| LYONDELL CHEMICAL CO Item 1A Risk Factors There are many factors that may affect the businesses and results of operations of Lyondell and its joint ventures |
| For additional discussion regarding factors that may affect the businesses and operating results of discussed below in this “Item 1A Risk Factors,” the ability of each of LCC, Millennium, Equistar and LCR to make payments on and to refinance its respective indebtedness may depend solely upon its individual ability to generate cash |
| Each of LCC, Millennium, Equistar and LCR is separately responsible for its respective outstanding debt (except that dlra300 million of Equistar’s debt is guaranteed by LCC) |
| The businesses of each of LCC, Millennium, Equistar and LCR may not generate sufficient cash flow from operations to meet their respective debt service obligations, future borrowings may not be available under current or future credit facilities of each entity in an amount sufficient to enable each of them to pay their respective indebtedness at or before maturity, and each entity may not be able to refinance its respective indebtedness on reasonable terms, if at all |
| Factors beyond the control of LCC, Millennium, Equistar and LCR affect the ability of each of them to make these payments and refinancings |
| These factors include those discussed elsewhere in this “Item 1A Risk Factors” section and those listed in the “Forward-Looking Statements” section of this Annual Report on Form 10-K Further, the ability of LCC, Millennium, Equistar and LCR to fund capital expenditures and working capital depends on the ability of each entity to generate cash and depends on the availability of funds under lines of credit and other liquidity facilities |
| If, in the future, sufficient cash is not generated from their respective operations to meet their respective debt service obligations and sufficient funds are not available under lines of credit or other liquidity facilities, LCC, Millennium, Equistar and LCR each may need to reduce or delay non-essential expenditures, such as capital expenditures and research and development efforts |
| In addition, these entities may need to refinance debt, obtain additional financing or sell assets, which they may not be able to do on reasonable terms, if at all |
| Debt and other agreements restrict the ability of LCC, Millennium, Equistar and LCR to take certain actions and require the maintenance of certain financial ratios; failure to comply with these requirements could result in acceleration of debt |
| LCC’s Debt and Accounts Receivable Facility—LCC’s revolving credit facility, indentures and accounts receivable sales facility contain covenants that, subject to exceptions, restrict, among other things, sale and leaseback transactions, lien incurrence, debt incurrence, dividends, investments, non-regulatory capital expenditures, lease payments, certain other payments, joint ventures, affiliate transactions, restrictive agreements, sales of assets and mergers |
| In addition, the credit facility contains covenants that require the maintenance of specified financial ratios: (1) the Interest Coverage Ratio (as defined) at the end of any period of four consecutive fiscal quarters ending on or most recently before each of the indicated dates below, is required to be equal to or greater than the indicated ratio and (2) on any day during the period commencing with each indicated date below and ending on the date prior to the next succeeding indicated date, the ratio of (a) Senior Secured Debt (as defined) at such day, to (b) Adjusted EBITDA (as defined) for the period of four consecutive fiscal quarters most recently ended on or prior to such day, is required to be equal to or less than the ratio set forth below opposite the date commencing such period: Interest Coverage Ratio _________________________________________________________________ Senior Secured Debt to Adjusted EBITDA Ratio _________________________________________________________________ December 31, 2005 2dtta00 3dtta75 March 31, 2006 2dtta25 3dtta25 June 30, 2006 2dtta50 2dtta75 September 30, 2006 and thereafter 3dtta00 2dtta50 Millennium’s Debt—Millennium has a US and an Australian revolving credit facility, an Australian term loan facility and a UK revolving credit facility |
| Millennium’s facilities and its indentures contain covenants that, subject to exceptions, restrict, among other things, distributions, debt incurrence, lien incurrence, investments, sale and leaseback transactions, certain other payments, sales of assets, affiliate transactions, mergers, domestic 36 ______________________________________________________________________ [119]Table of Contents accounts receivable securitization transactions, restrictive agreements and issuances of redeemable stock and preferred stock |
| Pursuant to these provisions, Millennium is prohibited from making restricted payments, including paying certain dividends |
