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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 1-12091
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MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
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Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Half Mile Road 07701
Red Bank, NJ (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 732-933-5000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant is required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
The aggregate market value of voting stock held by non-affiliates as of
March 19, 2003 (based upon the closing price of $11.90 per common share as
quoted on the New York Stock Exchange), is approximately $740 million. For
purposes of this computation, the shares of voting stock held by directors,
officers and employee benefit plans of the registrant and its wholly owned
subsidiaries were deemed to be stock held by affiliates. The number of shares of
common stock outstanding at March 19, 2003, was 63,440,462 shares, excluding
14,456,124 shares held by the registrant, its subsidiaries and certain Company
trusts, which are not entitled to be voted.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement relating to the
2003 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission, are incorporated by reference in Part III of this Annual
Report on Form 10-K as indicated herein.
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TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business..................................................................... 5
2. Properties................................................................... 23
3. Legal Proceedings............................................................ 24
4. Submission of Matters to a Vote of Security Holders.......................... 27
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters.... 28
6. Selected Financial Data...................................................... 28
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 30
7A. Quantitative and Qualitative Disclosures about Market Risk................... 54
8. Financial Statements and Supplementary Data.................................. 55
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 96
PART III
10. Directors and Executive Officers of the Registrant........................... 97
11. Executive Compensation....................................................... 97
12. Security Ownership of Certain Beneficial Owners and Management............... 97
13. Certain Relationships and Related Transactions............................... 97
14. Controls and Procedures...................................................... 97
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K............... 99
Signatures................................................................... 103
Certifications............................................................... 104
Disclosure Concerning Forward-Looking Statements
The statements in this Annual Report on Form 10-K (the "Annual Report")
that are not historical facts are, or may be deemed to be, "forward-looking
statements" ("Cautionary Statements") as defined in the Private Securities
Litigation Reform Act of 1995. Some of these statements can be identified by the
use of forward-looking terminology such as "prospects," "outlook," "believes,"
"estimates," "intends," "may," "will," "should," "anticipates," "expects" or
"plans," or the negative or other variation of these or similar words, or by
discussion of trends and conditions, strategy or risks and uncertainties. In
addition, from time to time, Millennium Chemicals Inc. (the "Company") or its
representatives have made or may make forward-looking statements in other
filings that the Company makes with the Securities and Exchange Commission, in
press releases or in oral statements made by or with the approval of one of its
authorized executive officers.
These forward-looking statements are only present expectations as at the
time of this filing. Actual events or results may differ materially. Factors
that could cause such a difference include:
o the cyclicality and volatility of the chemical industries in which the
Company and Equistar Chemicals, LP ("Equistar") operate, particularly
fluctuations in the demand for ethylene, its derivatives and acetyls
and the sensitivity of these industries to capacity additions;
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o general economic conditions in the geographic regions where the
Company and Equistar generate sales, and the impact of government
regulation and other external factors, in particular, the events in
the Middle East;
o the ability of Equistar to distribute cash to its partners and
uncertainties arising from the Company's shared control of Equistar
and the Company's contractual commitments regarding possible future
capital contributions to Equistar;
o changes in the cost of energy and raw materials, particularly natural
gas and ethylene, and the ability of the Company and Equistar to pass
on cost increases to their customers;
o the ability of raw material suppliers to fulfill their commitments;
o the ability of the Company and Equistar to achieve their productivity
improvement, cost reduction and working capital targets, and the
occurrence of operating problems at manufacturing facilities of the
Company or Equistar;
o risks of doing business outside the United States, including currency
fluctuations;
o the cost of compliance with the extensive environmental regulations
affecting the chemical industry and exposure to liabilities for
environmental remediation and other environmental matters relating to
the Company's and Equistar's current and former operations;
o pricing and other competitive pressures;
o legal proceedings relating to present and former operations (including
proceedings based on alleged exposure to lead-based paints and lead
pigments, asbestos and other materials), ongoing or future tax audits
and other claims;
o the Company's substantial indebtedness and its impact on the Company's
cash flow, business operations and ability to obtain additional
financing.
A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to this Annual Report.
Some of these Cautionary Statements are discussed in more detail under
"Business" and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Annual Report. Readers are cautioned not to
place undue reliance on forward-looking or Cautionary Statements, which reflect
management's opinions only as of the date hereof. The Company undertakes no
obligation to update any forward-looking or Cautionary Statement. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on behalf of the Company are expressly qualified in their
entirety by the Cautionary Statements in this Annual Report. Readers are advised
to consult any further disclosures the Company may make on related subjects in
subsequent 10-Q, 8-K, and 10-K reports to the Securities and Exchange
Commission.
Non-GAAP Financial Measures
Financial measures based on accounting principles generally accepted in the
United States of America ("GAAP") are commonly referred to as GAAP financial
measures. For this purpose, a non-GAAP financial measure is generally defined by
the Securities and Exchange Commission as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be so adjusted in the most
comparable GAAP measure. From time to time the Company discloses so-called
non-GAAP financial measures, primarily EBITDA, Pro Forma EBITDA, Pro Forma
Operating Income, Pro Forma Net Sales and Pro Forma Depreciation and
Amortization. EBITDA represents income from operations before interest, taxes,
depreciation and amortization, other income items, equity earnings (which
includes an allocation of costs incurred by the Company in connection with its
interest in Equistar), and the cumulative effect of accounting changes. EBITDA
is a key measure used by the banking and investing communities in their
evaluation of economic performance. Accordingly, management believes that
disclosure of EBITDA provides useful information to investors because it is
frequently cited by financial analysts in evaluating companies' performance. Pro
Forma EBITDA includes the Company's underlying interest (29.5%) in Equistar's
results, together with an allocation of costs incurred by the Company in
connection with its interest in Equistar. Pro Forma Operating Income includes
the
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Company's underlying interest in Equistar's results. Pro Forma Net Sales and Pro
Forma Depreciation and Amortization include net sales and depreciation and
amortization, respectively, in accordance with GAAP together with the Company's
underlying interest in Equistar's corresponding amounts. The Company believes
this pro forma information provides useful information to investors regarding
its underlying interest in Equistar. EBITDA and the pro forma measures
identified above are not a measure of operating performance computed in
accordance with GAAP and should not be considered as a substitute for GAAP
measures. Additionally, these measures may not be comparable to similarly named
measures of other companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding certain items that are unusual in nature or
not comparable from period to period and that are included in GAAP measures of
earnings. Management believes that excluding these items generally helps
investors to compare operating performance between two periods. Such adjusted
data is not reported without an explanation of the items that are excluded.
4
PART I
Item 1. Business
The Company is a major international chemical company, with leading market
positions in a broad range of commodity, industrial, performance and specialty
chemicals.
The Company has three business segments: Titanium Dioxide and Related
Products, Acetyls, and Specialty Chemicals. The Company also owns a 29.5%
interest in Equistar, a joint venture owned by the Company and Lyondell Chemical
Company ("Lyondell"). The Company accounts for its interest in Equistar as an
equity investment.
The Company has leading market positions in the United States and the
world:
o Through its Titanium Dioxide and Related Products business segment,
the Company is the second-largest producer of titanium dioxide
("TiO[u]2") in the world, with manufacturing facilities in the United
States, the United Kingdom, France, Brazil and Australia. The Company
is also the largest merchant seller of titanium tetrachloride
("TiCl[u]4") in North America and Europe and a leading producer of
zirconia, silica gel and cadmium-based pigments;
o Through its Acetyls business segment, the Company is the
second-largest producer of vinyl acetate monomer ("VAM") and acetic
acid in North America, and through its 85% interest in La Porte
Methanol Company, LP ("La Porte Methanol Company"), a partner in a
leading US producer of methanol;
o Through its Specialty Chemicals business segment, the Company is a
leading producer of terpene-based fragrance and flavor chemicals;
o Through its 29.5% interest in Equistar, the Company is a partner in
the second-largest producer of ethylene and the third-largest producer
of polyethylene in North America, and a leading producer of
performance polymers, oxygenated chemicals, aromatics and specialty
petrochemicals.
The Company's management strategy is based on "Operational Excellence" and
"Growth and Development" models. The Operational Excellence model focuses on
optimizing cash flow and disciplined growth for the Company's more mature
businesses. The Company's high-volume TiO[u]2 and acetyls businesses, as well as
its interest in Equistar, are managed pursuant to the Operational Excellence
model. The Growth and Development model focuses on developing the Company's
current and prospective higher margin, higher growth-potential businesses to
achieve operating margins that exceed chemical industry averages. The businesses
within the Company's Specialty Chemicals segment, as well as the specialty and
performance chemicals businesses within the Titanium Dioxide and Related
Products segment, are managed pursuant to the Growth and Development model. The
Company's centralized Shared Services organization is responsible for providing
finance, human resources, certain manufacturing services, research and
development, strategic planning, supply chain, legal, information technology,
quality, safety, health and environmental services to all Company businesses.
The Company is testing its business plan with an independent third party to help
drive optimal performance.
The Company's Titanium Dioxide and Related Products segment is operated
through Millennium Inorganic Chemicals Inc. and its non-United States affiliates
(collectively, "Millennium Inorganic Chemicals"); the Company's Acetyls segment
is operated through Millennium Petrochemicals Inc. ("Millennium Petrochemicals")
and the Company's Specialty Chemicals segment is operated through Millennium
Specialty Chemicals Inc. ("Millennium Specialty Chemicals"). In addition to its
29.5% interest in Equistar, the Company owns an 85% interest in La Porte
Methanol Company, a Delaware limited partnership, which owns a methanol plant
located in La Porte, Texas and certain related facilities that were contributed
to the partnership by Millennium Petrochemicals. La Porte Methanol Company is
included in the Company's Consolidated Financial Statements.
The Company was incorporated in Delaware on April 18, 1996 and became a
publicly traded company following its demerger (i.e., spin-off) from Hanson plc
("Hanson"), a company incorporated in the United Kingdom, on October 1, 1996
(the "Demerger"). The Company's principal executive offices are located at 230
Half Mile Road, Red Bank, NJ 07701. Its telephone number is (732) 933-5000 and
its fax number is (732) 933-5240. Its website is http://www.millenniumchem.com.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Proxy Statements and all amendments thereto are
available free of charge through the Company's website as soon as reasonably
practicable after they are electronically filed with or furnished
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to the Securities and Exchange Commission. Information contained on the
Company's website or any other website is not incorporated into this Annual
Report and does not constitute a part of this Annual Report.
