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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FROM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 333-85141
HUNTSMAN ICI CHEMICALS LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 87-0630358
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 HUNTSMAN WAY
SALT LAKE CITY, UTAH 84108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (801) 584-5700
INDICATE BY A 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 WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES / / NO /X/
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL
DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES
UNDER A PLAN CONFIRMED BY A COURT. YES / / NO / /
AT MARCH 21, 2000, 1,000 MEMBER EQUITY UNITS of Huntsman ICI Chemicals
LLC were outstanding.
HUNTSMAN ICI CHEMICALS LLC AND SUBSIDIARIES
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS..............................................................3
ITEM 2. PROPERTIES...........................................................16
ITEM 3. LEGAL PROCEEDINGS....................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS............17
ITEM 6. SELECTED FINANCIAL DATA..............................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................27
ITEM 11. EXECUTIVE COMPENSATION...............................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K.....36
SIGNATURES....................................................................39
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HUNTSMAN ICI CHEMICALS LLC AND SUBSIDIARIES
1999 FORM 10-K ANNUAL REPORT
This report contains certain forward-looking statements that involve risks
and uncertainties, including statements about our plans, objectives, goals,
strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements.
Some of the factors that could negatively affect our performance are
discussed in "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations Cautionary Statement for Forward -
Looking Information" and elsewhere in this report.
PART I
ITEM 1. BUSINESS
GENERAL
We are a global manufacturer and marketer of chemicals through our three
principal businesses: Specialty Chemicals, Petrochemicals and Titanium
Dioxide ("TiO2"). We believe that our company is characterized by superior
low cost operating capabilities; a high degree of technological expertise; a
diversity of products, end markets and geographic regions served; significant
product integration; and strong growth prospects.
Our company, a Delaware limited liability company, was formed in 1999 in
connection with a transaction between our parent, Huntsman ICI Holdings LLC
("Holdings"), Huntsman Specialty Chemicals Corporation ("Huntsman Specialty")
and Imperial Chemicals Industries PLC ("ICI"). In connection with the
transaction, Holdings acquired, on June 30, 1999, ICI's polyurethane
chemicals, selected petrochemicals and TiO2 businesses and Huntsman
Specialty's PO business. Holdings also acquired BP Chemicals Limited's 20%
ownership interest in the Wilton olefins facility and certain related assets.
Holdings transferred the acquired businesses to us and to our subsidiaries.
Holdings owns all of our common equity interests. Holdings' common equity
interests are owned 60% by Huntsman Specialty, 30% by ICI and its affiliates
and 10% by institutional investors.
RECENT EVENTS
EXCHANGE OFFER
On February 1, 2000, we commenced an exchange offer (the "Exchange Offer")
pursuant to which we offered to exchange up to $600,000,000 aggregate
principal amount of our 10 1/8% Senior Subordinated Notes due 2009 and up to
$200,000,000 aggregate principal amount of our 10 1/8% Senior Subordinated
Notes due 2009 (collectively, the "New Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), for a
like principal amount and currency-denomination of our issued and outstanding
10 1/8% Senior Subordinated Notes due 2009 (the "Old Notes" and, together
with the New Notes, the "Notes"). The terms of the New Notes are identical to
the terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes. The Notes are fully and
unconditionally guaranteed on an unsecured senior subordinated basis by
certain of our subsidiaries (collectively, the "Guarantors"). We completed
the exchange offer on March 9, 2000.
Upon the effectiveness of the registration statement relating to the Exchange
Offer, we became subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Further, in the event
that at any time in the future we are not subject to the reporting
requirements of the Exchange Act, we, for so long as any Notes are
outstanding, will continue to file with the Securities and Exchange
Commission and provide holders of the Notes with such information, documents
and other reports specified in Sections 13 and 15(d) of the Exchange Act as
we would have been required to file had we been subject to such reporting
requirements.
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CANADIAN PLANT CLOSING
On January 31, 2000, we announced our intention to close our TiO2 plant in
Tracy, Canada around mid-year 2000. We do not anticipate that the closing of
this plant will have an adverse effect on our business or results of
operations. The plant currently performs the later steps in the production
process for a portion of the product produced at our European and South
African TiO2 facilities. Because we now have the capacity to finish all our
TiO2 product at our other facilities, we do not expect a decrease in our
total TiO2 production due to this plant's closure.
AUSTRALIAN ACQUISITION
On March 3, 2000, we announced our acquisition of the Orica Ltd. polyurethane
business. Located in Deerpark, Australia, the business has sales in
Australia, New Zealand and Southeast Asia. The business was formerly owned by
ICI as part of their global polyurethane business. In 1999 the business had
net sales of $33 million.
SPECIALTY CHEMICALS
GENERAL
Our Specialty Chemicals business is comprised of the polyurethane chemicals
business that we acquired from ICI and the propylene oxide business that we
acquired from Huntsman Specialty.
We are one of the leading polyurethane chemicals producers in the world in
terms of production capacity. We market a complete line of polyurethane
chemicals, including methylene diphenyl diisocyanate ("MDI"), toluene
diisocyanate ("TDI"), polyols, polyurethane systems and aniline, with an
emphasis on MDI-based chemicals. We have the world's second largest
production capacity of MDI and MDI-based polyurethane systems, with an
estimated 24% global MDI market share. Our customers produce polyurethane
products through the combination of an isocyanate, such as MDI or TDI, with
polyols, which are derived largely from PO and ethylene oxide. Primary
polyurethane end-uses include automotive interiors, refrigeration and
appliance insulation, construction products, footwear, furniture cushioning,
adhesives and other specialized engineering applications.
Our Specialty Chemicals business is recognized as an industry leader in
utilizing state-of-the-art application technology to develop new polyurethane
chemical products and applications. Approximately 30% of our 1999
polyurethane chemicals sales were generated from products and applications
introduced in the last three years. Our rapid rate of new product and
application development has led to a high rate of product substitution, which
in turn has led to MDI sales volume growth for our business of approximately
9.2% per year over the past ten years, a rate in excess of the industry
growth rate. Largely as a result of our technological expertise and history
of product innovation, we have enjoyed long-term relationships with a diverse
customer base.
We own the world's two largest MDI production facilities in terms of
capacity, located in Rozenburg, Netherlands and Geismar, Louisiana. These
facilities receive raw materials from our aniline facilities located in
Wilton, U.K. and Geismar, Louisiana, which in the terms of production
capacity are the world's two largest aniline facilities. Since 1996, over
$500 million has been invested to significantly enhance our production
capabilities through the rationalization of our older, less efficient
facilities and the modernization of our newer facilities listed above.
We are one of three North American producers of propylene oxide ("PO"). Our
customers process PO into derivative products such as polyols for
polyurethane products, propylene glycol ("PG"), and various other chemical
products. End uses for these derivative products include applications in the
home furnishings, construction, appliance, packaging, automotive and
transportation, food, paints and coatings and cleaning products industries.
Our PO business is also the third largest U.S. marketer of PG which is used
primarily to produce unsaturated polyester resins for bath and shower
enclosures and boat hulls, and to produce heat transfer fluids and solvents.
As a co-product of our PO manufacturing process, we also produce methyl
tertiary butyl ether ("MTBE"). MTBE is an oxygenate that is blended with
gasoline to reduce harmful vehicle emissions and to enhance the octane rating
of gasoline.
Our proprietary technology is utilized to manufacture PO and MTBE at our
state-of-the-art facility in Port Neches, Texas. This facility, which is the
most recently built PO manufacturing facility in North America, was designed
and built under the
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supervision of Texaco and began commercial operations in August 1994. Since
acquiring the facility in 1997, we have increased its PO capacity by
approximately 30% through a series of low cost process improvement projects.
The current capacity of the PO facility is approximately 525 million pounds
of PO per year. We produce PG under a tolling arrangement with Huntsman
Petrochemical Corporation, which has the capacity to produce approximately
120 million pounds of PG per year at a neighboring facility.
Our Specialty Chemicals business, on a pro forma basis, accounted for 48% and
46% of our net sales in 1999 and 1998 respectively. For 1997, 100% of
Huntsman Specialty's revenues were from Specialty Chemicals.
INDUSTRY OVERVIEW
The polyurethane chemicals industry is a $24 billion global market,
consisting primarily of the manufacture and marketing of MDI, TDI and
polyols. MDI is used primarily in rigid foam, conversely, TDI is used
primarily in flexible foam applications. Polyols, including polyether and
polyester polyols, are used in conjunction with MDI and TDI in rigid foam,
flexible foam and other non-foam applications. PO, one of the principal raw
materials for polyurethane chemicals, is primarily used in consumer durables.
MDI. MDI has a substantially larger market size and a higher growth rate than
TDI. MDI's leadership in the polyurethane chemicals market primarily results
from its superior properties and ability to be used in a more diverse range
of polyurethane applications as compared to TDI. Since 1992, the global
consumption of MDI has grown at an average rate of 8.5%, which exceeds both
GDP growth and TDI consumption growth during the same period. The U.S. and
European markets consume the largest quantities of MDI. There are four major
producers of MDI: Bayer, Huntsman ICI Chemicals, BASF and Dow. We believe it
is unlikely that any new major producers of MDI will emerge due to the
substantial requirements for entry such as the limited availability of
licenses for MDI technology and the substantial capital commitment that is
required to develop both the necessary technology and the infrastructure to
manufacture and market MDI.
TDI. The TDI market generally grows at a rate consistent with GDP and
exhibits relatively stable prices. The four largest TDI producers supply
approximately 60% of global TDI demand. The consumers of TDI consist
primarily of numerous small producers that manufacture flexible foam blocks
sold as commodities for use as furniture cushions and mattresses. Flexible
foam is typically the first polyurethane market to become established in
developing countries, and, as a result, development of TDI demand typically
precedes MDI demand.
POLYOLS. In the U.S., approximately 77% of all polyols produced are used in
polyurethane foam applications. In 1998, approximately 50% of polyols were
used to produce flexible foam blocks sold as commodities and the remaining
50% were sold as specialty products for use in various applications that meet
the specific needs of individual customers. The creation of a broad spectrum
of polyurethane products is made possible through the different combinations
of the various polyols with MDI, TDI and other isocyanates. We believe that
the market for specialty polyols that are reacted with MDI has been growing
at approximately the same rate at which MDI consumption has been growing. We
believe that the growth of consumption of commodity polyols has approximately
paralleled the growth of global GDP.
