years for machinery and equipment. Goodwill: Goodwill represents the excess of the purchase price over the fair value of assets allocated to acquired companies. Goodwill is being amortized using the straight-line method over 40 years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to its operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill is adjusted. In the opinion of management, no impairment of goodwill exists at December 31, 1998. In connection with the formation of Equistar, consolidated goodwill was reduced by $1,253 in 1997. 35 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) Environmental Liabilities and Expenditures: Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties (except where payment has been received or the amount of liability or contribution by such other parties, including insurance companies, has been agreed) and are not discounted. In general, costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. Foreign Currency Translation: Assets and liabilities of the Company's foreign operating subsidiaries are translated at the exchange rates in effect at the balance sheet dates, while revenue, expenses and cash flows are translated at average exchange rates for the reporting period. Resulting translation adjustments are recorded as a currency component of Shareholders' equity. Gains and losses resulting from foreign exchange changes on transactions denominated in currencies other than the functional currency are recognized in income in the Consolidated Statements of Operations except for gains and losses on hedges of net investments which are included as a component of Shareholders' equity. Prior to the Demerger, certain of the Company's subsidiaries, whose holdings principally consisted of sterling-denominated cash deposits, were considered to hedge a portion of Hanson's investments in the United States. The functional currency of these subsidiaries was the local currency. After the Demerger, such deposits no longer acted as a hedge; instead, the entities were primarily holding companies, the assets of which were remittable to the Company. As such, the functional currency of these subsidiaries was changed to the U.S. dollar. Gains from the remeasurement of these deposits and other assets and liabilities into U.S. dollars are included in Other expense, net, and aggregated $34 for the year ended December 31, 1996. Federal Income Taxes: Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using enacted marginal tax rates of the respective tax jurisdictions. Deferred income tax expense (credit) is based on the changes in the assets and liabilities from period to period. The Company and certain of its subsidiaries have entered into tax-sharing and indemnification agreements with Hanson or its subsidiaries in which the Company and/or its subsidiaries generally agreed to indemnify Hanson or its subsidiaries for income tax liabilities attributable to periods when such other operations were included in the consolidated tax returns of the Company's subsidiaries. Research and Development: The cost of research and development efforts is expensed as incurred. Such costs aggregated $21, $28 and $39 for the years ended December 31, 1998, 1997 and 1996, respectively. Earnings per share: The weighted-average number of common equivalent shares outstanding used in computing earnings per share for 1998, 1997 and 1996 was as follows:
===================================================================== 1998 1997 1996 - --------------------------------------------------------------------- Basic 75,126,209 74,484,588 74,412,283 Options 119,939 31,846 -- Restricted shares 450,500 130,000 -- ---------- ---------- ---------- Diluted 75,696,648 74,646,434 74,412,283 ========== ========== ==========
Pro forma income from continuing operations for 1996 was calculated as if: (a) the Demerger had been consummated at the beginning of the period; (b) the changes in the Company's capital structure resulting from the Demerger had occurred on such date; (c) the Company's level of general and administrative corporate costs is that as if it operated as a separate entity; and (d) compensation expense related to the restricted share awards pursuant to the Long Term Stock Incentive Plan (see Note 10) had been incurred for a full year. NOTE 4--SUPPLEMENTAL BALANCE SHEET INFORMATION
===================================================================== 1998 1997 - --------------------------------------------------------------------- TRADE RECEIVABLES Trade receivables $245 $371 Allowance for doubtful accounts (3) (2) ---- ---- $242 $369 ==== ==== INVENTORIES Finished products $139 $121 In-process products 28 21 Raw materials 117 89 Other inventories 50 42 ---- ---- $334 $273 ==== ====
Inventories valued on a LIFO basis were approximately $41 and $32 less than the amount of such inventories valued at current cost at December 31, 1998 and 1997, respectively. 36 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
===================================================================== 1998 1997 - --------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land and buildings $ 267 $ 217 Machinery and equipment 1,377 1,205 ------ ------ 1,644 1,422 Allowance for depreciation and amortization 600 571 ------ ------ $1,044 $ 851 ====== ====== GOODWILL $ 480 $ 528 Accumulated amortization 68 60 ------ ------ $ 412 $ 468 ====== ======
===================================================================== 1998 1997 1996 - --------------------------------------------------------------------- Amortization expense $ 14 $ 45 $ 48
Rental expense for operating leases is as follows:
===================================================================== 1998 1997 1996 - --------------------------------------------------------------------- Minimum rentals $ 12 $ 55 $ 53
Future minimum rental commitments under non-cancelable operating leases, as of December 31, 1998, are as follows: 1999 $11 2000 8 2001 4 2002 3 2003 2 Thereafter 12
NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS During 1996, the Company recorded a $75 non-recurring charge ($48 after tax), to reduce the carrying value of certain facilities employed in sulfate-process manufacturing of TiO2 and to provide for the cost associated with the closure of certain of these facilities. During the first half of 1996, intense price competition was experienced, as customers of the anatase products associated with the sulfate-process operations sought more cost efficient manufacturing inputs to their applications. As a result of the deterioration of market conditions in the TiO2 industry, the Company decided to implement a program which included a reduction of its sulfate-process manufacturing capacity in both the United Kingdom and United States. The carrying value of plant and equipment associated with sulfate-process manufacturing was reduced by $60 as a result of evaluating the recoverability of such assets under the unfavorable market conditions existing at that time. The amount of the write-down was determined by comparison to the fair value of the related assets, as determined based on the projected discounted cash flows identified to such assets. During 1996, the Company also recorded an initial non-cash charge resulting from adopting the evaluation methodology provided by SFAS 121 of $4,497 ($3,206 after tax), related to one of the Discontinued Businesses. Prior to the adoption of SFAS 121, asset impairment was evaluated at an operating company level based on the contribution of operating profits and undiscounted cash flows being generated from those operations. Under this policy, assets used in one of the Discontinued Businesses, comprised of approximately 20 separate operating companies, were evaluated for impairment based on gross margins and cash flows generated by each separate operating company in a given business cycle. Evaluation of the businesses' assets at this level did not result in any impairment. SFAS 121 requires the impairment review to be performed at the lowest level of asset grouping for which there are identifiable cash flows which represents a change from the level at which the previous accounting policy measured impairment. In this case, economic groupings of assets were made based on local marketplaces. Evaluation of assets at this lower grouping level indicated an impairment of certain of those assets. The impairment loss was measured based on the difference between estimated discounted cash flows and the carrying value of such assets. NOTE 6--INCOME TAXES
===================================================================== 1998 1997 1996 - --------------------------------------------------------------------- PRE-TAX INCOME IS GENERATED FROM United States $ 101 $ 321 $ 12 Foreign 101 26 71 ----- ----- ------- 202 347 83 ===== ===== ======= INCOME TAXES ARE COMPRISED OF Federal Current $ (36) $ 19 $ 67 Deferred 43 116 (1,083) Foreign 23 6 15 State and local 8 16 23 ----- ----- ------- 38 157 (978) ===== ===== ======= INCOME TAXES ARE CLASSIFIED AS Continuing operations $ 37 $ 159 $ 50 Discontinued operations 1 (2) (1,028) ----- ----- ------- $ 38 $ 157 $ (978) ===== ===== =======
37 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) The Company's effective income tax rate differs from the amount computed by applying the statutory federal income tax rate as follows:
=============================================================================== 1998 1997 1996 - ------------------------------------------------------------------------------- CONTINUING OPERATIONS Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal benefit 2.4 3.0 17.0 Provision for non-deductible expenses, primarily goodwill amortization 7.6 5.2 20.8 Foreign rate differential (5.1) (10.0) Utilization of net operating loss carryforwards (20.3) Tax benefit from previous years (20.8) -- -- Other (0.8) 2.6 17.7 ----- ---- ----- Effective income tax rate for continuing operations 18.3% 45.8% 60.2% ----- ---- ----- DISCONTINUED OPERATIONS Effective income tax rate 38.9% 45.8% 30.7% ===== ==== =====
As a result of a favorable tax judgement received during 1998, the Company recorded a benefit of $42 related to taxes recoverable from previous years' tax filings. The difference between the effective income tax rate on discontinued operations and the statutory federal income tax rate in 1996 primarily relates to non-deductible goodwill amortization and tax depletion of the Discontinued Businesses. At December 31, 1998, certain foreign subsidiaries of the Company had available net operating loss carryforwards aggregating $20, which are subject to certain limitations on their use. Significant components of deferred taxes are as follows:
===================================================================== 1998 1997 - --------------------------------------------------------------------- DEFERRED TAX ASSETS Environmental and legal obligations $ 54 $ 62 Other postretirement benefits and pension obligations 47 60 Net operating loss carryforwards 20 28 Capital loss carryforwards 136 143 AMT credits 98 131 Other accruals 40 59 ----- ----- 395 483 Valuation allowance (136) (143) ----- ----- Total deferred tax assets 259 340 ----- ----- DEFERRED TAX LIABILITIES Excess of book over tax basis in property, plant and equipment 400 412 Other 183 186 ----- ----- Total deferred tax liabilities 583 598 ----- ----- Net deferred tax liabilities ($10 in 1998 and $22 in 1997, classified in Current assets) $ 324 $ 258 ===== =====
Certain of the income tax returns of the Company's subsidiaries are currently under examination by the Internal Revenue Service and various state tax agencies. In the opinion of management, any assessments which may result will not have a material adverse effect on the financial condition or results of operations of the Company. Income taxes paid during 1998 and 1997 were $40 and $53, respectively. NOTE 7--LONG-TERM DEBT AND CREDIT ARRANGEMENTS
===================================================================== 1998 1997 - --------------------------------------------------------------------- Revolving Credit Facility bearing interest at the prime lending rate, or at LIBOR or NIBOR plus .275%, at the option of the Company, plus a Facility Fee of .15% to be paid quarterly $ 235 $ 546 7% Senior Notes due 2006 (net of unamortized discount of $.5 and $.5) 500 500 7.625% Senior Notes due 2026 (net of unamortized discount of $1.1 and $1.1) 249 249 Debt payable through 2007 at interest rates ranging from 2.4% to 22% 69 52 Less current maturities of long-term debt (14) (20) ------ ------ $1,039 $1,327 ====== ======
Under the Revolving Credit Agreement, as amended on October 20, 1997, certain of the Company's subsidiaries may borrow up to $500 under an unsecured multi-currency revolving credit facility, which matures in July 2001 (the "Credit Agreement" or the "Revolving Credit Facility"). The Company is the guarantor of this facility. Borrowings under the Credit Agreement may consist of standby loans or uncommitted competitive loans offered by syndicated banks through an auction bid procedure. Loans may be borrowed in U.S. dollars and/or other currencies. The proceeds from the borrowings may be used to provide working capital and for general corporate purposes. The Credit Agreement contains covenants and provisions that restrict, among other things, the ability of the Company and its material subsidiaries to: (i) create liens on any of its property or assets, or assign any rights to or security interests in future revenues; (ii) engage in sale-and-leaseback transactions; (iii) engage in mergers, consolidations or sales of all or substantially all of their assets on a consolidated basis; (iv) enter into agreements restricting dividends and advances by their subsidiaries; and (v) engage in transactions with affiliates other than those based on arm's-length negotiations. The Credit Agreement also limits the ability of certain subsidiaries of the Company to incur indebtedness or issue preferred stock. In addition, the Credit Agreement requires the Company to satisfy certain financial performance criteria. The Senior Notes and Senior Debentures were issued by Millennium America Inc., a wholly owned subsidiary of the 38 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) Company, and are guaranteed by the Company. The indenture under which the Senior Notes and Senior Debentures were issued contains certain covenants that limit, among other things: (i) the ability of Millennium America Inc. and its Restricted Subsidiaries (as defined) to grant liens or enter into sale-and-leaseback transactions; (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness; and (iii) the ability of Millennium America Inc. and the Company to merge, consolidate or transfer substantially all of their respective assets. At December 31, 1998, the Company had outstanding notes payable of $29 bearing interest at an average rate of approximately 12% with maturity of 30 days or less; no outstanding notes were payable December 31, 1997. At December 31, 1998, the Company had outstanding standby letters of credit amounting to $102 and had unused availability under short-term lines of credit and its Revolving Credit Facility of $432. In addition, Millennium America Inc. has guaranteed certain debt obligations of Equistar up to $750. The maturities of long-term debt during the next five years are as follows: 1999 -- $5; 2000 -- $24; 2001 -- $245; 2002 -- $5; and 2003 and beyond -- $760. Interest paid for the years ended December 31, 1998, 1997 and 1996 was $72, $129 and $58, respectively. NOTE 8 -FINANCIAL INSTRUMENTS Fair Value of Financial Instruments: The fair value of all short-term financial instruments approximate their carrying value due to their short maturity. The fair value of long-term financial instruments (excluding forward exchange contracts, interest rate protection agreements and the Senior Notes and Senior Debentures) approximates carrying value as they were based on terms that continue to be available to the Company from its lenders. The fair value of the Company's other financial instruments are based upon estimates received from independent financial advisors as follows:
================================================================================================= 1998 1997 - ------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value Senior Notes and Debentures $ 749 $ 695 $ 749 $ 748
Off Balance Sheet Risk: The Company has certain receivables, payables and borrowings denominated in currencies other than the functional currency of the Company and/or its subsidiaries. The Company hedges certain of these exposures by entering into forward exchange contracts. Gains and losses related to these hedges are recognized in income as part of, and concurrent with the hedged transactions. The Company does not use derivative financial instruments for trading or speculative purposes. The table below summarizes the contractual amounts of the Company's forward exchange contracts at December 31, 1998, all of which mature within 90 days. The foreign currency amounts have been translated into U.S. dollars using applicable exchange rates at December 31, 1998.