In this Annual Report:
o References to the Company are to the Company and its consolidated
subsidiaries, except as the context otherwise requires.
o References to "tpa" are to metric tons per annum (a metric ton is
equal to 1,000 kilograms or 2,204.6 pounds).
o References to the Company's and Equistar's market positions, with the
exception of the Company's market position in the Specialty Chemicals
business segment, are based on estimates of their respective
production capacities, as compared to the production capacities of
other industry participants. The reference to the Company's market
position with respect to the Specialty Chemicals business segment is
based on sales volumes of the Specialty Chemicals business segment, as
compared to the estimated sales volumes of its competitors.
o Estimates of the Company's and Equistar's production capacities are
based upon engineering assessments made by the Company and Equistar,
respectively, and estimates of the production capacities and sales
volumes of other industry participants are based on available
information from a variety of sources. Actual production may vary
depending on a number of factors including feedstocks, product mix,
unscheduled maintenance and demand.
Business Segments
The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls and Specialty
Chemicals. Operating income and expense not identified with the three separate
business segments, consisting primarily of employee-related costs from
predecessor businesses and certain other expenses, are reflected as Other. See
Note 16 to the Consolidated Financial Statements included in this Annual Report.
The Company also holds a 29.5% interest in Equistar that is accounted for under
the equity method. See Notes 1 and 4 to the Consolidated Financial Statements
included in this Annual Report.
Principal Products
The following is a description of the principal products of the Company's
business segments:
Product Uses
------- ----
Titanium Dioxide and Related Products:
Titanium dioxide ("TiO[u]2")............... A white pigment used to
provide whiteness, brightness,
opacity and durability in
paint and coatings, plastics,
paper and elastomers.
Titanium tetrachloride ("TiCl[u]4")........ The intermediate product used
in making TiO[u]2. TiCl[u]4 is
also used for: the manufacture
of titanium metal, which is
used to make a wide variety of
products including eyeglass
frames, aerospace parts and
golf clubs; the manufacture of
catalysts and specialty
pigments; and, as a surface
treatment for glass.
Zirconium-based compounds and chemicals.... Chemicals used in coloring for
ceramics, in pigment surface
treatment, solid oxide fuel
cells and to enhance optics.
Ultra-fine TiO[u]2......................... Nanoparticle and ultra-fine
products used in optical,
electronic, catalyst and
ultra-violet absorption
applications.
Silica gel................................. Inorganic product used to
reduce gloss and control flow
in coatings. Also used to
stabilize beer and extend the
shelf life of plastic films,
powdered food products and
pharmaceuticals.
6
Cadmium-based pigments..................... Inorganic colors used in
engineered plastics, artists'
colors, ceramics, inks,
automotive refinish coatings,
coil and extrusion coatings,
aerospace coatings and
specialty industrial finishes.
Acetyls:
Vinyl acetate monomer ("VAM").............. A petrochemical product used
to produce a variety of
polymer products used in
adhesives, water-based paint,
textile coatings and paper
coatings.
Acetic acid................................ A feedstock used to produce
VAM, terephthalic acid (used
to produce polyester for
textiles and plastic bottles),
industrial solvents, and a
variety of other chemicals.
Methanol................................... A feedstock used to produce
acetic acid; methyl tertiary
butyl ether ("MTBE"), a
gasoline additive,
formaldehyde, and several
other products. The Company is
a producer of methanol through
its 85% interest in La Porte
Methanol Company.
Specialty Chemicals
Terpene fragrance chemicals................ Individual components that are
blended to make fragrances
used in detergents, soaps,
perfumes, personal-care items
and household goods.
Flavor chemicals........................... Individual components that are
blended to impart or enhance
flavors used in toothpaste,
chewing gum and other consumer
products.
For a description of Equistar's principal products, see "Equity Interest in
Equistar," below.
Titanium Dioxide and Related Products
Titanium Dioxide
The Company is the second-largest producer of TiO[u]2 in the world, based
on reported production capacities. TiO[u]2 is a white pigment used for imparting
whiteness, brightness, opacity and durability in a wide range of products,
including paint and coatings, plastics, paper and elastomers.
The following table sets forth the Company's annual production capacity
(excluding the Hawkins Point, Maryland sulfate-process plant, which has been
idle since September 2001) as of the date of this report, using the chloride
process and the sulfate process discussed below, and the approximate percentage
of its total production capacity represented by each such process.
Millennium Chemicals' TiO[u]2 Rated Capacity
(metric tons per annum)
Percentage
Process Capacity of Capacity
------- -------- -----------
Chloride................................. 505,000 73%
Sulfate.................................. 185,000 27%
------- ----
Total................................. 690,000 100%
TiO[u]2 is produced in two crystalline forms: rutile and anatase. Rutile
TiO[u]2 is a more tightly packed crystal that has a higher refractive index than
anatase TiO[u]2 and, therefore, better opacification and tinting strength in
many applications. Some rutile TiO[u]2 products also provide better resistance
to the harmful effects of weather. Rutile TiO[u]2 is the preferred form for use
in paint and coatings, ink and plastics. Anatase TiO[u]2 has a bluer undertone
and is less abrasive than rutile. It is often preferred for use in paper,
ceramics, rubber and man-made fibers.
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TiO[u]2 producers process titaniferous ores to extract a white pigment using
one of two different technologies. The sulfate process is a wet chemical process
that uses concentrated sulfuric acid to extract TiO[u]2, in either anatase or
rutile form. The sulfate process generates higher volumes of waste materials,
including iron sulfate and spent sulfuric acid. The newer chloride process is a
high-temperature process in which chlorine is used to extract TiO[u]2 in rutile
form, with greater purity and higher control over the size distribution of the
pigment particles than the sulfate process permits. In general, the chloride
process is also less intensive than the sulfate process in terms of capital
investment, labor and energy. Because much of the chlorine can be recycled, the
chloride process produces less waste subject to environmental regulation. Once
an intermediate TiO[u]2 pigment has been produced by either the chloride or
sulfate process, it is "finished" into a product with specific performance
characteristics for particular end-use applications through proprietary
processes involving surface treatment with various chemicals and combinations of
milling and micronizing.
The Company's TiO[u]2 plants are located in the four major world markets for
TiO[u]2: North America, South America, Western Europe and the Asia/Pacific
region. The North American plants, consisting of one in Baltimore, Maryland and
two in Ashtabula, Ohio have aggregate production capacities of 260,000 tpa using
the chloride process. The plant in Salvador, Bahia, Brazil has a capacity to
produce approximately 60,000 tpa using the sulfate process. The Company also
owns a mineral sands mine located at Mataraca, Paraiba, Brazil, which supplies
the Brazilian plant with titanium ores. The mine has over two million metric
tons of recoverable reserves and a capacity to produce over 120,000 tpa of
titanium ores, which are generally consumed in the Salvador TiO[u]2 plant, and
19,000 tpa of zircon and 2,000 tpa rutile TiO[u]2, which are sold to third
parties. The Company's Stallingborough, United Kingdom plant has
chloride-process production capacity of 150,000 tpa. The plants in France at Le
Havre, Normandy and Thann, Alsace have sulfate-process capacities of 95,000 tpa
and 30,000 tpa, respectively. The Kemerton plant in Western Australia has
chloride-process production capacity of 95,000 tpa.
The Company's TiO[u]2 plants operated at an average rate of 89%, 85% and 94%
of installed capacity during 2002, 2001 and 2000, respectively. The decline in
the operating rate in 2001 compared to 2000 was primarily due to curtailment of
production at certain facilities in response to reduced market demand. The
increase in operating rate from 2001 to 2002 was primarily due to higher
production driven by increased market demand.
Titanium-bearing ores used in the TiO[u]2 extraction process (ilmenite,
leucoxene and natural rutile) occur as mineral sands and hard rock in many parts
of the world. Mining companies increasingly treat ilmenite to extract iron and
other minerals and produce slag or synthetic rutile with higher TiO[u]2
concentrations, resulting in lower amounts of wastes and by-products during the
TiO[u]2 production process. Ores are generally shipped by bulk carriers from
terminals in the country of origin to TiO[u]2 production plants, usually located
near port facilities. The Company obtains ores from a number of suppliers in
South Africa, Australia, Canada, Brazil, and Ukraine, generally pursuant to
one-to six-year supply contracts expiring in 2003 through 2006. Rio Tinto Iron &
Titanium Inc. (through its affiliates Richards Bay Iron & Titanium (Proprietary)
Limited and QIT-Fer et Titane Inc.) and Iluka Resources Limited are the world's
largest producers of titanium ores and upgraded titaniferous raw materials and
accounted for approximately 76% of the titanium ores and upgraded titaniferous
raw materials purchased by the Company in 2002.
Other major raw materials and utilities used in the production of TiO[u]2
are chlorine, caustic soda, petroleum and metallurgical coke, aluminum, sodium
silicate, sulfuric acid, oxygen, nitrogen, natural gas and electricity. The
number of sources for and availability of these materials is specific to the
particular geographic region in which the facility is located. For the Company's
Australian plant, chlorine and caustic soda are obtained exclusively from one
supplier under a long-term supply agreement. There are certain risks related to
the acquisition of raw materials from less-developed or developing countries.
A number of the Company's raw materials are provided by only a few vendors
and, accordingly, if one significant supplier or a number of significant
suppliers were unable to meet their obligations under present supply
arrangements, the Company could suffer reduced supplies and/or be forced to
incur increased prices for its raw materials. Such an event could have a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company. At the present time, chloride- and
sulfate-process feedstock is available in sufficient quantities.
Of the total 627,000 metric tons of TiO[u]2 sold by the Company in 2002,
approximately 62% was sold to customers in the paint and coatings industry,
approximately 23% to customers in the plastics industry, approximately 12% to
customers in the paper industry, and approximately 3% to other customers. The
Company's ten largest customers accounted for approximately 40% of its TiO[u]2
sales volume in 2002. The Company experiences
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some seasonality in its sales because its customers' sales of paint and coatings
are greatest in the spring and summer months.
TiO[u]2 is sold either directly by the Company to its customers or, to a
lesser extent, through agents or distributors. TiO[u]2 is distributed by rail,
truck and ocean carrier in either dry or slurry form.
The global markets in which the Company's Titanium Dioxide and Related
Products business segment operates are all highly competitive. The Company
competes primarily on the basis of price, product quality and service. Certain
of the Company's competitors are partially vertically integrated, producing
titanium-bearing ores as well as TiO[u]2. The Company is vertically integrated
at its Brazilian facility, which owns a titanium ore mine that supplies the
facility. The Company's major competitors in the TiO[u]2 business are E. I.
DuPont deNemours and Company ("DuPont"), Kerr-McGee Chemical Corporation (both
directly and through various joint ventures) ("Kerr-McGee Chemicals"), a unit of
Kerr-McGee Corporation, Huntsman Tioxide ("Huntsman"), a business segment of
Huntsman International LLC, and, Kronos, Inc. ("Kronos"), a unit of NL
Industries Inc. Collectively, DuPont, the Company, Kerr-McGee Chemicals,
Huntsman and Kronos account for approximately three-quarters of the world's
production capacity.