ANILINE. Aniline is an intermediate chemical used primarily as a raw material
to manufacture MDI. Approximately 80% of all aniline produced is consumed by
MDI producers, while the remaining 20% is consumed by synthetic rubber and
dye producers. Generally, most aniline produced is either consumed downstream
by the producers of the aniline or is sold to third parties under long-term,
sole supply contracts. The lack of a significant spot market for aniline
means that in order to remain competitive, MDI manufacturers must either be
integrated with an aniline manufacturing facility or have a long-term
cost-competitive aniline supply contract.
PO. Demand for PO depends largely on overall economic demand, especially that
of consumer durables. Consumption of PO in the U.S. represents approximately
40% of global consumption. Two U.S. producers, Lyondell and Dow, account for
approximately 90% of North American PO production. We believe that Lyondell
and Dow, have consumed approximately 50% and 70%, respectively, of their
North American PO production in their North American downstream operations.
MTBE. MTBE, a co-product of our PO production process, is an oxygenate that
is blended with gasoline to reduce harmful vehicle emissions and to enhance
the octane rating of gasoline. Historically, the refining industry utilized
tetra ethyl lead as the primary additive to increase the octane rating of
gasoline until health concerns resulted in the removal of
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tetra ethyl lead from gasoline. This led to the increasing use of MTBE as a
component in gasoline during the 1980s. U.S. consumption of MTBE, has grown
at a compound annual rate of 15.2% in the 1990s due primarily to the
implementation of federal environmental standards that require improved
gasoline quality through the use of oxygenates. MTBE has experienced strong
growth due to its ability to satisfy the oxygenation requirement of the Clean
Air Act Amendments of 1990 with respect to exhaust emissions of carbon
monoxide and hydrocarbon emissions from automobile engines. Some regions of
the U.S. have adopted this oxygenate requirement to improve air quality even
though they may not be mandated to do so by the Clean Air Act. While this
trend has further increased MTBE consumption, the use of MTBE is becoming
increasingly controversial and may be substantially curtailed by pending or
future legislation or regulatory action. See "Business - MTBE Developments".
SALES AND MARKETING
We manage a global sales force at 43 locations with a presence in 32
countries, which sells our polyurethane chemicals to over 2,000 customers in
67 countries. Our sales and technical resources are organized to support
major regional markets, as well as key end-use markets which require a more
global approach. These key end-use markets include the appliance, automotive,
footwear, furniture, construction, binders and coatings, adhesives, sealants
and elastomers ("CASE") industries.
Approximately 50% of our polyurethane chemicals sales are in the form of
"systems" in which we provide the total isocyanate and polyol formulation to
our customers in a ready-to-use form. Our ability to supply polyurethane
systems is a critical factor in our overall strategy to offer comprehensive
product solutions to our customers. We have strategically located our polyol
blending facilities, commonly referred to in the chemicals industry as
"systems houses", close to our customers, enabling us to focus on customer
support and technical service. We believe this customer support and technical
service system contributes to customer retention and also provides
opportunities for identifying further product and service needs of customers.
We intend to increase the utilization of our systems houses to produce and
market greater volumes of polyols and MDI polyol blends.
We have entered into contractual arrangements with Huntsman Corporation and
Huntsman Petrochemical Corporation under which Huntsman Corporation provides
us with all of the management, sales, marketing and production personnel
required to operate our PO business. See "Item 13 - Certain Relationships and
Related Transactions". We believe that the extensive market knowledge and
industry experience of the sales executives and technical experts provided to
us by Huntsman Corporation and Huntsman Petrochemical Corporation, in
combination with our strong emphasis on customer relationships, has
facilitated our ability to establish and maintain long-term customer
contracts. Due to the specialized nature of our markets, our sales force must
possess technical knowledge of our products and their applications. Our
strategy is to continue to increase sales to existing customers and to
attract new customers by providing quality products, reliable supply,
competitive prices and superior customer service.
Based on current production levels, we have entered into long-term contracts
to sell 100% of our PO to customers including Huntsman Petrochemical
Corporation through 2007. Other contracts provide for the sale of 63% of our
annual MTBE production in 2000 and 51% of our annual MTBE production from
2001 through March 2007. In addition, over 70% of our current annual PG
production is sold pursuant to long-term contracts.
MANUFACTURING AND OPERATIONS
Our primary facilities are located at Geismar, Louisiana; Port Neches, Texas;
Rozenburg, Netherlands; and Wilton, U.K. Our Wilton facility currently has
the largest production capacity for nitrobenzene and aniline in the world.
Following the completion of an expansion project in the first quarter of
2000, the Geismar facility has the largest production capacity for
nitrobenzene, aniline and MDI in the world.
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The following chart provides information regarding the capacities of our
primary facilities:
ANNUAL CAPACITIES (IN MILLIONS)
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LOCATION MDI TDI POLYOLS ANILINE NITROBENZENE PO PG MTBE
- -------------------------------------------------------------------------------------------------------- ------------
(pounds) (GALLONS)
Geismar, Louisiana(a)....... 840(a) 90 150 830(b) 1,100(b)
Port Neches, Texas.......... 525 120(c) 260
Wilton, U.K. ............... 640 880
Rozenburg, Netherlands...... 550 100
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TOTAL.................. 1,390 90 250 1,470 1,980 525 120 260
========================================================================================
(a) The Geismar facility is owned as follows: we own 100% of the MDI, TDI and
polyol facilities, and Rubicon, Inc., a manufacturing joint venture with CK
Witco in which we own 50%, owns the aniline and nitrobenzene facilities.
Rubicon is a separate legal entity that operates both the assets that we own
jointly with Witco and our wholly-owned assets at Geismar.
(b) We have the right to approximately 78% of this capacity under the Rubicon
joint venture arrangements.
(c) We produce under a tolling arrangement with Huntsman Petrochemical
Corporation.
Since 1996, over $500 million has been invested to improve and expand our MDI
production capabilities through the rationalization of older, less efficient
facilities and the modernization of newer facilities. We expect to pursue
future plant expansions and capacity modification projects when justified by
market conditions.
In addition to MDI, we produce TDI and polyols at our Geismar facility and
polyols and polyol blends at our Rozenburg facility. We manufacture TDI and
polyols primarily to support our MDI customers' requirements. We believe the
combination of our PO business, which produces the major feedstock for
polyols, with our polyols business creates an opportunity to expand our
polyols business and market greater volumes of polyols through our existing
sales network and customer base.
We use a proprietary manufacturing process to manufacture PO. We own or
license all technology, know-how and patents developed and utilized at this
facility. Our process reacts isobutane and oxygen in proprietary oxidation
(peroxidation) reactors, thereby forming tertiary butyl hydroperoxide
("TBHP") and tertiary butyl alcohol ("TBA") which are further processed into
PO and MTBE. Because our PO production process is less expensive relative to
other technologies and allows all of our PO co-products to be processed into
saleable or useable materials, we believe that our PO production technology
possesses several distinct advantages over its alternatives.
RUBICON JOINT VENTURE. We are a 50% joint venture owner, along with CK Witco,
of Rubicon, Inc., which owns aniline, nitrobenzene and diphenlylamine ("DPA")
manufacturing facilities in Geismar, Louisiana. In addition to operating our
100% owned MDI, TDI and polyol facilities at Geismar, Rubicon also operates
the jointly-owned aniline, nitrobenzene and DPA facilities and is responsible
for providing other auxiliary services to the entire Geismar complex. We are
entitled to approximately 78% of the nitrobenzene and aniline production
capacity of Rubicon, and CK Witco is entitled to 100% of the DPA production.
As a result of this joint venture, we are able to achieve greater scale and
lower costs for our products than we would otherwise have been able to obtain.
RAW MATERIALS. The primary raw materials for polyurethane chemicals are
benzene and PO. Benzene is a widely-available commodity that is the primary
feedstock for the production of MDI. Approximately one-third of the raw
material costs of MDI is attributable to the cost of benzene. Our integration
with our suppliers of benzene, nitrobenzene and aniline provides us with a
competitively priced supply of feedstocks and reduces our exposure to supply
interruption.
A major cost in the production of polyols is attributable to the costs of PO.
We believe that the integration of our PO business with our polyurethane
chemicals business will give us access to a competitively priced, strategic
source of PO and the opportunity to further expand into the polyol market.
The primary raw materials used in our PO production process are isobutane,
propylene, methanol and oxygen, which accounted for 58%, 26%, 12%, and 4%,
respectively, of total raw material costs in 1999. We purchase our raw
materials primarily under long-term contracts. While most of these feedstocks
are commodity materials generally available to us from a wide variety of
suppliers at competitive prices in the spot market, we purchase all of the
propylene used in the production of our PO from Huntsman Petrochemical
Corporation, through Huntsman Petrochemical Corporation's pipeline which is
the only propylene pipeline connected to our PO facility.
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COMPETITION
The polyurethane chemicals business is characterized by a small number of
competitors, including BASF, Bayer, Dow and Lyondell. While these competitors
produce various types and quantities of polyurethane chemicals, we focus on
MDI and MDI-based polyurethane systems. We compete based on technological
innovation, technical assistance, customer service, product reliability and
price. In addition, our polyurethane chemicals business also differentiates
itself from its competition in the MDI market in two ways: (1) where price is
the dominant element of competition, our polyurethane chemicals business
differentiates itself by its high level of customer support including
cooperation on technical and safety matters; and (2) elsewhere, we compete on
the basis of product performance and our ability to react to customer needs,
with the specific aim of obtaining new business through the solution of
customer problems. Nearly all the North American PO production capacity is
located in the U.S. and controlled by three producers, Lyondell, Dow, and
ourselves. We compete based on price, product performance and service.
On November 16, 1999 Lyondell announced that their polyols business was being
sold to Bayer. We do not believe that the transaction will have a material
effect on our business.
MTBE DEVELOPMENTS
The presence of MTBE in some groundwater supplies in California and other
states (primarily due to gasoline leaking from underground storage tanks) and
in surface water (primarily from recreational watercraft) has led to public
concern about MTBE's potential to contaminate drinking water supplies.
Heightened public awareness regarding this issue has resulted in state and
federal initiatives to rescind the federal oxygenate requirements for
reformulated gasoline or restrict or prohibit the use of MTBE in particular.
For example, the State of California has requested that the U.S.