| Other than the UK facility, Millennium’s facilities also contain covenants that require the maintenance of specified financial ratios: (1) the Leverage Ratio (as defined) is required to be less than 4dtta50 to 1 and (2) the Interest Coverage Ratio (as defined) for any period of four consecutive fiscal quarters is required to be equal to or greater than (a) 1dtta75 to 1 for any such period ending before September 30, 2006, and (b) 2dtta25 to 1 for any such period ending on or after September 30, 2006 |
| Millennium’s UK facility does not require the maintenance of specified financial ratios as long as certain conditions are met |
| Equistar’s Debt and Accounts Receivable Facility—Equistar has an inventory-based revolving credit facility and an accounts receivable sales facility |
| Both of these facilities and Equistar’s indentures contain covenants that, subject to exceptions, restrict, among other things, lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain other payments, affiliate transactions, restrictive agreements and mergers |
| Equistar’s credit facility does not require the maintenance of specified financial ratios as long as certain conditions are met |
| Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when Equistar’s Fixed Charge Coverage Ratio (as defined) is less than 1dtta75 to 1 |
| Equistar met this ratio as of December 31, 2005 |
| LCR’s Debt—LCR’s term loan facility and revolving credit facility contain covenants that, subject to exceptions, restrict, among other things, lien incurrence, investments, certain other payments, issuances of equity, affiliate transactions, restrictive agreements, sales of assets and mergers |
| In addition, the facilities contain covenants that require the maintenance of specified financial ratios: (1) the Debt to Total Capitalization Ratio (as defined) is required to be equal to or less than 0dtta85 to 1 at the end of any fiscal quarter, (2) the Coverage Ratio (defined generally to be the ratio of the Consolidated EBITDA (as defined) for the four most recently ended fiscal quarters to the Consolidated Interest Expense (as defined) for such fiscal quarters) is required to be equal to or greater than 4dtta5 to 1 at the end of any fiscal quarter and (3) the Senior Secured Debt to EBITDA Ratio (as defined) is required to be equal to or less than 2dtta5 to 1 at the end of any fiscal quarter |
| LCR’s owners also have loaned money to LCR Effects of a Breach—A breach by LCC, Millennium, Equistar or LCR of any of the covenants or other requirements in their respective debt instruments could (1) permit that entity’s note holders or lenders to declare the outstanding debt under the breached debt instrument due and payable, (2) permit that entity’s lenders under that credit facility to terminate future lending commitments and (3) permit acceleration of that entity’s other debt instruments that contain cross-default or cross-acceleration provisions |
| The respective debt agreements of LCC, Millennium, Equistar and LCR contain various event of default and cross-default provisions |
| In particular, certain of the debt agreements include event of default provisions that, under certain circumstances, may be triggered in connection with judgments against the relevant entity unless discharged, stayed or bonded within a specified time period |
| Furthermore, under specified circumstances, a default under Equistar’s or Millennium’s debt instruments would constitute a cross-default under LCC’s credit facility, which, under specified circumstances, would then constitute a default under LCC’s indentures |
| It is not likely that LCC, Millennium, Equistar or LCR, as the case may be, would have, or be able to obtain, sufficient funds to make these accelerated payments |
| In that event, the breaching entity’s lenders could proceed against any assets that secure their debt |
| Similarly, the breach by LCC or Equistar of covenants in their respective accounts receivable sales facilities would permit the counterparties under the facility to terminate further purchases of interests in accounts receivable and to receive all collections from previously sold interests until they had collected on their interests in those receivables, thus reducing the entity’s liquidity |
| In addition, if LCR were unable to pay its debts as they become due, PDVSA Oil would have the right to terminate the Crude Supply Agreement |
| See “Risks Relating to the Businesses—LCR’s Crude Supply Agreement with PDVSA Oil is important to LCR’s operations because it reduces the volatility of earnings and cash flow |
| The agreement is subject to the risk of enforcing contracts against non-US affiliates of a sovereign nation and force majeure risks” above |
| 37 ______________________________________________________________________ [120]Table of Contents Debt covenants limit transfers of cash between Lyondell, Millennium, Equistar and LCR and, as a result, cash flows of Millennium, Equistar and LCR may not be available to LCC and, conversely, LCC may not be able to provide cash to them |