In certain applications, TiO[u]2 competes with other whitening agents that
are generally less effective but less expensive. For example, paper
manufacturers have, in recent years, developed alternative technologies that
reduce the amount of TiO[u]2 used in paper by using kaolin and precipitated
calcium carbonate as fillers in medium- and lower-priced products.
New plant capacity additions in the TiO[u]2 industry are slow to develop
because of the substantial capital expenditure required and the significant lead
time (three to five years typically for a new plant) needed for planning,
obtaining environmental approvals and permits, construction of manufacturing
facilities and arranging for raw material supplies. Debottlenecking and other
capacity expansions at existing plants require substantially less time and
capital and can increase overall industry capacity. As of the date of this
report, no major new plant capacity additions or expansions have been announced
in the TiO[u]2 industry.
Related Products
The Company produces a number of specialty and performance TiO[u]2-related
products, some of which are manufactured at dedicated plants and others of which
are manufactured at plants that also produce other TiO[u]2 products.
Titanium Tetrachloride: The Company is the largest merchant seller of
TiCl[u]4 in North America and Europe. It produces TiCl[u]4 for merchant sales at
its plants in Ashtabula, Ohio and Thann, Alsace, France. TiCl[u]4 is distributed
by rail and truck as anhydrous TiCl[u]4 and as an aqueous solution, titanium
oxychloride. These products are sold into a wide variety of markets, including
the titanium metal, catalyst, pearlescent pigment and surface treatment markets.
The Company's principal competitors in the TiCl[u]4 market are Toho Titanium Co.
and Kronos.
Ultra-fine TiO[u]2 Products: Ultra-fine TiO[u]2 products are produced at the
Company's plant in Thann, Alsace, France. These non-pigmentary products with a
particle size of less than 150 nanometers in size are produced and sold for
their physico-chemical characteristics in various applications. The Company is a
major supplier of ultra-fine TiO[u]2 used to remove nitrogen oxides from power
plant emissions. The principal competitors in the ultra-fine TiO[u]2 products
market are Ishihara Sangyo Kaisha, Ltd., Kerr-McGee Chemicals, and Tayca
Corporation.
Zirconium-based Compounds and Chemicals: A wide range of zirconium products
is produced at the Company's Rockingham, Western Australia plant. These products
are sold globally into the electronics, catalyst, glass, solid oxide fuel cells
and colored pigments markets. In addition, zirconium dioxide is sold internally
to the Company's TiO[u]2 operations and to other TiO[u]2 producers to enhance
the durability and treat the surfaces of various TiO[u]2 products. The Company's
principal competitors in this market are Daiichi Kigenso Kagakukgyo Co., Ltd.
and MEL Chemicals, a subsidiary of Luxfer Holdings, PLC.
Silica Gel: The Company produces several grades of fine-particle silica gel
at the St. Helena plant in Baltimore, Maryland, and markets them
internationally. Fine-particle silica gel is a chemically and biologically inert
form of silica with a particle size ranging from three to ten microns. The
Company's SiLCRON'r' brand of fine-particle silica gel is used in coatings as a
flatting or matting (gloss reduction) agent and to provide mar-resistance.
SiLCRON'r' is also used in food and pharmaceutical applications. SiL-PROOF'r'
grades of fine-particle silica gel are
9
chill-proofing agents used to stabilize chilled beer and prevent clouding.
Fine-particle silica gel is distributed in dry form in palletized bags by truck
and ocean carrier.
Cadmium-based Pigments: The Company manufactures a line of cadmium-based
colored pigments at its St. Helena, Maryland plant, and markets them
internationally. In addition to their brilliance, cadmium colors are light and
heat stable. These properties promote their use in such applications as artists'
colors, plastics and glass colors. Due to concern for the toxicity of heavy
metals, including cadmium, the Company has introduced low-leaching cadmium-based
pigments that meet all United States government requirements for landfill
disposal of non-hazardous waste. Colored pigments are distributed in dry form in
drums by truck and ocean carrier.
Acetyls
The following table sets forth information concerning the annual production
capacity, as of the date of this report, of the Company's principal Acetyls
products:
Millennium Chemicals' Acetyls Rated Capacity
(millions of pounds per annum)
Product Capacity
-------- --------
Vinyl Acetate Monomer.................................. 850
Acetic Acid............................................ 1,200
In addition, the Company owns an 85% interest in La Porte Methanol Company,
which owns a methanol plant with an annual production capacity of 207 million
gallons per annum. For a description of the plant and La Porte Methanol Company,
see "La Porte Methanol Company" below.
Vinyl Acetate Monomer
The Company is the second-largest producer of VAM in North America, and the
third-largest producer worldwide, based on reported production capacities. Its
VAM plant is located downstream from the Company's acetic acid plant at La
Porte, Texas. The process used by the Company to produce VAM is proprietary.
The principal feedstocks for the production of VAM are acetic acid and
ethylene. The Company obtains its entire requirements for acetic acid from its
internal production and buys all of its ethylene requirements from Equistar
under a long-term supply contract based on market prices.
The Company has a long-term agreement with DuPont to toll acetic acid
produced at the Company's La Porte, Texas plant through DuPont's nearby VAM
plant, thereby acquiring all the VAM production at DuPont's plant not utilized
internally by DuPont. The contract expires on December 31, 2006 but may be
extended by mutual agreement thereafter from year-to-year. The tolling
arrangement provided approximately 35% of the VAM available for sale by the
Company in 2002.
The Company sells VAM into domestic and export markets under contracts that
range in term from one to seven years, as well as on a spot basis. The majority
of sales are completed under contract. The pricing for domestic contracts
generally is determined by formula or index-based pricing in accordance with
movements in the costs of raw materials. The Company also sells VAM to Equistar
pursuant to a yearly contract at a formula-based price. The Company ships this
product by barge, ocean-going vessel, pipeline, tank car and tank truck. The
Company has bulk storage arrangements for VAM in the Netherlands, the United
Kingdom, Italy, Turkey and several Asian countries to better serve its
customers' requirements in those regions. Sales are made through the Company's
direct sales force and through agents and distributors. The Company's ten
largest VAM customers accounted for approximately 65% of its VAM sales volume in
2002.
The global market for VAM is highly competitive. The Company competes
primarily on the basis of price, product quality and service. The Company's
principal competitors in the VAM business are Celanese AG ("Celanese"), BP
P.L.C. ("BP"), The Dow Chemical Company ("Dow"), Acetex Chemie S.A., a
subsidiary of Acetex Corporation ("Acetex") and Dairen Chemical Corporation.
10
Acetic Acid
The Company is the second-largest producer of acetic acid in North America,
and the third-largest producer worldwide, based on reported production
capacities. Its acetic acid plant is located at La Porte, Texas. In 2002, the
Company used approximately 62% of its acetic acid production to produce VAM. The
Company utilizes proprietary technology to produce acetic acid.
The principal starting feedstocks for the production of acetic acid are
carbon monoxide and methanol. The Company purchases its carbon monoxide from
Linde AG ("Linde") pursuant to a long-term contract based primarily on cost of
production. Linde produces this carbon monoxide at the Company's synthesis gas
("syngas") plant at La Porte, Texas, which is owned by the Company and leased
to Linde pursuant to a long-term lease that commenced on January 18, 1999. La
Porte Methanol Company, 85% owned by the Company, supplies all of the
Company's requirements for methanol. See "La Porte Methanol Company" below.
Acetic acid not consumed internally by the Company is sold into domestic
and export markets under contract and on a spot basis. These contracts range in
term from one to five years. Pricing for domestic sales under these contracts
generally is determined by formula or index-based pricing in accordance with
movements in the costs of raw materials. Acetic acid is shipped by ocean-going
vessel, barge, tank car and tank truck. Sales are made through the Company's
direct sales force and through agents and distributors. The Company's ten
largest acetic acid customers accounted for approximately 85% of its acetic acid
sales volume in 2002.
The global market for acetic acid is highly competitive. The Company
competes primarily on the basis of price, product quality and service. The
Company's principal competitors in the acetic acid business are Celanese, BP,
Kyodo Sakusan, Acetex and Eastman Chemical Corp ("Eastman").
Specialty Chemicals
The Company is one of the world's leading producers of terpene-based
fragrance ingredients and a major producer of flavor ingredients, primarily for
the oral care markets. In addition, the Company supplies products into a number
of other applications, including initiators to the rubber industry,
intermediates to the vitamin market, and solvents and cleaners like pine oil to
the hard surface cleaner markets.
The Company operates manufacturing facilities in Jacksonville, Florida and
Brunswick, Georgia. The Jacksonville site has facilities for the fractionation
of crude sulfate turpentine ("CST"), the Company's key raw material for
producing fragrance ingredients. Through fractionation, the molecular components
of CST are separated into relatively pure individual materials such as alpha-
and beta-pinene. The Company believes it is the largest purchaser and distiller
of CST in the world based on the amount of CST processed. Sophisticated chemical
processes are then used to produce a number of fragrance and flavor ingredients.
The Jacksonville facility also produces synthetic pine oil, anethole,
l-carvone and coolants. Synthetic pine oil is an active ingredient in cleaning
products. Anethole is a flavor ingredient and sweetener used in mint
formulations primarily in the oral care market. L-carvone is the primary
component in spearmint oil. Coolants are used in confectionery, oral care and
other food and personal care applications. The Brunswick site produces linalool,
geraniol and dihydromyrcenol from the alpha-pinene component of CST. Linalool,
geraniol and dihydromyrcenol are fragrance ingredients used in a wide range of
fragrance applications including soaps, detergents and fine fragrances. Linalool
and geraniol are produced utilizing a proprietary and, the Company believes,
unique technology. Linalool and geraniol produced at the Brunswick site are
generally further processed at the Jacksonville site to produce fragrance
ingredients including citral, citronellol and dimethyloctanol. The Company
believes, based on production capacity, it operates the world's largest
dihydromyrcenol facility at Brunswick, with a rated annual capacity of over
three thousand tons.
CST is a by-product of the kraft process of papermaking. The Company
purchases CST from approximately 40 pulp mills in North America. Additionally,
the Company purchases quantities of gum turpentine or its derivatives from
Indonesia, China and other Asian countries, Europe and South America, as
business conditions dictate.
The Company has experienced tightness in CST supply from time to time,
together with corresponding price increases. Generally, the Company seeks to
enter into long-term supply contracts with pulp mills in order to ensure a
stable supply of CST. At the present time, sufficient quantities of CST are
available; however, the price of CST has
11
increased due to a decline in the quantity of CST available, which is a result
of decreased paper production by North American pulp mills.
Fragrance ingredients are used primarily in the production of perfumes. The
major consumers of perfumes worldwide are soap and detergent manufacturers. The
Company sells directly worldwide to major soap, detergent and fabric conditioner
producers. It also sells a significant quantity of product to the major
fragrance compounders and to producers of cosmetics and toiletries.
