solid strategy, confident execution csfb chemical conference september 16, 2003 kevin denicola...
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Solid Strategy, Confident Execution
CSFB Chemical ConferenceSeptember 16, 2003
Kevin DeNicolaSenior Vice President and CFO
2
Safe Harbor Language
Statements in this presentation relating to matters that are not historical facts are forward-looking statements. These forward-looking statements are just predictions or expectations and are subject to risks and uncertainties. Actual results could differ materially, based on factors including but not limited to the cyclical nature of the chemical and refining industries; availability, cost and volatility of raw materials and utilities; governmental regulatory actions and political unrest; global economic conditions; industry production capacity and operating rates; the supply/demand balance for Lyondell's and its joint ventures' products; competitive products and pricing pressures; access to capital markets; and technological developments and other risk factors. For more detailed information about the factors that could cause our actual results to differ materially, please refer to Lyondell Chemical Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed in March 2003, and Lyondell’s Quarterly Report on Form 10-Q, filed in August 2003. Reconciliations of GAAP financial measures to non-GAAP financial measures are provided at the end of this presentation.
3
Lyondell Has Built a Balanced Portfolio
Lyondell
IC&D
LCR
Equistar
Commodity Leverage-- A leading North American producer of ethylene, propylene
and polyethylene-- Low cost position based on feedstock flexibility and scale
Growth & International Presence-- A leading global producer of PO and derivatives-- Process technology strength
Cash Generation-- Unique capability to refine heavy crude oils-- Contractually stable business; strong cash flow generator
($ MM)
Revenues EBITDALyondell
OwnershipIC&D $3,262 $410 100.0%Equistar 5,537 256 70.5LCR 3,392 362 58.75
2002
4
Significant Integration Exists Among the Operating Entities and With Our Partners
5
Leading Product Positions Create Significant Earnings Leverage
1 Source: CMAI, LYO capacities as of Jan 20032 Includes 1.5 billion pounds that represents Bayer’s share under the PO Joint Venture and 385 million pounds or
100% of the capacity of Nihon Oxirane3 Does not include refinery-grade material or production from the product flexibility unit at Equistar’s Channelview
facility.4 Based on 1¢/gal change
Inte
rmed
iate
C
hem
ica
ls a
nd
D
eriv
ati
ves
Eq
uis
tar
Product Annual Capacity 1Capacity Position
Propylene Oxide2 (lbs) 3.9 billion 1st in North America2nd in the world
Styrene Monomer (lbs) 3.7 billion 1st in North America3rd in the world
MTBE (bbl/day) 58,500 1st in North America1st in the world
Ethylene (lbs) 11.6 billion 2nd in North America5th in the world
Propylene (lbs) 5.0 billion 2nd in North America6 th in the world
Polyethylene (lbs) 5.7 billion 3 rd in North America4 th in the world
1
3
$20MM
$14MM
$ 94MM
$116MM
$50MM
$57MM
Pre-TaxLeverage(∆1¢/unit)
6
The Lyondell and Equistar Products Serve a Broad Mix of End Users
Bldg & Const
Consumer
Electronics
Other
Transportation
Packaging
Textiles/Furnishings
Bldg & Const
ConsumerPackaging
Textiles/ Furnishings
Electronics
Other
Transportation
PROPYLENE OXIDEETHYLENE
7
We Have Focused Our Efforts On Operational Excellence
0
10
20
30
40
50
60
70
80
90
EQU LYO/EQU Polymers Polymers
Downtime Environment Quality
1998 - 2002% Improvement
ProductSimplification
%
8
Industry Leading Safety PerformanceEnterprise Incident Rate (1)
1.18
0.99
0.8
0.52
0
0.5
1
1.5
2
199920002001
2002 2003 YTD
RIR
(1) Enterprise Recordable Incident Rate (RIR) data does not include Lyondell-Citgo Refining (LCR)American Chemistry Council Best 2002 = 0.37; Top Quartile 2002 = 1.0
0.37
9
0102030405060708090
1998 2003 YTD
Lyondell Equistar
0
30
60
90
120
150
180
Lyondell Equistar PO11 Spending
Strong Operations Lead to Reduced Capital Requirements
$MM
1999 2002
Capital Spending Days of Working Capital*
* Based on accounts receivable (including those sold), inventories and accounts payable as of 6/30, and second-quarter days of sales.
