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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 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, 2000
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 333-88057
HUNTSMAN INTERNATIONAL HOLDINGS LLC
(Exact name of registrant as specified in charter)
Delaware 87-0630359
(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 [X] No [_]
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 20, 2001, 1,000 membership interests of Huntsman International
Holdings LLC were outstanding.
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
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ITEM 1. BUSINESS..................................................................................... 3
ITEM 2. PROPERTIES................................................................................... 18
ITEM 3. LEGAL PROCEEDINGS............................................................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.................................... 19
ITEM 6. SELECTED FINANCIAL DATA...................................................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................... 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 31
ITEM 11. EXECUTIVE COMPENSATION....................................................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K............................. 44
SIGNATURES............................................................................................... 47
2
HUNTSMAN INTERNATIONAL HOLDINGS LLC AND SUBSIDIARIES
2000 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
Huntsman International Holdings LLC, formerly known as Huntsman ICI Holdings LLC
("Holdings" or the "Company"), is a global manufacturer and marketer of
specialty and commodity chemicals through our three principal businesses:
Specialty Chemicals, Petrochemicals and Tioxide ("TiO\\2\\"). We believe that
company is characterized by 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 company, Huntsman International LLC,
our wholly-owned subsidiary that was formerly known as Huntsman ICI Chemicals
LLC ("Huntsman International"), Huntsman Specialty Chemicals Corporation
("HSCC") and Imperial Chemicals Industries PLC ("ICI"). In connection with the
transaction, we acquired, on June 30, 1999, ICI's polyurethane chemicals,
selected petrochemicals and TiO\\2\\ businesses and HSCC's propylene oxide
("PO") business. We also acquired BP Chemicals Limited's ("BP Chemicals") 20%
ownership interest in the Wilton olefins facility and certain related assets. We
transferred the acquired businesses to Huntsman International and to its
subsidiaries. Our membership interests are owned 60% by HSCC, 30% by ICI and its
affiliates and 10% by institutional investors.
Recent Events
Issuance of Eu200 Million Senior Subordinated Notes
On March 13, 2001, Huntsman International completed an offering of its 10-1/8%
Senior Subordinated Notes due 2009, resulting in net proceeds of approximately
Eu204 million, including Eu4.0 million of interest accrued from January 1,
2001 paid by the purchasers. The terms of these notes are substantially similar
to the terms of its outstanding senior subordinated notes. Huntsman
International intends to use the proceeds of this offering to finance our
acquisition of Albright & Wilson's surfactants business. See "--Acquisition of
Surfactants Business."
Expansion of Huelva, Spain Plant
On March 9, 2001, we announced our intention to expand the annual production
capacity of our TiO\\2\\ plant at our Huelva, Spain facility by approximately
17,000 tonnes. Following this $40 million expansion, we will have an annual
TiO\\2\\ production capacity of approximately 97,000 tonnes. The expansion is
expected to be completed in late 2002.
3
Acquisition of Surfactants Business
On February 27, 2001 and pursuant to the terms of a letter of intent, we entered
into a definitive purchase agreement with several affiliates of Rhodia S.A.
relating to our planned purchase of the European surfactants business of
Albright & Wilson, a subsidiary of Rhodia. Albright & Wilson's surfactants
business participates in the anionic sulfonated surfactants and non-ionic
ethoxylated surfactants markets.
The surfactants business that we plan to acquire manufactures, develops and
markets a wide range of surfactants and surfactant intermediates used primarily
in consumer detergents, toiletries, baby shampoos and personal care products. It
also is a major producer of surfactants and specialty products for industrial
uses including leather and textile treatment, foundry and construction,
agriculture, polymers and coatings, and includes a facility for the manufacture
of fatty alcohol, a key surfactants intermediate raw material. The proposed
acquisition will include seven manufacturing facilities: one in the U.K., and
two sites in each of Italy, France and Spain. We anticipate that we will work
cooperatively with Rhodia in the joint operation and management of the U.K.
site.
Under the purchase agreement among us, Rhodia and its affiliates, we will
acquire all of the issued and outstanding stock of Albright & Wilson Srl,
Albright & Wilson Lavera SAS, and Albright & Wilson Iberica S.A. We will also
purchase the assets of several of Albright & Wilson's surfactants manufacturing
and sales sites in Europe, including sites in Whitehaven, Warley and Oldbury in
the U.K. The aggregate purchase price (including the purchase price prepayment
of approximately Eu5.1 million) that we will pay to Rhodia is Eu205 million,
which is subject to adjustment in certain circumstances. We intend to use the
proceeds of Huntsman International's recent offering of senior subordinated
notes to fund the purchase price of this acquisition. If we complete the
acquisition, Rhodia has agreed to indemnify us against a specified list of
matters, including certain contingent liabilities, up to a maximum aggregate
amount equal to seventy-five percent (75%) of the total purchase price paid by
us. Although we expect to complete the acquisition by March 31, 2001, we cannot
give any assurance as to when the transaction will be completed, if at all.