Environmental Protection Agency waive the federal oxygenated fuels
requirements for gasoline sold in California. Separately, in 1999, the
California Air Resources Board proposed regulations that would prohibit the
addition of MTBE to gasoline after 2002. Several bills have been introduced
in the U.S. Congress to accomplish similar goals of curtailing or eliminating
the oxygenated fuels requirements in the Clean Air Act, or of curtailing MTBE
use in particular. In 1998, the EPA established a committee to review and
provide recommendations concerning the requirements for oxygenated fuels in
the Clean Air Act. The committee's findings were released to the public in
1999, and include, among other things, recommendations that (1) MTBE use be
reduced substantially, (2) the U.S. Congress clarify federal and state
authority to regulate or eliminate gasoline additives that threaten water
supplies and (3) the U.S. Congress amend the Clean Air Act to remove certain
of the oxygenated fuels requirements for reformulated gasoline. In a
statement issued in response to these recommendations, the administrator of
the EPA stated that the EPA would work with the U.S. Congress to craft a
legislative solution that would allow for a significant reduction in MTBE
use, while maintaining air quality. Also in 1999, the U.S. Senate passed a
resolution calling for a phase out of MTBE. While this resolution has no
binding legislative effect, there can be no assurance that future
Congressional action will not result in a ban or other restrictions on MTBE
use. On March 20, 2000, the EPA announced its intention, through an advanced
notice of proposed rulemaking, to phase out the use of MTBE under authority
of the federal Toxic Substances Control Act. In its notice, the EPA also
called on the U.S. Congress to similarly restrict MTBE under the Clean Air
Act. Any phase-out of or prohibition against the use of MTBE in California
(in which a significant amount of MTBE is consumed), in other states, or
nationally could result in a significant reduction in demand for our MTBE and
result in a material loss in revenues or material costs or expenditures.
While the environmental benefits of the inclusion of MTBE in gasoline are
widely debated, we believe that there is no reasonable replacement for MTBE
as an octane enhancer and, while its use may no longer be mandated, we
believe that it will continue to be used as an octane enhancer as long as its
use is not prohibited. We believe that our low production costs will put us
in a favorable position relative to other higher cost sources of MTBE
(primarily imports and on-purpose manufacturing facilities). In the event
that there should be a phase-out, however, we believe we will be able to
modify our PO production process to use our co-product TBA stream to produce
saleable products other than MTBE, though the necessary modifications may
require material capital expenditures and the sale of the other products may
produce a lower level of cash flow than the sale of MTBE. Furthermore, we
cannot give any assurance that we will not be named in litigation by citizens
groups, municipalities or others relating to the environmental effects of
MTBE or that such litigation will not have a material adverse effect on our
business, financial condition, results of operations or cash flows.
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PETROCHEMICALS
GENERAL
We are a highly-integrated European olefins and aromatics producer. Olefins,
principally ethylene and propylene, are the largest volume basic
petrochemicals and are the key building blocks from which many other
chemicals are made. For example, olefins are used to manufacture most
plastics, resins, adhesives, synthetic rubber and surfactants which are used
in a variety of end-use applications. Aromatics are basic petrochemicals used
in the manufacture of polyurethane chemicals, nylon, polyester fiber and a
variety of plastics.
Our olefins facility at Wilton, U.K. is one of Europe's largest and lowest
cost olefins facilities. Our Wilton facility has the capacity to produce
approximately 1.9 billion pounds of ethylene, 880 million pounds of propylene
and 200 million pounds of butadiene per year. The Wilton olefins facility
benefits from its feedstock flexibility and superior logistics, which allows
for the processing of naphthas, condensates and natural gas liquids ("NGL").
We produce aromatics at our two integrated manufacturing facilities located
in Wilton, U.K. and North Tees, U.K. We are Europe's largest cyclohexane
producer, second largest paraxylene producer and third largest benzene
producer. We also produce cumene. We use all of the benzene produced by our
aromatics business internally in the production of nitrobenzene for our
polyurethane chemicals business and for the production of cyclohexane and
cumene. The balance of our aromatics products are sold to several key
customers. Our aromatics business has entered into a contract with Shell
Trading International Limited for the purchase of reformate feedstock. This
allowed us to close part of our aromatics facilities in the fourth quarter of
1999 permanently reducing fixed production costs while maintaining production
of key products. We believe that this change will improve the future
profitability of our aromatics business.
Our petrochemicals business, on a pro forma basis, accounted for 26% and 28%
of our net sales in 1999 and 1998 respectively.
INDUSTRY OVERVIEW
Petrochemical markets are essentially global commodity markets. However, the
olefins market is subject to some regional price differences due to the
limited inter-regional trade resulting from the high costs of product
transportation. The global petrochemicals market is cyclical and is subject
to pricing swings due to supply and demand imbalances, feedstock prices
(primarily driven by crude oil prices) and general economic conditions. The
following table sets forth the primary markets for our petrochemicals.
PRODUCT MARKETS END USES
Ethylene Polyethylene, ethylene oxide, polyvinyl Packaging materials, plastics,
chloride, alpha olefins housewares, beverage containers, personal care
Propylene Polypropylene, propylene oxide, acrylonitrile, Clothing fibers, plastics, automotive parts,
isopropanol foams for bedding & furniture
Benzene Polyurethanes, polystyrene, Appliances, automotive components, detergents,
cyclohexane, cumene personal care, packaging materials, carpet
Paraxylene Polyester, purified Fibers, textiles, beverage containers
terephthalic acid ("PTA")
The ethylene market in Western Europe is supplied by numerous producers, none
of whom have a dominant position in terms of their share of Western European
production capacity. The top three Western European producers of ethylene are
Total-Fina-Elf, Dow Union Carbide and Enichem. Olefins capacity in Western
Europe has expanded moderately in recent years primarily through
implementation of low-cost process improvement projects at existing units. No
greenfield olefins capacity has been constructed in Western Europe since
1994, and to our knowledge, no new olefins plants have been announced.
9
Like the ethylene market, the aromatics market, which is comprised of benzene
and paraxylene, in Western Europe is characterized by numerous producers. The
six largest Western European producers of benzene are Dow, Total-Fina-Elf,
Shell, Enichem, Exxon and Huntsman ICI Chemicals.
Both the benzene and paraxylene markets are currently in a period of
overcapacity. The increasing restrictions imposed by regulatory authorities
on the aromatics content of gasoline in general, and the benzene content in
particular, have led to an increase in supply of aromatics in recent years.
In 1999, global paraxylene demand fell by 1.2% largely as a result of the
recent Asian economic downturn, while global capacity rose by 8%.
SALES AND MARKETING
In recent years, our sales and marketing efforts have focused on developing
long-term contracts with customers to minimize our selling expenses and
administration costs. In 1999, over 85% of our primary petrochemicals sales
were made under long-term contracts. We delivered over 70% of our
petrochemical products in 1999 by pipeline, and we delivered the balance of
our products by road and ship to either the U.K. or export markets, primarily
in continental Western Europe.
MANUFACTURING AND OPERATIONS
We produce olefins at our facility in Wilton, U.K. In addition, we own and
operate two integrated aromatics manufacturing facilities at our Wilton and
North Tees sites at Teesside, U.K. Information regarding these facilities is
set forth in the following chart:
LOCATION PRODUCT ANNUAL CAPACITY
- ---------------------------------------------------------------
(MILLIONS OF POUNDS)
Wilton, U.K. Ethylene 1,900
Propylene 880
Butadiene 200
Paraxylene 750
North Tees, U.K. Benzene 1,125
Mixed xylenes 990
Cyclohexane 605
Cumene 275
Ethylbenzene 90
The Wilton olefins facility's flexible feedstock capability, which permits it
to process naphtha, condensates and NGL feedstocks, allows us to take
advantage of favorable feedstock prices arising from seasonal fluctuations or
local availability. In addition to our manufacturing operations, we also
operate an extensive logistics operations infrastructure in North Tees. This
infrastructure includes both above and below ground storage facilities,
jetties and logistics services on the River Tees. These operations reduce our
raw material costs by providing greater access and flexibility for obtaining
feedstocks.
In order to reduce costs and improve the cash performance of our aromatics
business, we entered into a supply contract with Shell in 1999 to purchase
large volumes of refinery by-product streams which are rich in aromatics.
Beginning in the fourth quarter of 1999, we ceased production at our existing
aromatics reformer unit and utilized the remaining assets to extract
aromatics from purchased by-product streams and by-product streams produced
at the Wilton olefins facility. As a result of this arrangement, we expect to
realize a significant improvement in the cash performance of our aromatics
business in the near term.
RAW MATERIALS. Teesside, situated on the North East coast of England, is near
a substantial supply of oil, gas and chemical feedstocks. Due to our location
at Teesside, we have the option to purchase feedstocks from a variety of
sources. However, we have elected to procure the majority of our naphtha,
condensates and NGLs from local producers, as they have been the most
economical sources. In order to secure the optimal mix of the required
quality and type of feedstock for our petrochemical operations at fully
competitive prices, we regularly engage in the purchase and sale of
feedstocks and hedging activities.
10
COMPETITION
The markets in which our petrochemicals business operates are highly
competitive. Our competitors in the olefins and aromatics business are
frequently some of the world's largest chemical companies such as BP Amoco,
Dow, Exxon and Shell. The primary factors for competition in this business
are price, service and reliability of supply. The technology used in these
businesses is widely available and licensed, though new entrants must make
significant capital expenditures in order to participate in this market.
TITANIUM DIOXIDE
GENERAL
Our TiO2 business, which operates under the tradename "Tioxide", has the
largest production capacity for TiO2 in Europe, with an estimated 21% market
share, and the third largest production capacity in the world, with an
estimated market share of 14%. TiO2 is a white pigment used to impart
whiteness, brightness and opacity to products such as paints, plastics,
paper, printing inks, synthetic fibers and ceramics. In addition to its
optical properties, TiO2 possesses traits such as stability, durability and
non-toxicity, making it superior to other white pigments.
We offer an extensive range of products that are sold worldwide to over 3,000
customers in all major TiO2 end markets and geographic regions. The
geographic diversity of our manufacturing facilities allows our TiO2 business
to service local customers, as well as global customers that require delivery
to more than one location. Our TiO2 business has an aggregate annual capacity
of approximately 570,000 tonnes at our nine production facilities. Five of
our TiO2 manufacturing plants are located in Europe, two are in North
America, including a 50% interest in a manufacturing joint venture with NL
Industries, one is in Asia, and one is in South Africa (a 60% owned
subsidiary).
We believe that we are one of the lowest cost TiO2 producers in the world. We
have embarked on a comprehensive cost reduction program which has eliminated
approximately $50 million of annualized cash costs since 1996, with an
additional $30 million of annualized savings expected to be achieved by the
end of 2001. As part of this program, we have reduced the number of product
grades we produce, focusing on those with wider applications. This program
has resulted in reduced total plant set-up times and further improved product
quality, product consistency, customer service and profitability.