================================================== Sell - -------------------------------------------------- German Marks $ 2 French Francs 6 Italian Lira 5 Belgium Francs 5 Spanish Pesetas 3 Other 3 ---- $ 24 ====
SFAS 133: On June 15, 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivatives and Hedging Activities," effective for fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in net income or as Comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company is currently evaluating the implications of this new pronouncement but, due to the Company's limited use of derivative instruments, the adoption of SFAS 133 is not expected to have a significant effect on the Company's results of operations or its financial position. NOTE 9--PENSION AND OTHER POSTRETIREMENT BENEFITS Domestic Pension Plans: The Company has adopted SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS 132 revises the employer's disclosure presentation but does not change the measurement or recognition of these plans. The Company has several noncontributory defined benefit pension and other postretirement benefit plans covering substantially all of its United States employees. The benefits for these plans are based primarily on years of credited service and average compensation as defined under the respective plan provisions. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. 39 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) The Company also sponsors defined contribution plans for its salaried and certain union employees. Contributions relating to defined contribution plans are made based upon the respective plan provisions. The following table provides a reconciliation of the changes in the benefit obligations and the fair value of the plan assets over the two-year period ending December 31, 1998, and a statement of the funded status as of December 31 for both years.
==================================================================================== Pension Other Post- Benefits retirement Benefits 1998 1997 1998 1997 - ------------------------------------------------------------------------------------ RECONCILIATION OF BENEFIT OBLIGATION Projected benefit obligation at December 31 $ 671 $ 636 $ 127 $ 234 Service cost, including interest 7 14 10 8 Interest on PBO 46 45 -- -- Participant contributions -- -- 2 2 Benefit payments (79) (54) (14) (15) Special termination benefits 6 -- -- 1 Curtailments (2) 5 Net experience loss (gain) 42 25 2 (19) Amendments 24 (65) Divestiture -- -- -- (19) ----- ----- ----- ----- Projected benefit obligation at December 31 715 671 127 127 ----- ----- ----- ----- RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at December 31 776 718 -- -- Return on plan assets 87 106 -- Employer contributions 2 6 11 13 Participant contributions 2 2 Benefit payments (75) (54) (13) (15) ----- ----- ----- ----- Fair value of plan assets at December 31 790 776 -- -- ----- ----- ----- ----- FUNDED STATUS Funded status at December 31 75 105 (127) (127) Unrecognized net asset (1) (1) Unrecognized prior-service cost 23 5 -- -- Unrecognized loss (gain) 22 10 (23) (26) Additional minimum liability (8) (5) -- -- ----- ----- ----- ----- Prepaid (accrued) interest $ 111 $ 114 $(150) $(153) ===== ===== ===== =====
The following table provides the components of net periodic benefit cost for the plans for 1998 and 1997. Pension benefit income was $10 while other postretirement benefits costs were $6 for the year ended December 31, 1996.
==================================================================================== Pension Other Post- Benefits retirement Benefits 1998 1997 1998 1997 - ------------------------------------------------------------------------------------ NET PERIODIC BENEFIT COST Service cost, including interest $ 7 $ 13 $ 10 $ 8 Interest on PBO 46 45 -- Return on plan assets (61) (82) -- -- Amortization of unrecognized net loss 2 -- (2) (2) Amortization of prior service cost 1 1 -- Deferral -- 21 -- -- Special termination benefits 6 -- 2 Recognition of prior service cost 5 -- -- -- Curtailment loss 5 ----- ----- ----- ----- Net periodic benefit cost 6 3 8 8 Defined contribution plans 1 1 ----- ----- ----- ----- Net periodic benefit cost after curtailment $ 7 $ 4 $ 8 $ 8 ===== ===== ===== =====
The assumptions used in the measurement of the Company's benefit obligations are shown in the following table:
==================================================================================== Pension Other Post- Benefits retirement Benefits 1998 1997 1998 1997 - ------------------------------------------------------------------------------------ WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 7.00% 7.25% 7.00% 7.25% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 4.25% 4.25% 4.25% 4.25%
The projected benefit obligation, accumulated benefit obligation and the fair value of plan assets for pension plans with accumulated benefit obligations in excess of the plan assets were $42, $40 and $28, respectively, for the year ended December 31, 1998; and $36, $34 and $25; respectively, for the year ended December 31, 1997. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% increase or decrease in assumed health care cost trend rates would affect service and interest components of postretirement health care benefit cost by $1 for the years ended December 31, 1998 and 1997, respectively. The effect on the accumulated postretirement benefit obligation would be $8 for the years ended December 31, 1998 and 1997, respectively. Foreign Benefit Arrangements: The Company's foreign subsidiaries have several defined benefit plans. The assets of these plans are held separately from the Company in independent funds. The total pension expense was $3 in each of the years ended December 31, 1998 and 1997. 40 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) Where required, the contributions are determined by a qualified actuary every three years. The most recent such valuation was April 1, 1998. Assumptions were 8% per year for return on investment, 8% per year for salary increases and 4% per year for present and future pension increases. The aggregate market value of the plan assets was $110, approximately 120% of the benefit obligations, after allowing for expected future increases in earnings. NOTE 10--EMPLOYEE BENEFIT PLANS The Company adopted a Long Term Stock Incentive Plan ("Stock Incentive Plan") for the purpose of enhancing the profitability and value of the Company for the benefit of its shareholders. A maximum of 3,909,000 shares of Common Stock may be issued or used for reference purposes pursuant to the Stock Incentive Plan. The Stock Incentive Plan provides for the following types of awards to employees: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) performance units; and (v) performance shares. The vesting schedule for granted restricted stock awards is as follows: (i) three equal tranches aggregating 25% of the total award will vest in each of October 1999, 2000 and 2001; and (ii) three equal tranches aggregating 75% of the total award will be subject to the achievement of "value creation" performance criteria established by the Compensation Committee for each of the three performance cycles commencing January 1, 1997 and ending December 31, 1999, 2000 and 2001, respectively. If and to the extent such criteria are achieved, half of the earned portion of a tranche relating to a particular performance-based cycle of the award will vest immediately and the remainder will vest in five equal annual installments commencing on the first anniversary of the end of the cycle. Options granted under the Stock Incentive Plan vest three years from the date of grant and expire ten years from the date of grant. All grants under the Stock Incentive Plan fully vest in the event of a change-in-control (as defined by the plan) of the Company, or in the case of employees of a subsidiary of the Company, a change-in-control of the relevant subsidiary. The Company has authorization under the Stock Incentive Plan to grant awards for up to an additional 184,256 shares at December 31, 1998. Unearned restricted stock, based on the market value of the shares at each balance sheet date, is included as a separate component of Shareholders' equity and amortized over the restricted period. Compensation expense of $6, $23 and $2 was recognized for the years ended December 31, 1998, 1997 and 1996, respectively. Expense for 1997 included $12 as a result of the change-in-control provisions being triggered by the formation of Equistar for certain restricted stock awards and options held by employees of Millennium Petrochemicals. A summary of changes in the awards under the Stock Incentive Plan (other than awards to non-employee directors) is as follows:
==================================================================================== Weighted Weighted Average Average Restricted Grant Share Exercise Shares Price Options Price - ------------------------------------------------------------------------------------ Initial awards on October 8, 1996 2,912,322 $ 22.32 523,000 $ 19.00 --------- ------- -------- ------- Balance at December 31, 1996 2,912,322 $ 22.32 523,000 $ 19.00 Vested and issued (683,273) 22.32 -- 19.00 Cancelled (226,491) 22.32 (200,000) 19.00 Granted 174,736 23.72 81,000 22.15 --------- -------- Balance at December 31, 1997 2,177,294 22.43 404,000 19.79 Vested and issued (5,600) 22.32 (59,000) 19.00 Cancelled (25,538) 22.32 -- -- Granted 311,153 33.15 160,000 23.91 --------- -------- BALANCE AT DECEMBER 31, 1998 2,457,309 $ 23.81 505,000 $21.15 ========= ======= ======== =======
For options outstanding at December 31, 1998, the range of exercise prices was $18.00 to $34.875 per share, and the weighted-average remaining contractual life was 9 years. The weighted-average fair value at December 31, 1998, was $4 per share option. The Company adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." The impact on net income and earnings per share would not have been materially different had compensation expense for the Company's incentive plan been determined based on the fair value of such grants on the grant date in accordance with the provisions of SFAS 123. The Company has a deferred compensation plan that permits officers, directors and certain management employees to defer a portion of their compensation on a pre-tax basis in the form of Common Stock. A rabbi trust (the "Trust") has been established to hold shares of Common Stock purchased in open market transactions to fund this obligation. Shares purchased by the Trust are reflected as Treasury stock and along with the related obligation for this plan, are included in Shareholders' equity. At December 31, 1998, 256,987 shares have been purchased for $7 and are held in the Trust. The Company has a Long Term Incentive Plan for certain management employees. The plan provides for awards of Common Stock to be granted if annual EVA'r' targets are achieved. Such 41 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) earned shares are held in a trust until certain vesting provisions are satisfied. Such awards will vest on the later of: (a) three years following the date of grant or (b) achievement of cumulative positive EVA'r' during a three-consecutive-year period. Unvested shares will be forfeited after six years. Compensation expense of $1 was recognized in 1998. NOTE 11--RELATED PARTY TRANSACTIONS One of the Company's subsidiaries purchases ethylene from Equistar at market-related prices pursuant to an agreement made in connection with the formation of Equistar. Under the agreement the subsidiary is required to purchase 100% of its ethylene requirements for its La Porte, Texas, facility up to a maximum of 330 million pounds per year. The initial term of the contract expires December 1, 2000. Thereafter, the contract automatically renews annually. Either party may terminate on one year's notice. The subsidiary incurred charges of $41 in 1998 under this contract. One of the Company's subsidiaries and Equistar have entered into various operating, manufacturing and technical service agreements. These agreements provide the subsidiary with materials management, certain utilities, administrative office space, health, safety and environmental services. The subsidiary incurred charges of $5 in 1998 for such services. NOTE 12--COMMITMENTS AND CONTINGENCIES The Company is subject, among other things, to several proceedings under the Federal Comprehensive Environmental Response Compensation and Liability Act and other federal and state statutes or agreements with third parties. These proceedings are in various stages ranging from initial investigation to active settlement negotiations to implementation of the clean-up or remediation of sites. Additionally, certain of the Company's subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business including those relating to commercial transactions and product liability. While certain of the lawsuits involve allegedly significant amounts, it is management's opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on the Company's financial position or results of operations. The Company believes that the range of potential liability for these matters, collectively, which primarily relate to environmental remediation activities, is between $150 and $176 and has accrued $176 as of December 31, 1998. The Company has various contractual obligations to purchase raw materials used in its production of TiO2 and fragrance and flavor chemicals. Commitments to purchase ore used in the production of TiO2 are generally 1-to 8-year contracts with competitive prices generally determined at a fixed amount subject to escalation for inflation. Total commitments to purchase ore for TiO2 aggregate approximately $1,100 and expire between 1999 and 2002. Commitments to acquire crude sulfate turpentine, used in the production of fragrance chemicals, are generally pursuant to 1-to 5-year contracts with prices based on the market price and which expire between 1999 and 2008. The Company is organized under the laws of Delaware and is subject to United States federal income taxation of corporations. However, in order to obtain clearance from the United Kingdom Inland Revenue as to the tax-free treatment of the Demerger stock dividend for United Kingdom tax purposes for Hanson and Hanson's shareholders, Hanson agreed with the United Kingdom Inland Revenue that the Company will continue to be centrally managed and controlled in the United Kingdom at least until September 30, 2001. Hanson also agreed that the Company's Board of Directors will be the only medium through which strategic control and policy making powers are exercised, and that board meetings almost invariably will be held in the United Kingdom during this period. The Company has agreed not to take, or fail to take, during such five-year period, any action that would result in a breach of, or constitute non-compliance with, any of the representations and undertakings made by Hanson in its agreement with the United Kingdom Inland Revenue and to indemnify Hanson against any liability and penalties arising out of a breach of such agreement. The Company's By-Laws provide for similar constraints. The Company and Hanson estimate that such indemnification obligation would have amounted to approximately $421 if it had arisen during the twelve months ended September 30, 1997, and that such obligation will decrease by approximately $84 on each October 1 prior to October 1, 2001, when it will expire. If the Company ceases to be a United Kingdom tax resident at any time, the Company will be deemed for purposes of United Kingdom corporation tax on chargeable gains to have disposed of all of its assets at such time. In such a case, the Company would be liable for United Kingdom corporation tax on chargeable gains on the amount by which the fair market value of those assets at the time of such deemed disposition exceeds the Company's tax basis in those assets. The tax basis of the assets would be calculated in pounds sterling, based on the fair market value of the assets (in pounds sterling) at the time of acquisition of the assets by the Company, adjusted for United Kingdom inflation. Accordingly, in such circumstances, the Company could incur a tax liability even though it has not actually sold the assets and even though the underlying value of the assets may not actually have appreciated (due to currency movements). Since it is impossible to predict the future value of the Company's assets, currency movements and inflation rates, it is impossible to predict the magnitude of such liability, should it arise. 42 MILLENNIUM CHEMICALS INC. --------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT SHARE DATA) NOTE 13--OPERATIONS BY BUSINESS SEGMENT AND GEOGRAPHIC AREA Using the guidelines set forth in SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's principal operations are grouped into four business segments: titanium dioxide and related products; acetyls; specialty chemicals; and polyethylene, alcohol and related products. See page 19 for information with respect to these segments. Most of the Company's foreign operations are conducted by subsidiaries in the United Kingdom, France, Brazil and Australia. Sales between the Company's operations are made on terms similar to those of its third-party distributors. Sales between geographic areas are not significant. Income and expense not allocated to industry segment in computing operating income include interest income and expense and other income and expense of a general corporate nature. Export sales from the United States for the years ended December 31, 1998, 1997 and 1996 were approximately $157, $273 and $272, respectively.