Proposed Investment by Bain Capital in Huntsman Corporation
On February 23, 2001, Huntsman Corporation ("Huntsman"), affiliates of which own
60% of our membership interests, announced that it had entered into a letter of
intent with Bain Capital, Inc. relating to a proposed investment by Bain in
Huntsman. The letter of intent contemplates that Huntsman and Bain will
negotiate definitive agreements pursuant to which Bain will invest over $600
million in Huntsman in exchange for a minority equity interest in Huntsman. If
the parties complete their proposed transaction, then Huntsman intends to use a
substantial portion of the proceeds received from Bain to finance the purchase
of our membership interests that are held by ICI and affiliates of Goldman
Sachs, as described under "--Sale by ICI of Our Equity Interests".
Acquisition of Ethyleneamines Business
On February 9, 2001, we completed our acquisition of the global ethyleneamines
and related businesses of The Dow Chemical Company for an aggregate purchase
price of approximately $33 million, excluding accounts receivable and accounts
payable. We believe that we now have the world's second largest production
capacity for ethyleneamines, which are a family of highly versatile performance
chemicals with a wide variety of end-use applications including lube oil
additives, epoxy hardeners, wet strength resins, chelating agents and
fungicides. The acquisition of this business provides us with ethyleneamines and
aminoethylethanolamines production facilities in Freeport, Texas and a long-term
supply arrangement for up to 50% of the existing production capacity of Dow's
ethyleneamines plant at Terneuzen, Netherlands. The acquired business will be
included in the Specialty Chemicals division of the Company.
Securitization of Receivables
On December 21, 2000, we entered into a securitization program arranged by The
Chase Manhattan Bank under which certain trade receivables were and will be
transferred to a special purpose securitization entity. The acquisition of these
receivables by the entity was financed through the issuance of commercial paper.
We received $175 million in proceeds from the securitization transaction which
were used to reduce our outstanding indebtedness.
4
Sale by ICI of Holdings' Equity Interests
In November 2000 ICI entered into agreements with HSCC, our company and
Huntsman International, under which ICI has an option to transfer to HSCC or its
permitted designated buyers, and HSCC or its permitted designated buyers have a
right to buy, the membership interests in our company that are indirectly held
by ICI for approximately $365 million plus interest from November 30, 2000 until
the completion of such sale. Unless waived by ICI, the right of HSCC or its
designees to buy the membership interests (which expires if not exercised by
July 2001) is contingent upon the completion of the resale by ICI of our 8%
Senior Subordinated Reset Discount Notes. Additionally, ICI may only exercise
its option to transfer the membership interests to HSCC between April 2001 and
July 2001.
In addition, and in the event that ICI completes the transfer of its membership
interests in our company as described in the preceding paragraph, the affiliates
of The Goldman Sachs Group who collectively own 1.1% of our outstanding
membership interests have agreed to transfer those interests to HSCC, or its
designee, in exchange for approximately $13.5 million plus interest from
November 30, 2000 until the completion of such sale.
Our agreements with ICI also permit ICI to resell, subject to certain
conditions, our Senior Subordinated Reset Discount Notes, settle certain
outstanding indemnification matters under the contribution agreement, provide
for the finalization of certain ancillary agreements contemplated by the
contribution agreement and establish new contractual terms with respect to ICI's
obligation to transfer to us its interests in Nippon Polyurethane Industry Co.
Ltd. See "Item 13--Certain Relationships and Related Transactions".
We expect that a substantial portion of the proceeds from the proposed
investment of Bain in Huntsman Corporation will be used by HSCC or other
affiliates of Huntsman Corporation to finance the purchase of our membership
interests held by ICI and the Goldman Sachs affiliates. See "--Proposed
Investment by Bain Capital in Huntsman Corporation".
Specialty Chemicals
General
Our Specialty Chemicals business is composed of the polyurethane chemicals
business that we acquired from ICI, the PO business that we acquired from HSCC,
the thermoplastic polyurethane ("TPU") business that we acquired from Rohm and
Haas Company in August 2000 and the ethyleneamines business that we acquired
from The Dow Chemical Company in February 2001.
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"),
TPU, polyols, polyurethane systems and aniline, with an emphasis on MDI-based
chemicals. We believe that we have the world's second largest production
capacity for MDI and MDI-based polyurethane systems, with an estimated 24%
global MDI market share; the fourth largest producer of TPU, with an estimated
11% global TPU market share; and the second largest producer of ethyleneamines,
with an estimated 23% global ethyleneamines 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 widely 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 2000 polyurethane
chemicals sales were generated from products and applications introduced in the
previous 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.
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We believe that 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, we have invested
over $600 million to significantly enhance our production capabilities through
the rationalization of our older, less efficient facilities and the
modernization of our newer facilities at Rozenburg and Geismar.
We are one of three North American producers of 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. We believe that we are 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"), which is an oxygenate that
is blended with gasoline to reduce harmful vehicle emissions and to enhance the
octane rating of gasoline.
We use our proprietary technology to manufacture PO and MTBE at our state-of-
the-art facilities in Port Neches, Texas. This facility, which is the most
recently built PO manufacturing facility in North America, was designed and
built under the 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 130
million pounds of PG per year at a neighboring facility.
Our Specialty Chemicals business accounted for 47% of net sales in 2000, and, on
a pro forma basis, accounted for 48% and 46% of our net sales in 1999 and 1998,
respectively.
Industry Overview
The polyurethane chemicals industry is estimated to be 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. TPU is used in flexible elastomers and other
specialty 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 than TDI. Since 1992, the global consumption of MDI
has grown at a compound rate of 8.1%, 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 International, BASF and Dow.