Our TiO2 business, on a pro forma basis, accounted for 26% of our net sales
in both 1999 and 1998.
INDUSTRY OVERVIEW
The historical long-term growth rate for global TiO2 consumption has been
generally consistent with global GDP growth. Although short-term influences
such as customer and producer stocking and de-stocking activities in response
to changes in capacity utilization and price may distort this trend, over the
long-term, GDP growth is the primary underlying factor influencing growth in
TiO2 demand. The TiO2 industry experiences some seasonality in its sales
because paint sales generally peak during the spring and summer months in the
northern hemisphere, resulting in greater sales volumes during the first half
of the year.
The global TiO2 market is characterized by a small number of large global
producers. As of December 31, 1999, the TiO2 industry had six major
producers, the top four of which (DuPont, Millennium Chemicals, Huntsman ICI
Chemicals and NL Industries) account for 64% of the global market share.
There has been recent industry consolidation as large global producers have
acquired smaller, local producers. The TiO2 industry has substantial
requirements for entry, including proprietary production technology and world
scale assets requiring significant capital investment. No greenfield TiO2
capacity has been announced in the last few years. Based upon current price
levels and the long lead times for planning, governmental approvals and
construction, additional greenfield capacity is not expected in the near
future.
On February 14, 2000, The Kemira Group announced that Kerr-McGee Chemicals
would be acquiring its TiO2 plants in the U.S. and Netherlands. Following
this transaction, the prior top four producers, plus Kerr-McGee, will account
for approximately 80% of the global TiO2 market share.
11
There are two manufacturing processes for the production of TiO2, the sulfate
process and the chloride process. Most recent capacity additions have
employed the chloride process technology. However, the global distribution of
sulfate and chloride-based TiO2 capacity varies by region, with the sulfate
process being predominant in Europe, our primary market. The chloride process
is the predominant process used in North America and both processes are used
in Asia. We believe that approximately 50% of end-use applications can use
pigments produced by either process.
SALES AND MARKETING
Approximately 95% of our TiO2 sales are made through our direct sales and
technical services network, enabling us to cooperate more closely with our
customers and to respond to our increasingly global customer base. Our
concentrated sales effort and local manufacturing presence have allowed us to
achieve our leading market shares in a number of the countries where we
manufacture TiO2, including the U.K., France, South Africa, Spain, Malaysia
and Italy.
In addition, we have focused on marketing products to higher growth
industries. For example, we believe that our TiO2 business is well-positioned
to benefit from the projected growth in the plastics sector, which we expect
to grow faster than the overall TiO2 market over the next several years. The
table below summarizes the major end markets for our TiO2 products.
% OF 1999 SALES
END MARKETS VOLUME
Paints and Coatings 58%
Plastics 27%
Paper 4%
Inks 5%
MANUFACTURING AND OPERATIONS
Our TiO2 business has nine manufacturing sites in eight countries with a
total estimated capacity of 570,000 tonnes per year. Approximately 75% of our
TiO2 capacity is located in Western Europe. Our manufacturing plant in Tracy,
Canada is a "finishing" plant, which performs the later steps in the
production process for a portion of the product produced at our European and
South African facilities. The following table presents information regarding
our TiO2 facilities:
LOCATION SITE ANNUAL CAPACITY PROCESS
- ----------------------------------------------------------------------------------------------------
(tonnes)
Western Europe Calais, France 100,000 Sulfate
Greatham, U.K. 80,000 Chloride
Grimsby, U.K. 80,000 Sulfate
Huelva, Spain 80,000 Sulfate
Scarlino, Italy 80,000 Sulfate
North America Lake Charles, Louisiana (1) 60,000 Chloride
Tracy, Canada (2) N/A Finishing
Asia Teluk Kalung, Malaysia 50,000 Sulfate
Southern Africa Umbogintwini, South Africa (3) 40,000 Sulfate
----------------------
570,000
======================
(1) This facility is owned and operated by Louisiana Pigment Company, L.P., a
manufacturing joint venture that is owned 50% by us and 50% by Kronos
Louisiana, Inc., a subsidiary of NL Industries, Inc. The capacity shown
reflects our 50% interest in Louisiana Pigment Company.
(2) On January 31, 2000, we announced our intention to close the plant.
Operations are expected to cease around mid-year 2000.
(3) This facility is owned by Tioxide Southern Africa (Pty) Limited, a
company that is owned 60% by us and 40% by AECI. We operate this facility
and are responsible for marketing 100% of the production.
12
JOINT VENTURES. We own a 50% interest in a manufacturing joint venture
located in Lake Charles, Louisiana. The remaining 50% interest is held by our
joint venture partner Kronos Louisiana, Inc., a wholly-owned subsidiary of NL
Industries, Inc. We share production offtake and operating costs of the plant
equally with Kronos, though we market our share of the production
independently. The operations of the joint venture are under the direction of
a supervisory committee on which each partner has equal representation.
We also own a 60% interest in Tioxide Southern Africa (Pty) Limited, based in
Umbogintwini, near Durban, South Africa. The remaining 40% interest is owned
by AECI, a major South African chemicals and minerals company. We operate
this facility and are responsible for marketing 100% of the production.
RAW MATERIALS. The primary raw materials used to produce TiO2 are
titanium-bearing ores. There are a limited number of ore suppliers and we
purchase ore under long-term supply contracts. The cost of titanium-bearing
ores has been relatively stable in comparison to TiO2 prices.
Titanium-bearing ore represents approximately 40% of TiO2 pigment production
costs.
TiO2 producers extract titanium from ores and process it into pigmentary TiO2
using either the chloride or sulfate process. Once an intermediate TiO2
pigment has been produced, it is "finished" into a product with specific
performance characteristics for particular end-use applications. The
finishing process is common to both the sulfate and chloride processes and is
a major determinant of the final product's performance characteristics.
The sulfate process generally uses less-refined ores which are cheaper to
purchase but produce more co-product than the chloride process. Co-products
from both processes require treatment prior to disposal in order to comply
with environmental regulations. In order to reduce our disposal costs and to
increase our cost competitiveness, we have aggressively developed and
marketed the co-products of our TiO2 business.
COMPETITION
The global markets in which our TiO2 business operates are highly
competitive. The primary factors of competition are price, product quality
and service. The TiO2 industry has recently undergone a consolidation
process, where larger global producers have acquired smaller, regional
producers. The major producers against whom we compete are DuPont, Millennium
Chemicals, NL Industries and Kerr-McGee Chemicals. Our low production costs,
combined with our presence in numerous local markets, give us a competitive
advantage, particularly with respect to those global customers demanding
presence in the various regions in which they conduct business.
SIGNIFICANT CUSTOMERS
In 1999, sales to ICI and its affiliates by our Specialty Chemicals,
Petrochemicals and TiO2 businesses accounted for approximately 14% of our pro
forma consolidated revenues. As a result of our transaction with ICI and
Huntsman Specialty on June 30, 1999, ICI now indirectly owns 30% of our
member equity units. See "Item 13 - Certain Relationships and Related
Transactions" for a further discussion of our relationship with ICI.
RESEARCH AND DEVELOPMENT
Our PO business spent approximately $3 million on research and development
for our products in both 1998 and 1997. In 1998 and 1997, an aggregate of
approximately $65 million and $80 million, respectively on a pro forma basis,
was spent by our polyurethane chemicals, petrochemicals and TiO2 businesses
for research and development. We spent a total of $73 million on a pro forma
basis in 1999 on research and development for all our businesses combined.
INTELLECTUAL PROPERTY RIGHTS
Proprietary protection of our processes, apparatuses, and other technology
and inventions is important to our businesses. For our PO business, we own
approximately 140 U.S. patents, approximately 5 patent applications
(including provisionals) currently pending at the United States Patent and
Trademark Office, and approximately 425 foreign counterparts, including both
issued patents and pending patent applications. For our TiO2 business, we
have approximately 25 U.S. patents and pending patent applications, and
approximately 375 foreign counterparts. For our polyurethane chemicals
business, we
13
own approximately 200 U.S. patents and pending patent applications, and
approximately 2,200 foreign counterparts. For our petrochemicals business, we
own approximately 3,400 patents and pending applications (both U.S. and
foreign). We also rely upon unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position.
In addition to our own patents and patent applications and proprietary trade
secrets and know-how, we have entered into certain licensing arrangements
which authorize us to use certain trade secrets, know-how and related
technology and/or operate within the scope of certain patents owned by other
entities. Our petrochemicals business primarily uses technology licensed from
a number of suppliers. We have operated several generations of petrochemicals
plants and have accumulated well developed proprietary know-how, some of
which is patented, and technology which we apply to maintain and improve the
performance of our existing asset base. We also license and sub-license
certain intellectual property rights to affiliates and to third parties. In
connection with our transaction with ICI and Huntsman Specialty (under the
terms of a technology transfer agreement and a PO/MTBE technology transfer
agreement), we have licensed back to ICI and Huntsman Corporation (on a
non-exclusive basis) certain intellectual property rights for use in their
respective retained businesses, and ICI and Huntsman Corporation have each
licensed certain retained intellectual property to us.
For our Specialty Chemicals business, we have brand names for a number of our
products, and we own approximately 25 U.S. trademark registrations and
applications for registration currently pending at the United States Patent
and Trademark Office, and approximately 1,200 foreign counterparts, including
both registrations and applications for registration. For our TiO2 business,
we have approximately 200 trademark registrations and pending applications,
approximately 150 of which relate to the trademark "Tioxide". Our
petrochemicals business is not dependent on the use of trademarks. We have
entered into a trademark license agreement with each of Huntsman Corporation
and ICI under which we have obtained, respectively, the rights to use the
trademark "Huntsman" and the trademark "ICI", subject to certain
restrictions, including, in the case of the "ICI" mark, that it will only be
used as part of the combination "Huntsman ICI". The license to use the
trademark "ICI" expires on June 30, 2000.
EMPLOYEES
We employ over 5,600 people. An additional 900 people are employed by two of
our U.S. 50% joint ventures. Approximately 96% of our employees work outside
the U.S. We have over 200 employees located in the U.S., none of whom are
subject to collective bargaining agreements, approximately 2,100 employees in
the U.K., 229 of whom are subject to collective bargaining agreements, and
3,200 employees elsewhere most of whom are subject to collective bargaining
agreements. A collective bargaining agreement for our facility at Scarlino,
Italy will be negotiated this year, with a second collective bargaining
agreement at Scarlino to be renegotiated next year. Overall, we believe that
our relations with our employees are good. In addition, Huntsman Corporation
and Huntsman Petrochemical Corporation are providing operating, management
and administrative services to us for our PO business similar to the services
that it provided to Huntsman Specialty with respect to the PO business before
it was transferred to us. See "Item 13 - Certain Relationships and Related
Transactions."