10
A Brief Portfolio Review
IC&D
– Propylene Oxide (PO) and Derivatives
– Styrene
– MTBE
LCR
– Gasoline
– Heating oil
– Jet fuel
Equistar
– Ethylene
– Polyethylene
11
The PO Industry Has Absorbed a Period of Capacity Additions
Source: SRI / Lyondell
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Bln
lbs
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Op
erat
ing
Rat
e
Lyondell/Partners Dow Shell/BASF Rest of World
Nam
epla
te C
apac
ity
Effective Operating Rate(96% On Stream Time)
Demand
12
Global Styrene Supply/Demand Balances Are Relatively Tight
Source: CMAI 2003 World Styrene Analysis
20
30
40
50
60
70
80
90
100
1998 2000 2002 2004 2006 2008
Ca
pa
cit
y (
Bil
lio
ns
Po
un
ds
)
60%
65%
70%
75%
80%
85%
90%
95%
100%
Op
erat
ing
Rat
e (%
)
92% Rate
Demand at 4.5% Growth
13
600
500
400
300
200
100
MTBE is a Source of Premium Clean Octane to the 19-20 MMB/D Global Gasoline Market
Global Supply/Demand US Market Balance
MB/D
CA
U.S.
Non-U.S.
CARefinery/Olefins
U.S.Dehydro
DehydroNon -US
PO
DEMAND
CAPACITY
DEMAND SUPPLY
Refinery/Olefins
U.S.
Imports
U.S.Dehydro
PO
Source : Dewitt
14
Component Premiums Above Gasoline
0
10
20
30
40
50
60
J ul '0
1
Sep '0
1
Nov '0
1
J an '0
2
Mar '
02
May
'02
J ul '0
2
Sep '0
2
Nov '0
2
J an '0
3
Mar '
03
May
'03
J ul '0
3
Pre
miu
m a
bo
ve
Ga
so
lin
e (
¢/g
al)
MTBE
Alkylate
Source: Platts
15
600
500
400
300
200
100
Steps Toward Increased IC&D Cash Flow
Complete PO-11
Capital Spend
Convert PO/SM
Purchases onProduction
1999PO / TDI
SMMargins
MTBEResolution
Sell-out at 1995PO / TDI / SM Margins
Potential Cash Improvement
From 1st Half, 2003 *
$ MM/Yr
* 1st Half EBITDA
Annualized = $200MM
1st Half
16
LCR Important Cash Generator
Operating Reliability and Crude Deliveries Drive Performance
1 4Q01: Scheduled maintenance turnaround2 1Q03: Includes a $25MM write-off
0
50
100
150
200
250
300
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03
0
20
40
60
80
100
120
140CSA Spot Mkt EBITDA
MB/day $MM
21
Net Distribution To LYO, $MM 33 (7) 16 76 20 24 59 17 2 22 49 7 67 68
17
Improved LCR Operations Result in Stronger Distributions
Recent Current
History Performance
Safety, Recordable Injury Rate 1.8 0.35
Unscheduled Unit Downtime, Days 400+ <50
Headcount, Fulltime Equivalents 2400 1500
18
Equistar is a Leading Ethylene Producer
#2 in North America
Competitive position based on feedstock flexibility
1991 2002
Top 5 North America
Shell9%
Dow9%
Equistar15%Nova
8%
Union Carbide7%
Exxon7%
Dow/Carbide20%
ExxonMobil13%
ChevronPhillips10%
Nova 8%
40%
66%
Source: CMAI
19
North American Supply/Demand Balance Is On Track To Improve Significantly
30
40
50
60
70
80
90
100
110
120
1994 1996 1998 2000 2002 2004 2006
Bil
lio
n P
ou
nd
s
60%
70%
80%
90%
100%
Op
erat
ing
Rat
e
Ethylene Supply/Demand Balance – North America
Source: CMAI / Equistar (September/2003)
Nam
epla
te C
apac
ity
N. American Effective Operating Rate(96% On-Stream Time)
N. America Demand
Rest of World
N. America
20
5000
15000
25000
35000
45000
55000
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
-5%
0%
5%
10%
15%
20%
25%
30%
GDP %AGR Ethylene consumption
Ethylene Demand Growth has Historically Accelerated out of a Downturn
MM Lbs % Change GDP
Source: DRI & ChemData
Ethylene Demand 1971-2004 – United States
9%
13%
6%
21
Middle Eastern Capacity is Required to Meet Global Demand
Source: CMAI (August 2003)
Ethylene Cumulative Capacity Increase vs. Demand(Assumes 50% of 2005+ Middle East Projects Delayed)
0
10
20
30
40
50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008
(Billio
n P
ou
nd
s)
Change in Rest of the Global Nameplate Capacity Change in Non-Speculative Middle East CapacityChange in Speculative Middle East Capacity Cumulative Change in Demand @ 4.4%Cumulative Change in Demand @ 5.4% Cumulative Change in Demand @ 3.4%
22
Ethane - Light Naphtha Cost of Ethylene Spread
