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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 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)
20 Wight Avenue, Suite 100 21030
Hunt Valley, MD (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 410-229-4400
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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
- ----------------------- -----------------------
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 75 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 the
last business day of the registrant's most recently completed second fiscal
quarter (based upon the closing price of $9.51 per common share as quoted on the
New York Stock Exchange), was approximately $593 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 5, 2004, was 64,605,553 shares, excluding 13,291,033 shares held by the
registrant, its subsidiaries and certain Company trusts that are not entitled to
vote.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement relating to the
2004 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.
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business....................................................................... 5
2. Properties..................................................................... 23
3. Legal Proceedings.............................................................. 23
4. Submission of Matters to a Vote of Security Holders............................ 26
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters...... 27
6. Selected Financial Data........................................................ 27
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 29
7A. Quantitative and Qualitative Disclosures about Market Risk.................... 55
8. Financial Statements and Supplementary Data................................... 56
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 100
9A. Controls and Procedures....................................................... 100
PART III
10. Directors and Executive Officers of the Registrant............................ 101
11. Executive Compensation........................................................ 101
12. Security Ownership of Certain Beneficial Owners and Management................ 101
13. Certain Relationships and Related Transactions................................ 101
14. Principal Accountant Fees and Services........................................ 101
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K................ 102
Signatures.................................................................... 107
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. and its majority-owned
subsidiaries (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.
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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;
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; and
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. 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 non-GAAP financial measures,
primarily EBITDA. EBITDA represents income from operations before interest,
taxes, depreciation and amortization, other income items, equity earnings, and
the cumulative effect of accounting changes. EBITDA is a
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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. EBITDA identified above
is 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 used by other
companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding designated items. Management believes that
excluding these items generally helps investors to compare operating performance
between two periods. Adjusted data are 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 partnership between 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 major 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 manages its operations under an operational excellence business
model, focused on optimizing cash flow while providing resources for disciplined
growth. As a result of a strategic review completed in mid-2003, and a cost
reduction program that was implemented as a result of that review, the Company
identified and communicated three priorities for the near to medium term: 1)
achieving a world class cost position in its core businesses; 2) focusing on
earning its customers' business with highly competitive products and services;
and 3) improving financial flexibility through debt reduction. These priorities
provide the foundation for the Company's management structures, work processes,
and pay practices.
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 20
Wight Avenue, Suite 100, Hunt Valley, MD 21030. Its telephone number is (410)
229-4400 and its fax number is (410) 229-5003. 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 to the Securities and Exchange Commission. Information
contained on the Company's website is not incorporated into this Annual Report
and does not constitute a part of this Annual Report.
5
In this Annual Report:
o References to the Company are to Millennium Chemicals Inc., including
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, including certain of the Company's selling, development and
administrative ("S,D&A") costs not allocated to its three business segments,
employee-related costs from predecessor businesses and certain other expenses,
including costs associated with the Company's cost reduction program announced
in July 2003 and the Company's reorganization activities in 2001 (see Note 3 to
the Consolidated Financial Statements included in this Annual Report), are
grouped under the heading Other. See Note 16 to the Consolidated Financial
Statements included in this Annual Report. The Company's 29.5% interest in
Equistar is accounted for under the equity method. See Notes 1 and 4 to the
Consolidated Financial Statements included in this Annual Report.
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"). Third party equity investors
own a minority interest in Millennium Inorganic Chemicals Do Brasil S.A.
("Millennium Brasil"), which is one of the non-United States affiliates of the
Titanium Dioxide and Related Products segment. 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.
Principal Products
The following is a description of the principal products of each of the
Company's three 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.
6
Product Uses
------- ----
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.
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.
Zircon Sand ("Zircon").................... A coarse fine white mineral
powder used in refractory
material, ceramic material and
foundry sand.
Acetyls:
Vinyl acetate monomer..................... A petrochemical product used to
produce a variety of polymers
products used in adhesives,
water-based paint, textile
coatings and paper coatings.