ENVIRONMENTAL REGULATIONS
We are subject to extensive environmental laws. In the ordinary course of
business, we are subject continually to environmental inspections and
monitoring by governmental enforcement authorities. We may incur substantial
costs, including fines, damages, and criminal or civil sanctions, for actual
or alleged violations arising under environmental laws. In addition, our
production facilities require operating permits that are subject to renewal,
modification, and, in certain circumstances, revocation. Our operations
involve the handling, transportation and use of numerous hazardous
substances. From time to time, these operations may result in violations
under environmental laws including spills or other releases of hazardous
substances into the environment. In the event of a catastrophic incident, we
could incur material costs or experience interruption in our operations as a
result of addressing and implementing measures to prevent such incidents in
the future. In February 1999, hydrochloric acid was accidentally released
from the Greatham facility into a nearby marsh that includes a conservation
area. This matter is being investigated by the British Environmental Agency,
which has issued a court summons for a hearing on this matter. We have an
indemnity from ICI which we believe will cover, in large measure, our
liability, if any, for this matter. In addition, the Texas Natural Resource
Conservation Commission ("TNRCC") has issued certain notices of violation
relating to air emissions and wastewater issues at the Port Neches facility,
and filed an administrative petition with respect to certain of these
violations on December 14, 1998. While these
14
matters remain pending and could result in fines of over $100,000, we do not
believe any of these matters will be material to us. However, given the
nature of our business, we cannot give any assurance, that violations of
environmental laws will not result in restrictions imposed on our activities,
substantial fines, penalties, damages or other costs.
Under some environmental laws, we may be jointly and severally liable for the
costs of environmental contamination on or from our properties and at
off-site locations where we disposed of or arranged for the disposal or
treatment of hazardous wastes. For example, in the United States under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, and similar state laws, a current owner or operator of real
property may be liable for such costs regardless of whether the owner or
operator owned or operated the real property at the time of the release of
the hazardous substances and regardless of whether the release or disposal
was in compliance with law at the time it occurred. In addition, under the
United States Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), and similar state laws, as the holder of permits to treat or store
hazardous wastes, we may, under some circumstances, be required to remediate
contamination at our properties regardless of when the contamination
occurred. Similar laws are being developed or are in effect to varying
degrees in other parts of the world, most notably in the European Union. For
example, in the U.K., a new contaminated land regime is expected to come into
effect shortly which will provide a detailed framework for the
identification, management and remediation of contaminated sites. This law
may increase governmental scrutiny of our U.K. facilities.
We are aware that there is or may be soil or groundwater contamination at
some of our facilities resulting from past operations at these or neighboring
facilities. Based on available information and the indemnification rights
that we possess (including indemnities provided by Huntsman Specialty and ICI
for the facilities that each of them transferred to us), we believe that the
costs to investigate and remediate known contamination will not have a
material adverse effect on our business, financial condition, results of
operations or cash flows; however, we cannot give any assurance that such
indemnities will fully cover the costs of investigation and remediation, that
we will not be required to contribute to such costs or that such costs will
not be material.
We may also incur future costs for capital improvements and general
compliance under environmental laws, including costs to acquire, maintain and
repair pollution control equipment. Capital expenditures are planned, for
example, under national legislation implementing the EU Directive on
Integrated Pollution Prevention and Control. Under this directive the
majority of our plants will, over the next few years, be required to obtain
governmental authorizations which will regulate air and water discharges,
waste management and other matters relating to the impact of operations on
the environment, and to conduct site assessments to evaluate environmental
conditions. Although the implementing legislation in most Member States is
not yet in effect, it is likely that additional expenditures may be necessary
in some cases to meet the requirements of authorizations under this
directive. In particular, we believe that related expenditures to upgrade our
wastewater treatment facilities at several sites may be necessary and
associated costs may be material. Wastewater treatment upgrades unrelated to
this initiative also are planned at certain facilities. In addition, we may
also incur material expenditures in complying with the EU Directive on
Hazardous Waste Incineration beyond currently anticipated expenditures,
particularly in relation to our Wilton facility. It is also possible that
additional expenditures to reduce air emissions at two of our U.K. facilities
may be material. Capital expenditures and, to a lesser extent, costs and
operating expenses relating to environmental matters will be subject to
evolving regulatory requirements and will depend on the timing of the
promulgation and enforcement of specific standards which impose requirements
on our operations. Therefore, we cannot assure you that material capital
expenditures beyond those currently anticipated will not be required under
environmental laws. See "Item 7 - Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Environmental Matters".
15
ITEM 2. PROPERTIES
We own or lease chemical manufacturing and research facilities in the
locations indicated in the list below, which we currently believe are
adequate for our short-term and anticipated long-term needs. We own or lease
office space and storage facilities throughout the U.S. and many foreign
countries. Our principal executive offices, which are leased from Huntsman
Corporation, are located at 500 Huntsman Way, Salt Lake City, Utah 84108. The
following is a list of our material owned or leased properties where
manufacturing, blending, research and main office facilities are located.
LOCATION DESCRIPTION OF FACILITY
Geismar, Louisiana MDI, TDI, Nitrobenzene(1), Aniline(1) and
Polyols Manufacturing Facilities
Rozenburg, Netherlands(2) MDI Manufacturing Facility, Polyols
Manufacturing Facilities and Systems House
Wilton, U.K. Aniline and Nitrobenzene Manufacturing Facilities
Shepton Mallet, U.K. Polyester Polyols Manufacturing Facility
Peel, Canada (2) Polyurethane Systems House
West Deptford, New Jersey Polyurethane Systems House, Research Facility
and U.S. Regional Headquarters
Sterling Heights, Michigan(2) Polyurethane Research Facility
Auburn Hills, Michigan(2) Polyurethane Office Space and Research Facility
Deerpark, Australia (6) Polyurethane Systems House
Cartagena, Colombia Polyurethane Systems House
Deggendorf, Germany Polyurethane Systems House
Ternate, Italy Polyurethane Systems House
Shanghai, China(2) Polyurethane Systems House
Samuprakam, Thailand(2) Polyurethane Systems House
Kuan Yin, Taiwan(2) Polyurethane Systems House
Tlalnepantla, Mexico Polyurethane Systems House
Everberg, Belgium Polyurethane Research Facility, Global
Headquarters and European Headquarters
Gateway West, Singapore Polyurethane Regional Headquarters
Port Neches, Texas PO Manufacturing Facility
Austin, Texas PO/TBA Pilot Plant Facility
Wilton, U.K. Olefins and Aromatics Manufacturing Facilities
Teesport, U.K.(2) Logistics/Storage Facility
North Tees, U.K.(2) Aromatics Manufacturing Facility and
Logistics/Storage Facility
Saltholme, U.K. Underground Cavity Storage Operations
Grimsby, U.K. TiO2 Manufacturing Facility
Greatham, U.K. TiO2 Manufacturing Facility
Calais, France TiO2 Manufacturing Facility
Huelva, Spain TiO2 Manufacturing Facility
Scarlino, Italy TiO2 Manufacturing Facility
Teluk Kalung, Malaysia TiO2 Manufacturing Facility
Lake Charles, Louisiana(3) TiO2 Manufacturing Facility
Umbogintwini, South Africa(4) TiO2 Manufacturing Facility
Tracy, Canada (5) TiO2 Finishing Plant
Billingham, U.K. TiO2 Research and Technical Facility
(1) 50% owned manufacturing joint venture with CK Witco.
(2) Leased property.
(3) 50% owned manufacturing joint venture with Kronos Louisiana, Inc., a
subsidiary of NL Industries, Inc.
(4) 60% owned subsidiary.
(5) We expect to close this facility in 2000. See "Item 1-Business-Recent
Events-Canadian Plant Closing."
(6) Acquired from Orica Ltd. on March 3, 2000.
16
ITEM 3. LEGAL PROCEEDINGS
We are a party to various proceedings instituted by governmental authorities
and others arising under provisions of applicable laws, including various
environmental laws. Based in part on the indemnities provided to us by ICI
and Huntsman Specialty in connection with their transfer of businesses to us
and our insurance coverage, we do not believe that the outcome of any of
these matters will have a material adverse effect on our financial condition
or results of operations. See "Item 1-Business - Environmental Regulations"
for a discussion of two environmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matter was submitted to a vote of our
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
As of the date of this report, there was no established public trading market
for any class of our member equity units.
HOLDERS
As of the date of this report, there was only one holder of record of our
member equity units, Huntsman ICI Holdings LLC ("Holdings"). An indirect
subsidiary of Huntsman Corporation owns 60% of the Holdings member equity
units.
DISTRIBUTIONS
Pursuant to our Limited Liability Company Agreement and the Limited Liability
Company Agreement of Holdings, we have a tax sharing arrangement with all of
our and Holdings' member equity unit holders. Under the arrangement, because
we are treated as a partnership for U.S. income tax purposes, we will make
quarterly payments (with appropriate annual adjustments) to our parent,
Holdings, which will in turn make payments to its member equity unit holders,
in an amount equal to the U.S. federal and state income taxes we and Holdings
would have paid had Holdings been a consolidated or unitary group for federal
tax purposes.
Except in accordance with the above paragraph, our senior credit facilities
restrict our ability to pay dividends or other distributions on our equity
interests, including prohibiting us from making distributions to Holdings for
the purpose of paying principal, interest or premium on Holdings' 13.375%
Senior Discount Notes due 2009 (the "Senior Discount Notes") or its 8% Senior
Subordinated Discount Notes due 2009 (the "Senior Subordinated Discount
Notes"). The indenture governing our Notes, also places certain restrictions
on our ability to pay dividends and make other distributions.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for our company as of
the dates and for the periods indicated. Information should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
included on the pages immediately following the Index to Consolidated
Financial Statements appearing on page F-1. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations".