=============================================================================== 1998 1997 1996 - ------------------------------------------------------------------------------- NET SALES United States $ 993 $2,677 $2,693 Non United States United Kingdom 220 255 231 France 228 Asia/Pacific 160 138 146 Brazil 76 ------ ------ ------ 684 393 377 ------ ------ ------ Inter-area elimination (80) (22) (30) ------ ------ ------ Total $1,597 $3,048 $3,040 ====== ====== ====== OPERATING INCOME United States $ 90 $ 422 $ 245 Non-United States United Kingdom 23 10 16 France 22 -- -- Asia/Pacific 54 17 22 Brazil 16 -- -- ------ ------ ------ 115 27 38 ------ ------ ------ Total $ 205 $ 449 $ 283 ====== ====== ====== IDENTIFIABLE ASSETS United States $3,098 $3,599 Non-United States United Kingdom 354 296 France 288 253 Asia/Pacific 121 102 Brazil 181 All Other 58 76 ------ ------ 1,002 727 ------ ------ Total $4,100 $4,326 ====== ======
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Common Stock of the Company is traded on the New York Stock Exchange (the "NYSE") under the symbol "MCH". The following table sets forth the high and low closing sales prices per share of Common Stock reported by the NYSE since October 2, 1996, the commencement of "regular way" trading:
===================================================================== High Low - --------------------------------------------------------------------- 1996 Fourth quarter $23.000 $17.250 1997 First quarter $20.875 $16.875 Second quarter 22.750 17.500 Third quarter 23.500 20.250 Fourth quarter 24.063 22.250 1998 First quarter $33.625 $20.250 Second quarter 36.875 31.375 Third quarter 32.625 18.625 Fourth quarter 25.250 18.500
As of March 15, 1999, there were 29,014 record holders of Common Stock. The closing price per share of Common Stock as reported by the NYSE on such date was $19.00. On January 22, 1999, the Company declared a dividend of $0.135 per share of Common Stock payable to all holders of record on March 24, 1999, and will carry a United Kingdom notional tax credit of $0.015 per share in respect of the dividend. This dividend will be paid on April 9, 1999. 43 "Excerpts from 1997 Annual Report to Shareholders" Millennium Chemicals Inc. ------------ Index to the Financial Review 18 Selected and Quarterly Financial Data 19 Segment Information 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Report of Independent Accountants 29 Consolidated Balance Sheets 30 Consolidated (Combined) Statements of Operations 31 Consolidated (Combined) Statements of Cash Flows 32 Consolidated (Combined) Statements of Changes in Shareholders' Equity 33 Notes to Consolidated (Combined) Financial Statements Disclosure Concerning Forward-Looking Statements All statements, other than statements of historical fact, included in this Annual Report to Shareholders, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Outlook for 1998" are, or may be deemed to be, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ("Cautionary Statements") include: the balance between industry production capacity and operating rates on the one hand, and demand for the products of Millennium Chemicals Inc. (the "Company") and Equistar Chemicals, LP ("Equistar"), including ethylene, polyethylene and titanium dioxide, on the other hand; the economic trends in the United States and other countries which serve as the Company's and Equistar's marketplace; customer inventory levels; competitive pricing pressures; the cost and availability of the Company's feedstocks and other raw materials, including natural gas and ethylene; competitive technology positions; and failure to achieve the Company's or Equistar's productivity improvement and cost-reduction targets or to complete construction projects on schedule. Some of these Cautionary Statements are discussed in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations." All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such Cautionary Statements. 17 Millennium Chemicals Inc. ------------ Selected and Quarterly Financial Data (in millions except share data)
Selected Financial Data Three Year Ended Months Ended Fiscal Year Ended December 31 December 31 September 30 -------------------------------------- ------------- ------------------ 1997(1) 1996 1995 1994 1994 1993(6) - --------------------------------------------------------------------------------------------------------------------------------- Income statement data Net sales $ 3,048 $ 3,040 $ 3,800 $ 908 $ 3,288 $ 862 Operating income 449 283(2) 842 203 344 139 Income from continuing operations 185 141(2)(3) 331 84 66 103 Net income (loss) 185 (2,701)(2)(3)(4) 349 96 94 123 Balance sheet data (at period end) Total assets (5) $ 4,326 $ 5,601 $10,043 $10,024 $ 9,691 $10,135 Total liabilities 2,862 4,283 5,242 5,166 5,053 4,692 Shareholders' equity (5) 1,464 1,318 4,801 4,858 4,638 5,443 Other data (with respect to continuing operations) Depreciation and amortization $ 203 $ 201 $ 241 $ 59 $ 247 $ 44 Capital expenditures 152 285 276 30 109 28
(1) Includes 11 months of polyethylene, alcohol and related products businesses which were contributed to Equistar Chemicals, LP ("Equistar") on December 1, 1997. Since December 1, 1997, the equity method is used to account for the 43% interest held by Millennium Chemicals Inc. (the "Company"). (2) Includes the effects of non-recurring charges of $75 ($48 after-tax) to reduce the carrying value of certain facilities employed in the sulfate-process manufacturing of titanium dioxide ("TiO2") and to provide for the costs associated with the closure of certain of these facilities, as described in Note 5 to the Consolidated (Combined) Financial Statements of the Company. (3) Includes gain of $210 ($86 after-tax) resulting from the Company's sale in March 1996 of a 73.6% equity interest in Suburban Propane Partners, L.P. ("Suburban Propane"), as described in Note 2 to the Consolidated (Combined) Financial Statements of the Company. In 1995 and fiscal 1994, Suburban Propane is included as a continuing operation. (4) Includes the effects of a non-cash after-tax charge of $3,206 relating to one of the Discontinued Businesses (as defined in Note 5 to the Consolidated (Combined) Financial Statements of the Company) as a result of the Company's adoption of the long-lived asset carrying value methodology provided by SFAS 121, as described in Note 5 to the Consolidated (Combined) Financial Statements of the Company. The Discontinued Businesses were sold to Hanson on October 6, 1996. (5) Includes net assets of the Discontinued Businesses: $3,772 at December 31, 1995; $3,757 at December 31, 1994; $3,757 at September 30, 1994; and, $3,935 at September 30, 1993. (6) Income statement data and other data for fiscal 1993 exclude the operations of Millennium Petrochemicals, which was acquired on September 30, 1993, in a transaction accounted for as a purchase.
- ------------------------------------------------------------------------------------------------------------------- Quarterly Financial Data 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. - ------------------------------------------------------------------------------------------------------------------- 1997 Net sales $ 794 $ 813 $ 816 $ 625 Operating income 66 132 157 94 Net income 20 82 67 16 Basic earnings per share .27 1.10 .90 .21 1996 Net sales $ 730 $ 780 $ 769 $ 761 Operating income 86 29 90 78 Net income (loss) from continuing operations 112 (19) 10 38 Net (loss) income (3,078) (33) 47 363 Income from continuing operations per share 1.50 (0.26) 0.13 0.51 Net income per share (41.36) (0.44) 0.63 4.88 Pro forma income (loss) from continuing operations 118 (10) 22 38 Pro forma income (loss) from continuing operations per share 1.59 (0.13) 0.30 0.51
18 Millennium Chemicals Inc. ------------ Segment Information (in millions)
- ----------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Net sales Titanium dioxide and related products $ 843 $ 868 $ 848 Acetyls 271 240 328 Specialty chemicals 148 127 115 Polyethylene, alcohol and related products (1) 1,786 1,805 1,870 ------ ------ ------ 3,048 3,040 3,161 Propane (2) -- -- 639 ------ ------ ------ Total $3,048 $3,040 $3,800 ------ ------ ------ ------ ------ ------ Operating income Titanium dioxide and related products (3) $ 60 $ 7 $ 177 Acetyls 39 12 96 Specialty chemicals 42 36 31 Polyethylene, alcohol and related products (1) 308 228 485 ------ ------ ------ 449 283 789 Propane (2) -- -- 53 Total $ 449 $ 283 $ 842 ------ ------ ------ ------ ------ ------ Depreciation and amortization Titanium dioxide and related products $ 44 $ 46 $ 42 Acetyls 28 24 29 Specialty chemicals 6 4 3 Polyethylene, alcohol and related products (1) 125 127 132 Propane (2) -- -- 34 Corporate -- -- 1 ------ ------ ------ Total $ 203 $ 201 $ 241 ------ ------ ------ ------ ------ ------ Capital expenditures Titanium dioxide and related products $ 77 $ 81 $ 124 Acetyls 24 65 30 Specialty chemicals 10 12 17 Polyethylene, alcohol and related products (1) 41 127 75 Propane (2) -- -- 29 Corporate -- -- 1 ------ ------ ------ Total $ 152 $ 285 $ 276 ------ ------ ------ ------ ------ ------ Identifiable assets at year end Titanium dioxide and related products $ 908 $ 854 Acetyls 824 708 Specialty chemicals 108 87 Polyethylene, alcohol and related products (1) -- 3,241 Corporate (4) 2,486 711 ------ ------ Total $4,326 $5,601 ------ ------ ------ ------
(1) Segment information for 1996 and 1995 has been restated to combine the information for the polyethylene, alcohol and related products businesses which have been contributed to Equistar as one segment. The Company's 43% interest in Equistar is excluded from this segment beginning December 1, 1997, at which time the equity method is used to account for this continuing investment. (2) Suburban Propane is reflected as a continuing operation of the Company through December 31, 1995. In March 1996, the Company sold a 73.6% interest in Suburban Propane in an initial public offering. The Company has accounted for its continuing investment using the equity method effective January 1, 1996. (3) 1996 includes non-recurring charges of $75 ($48 after tax) to reduce the carrying value of certain facilities employed in the sulfate-process manufacturing of TiO2 and to provide for the costs associated with the closure of certain of these facilities. (4) Corporate assets consist primarily of cash and cash equivalents, equity investments and other assets. 19 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis Introduction Millennium Chemicals Inc.'s (the "Company") principal operations are grouped into four business segments: titanium dioxide and related products, acetyls, specialty chemicals and polyethylene, alcohol and related products. The Company's businesses comprising the polyethylene, alcohol and related products segment were contributed to Equistar Chemicals, LP ("Equistar"), a joint venture partnership formed by the Company and Lyondell Petrochemical Company ("Lyondell") on December 1, 1997, to own and operate the olefins and polymers businesses of the partners. Results of these businesses for the first eleven months of 1997, before the formation of Equistar, are included. Since December 1, 1997, the Company's 43% share in the results of Equistar is accounted for using the equity method. On March 20, 1998, the Company, Lyondell and Occidental Petroleum Corporation ("Occidental") announced the signing of a definitive agreement to expand Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental's chemical subsidiary. See Note 13 to the Consolidated (Combined) Financial Statements. The following information should be read in conjunction with the Company's Consolidated (Combined) Financial Statements and Notes thereto. In connection with the forward-looking statements that appear in the following information, the Cautionary Statements referred to in "Disclosure Concerning Forward-Looking Statements" should be reviewed carefully. Historical Cyclicality of Components of the Company's Operations The markets for ethylene and polyethylene in which the Company participates through its interest in Equistar are highly cyclical. The global markets for titanium dioxide ("TiO2") and acetyls are also cyclical, although to a lesser degree. In contrast, the Company believes that, over a business cycle, the markets for specialty chemicals are generally more stable in terms of industry demand, selling prices and operating margins. In the United States, demand for ethylene and its primary derivative, polyethylene, has historically fluctuated from year to year. Demand for ethylene and polyethylene, respectively, has increased at average annual rates of approximately 4.7% and 3.6% over the last five years and approximately 2.4% and 5.3% over the last ten years. The industry is particularly sensitive to capacity additions, including capacity to manufacture ethylene, polyethylene's principal raw material. Polyethylene producers have historically experienced alternating periods of inadequate ethylene and/or polyethylene capacity, resulting in increased selling prices and operating margins, followed by periods of large capacity additions, resulting in declining capacity utilization rates, selling prices and operating margins. The cyclicality of ethylene and polyethylene profitability is further influenced by fluctuations in the price of feedstocks for ethylene, which include natural gas and natural gas liquids, and which generally follow price trends for crude oil. Recently, a heightened interest in forming partnerships between companies for existing and new capacity is evident in the industry. These partnerships expect to capitalize on the scale of combined production facilities and the opportunities for cost synergies. TiO2 is considered a "quality of life" performance chemical, the demand for which is influenced by changes in the gross domestic product of various regions of the world. The worldwide TiO2 industry has experienced cyclical demand, supply and pricing, although to a lesser degree than the ethylene and polyethylene industry. Demand for TiO2 has historically fluctuated from year to year, although it has increased at average annual rates of 3.3% over the last five years, and rates have varied among the regional marketplaces in the world. The industry is also sensitive to changes in its customers' marketplaces, which are primarily the paint and coatings, plastics and paper industries. In recent history, consolidations and nega- 20 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis [GRAPH] tive business conditions within certain of those industries have put pressure on TiO2 prices as companies compete to keep volumes placed. In addition, TiO2 is manufactured using two different technologies: the environmentally preferred chloride process and the sulfate process.The cost structure of these processes can differ significantly, with the sulfate process generally carrying a higher cost to produce. In periods of declining selling prices, the profitability of sulfate-process production is generally the first to be negatively affected. Results for 1997 and Outlook for 1998 The Company had operating income of $449 million for the year ended December 31, 1997, an increase of $166 million (59%) from 1996. Net sales for 1997 of $3.048 billion were relatively flat compared to 1996. These results include the results of operations for the polyethylene, alcohol and related products businesses through November 30, 1997, at which time the Company contributed these businesses to Equistar. During 1997, the Company incurred one-time reorganization and other costs related to the formation of Equistar of $47 million ($37 million post-tax), which was principally offset by a one-time gain related to an insurance settlement of $46 million ($28 million post-tax). During 1996, the Company recorded non-recurring charges of $75 million ($48 million after tax) to reduce the carrying value and provide for closure costs of certain TiO2 sulfate-process production facilities. Excluding these non-recurring items, the Company's operating income increased $92 million (26%) from the prior year. This increase is due primarily to higher average selling prices for polyethylene and acetyls, the prices of which had dropped dramatically during 1996, combined with lower feedstock costs during 1997. While the pricing trends for TiO2 improved during 1997, reversing the downward slide of prices which began in late 1995, the average selling price for the whole of 1997 was below that of 1996. Accordingly, 1997 operating income for this segment was below 1996 levels. Income from continuing operations for 1997 of $185 million increased $44 million (31%), compared to 1996 income from continuing operations. 