Acetic acid............................... A feedstock used to produce
vinyl acetate monomer,
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.
As of the date of this report, the Company's annual production capacity,
using the chloride process and the sulfate process discussed below, is
approximately 690,000 metric tons per annum.
The Company has decided to rationalize certain equipment at its Le Havre,
France plant in the second quarter of 2004, which will result in the reduction
of the rated capacity for that plant from 95,000 metric tons per annum to 65,000
tons per annum. This rationalization will include the idling of certain
equipment. In addition to the Le Havre plant reduction, in the second quarter of
2004, the Company will also recognize an aggregate gain of 10,000
7
metric tons per annum of production capacity at its Ashtabula, Ohio and
Australian chloride plants, due primarily to reliability improvements made with
a limited investment in those plants. Therefore, in the second quarter of 2004,
the Company's total net reduction of production capacity for TiO[u]2 will
be 20,000 metric tons per annum. The rated capacities provided in the table
below reflect both the reduction of capacity at the Le Havre plant and the
increase in capacity at the Ashtabula, Ohio and Australian plants.
Millennium Chemicals' TiO[u]2 Rated Capacity
(metric tons per annum)
Percentage
Process Capacity of Capacity
- ------- -------- -----------
Chloride............................................... 515,000 77%
Sulfate................................................ 155,000 23%
-------- -----------
Total............................................... 670,000 100%
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.
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 265,000 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
ilmenite (titanium-bearing ore), which is generally consumed in the Salvador
TiO[u]2 plant, and 19,000 tpa of zircon and 2,000 tpa of natural rutile
titanium ore, 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 65,000 tpa and 30,000 tpa, respectively. The
Kemerton plant in Western Australia has chloride-process production capacity
of 100,000 tpa.
The Company's TiO[u]2 plants operated at an average rate of 89%, 89% and
85% of installed capacity during 2003, 2002 and 2001, respectively. Production
volumes for 2003 and 2002 were similar. The increase in the operating rate in
2002 compared to the rate in 2001 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 2004 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
8
Limited are the world's largest producers of titanium ores and upgraded
titaniferous raw materials and accounted for approximately 71% of the titanium
ores and upgraded titaniferous raw materials purchased by the Company in 2003.
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 raw materials used by the Company in the production of
TiO[u]2 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 these raw materials.
Such an event could have a material adverse effect on the consolidated financial
condition, results of operations and cash flows of the Company. At the present
time, chloride- and sulfate-process feedstock is available in sufficient
quantities.
Of the total 591,000 metric tons of TiO[u]2 sold by the Company in 2003,
approximately 61% was sold to customers in the paint and coatings industry,
approximately 24% to customers in the plastics industry, approximately 14% to
customers in the paper industry, and approximately 1% to other customers. The
Company's ten largest customers accounted for approximately 40% of its TiO[u]2
sales volume in 2003. The Company experiences some seasonality in its sales
because, in general, its customers' sales of paint and coatings are greatest in
the spring and summer months.
TiO[u]2 is sold by the Company either directly 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 for TiO[u]2 and related products are highly competitive.
The Company competes primarily on the basis of price, product quality and
service. Certain of the Company's competitors are more vertically integrated
than the Company, 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 that facility. The Company's major competitors
in the TiO[u]2 business are E. I. Du Pont de Nemours 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 Worldwide, Inc. ("Kronos"), a majority-owned subsidiary 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. These alternate products
include kaolin clays, calcium carbonate pigments, both ground and precipitated
forms, and synthetic polymers materials. 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
9
sold for their physio-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 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. The Company's principal
competitors in this market are W.R. Grace & Co., Ineos Silicas, The PQ
Corporation, and Fuji Silysia Ltd.
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. The principal competitor in this market is
Johnson Matthey plc.