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
manufacturers of flexible foam blocks sold 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.
TPU. In August 2000, we completed our acquisition of the Morton global TPU
business from Rohm and Haas Company. The acquired TPU business adds production
capacity in Osnabruck, Germany and Ringwood, Illinois, which complements our
existing footwear-based TPU business. TPU is high quality material with unique
qualities such as durability, flexibility, strength, abrasion-resistance, shock
absorbency and chemical resistance. We can tailor its performance
characteristics to meet the specific requirements of our customers, such as for
use in injection molding and components for
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the automotive and footwear industries. It is also extruded into films and
profiles and finds a wide variety of applications in the CASE markets.
Polyols. Polyols are reacted with isocyanates, primarily MDI and TDI, to produce
finished polyurethane products. In the U.S., approximately 77% of all polyols
produced are used in polyurethane foam applications. In 2000, approximately two-
thirds of the polyols used in polyurethane applications were processed with TDI
to produce flexible foam blocks and the remaining one-third was processed 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. The market for specialty polyols that are reacted with MDI
consumption has been growing at approximately the same rate as MDI consumption.
We believe that the growth of commodity polyols demand has paralleled the growth
of global GDP.
Ethyleneamines. In February 2001, we completed our acquisition of the global
ethyleneamines business of The Dow Chemical Company. The acquired ethyleneamines
business adds production capacity in Freeport, Texas and a long-term supply
arrangement for up to 50% of the existing production capacity of Dow's
ethyleneamines plant in Terneuzen, Netherlands. Ethyleneamines are highly
versatile performance chemicals with a wide variety of end-use applications
including lube oil additives, epoxy hardeners, wet strength resins, chelating
agents and fungicides.
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 supply
contracts.
PO. Demand for PO depends largely on overall economic demand, especially that
for 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 Dow consumes
approximately 70% of their North American PO production in their North American
downstream operations, and that approximately 50% of Lyondell's North American
PO production is consumed internally or sold to Bayer, which recently acquired
Lyondell's polyols business.
MTBE. We currently use our entire production of tertiary butyl alcohol ("TBA"),
a co-product of our PO production process to produce MTBE. MTBE 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 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 or eliminated in the future by legislation or regulatory action. See
"--MTBE Developments".
Sales and Marketing
We manage a global sales force at 45 locations with a presence in 33 countries,
which sells our polyurethane chemicals to over 2000 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.
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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 and Huntsman
Petrochemical Corporation provide us with all of the management, sales,
marketing and production personnel required to operate our PO business and our
MTBE 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 our MTBE production to
Texaco and BP Amoco. More than half of our annual MTBE production is committed
to Texaco and BP Amoco, with our contract with Texaco expiring in 2007. In
addition, over 70% of our current annual PG production is sold pursuant to long-
term contracts.
Manufacturing and Operations
Our primary Specialty Chemicals facilities are located at Geismar, Louisiana;
Port Neches, Texas; Rozenburg, Netherlands; and Wilton, U.K. Our Geismar
expansion was completed in 2000, giving it the largest production capacity for
nitrobenzene, aniline and MDI in the world.
The following chart provides information regarding the capacities of our primary
facilities:
Annual Capacities (in millions)
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Location MDI TDI Polyols TPU Aniline Nitrobenzene Ethyleneamines PO PG MTBE
- ------------------------------ --- --- ------- --- ------- ------------ -------------- -- -- ----
(pounds) (gallons)
Geismar, Louisiana(1) 840(1) 90 160 830(2) 1,200(2)
Freeport, Texas 160
Osnabruck, Germany 20 30
Port Neches, Texas. 525 130(3) 260
Ringwood, Illinois. 20
Rozenburg, Netherlands 620 120
Shepton Mallet, U.K. 50
Wilton, U.K. 660 810
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Total 1,460 90 350 50 1,490 2,010 160 525 130 260
=================================================================================================
(1) 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
Crompton Corp. in which we own a 50% interest, owns the aniline and
nitrobenzene facilities. Rubicon is a separate legal entity that operates
both the assets that we own jointly with Crompton Corp. and our wholly-
owned assets at Geismar.
(2) We have the right to approximately 73% of this capacity under the Rubicon
joint venture arrangements.
(3) We produce under a tolling arrangement with Huntsman Petrochemical
Corporation.
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Since 1996, over $600 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, processes 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 TBA which
are further processed into PO and MTBE, respectively. 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 Crompton
Corp., 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 joint venture's aniline, nitrobenzene and DPA facilities and is responsible
for providing other auxiliary services to the entire Geismar complex. We are
entitled to approximately 80% of the nitrobenzene and aniline production
capacity of Rubicon, and Crompton Corp. 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 butane/isobutane,
propylene, methanol and oxygen, which accounted for 61%, 20%, 13%, and 3%,
respectively, of total raw material costs in 2000. 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, and through Huntsman Petrochemical Corporation's pipeline which is
the only propylene pipeline connected to our PO facility.
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.