17
(MILLIONS OF DOLLARS)
------------------------------------------------------------------------------------------------
HSCC PREDECESSOR COMPANY TEXACO PREDECESSOR COMPANY
--------------------------------------- -----------------------------------------
SIX MONTHS SIX MONTHS TEN MONTHS TWO MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1999 1999 1998 1997 1997 1996 1995
------------- --------------------------------------- -----------------------------------------
Consolidated Statements
of Operations Data:
Revenues $ 1,997.3 $ 192.0 $ 338.7 $ 348.5 $ 61.0 $ 415.0 $ 327.0
Operating income
(loss) 197.3 52.6 54.3 40.4 (5.7) 19.0 (3.0)
Net income (loss) 80.6 21.5 9.4 3.0 (3.7) 12.0 (2.0)
Consolidated Balance
Sheet Data:
Working capital $ 456.7 $ 32.6 $ 30.4 $ 40.4 $ 39.0 $ 44.0
Total assets 4,818.4 577.9 577.6 593.7 292.0 243.0
Long-term debt and
other non-current
liabilities 2,942.2 474.6 503.8 524.8 287.0 250.0
Members'/Stockholders'
equity 1,104.0 49.8 30.6 25.3 5.0 (7.0)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On June 30, 1999, we received capital contributions of cash and U.S.
operating assets from our parent company, Holdings, a joint venture between
Huntsman Specialty and ICI. With this capitalization, we acquired ICI's
polyurethane chemicals, petrochemicals (including ICI's 80% interest in the
Wilton olefins facility), and titanium dioxide businesses, and Huntsman
Specialty's propylene oxide business. In addition, we acquired the remaining
20% ownership interest in the Wilton olefins facility from BP Chemicals
Limited ("BP") (together, the "Transaction").
We derive our revenues, earnings and cash flow from the manufacture and sale
of a wide variety of specialty and commodity chemical products. These
products are manufactured at facilities located in the Americas, Europe,
Africa and Asia and are sold throughout the world. We manage our businesses
in three segments: Specialty Chemicals (the former ICI polyurethanes and
Huntsman Specialty propylene oxide businesses); Petrochemicals (the former
ICI petrochemical business and the assets acquired from BP Chemicals); and
Tioxide (the former ICI titanium dioxide business).
The profitability of our three principal business segments are impacted to
varying degrees by economic conditions, prices of raw materials, customers'
inventory levels, global supply and demand pressures as well as other
seasonal and, to a limited extent, cyclical factors. Generally, the global
market for our Specialty Chemicals products have grown at rates in excess of
global GDP growth, while the demand of our Petrochemical and Tioxide products
have historically grown at rates that are approximately equal to global GDP
growth.
Huntsman Specialty is considered the acquirer and predecessor of the
businesses transferred to us in the Transaction. The Transaction also
resulted in the implementation of a new basis of accounting, resulting in new
carrying values for the transferred ICI and BP Chemicals businesses. Our
consolidated financial statements reflect this new basis of accounting
beginning with the date of the Transaction as follows (in millions of
dollars):
18
TEXACO
HUNTSMAN SPECIALTY PREDECESSOR
PREDECESSOR COMPANY COMPANY
---------------------------------------------- -----------------
SIX MONTHS TEN MONTHS TWO MONTHS
ENDED SIX MONTHS YEAR ENDED ENDED ENDED
DECEMBER 31, ENDED JUNE 30, DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1999 1999 1998 1997 1997
-------------- ---------------------------------------------- -----------------
Revenues $ 1,997.3 $ 192.0 $ 338.7 $ 348.5 $ 61.0
Cost of goods sold 1,602.0 134.1 276.6 300.0 64.9
-------------- ---------------------------------------------- -----------------
Gross profit (loss) 395.3 57.9 62.1 48.5 (3.9)
Expenses of selling, general and
administrative, research
and development 198.0 5.3 7.8 8.1 1.8
-------------- ---------------------------------------------- -----------------
Operating income (loss) 197.3 52.6 54.3 40.4 (5.7)
Interest expense, net 104.0 18.0 39.9 35.5 -
Other income (expense) 6.5 - 0.8 - -
-------------- ---------------------------------------------- -----------------
Net income (loss) before income taxes
and minority interest 99.8 34.6 15.2 4.9 (5.7)
Income tax expense (benefit) 18.2 13.1 5.8 1.9 (2.0)
Minority interests in subsidiaries 1.0 - - - -
-------------- ---------------------------------------------- -----------------
Net income (loss) $ 80.6 $ 21.5 $ 9.4 $ 3.0 $ (3.7)
============== ============================================== =================
1999 (PRO FORMA) COMPARED TO 1998 (PRO FORMA)
In order to present data which is useful for comparative purposes, the
following pro forma tabular data for 1999 and 1998 and related discussion,
have been prepared as if this Transaction (excluding the acquisition of 20%
of the Wilton olefins facility in June 1999 from BP Chemicals) had taken
place in January 1998. These results do not necessarily reflect the results
which would have been obtained if the Transaction actually occurred on the
date indicated, or the results which may be expected in the future.
(MILLIONS OF DOLLARS)
1999 PRO FORMA 1998 PRO FORMA
----------------- --------------------
Specialty Chemicals sales $ 1,855 $ 1,691
Petrochemical sales 1,022 1,029
Tioxide sales 991 951
----------------- --------------------
Total revenues 3,868 3,671
Cost of goods sold 3,096 3,014
----------------- --------------------
Gross profit 772 657
Expenses of selling, general, administrative,
research and development 409 421
----------------- --------------------
Operating income 363 236
Interest expense, net 216 225
Other income 6 9
----------------- ---------------------
Net loss before income taxes and minority interest 153 20
Income tax expense 25 5
Minority interests in subsidiaries 1 2
----------------- --------------------
Net income $ 127 $ 13
================= ====================
Depreciation and amortization $ 200 $ 179
================= ====================
Pro forma EBITDA (1) $ 569 $ 424
Net reduction in corporate overhead allocation
and insurance expenses 11 21
Impact of PO facility turnaround and inspection - 19
Rationalization of TiO2 operations 5 17
----------------- ---------------------
Pro forma adjusted EBITDA $ 585 $ 481
================= =====================
19
(1) EBITDA is defined as earnings from continuing operations before
interest expense, depreciation and amortization, and taxes. EBITDA is
included in this report because it is a basis on which we assess our
financial performance and debt service capabilities, and because
certain covenants in our borrowing arrangements are tied to similar
measures. However, EBITDA should not be considered in isolation or
viewed as a substitute for cash flow from operations, net income or
other measures of performance as defined by GAAP or as a measure of a
company's profitability or liquidity. We understand that while EBITDA
is frequently used by security analysts, lenders and others in their
evaluation of companies, EBITDA as used herein is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation.
REVENUES. Revenues for the business in 1999 increased by $197 million, or
5%, to $3,868 million from $3,671 million during 1998.
SPECIALTY CHEMICALS - Total MDI sales volumes increased by 11% from the 1998
period. A strong recovery in the Asian economies led to an increase in sales
volumes of 27%, while in Europe and the Americas sales volumes grew by 7% and
13%, respectively. Polyol sales volumes also grew by 9%, but Aniline sales
fell by 16% as more product was consumed in MDI production. PO sales volumes
increased by 16% due largely to the testing and inspection period in 1998
during which the plant was shut down for two months. Average sales prices of
MTBE increased by 20% compared to 1998 due largely to higher gasoline and
crude oil prices. These gains were partially offset by a decrease in average
selling prices for MDI and Polyols compared to 1998.
PETROCHEMICALS - Sales volumes of ethylene and propylene increased by 12% and
5% respectively, these increases were almost entirely due to the additional
olefins capacity acquired from BP Chemicals on June 30, 1999 which are not
reflected in the proforma information for periods prior to June 30, 1999. In
aromatics, paraxylene volumes rose by 12% but the impact of this gain was
more than offset by a 66% fall in cumene sales volumes following production
problems that have now been rectified. Selling prices in local currency rose
in response to increases in feedstock prices - ethylene, propylene and
paraxylene prices were higher by 3%, 5% and 4%, respectively. Sales revenues
from feedstock trading fell by $46 million, mainly due to the cessation of
crude oil trading from the date of the Transaction.
TIOXIDE - Sales volumes increased by 7% compared to the 1998 period due
largely to strengthening Asian and European markets. These gains were offset
by a fall in average sales prices of 2%, largely due to currency movements.
Prices declined from a peak in the fourth quarter of, 1998 to a low in
mid-1999, before recovering later in 1999 as the market tightened and
announced price increases began to take affect.
GROSS PROFIT. Gross profit in 1999 increased by $115 million, or 18%, to
$772 million from $657 million in 1998.
SPECIALTY CHEMICALS - MDI and Polyols benefitted from increased sales volumes
as well as from a reduction in average raw material costs. Prices of the
major raw materials of MDI, benzene and chlorine, declined from a peak at the
beginning of 1998 throughout that period and reached a low in the first
quarter of 1999 from which they have increased throughout the remainder of
1999. Fixed production costs were lower in 1999 largely attributable to
reduced maintenance expenditures. The increased gross profit in PO was
attributable to significantly higher PO and MTBE production rates and MTBE
selling prices compared to 1998.
PETROCHEMICALS - Petrochemicals gross profit was improved by a reduction in
the amount of purchased finished product for resale. The impact of an
increase in the cost of the main raw material, naphtha, was mitigated by
hedging activities.
TIOXIDE - The benefit of increased volumes was primarily offset by lower
sales prices in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (INCLUDING RESEARCH AND
DEVELOPMENT EXPENSES). Selling, general and administrative expenses
(including research and development expenses) ("SG&A") in 1999 decreased by
$12 million, or 3%, to $409 million from $421 million in 1998.
SPECIALTY CHEMICALS - In Specialty Chemicals there was an increase in SG&A
due to non-capitalizable administrative expenses relating to the
polyurethanes MDI project expansion at the Geismar, Louisiana facility in
1999.
PETROCHEMICALS - In Petrochemicals lower corporate charges and reduced
expenditures on insurance and consultancy fees produced a sharply lower SG&A
charge.
20
TIOXIDE - The decrease in SG&A was primarily due to restructuring activities
within selling organizations in Europe and Asia Pacific.
INTEREST EXPENSE. Net interest expense in 1999 was relatively unchanged
from 1998.
INCOME TAXES. Income taxes in 1999 increased by $20 million, to $25
million from $5 million in 1998. Higher taxes were due primarily to higher
earnings for the period. The effective income tax rate declined in 1999 from
1998 due to a greater share of the income being earned in the U.S., which
income is not subject to U.S. Federal income tax at the company level.
NET INCOME. Net income in 1999 increased by $114 million to $127 million
from $13 million during 1998 as a result of the factors discussed above.
1998 (ACTUAL) COMPARED TO 1997 (PRO FORMA)
The financial information for the year ended December 31, 1997 discussed
below is presented on a pro forma basis as if the acquisition by Huntsman
Specialty of the PO business from Texaco Chemical had occurred on January 1,
1997. Prior to the acquisition on March 31, 1997, Texaco Chemical leased
substantially all of the plant and equipment of the PO business under an
operating lease agreement. The pro forma adjustments consist primarily of
adjustments to reflect the plant and equipment as if owned and not leased,
interest expense related to the financing to acquire Texaco Chemical and
related income tax adjustments.