1996 includes a one-time after-tax gain from the sale by the Company of a 73.6% interest in Suburban Propane Partners, L.P. ("Suburban Propane") of $86 million. On a pro forma basis, income from continuing operations, excluding this gain and charges related to the sulfate-process TiO2 operations in 1996 and excluding the reorganization costs and gain from an insurance settlement in 1997, would have been $91 million (88%) higher than 1996. Titanium dioxide and related products: Titanium dioxide and related products operating income increased to $60 million from $7 million in 1996. Operating income in 1996 included $75 million of non-recurring charges related to the closure of certain sulfate-process production facilities in response to deteriorating market conditions during that period. Excluding these charges, operating income for the year decreased 27% from 1996. Net sales for 1997 decreased 3% to $843 million, compared to $868 million for 1996. Strong demand from the spring paint and coating season, the rationalization of some industry capacity and other market factors steadied the marketplace during the year. Overall sales volumes reached record levels in 1997, 4% higher than 1996, despite the loss of some volume from the reduction of sulfate-process production during the year. Pricing trends, which started downward in 1995 and continued to fall through 1996, reversed direction in March 1997 and rose through the balance of 1997. This trend is expected to continue in 1998 as global price increase announcements are expected to be supported by strong demand and tight supply. While the average TiO2 selling price for 1997 was 7% lower than the prior year, the fourth quarter's average price was 5% higher than in the third quarter and 4% above last year's comparable quarter. The 21 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis fourth quarter price gains by region were 3% in the Americas, 8% in Europe and nearly 10% in Asia/Pacific, where the previous price declines were the most dramatic. The lower average prices, combined with unfavorable foreign currency fluctuations in Europe and Australia, adversely impacted 1997 profitability. These effects were largely, but not fully, offset by lower production costs and higher production output as a result of cost-control programs put in place early this year to reduce annual production costs by $100 million from 1996 levels by 1999. The TiO2 plants produced at approximately 97% of capacity during 1997, compared to 88% during 1996. This added production not only reduced overall unit costs, but was necessary to meet growing demand during the year. By the end of 1997, inventories had dropped to record-low levels. A $120 million capital project to expand capacity at the Stallingborough, United Kingdom, plant by 41,000 metric tons per annum ("tpa") is progressing, with completion expected by the end of 1998 and production ramping up in early 1999. On December 31, 1997, the Company acquired Rhone-Poulenc's TiO2 and related intermediate and specialty chemicals operations in France, adding 138,000 tpa of TiO2 capacity and intermediate and specialty chemical capacity to serve the growing demand in Europe. The outlook for 1998 includes a continuation of the improving pricing trend worldwide, supported by continued growth in demand. Combined with progress in realizing the benefits of cost initiatives, profitability should continue to improve in this segment. Acetyls: Net sales of acetyls increased $31 million (13%) to $271 million in 1997, and operating income more than tripled to $39 million. The increase in operating income primarily related to increased selling prices in all three of its product lines over depressed 1996 levels. Average selling prices for 1997 were 10%, 3% and 28% higher than 1996 for vinyl acetate monomer ("VAM"), acetic acid and methanol, respectively. In addition, the mechanical difficulties experienced in the 1996 conversion of the syngas unit to natural gas feedstock were resolved early in 1997, significantly improving production output and reducing production costs during the year. Demand for VAM in 1997 was steady, with volumes 1% above 1996. A mid-year price increase and new industry capacity coming on-stream were absorbed by higher demand. Weakening Asian markets had a negative impact in the fourth quarter, with prices falling 4% from the previous quarter. Continued reduced demand from these markets during 1998 would put further pressure on prices. The outlook for 1998 profitability anticipates such price declines, offset somewhat by lower feedstock costs. Acetic acid sales volumes were 17% below prior year, primarily as a result of a planned customer outage during 1997. Volumes are expected to return to more normal levels in 1998. Prices, which increased earlier in the year, dropped 2% in the fourth quarter as formula-driven prices were impacted by falling feedstock costs. During 1998, commercialization of proprietary low-water technology, if proven successful, is expected to increase capacity by 11% and reduce per unit operating costs for acetic acid. Methanol sales volumes for 1997 were 57% higher than the prior year, with industry outages during the year keeping supplies tight. Prices, which were up 17% in the fourth quarter over 1996, and equal to the third quarter, fell sharply in early 1998. Lower feedstock costs and improved production efficiency should mitigate the negative impact of declining prices in the acetyls businesses in 1998. Specialty chemicals: Another record year was completed by Millennium Specialty Chemicals, with operating income of $42 million increas- [GRAPH] 22 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis [GRAPH] ing $6 million (17%) from 1996. Net sales also increased $21 million (17%) to $148 million. A 6% increase in sales volume for fragrance chemicals was principally responsible for the increased profitability. The cost of crude sulfate turpentine ("CST"), a principal raw material for these chemicals, increased an average of 25% over 1996 levels. These higher costs have thus far been offset by strong demand for these products together with tight supplies, keeping prices at premium levels. Millennium Specialty Chemicals expects to spend up to $27 million in 1998 on cost-reduction projects and to further expand production capacity for its high-demand, value-added fragrance chemical products. The outlook for fragrance and flavor chemicals, while good, is expected to include some downward pressure on prices as new competitors enter these markets. Polyethylene, alcohol and related products: Net sales of polyethylene, alcohol and related products (which includes sales from these businesses for the eleven months ended November 30, 1997, at which time they were contributed to Equistar) were $1.786 billion for 1997, a decrease of $19 million (1%) from 1996 full- year results. Operating income increased $80 million (35%) to $308 million for 1997, principally as a result of a 15% increase in average selling prices during the 1997 period coupled with lower feedstock costs, which declined from peak 1996 levels. During 1997, strong demand, both domestically and in the export markets, coupled with tight supply resulted in prices rising through the third quarter. Prices began to slowly weaken thereafter as expectations of new industry capacity coming on-stream and normal seasonal slowdowns reduced demand and put pressure on prices. Prices during the fourth quarter were down 5% from the third quarter. Polyethylene unit volumes for the 1997 period were 2% higher than 1996. Feedstock costs were on average 31% lower than last year's historical highs, as warmer-than-normal winter weather reduced demand for natural gas and natural gas liquids. These costs continued their decline late in the year as winter temperatures remained above normal, and crude oil inventories began building due to decreased demand from Asian markets. By year end, and into 1998, feedstock costs continued below expectations, softening the impact of declining prices on margins late in the year. Continued downward pressure on ethylene and polyethylene prices is expected during 1998, as is a return to more normal levels of feedstock costs. Accordingly, the ethylene and polyethylene businesses are expected to generate lower income in 1998. The Company, through its 43% interest in Equistar, will be affected by any such downturn. 1996 Results Compared to 1995 The Company had operating income of $283 million for the year ended December 31, 1996, a decrease of $559 million (66%) from 1995, and net sales of $3.040 billion, a decrease of $760 million (20%). The Company recorded non-recurring charges of $75 million ($48 million after tax) during 1996 to reduce the carrying value of certain facilities employed in the sulfate-process manufacturing of TiO2 and to provide for the cost associated with the closure of certain of these facilities. In addition, as a result of the sale of a 73.6% interest in Suburban Propane through an initial public offering in March 1996, the Company's interest in the results of Suburban Propane has been reflected as equity in earnings of Suburban Propane in the Consolidated (Combined) Financial Statements of the Company since January 1, 1996. Suburban Propane contributed $639 million to net sales and $53 million to operating income during 1995. Exclu-ding Suburban Propane and the non-recurring charges referred to above, the Company's net sales decreased $121 million (3.8%) and its operating income decreased $431 million (55%) 23 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis Rest of World Asia/Pacific Western Europe North America *December 31, 1997, including the Thann et Mulhouse acquisition from the prior year. These decreases are primarily due to lower average selling prices for polyethylene, acetyls and performance polymer product as they declined from their 1995 peak levels and declining selling prices for TiO2 as a result of high producer inventories, excess capacity and customer destocking. Additionally, increasing costs for feedstocks for ethylene (polyethylene's principal raw material) and higher costs for titanium ores during this period further reduced operating income. On a pro forma basis, basic earnings per share from continuing operations for 1996 would have been $2.26, based on 74,412,000 shares outstanding (as calculated under the recently issued FAS 128 and which assumes the shares issued to Hanson shareholders pursuant to the Demerger were outstanding for the entire year). Such earnings per share include ($0.65) and $1.15 per share from the after-tax impact of the non-recurring charges related to the sulfate-process TiO2 operations and the gain on the sale of the 73.6% interest in Suburban Propane, respectively. Titanium dioxide and related products: Titanium dioxide and related products operating income for 1996 decreased $170 million (96%) from $177 million in 1995. This reflects non-recurring charges of $75 million ($48 million after tax) to reduce the carrying value of certain facilities employed in the sulfate-process manufacturing of TiO2 and to provide for the cost associated with the closure of certain of these facilities. Excluding these non-recurring charges, operating income for the year decreased $95 million (54%) compared to 1995. Net sales for 1996 increased 2% to $868 million, compared to $848 million for 1995. During 1996, the TiO2 industry experienced severe price competition, with global prices continuing on a downward trend which began in late 1995. The price erosion reflected a confluence of market factors, including customer destocking, consolidations in the paint and coatings industry, a weak paper industry, increased TiO2 capacity and a weak spring paint and coatings season. These conditions caused global average TiO2 selling prices in United States dollar terms to be 6% lower during 1996, compared to 1995, as producers attempted to maintain volume and market share. These declines were worldwide, with yearly average prices down 3% in the Americas, 8% in Europe and 13% in the Asia/Pacific region compared to yearly average prices in these regions in 1995. The worldwide average TiO2 selling price in United States dollar terms was 14% lower in December 1996 than December 1995, with local prices in Europe and the Asia/Pacific region declining 25% and 29%, respectively, during the same period. These conditions had severe effects on TiO2 sulfate-process products, which have higher production costs and lower selling prices than chloride-process products. In response to these deteriorating market conditions, the 10,000 tpa sulfate-process plant in Stallingborough, United Kingdom, was closed, and production capacity of the 66,000 tpa sulfate-process plant in Baltimore, Maryland, was scaled back by approximately one-third. In addition, completion of the expansion of the chloride-process facility in the United Kingdom was delayed until the end of 1998, and plans for the 111,000 tpa expansion in Australia postponed until market conditions and trends improve. Finally, cost containment measures and reengineering efforts for certain processes are being implemented in order to reduce overall operating costs by $100 million from 1996 levels by 1999. Also contributing to the decline in operating income were higher fixed costs, resulting from an increase in chloride-process capacity that was phased in, thereby reducing operating rates, and higher variable costs due to increased costs of titanium ore feedstocks, coke and utilities. [GRAPH] 24 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis A $75 million capital investment program to increase Millennium Inorganic Chemicals' chloride-process capacity by 52,000 tpa was completed during 1996. A $50 million two-year program to improve environmental performance at its Ashtabula, Ohio, facilities is underway, with final completion scheduled for 1998. In addition, plans are underway to expand chloride-process capacity at the Stallingborough plant by 41,000 tpa in 1998 at a cost of approximately $120 million to meet projected long-term growth in demand in the European markets. The TiO2 plants operated at approximately 88% of capacity during 1996, compared to approximately 96% during the prior year. Decreased operating rates reflected market conditions and increased capacity for chloride-process manufacturing. Sales volume for 1996 increased 8%, largely due to stronger demand in the coatings and plastics markets, with shipments to the sluggish paper market continuing to lag. Acetyls: Net sales of acetyls decreased $88 million (27%) to $240 million in 1996, while operating income decreased $84 million (87%) to $12 million. The decline in operating income resulted from decreased average selling prices and lower volumes. This was primarily true for methanol, which experienced historically high selling prices during 1995 due to strong demand from reformulated gasoline producers to meet environmental requirements. As some of these requirements were subsequently relaxed and additional capacity became available, methanol prices fell 32%. VAM also experienced a 20% decline in average selling prices during 1996 as export markets were affected by oversupply and weakened demand. In addition, an outage to convert the syngas unit to natural gas caused production limitations, which resulted in a decline in sales volumes in both methanol and acetic acid in 1996 compared to 1995. Mechanical difficulties associated with the resumption of acetyls production, as well as certain suppliers' failure to perform at expected levels, resulted in curtailed production and increased costs during the first quarter of 1997. Specialty chemicals: Specialty chemicals (which now includes the Colors & Silica business previously reported as part of the titanium dioxide and related products segment) continued its growth trend with its