Zircon: Zircon is a coproduct of titanium minerals production mined at the
Company's Mataraca, Paraiba, Brazil mineral sands mine. Zircon is stable to very
high temperatures and insoluble in water, dilute acids and hot concentrated
sulfuric acid. Zircon is used primarily as an opacifier in the ceramics industry
(particularly in ceramic tiles) and is also sold to molders for use in
refractory and foundry applications. The Company's principal competitor in this
market is INB.
Acetyls
The following table sets forth information concerning the Company's annual
production capacity, as of the date of this report, for its principal Acetyls
products:
Millennium Chemicals' Acetyls Rated Capacity
(millions of pounds per annum)
Product Capacity
- ------- --------
Vinyl Acetate Monomer ("VAM")........................................ 850
Acetic Acid.......................................................... 1,200
The Company also 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 next to 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.
10
The Company has a long-term agreement with DuPont to convert acetic acid
produced at the Company's La Porte, Texas plant into VAM through DuPont's nearby
VAM plant and to acquire 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 conversion
agreement increases the Company's effective VAM capacity to approximately 11% of
the world's installed capacity.
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. Equistar has provided
notice to the Company that it will terminate this contract on December 31, 2004.
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 71% of
its VAM sales volume in 2003.
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"); Dow Chemical Company ("Dow"); Acetex Chemie S.A., a subsidiary of
Acetex Corporation ("Acetex"); and Dairen Chemical Corporation.
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, near its VAM
plant. In 2003, the Company used approximately 54% of its acetic acid production
to produce VAM. The Company utilizes proprietary technology to produce acetic
acid.
The principal raw materials required 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 under which pricing is based
primarily on cost of production. Linde produces this carbon monoxide at its
synthesis gas ("syngas") plant at La Porte, Texas. La Porte Methanol Company,
85% owned by the Company, and 15% owned by Linde, supplies all of the Company's
requirements for methanol. See "La Porte Methanol Company" below.
Acetic acid not consumed internally by the Company for the production of
VAM is sold into domestic and export markets under contract and on a spot basis.
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 top
ten customers accounted for approximately 71% of the Company's acetic acid
sales volume in 2003.
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 Company ("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 for a number
of other applications, including chemical reaction agents, or initiators, for
the rubber industry and solvents and cleaners, like pine oil, for 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 key raw material used by the Company
for the production of fragrance ingredients. Through fractionation, the
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
11
formulations, primarily in the oral care market. L-carvone is the primary
component in spearmint oil and is used in flavor formulations. 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 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 linalyl and geranyl acetate,
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 papermaking process. The Company purchases
CST from approximately 30 pulp mills in North America. These purchases are made
under long-term contracts in order to ensure a stable supply of CST.
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.
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 68% of the Company's specialty chemical sales are to users of
fragrance ingredients, 23% are to users of flavor ingredients, and 9% are to
users of solvents and cleaners and industrial specialties. Approximately 60% of
the Company's 2003 specialty chemicals sales were made outside the United States
to approximately 49 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 quality specifications of its customers. The Company works closely
with many of its customers in developing products to satisfy specific
requirements of those customers. 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. From time to
time, a customer may change the formulations of an end product in which one of
the Company's fragrance ingredients is used, which may affect demand for that
ingredient. The top ten customers accounted for approximately 57% of the
Company's Specialty Chemicals business segment revenue in 2003. The 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 $21
million, $20 million and $20 million in 2003, 2002 and 2001, respectively.