Approximately 70% of the Company's specialty chemical sales are to users of
fragrance ingredients, 20% are to users of flavor ingredients, and 10% are to
users of solvents and cleaners and industrial specialties. Approximately 60% of
the Company's 2002 specialty chemicals sales were made outside the United
States, to more than 45 different countries. Sales are made primarily through
the Company's direct sales force, while agents and distributors are used in
outlying areas where volume does not justify full-time sales coverage.
The markets in which the Company's Specialty Chemicals business segment
competes are highly competitive. The Company competes primarily on the basis of
price, quality, service and on its ability to produce its products to the
technical and qualitative requirements of its customers. The Company works
closely with many of its customers in developing products to satisfy their
specific requirements. The Company's supply agreements with customers are
typically short-term in duration (up to one year). Therefore, its Specialty
Chemicals business segment is substantially dependent on long-term customer
relationships based upon quality, innovation and customer service. Customers
from time to time change the formulations of an end product in which one of the
Company's fragrance ingredients is used, which may affect demand for such
ingredients. The Company's ten largest Specialty Chemicals business segment
customers accounted for approximately 57% of its total Specialty Chemicals
business segment revenue in 2002. The Company's major Specialty Chemicals
competitors are BASF AG, Givaudan SA, Derives Resiniques Et Terpeniques (DRT),
Kuraray Co. LTD and International Flavors & Fragrances Inc.
Research and Development
The Company's expenditures for research and development totaled $20
million, $20 million and $26 million in 2002, 2001 and 2000, respectively.
Research and development expense decreased by approximately $6 million from 2000
to 2001 due to the Company's efforts to reduce selling, development and
administrative ("S,D&A") costs in the current economic environment. The Company
conducts research at facilities in Baltimore, Maryland, Stallingborough, United
Kingdom, Bunbury, Western Australia, Le Havre, Normandy and Jacksonville,
Florida. The Company's research efforts are principally focused on improvements
in process technology, product development, technical service to customers,
applications research and product quality enhancements.
International Exposure
The Company generates revenue from export sales (i.e., sales outside the
United States by domestic operations), as well as revenue from the Company's
operations conducted outside the United States. Export sales, which are made to
more than 90 countries, amounted to approximately 14%, 13% and 11% of total
revenues in 2002, 2001 and 2000, respectively. Revenue from non-United States
operations amounted to approximately 45%, 41% and 40% of total revenues in 2002,
2001 and 2000, respectively, principally reflecting the operations of the
Company's Titanium Dioxide and Related Products business segment in Europe,
Australia and Brazil. Identifiable assets of the non-United States operations
represented 35% and 28% of total identifiable assets at December 31, 2002 and
2001, respectively, principally reflecting the assets of these operations.
Identifiable assets of non-United States operations as a percentage of the
Company's total assets increased in 2002 compared to 2001 due to a decrease in
the Company's identifiable assets in the United States, primarily goodwill,
pension assets and the Company's investment in Equistar. See Notes 4 and 11 and
"Goodwill" in Note 1 to the Consolidated Financial Statements included in this
Annual Report.
The Company obtains a portion of its principal raw materials from sources
outside the United States. The Company obtains ores used in the production of
TiO[u]2 from a number of suppliers in South Africa, Australia, Canada, Brazil
and Ukraine. The Company's Specialty Chemicals business segment obtains a
portion of its requirements of CST and gum turpentine and its derivatives from
suppliers in Indonesia, China and other Asian countries, Europe and
South America.
The Company's export sales and its non-United States manufacturing and
sourcing are subject to the usual risks of doing business abroad, such as
fluctuations in currency exchange rates, transportation delays and
12
interruptions, political and economic instability and disruptions, restrictions
on the transfer of funds, the imposition of duties and tariffs, import and
export controls and changes in governmental policies. The Company's exposure to
the risks associated with doing business abroad will increase if the Company
expands its worldwide operations. From time to time, the Company utilizes
derivative financial instruments to hedge the impact of currency fluctuations on
its purchases and sales.
The functional currency of each of the Company's non-United States
operations is the local currency. As a result of translating the functional
currency financial statements of all its foreign subsidiaries into US dollars,
consolidated Shareholders' equity increased by approximately $27 million during
2002, and decreased by $19 million during 2001 and by $46 million during 2000.
Future events, which may significantly increase or decrease the risk of future
movement in the currencies in which the Company conducts business, including the
Brazilian real or the euro, cannot be predicted.
The Company generates revenue from export sales and revenue from operations
conducted outside the United States that may be denominated in currencies other
than the relevant functional currency. The Company hedges certain revenues and
costs to minimize the impact of changes in the exchange rates of those
currencies compared to the functional currencies. The Company does not use
derivative financial instruments for trading or speculative purposes. Net
foreign currency transactions aggregated gains of $3 million in 2002 and losses
of $7 million and $4 million in 2001 and 2000, respectively.
Equity Interest in Equistar
Through its 29.5% interest in Equistar, the Company is a partner in one of
the largest chemical producers in the world with total 2002 revenues of $5.5
billion and assets of $5.1 billion at the end of 2002. Equistar is currently the
world's third-largest, and North America's second-largest, producer of ethylene.
Ethylene is the world's most widely used petrochemical. Equistar currently is
also the third-largest producer of polyethylene in North America, and a leading
producer of performance polymers, oxygenated products, aromatics and specialty
products.
Equistar commenced operations on December 1, 1997, when the Company
contributed substantially all of the assets comprising its former ethylene,
polyethylene, ethanol and related products business to Equistar and Lyondell
contributed substantially all the assets comprising its petrochemical and
polymer business segments to Equistar. On May 15, 1998, the Company and Lyondell
expanded Equistar with the addition of the ethylene, propylene, ethylene oxide,
ethylene glycol and other ethylene oxide derivatives businesses of the chemicals
subsidiary of Occidental Petroleum Corporation ("Occidental"). On August 22,
2002, Occidental sold its 29.5% equity interest in Equistar to Lyondell,
bringing Lyondell's ownership interest in Equistar to 70.5%, with the Company
holding the remaining 29.5% interest. See the description of the Equistar
Partnership Agreement and Equistar Parent Agreement in "Equity Interest in
Equistar -- Management of Equistar; Agreements between Equistar, Lyondell and
the Company".
Equistar's petrochemical segment manufactures and markets olefins,
oxygenated products, aromatics and specialty products. Equistar's olefins
products are primarily ethylene, propylene and butadiene. Olefins and their
co-products are basic building blocks used to create a wide variety of products.
Ethylene is used to produce polyethylene, ethylene oxide, ethylene dichloride
and ethylbenzene. Propylene is used to produce polypropylene and propylene
oxide. Equistar's oxygenated products include ethylene oxide, ethylene glycol,
ethanol and MTBE. Oxygenated products have uses ranging from paint to cleaners
to polyester fibers to gasoline additives. Equistar's aromatics are benzene and
toluene.
Equistar's polymer segment manufactures and markets polyolefins, including
high density polyethylene, low density polyethylene, linear low density
polyethylene, polypropylene and performance polymers. Polyethylene is used to
produce packaging film, grocery and trash bags, housewares, toys and lightweight
high-strength plastic bottles and containers for milk, juices, shampoos and
detergents. Polypropylene is used in a variety of products including carpets,
upholstery, housewares, automotive components, rigid packaging and plastic caps
and other closures. Equistar's performance polymers include enhanced grades of
polyethylene, such as wire and cable insulating resins, polymeric powders,
polymers for adhesives, sealants and coatings, reactive polyolefins, and liquid
polyolefins.
13
Equistar's Petrochemical Segment
Equistar produces petrochemicals at eleven facilities located in five
states. Equistar's Chocolate Bayou, Corpus Christi and two Channelview, Texas
olefin plants use petroleum liquids, including naphtha, condensates and gas oils
(collectively, "Petroleum Liquids"), to produce ethylene. The use of Petroleum
Liquids results in the production of a significant amount of co-products, such
as propylene, butadiene, benzene and toluene, and specialty products such as
dicyclopentadiene, isoprene, resin oil and piperylenes. Assuming the co-products
are recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquid feedstocks, including ethane, propane and butane (collectively, "NGLs").
For example, facilities using petroleum liquids historically have generated
approximately four cents additional variable margin on average per pound of
ethylene produced compared to using ethane. This margin advantage is based on an
average of historical data over a period of years and is subject to short-term
fluctuations, which can be significant. During the second half of 2001 and in
2002, the advantage has been significantly less than the historical average.
Equistar has the capability to realize this margin advantage due to its ability
to process petroleum liquids at the Channelview, Corpus Christi and Chocolate
Bayou, Texas facilities. Equistar's Channelview and Corpus Christi, Texas
facilities can process 100% and 70% Petroleum Liquids, respectively, or up to
80% and 70% NGLs, respectively, subject to the availability of NGLs. The
Chocolate Bayou facility processes 100% Petroleum Liquids.
Equistar's Morris, Illinois, Clinton, Iowa, Lake Charles, Louisiana, and,
La Porte, Texas plants are designed to use primarily NGLs, which primarily
produce ethylene with some co-products, such as propylene. Equistar's La Porte,
Texas facility can process heavier NGLs such as butane and natural gasoline. A
comprehensive pipeline system connects Equistar's Gulf Coast plants with major
olefin customers. Raw materials are sourced both internationally and
domestically from a wide variety of sources. The majority of Equistar's
Petroleum Liquids requirements are purchased via contractual arrangements.
Equistar obtains a portion of its olefin raw material requirements from
LYONDELL-CITGO Refining LP, a joint venture owned by Lyondell and CITGO
Petroleum Corporation ("LCR"), at market-related prices. Raw materials are
shipped via vessel and pipeline.
Equistar produces ethylene oxide and derivatives thereof, including
ethylene glycol, at facilities located at Pasadena, Texas and through a joint
venture located in Beaumont, Texas that is 50% owned by Equistar and 50% owned
by DuPont. Equistar produces synthetic ethanol at Tuscola, Illinois and
denatures ethanol at facilities in Newark, New Jersey. In March 2002, Equistar
permanently shut down its Anaheim, California facility for denaturing ethanol.