| Although Equistar and Millennium are wholly owned subsidiaries of Lyondell, debt covenants limit the ability to transfer cash among Lyondell, Equistar and Millennium |
| Debt covenants also limit transfers of cash between Lyondell and LCR One of Millennium’s indentures prevents it from paying certain dividends to LCC This prohibition will continue unless and until Millennium’s cumulative earnings and its fixed charge coverage ratio reach specified levels |
| Accordingly, cash flow of Millennium currently is not, and in the future may not be, available to LCC to fund LCC’s needs, such as servicing LCC’s debt, paying its capital expenditures or paying dividends to its shareholders |
| Some of Equistar’s indentures require additional interest payments to the note holders if Equistar makes distributions when Equistar does not meet a specified fixed charge coverage ratio |
| Equistar met this ratio as of December 31, 2005 |
| In addition, Equistar’s credit facility and LCR’s credit facility prohibit the payment of distributions during any default under their respective facilities |
| These provisions may deter or limit the movement of cash from Equistar to Lyondell and Millennium and from LCR to Lyondell |
| Applicable laws may also limit the amounts Millennium, Equistar and LCR are permitted to pay as distributions on their equity interests |
| The ability of Lyondell’s subsidiaries and joint ventures to distribute cash to Lyondell also is dependent upon their economic performance, which is dependent on a variety of factors, including factors described elsewhere in this “Item 1A Risks Factors” section |
| LCC’s indentures contain a covenant that prohibits it from making investments in subsidiaries and joint ventures that are not restricted subsidiaries as defined in the indentures, subject to limited exceptions |
| Neither Millennium nor Equistar currently is a restricted subsidiary |
| LCC’s credit facility also contains a covenant that places limitations on its ability to make investments in joint ventures |
| Lyondell’s flexibility to make investments in LCR, and Millennium’s flexibility to make investments in Equistar, are also limited by other tests |
| Future borrowings also may contain restrictions on making investments in subsidiaries and joint ventures |
| As a result of these limitations, LCC’s cash flow may not be available to fund cash needs of Millennium, Equistar and LCR, such as servicing debt or paying capital expenditures |
| 38 ______________________________________________________________________ [121]Table of Contents FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report are “forward-looking statements” within the meaning of the federal securities laws |
| Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget” or other words that convey the uncertainty of future events or outcomes |
| Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate |
| While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond Lyondell’s control |
| Lyondell’s or its joint ventures’ actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to: • the availability, cost and price volatility of raw materials and utilities, • the supply/demand balances for Lyondell’s and its joint ventures’ products, and the related effects of industry production capacities and operating rates, • the cyclical nature of the chemical and refining industries, • operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, supplier disruptions, labor difficulties, transportation interruptions, spills and releases and other environmental risks), • uncertainties associated with the US and worldwide economies, including those due to political tensions in the Middle East and elsewhere, • current and potential governmental regulatory actions in the US and in other countries, • terrorist acts and international political unrest, • competitive products and pricing pressures, • risks of doing business outside the US, including foreign currency fluctuations, • legal, tax and environmental proceedings, • access to capital markets, • technological developments, and • Lyondell’s ability to implement its business strategies |
| Any of these factors, or a combination of these factors, could materially affect Lyondell’s or its joint ventures’ future results of operations and the ultimate accuracy of the forward-looking statements |
| These forward-looking statements are not guarantees of Lyondell’s or its joint ventures’ future performance, and Lyondell’s or its joint ventures’ actual results and future developments may differ materially from those projected in the forward-looking statements |
| Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels |
| All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report |
| Business,” “Item 1A Risk Factors,” |