Research and development expense increased by approximately $1 million from 2002
to 2003 due to the Company's intensified focus on product quality and
improvement. The Company conducts research at its facilities in Baltimore,
Maryland; Stallingborough, United Kingdom; Bunbury, Western Australia; Le Havre,
France 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 from within
the United States to foreign customers), as well as revenue from those of the
Company's operations that are conducted outside the United States. Export sales,
which are made to more than 90 countries, amounted to approximately 16%, 14% and
13% of total revenues in 2003, 2002 and 2001, respectively. Revenue from
non-United States operations amounted to approximately 46%, 45% and 41% of total
revenues in 2003, 2002 and 2001, 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 41% and 36% of total identifiable assets at
December 31, 2003 and 2002, 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 2003 compared to 2002, due
to an increase in assets outside the United States, primarily current assets,
partially offset by the writedown of
12
property, plant and equipment at the Company's Le Havre, France TiO[u]2
manufacturing plant and a decrease in the Company's identifiable assets in the
United States, primarily the Company's investment in Equistar. See Notes 2 and 4
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 customary risks of doing business abroad, such as
fluctuations in currency exchange rates, transportation delays and
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
these risks will increase if and to the extent that the Company expands its
foreign 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 generally the local currency. The Company is subject to the
strengthening and weakening of various currencies against each other and against
the US dollar. Foreign currency exposure from transactions and commitments
denominated in currencies other than the functional currency are managed by
selectively entering derivative transactions pursuant to the Company's hedging
practices. Translation exposure associated with translating the functional
currency financial statements of the Company's foreign subsidiaries into US
dollars is generally not hedged. Upon translation to the US dollar, operating
results could be significantly affected by foreign currency exchange rate
fluctuations. Since the Company's mix of foreign denominated revenues and costs
compared to functional currency denominated revenues and costs varies
significantly from subsidiary to subsidiary, it is difficult to predict the
impact foreign currency exchange fluctuations will have on the Company's
results. Costs associated with the Company's non-United States operations are
predominately denominated in foreign currencies; however, a portion of the
revenue generated by these non-United States operations is denominated in US
dollars.
As a result of translating the functional currency financial statements of
all its foreign subsidiaries into US dollars, consolidated shareholders' deficit
decreased by approximately $128 million and $27 million during 2003 and 2002,
respectively, and consolidated shareholders' equity decreased by $19 million
during 2001. 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 losses of $2 million and $7 million in
2003 and 2001, respectively, and gains of $3 million in 2002.
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 2003 revenues of $6.5
billion and assets of $5.0 billion as of December 31, 2003. Equistar is one of
the world's 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
polymers 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 (together with
its subsidiaries and affiliates, collectively "Occidental"). On August 22, 2002,
13
Occidental sold its 29.5% equity interest in Equistar to Lyondell, bringing
Lyondell's ownership interest in Equistar to 70.5%, with the Company continuing
to hold its 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"
below.
Equistar's petrochemicals segment manufactures and markets olefins,
oxygenated products, aromatics and specialty products. Equistar's olefins
products include 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, ethanol, ethylene
dichloride and ethylbenzene. Propylene is used to produce polypropylene,
acrylonitrile and propylene oxide. Equistar's oxygenated products include
ethylene oxide and its derivatives, ethylene glycol, ethanol and MTBE.
Oxygenated products have uses ranging from paint to cleaners to polyester fibers
to gasoline additives. Equistar's aromatics include benzene and toluene.
Equistar's polymers 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 fibers for
carpets and 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 and reactive
polyolefins.
Equistar's Petrochemicals Segment
Equistar produces a variety of petrochemicals at eleven facilities located
in five states. Equistar's Chocolate Bayou, Corpus Christi and two Channelview,
Texas olefins plants use crude oil-based liquid raw materials, 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"). Facilities using Petroleum Liquids
historically have generated, on average, approximately four cents of additional
variable margin per pound of ethylene produced compared to facilities restricted
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. For example, during the first quarter of 2003, when crude oil
prices rose sharply in anticipation of the war in Iraq, the advantage was
significantly reduced. However, the advantage rebounded strongly in the second
quarter of 2003, bringing the 2003 yearly average back to historical levels.