seventh consecutive record year of operating income of $36 million for 1996, an increase of $5 million (16%) compared to 1995. Net sales increased $12 million (10%) to $127 million. This trend reflected a 2.2% increase in unit sales volume for fragrance products over 1995 as well as a shift toward higher value-added products. This growth was accomplished in spite of worldwide demand for fragrance chemicals being flat in 1996, and more than offset significant increases in the cost of CST, the principal raw material for these chemicals, which increased 49% on a unit basis compared to 1995. Millennium Specialty Chemicals' continued emphasis on higher-margin intermediate and upgraded products also contributed to 1996's operating margin per unit increasing 7.6% over 1995. During 1996, Millennium Specialty Chemicals' expansion continued. Completion of the final phase of the program, in the fall of 1997, increased capacity of linalool and geraniol, two major fragrance chemicals, by 80% over 1995 levels. Polyethylene, alcohol and related products: Net sales of polyethylene, alcohol and related products were $1.805 billion for 1996, a decrease of $65 million (3%). Operating income decreased $257 million (53%) to $228 million, principally as a result of a 15% decline in average selling prices for polyethylene products coupled with higher feedstock costs. The lower prices reflected competitive pressure arising from excess industry capacity and a destocking of customer inventories during the first half of 1996. In 1995, industry ethylene inventories were extremely tight due to unexpected industry outages, causing ethylene and, conse- 25 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis quently, polyethylene prices to rise dramatically; this situation corrected itself toward the end of 1995. During 1996, average selling prices increased during the second and third quarters on increased domestic demand, strong exports and higher natural gas feedstock costs, but dropped during the last quarter and early in 1997 as customers worked off polyethylene inventories in anticipation of future price decreases and reduced seasonal demand. Polyethylene unit volumes for 1996 increased 7.2% over 1995 on increased demand. Average unit costs for polyethylene increased 9.5% over 1995 due to increased feedstock costs for ethylene. These costs rose dramatically as a result of the colder-than-normal winter temperatures experienced in late 1995 and early 1996, which increased the demand for natural gas and the cost of natural gas liquids. Millennium Petrochemicals' ethylene feedstock and natural gas costs remained at high levels throughout 1996 and a significant portion of the first quarter of 1997. Feedstock costs rose 45% during the fourth quarter of 1996 alone. Effect of Inflation Because of the relatively low level of inflation experienced in the United States, inflation did not have a material impact on the Company's combined results of operations for 1997, 1996 or 1995. Foreign Currency Matters The functional currency of each of the Company's non-United States operations (principally the operations of Millennium Inorganic Chemicals in the United Kingdom, France and Australia) is the local currency. The impact of currency translation in combining the results of operations and financial position of such operations has not been material to the combined financial position of the Company. However, the Company generates revenue from export sales and revenue from operations conducted outside the United States that may be denominated in currencies other than the relevant functional currency. During 1997, the Company hedged certain revenues and costs to minimize the impact of changes in the exchange rates of those currencies compared to the functional currencies. The Company does not use derivative financial instruments for trading or speculative purposes. Foreign currency losses (gains) aggregated $4 million, $7 million and ($13) million in 1997, 1996 and 1995, respectively. Year 2000 The Company is currently developing a formal plan to address the impact of Year 2000 on its financial and business systems, and it intends to adopt and implement such a plan during 1998. This plan will include a companywide implementation of an SAP-based business solution that is Year 2000 compliant. It is anticipated that the Year 2000 issues will be addressed on a timely basis and at a cost that will not be material to the Company's operations or financial condition. However, in the event that the Year 2000 issues of the Company and/or third parties with whom the Company transacts business are not addressed on a timely basis, it is possible that such issues could have an adverse impact on the Company's operations and/or financial condition. Liquidity and Capital Resources Through September 30, 1996, the Company financed its operations and capital and other expenditures from a combination of cash generated from operations, external borrowings and loans, and invested capital provided by Hanson or its United States affiliates. Since its demerger from Hanson, the Company has met all of its cash requirements through internally generated funds and external borrowings. The Company's ability to generate cash from operations and the servicing and repayment of debt depends upon numerous business factors, some of which are outside the control of the Company, including industry cyclicality (resulting 26 Millennium Chemicals Inc. ------------ Management's Discussion and Analysis [GRAPH] from industrywide capacity additions, changes in general economic conditions and other conditions) and price volatility of certain raw materials. Net cash provided by operating activities was $383 million, $372 million and $795 million in 1997, 1996 and 1995, respectively. The decline since 1995 principally resulted from decreased income from the polyethylene businesses, where lower average selling prices and higher feedstock costs were experienced during 1996 as discussed above. During 1997, cash generated from increased operating income was used primarily for working capital purposes, keeping 1997 levels on par with 1996. Net cash provided by investing activities was $431 million and $458 million in 1997 and 1996, respectively, compared to net cash used of $246 million in 1995. During 1997 and 1996, two significant transactions occurred: the Company's contribution of the polyethylene, alcohol and related businesses to Equistar and the sale of a 73.6% interest in Suburban Propane, respectively. These transactions provided cash of $775 million and $733 million for 1997 and 1996, respectively. In addition, the Company used $152 million for capital expenditures during 1997, compared to $285 million and $276 million in 1996 and 1995, respectively. On December 31, 1997, the Company acquired the TiO2 and certain specialty and intermediate chemical operations of Rhone-Poulenc for $185 million, including assumed debt. The Company expects capital expenditures for 1998 to be approximately $200 million as a result of completing the TiO2 expansion in the United Kingdom, building a technical research center in the United States for TiO2, implementing SAP-based business solutions companywide, and continuing expansion and cost-reduction projects at Millennium Specialty Chemicals. The Company continuously evaluates its level of capital expenditures in light of current and expected market conditions, other opportunities to create value, and exceptional requirements which may arise. Accordingly, there can be no assurance as to the actual level of capital expenditures in 1998. Net cash used in financing activities was $1.155 billion, $834 million and $503 million in 1997, 1996 and 1995, respectively. The increase from year to year principally related to changes in the level of funding and other transactions between the Company and its affiliates prior to the Demerger and from external sources since October 1, 1996. At December 31, 1997, the Company had net debt of $1.283 billion, or $773 million less than December 31, 1996. The principal reduction in net debt during 1997 was funded primarily by operations and $775 million of proceeds received in connection with the formation of Equistar. As a result, the Company permanently reduced its availability under its credit facility by $750 million upon the formation of Equistar. The Company retained $250 million from existing receivables related to the businesses contributed to Equistar, of which $25 million was collected in December 1997, and the balance is expected to be collected early in 1998. The ratio of net-debt-to-total-capital at December 31, 1997, was 47%. Including the Company's proportional share of Equistar's debt, the ratio of net-debt-to-total-capital at December 31, 1997, would have been 55%. The Company guarantees certain debt obligations of Equistar up to $750 million. At December 31, 1997, the Company had approximately $358 million of unused availability under short-term lines of credit and its credit facility. The Company believes that, during 1998, cash provided by operations, expected distributions from Equistar and availability under existing borrowing facilities will provide adequate support for all of the Company's cash needs for working capital and capital expenditures for its existing businesses and dividends. In addition, it expects to further reduce its debt availability under its credit facility by $250 million. 27 Millennium Chemicals Inc. ----------------- Report of Independent Accountants To the Board of Directors and Shareholders of Millennium Chemicals Inc. We have audited the accompanying consolidated balance sheets of Millennium Chemicals Inc. (the "Company") and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated (combined) statements of operations, of cash flows and of changes in shareholders' equity/invested capital for each of the three years in the period ended December 31, 1997. 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 did not audit the financial statements of Cornerstone-Spectrum Inc. (formerly HMB Holdings Inc.) ("Cornerstone") which statements reflect (loss) income from discontinued operations of ($2,877) million, and $15 million for the fiscal years ended September 30, 1996 and 1995, respectively. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Cornerstone, is based solely on the reports of the other auditors. 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated (combined) financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Morristown, New Jersey January 23, 1998, except as to Note 13, which is as of March 20, 1998. 28 Millennium Chemicals Inc. ----------------- Consolidated Balance Sheets (in millions, except share data)
======================================================================================================== Year Ended December 31 1997 1996 - -------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 64 $ 408 Trade receivables, net 369 464 Inventories 273 515 Other current assets 106 83 ------- ------- Total current assets 812 1,470 Property, plant and equipment, net 851 2,031 Investment in Equistar 1,934 -- Other assets 261 334 Goodwill 468 1,766 ------- ------- Total assets $ 4,326 $ 5,601 ======= ======= Liabilities and shareholders' equity Current liabilities Notes payable $ -- $ 98 Current maturities of long-term debt 20 6 Trade accounts payable 86 160 Income taxes payable 12 33 Accrued expenses and other liabilities 323 470 ------- ------- Total current liabilities 441 767 Long-term debt 1,327 2,360 Deferred income taxes 280 78 Other liabilities 814 1,078 ------- ------- Total liabilities 2,862 4,283 ------- ------- Commitments and contingencies (Note 11) Shareholders' equity Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued and outstanding) -- -- Common stock (par value $.01 per share, authorized 225,000,000 shares; issued and outstanding 77,276,942 shares in 1997 and 77,324,605 in 1996) 1 1 Paid in capital 1,334 1,319 Retained earnings 177 38 Unearned restricted shares (42) (50) Cumulative translation adjustment (6) 10 ------- ------- Total shareholders' equity 1,464 1,318 ------- ------- Total liabilities and shareholders' equity $ 4,326 $ 5,601 ======= =======
See Notes to Consolidated (Combined) Financial Statements 29 Millennium Chemicals Inc. ---------------- Consolidated (Combined) Statements of Operations (in millions except share data)
======================================================================================================== Year Ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Net sales $ 3,048 $ 3,040 $ 3,800 Operating costs and expenses Cost of products sold 2,180 2,264 2,458 Depreciation and amortization 203 201 241 Selling, development and administrative expense 216 217 259 Impairment of assets and related closure costs -- 75 -- ------- ------ ------- Operating income 449 283 842 Interest expense (primarily to a related party in 1996 and 1995) (131) (214) (240) Interest income 10 37 25 Gain on sale of Suburban Propane -- 210 -- Equity in earnings of Equistar 18 -- -- Other (expense) income, net (4) 14 (73) ------- ------ ------- Income from continuing operations before provision for income taxes 342 330 554 Provision for income taxes (157) (189) (223) ------- ------ ------- Income from continuing operations 185 141 331 (Loss) income from discontinued operations (net of income taxes of ($1,167) and $22 in 1996 and 1995, respectively) -- (2,842) 18 ------- ------ ------- Net income (loss) $ 185 $(2,701) $ 349 ======= ======= ======= Income per share from continuing operations $ 2.48 $ 1.89 $ 4.45 (Loss) income per share from discontinued operations 0 (38.19) .24 ------- ------ ------- Net income (loss) per share - basic $ 2.48 $(36.30) $ 4.69 ======= ======= ======= Net income (loss) per share - diluted $ 2.47 $(36.30) $ 4.69 ======= ======= ======= Pro forma income from continuing operations (unaudited) $ 168 ======= Pro forma income from continuing operations per share (unaudited) $ 2.26 =======
See Notes to Consolidated (Combined) Financial Statements 30 Millennium Chemicals Inc. Consolidated (Combined) Statements of Cash Flows (in millions)
=================================================================================================================== Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Income from continuing operations $ 185 $ 141 $ 331 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 203 201 241 Impairment of assets and related closure costs -- 75 -- Provision for deferred income taxes 122 86 35 Restricted stock amortization 23 -- -- Equity earnings (13) -- -- Gain on sale of business -- (210) -- Unrealized translation gain -- (21) -- Changes in assets and liabilities (net of acquisition and dispositions) Decrease in trade receivables 141 38 13 Decrease (increase) in inventories 14 5 (92) (Increase) decrease in other current assets (40) 126 8 Decrease (increase) in investments and other assets 58 (65) 173 (Decrease) increase in trade accounts payable (97) 13 32 (Decrease) increase in accrued expenses and other liabilities and income taxes payable (126) 7 86 Decrease in other liabilities (87) (24) (32) ------- ------- ------- Cash provided by operating activities 383 372 795 Cash flows from investing activities Capital expenditures (152) (285) (276) Acquisition of Thann et Mulhouse (169) -- -- Proceeds from Equistar 750 -- -- Proceeds from sale of Suburban Propane -- 733 -- Proceeds from sale of fixed assets 2 10 30 ------- ------- ------- Cash provided by (used in) investing activities 431 458 (246) Cash flows from financing activities Dividend to parent -- -- (1,617) Dividend to shareholders (46) -- -- Distribution from Equistar 43 -- -- Contribution to Suburban Propane (22) -- -- Net transactions with affiliates -- -- 1,212 Net contribution from Hanson plc and Prior Affiliates -- 167 -- Proceeds from long-term debt 185 2,335 40 Repayment of long-term debt (1,217) (3,321) (4) Decrease in notes payable (98) (15) (134) ------- ------- ------- Cash (used in) financing activities (1,155) (834) (503) Effect of exchange rate changes on cash (3) -- (1) ------- ------- ------- (Decrease) increase in cash and cash equivalents (344) (4) 45 Cash and cash equivalents at beginning of period 408 412 367 ------- ------- ------- Cash and cash equivalents at end of period $ 64 $ 408 $ 412 ======= ======= =======