MTBE Developments
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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 various 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 of the federal Clean Air
Act for gasoline sold in California. Separately, the California Air Resources
Board has adopted regulations that would prohibit the addition of MTBE to
gasoline after 2002. Certain other states have also taken actions to restrict or
eliminate the future use of MTBE. The actual effect of these state action on the
use of MTBE in gasoline is unclear in light of federal law. However, 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 1999, the U.S. Senate also
passed a resolution calling for a phase out of MTBE. While this resolution has
no binding legal effect, there can be no assurance that future Congressional
action will not result in a ban or other restrictions on MTBE use. In addition,
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 restrict the use of 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 may 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 near term 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 of MTBE in the U.S., however, we believe we will be able to export
MTBE to Europe or elsewhere or use our co-product TBA to produce saleable
products other than MTBE. If we opt to produce products other than MTBE,
necessary modifications to our facilities 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.
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.
We believe that our olefins facility at Wilton, U.K. is one of Europe's largest
single-site 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 225 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 believe that we are Europe's largest
cyclohexane producer with 660 million pounds of annual capacity, third largest
paraxylene producer with 750 million pounds of annual capacity and ninth largest
benzene producer with 1,125 million pounds of annual capacity. 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
aromatics-rich feedstock. This transaction allowed us to close part of our
aromatics facilities in the fourth quarter of 1999, thereby reducing fixed
production costs while maintaining production of key products. We believe that
this change will improve the future profitability of our aromatics business.
10
Our petrochemicals business accounted for 31% of net sales in 2000, and, 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, styrenes 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
AtoFina, Dow 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.
Like the ethylene market, the aromatics market, which is comprised of benzene,
paraxylene and cyclohexane, in Western Europe is characterized by numerous
producers. The six largest Western European producers of benzene are AtoFina,
Dow, Shell, EniChem, ExxonMobil and BASF.
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.
However, demand has increased in 2000 as markets continued to recover from the
economic downturn in Asia.
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 2000, over 85% of our primary petrochemicals sales
volume was made under long-term contracts. We delivered over 70% of our
petrochemical products volume in 2000 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:
11
Location Product Annual Capacity
-------------------------------------------------------------------
(millions of pounds)
Wilton, U.K. Ethylene 1,900
Propylene 880
Butadiene 225
Paraxylene 750
North Tees, U.K. Benzene 1,125
Cyclohexane 660
Cumene 275
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 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.
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.
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,
ExxonMobil 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
We believe that our TiO\\2\\ business, which operates under the trade name
"Tioxide", has the largest production capacity for TiO\\2\\ in Europe, with an
estimated 31% of European production capacity, and has the third largest
production capacity in the world, with an estimated 14% market share. TiO\\2\\
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, TiO\\2\\ 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 TiO\\2\\ end markets and geographic regions. The
geographic diversity of our manufacturing facilities allows our TiO\\2\\
business to service local customers, as well as global customers that require
delivery to more than one location. Our TiO\\2\\ business has an aggregate
annual nameplate capacity of approximately 570,000 tonnes at our eight
production facilities. Five of our TiO\\2\\ manufacturing plants are located in
Europe, one is in North America, one is in Asia, and one is in South Africa. Our
North
12
American operations consist of a 50% interest in a manufacturing joint venture
with NL Industries, Inc. and our South African operations consist of a 60% owned
subsidiary.
We recently commenced construction of a new TiO\\2\\ manufacturing plant at our
Greatham, UK facility. The new plant will allow us to close an older, plant
located at Greatham and will increase our annual production capacity of the
facility to 100,000 tonnes of chloride-based TiO\\2\\. We expect to commence
production at the new plant in mid-2002. In addition, we are in the process of
expanding our Teluk Kalung, Malaysia facility by 6,000 tonnes by mid-2001 and
are in the process of expanding our Huelva, Spain plant by 17,000 tonnes by
late-2002.
We believe that we are one of the lowest cost TiO\\2\\ producers in the world.
We have embarked on a comprehensive cost reduction program which has eliminated
approximately $110 million of annualized costs since 1996, with an additional
$20 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 TiO\\2\\ business accounted for 22% of our net sales in 2000, and 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 TiO\\2\\ 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 TiO\\2\\
demand. The TiO\\2\\ 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 TiO\\2\\ market is characterized by a small number of large global
producers. As of December 31, 2000, following recent industry consolidation, the
TiO\\2\\ industry had five major producers, (DuPont, Millennium Chemicals,
Huntsman International, Kerr-McGee Chemicals and NL Industries) accounting for
76% of the global market share. The TiO\\2\\ industry has substantial
requirements for entry, including proprietary production technology and world
scale assets requiring significant capital investment. No greenfield TiO\\2\\
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.
There are two manufacturing processes for the production of TiO\\2\\, 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 TiO\\2\\ 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 TiO\\2\\ 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 TiO\\2\\.
In addition, we have focused on marketing products to higher growth industries.
For example, we believe that our TiO\\2\\ business is well-positioned to benefit
from the projected growth in the plastics sector, which we expect to grow faster
than the overall TiO\\2\\ market over the next several years. The table below
summarizes the major and markets for our TiO//2// products.