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 temporarily idled its La Porte ethylene
facility from June 2003 to August 2003 to lower its average cost of US ethylene
production by taking advantage of unused production capacity at its Channelview,
Corpus Christi and Chocolate Bayou facilities, which can process Petroleum
Liquids. The Channelview facility is particularly flexible because it can range
from processing all Petroleum Liquids to processing a majority of NGLs. The
Corpus Christi plant can range from processing predominantly Petroleum Liquids
to processing predominantly 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 to 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 in Pasadena, Texas and through a joint
venture with DuPont located in Beaumont, Texas that is 50% owned by Equistar and
50% owned by DuPont. Equistar produces synthetic ethanol at its Tuscola,
Illinois facility and denatures ethanol at a facility in Newark, New Jersey.
14
The following table outlines Equistar's primary petrochemical products and
the annual processing capacity for each product, as of January 1, 2004:
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
oxide equivalents, 400 million
pounds as pure ethylene
oxide (c)
Ethylene glycol............................ 1.0 billion pounds (c)
Ethylene oxide derivatives................. 225 million pounds
MTBE....................................... 284 million gallons (d)
Ethanol.................................... 50 million gallons
Aromatics:
Benzene.................................... 310 million gallons
Toluene.................................... 66 million gallons
Specialty Products:
Dicyclopentadiene.......................... 130 million pounds
Isoprene................................... 145 million pounds
Resin oil.................................. 150 million pounds
Piperylenes................................ 100 million pounds
Alkylate................................... 337 million gallons (e)
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, pending sustained improvement in market conditions.
(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 350 million pounds/year of ethylene oxide equivalents capacity and
400 million pounds/year of ethylene glycol capacity at the Beaumont, Texas
facility, which represents Equistar's 50% of the total ethylene oxide
equivalents capacity and ethylene glycol capacity, respectively, at the
facility. The Beaumont, Texas facility is owned by PD Glycol, a partnership
owned 50% by Equistar and 50% by DuPont.
(d) Includes up to 44 million gallons/year of capacity processed by Equistar
for LCR and returned to LCR.
(e) Includes up to 172 million gallons/year of capacity processed by Equistar
for LCR and returned to LCR.
Ethylene produced by the Morris and Clinton facilities is generally
consumed as raw material by the polymers 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 Equistar's other internal uses and to
third parties. Ethylene and propylene produced at the Channelview, Corpus
Christi, Chocolate Bayou and Lake Charles olefins plants are generally
distributed by pipeline or via exchange agreements to Equistar's Gulf Coast
polymers and ethylene oxide and glycol facilities as well as Equistar's
affiliates and unrelated parties. Equistar's Lake Charles facility has been
idled since the first quarter of 2001, pending sustained improvement in market
conditions. For the year ended December 31, 2003, approximately 70% of the
ethylene produced by Equistar, based on sales dollars, was consumed by
Equistar's polymers or oxygenated products businesses or sold to Equistar's
owners and their affiliates at market-related prices. In addition, Equistar also
had significant ethylene sales to Occidental Chemical Corporation (a subsidiary
of Occidental, which is the beneficial owner of approximately 25% of Lyondell)
during 2003 pursuant to a long-term ethylene supply agreement.
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
15
negotiation of price, customer purchases 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, La Porte and Lake Charles facilities is shipped via a
1,430 mile 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 an
unrelated party is used to transport ethylene from Morris, Illinois to Tuscola,
Illinois.
In 2003, Equistar entered into a long-term propylene supply arrangement
with Sunoco, Inc. Beginning in April, 2003, Equistar supplies 700 million pounds
of propylene annually to Sunoco for a period of 15 years, with a majority of the
propylene to be supplied under a cost-based formula and the balance to be
supplied on a market-related basis, adjusted monthly. This 15-year supply
arrangement replaces a previous contract under which Equistar supplied 400
million pounds of propylene to Sunoco at market-related prices.