See Notes to Consolidated (Combined) Financial Statements 31 Millennium Chemicals Inc. Consolidated (Combined) Statements of Changes in Shareholders' Equity (in millions)
=================================================================================================================================== Unearned Cumulative Common Stock Paid In Retained Restricte Translation Invested Shares Amount Capital Earnings Shares Adjustmen Capital Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 -- $ -- $ -- $ -- $ -- $ -- $ 4,858 $ 4,858 Net income 349 349 Dividend to parent (1,617) (1,617) Net transactions with affiliates 1,212 1,212 Translation adjustment (1) (1) ------- ------- ------- ------- ----- ----- ------- ------- Balance at December 31, 1995 -- -- -- -- -- -- 4,801 4,801 Net income (loss) 38 (2,739) (2,701) Amortization and adjustment of unearned restricted shares (13) 15 2 Issuance of stock 74 1 1,267 (1,268) -- Issuance of restricted shares 3 65 (65) -- Net capital contribution from Demerger 443 443 Net transactions with affiliates (1,237) (1,237) Translation adjustment 10 -- 10 ------- ------- ------- -------- ----- ----- ------- ------- Balance at December 31, 1996 77 1 1,319 38 (50) 10 -- 1,318 Net income 185 185 Dividend (46) (46) Amortization and adjustment of unearned restricted shares (1) 15 8 23 Translation adjustment (16) (16) ------- -------- ------- -------- ----- ----- ------- ------- Balance at December 31, 1997 76 $ 1 $ 1,334 $ 177 $(42) $ (6) $ -- $ 1,464 ======= ======== ======= ======== ===== ===== ======= ========
32 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) Note 1--Basis of Presentation and Description of Company Millennium Chemicals Inc. (the "Company") is a major international chemicals company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals, operating through its wholly-owned subsidiaries: Millennium Petrochemicals Inc., Millennium Inorganic Chemicals Inc. (and its non-United States affiliates) and Millennium Specialty Chemicals Inc. and, beginning December 1, 1997, through its 43% interest in Equistar Chemicals, LP ("Equistar"), a joint venture formed by the Company and Lyondell Petrochemical Company ("Lyondell") to jointly own and operate the olefins and polymers businesses of the Company and Lyondell (See Note 2). The Company was incorporated on April 18, 1996, and has been publicly-owned since October 1, 1996, when Hanson plc ("Hanson") transferred its chemical operations to the Company and, in consideration, all of the then outstanding shares of the Company's common stock were distributed pro rata to Hanson's shareholders (the "Demerger"). For periods prior to the Demerger, the financial statements present, on a combined basis, the historical net assets and results of operations of Hanson's chemical operations. Consequently, the Company's results of operations and cash flows prior to October 1, 1996, may not be indicative of what would have been reported if the Company had been a separate entity. For periods subsequent to the Demerger, the financial statements are presented on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. The consolidated (combined) financial statements of operations and cash flows for the year ended December 31, 1996, also include the combined operations of certain non-chemical businesses ("Discontinued Businesses") which were owned by subsidiaries of Hanson that became subsidiaries of the Company upon the Demerger. The Company sold the Discontinued Businesses to Hanson on October 6, 1996. Since these operations were not a part of the Company upon completion of the Demerger transactions, their historical results of operations have been presented as discontinued operations. Prior to the Demerger, the Company provided certain corporate, general and administrative services to certain other indirect wholly-owned subsidiaries of Hanson ("Prior Affiliates"), including legal, finance, tax, risk management and employee benefit services. Charges for these services, which were allocated to the Prior Affiliates based on the respective revenues of the Company and the Prior Affiliates, reduced the Company's selling and administrative expense by $18 and $26 for the years ended December 31, 1996 and 1995, respectively. The Company's management believes such method of allocation was reasonable. In addition, prior to the Demerger, a subsidiary of the Company controlled, on a centralized basis, all cash receipts and disbursements received or made by such affiliates. Note 2--Acquisition and Dispositions On December 31, 1997, the Company completed the purchase of the shares of Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse titanium dioxide ("TiO2") and specialty and intermediate chemicals subsidiary for $185, including assumed debt. The purchase price was allocated to the net assets acquired, principally property, plant and equipment and working capital based on their fair value. On December 1, 1997, the Company and Lyondell completed the formation of Equistar, a joint venture partnership to own and operate the olefins and polymers and ethyl alcohol businesses of the Company and Lyondell. The Partnership is the largest producer of ethylene and polyethylene in North America. Equistar, 57% owned by Lyondell and 43% by the Company, is managed by a Partnership Governance Committee consisting of three representatives of each of Lyondell and the Company. Approval of Equistar's strategic plans and other major decisions requires the consent of representatives of both partners. All decisions of Equistar's Governance Committee that do not require unanimity between Lyondell and the Company may be made by Lyondell's representatives alone. The Company contributed to Equistar substantially all of the net assets of its polyethylene, performance polymers and ethyl alcohol businesses. The Company retained $250 from the proceeds of accounts receivable collections and substantially all the accounts payable and accrued expenses of its contributed businesses existing on December 1, 1997, and received proceeds of $750 from borrowings under a new credit facility entered into by Equistar. The Company used the $750 which it received to repay debt. 33 Lyondell contributed substantially all of the assets of its petrochemicals businesses, except for substantially all the accounts payable and accrued expenses which it retained. In addition, Equistar assumed senior debt obligations of Lyondell aggregating $745 and received a note payable by Lyondell to the partnership in the amount of $345. As of December 1, 1997, the Company accounted for its interest in Equistar using the equity method. The investment in Equistar at December 1, 1997, represented the carrying value of the Company's net assets which it contributed to the venture and approximated the fair market value of a 43% interest in Equistar based upon independent valuation. The difference between the carrying value of the Company's investment and its underlying equity in the net assets of Equistar is $617, which is being amortized over 25 years. During 1997, the Company incurred one-time costs of $47 (pre-tax) related to the formation of Equistar, including $18 (the Company's 43% share) of costs incurred by Equistar. Because of the significance of the Company's interest in Equistar to its total results of operations, the separate financial statements of Equistar since its formation have been included in the Company's 1997 Annual Report filed on Form 10-K. In March 1996, the Company sold a 73.6% interest in Suburban Propane, through an initial public offering of 21,562,500 common units in a new master limited partnership, Suburban Propane Partners, L.P., and received aggregate proceeds from the sale of the common units and the issuance of notes of the operating partnership, Suburban Propane, L.P., of approximately $831 resulting in a pre-tax gain of $210. The Company retains a combined subordinated and general partnership interest of 26.4% in Suburban Propane Partners, L.P. and Suburban Propane, L.P. (collectively "Suburban Propane"), which is accounted for on an equity basis effective January 1, 1996. Note 3--Significant Accounting Policies Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents: Cash equivalents represent investments in short-term deposits and commercial paper with banks which have original maturities of ninety days or less. The equivalent of approximately $362 at December 31, 1996, was represented by sterling-denominated deposits. In addition, investments and other assets include approximately $83 and $112 in restricted cash at December 31, 1997 and 1996, respectively, which is on deposit primarily to satisfy insurance claims. Inventories: Inventories are stated at the lower of cost or market value. For certain United States operations, cost is determined under the last-in, first-out (LIFO) method. The first-in, first-out (FIFO) method is used by all other subsidiaries. Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, generally 20-to 40-years for buildings and 5-to 25-years for machinery and equipment. Goodwill: Goodwill represents the excess of the purchase price over the fair value of assets allocated to acquired companies. Goodwill is being amortized using the straight-line method over 40 years. Management periodically evaluates goodwill for impairment based on the anticipated future cash flows attributable to its operations. Such expected cash flows, on an undiscounted basis, are compared to the carrying value of the tangible and intangible assets, and if impairment is indicated, the carrying value of goodwill is adjusted. In the opinion of management, no impairment of goodwill exists at December 31, 1997. Environmental Liabilities and Expenditures: Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties (except where payment has been received or the amount of liability or contribution by such other parties, including insurance companies, has been agreed) and are not discounted. In general, costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. Foreign Currency Translation: Assets and liabilities of the Company's foreign operating subsidiaries are translated at the exchange rates in effect at the balance sheet dates, while revenue, expenses and cash flows are translated at average exchange rates for the reporting period. Prior to the Demerger, certain of the Company's subsidiaries, whose holdings principally consisted of sterling denominated cash deposits, were considered to hedge a portion of Hanson's investments in the United States. The functional currency of 34 these subsidiaries was the local currency. After the Demerger, such deposits no longer acted as a hedge; instead, the entities were primarily holding companies, the assets of which were remittable to the Company. As such, the functional currency of these subsidiaries was changed to the United States dollar. Gains from the remeasurement of these deposits and other assets and liabilities into United States dollars are included in Other expense, net and aggregated $34 for the year ended December 31, 1996. In 1997, certain of the subsidiaries holding these deposits were sold and proceeds of approximately $343 were used to reduce the Company's debt. Federal Income Taxes: Deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset and liability from period to period. Prior to the Demerger, the United States earnings of the Company were included in the consolidated federal income tax return filed by Hanson's ultimate United States parent, which is now a subsidiary of the Company. Pursuant to an informal tax allocation agreement, the Company provided for income taxes as if it filed separate income tax returns. Accordingly, the Company had not reflected in the historical financial statements certain tax benefits arising out of the consolidated tax group (including certain predecessor entities, the "Consolidated Group") that became allocable to the Company once the Demerger was completed. Upon the Demerger, such tax benefits have been included in deferred taxes and were accounted for as a capital transaction. Certain other operations of Hanson previously included in the Consolidated Group upon completion of the Demerger no longer qualify as members of the Consolidated Group. The Company and certain of its subsidiaries have entered into tax-sharing and indemnification agreements with Hanson or its subsidiaries in which the Company and/or its subsidiaries generally agreed to indemnify Hanson or its subsidiaries for income tax liabilities attributable to periods when such other operations were included in the consolidated tax returns of the Consolidated Group. Research and Development: The cost of research and development efforts is expensed as incurred. Such costs aggregated $28, $39 and $42 for the years ended December 31, 1997, 1996 and 1995, respectively. Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued SFAS No 128, "Earnings Per Share," which specifies new standards designed to improve the earnings per share ("EPS") information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirement, and increasing the comparability of EPS data on an international basis. The Company adopted these provisions for the year ended December 31, 1997, and has restated per share disclosures for 1996 and 1995 in accordance with its provisions. The weighted-average number of common and common equivalent shares outstanding used in computing EPS per share for 1997, 1996 and 1995 was as follows:
================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Basic 74,484,247 74,412,283 74,412,283 Options 31,846 -- -- Restricted stock 130,000 -- -- ---------- ---------- ---------- Diluted 74,646,093 74,412,283 74,412,283 ========== ========== ==========
Pro forma income from continuing operations for 1996 was calculated as if: (a) the Demerger had been consummated at the beginning of the period; (b) the changes in the Company's capital structure resulting from the Demerger had occurred on such date; (c) the Company's level of general and administrative corporate costs is as if it operated as a separate entity; and, (d) compensation expense related to the restricted stock awards pursuant to the Long-Term Stock Incentive Plan (see Note 10) had been incurred for a full year. Note 4--Supplemental Information
================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Trade receivables Trade receivables $ 371 $ 472 Allowance for doubtful accounts (2) (8) -------- ------- $ 369 $ 464 ======== ======= Inventories Finished products $ 121 $ 270 In-process products 21 12 Raw materials 89 165 Other inventories 42 68 ------- -------- $ 273 $ 515 ======= ========
Inventories valued on a LIFO basis were approximately $32 and $45 less than the amount of such inventories valued at current cost at December 31, 1997 and 1996, respectively. 35 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated)
================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Property, plant and equipment Land and buildings $ 247 $ 364 Machinery and equipment 1,429 2,494 Leasehold improvements -- 4 ------ ------ 1,676 2,862 Allowance for depreciation and amortization 825 831 ------ ------ $ 851 $2,031 ====== ====== Goodwill $ 528 $1,963 Accumulated amortization 60 197 ------ ------ $ 468 $1,766 ====== ======
================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Amortization expense $ 45 $ 48 $ 58 ====== ===== =====
In connection with the formation of Equistar, consolidated goodwill has been reduced by $1,253. Rental expense for operating leases is as follows:
================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Minimum rentals $ 55 $ 53 $ 59 ====== ====== ======
Future minimum rental commitments under non-cancelable operating leases, as of December 31, 1997, are as follows: 1998 $ 7 1999 7 2000 5 2001 4 2002 3 Thereafter 6