% of 2000 Sales
13
End Markets Volume
Paints and Coatings 8%
Plastics 7%
Inks 5%
Paper 4%
Manufacturing and Operations
Our TiO\\2\\ business has eight manufacturing sites in seven countries with a
total estimated capacity of 570,000 tonnes per year. Approximately 75% of our
TiO\\2\\ capacity is located in Western Europe. During 2000, we closed our
manufacturing plant in Tracy, Canada. This facility was a "finishing" plant,
performing the later steps in the production process for a portion of the
product produced at our European and South African facilities. Following an
increase of our capacity for finishing TiO\\2\\ at our European and South
African facilities, we are able to finish all product produced locally. The
following table presents information regarding our TiO\\2\\ facilities:
Region Site Annual Capacity Process
------ ---- --------------- -------
(tonnes)
Western Europe Calais, France 100,000 Sulfate
Greatham, U.K.(1) 80,000 Chloride
Grimsby, U.K. 80,000 Sulfate
Huelva, Spain(1) 80,000 Sulfate
Scarlino, Italy 80,000 Sulfate
North America Lake Charles, Louisiana(2) 60,000 Chloride
Asia Teluk Kalung, Malaysia(1) 50,000 Sulfate
Southern Africa Umbogintwini, South Africa(3) 40,000 Sulfate
-------
570,000
=======
(1) We have recently announced plans to expand the capacity of these
facilities.
(2) 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.
(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.
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 TiO\\2\\ 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 TiO\\2\\ prices. Titanium-bearing ore
represents approximately 40% of TiO\\2\\ pigment production costs.
TiO\\2\\ producers extract titanium from ores and process it into pigmentary
TiO\\2\\ using either the chloride or sulfate process. Once an intermediate
TiO\\2\\ 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
14
environmental regulations. In order to reduce our disposal costs and to
increase our cost competitiveness, we have developed and marketed the co-
products of our TiO\\2\\ business.
Competition
The global markets in which our TiO\\2\\ business operates are highly
competitive. The primary factors of competition are price, product quality and
service. The TiO\\2\\ 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, Kerr-
McGee Chemicals and NL Industries. 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 2000, sales to ICI and its affiliates by our Specialty Chemicals,
Petrochemicals and TiO\\2\\ businesses accounted for approximately 8% of our
consolidated revenue. In 1999, sales to ICI and its affiliates accounted for
approximately 14% of our pro forma consolidated revenue. ICI owns 30% of our
membership interests. See "Item 13 - Certain Relationships and Related
Transactions" for a further discussion of our relationship with ICI.
Research and Development
In 2000, we spent a total of $59 million on research and development of our
products and on a pro forma basis we spent a total of $73 million and $68
million in 1999 and 1998, respectively.
Intellectual Property Rights
Proprietary protection of our processes, apparatuses, and other technology and
inventions is important to our businesses. For our Specialty Chemicals
business, we own approximately 370 U.S. patents and pending applications
(including provisionals) currently pending at the United States Patent and
Trademark Office, and approximately 3,100 foreign counterparts, including both
issued patents and pending patent applications. For our TiO\\2\\ business, we
have approximately 25 U.S. patents and pending patent applications, and
approximately 345 foreign counterparts. For our petrochemicals business, we own
approximately 35 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 that
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. We
also license and sub-license certain intellectual property rights to affiliates
and to third parties. In connection with our transaction with Holdings, ICI and
HSCC (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 20 U.S. trademark registrations and
applications for registration currently pending at the United States Patent and
Trademark Office, and approximately 840 foreign counterparts, including both
registrations and applications for registration. For our TiO\\2\\ business, we
have approximately 180 trademark registrations and pending applications,
approximately 110 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 Huntsman Corporation under which we have
obtained the rights to use the trademark "Huntsman", subject to certain
restrictions.
Employees
We employ over 5,800 people as of December 31, 2000. Additionally, over 800
people are employed by our U.S. Joint Ventures. Approximately 94% of our
employees (excluding employees of our Joint Ventures) work outside the USA and
15
approximately 48% of our employees are subject to collective bargaining
agreements. 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 HSCC 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 2000, the case brought
against Tioxide by the British Environment Agency (EA) for a February 1999 spill
of acidic wastewater into Greenabella Marsh from its Greatham site was settled
for combined penalties of (Pounds)150,000. Under our indemnity with ICI, ICI
must reimburse us for this amount. 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
amended administrative petition with respect to certain of these violations on
January 12, 2001. While these matters remain pending and could result in fines
of over $100,000 allocable to the PO/MTBE facility, 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 ("EU"). 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 HSCC 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. See "Item 1 - Specialty Chemicals - MTBE
Developments" for a discussion of the proposed regulations regarding MTBE.
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
16
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, beyond currently anticipated
expenditures, in complying with EU Directives, including the Directive on
Hazardous Waste Incineration and the Seveso II Directive, which governs major
accident hazards. 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".