The following table outlines Equistar's primary petrochemical products and
the annual processing capacity for each product, as of January 1, 2003:
Product Annual Capacity
- ------- ---------------
Olefins:
Ethylene.......................................... 11.6 billion pounds(a)
Propylene......................................... 5.0 billion pounds(a)(b)
Butadiene......................................... 1.2 billion pounds
Oxygenated Products:
Ethylene oxide.................................... 1.1 billion pounds
Ethylene glycol................................... 1.0 billion pounds
Ethylene oxide derivatives........................ 225 million pounds
MTBE.............................................. 284 million gallons(c)
Ethanol........................................... 50 million gallons
Aromatics:
Benzene........................................... 310 million gallons
Toluene........................................... 66 million gallons
14
Specialty Products:
Dicyclopentadiene................................. 130 million pounds
Isoprene.......................................... 145 million pounds
Resin oil......................................... 150 million pounds
Piperylenes....................................... 100 million pounds
Alkylate.......................................... 337 million gallons(d)
Diethyl ether..................................... 5 million gallons
- ----------
(a) Includes 850 million pounds/year of ethylene capacity and 200 million
pounds/year of propylene capacity at Equistar's Lake Charles, Louisiana
facility. Equistar's Lake Charles facility has been idled since the first
quarter of 2001.
(b) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has
an annual processing capacity of one billion pounds per year of propylene.
(c) Includes up to 44 million gallons/year of capacity operated for the benefit
of LCR.
(d) Includes up to 172 million gallons/year of capacity operated for the
benefit of LCR.
Ethylene produced by the La Porte, Morris and Clinton facilities is
generally consumed as raw material by the polymer operations at those sites, or
is transferred to Tuscola from Morris by pipeline for the production of ethanol.
Ethylene produced at Equistar's La Porte facility is consumed as a raw material
by Equistar's polymers operations and the Company's VAM operations in La Porte
and also is distributed by pipeline for other internal uses and to third
parties. Ethylene and propylene produced at the Channelview, Corpus Christi,
Chocolate Bayou and Lake Charles olefin plants are generally distributed by
pipeline or via exchange agreements to Equistar's Gulf Coast polymer and
ethylene oxide and glycol facilities as well as Equistar's affiliates and third
parties. Equistar's Lake Charles facility has been idled since the first quarter
of 2001. For the year ended December 31, 2002, approximately 70% of the ethylene
produced by Equistar, based on sales dollars, was consumed by Equistar's
polymers or oxygenated products business or sold to Equistar's owners and their
affiliates at market-related prices.
With respect to sales to third parties, Equistar sells a majority of its
olefin products to customers with whom it has had long-standing relationships,
generally pursuant to written agreements that typically provide for monthly
negotiation of price, customer purchase of a specified minimum quantity, and
three to six year terms with automatic one- or two-year extension provisions.
Some contracts may be terminated early if deliveries have been suspended for
several months.
Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities is shipped via a pipeline
system that has connections to numerous Gulf Coast ethylene and propylene
consumers. Exchange agreements with other olefin producers allow access to
customers who are not directly connected to this pipeline system. Some ethylene
is shipped by railcar from Clinton, Iowa to Morris, Illinois and some propylene
is shipped by ocean-going vessel. A pipeline owned and operated by Williams
Pipeline Company is used to transport ethylene from Morris, Illinois to Tuscola,
Illinois.
The bases for competition in Equistar's petrochemical products are price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP, Chevron
Phillips Chemical Company LP ("Chevron Phillips"), Dow, ExxonMobil Chemical
Company ("ExxonMobil"), Huntsman Chemical Company, NOVA Chemicals Corporation
("NOVA Chemicals") and Shell Chemical Company. Industry consolidation has
concentrated North American production capacity under the control of fewer,
although larger and stronger, competitors.
Equistar's Polymer Segment
Through facilities located at nine plant sites in four states, Equistar's
polymer business unit manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.
Equistar currently manufactures polyethylene using a variety of
technologies at five facilities in Texas and at its Morris, Illinois and
Clinton, Iowa facilities. The Morris and Clinton facilities are the only
polyethylene facilities
15
located in the United States Midwest. These facilities enjoy a freight cost
advantage over Gulf Coast producers in delivering products to customers in the
United States Midwest and on the East Coast of the United States.
Equistar's Morris, Illinois and Pasadena, Texas facilities manufacture
polypropylene using propylene produced as a co-product of Equistar's ethylene
production as well as propylene purchased from third parties. Equistar produces
performance polymer products, which include enhanced grades of polyethylene and
polypropylene, at several of its polymer facilities. Equistar produces wire and
cable insulating resins and compounds at Morris, Illinois and La Porte, Texas
and wire and cable insulating compounds at Tuscola, Illinois and Fairport
Harbor, Ohio. Wire and cable insulating resins and compounds are used to
insulate copper and fiber optic wiring in power, telecommunication, computer and
automobile applications. In August 2002, Equistar permanently shut down its
Peachtree, Georgia wire and cable insulating compounds facility.
Equistar's polymers facilities have the capacity to produce annually 3.1
billion pounds of high density polyethylene, 1.5 billion pounds of low density
polyethylene, 1.1 billion pounds linear low density polyethylene and 680 million
pounds of polypropylene. Equistar's polymer facilities also produce wire and
cable insulating resins and compounds, polymeric powders, polymers for
adhesives, sealants and coatings, reactive polyolefins and liquid polyolefins.
These products are enhanced grades of polyethylene. Equistar's capacity to
produce these products is included in the capacity figures for polyethylene,
discussed above.
With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefin pipeline system, third party pipelines or Equistar's own on-site
production. The polyethylene plants at Chocolate Bayou, La Porte and Pasadena,
Texas are connected to third parties and can receive ethylene via exchanges or
purchases. The polypropylene facility at Morris, Illinois receives propylene
from third parties.
Equistar's polymer products are primarily sold to an extensive base of
established customers. Approximately 45% of Equistar's polymers products volumes
are sold to customers under term contracts, typically having a duration of one
to three years. The remainder is generally sold without contractual term
commitments. In either case, in most of the continuous supply relationships,
prices may be changed upon mutual agreement between Equistar and its customer.
Equistar sells its polymer products in the United States and Canada primarily
through its own sales organization. It generally engages sales agents to market
its polymer products in the rest of the world. Polymers are distributed
primarily by railcar.
The bases for competition in Equistar's polymers products are price,
product performance, product quality, product deliverability and customer
service. Equistar competes with other large producers of polymers, including BP
Solvay Polyethylene, Chevron Phillips, Dow, Eastman, ExxonMobil, Formosa
Plastics, Huntsman, NOVA Chemicals, TotalFinaElf and Westlake Polymers. Industry
consolidation has concentrated North American production capacity under the
control of fewer, although larger and stronger, competitors.
Management of Equistar; Agreements between Equistar, Lyondell and the Company
Equistar is a Delaware limited partnership. The Company owns its 29.5%
interest in Equistar through two wholly owned subsidiaries of Millennium
Petrochemicals, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. The Equistar Partnership Agreement governs,
among other things, the ownership, cash distributions, capital contributions and
management of Equistar.
The Equistar Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee consisting of six representatives, three
appointed by each general partner. Matters requiring agreement by the
representatives of Lyondell and the Company include changes in the scope of
Equistar's business, approval of the five-year Strategic Plan (and annual
updates thereof) (the "Strategic Plan"), the sale or purchase of assets or
capital expenditures of more than $30 million not contemplated by an approved
Strategic Plan, additional investments by Equistar's partners not contemplated
by an approved Strategic Plan or required to achieve or maintain compliance with
health, safety and environmental laws if the partners are required to contribute
more than a total of $100 million in a specific year or $300 million in a
five-year period, incurring or repaying debt under certain circumstances,
issuing or repurchasing partnership interests or other equity securities of
Equistar, making certain distributions, hiring and firing executive officers of
Equistar (other than Equistar's Chief Executive Officer), approving material
compensation and benefit plans for employees, commencing and settling material
lawsuits, selecting or changing accountants or accounting methods and merging or
combining with another business. All decisions of the Partnership Governance
Committee that do not require consent of the representatives of Lyondell
16
and the Company (including approval of Equistar's annual budget, which must be
consistent with the most recently approved Strategic Plan, and selection of
Equistar's Chief Executive Officer, who must be reasonably acceptable to the
Company) may be made by Lyondell's representatives alone. The day-to-day
operations of Equistar are managed by the executive officers of Equistar. Dan F.
Smith, the Chief Executive Officer of Lyondell, also serves as the Chief
Executive Officer of Equistar.
Millennium Petrochemicals and Equistar entered into an agreement on
December 1, 1997 providing for the transfer of assets to Equistar. Among other
things, such agreement sets forth representations and warranties by Millennium
Petrochemicals with respect to the transferred assets and requires
indemnification by Millennium Petrochemicals with respect to such assets. Such
agreement also provides for the assumption of certain liabilities by Equistar,
subject to specified limitations. Lyondell and Occidental entered into similar
agreements with Equistar with respect to the transfer of their respective assets
and Equistar's assumption of liabilities. Millennium Petrochemicals, Lyondell
and Occidental each remains liable under these indemnification arrangements to
the same extent following Lyondell's acquisition of Occidental's interest in
Equistar as it was before.
Equistar is party to a number of agreements with Millennium Petrochemicals
for the provision of services, utilities and materials from one party to the
other at common locations, principally La Porte, Texas. In general, the goods
and services under these agreements, other than the purchase of ethylene by
Millennium Petrochemicals from Equistar and the purchase of VAM by Equistar from
Millennium Petrochemicals, are provided at cost. Millennium Petrochemicals
purchases its ethylene requirements at market-based prices from Equistar
pursuant to a long-term contract. Equistar purchases its VAM requirements from
Millennium Petrochemicals at a formula-based price pursuant to a long-term
contract. Lyondell also entered into agreements with Equistar for the provision
of services. Pursuant to the Equistar Parent Agreement, the Company and Lyondell
have agreed to guarantee the obligations of their respective subsidiaries under
each of the agreements discussed above, including the Equistar Partnership
Agreement and the asset-transfer agreements.
Millennium America Inc. ("Millennium America"), a wholly owned indirect
subsidiary of the Company, had an indemnity agreement with Equistar pursuant to
which Millennium America could have been required under certain circumstances to
contribute to Equistar up to $750 million. This indemnity terminated upon the
closing of the purchase by Lyondell of Occidental's interest in Equistar. The
requirement under the December 1, 1997 asset transfer agreement to indemnify
Equistar with respect to the assets transferred to Equistar and the requirement
under the Equistar Partnership Agreement to make additional investments in
Equistar, each as described above, remain in effect to the same extent after
Lyondell purchased Occidental's interest in Equistar.
The Equistar Partnership Agreement and Equistar Parent Agreement contain
certain limitations on the ability of the partners and their affiliates to
transfer, directly or indirectly, their interests in Equistar. The following is
a summary of those limitations:
Equistar Partnership Agreement: Without the consent of the general partners
of Equistar, no partner may transfer less than all of its interest in Equistar,
nor can any partner transfer its interest other than for cash. If one of the
limited partners and its affiliated general partner desire to transfer, via a
cash sale, all of their units, they must give written notice to Equistar and the
other partner and the non-selling partner shall have the option, exercisable by
delivering written acceptance notice of the exercise to the selling partner
within 45 days after receiving notice of the sale, to elect to purchase all of
the partnership interests of the selling partner on the terms described in the
initial notice. The notice of acceptance will set a date for closing the
purchase, which is not less than 30 nor more than 90 days after delivery of the
notice of acceptance, subject to extension. The purchase price for the selling
partners' partnership interests will be paid in cash.