0
1
2
3
4
5
6
7
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
¢/lb
eth
yle
ne Average
Liquid Cracking Variable Cost Advantage vs. NGL
Source: ChemData
Equistar Capability
NGL
37%
Liquid
63%
N. American Industry
(ex. Equistar)
NGL
78%
Liquid
22%
Liquid Cracking Provides an Advantage vs. Ethane Raw Materials
Source: CMAI and Lyondell
20
03
YT
D
23
Cost Advantage of Liquid Feedstock Versus Ethane: Equistar Impact - 1¢/lb equals $70MM/yr
-2
0
2
4
6
8
10
12
Jan Jul Jan Jul
Liquid Variable Cost AdvantageCents/lb
2002 2003
Source : ChemData
COE – Cost of ethylene production
24
40
60
80
100
120
140
160
180
200
PG Styrene HDPE
Relative Raw Material Margin Range, 1994-2002100 = Period Average
•PG: U.S. Industrial Grade Propylene Glycol minus 0.63 x Chem Grade Propylene, both as reported by Chem Data•Styrene: US Net Industry Average Styrene Price minus 0.28 x North America ethylene Net Transaction Price, minus 0.105 x North America Contract Benzene, all as reported by CMAI•HDPE: North America HDPE Domestic Market Contract Injection Molding price - Ethylene product cash cost (Weighted Average Feed) as reported by CMAI
The Chemical Product Chains All Offer Upside in a Recovery
25
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2002 1999/2000Margins¹
1995Margins¹
1988Margins¹
LCR IC&D Equistar
Enterprise Earnings Capability Far Exceeds Recent Trough Results
Cycle EBITDA Potential
1 Chem Data/CMAI industry margins conditions for IC&D and Equistar products (ex. MTBE) applied to current capacities and ownership, LCR 2002 EBITDA, includes PO-11
Note: Assumes current capital structure; 160MM shares
($MM)
$7.45 / share
$1.35 / share
PeakRecession / Trough
Pre-Recession
2002 Proportional Interest,
Dividends & Capital
26
Our Financial Strategy is Focused and Unchanged
Maintain Sufficient Liquidity
Repay Debt
27
We Have Maintained Significant Liquidity
1 – represents the total commitment and has not been reduced by amounts committed against letters of credit:
(12/30/02: LYO-$49MM, Equ-$16MM)
(6/30/03: LYO-$53MM, Equ-$17MM)
$497MM$677MM $477MM$680MM Total Liquidity
$354MM$350MM $450MM$350MMRevolver 1
$143MM$327MM $27MM $330MMCash & ST Investments
EquistarLyondell Equistar
Lyondell
06/30/200312/31/2002
28
We Have Actively Managed Our Maturity Profile
Debt Maturities
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2003 2004 2005 2006
Lyondell Equistar($MM)
Pre-Payable Debt
$0
$400
$800
$1,200
$1,600
2003 2004 2005 2006
Lyondell Equistar($MM)
29
1 Capitalization = debt + book value of equity + minority interest Based on 160 MM shares outstanding
De-leveraging Will Benefit All Stakeholders
Impact of Lyondell debt reduction at constant capitalization1:
Debt Reduction
$1B $2B
Debt to capitalization 54% 36%
Avoided interest expense $100MM/Yr $200MM/Yr
Earnings improvement 40¢/share 80¢/share
Share price improvement atconstant capitalization $6/share $12/share
30
There are Striking Similarities Between 1993 and 2003
Coming out of the “U.S. recession of 1991”
1992 and 1993 confirmed the worse fears of pessimists
U.S. hoping to sustain economic growth of late 1993
Europe headed to moderate economic recovery
Japan waiting for some sign of recovery
Uncertainty and apprehension for 1994 and 1995…the most dominant emotions in light olefins
Iraq will comply with UN edict and…export crude
Reinvestment reached in the U.S. by the end of decade
Source: 1993 World Light Olefins Analysis, CMAI
1991-1997 or 2001-2007?
31
Interpretations of the Global Situation Created Forecasts Very Similar to Those Being Made Today
Demand forecasts
• Annual rate of 4.9% per year 1992-1998 period
• Worldwide growth…during 1993 to 2%
• New light olefins in Asia/Pacific and Africa/Middle East will severely impact exports
Source: 1993 World Light Olefins Analysis, CMAI
1991-1997 or 2001-2007?