17
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(3) 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(3) Polyurethane Systems House
West Deptford, New Jersey Polyurethane Systems House, Research Facility
and U.S. Regional Headquarters
Auburn Hills, Michigan(3) Polyurethane Office Space and Research Facility
Deerpark, Australia(3) 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(3) Polyurethane Regional Headquarters
Osnabruck, Germany TPU Manufacturing Facility
Ringwood, Illinois(2) TPU Manufacturing Facility
North Andover, Massachusetts(3) TPU Research Facility
Port Neches, Texas PO Manufacturing Facility and MTBE manufacturing facility
Austin, Texas PO/TBA Pilot Plant Facility
Wilton, U.K. Olefins and Aromatics Manufacturing Facilities, Petrochemicals Headquarters
Teesport, U.K.(2) Logistics/Storage Facility
North Tees, U.K.(3) Aromatics Manufacturing Facility and Logistics/Storage Facility
Saltholme, U.K. Underground Cavity Storage Operations
Grimsby, U.K. TiO\\2\\ Manufacturing Facility
Greatham, U.K. TiO\\2\\ Manufacturing Facility
Calais, France TiO\\2\\ Manufacturing Facility
Huelva, Spain TiO\\2\\ Manufacturing Facility
Scarlino, Italy TiO\\2\\ Manufacturing Facility
Teluk Kalung, Malaysia TiO\\2\\ Manufacturing Facility
Westlake, Louisiana(4) TiO\\2\\ Manufacturing Facility
Umbogintwini, South Africa(5) TiO\\2\\ Manufacturing Facility
Billingham, U.K. TiO\\2\\ Research and Technical Facility, and office space
Hammersmith, U.K. TiO\\2\\ Headquarters
(1) 50% owned manufacturing joint venture with Crompton Corp.
(2) Leased.
(3) Leased land and/or building.
(4) 50% owned manufacturing joint venture with Kronos Louisiana, Inc., a
subsidiary of NL Industries, Inc.
(5) 60% owned subsidiary with AECI.
18
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
HSCC 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
environmental proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, 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 membership interests.
Holders
As of the date of this report, there were six holders of record of our
membership interests. HSCC, an indirect subsidiary of Huntsman Corporation,
owns 60% of the our membership interests, ICI and its affiliates own 30% of our
membership interests and four institutional investors own the remaining 10%.
Distributions
Pursuant to our Limited Liability Company Agreement and the Limited Liability
Company Agreement of Huntsman International, we have a tax sharing arrangement
with all of our membership interest holders. Under the arrangement, because we
are treated as a partnership for U.S. income tax purposes, we make quarterly
payments (with appropriate annual adjustments) to our membership interest
holders, in an amount equal to the U.S. federal and state income taxes we would
have paid had we 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. The indentures governing our notes, and the notes of Huntsman
International, also place certain restrictions on our ability to pay dividends
and make other distributions.
19
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".
(Millions of Dollars)
HSCC Predecessor Texaco Predecessor
Company Company
----------------------------------------------------------------------------
Six Months Six Months Ten Months Two Months
Year Ended Ended Ended Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31, December 31, February 28, December 31,
2000 1999 1999 1998 1997 1997 1996
----------------------------------------------------------------------------------------------------------
Consolidated Statements
of Operations Data:
Revenues $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7 $ 348.5 $ 61.0 $ 415.0
Operating income
(loss) 413.0 198.3 52.6 54.3 40.4 (5.7) 19.0
Net income (loss) 82.0 49.7 21.5 9.4 3.0 (3.7) 12.0
Consolidated Balance
Sheet Data:
Working capital $ 330.6 $ 456.7 $ 32.6 $ 30.4 $ 40.4 $ 39.0
Total assets 4,779.5 4,778.5 577.9 577.6 593.7 292.0
Long-term debt and
other non-current
liabilities 3,375.7 3,433.2 474.6 503.8 524.8 287.0
Members'/Stockholders'
equity 521.1 565.1 49.8 30.6 25.3 5.0
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 HSCC, ICI and institutional investors. With this capitalization, we
acquired ICI's polyurethane chemicals, petrochemicals (including ICI's 80%
interest in the Wilton olefins facility), and TiO\\2\\ businesses, and HSCC's PO
business. In addition, we acquired the remaining 20% ownership interest in the
Wilton olefins facility from BP Chemicals (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 HSCC PO 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 is 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 for our Petrochemical and Tioxide products has
historically grown at rates that are approximately equal to global GDP growth.
20
HSCC 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):
HSCC
Predecessor Company
-------------------------------
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
--------------------------------------------------------
Revenues $ 4,447.9 $ 1,997.3 $ 192.0 $ 338.7
Cost of goods sold 3,705.4 1,602.0 134.1 276.6
--------------------------------------------------------
Gross profit 742.5 395.3 57.9 62.1
Expenses of selling, general and
administrative, research and
development 329.5 197.0 5.3 7.8
--------------------------------------------------------
Operating income 413.0 198.3 52.6 54.3
Interest expense, net 292.9 135.9 18.0 39.9
Loss on sale of accounts receivable 1.9
Other income (expense) (3.2) 6.5 - 0.8
--------------------------------------------------------
Net income before income taxes and
minority interest 115.0 68.9 34.6 15.2
Income tax expense 30.2 18.2 13.1 5.8
Minority interests in subsidiaries 2.8 1.0 - -
--------------------------------------------------------
Net income $ 82.0 $ 49.7 $ 21.5 $ 9.4
========================================================
2000 Actual Compared to 1999 (Pro Forma)
In order to present data which is useful for comparative purposes, the following
tabular data for 1999 pro forma and related discussion, have been prepared as if
the Transaction, excluding the acquisition of 20% of the Wilton olefins facility
in June 1999 from BP Chemicals, had taken place in January 1999. 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)
2000 Actual 1999 Pro Forma
----------------- -----------------
Specialty Chemicals sales $ 2,109 $ 1,855
Petrochemical sales 1,383 1,022
Tioxide sales 956 991
----------------- -----------------
Total revenues 4,448 3,868
Cost of goods sold 3,706 3,096
----------------- -----------------
Gross profit 742 772
Selling, general, administrative, research and development expenses 329 407
----------------- -----------------
Operating income 413 365
Interest expense, net 293 291
Loss on sale of accounts receivable 2 -
Other income (expense) (3) 7
----------------- -----------------
Net income before income taxes and minority interest 115 80
Income tax expense 30 25
Minority interests in subsidiaries 3 1
----------------- -----------------
Net income $ 82 $ 54
================= =================
21
Depreciation and amortization $ 214 $ 193
================= =================
EBITDA (1) $ 622 $ 564
Net reduction in corporate overhead allocation and insurance expenses - 11
Rationalization of TiO\\2\\ operations - 5
Loss on sale of accounts receivable(2) 2 -
================= =================
Adjusted EBITDA $ 624 $ 580
================= =================
(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 accounting principles generally accepted in the United States
("US 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.