If the non-selling partner does not elect to purchase the selling partner's
partnership interests within 45 days after the receipt of initial notice of
sale, the selling partner will have a further 180 days during which it may
consummate the sale of its units to a third-party purchaser. The sale to a
third-party purchaser must be at a purchase price and on other terms that are no
more favorable to the purchaser than the terms offered to the non-selling
partner. If the sale is not completed within the 180-day period, the initial
notice will be deemed to have expired, and a new notice and offer shall be
required before the selling partner may make any transfer of its partnership
interests.
Before the selling partner may consummate a transfer of its partnership
interests to a third party under the Equistar Partnership Agreement, the selling
partner must demonstrate that the person willing to serve as the proposed
purchaser's guarantor has outstanding indebtedness that is rated investment
grade by Moody's Investor's Services, Inc. ("Moody's") and Standard & Poor's
("S&P"). If the proposed guarantor has no rated indebtedness
17
outstanding, it shall provide an opinion from a nationally recognized investment
banking firm that it could be reasonably expected to obtain suitable ratings. In
addition, a partner may transfer its partnership interests only if, together
with satisfying all other requirements (1) the transferee executes an
appropriate agreement to be bound by the Equistar Partnership Agreement, (2) the
transferor and/or the transferee bears all reasonable costs incurred by Equistar
in connection with the transfer and (3) the guarantor of the transferee delivers
an agreement to the ultimate parent entity of the non-selling partner and to
Equistar substantially in the form of the Equistar Parent Agreement.
Equistar Parent Agreement: Without the consent of Lyondell or the Company
(collectively, the "Parents") as the case may be, the other Parent may not
transfer less than all of its interests in the entities that hold its general
partnership and limited partnership interests in Equistar (the "Partner Sub
Stock") except in compliance with the following provisions.
Each Parent may transfer all, but not less than all, of its Partner Sub
Stock, without the consent of the other Parent, if the transfer is in connection
with either (1) a merger, consolidation, conversion or share exchange of the
transferring Parent or (2) a sale or other disposition of (A) the Partner Sub
Stock, plus (B) other assets representing at least 50% of the book value of the
transferring Parent's assets excluding the Partner Sub Stock, as reflected on
its most recent audited consolidated or combined financial statements.
In addition, any transfer of Partner Sub Stock by any Parent described
above is only permitted if the acquiring, succeeding or surviving entity, if
any, both (1) succeeds to and is substituted for the transferring Parent with
the same effect as if it had been named in the Equistar Parent Agreement and (2)
executes an instrument agreeing to be bound by the obligations of the
transferring Parent under the Equistar Parent Agreement, with the same effect as
if it had been named in the instrument.
The transferring Parent may be released from its guarantee obligations
under the Equistar Parent Agreement after the successor parent agrees to be
bound by the transferring Parent's obligations.
Unless a transfer is permitted under the provisions described above, a
Parent desiring to transfer all of its Partner Sub Stock to any person,
including the other Parent or any affiliate of the other Parent, may only
transfer its Partner Sub Stock for cash consideration and must give a written
right of first option to Equistar and the other Parent. The offeree Parent will
then have the option to elect to purchase all of the Partner Sub Stock of the
selling Parent, on the terms described in the right of first offer. If the
offeree Parent does not elect to purchase all of the selling Parent's Partner
Sub Stock within 45 days after the receipt of the initial notice from the
selling Parent, the selling Parent will have a further 180 days during which it
may, subject to the provisions of the following paragraph, consummate the sale
of its Partner Sub Stock to a third-party purchaser at a purchase price and on
other terms that are no more favorable to the purchaser than the initial terms
offered to the offeree Parent. If the sale is not completed within the further
180-day period, the right of first offer will be deemed to have expired and a
new right of first offer is required.
Before the selling Parent may consummate a transfer of its Partner Sub
Stock to a third party under the provisions described in the preceding
paragraph, the selling Parent shall demonstrate to the other Parent that the
proposed purchaser, or the person willing to serve as its guarantor as
contemplated by the terms of the Equistar Parent Agreement, has outstanding
indebtedness that is rated investment grade by either Moody's or S&P. If such
proposed purchaser or the other person has no rated indebtedness outstanding,
that person shall provide an opinion from Moody's, S&P or from a nationally
recognized investment banking firm that it could be reasonably expected to
obtain a suitable rating. Moreover, a Parent may transfer its Partner Sub Stock
under the previous paragraph only if all of the following occur: (A) the
transfer is accomplished in a nonpublic offering in compliance with, and exempt
from, the registration and qualification requirements of all federal and state
securities laws and regulations; (B) the transfer does not cause a default under
any material contract which has been approved unanimously by the Partnership
Governance Committee and to which Equistar is a party or by which Equistar or
any of its properties is bound; (C) the transferee executes an appropriate
agreement to be bound by the Equistar Parent Agreement; (D) the transferor
and/or transferee bear all reasonable costs incurred by Equistar in connection
with the transfer; (E) the transferee, or the guarantor of the obligations of
the transferee, delivers an agreement to the other Parent and Equistar
substantially in the form of the Equistar Parent Agreement; and (F) the
transferor is not in default in the timely performance of any of its material
obligations to Equistar.
18
La Porte Methanol Company
The La Porte Methanol Company is a Delaware limited partnership that owns a
methanol plant and certain related facilities in La Porte, Texas. The
partnership is owned 85% by the Company and 15% by Linde. Linde is also required
to purchase, under certain circumstances, an additional 5% interest in the
partnership. A wholly owned subsidiary of the Company is the managing general
partner of the partnership. A wholly owned subsidiary of Linde is responsible
for operating the methanol plant. The partnership commenced operations on
January 18, 1999 when the methanol plant and certain related facilities owned by
the Company were contributed to the partnership and Linde purchased its
partnership interest from the Company.
La Porte Methanol Company's methanol plant had an annual production
capacity of 207 million gallons as of December 31, 2002. The plant employs a
process supplied by a major engineering and construction firm to produce
methanol.
Methanol is used primarily as a feedstock to produce acetic acid, MTBE and
formaldehyde. The Company uses approximately 80 million gallons of La Porte
Methanol Company's annual methanol production for the manufacture of acetic acid
at the Company's La Porte, Texas acetic acid plant. The methanol produced by La
Porte Methanol Company not consumed by the Company or sold by Linde to a
customer of Linde is marketed by the Company on behalf of itself and Linde.
Methanol is sold under contracts that range in term from one to six years and on
a spot basis to large domestic customers. The product is shipped by barge and
pipeline.
The principal feedstocks for the production of methanol are carbon monoxide
and hydrogen, collectively termed synthesis gas or syngas. These raw materials
are largely supplied to La Porte Methanol Company from the Company's syngas
plant at La Porte, Texas, which is owned by the Company and leased to
Linde pursuant to a long-term lease that commenced on January 18, 1999.
La Porte Methanol Company also purchases relatively small volumes of hydrogen
from time to time from other parties.
La Porte Methanol Company's principal competitors in the methanol business
are Methanex Company, Saudi Basic Industries Corporation, and Caribbean
Petrochemical Marketing Company Limited.
Employees
At December 31, 2002, the Company had approximately 3,800 full- and
part-time employees. Approximately 3,100 of the Company's employees were engaged
in manufacturing, 500 were engaged in sales, distribution and technology, and
200 were engaged in administrative, executive and support functions.
Approximately one-fourth of the Company's United States employees are
represented by various labor unions, and a significant percentage of the
Company's European and Brazilian employees are represented by various worker
associations. Of the Company's nine collective bargaining agreements or other
required labor negotiations, four must be renegotiated on an annual basis, four
others must be renegotiated in 2003, and one must be renegotiated in 2004. All
required annual renegotiations relate to units outside the United States. The
Company believes that the relations of its operating subsidiaries with
employees, unions and worker associations are generally good.
Environmental Matters
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and releases to land and water, the generation,
handling, storage, transportation, treatment and disposal of wastes and other
materials and the remediation of environmental pollution caused by releases of
wastes and other materials (collectively, "Environmental Laws"). The operation
of any chemical manufacturing plant and the distribution of chemical products
entail risks under Environmental Laws, many of which provide for substantial
fines and criminal sanctions for violations. There can be no assurance that
significant costs or liabilities will not be incurred with respect to the
Company's operations and activities. In particular, the production of TiO[u]2,
TiCl[u]4, VAM, acetic acid, methanol and certain other chemicals involves the
handling, manufacture or use of substances or compounds that may be considered
to be toxic or hazardous within the meaning of certain Environmental Laws, and
certain operations have the potential to cause environmental or other damage.
Significant expenditures including facility-related expenditures could be
required in connection with any investigation and remediation of threatened or
actual pollution, triggers under existing Environmental Laws tied to production
or new requirements under Environmental Laws.
19
The Company's annual operating expenses relating to environmental matters
were approximately $46 million, $46 million and $47 million in 2002, 2001 and
2000, respectively. These amounts cover, among other things, the Company's cost
of complying with environmental regulations and permit conditions, as well as
managing and minimizing its waste. Capital expenditures for environmental
compliance and remediation were approximately $17 million, $19 million and $7
million in 2002, 2001 and 2000, respectively. In addition, capital expenditures
for projects in the normal course of operations and major expansions include
costs associated with the environmental impact of those projects that are
inseparable from the overall project cost. Capital expenditures and costs and
operating expenses relating to environmental matters for years after 2002 will
be subject to evolving regulatory requirements and will depend, to some extent,
on the amount of time required to obtain necessary permits and approvals.
The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the Texas Commission on Environmental Quality (the
"TCEQ") submitted a plan to the United States Environmental Protection Agency
("EPA") requiring the eight-county Houston/Galveston, Texas area to come into
compliance with the National Ambient Air Quality Standard for ozone by 2007.