The actual results for the year ended December 31, 1998 and pro forma results
for the year ended December 31, 1997, are illustrated below.
(MILLIONS OF DOLLARS)
PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ----------------------
Revenues $ 339 $ 409
Cost of goods sold 277 364
----------------------- ----------------------
Gross profit 62 45
Expenses of selling, general, administrative,
research and development 8 10
----------------------- ----------------------
Operating income 54 35
Interest expense - net 40 42
Other income 1 -
----------------------- ----------------------
Income (loss) before income tax 15 (7)
Income tax expense (benefit) 6 (2)
----------------------- ----------------------
Net income (loss) $ 9 $ (5)
======================= ======================
REVENUES. Revenues for our PO business in 1998 decreased by $70 million,
or 17%, to $339 million from $409 million in 1997. Lower revenues from the
sale of MTBE and by products were partially offset by higher PG revenues.
MTBE revenues declined as a result of a 25% decline in average sales prices
and a 10% decline in sales volumes. Higher PG revenues were a result of a 68%
increase in sales volumes, partially offset by a 10% decline in average
selling prices. Revenues from the sale of PO remained essentially unchanged
as a 1% decline in sales volume was offset by a 1% increase in average sales
prices. Higher average PO sales prices were a result of higher tolling fees.
PO and MTBE sales volumes were negatively impacted by a 49 day turnaround and
inspection ("T&I") period which occurred during 1998.
GROSS PROFIT. Gross profit in 1998 increased by $17 million, or 38%, to
$62 million from $45 million in 1997. The increase was a result of
significantly lower costs of raw materials used to produce MTBE as the cost
of isobutane and methanol declined significantly as compared to 1997. Gross
margin was negatively impacted by the T&I mentioned above.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (INCLUDING RESEARCH AND
DEVELOPMENT EXPENSES). SG&A in 1998 decreased by $2 million, or 20%, to $8
million from $10 million in 1997. Lower SG&A expenses were a result of
ongoing expense reduction initiatives which have been instituted since the
acquisition of the PO business by Huntsman Specialty in March 1997.
INTEREST EXPENSE. Net interest expense in 1998 declined by $2 million, or
5%, to $40 million from $42 million in 1997. Lower interest expense was a
result of the repayment of debt and lower interest rates during 1998 as
compared to 1997.
NET INCOME. Net income in 1998 increased by $14 million to $9 million as
compared to a net loss of $5 million in 1997 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Contemporaneous with the closing of the Transaction, our company and Holdings
took the following actions:
- We issued $807 million of Notes.
- We entered into the senior secured credit facilities which
provide for borrowings of up to $2,070 million, including $400
million under a revolving facility. The credit facilities are
secured by a first priority perfected lien on substantially
all of our assets.
- Holdings issued the Senior Discount Notes and the Senior
Subordinated Discount Notes to ICI.
- Holdings received $90 million from institutional investors and
contributed it to us.
As of December 31, 1999, we had approximately $376 million available under
our revolving credit facility and approximately $139 million in available
cash balances. We also maintain $80 million of short-term overdraft
facilities, of which $80 million was available as of December 31, 1999. We
anticipate that borrowings under the credit facilities and cash flow from
operations will be sufficient for us to make required payments of principal
and interest on our debt when due, as well as to fund capital expenditures.
CAPITAL EXPENDITURES
Capital expenditures for our businesses for the six months ended December 31,
1999 were $132 million. In 1999, the major capital expenditures were related
to the capacity expansion program at our Geismar, Louisiana facility which
was completed in the first quarter of 2000. In addition to completion of the
Geismar expansion, various other small capacity expansion projects are
planned for 2000. Also, the next phase of funding has been approved to build
a sister plant to the Tioxide Icon pigment facility at Greatham near
Hartlepool, UK. We estimate our total capital expenditures for 2000,
including expenditures relating to environmental compliance, to be between
$225 million and $250 million.
ENVIRONMENTAL MATTERS
The operations of any chemical manufacturing plant and the distribution of
chemical products, and the related production of co-products and wastes,
entail risk of adverse environmental effects, and therefore, we are subject
to extensive federal, state, local and foreign laws, regulations, rules and
ordinances relating to pollution, the protection of the environment and the
generation, storage, handling, transportation, treatment, disposal and
remediation of hazardous substances and waste materials. In the ordinary
course of business, we are subject continually to environmental inspections
and monitoring by governmental enforcement authorities. The ultimate costs
under environmental laws and the timing of such costs are difficult to
predict; however, potentially significant expenditures could be required in
order to comply with existing or future environmental laws.
Our capital expenditures relating to environmental matters for the six months
ended December 31, 1999 were approximately $18 million. Capital costs in 2000
are expected to remain at a comparable (annualized) level for
22
environmental matters. Anticipated capital expenditures include, for example,
costs to comply with national legislation implementing the European Union
Directive on Integrated Pollution Prevention and Control. Under this
directive, the majority of our plants will, over the next few years, be
required to obtain governmental authorizations which will regulate air and
water discharges, waste management and other matters relating to the impact
of operations on the environment, and to conduct site assessments to evaluate
environmental conditions. Although the implementing legislation in most
Member States is not yet in effect, it is likely that additional expenditures
may be necessary in some cases to meet the requirements of authorizations
under this directive. In particular, we believe that related expenditures to
upgrade our wastewater treatment facilities at several sites may be necessary
and associated costs could be material. Wastewater treatment upgrades
unrelated to this initiative also are planned at certain facilities. In
addition, we may incur material expenditures in complying with the European
Union Directive on Hazardous Waste Incineration beyond currently anticipated
expenditures, particularly in relation to our Wilton facility. It is also
possible that additional expenditures to reduce air emissions at two of our
U.K. facilities may be material. Capital expenditures relating to
environmental matters will be subject to evolving regulatory requirements and
will depend on the timing of the promulgation of specific standards which
impose requirements on our operations. Therefore, we cannot assure you that
material capital expenditures beyond those currently anticipated will not be
required under environmental laws.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No.133
established accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
assets or liabilities in the balance sheet and measure those instruments at
fair value. SFAS No.133 is effective for financial statements for the year
ending December 31, 2001. The Company is currently evaluating the effects of
SFAS No.133 on its financial statements.
YEAR 2000
The "Year 2000 problem" is the result of computer programs and embedded
computer chips being designed to read and store dates using only the last two
digits of the year rather than four digits to define the applicable year and
therefore may not correctly recognize date changes such as the change from
December 31, 1999 to January 1, 2000. This could result in a systems failure.
The Year 2000 problem is believed to affect virtually all companies and
organizations which include us as well as our key suppliers and customers.
Our failure, or the failure of our key suppliers or customers, to address
this issue could adversely affect our operations.
RISKS
It is not possible to predict with certainty all the adverse effects that
could arise as a result of our failure, or the failure of third parties upon
which we rely, to become Year 2000 ready, or whether such effects would have
a material adverse effect on any or all of our businesses. In light of our
Year 2000 preparations and contingency plans, we believe that a Year 2000-
related system failure will not cause our businesses to suffer significantly
as a result. However, if our systems encounter Year 2000 problems which
cannot be mitigated by our contingency plans, or if one or more of our
significant third party providers is unable to provide services due to a Year
2000 problem (e.g. the disruption of services forcing a shutdown of all or
part of our manufacturing processes), our business, financial condition,
results of operations or cash flows could suffer a material adverse effect.
As of the date of this report , we have not experienced any significant Year
2000 problems with any critical system, disruption to the Company's
operations, or negative impact to our businesses.
COSTS
As of December 31, 1999, in accordance with our Year 2000 preparations, we
spent approximately $165,000 for our PO business and approximately $20.1
million for our petrochemicals, polyurethane chemicals and TiO2 businesses
combined. We expect to have additional expenses of approximately $35,000 in
2000. The costs of our Year 2000 readiness program are based on our 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 procedures at various
facilities. There can be no assurance that these estimates will prove to be
accurate and, therefore, actual results
23
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.
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions
and other information that is not historical information. In some cases,
forward-looking statements can be identified by terminology such as
"believes," "expects," "may," "will," "should," or "anticipates", or the
negative of such terms or other comparable terminology, or by discussions of
strategy. We may also make additional forward-looking statements from time to
time. All such subsequent forward-looking statements, whether written or
oral, by us or on our behalf, are also expressly qualified by these
cautionary statements.
All forward-looking statements, including without limitation, management's
examination of historical operating trends, are based upon our current
expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them, but, there can be no assurance that management's
expectations, beliefs and projections will result or be achieved. All
forward-looking statements apply only as of the date made. We undertake no
obligation to publicly update or revise forward-looking statements which may
be made to reflect events or circumstances after the date made or to reflect
the occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
or contemplated by this report. The following are among the factors that
could cause actual results to differ materially from the forward-looking
statements. There may be other factors, including those discussed elsewhere
in this report, that may cause our actual results to differ materially from
the forward-looking statements. Any forward-looking statements should be
considered in light of these factors.
SUBSTANTIAL DEBT. We have incurred substantial debt to acquire our
businesses. A substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our debt. In addition,
our high degree of debt may make it difficult for us to obtain additional
financing. Some of our debt is subject to variable interest rates, which
makes us vulnerable to interest rate increases. Our debt may limit our
flexibility to adjusting to changing market conditions and our ability to
withstand competitive pressures.
DEPENDENCE ON JOINT VENTURES. We conduct a substantial amount of our
operations through our joint ventures. Our ability to meet our debt service
obligations depends, in part, upon the operation of our joint ventures. The
failure of any of our joint venture partners to observe its commitments and
differences in views among the partners may have an adverse effect on the
business and operations of the joint ventures, adversely affecting our
business and operations.
INTEGRATION OF BUSINESSES. Prior to the Transaction, we did not own a
majority of our assets. In order to receive the full benefit of the
businesses transferred to us, we must be able to integrate our businesses
effectively. The failure to do so could adversely affect our business.
CYCLICAL NATURE OF INDUSTRY. Historically, the markets for some of our
products, including most of the products of our petrochemicals business, have
experienced alternating periods of tight supply, causing prices and profit
margins to increase, followed by periods of capacity additions, resulting in
oversupply and declining prices and profit margins. Currently, several of our
markets are experiencing periods of oversupply, and the pricing of our
products in these markets is depressed. We cannot guarantee that future
growth in demand for these products will be sufficient to alleviate any
existing or future conditions of excess industry capacity or that such
conditions will not be sustained or further aggravated by anticipated or
unanticipated capacity additions or other events.