Note 5--Impairment of Long-Lived Assets During 1996, the Company recorded a $75 non-recurring charge ($48 after tax), to reduce the carrying value of certain facilities employed in sulfate-process manufacturing of TiO2 and to provide for the cost associated with the closure of certain of these facilities. During the first half of 1996, intense price competition was experienced, as customers of the anatase products associated with the sulfate-process operations sought more cost-efficient manufacturing inputs to their applications. As a result of the deterioration of market conditions in the TiO2 industry, the Company decided to implement programs which included a reduction of its sulfate-process manufacturing capacity both in the United Kingdom and the United States. The 10,000 metric tons per annum ("tpa") sulfate-process plant in Stallingborough, United Kingdom, has been closed, and production at the 66,000 tpa sulfate-process facility in Baltimore, Maryland, has been reduced by approximately one-third. The carrying value of plant and equipment associated with sulfate-process manufacturing was reduced by $60 as a result of evaluating the recoverability of such assets under the unfavorable market conditions existing at that time. The amount of the write-down was determined by comparison to the fair value of the related assets, as determined based on the projected discounted cash flows associated with such assets. During 1996, the Company also recorded an initial non-cash charge resulting from adopting the evaluation methodology provided by SFAS 121 of $4,497 ($3,206 after tax), related to one of the Discontinued Businesses. Prior to the adoption of SFAS 121, asset impairment was evaluated at an operating company level based on the contribution of operating profits and undiscounted cash flows being generated from those operations. Under this policy, assets used in one of the Discontinued Businesses, comprised of approximately 20 separate operating companies, were evaluated for impairment based on gross margins and cash flows generated by each separate operating company in a given business cycle. Evaluation of the businesses' assets at this level did not result in any impairment. SFAS 121 requires the impairment review to be performed at the lowest level of asset grouping for which there are identifiable cash flows, which represents a change from the level at which the previous accounting policy measured impairment. In this case, economic groupings of assets were made based on local marketplaces. Evaluation of assets at this lower grouping level indicated an impairment of certain of those assets. The impairment loss was measured based on the difference between estimated discounted cash flows and the carrying value of such assets. 36 Millennium Chemicals Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) Note 6--Income Taxes
====================================================================================== 1997 1996 1995 - -------------------------------------------------------------------------------------- Pretax income is generated from United States $ 316 $ 259 $ 473 Foreign 26 71 81 ------- ------- ------- $ 342 $ 330 $ 554 ======= ======= ======= Income taxes are comprised of Federal Current $ 19 $ 67 $ 145 Deferred 116 (1,083) 54 Foreign 6 15 29 State and local 16 23 17 ------ ------- ------- $ 157 $ (978) $ 245 ====== ======= ======= Income taxes are classified as Continuing operations $ 157 $ 189 $ 223 Discontinued operations -- (1,167) 22 ------ ------- ------- $ 157 $ (978) $ 245 ====== ======= =======
The Company's effective income tax rate differs from the amount computed by applying the statutory federal income tax rate as follows:
======================================================================================= 1997 1996 1995 - --------------------------------------------------------------------------------------- Continuing operations Statutory federal income tax rate 35.0% 35.0% 35.0% Basis difference relating to Suburban Propane -- 17.4 -- State and local income taxes, net of federal benefit 3.0 5.0 4.2 Provision for non-deductible expenses, primarily goodwill amortization 5.2 5.2 4.0 Non-taxable foreign interest income -- (2.5) (1.2) Utilization of net operating losses -- (5.1) (3.3) Other 2.7 2.3 1.6 ----- ----- ----- Effective income tax rate for continuing operations 45.9% 57.3% 40.3% ===== ===== ===== Discontinued operations Effective income tax rate 29.1% 55.4% ===== =====
The difference between the effective income tax rate on discontinued operations and the statutory federal income tax rate primarily relates to non-deductible goodwill amortization and tax depletion. At December 31, 1997, certain subsidiaries of the Company had available operating loss carryforwards aggregating $20 which expire in the years 2003 through 2008, all of which are subject to certain limitations on their use. Significant components of deferred taxes are as follows:
================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets Environmental and legal obligations $ 35 $ 39 Other postretirement benefits and pension obligations 29 118 Net operating loss carryforwards 7 83 Capital loss carryforwards 143 112 AMT credits 131 114 Other accruals 48 92 ------ ------ 393 558 Valuation allowance (143) (112) ------ ------ Total deferred tax assets 250 446 ------ ------ Deferred tax liabilities Excess of book over tax basis in property, plant and equipment 314 306 Other 194 208 ------ ------ Total deferred tax liabilities 508 514 ------ ------ Net deferred tax liabilities ($22 in 1997 and $10 in 1996, classified in Current assets) $ 258 $ 68 ====== ======
Certain of the federal income tax returns of the Consolidated Group and certain of the state income tax returns of the Company's subsidiaries are currently under examination by the Internal Revenue Service. In the opinion of management, any assessments that may result will not have a material adverse effect on the financial condition or results of operations of the Company. 37 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) Note 7--Long-Term Debt and Credit Arrangements
================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Revolving Credit Agreement bearing interest at either the bank's prime lending rate, LIBOR or NIBOR plus .275% at the option of the Company plus Facility Fee of .15% to be paid quarterly $ 546 $1,540 7% Senior Notes due 2006 (net of unamortized discount of $.5 and $.5) 500 500 7.625% Senior Notes due 2026 (net of unamortized discount of $1.1 and $1.1) 249 249 Debt payable through 2007 at interest rates ranging from 2.4% to 11% 52 77 Less current maturities of long-term debt (20) (6) ------- ------- $1,327 $2,360 ======= =======
Under the Revolving Credit Agreement, as amended as of October 20, 1997, certain of the Company's subsidiaries may borrow up to $750 under the five-year unsecured revolving credit facility, which matures in July 2001 (the "Credit Agreement"). The Company is the guarantor of this facility. Borrowings under the Credit Agreement may consist of standby loans or uncommitted competitive loans offered by syndicated banks through an auction bid procedure. Loans may be borrowed in United States dollars and/or other currencies. The proceeds from the borrowings may be used to provide working capital and for general corporate purposes. During 1997, the Company used the $750 of proceeds received on the formation of Equistar to permanently reduce its obligations under this facility. In addition, borrowing availability is expected to be permanently reduced by $250 as funds are received on the collection of the retained accounts receivable related to the businesses contributed to Equistar. The Credit Agreement contains covenants and provisions that restrict, among other things and with certain exceptions, the ability of the Company and its material subsidiaries to: (i) create liens on any of its property or assets, or assign any rights to or security interests in future revenues; (ii) engage in sale and leaseback transactions; (iii) engage in mergers, consolidations and sales of all or substantially all of their assets on a consolidated basis; (iv) enter into agreements restricting dividends and advances by their subsidiaries; and, (v) engage in transactions with affiliates other than those based on arm's-length negotiations. The Credit Agreement also limits the ability of certain subsidiaries of the Company to incur indebtedness or issue preferred stock. In addition, the Credit Agreement requires the Company to satisfy certain financial performance criteria. The indenture under which the Senior Notes and Senior Debentures are issued contains certain covenants that limit, among other things and with certain exceptions: (i) the ability of Millennium America Inc. and its Restricted Subsidiaries (as defined) to grant liens or enter into sale and leaseback transactions; (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness; and, (iii) the ability of Millennium America Inc. and the Company to merge, consolidate or transfer substantially all of their respective assets. At December 31, 1996, the Company had outstanding notes payable of $98 bearing interest at an average rate of approximately 7.2% with maturity of thirty days or less. At December 31, 1997, the Company and its subsidiaries had outstanding standby letters of credit amounting to $124 and had unused availability under short-term lines of credit and its credit facility of $358. In addition, the Company has guaranteed certain debt obligations of Equistar up to $750. The maturities of long-term debt during the next five years are as follows: 1998--$20; 1999--$7; 2000--$17; 2001--$549; and, 2002 and beyond--$754. Interest paid for the years ended December 31, 1997, 1996 and 1995 was $129, $58 and $380, respectively. Note 8--Financial Instruments Fair Value of Financial Instruments: The fair value of all short-term financial instruments approximate their carrying value due to their short maturity. The fair value of long-term financial instruments (excluding forward exchange contracts, interest rate protection agreements and the Senior Notes and Senior Debentures) approximates carrying value as they were based on terms that continue to be available to the Company from its lenders. 38 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) The fair value of the Company's other financial instruments are based upon estimates received from independent financial advisors as follows:
=================================================================================== 1997 1996 - ----------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ------ Senior Notes and Debentures $ 749 $ 748 $ 750 $ 732
Off-Balance Sheet Risk: The Company has certain receivables, payables and short-term borrowings denominated in currencies other than the functional currency of the Company and/or its subsidiaries. During the year the Company hedged certain of these exposures by entering into forward exchange contracts. Gains and losses related to these hedges are recognized in income as part of, and concurrent with, the hedged transactions. The Company does not use derivative financial instruments for trading or speculative purposes. At December 31, 1997, the stated or notional amounts of the Company's outstanding forward exchange contracts mature within 90 days. The table below summarizes the contractual amounts of the Company's forward exchange contracts in United States dollars. The foreign currency amounts have been translated into United States dollars using the exchange rate at the reporting date.
==================================================================================== (Buy) Sell - ------------------------------------------------------------------------------------ Australian Dollars $(14) German Marks 4 French Francs 5 Italian Lira 4 Dutch Guilders 3 Belgium Francs 2 Spanish Pesetas 2 ---- $ 6 ====
The Company enters into interest rate protection agreements to manage interest costs and risks associated with changing interest rates; these agreements effectively convert underlying variable rate debt into fixed rate debt. At December 31, 1997, the Company had several such agreements covering various periods. The notional amount of these agreements was $250 at December 31, 1997. The fixed rates payable to the Company under these agreements average 5.9% with terms expiring at various dates through October 1998. Note 9--Pension and Other Postretirement Benefits Domestic Pension Plans: The Company has several noncontributory defined benefit pension plans covering substantially all of its United States employees. The benefits for these plans are based primarily on years of credited service and average compensation as defined under the respective plan provisions. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. The Company also sponsors defined contribution plans for its salaried and certain union employees. Contributions relating to defined contribution plans are made based upon the respective plan provisions. The components of net periodic pension cost for continuing operations for the Company's United States defined benefit plans and the total contributions charged to pension expense for the Company's United States defined contribution plans are as follows:
================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost benefit earned during the period $ 13 $ 12 $ 15 Interest cost on projected benefit obligation 46 45 54 Actual return on plan assets (89) (68) (79) Net amortization and deferral 28 (1) -- Curtailment gain 5 -- -- ------ ------- ------- Net periodic pension expense (income) for defined benefit plans 3 (12) (10) Defined contribution plans 1 2 4 ------ ------- ------- Total pension expense (income) $ 4 $ (10) $ (6) ====== ======= =======
Assumptions used in the actuarial calculations relating to the defined benefit plans were as follows:
==================================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------------ Weighted-average discount rates 7.25% 7.50% 7.50% Rates of increase in compensation levels 4.25% 4.25% 4.25% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
39 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) The following table sets forth the funded status and amounts recognized in the consolidated balance sheets for the Company's United States defined benefit pension plans:
=========================================================================================================================== 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Plans Whose Plans Whose Plans Whose Plans Whose Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Benefits Exceed Assets Benefits Exceed Assets ------------- ------------- ------------- ------------- Actuarial present value of benefit obligations Vested benefit obligation $(497) $ (98) $(500) $ (86) Nonvested benefit obligation (12) (8) (12) (7) ------ ------ ------ ------ Accumulated benefit obligation (509) (106) (512) (93) Projected benefit obligation (549) (123) (546) (111) Plan assets at fair value 681 96 670 85 ------ ------ ------ ------ Projected benefit obligation less than (in excess of) plan assets 132 (27) 124 (26) Add (deduct) Unrecognized prior service cost -- 5 -- 5 Unrecognized net loss 2 7 25 11 Unrecognized net asset at date of adoption, net of amortization (1) -- (2) -- Adjustment required to recognize minimum liability -- (5) -- (6) ------ ------ ------ ------ Prepaid (accrued) pension costs (included in Investments and other assets) $ 133 $ (20) $ 147 $ (16) ======= ====== ====== ======
The plans' assets are primarily included in a master trust, which principally invests in listed stocks and bonds, including common stock of the Company which, at market value, comprises less than 1% of the master trust's assets at December 31, 1997. Postretirement Benefits: The Company provides unfunded health care and life insurance benefits to certain groups of retirees. Net periodic postretirement benefit cost includes the following components:
================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost $ 2 $ 2 $ 3 Interest cost 4 4 9 --- --- ---- Net periodic postretirement benefit cost $ 6 $ 6 $ 12 === === ====
The following table presents the plans' unfunded status reconciled with amounts recognized in the Company's balance sheets:
================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Retirees $(110) $(201) Fully eligible active plan participants (9) (10) Other active plan participants (8) (23) ------ ------ Accumulated postretirement benefit obligation (127) (234) Unrecognized net gain (26) (9) ------ ------ Accrued postretirement benefit obligation (included in other liabilities) $(153) $(243) ====== ======