(2) For purposes of the Senior Credit Facility's covenants, loss on sale of
accounts receivable related to the securitization program is excluded from
the computation of EBITDA.
Revenues. Revenues for the business in 2000 increased by $580 million, or
15%, to $4,448 million from $3,868 million during 1999.
Specialty Chemicals - Total MDI sales volumes increased by 17% from the 1999
period. A strong recovery in the Asian economies led to an increase in sales
volumes of 41% in that region, while in Europe, sales volumes grew by 19%. In
the Americas, sales volumes grew by 11% from the prior year following the
completion in February, 2000 of the MDI expansion project at our Geismar,
Louisiana facility. Polyol sales volumes grew by 19% with the increase
attributable to the European region. These gains were partially offset by a 9%
decrease in average selling prices for MDI and a 14% decrease in the price of
polyols compared to the same period in 1999, a substantial portion of which was
due to a weakening in the value of the Euro versus the U.S. dollar. PO sales
revenue grew by 4% due to a 7% average selling price increase. MTBE sales
revenue grew by 52% due to a 54% MTBE average selling price increase. The MTBE
average selling price increase is primarily attributable to higher prices in
2000 for gasoline, the principal end-use product for MTBE.
22
Petrochemicals - Sales volumes of ethylene and propylene increased by 27% and
19%, respectively. These increases are primarily attributable to increased
output, stronger customer demand and the impact of additional olefins capacity
acquired from BP Chemicals on June 30, 1999. In aromatics, sales volumes of
benzene, paraxylene and cyclohexane rose by 18%, 13% and 12%, respectively.
Average selling prices for all products rose in response to increases in
feedstock prices. Ethylene, propylene, benzene and paraxylene prices were 35%,
56%, 47% and 40% higher, respectfully. Sales revenues from feedstock trading
fell by $193 million, mainly due to the cessation of crude oil trading following
the Transaction.
Tioxide - Sales volumes decreased by 2% compared to the 1999 period due to
weakening of demand, particularly in the Asian and American markets, in the
fourth quarter of 2000. While selling prices in local currency were higher in
2000 than in 1999, the weakness of the euro against the U.S. dollar more than
offset these local currency selling price increases resulting in overall selling
prices 2% lower than in 1999.
Gross profit. Gross profit in 2000 decreased by $30 million, or 4%, to $742
million from $772 million in 1999. Of this $30 million decrease in gross
profit, approximately $21 million was attributable to increased depreciation
resulting from acquisitions and capital expansions, primarily in the Specialty
Chemicals business. Gross profit benefited from the increase in MTBE sales
revenue.
Specialty Chemicals - While MDI and polyols benefited from increased sales
volumes, however, this benefit was more than offset by a rise in prices for the
major raw materials of MDI, benzene and chlorine. Gross profit on MDI and
polyols decreased 18% and 26%, respectively. The price of benzene increased by
57% in the U.S. market and by 49% in the European market compared to the 1999
period.
Petrochemicals - The Petrochemicals gross profit increased by 98% due to
additional volumes and improved contribution margins. The price increases for
our main raw material, naphtha, were partially offset by our hedging activities.
See "Item 7A-- Quantitative And Qualitative Disclosures About Market Risks".
Tioxide - Despite lower revenues and higher utility costs, gross profit
increased 17% compared to 1999. This increase is due to fixed cost reductions
as a result of our on-going manufacturing excellence program.
Selling, general and administrative expenses (including research and
development expenses). Selling, general and administrative expenses (including
research and development expenses) ("SG&A") in 2000 decreased by $78 million, or
19%, to $329 million from $407 million in 1999.
Specialty Chemicals - There was a 21% decrease in SG&A (including R&D) in 2000
due largely to non-recurring items incurred in 1999. Major SG&A expenses during
1999 included restructuring costs in Asia and certain pension costs. In
addition, a reduction in the costs of insurance under Huntsman ownership also
contributed to the decline in SG&A costs.
Petrochemicals - In Petrochemicals, reduced expenditures on insurance and
consulting fees as well as the elimination of ICI corporate charges resulted in
a 28% reduction of SG&A cost in 2000 as compared to 1999.