These requirements, if implemented, would mandate significant reductions of
nitrogen oxide ("NOx") emissions requiring increased capital investment by
Equistar of between $200 million and $260 million before the 2007 regulatory
deadline, as well as create higher annual operating costs. This result could
potentially affect cash distributions from Equistar to the Company. In January
2001, Equistar, individually and as part of an industry coalition, filed a
lawsuit in State District Court in Travis County, Texas seeking adoption of an
alternative plan for air quality improvement. In response to the lawsuit, the
TCEQ conducted an accelerated scientific review during 2001 and 2002. In
December 2002, the TCEQ adopted revised rules, which changed the required NOx
emission reduction levels from 90% to 80% while requiring new controls on
emissions of highly reactive volatile organic compounds ("HRVOCs"), such as
ethylene, propylene, butadiene and butanes. These new rules still require
approval by the EPA. Based on the 80% NOx reduction requirement, Equistar
estimates that its aggregate related capital expenditures could total between
$165 million and $200 million before the 2007 deadline, and could result in
higher annual operating costs. Equistar is still assessing the impact of the new
HRVOC control requirements. Additionally, the TCEQ plans to make a final review
of these rules, with final rule revisions to be adopted by May 2004. The timing
and amount of these expenditures are subject to regulatory and other
uncertainties, as well as obtaining the necessary permits and approvals. At this
time, there can be no guarantee as to the ultimate capital cost of implementing
any final plan developed to ensure ozone attainment by the 2007 deadline.
From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with regulations or ordinances. In some cases, the
relevant operating unit may seek to meet with the agency to determine mutually
acceptable methods of modifying or eliminating the practice in question. The
Company believes that its operating units generally operate in compliance with
applicable regulations and ordinances in a manner that should not have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently or
previously owned, operated or used by the Company's current or former
subsidiaries or their predecessors, some of which are on the Superfund National
Priorities List of the EPA or similar state lists. These proceedings seek
cleanup costs, damages for personal injury or property damage, or both. Based
upon third-party technical reports, the projections of outside consultants or
outside counsel, or both, the Company has estimated its individual exposure at
these sites to be between $25 thousand and $26.7 million. In the most
significant of these proceedings, a subsidiary is named as one of four PRPs at
the Kalamazoo River Superfund Site in Michigan. The site involves contamination
of river sediments and floodplain soils with polychlorinated biphenyls.
Originally commenced on December 2, 1987 in the United States District Court for
the Western District of Michigan as Kelly v. Allied Paper, Inc. et al., the
matter was stayed and is being addressed under the Comprehensive Environmental
Response, Compensation and Liability Act. In October 2000, the Kalamazoo River
Study Group (the "KRSG"), of which one of the Company's subsidiaries is a
member, submitted to the State of Michigan a Draft Remedial Investigation and
Draft Feasibility Study (the "Draft Study"), which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost
20
of approximately $73 million. During 2001, additional sampling activities were
performed in discrete parts of the river. At the end of 2001, the EPA took
responsibility for the site at the request of the State. While the State has
submitted comments to the EPA on the Draft Study, the EPA has yet to similarly
comment. The Company has estimated its liability at this site based upon the
KRSG's recommended remedy. Guidance as to how the EPA will likely proceed with
further evaluation and remediation, if required, at the Kalamazoo site is
expected by early 2004. At that time, the Company's estimate of its liability
will be reevaluated. The Company's ultimate liability for the Kalamazoo site
will depend on many factors that have not yet been determined, including the
ultimate remedy selected by the EPA, the number and financial viability of the
other members of the KRSG as well as of other PRPs outside the KRSG, and the
determination of the final allocation among the members of the KRSG and other
PRPs.
The Company is defending a matter that involves the potential for civil
penalties or sanctions in excess of $100,000. In April 1997, the Illinois
Attorney General filed a complaint in Circuit Court in Grundy, Illinois alleging
releases into the environment from Millennium Petrochemical's former Morris,
Illinois facility (which was contributed to Equistar on December 1, 1997). The
Company believes it has substantial defenses to this action.
In 2002, the Company settled on favorable terms the matter of South
Carolina Department of Health and Environmental Control v. Henkel Corp, Cognis
Corp, Millennium Petrochemicals Inc., et al., civil action no. 6:00-2570-20
(U.S. District Court for the District of South Carolina).
The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities and other environmental proceedings, is between $67 million and $95
million and has accrued $71 million as of December 31, 2002. The Company expects
that cash expenditures related to these potential liabilities will be made over
a number of years, and will not be concentrated in any single year. This accrual
also reflects the fact that certain Company subsidiaries have contractual
obligations to indemnify other parties against certain environmental and other
liabilities. For example, the Company agreed as part of its Demerger to
indemnify Hanson and certain of its subsidiaries against certain of such
contractual indemnification obligations, and Millennium Petrochemicals agreed as
part of the December 1, 1997 formation of Equistar to indemnify Equistar for
certain liabilities related to the assets contributed by Millennium
Petrochemicals to Equistar in excess of $7 million, which threshold was exceeded
in 2001. The terms of these indemnification agreements do not limit the maximum
potential future payments to the indemnified parties. The maximum amount of
future indemnification payments is dependent upon many factors and is not
practicable to estimate.
No assurance can be given that actual costs for environmental matters will
not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.
Patents, Trademarks, and Licenses
The Company's subsidiaries have numerous United States and foreign patents,
registered trademarks and trade names, together with applications. The Company
has licensed to others certain of its process technology for the manufacture of
VAM. The Company is also licensed by others in the application of certain
processes and equipment designs related to its Acetyls business segment. The
Company generally does not license its Titanium Dioxide and Related Products
business segment's proprietary processes to third parties or hold licenses from
others. While the patents and licenses of the Company's subsidiaries provide
certain competitive advantages and are considered important, particularly with
regard to processing technologies such as the Company's proprietary titanium
dioxide chloride production process, the Company's proprietary acetic acid
process and the Company's proprietary terpene chemistry process, the Company
does not consider its business, as a whole, to be materially dependent upon any
one particular patent or license.
21
Executive Officers
The following individuals serve as executive officers of the Company:
Name Position
---- --------
William M. Landuyt............. Chairman of the Board, President and Chief Executive Officer
Robert E. Lee.................. Executive Vice President - Growth and Development
C. William Carmean............. Senior Vice President, General Counsel and Secretary
Timothy E. Dowdle.............. Senior Vice President - Manufacturing, Operational Excellence
Businesses
Marie S. Dreher................ Senior Vice President - Strategic Development
Peter P. Hanik................. Senior Vice President - Technology
John E. Lushefski.............. Senior Vice President and Chief Financial Officer
Myra J. Perkinson.............. Senior Vice President - Human Resources
David L. Vercollone............ Senior Vice President - Commercial, Operational Excellence Businesses
Mr. Landuyt, 47, has served as Chairman of the Board and Chief Executive
Officer of the Company since the Demerger. He has served as the President of the
Company since June 1997. Mr. Landuyt was Director, President and Chief Executive
Officer of Hanson Industries (which managed the United States operations of
Hanson until the Demerger) from June 1995 until the Demerger, a Director of
Hanson from 1992 until September 29, 1996, Finance Director of Hanson from 1992
to May 1995, and Vice President and Chief Financial Officer of Hanson Industries
from 1988 to 1992. He joined Hanson Industries in 1983. He is a member and a
Co-Chairman of the Equistar Partnership Governance Committee. He is also a
director of Bethlehem Steel Corporation.
Mr. Lee, 46, has served as the Executive Vice President - Growth and
Development of the Company since March 2001. He was President and Chief
Executive Officer of Millennium Inorganic Chemicals from June 1997 to March
2001. From the Demerger to June 1997, he served as the President and Chief
Operating Officer of the Company. He has been a Director of the Company since
the Demerger. Mr. Lee was a Director and the Senior Vice President and Chief
Operating Officer of Hanson Industries from June 1995 until the Demerger, an
Associate Director of Hanson from 1992 until the Demerger, Vice President and
Chief Financial Officer of Hanson Industries from 1992 to June 1995, Vice
President and Treasurer of Hanson Industries from 1990 to 1992, and Treasurer of
Hanson Industries from 1987 to 1990. He joined Hanson Industries in 1982.
Mr. Carmean, 50, has served as Senior Vice President, General Counsel and
Secretary of the Company since January 2002. He was Vice President - Legal of
the Company from December 1997 to December 2001. He was Associate General
Counsel of the Company from the Demerger to December 1997, Associate General
Counsel of Hanson Industries from 1993 to the Demerger, and Corporate Counsel of
Quantum Chemical Corporation from 1990 until its acquisition by Hanson in 1993.
Mr. Dowdle, 51, has served as Senior Vice President - Manufacturing,
Operational Excellence Businesses of the Company since March 2001. He served as
Senior Vice President - Global Manufacturing of Millennium Inorganic Chemicals
from January 1999 to March 2001 and as Vice President - Manufacturing of
Millennium Inorganic Chemicals from September 1997 to January 1999. Mr. Dowdle
served as General Manager of Millennium Petrochemicals' Morris Complex from June
1993 to September 1997. He joined Millennium Petrochemicals in 1980.
Ms. Dreher, 44, has served as Senior Vice President - Strategic Development
of the Company since January 2003. She was Vice President - Finance of the
Company from March 2001 to December 2002. She served as Senior Vice President
and Chief Financial Officer of Millennium Inorganic Chemicals from August 2000
to March 2001. She was Vice President - Corporate Controller of the Company from
October 1996 to August 2000. Ms. Dreher
22
joined Hanson Industries in 1994 as Assistant Corporate Controller, and was
appointed Director - Planning and Budgeting in 1995.
Mr. Hanik, 56, has served as Senior Vice President - Technology of the
Company since March 2001. He was President and Chief Executive Officer of
Millennium Petrochemicals from March 1998 to March 2001. Prior to that time, he
was Vice President, Chemicals and Supply Chain of Millennium Petrochemicals,
where he was responsible for the Company's Acetyls business segment. Mr. Hanik
joined Millennium Petrochemicals in 1974. Mr. Hanik is a member of the Equistar
Partnership Governance Committee.
Mr. Lushefski, 47, has served as Senior Vice President and Chief Financial
Officer of the Company since the Demerger. He was a Director and the Senior Vice
President and Chief Financial Officer of Hanson Industries from June 1995 until
the Demerger. He was Vice President and Chief Financial Officer of Peabody
Holding Company, a Hanson subsidiary that held Hanson's coal mining operations,
from 1991 to May 1995 and Vice President and Controller of Hanson Industries
from 1990 to 1991. Mr. Lushefski initially joined Hanson Industries in 1985. Mr.
Lushefski is a member of the Equistar Partnership Governance Committee.
Mrs. Perkinson, 51, has served as Senior Vice President - Human Resources
of the Company since August 2002. Prior to re-joining the Company, she was Vice
President, People, Olefins & Polyolefins for NOVA Chemicals starting in April
2000. From 1997 to 1999, she was Vice President, Human Resources for Equistar.
Prior thereto, she was Vice President, Human Resources, for Millennium
Petrochemicals. Mrs. Perkinson joined Millennium Petrochemicals in 1973.