The weighted-average annual assumed rates of increase in the health care cost trend rate are 9.4%-12.5% and are assumed to decrease .5% a year to 5.5%-6.0%. The effect of increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $7, and the aggregate of service and interest components of net periodic postretirement benefit cost for 1997 by $3. 40 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7.5% at December 31, 1997 and 1996, respectively. Foreign Benefit Arrangements: Pension and other employee benefits of the Company's foreign subsidiaries are primarily provided by government-sponsored plans and are being accrued currently over the period of active employment. Such amounts are not material. Note 10--Long-Term Incentive Plan The Company adopted a Long-Term Stock Incentive Plan ("Stock Incentive Plan") for the purpose of enhancing the profitability and value of the Company for the benefit of its shareholders. A maximum of 3,909,000 shares of common stock may be issued or used for reference purposes pursuant to the Stock Incentive Plan. The Stock Incentive Plan provides for the following types of awards: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) performance units; and, (v) performance shares. During 1996 and 1997, 2,912,322 and 174,736 shares, respectively, of performance-based and time-vested restricted stock were awarded to executive officers and key managers. The vesting schedule for the initial award was as follows: (i) three equal tranches aggregating 25% of the total award will vest in each of October 1999, 2000 and 2001; and, (ii) three equal tranches aggregating 75% of the total award will be subject to the achievement of "value creation" performance criteria established by the Compensation Committee for each of the three performance cycles commencing January 1, 1997, and ending December 31, 1999, 2000 and 2001, respectively. If and to the extent such criteria are achieved, half of the earned portion of the 25% tranche relating to a particular performance-based cycle of the award will vest immediately and the remainder will vest in five equal annual installments commencing on the first anniversary of the end of the cycle. Options granted under the Stock Incentive Plan vest three years from the date of grant and expire ten years from the date of grant. All grants under the Stock Incentive Plan fully vest in the event of a change-in-control (as defined by the plan) of the Company, or in the case of employees of a subsidiary of the Company, a change-in-control of the relevant subsidiary. The Company had authorization under the Stock Incentive Plan to grant awards for up to an additional 636,315 shares at December 31, 1997. Unearned restricted shares, based on the market value of the shares at each balance sheet date, are included as a separate component of shareholders' equity and amortized over the restriction period. Compensation expense recognized in accordance with Accounting Principles Board Opinion No. 25 was $11 and $2 for 1997 and 1996, respectively. During 1997, as a result of the change-in-control provisions in the Plan being triggered by the formation of the Equistar venture, certain restricted stock awards and options held by employees of Millennium Petrochemicals became fully vested. Compensation expense of $12 was recognized as a result of this vesting. A summary of changes in the awards under the Plan (other than awards to non-employee directors) is as follows:
============================================================================================================ Restricted Weighted-Average Share Weighted-Average Shares Grant Price Options Exercise Price - ------------------------------------------------------------------------------------------------------------ Initial awards October 8, 1996 2,912,322 $ 22.32 523,000 $ 19.00 Balance at December 31, 1996 2,912,322 $ 22.32 523,000 $ 19.00 Vested and issued (683,273) 22.32 -- -- Cancelled (226,491) 22.32 (200,000) 19.00 Granted 174,736 23.72 97,000 22.15 ---------- -------- Balance at December 31, 1997 2,177,294 $ 22.43 420,000 $ 19.79 ========= ======= ======== ========
For options outstanding at December 31, 1997, the range of exercise prices was $18.00 to $24.00 per share, and the weighted-average remaining contractual life was 9 years. The fair value of such options at December 31, 1997, was $4. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Had compensation cost for the Company's incentive plan been determined based on the fair value of such grants on the grant date in accordance with the provisions of SFAS 123, the impact on net income and EPS would not have been materially different. 41 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions unless otherwise indicated) Note 11--Commitments and Contingencies The Company is subject, among other things, to several proceedings under the Federal Comprehensive Environmental Response Compensation and Liability Act and other federal and state statutes or agreements with third parties. These proceedings are in various stages ranging from initial investigation to active settlement negotiations to implementation of the clean-up or remediation of sites. Additionally, certain of the Company's subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business, including those relating to commercial transactions and product liability. While certain of the lawsuits involve allegedly significant amounts, it is management's opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on the Company's financial position or results of operations. The Company believes that the range of potential liability for these matters, collectively, which primarily relate to environmental remediation activities, is between $150 and $184 and has accrued $184 as of December 31, 1997. The Company has various contractual obligations to purchase raw materials used in its production of TiO2 and fragrance and flavor chemicals. Commitments to purchase ore used in the production of TiO2 are generally 3-to 8-year contracts with competitive prices generally determined at a fixed amount subject to escalation for inflation. Total commitments to purchase ore aggregate approximately $1,100 for TiO2 and expire between 1998 and 2002. Commitments to acquire crude sulfate turpentine, used in the production of fragrance and flavor chemicals, are generally pursuant to 1-to 5-year contracts with prices based on the market price and which expire between 1998 and 2000. The Company is organized under the laws of Delaware and is subject to United States federal income taxation of corporations. However, in order to obtain clearance from the United Kingdom Inland Revenue as to the tax-free treatment of the stock dividend for United Kingdom tax purposes for Hanson and Hanson shareholders, Hanson agreed with the United Kingdom Inland Revenue that the Company will continue to be centrally managed and controlled in the United Kingdom at least until September 30, 2001. Hanson also agreed that the Company's Board of Directors will be the only medium through which strategic control and policy making powers are exercised, and that board meetings almost invariably will be held in the United Kingdom during this period. The Company has agreed not to take, or fail to take, during such five-year period, any action that would result in a breach of, or constitute non-compliance with, any of the representations and undertakings made by Hanson in its agreement with the United Kingdom Inland Revenue and to indemnify Hanson against any liability and penalties arising out of a breach of such agreement. The Company's By-Laws provide for similar constraints. The Company and Hanson estimate that such indemnification obligation would have amounted to approximately $421 if it had arisen during the twelve months ended September 30, 1997, and that such obligation will decrease by approximately $84 on each October 1 prior to October 1, 2001, when it will expire. If the Company ceases to be a United Kingdom tax resident at any time, the Company will be deemed for purposes of United Kingdom corporation tax on chargeable gains to have disposed of all of its assets at such time. In such a case, the Company would be liable for United Kingdom corporation tax on chargeable gains on the amount by which the fair market value of those assets at the time of such deemed disposition exceeds the Company's tax basis in those assets. The tax basis of the assets would be calculated in pounds sterling, based on the fair market value of the assets (in pounds sterling), at the time of acquisition of the assets by the Company, adjusted for United Kingdom inflation. Accordingly, in such circumstances, the Company could incur a tax liability even though it has not actually sold the assets and even though the underlying value of the assets may not actually have appreciated (due to currency movements). Since it is impossible to predict the future value of the Company's assets, currency movements and inflation rates, it is impossible to predict the magnitude of such liability, should it arise. Note 12--Operations by Industry Segment and Geographic Area The Company's principal operations are grouped into four business segments: titanium dioxide and related products, acetyls, specialty chemicals, and polyethylene, alcohol and related products. See page 19 for information with respect to these segments. Most of the Company's foreign operations are conducted by subsidiaries in the United Kingdom, France and Australia. Sales between the Company's operations are made on terms similar to those of its third-party distributors. Sales between geographic areas are not significant. Income and expense not allocated to industry segment in computing operating income include interest income and expense and other income and expense of a general corporate nature. Export sales from the United States for the years ended December 31, 1997, 1996 and 1995 were approximately $273, $272 and $379, respectively. 42 Millennium Chemicals Inc. Notes to Consolidated (Combined) Financial Statements (in millions except share data)
========================================================================================== By Geographic Area 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net sales United States $2,677 $2,693 $3,462 Foreign 393 377 368 Inter-area elimination (22) (30) (30) ------- ------- ------- Total $3,048 $3,040 $3,800 ======= ======= ======= Operating income United States $ 422 $ 245 $ 743 Foreign 27 38 99 ------ ------ ------ Total $ 449 $ 283 $ 842 ====== ====== ====== Identifiable assets United States $3,599 $4,733 Foreign 727 868 ------- ------- Total $4,326 $5,601 ======= =======
Note 13--Subsequent Events On March 20, 1998, the Company, Lyondell and Occidental Petroleum Corporation ("Occidental"), announced the signing of a definitive agreement to expand Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of Occidental's chemical subsidiary. Occidental will contribute the net assets of these businesses (including $200 of debt related to these businesses) to Equistar. Equistar will borrow an additional $500, $425 of which will be distributed to Occidental and $75 to the Company. Upon the completion of this transaction, expected to be by mid-1998, Equistar will be owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. Market for Registrant's Common Equity and Related Shareholder Matters The following table sets forth the high and low closing sales prices per share of Common Stock reported by the NYSE since October 2, 1996, the commencement of "regular way" trading:
================================================================================ High Low - -------------------------------------------------------------------------------- 1996 Fourth quarter $23.000 $17.250 1997 First quarter $20.875 $16.875 Second quarter 22.750 17.500 Third quarter 23.500 20.250 Fourth quarter 24.063 22.250
As of March 20, 1998, there were 34,615 record holders of Common Stock. The closing price per share of Common Stock as reported by the NYSE on such date was $31.00. 43 EX-21 14 EXHIBIT 21.1 EXHIBIT 21.1 MILLENNIUM CHEMICALS INC.
STATE OR COUNTRY OF INCORPORATION --------------------- Millennium Chemicals Inc. Delaware/UK Resident Millennium Overseas Holdings Limited United Kingdom Millennium Chemicals UK Holdings Limited United Kingdom Millennium Inorganic Chemicals Limited United Kingdom Millennium Inorganic Chemicals S.A. France Societe Immobiliere de la Cote Societe Anonyme France Thann Chimie Societe Anonyme France Millennium Holdings Brasil Ltda. Brazil Millennium Inorganic Chemicals do Brasil S.A. (1) Brazil SCMC Holdings B.V. Netherlands SCM Chemicals Ltd. Australia Millennium America Holdings Inc. Delaware Millennium America Inc. Delaware Millennium Holdings Inc. Delaware Millennium Specialty Chemicals Inc. Delaware Millennium Petrochemicals Inc. Virginia Millennium Petrochemicals GP LLC (2) Delaware Millennium Petrochemicals LP LLC (2) Delaware Millennium Methanol LP Inc. (3) Delaware Millennium Methanol GP Inc. (3) Delaware Suburban Propane GP, Inc. (4) Delaware Millennium Inorganic Chemicals Inc. Delaware HMB Holdings Inc. Delaware MHC Inc. Delaware LeMean Property Holdings Corporation Delaware
- ------------ (1) Millennium Holdings Brasil Ltda. owns 99% of the voting shares and 72% of the total shares of Millennium Inorganic Chemicals do Brasil S.A. (2) Millennium Petrochemicals GP LLC and Millennium Petrochemicals LP LLC together own a 29.5% interest in Equistar Chemicals, LP. (3) Millennium Methanol LP Inc. and Millennium Methanol GP Inc. together own an 85% interest in La Porte Methanol Company, L.P. (4) Suburban Propane GP, Inc. owns a 26.4% aggregate interest in Suburban Propane Partners, L.P. and Suburban Propane, L.P. EX-23 15 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Millennium Chemicals Inc. on Form S-8 (No. 333-13143) pertaining to the Millennium Chemicals Inc. Retirement Savings and Investment Plan, (No. 333-13147) pertaining to the Quantum Chemical Retirement Savings and Investment Plan for Hourly Represented Employees, (No. 333-13717) pertaining to the Millennium Chemicals Inc. Long-Term Stock Incentive Plan, and (No. 333-53139) pertaining to the Salary and Bonus Deferral Plan, of our report on the Millennium Chemicals Inc. financial statements dated January 21, 1999, which appears on page 29 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference to our report on Supplemental Financial Information and the Financial Statement Schedule, which appears on page F-1 of this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New Jersey March 29, 1999 EX-23 16 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Millennium Chemicals Inc. on Form S-8 (No. 333-13143) pertaining to the Millennium Chemicals Inc. Retirement Savings and Investment Plan, (No. 333-13147) pertaining to the Quantum Chemical Retirement Savings and Investment Plan for Hourly Represented Employees, (No. 333-13717) pertaining to the Millennium Chemicals Inc. Long-Term Stock Incentive Plan, and (No. 333-53139) pertaining to the Salary and Bonus Deferral Plan, of our report on the Equistar Chemicals, LP financial statements dated February 26, 1999 which appears on page F-5 of this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 29, 1999 EX-23 17 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of Millennium Chemicals, Inc. on Form S-8 (No. 333-13143) pertaining to the Quantum Chemical Retirement Savings & Investment Plan, Form S-8 (No. 333-13147) pertaining to Quantum Chemical Retirement Savings & Investment Plan for Hourly Represented Employees, Form S-8 (No. 333-13717) pertaining to Millennium Chemicals, Inc. Long-Term Stock Incentive Plan, and Form S-8 (No. 333-53139) pertaining to the Millennium Chemicals, Inc. Salary Bonus and Deferral Plan of our report dated November 13, 1996 with respect to the consolidated financial statements of Cornerstone-Spectrum, Inc. incorporated by reference in the Annual Report (Form 10-K) of Millennium Chemicals, Inc. for the year ended December 31, 1998. ERNST & YOUNG LLP Hackensack, New Jersey March 29, 1999 EX-27 18 EXHIBIT 27.1
5 1,000,000 12-Mos DEC-31-1998 JAN-01-1998 DEC-31-1998 103 0 245 3 334 936 1644 600 4100 379 1039 0 0 1 1577 4100 0 1597 1134 1392 29 40 72 202 37 165 1 (2) 0 164 2.18 2.17
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