Operating rate forecasts
• Slowly improve from 85% in 1993 to 89% in 1998
• Between 1993 and 1997…17.9 MM tons capacity will be added to 1993 total
• In the U.S. between 1990 and 1992 three new world scale plants
32
External Factors Can Quickly Alter the Outlook and Results Within the Ethylene Industry
Source: World Light Olefins Analysis, CMAI
Forecast Versus Actual Margins, ¢/lb
1994 1995 1996 1997 1998
Forecast 8.9 8.0 8.5 10.0 12.0
Actual 14.3 18.9 10.4 16.2 11.4
Actual Outcome: Ethylene margins peaked in 1994/1995;Under the current Equistar structure, 1994-1999 margins/conditions would equate to approximately $1B of EBITDA annually.
33
Six Months
Ended
June 30,
2003 2002 2001
Lyondell net loss (181)$ (148)$ (150)$ Add: Benefit from income tax (94) (58) (76)
Interest expense, net 182 373 369 Depreciation and amortization 118 244 254 Loss from equity investment in Equistar 132 117 77 Income from equity investment in LCR (56) (135) (129) Loss from other equity investments - 5 12 Restructuring charges (credits) (a) - (3) 63 Extraordinary loss on early retirement of debt, net of tax - 15 5
Lyondell EBITDA excluding restructuring charges (credits) (b) 101$ 410$ 425$
Equistar net loss (195)$ (1,299)$ (283)$ Add: Cumulative effect of accounting change - 1,053 -
Depreciation and amortization 154 298 319 Interest expense, net 102 204 189 Facility closing costs (c) - - 22 Extraordinary loss on early retirement of debt, net of tax - - 3
Equistar EBITDA 61$ 256$ 250$
Proportionate Share - % varies (d) 43$ 122$ 103$
LCR net income 86$ 213$ 203$ Add: Depreciation and amortization 57 116 108
Interest expense, net 19 32 51 Extraordinary loss on early retirement of debt - 1 2
LCR EBITDA 162$ 362$ 364$
Proportionate Share - 58.75% 95$ 213$ 214$
Lyondell and Proportionate Share of Equity Investments - EBITDA Lyondell EBITDA excluding restructuring charges (credits) 101$ 410$ 425$ Lyondell share of Equistar EBITDA (d) 43 122 103 58.75% of LCR EBITDA 95 213 214 75% of LMC EBITDA through April 30, 2002 - (3) (3)
Lyondell and Proportionate Share of Equity Investments 239$ 742$ 738$
________(a) Restructuring charges (credits) related to shutdown of Lyondell's ADI business.
(b) Annualized EBITDA for the six months ended June 30, 2003 is approximately $200 million.
(c) Closing costs related to Equistar's Port Arthur, Texas facility.
(d) Lyondell had a 41% interest in Equistar through August 22, 2002 and 70.5% thereafter.
For the twelve months ended
December 31,
Lyondell Chemical CompanyReconciliation of Net Income (Loss) to EBITDA
(Millions of dollars)
34
Equistar Lyondell
Working Capital as of June 30, 2003: a
Accounts Receivable 559$ 381$
Inventories 478 366
Accounts Payable (482) (396)
Total 555 351
Add: Accounts Receivable Sold 100 81
Adjusted Working Capital 655$ 432$
Days of Working Capital:Second Quarter Sales Revenue 1,597$ 913$
Days in Quarter 91 91
Sales per Day $17.5 $10.0
Days of Working Capital b 37 43
a - Defined as the major controllable components of working capital - receivables, inventories and payables.b - Days of working capital are calculated as adjusted working capital divided by sales per day.
(Millions of dollars)
Lyondell Chemical CompanyDays of Working Capital
Reconciliation
35
1Q 2000 2Q 2000 3Q 2000 4Q 2000 1Q 2001 2Q 2001 3Q 2001 (a) 4Q 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 (b) Q1 2003 Q2 2003
Net income (loss) 22$ (22)$ 66$ 62$ 42$ 66$ 78$ 17$ 41$ 63$ 50$ 59$ 28$ 58$
Add: Depreciation and amortization 26 30 28 28 28 27 26 27 29 30 28 29 28 29
Interest expense, net 12 16 16 17 16 15 10 10 8 7 8 9 10 9
LCR EBITDA 60$ 24$ 110$ 107$ 86$ 108$ 114$ 54$ 78$ 100$ 86$ 97$ 66$ 96$
________(a) EBITDA for LCR for the three months ended September 30, 2001 was originally reported as $116 million and was restated to include extraordinary charges
related to early debt retirement, currently reflected in other expense, net.
(b) EBITDA for the three months ended December 31, 2002 was originally reported as $98 million and was restated to include extraordinary charges related to early debt retirement, currently reflected in other expense, net.
Lyondell Chemical CompanyReconciliation of LCR Net Income (Loss) to EBITDA
(Millions of dollars)