Mr. Vercollone, 55, has served as Senior Vice President - Commercial,
Operational Excellence Businesses of the Company since March 2001. He served as
Senior Vice President, Commercial Operations of Millennium Inorganic Chemicals
from 1998 to March 2001, and as Senior Vice President - Global Sales and
Marketing and General Manager - Americas of Millennium Inorganic Chemicals from
1997 to 1998. From 1990 to 1997, he was Vice President and General Manager -
Americas of Millennium Inorganic Chemicals. Mr. Vercollone joined Millennium
Inorganic Chemicals as Vice President Sales and Marketing in 1986 and served in
that position until 1990.
Item 2. Properties
Set forth below is a list of the Company's principal manufacturing
facilities (not including facilities of Equistar or of La Porte Methanol
Company), all of which are owned. In addition, the Company, along with
third-party equity investors who hold a minority ownership interest, owns a
mineral sands mine in Mataraca, Paraiba, Brazil, that supplies the Company's
TiO[u]2 plant in Brazil with titanium ore, and the Company owns a syngas plant
in La Porte, Texas, which it leases to Linde. The Company leases warehouses,
offices and its research facility in Baltimore, Maryland. The Company
believes that its properties are well maintained and are in good
operating condition.
Location Products
-------- --------
Titanium Dioxide and Related Products
Ashtabula, Ohio*..................................... TiO[u]2 and TiCl[u]4
Baltimore, Maryland (Hawkins Point)*................. TiO[u]2
Baltimore, Maryland (St. Helena)..................... Cadmium-based pigments and silica gel
Kemerton, Western Australia.......................... TiO[u]2
Le Havre, Normandy, France........................... TiO[u]2
Rockingham, Western Australia........................ Zirconium-based compounds and chemicals
Salvador, Bahia, Brazil**............................ TiO[u]2
Stallingborough, United Kingdom...................... TiO[u]2
Thann, Alsace, France................................ TiO[u]2, TiCl[u]4 and ultra-fine TiO[u]2
23
Acetyls
La Porte, Texas...................................... VAM and acetic acid
Specialty Chemicals
Brunswick, Georgia................................... Fragrance and flavor chemicals
Jacksonville, Florida................................ Fragrance and flavor chemicals
* The Company has two manufacturing plants at Ashtabula, Ohio, both of
which use the chloride process, and two manufacturing plants located
in Baltimore, Maryland (Hawkins Point), one of which uses the chloride
process for manufacturing TiO[u]2 and the other of which used the
sulfate process but is currently idle.
** Third-party equity investors hold a minority ownership interest in
this facility.
Item 3. Legal Proceedings
The Company and various Company subsidiaries are defendants in a number of
pending legal proceedings relating to present and former operations. These
include several proceedings alleging injurious exposure of plaintiffs to various
chemicals and other materials on the premises of, or manufactured by, the
Company's current and former subsidiaries. Typically, such proceedings involve
claims made by many plaintiffs against many defendants in the chemical industry.
Millennium Petrochemicals is one of a number of defendants in 80 active
premises-based asbestos cases (i.e., where the alleged exposure to
asbestos-containing materials was to employees of third-party contractors or
subcontractors on the premises of certain facilities, and did not relate to any
products manufactured or sold by the Company or any of its predecessors).
Millennium Petrochemicals is also one of a number of defendants in one inactive
premises-based asbestos case where the court placed the claim on a formal
registry for dormant claims, and for which no defense costs are being incurred.
Millennium Petrochemicals is responsible for these premises-based cases as a
result of its indemnification obligations under the Company's agreements with
Equistar; however, Equistar will be required to indemnify Millennium
Petrochemicals for any such claims filed on or after December 1, 2004 related to
the assets or businesses contributed by Millennium Petrochemicals to Equistar.
Various other Company subsidiaries and alleged former subsidiaries are among a
number of defendants in 50 active premises-based asbestos cases.
Together with other alleged past manufacturers of lead-based paint and lead
pigments for use in paint, the Company, a current subsidiary, as well as alleged
predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, counties, school districts, individuals and one state,
and seek recovery under a variety of theories, including negligence, failure to
warn, breach of warranty, conspiracy, market share liability, fraud,
misrepresentation and public nuisance.
Legal proceedings relating to lead pigment or paint are in various
procedural stages of pre-trial, post-trial and post-dismissal settings. These
legal proceedings are described below in groups pursuant to their particular
procedural posture. Pending legal proceedings relating to lead pigment or paint
in various pre-trial stages are as follows: The City of New York et al. v. Lead
Industries Association, Inc., et al., commenced in the Supreme Court of the
State of New York on June 8, 1989; Kayla Sabater et al., individually and on
behalf of all those similarly situated in the State of New York v. Lead
Industries Association, Inc., et al., commenced in the Supreme Court of New
York, Bronx County, on November 25, 1998; Jackson, et al. v. The Glidden Co., et
al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August
12, 1992; City of St. Louis v. Lead Industries Association, Inc., et al.,
commenced in the St. Louis, Missouri, Circuit Court on January 25, 2000; The
County of Santa Clara, a political subdivision of the State of California,
individually and on behalf of all those similarly situated v. Atlantic Richfield
et al., commenced in the Santa Clara County, California, Superior Court on March
23, 2000; Frederick Moore and Virginia Moore v. The Glidden Company, et al,
commenced on June 17, 2002, in the Court of Common Pleas, Hamilton County, Ohio;
Mark Ludwigsen v. NL Industries, Inc., et al, commenced on July 18, 2002, in the
Supreme Court, County of Kings, New York; and City of Chicago v. American
Cyanamid Company, et al, commenced on September 5, 2002, in the Circuit Court,
Cook County, Illinois.
24
One legal proceeding relating to lead pigment or paint was tried in 2002.
On October 29, 2002, after a trial in which the jury deadlocked, the court in
the State of Rhode Island v. Lead Industry Association, Inc., et al, commenced
in the Superior Court of Providence, Rhode Island, on October 13, 1999, declared
a mistrial. The sole issue before the jury in this phase of the proceeding was
whether lead pigment in paint in and on public and private Rhode Island
buildings constitutes a "public nuisance." On March 20, 2003, the court denied
the motions for judgment as a matter of law filed by both sides during and
after the trial. The State of Rhode Island may seek a new trial.
Legal proceedings relating to lead pigment or paint dismissed after summary
judgment was granted by the court in favor of the defendants, but pending appeal
are as follows: Steven Thomas, et al. v. Lead Industries Association, Inc., et
al., commenced in the Milwaukee County, Wisconsin, Circuit Court on September
10, 1999; Reginald Smith, et al. v. Lead Industries Association, Inc., et al.
commenced in the Baltimore City, Maryland, Circuit Court on September 29, 1999;
Mary Lewis, Tashswan Banks and Jacqueline Nye v. Lead Industries Association,
Inc., et al, filed on March 14, 2002, in the Circuit Court, Cook County,
Illinois; and New Jersey as In Re Lead Paint Litigation, consolidated on
February 11, 2002, in the Superior Court of New Jersey, Law Division: Middlesex
County, Case Code 702.
One legal proceeding relating to lead pigment or paint was dismissed after
summary judgment was granted by the court in favor of the defendants. Joan
Young, et al v. Lead Industries Association, Inc., et al, commenced on February
14, 2002, in the Baltimore City, Maryland, Circuit Court is no longer pending
and the appeal period has run.
Legal proceedings relating to lead pigment or paint, which have been
voluntarily dismissed by the plaintiffs are as follows: Jefferson County School
District v. Lead Industries Association, et al., commenced in the Circuit Court
of Jefferson County, Mississippi, on April 6, 2001; Quitman County School
District v. Lead Industries Association, et al., commenced in the Circuit Court
of Quitman County, Mississippi, on November 27, 2001; Carletta Justice v.
Sherwin-Williams Company, et al., commenced in the Superior Court in the County
of San Francisco on October 5, 2000, and amended in August 2002; and Spring
Branch Independent School District v. Lead Industries Association, et al.,
commenced in the District Court of Harris County, Texas, on June 20, 2000.
Legal proceedings relating to lead pigment or paint that are pending but
have been abated under the laws of the State of Texas pending resolution of the
appeal of a decision granting summary judgment in favor of one lead pigment
defendant in Spring Branch Independent School District v. Lead Industries
Association, and for which no defense costs will be incurred during the
abatement period (expected to last one to two years), are as follows: Houston
Independent School District v. Lead Industries Association, et al., commenced in
the District Court of Harris County, Texas, on June 30, 2000; Harris County v.
Lead Industries Association, et al., commenced in the District Court of Harris
County, Texas, on April 23, 2001; Liberty Independent School District v. Lead
Industries Association, et al., commenced in the District Court of Liberty
County, Texas, on January 22, 2002; and Brownsville Independent School District
v. Lead Industries Association, Inc., et al, filed on May 28, 2002, in the
District Court, Cameron County, Texas.
Legal proceedings relating to lead pigment or paint that have been filed
with a court, are pending, but have yet to be formally served on the Company,
any of its subsidiaries, or alleged predecessor companies, are as follows: Hall,
et al v. Lead Industries Association, et al., commenced in the Baltimore City,
Maryland, Circuit Court on June 19, 2000; Hart, et al v. Lead Industries
Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on
June 26, 2000; Johnson, et al v. Clinton, et al., commenced in the Baltimore
City, Maryland, Circuit Court on October 10, 2000; Randle, et al v. Lead
Industries Association, et al., commenced in the Baltimore City, Maryland,
Circuit Court on August 10, 2000; Williams, et al v. Lead Industries
Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on
July 7, 2000; William Russell, et al. v. NL Industries, et al., commenced in the
Circuit Court of LeFlore County, Mississippi on December 30, 2002; Myreona
Stewart, et al. v. NL Industries, et al., commenced in the Circuit Court of
LeFlore County, Mississippi on December 31, 2002; Will T. Turner v.
Sherwin-Williams Company, et al., commenced in the Circuit Court of Jefferson
County, Mississippi on December 30, 2002; and John Henry Sweeney v. The Sherwin
Williams Co., et al., commenced in the Circuit Court of Hinds County,
Mississippi on December 30, 2002.
25
The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately $1 billion
in indemnity coverage for lead-based paint and lead pigment litigation. As a
result of insurance coverage litigation initiated by the Company, an Ohio trial
court issued a decision in 2002 effectively requiring certain insurance carriers
to resume paying defense costs in the lead-based paint and lead pigment cases.
Indemnity coverage was not at issue in the Ohio court's decision. The insurance
carriers may appeal the Ohio decision regarding defense costs, and they have in
the past and may in the future attempt to deny indemnity coverage if there is
ever a settlement or an adverse judgment in any lead-based paint or lead pigment
case.
In 1986, a predecessor of a company that is now a subsidiary of the Company
sold its recently acquired Glidden Paints business. As part of that sale, the
seller agreed to indemnify the purchaser against certain claims made during the
first eight years after the sale; the purchaser agreed to indemnify the seller
against such claims made after the eight-year period. Wit