Tioxide - A decrease of 22% in SG&A was primarily due to restructuring
activities, including personnel reductions, within selling organizations in
Europe, Asia Pacific and the U.S.
Interest expense. Net interest expense in 2000 was relatively unchanged from
1999 levels.
Income taxes. Income taxes in 2000 increased by $5 million, to $30 million
from $25 million in 1999. Higher taxes were due primarily to higher earnings for
the period. The effective income tax rate in 2000 was relatively unchanged from
1999.
Net income. Net income in 2000 increased by $28 million to $82 million from
$54 million during 1999 as a result of the factors discussed above.
23
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 had 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
Selling, general, administrative, research and development expenses 407 419
----------------- -----------------
Operating income 365 238
Interest expense, net 291 291
Other income 7 9
-----------------------------------
Net income (loss) before income taxes and minority interest 80 (44)
Income tax expense 25 5
Minority interests in subsidiaries 1 2
----------------- -----------------
Net income (loss) $ 54 $ (51)
================= =================
Depreciation and amortization $ 148 $ 177
================= =================
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 TiO\\2\\ operations 5 17
-----------------------------------
Adjusted EBITDA $ 585 $ 481
===================================
(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 US 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
volumes 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 18% 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 pro forma 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.
Selling
24
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 following 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 effect.
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 benefited 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). SG&A in 1999 decreased by $12 million, or 3%, to $407
million from $419 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, reduced expenditures on insurance and
consultancy fees as well as a reduction in ICI corporate charges resulted in
lower total SG&A costs in 1999 as compared to 1998.
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 (loss). Net income (loss) in 1999 increased by $105 million to net
income of $54 million from net loss of $51 million during 1998 as a result of
the factors discussed above.
Liquidity and Capital Resources
Liquidity
As of December 31, 2000, we had approximately $368 million available under our
revolving credit facility and approximately $66 million in available cash
balances. Huntsman International's senior secured credit facilities provide for
borrowings of up to $[1,922] 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. As of December 31, 2000, we also had
outstanding approximately $[___] million of our 13.375% Senior Discount Notes
and $[___] million of our 8% Senior Subordinated Reset Discount Notes, and
Huntsman International had outstanding $[785] million of its 10-1/8% Senior
Subordinated
25
Notes. We also maintain $80 million of short-term overdraft facilities, of which
$58 million was available as of December 31, 2000. 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. See "Item 1--Business--Recent Events--
Issuance of [_]200 Million Senior Subordinated Notes".
Our Senior Discount Notes and our Senior Subordinated Reset Discount Notes do
not pay interest or principal or interest until maturity on December 31, 2009.
The indebtedness of Huntsman International that restricts payments to us will
mature prior to the maturity of our indebtedness. We anticipate that we will
have the funds to pay the principal and interest of our notes at maturity from
Huntsman International's distributions or refinancing of our indebtedness.
However, we can make no assurances that the foregoing will occur.
Securitization of Receivables
On December 21, 2000, we entered into a securitization program arranged by The
Chase Manhattan Bank under which certain trade receivables were and will be
transferred to a special purpose securitization entity. The acquisition of these
receivables by the entity was financed through the issuance of commercial paper.
We received $175 million in proceeds from the securitization transaction which
were used to reduce our outstanding indebtedness.
Capital Expenditures
Capital expenditures for our businesses for the year ended December 31, 2000
were approximately $204.5 million. In 2000, the largest single capital
expenditure was related to the capacity expansion program at our Geismar,
Louisiana facility which was completed in the first quarter of 2000. In
September, 2000, we announced the construction of a new TiO\\2\\ manufacturing
plant at our Greatham, U.K. facility. This new plant is expected to cost
approximately $80 million and is scheduled to commence production in mid-2002.
We estimate our total capital expenditures for 2001, including expenditures
relating to environmental compliance, to be between $250 million and $285
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, including any restrictions on
MTBE. See "Item 1--Business--Specialty Chemicals--MTBE Developments."
Our capital expenditures relating to environmental matters for the twelve months
ended December 31, 2000 were approximately $35 million. Capital costs in 2001
are expected to remain at a comparable level for environmental matters. Capital
expenditures are planned to comply with 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 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, beyond currently anticipated expenditures, in complying with the
EU Directives, particularly the Directive on Hazardous Waste Incineration and
the Seveso II Directive, which govern
26
major accident hazards. 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 ("FASB") issued Statement
of Financial Accounting Standards ("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 as of January 1, 2001 for the Company. The accounting for changes in
the fair value of a derivative depends on the use of the derivative. Adoption
of this new accounting standard will not have a material effect on our
statements of operations or financial position.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140,
which replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, provides accounting and reporting
standards for securitizations and other transfers of assets. Those standards
are based on consistent application of a financial-components approach that
focuses on control. Under this approach, after a transfer of assets, an entity
recognizes the assts it controls and derecognizes assets when control has been
surrendered. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from those that are secured
borrowings. The accounting requirements of this standard are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and must be applied prospectively. The
disclosures required by this standard are required for fiscal years ending after
December 15, 2000. The Company has provided the disclosures required by this
standard in Note 9 to our consolidated financial statements contained in this
report. Adoption of the accounting requirements of this standard will not have
a material effect on our statements of operations or financial position.
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
27
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 adjust 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.
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 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