RAW MATERIAL SUPPLY. The prices for a large portion of our raw materials
are similarly cyclical. Our ability to pass on increases in the cost of raw
materials to our customers is, to a large extent, dependent upon market
conditions. There may be periods of time in which we are not able to recover
increases in the cost of raw materials due to weakness in demand for or
oversupply of our products. Additionally, we obtain some of our raw materials
from a few key suppliers. If any of our
24
key suppliers fails to meet its obligations, we may be forced to pay higher
prices to obtain additional raw materials, if such raw materials are
available at all. Accordingly, any interruption in supply or price increase
for our raw materials could adversely affect our business and operations.
COMPETITION. The industries in which we operate are highly competitive.
Among our competitors are some of the world's largest chemical companies and
major integrated petroleum companies that have their own raw material
resources. Some of these companies are able to produce products more
economically than we can. If any of our current or future competitors develop
proprietary technology that enables them to produce products at a
significantly lower cost, our technology could be rendered uneconomical or
obsolete. Moreover, because certain of our businesses use technology that is
widely available, or if we cannot protect our proprietary technology, new
competitors could emerge in certain product segments of our business.
Further, petroleum-rich countries have become more significant participants
in the petrochemical industry and may expand this role significantly in the
future. Any of these developments could have a significant impact on our
ability to enjoy higher profit margins during periods of increased demand.
ENVIRONMENTAL REGULATIONS. We are subject to extensive federal, state,
local and foreign laws, regulations, rules and ordinances relating to
pollution, the protection of the environment and the use or cleanup of
hazardous substances and wastes. We may incur substantial costs, including
fines, damages, criminal or civil sanctions and investigation and clean-up
expenses, or experience interruptions in our operations for actual or alleged
violations arising under any environmental laws. In addition, we could incur
significant expenditures in order to comply with existing or future
environmental laws. Furthermore, several state and federal initiatives and
legislation to rescind the oxygenate requirements for reformulated gasoline,
or to restrict or prohibit the use of MTBE in particular, have been enacted
or proposed. Any such environmental costs or any phase-out of or prohibition
against the use of MTBE could have a material adverse effect on our business
and operations.
INTERNATIONAL OPERATIONS. We conduct a significant portion of our business
outside the United States. Our operations outside the United States are
subject to risks normally associated with international operations. Our
business could be negatively effected by these risks, which include
fluctuations in exchange rates for foreign currencies, trade barriers,
tariffs, exchange controls, national and regional labor strikes, social and
political risks, general economic risks, required compliance with a variety
of foreign laws, and the difficulty of enforcing agreements and collecting
receivables through foreign legal systems.
OTHER FACTORS. In addition to the factors described above, we face a
number of other uncertainties, including:
- inability to obtain new customers or retain existing ones,
- conflicts of interest between Huntsman Corporation and ICI,
- significant changes in our relationship with our employees and
the potential adverse effects labor disputes or grievances
would occur, and
- unavailability of, and substantial delays in, transportation
of raw materials and products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risk, including changes in interest rates, currency
exchange rates, and certain commodity prices. Our exposure to foreign
currency market risk is limited since sales prices are typically denominated
in Euros or US dollars. To the extent we have material foreign currency
exposure on known transactions, hedges are put in place monthly to mitigate
such market risk. Our exposure to changing commodity prices is also limited
(on an annual basis) since the majority of raw material is acquired at posted
or market related prices, and sales prices for finished products are
generally at market related prices which are set on a quarterly basis in line
with industry practice. To manage the volatility relating to these exposures,
we enter into various derivative transactions. We hold and issue derivative
financial instruments for economic hedging purposes only.
25
Our cash flows and earnings are subject to fluctuations due to exchange rate
variation. Historically, the businesses transferred to us by ICI have managed
the majority of their foreign currency exposures by entering into short-term
forward foreign exchange contracts with ICI. In addition, short-term
exposures to changing foreign currency exchange rates at certain of our
foreign subsidiaries were managed, and will continue to be managed, through
financial market transactions, principally through the purchase of forward
foreign exchange contracts (with maturities of six months or less) with
various financial institutions. While the overall extent of our currency
hedging activities has not changed significantly, we have altered the scope
of our currency hedging activities to reflect the currency denomination of
our cash flows. In addition, we are now conducting our currency hedging
activities for our exposures arising in connection with the businesses
transferred to us by ICI with various financial institutions. We do not hedge
our currency exposures in a manner that would entirely eliminate the effect
of changes in exchange rates on our cash flows and earnings. As of December
31, 1999, we have outstanding in the notional amount of approximately $13
million equivalent of foreign exchange forward contracts with third party
banks with final settlement of not more than 60 days. Predominantly our
hedging activity is to sell forward the majority of our surplus non-U.S.
dollar receivables for U.S. dollars. Using sensitivity analysis, the foreign
exchange loss due to these derivative instruments from an assumed 10%
unfavorable change in year-end rates, when considering the effects of the
underlying hedged firm commitment, is not material.
Historically, Huntsman Specialty used interest rate swaps, caps and collar
transactions entered into with various financial institutions to hedge
against the movements in market interest rates associated with its floating
rate debt obligations. We do not hedge our interest rate exposure in a manner
that would entirely eliminate the effects of changes in market interest rates
on our cash flow and earnings. Under the terms of our senior secured credit
facilities, we are required to hedge a significant portion of our floating
rate debt. As a result, we have entered into approximately $650 million
notional amount of interest rate swap, cap and collar transactions,
approximately $600 million of which have terms ranging from approximately
three years to five years. The majority of these transactions hedge against
movements in U.S. dollar interest rates. The U.S. dollar swap transactions
obligate us to pay fixed amounts ranging from approximately 5.50% to
approximately 7.00%. The U.S. dollar collar transactions carry floors ranging
from 5.00% to 6.00% and caps ranging from 6.60% to 7.50%. We have also
entered into a Euro-denominated swap transaction that obligates us to pay a
fixed rate of approximately 4.3%. Assuming a 1% (100 basis point) increase in
U.S. dollar interest rates, the effect on the annual interest expense would
be an increase of approximately $14 million. This increase would be reduced
by approximately $4 million as a result of the effects of the interest rate
swap, cap and collar transactions described above.
In order to reduce our overall raw material costs, our petrochemical business
enters into various commodity contracts to hedge its purchase of commodity
products. We do not hedge our commodity exposure in a manner that would
entirely eliminate the effects of changes in commodity prices on our cash
flows and earnings. At December 31, 1999, the Company had forward purchase
contracts for 132,000 metric tons of naphtha and propane, which qualify for
hedge accounting. In addition, at December 31, 1999, the Company had forward
purchase and sales contracts for 137,000 and 177,000 tons (naphtha and other
hydrocarbons), respectively, which do not qualify for hedge accounting.
Assuming a 10% increase and a 10% decrease in the price per ton of naphtha,
the change would result in a net hypothetical gain and loss of approximately
$5 million and $1 million respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements required by this item are included on
the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in our external accountants, Deloitte & Touche
LLP, or disagreements with them on matters of accounting or financial
disclosure.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Members of our current board of managers and executive officers are listed
below. The members of the board of managers are appointed by the owner of our
common equity interests and hold office until their successors are duly
appointed and qualified. All officers serve at the pleasure of our board of
managers.
Board of Managers and Executive Officers
NAME AGE POSITION
- --------------------------------------------------------------------------------------------
Jon M. Huntsman* 62 Chairman of the Board of Managers, Chief Executive
Officer and Manager
Jon M. Huntsman, Jr.* 39 Vice Chairman and Manager
Peter R. Huntsman* 37 President, Chief Operating Officer and Manager
Patrick W. Thomas 42 President--Specialty Chemicals Division
Douglas A. L. Coombs 59 President--Tioxide Division
J. Kimo Esplin 37 Executive Vice President and Chief Financial Officer
Thomas G. Fisher 51 Executive Vice President--Tioxide
Michael J. Kern 50 Executive Vice President--Manufacturing
Robert B. Lence 42 Executive Vice President, General Counsel and
Secretary
Donald J. Stanutz 49 Executive Vice President--Specialty Chemicals
L. Russell Healy 44 Senior Vice President and Finance Director
Karen H. Huntsman* 61 Vice President
William M. Chapman, Jr. 58 Vice President--Human Resources
Curtis C. Dowd 40 Vice President--Corporate Development
James A. Huffman* 31 Vice President--Strategic Planning
Kevin J. Ninow 37 Vice President--Petrochemicals Manufacturing
Martin F. Petersen 39 Vice President and Treasurer
John B. Prows 46 Vice President--Petrochemicals
Samuel D. Scruggs 40 Vice President--Deputy General Counsel
Graham Thompson 48 Vice President and Controller
*Such persons are related as follows: Karen H. Huntsman is the wife of Jon M.
Huntsman. Jon M. Huntsman and Karen H. Huntsman are the parents of Jon M.
Huntsman, Jr. and Peter R. Huntsman. James A. Huffman is a son-in-law of Jon
M. Huntsman and Karen H. Huntsman and brother-in-law of Jon M. Huntsman, Jr.
and Peter R. Huntsman.
JON M. HUNTSMAN is Chairman of the Board of Managers and Chief Executive
Officer of both Huntsman ICI Chemicals and Huntsman ICI Holdings. He has been
Chairman of the Board and Chief Executive Officer of Huntsman Corporation and
all Huntsman companies since he founded his first company in 1970. In
addition, Mr. Huntsman serves or has served on numerous corporate and
industry boards, the Chemical Manufacturers Association and the American
Polymers Council. Mr. Huntsman was selected in 1994 as the chemical
industry's top CEO for all businesses in Europe and North America. Mr.
Huntsman formerly served as Special Assistant to the President of the United
States and as Vice Chairman of the U.S. Chamber of Commerce.
JON M. HUNTSMAN, JR. is Vice Chairman and a Manager of both Huntsman ICI
Chemicals and Huntsman ICI Holdings. Mr. Huntsman, Jr. serves as Vice
Chairman and Director of Huntsman Corporation. Mr. Huntsman serves on the
board of directors of Owens-Corning Corporation and on numerous corporate and
not-for-profit boards. Previously, Mr. Huntsman, Jr. was Senior Vice
President and General Manager of Huntsman Chemical Corporation. Later he
served as U.S. Deputy Assistant Secretary of Commerce in the International
Trade Administration, U.S. Deputy Assistant Secretary for East Asia and
Pacific Affair