The bases for competition in Equistar's petrochemical products are price,
product quality, product deliverability, reliability of supply and customer
service. Equistar competes with other large domestic producers of
petrochemicals, including BP, Chevron Phillips Chemical Company LP ("Chevron
Phillips"), Dow, Enterprise Products Partners L.P., ExxonMobil Chemical Company
("ExxonMobil"), Huntsman Chemical Company ("Huntsman"), and Shell Chemical
Company. Industry consolidation has concentrated North American production
capacity under the control of fewer, although larger and stronger, competitors.
Equistar's Polymers Segment
Through facilities located at nine plant sites in four states, Equistar's
polymers 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 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 facility manufactures polypropylene using
propylene produced as a co-product of Equistar's ethylene production as well as
propylene purchased from unrelated parties. On March 31, 2003, Equistar sold its
Bayport polypropylene manufacturing unit in Pasadena, Texas to a subsidiary of
Sunoco. Equistar produces performance polymers products, which include enhanced
grades of polyethylene and polypropylene, at several of its polymers facilities.
Equistar produces wire and cable insulating resins and compounds at its La
Porte, Texas facility, and wire and cable insulating compounds at its Fairport
Harbor, Ohio facility. Wire and cable insulating resins and compounds are used
to insulate copper and fiber optic wiring in power, telecommunication, computer
and automobile applications. Equistar intends to temporarily consolidate its
automotive compound production at the Fairport Harbor, Ohio facility and
temporarily idle the automotive compound production unit at the La Porte, Texas
facility at the end of the first quarter of 2004. On March 31, 2003, Equistar
sold its Bayport polypropylene manufacturing unit in Pasadena, Texas to a
subsidiary of Sunoco.
Equistar's polymers facilities have the capacity to produce annually 3.2
billion pounds of high density polyethylene, 1.4 billion pounds of low density
polyethylene, 1.1 billion pounds linear low density polyethylene and 280 million
pounds of polypropylene. Equistar's polymers facilities also produce wire and
cable insulating resins and compounds, polymeric powders, polymers for
adhesives, sealants and coatings, and reactive 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.
The primary raw material for Equistar's polymers segment is ethylene. With
the exception of the Chocolate Bayou polyethylene plant, Equistar's polyethylene
and polypropylene production facilities can receive their ethylene directly from
Equistar's petrochemical facilities via Equistar's olefins pipeline system,
third party pipelines or Equistar's own on-site production. All of the ethylene
used in Equistar's polyethylene production is produced internally by Equistar's
petrochemicals segment. However, the polyethylene plants at Chocolate Bayou, La
Porte and Bayport, Texas are connected by pipeline to unrelated parties and
could receive ethylene via exchanges or purchases. The polypropylene facility at
Morris, Illinois receives propylene from Equistar's petrochemicals segment and
from unrelated parties.
16
Equistar's polymers products are primarily sold to an extensive base of
established customers. Approximately 65% 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 are subject to change upon mutual agreement between Equistar and its
customer. Equistar sells its polymers products in the United States and Canada
primarily through its own sales organization. It generally engages sales agents
to market its polymers 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, reliability of
supply and customer service. Equistar competes with other large producers of
polymers, including Atofina, BP Solvay Polyethylene, Chevron Phillips, Dow,
Eastman, ExxonMobil, Formosa Plastics, Huntsman, NOVA Chemicals Corporation
("NOVA Chemicals"), 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 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, the 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. The
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. Equistar has provided notice to Millennium Petrochemicals that it will
terminate this contract on December 31, 2004. 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.
17
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 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.
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 must 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
18
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.
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, 2003. 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 Linde's syngas plant at
La Porte, Texas. 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, 2003, the Company had approximately 3,600 full- and
part-time employees. Approximately 3,000 of the Company's employees were engaged
in manufacturing; 400 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 ten collective bargaining agreements or other
required labor negotiations, five must be renegotiated on an annual basis, two
were renegotiated in 2003, and three must be renegotiated in 2004. All required
annual renegotiations relate to units outside the United States. The Company
believes that the relations between its operating subsidiaries and their
respective 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,
19
"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.
The Company's annual operating expenses relating to environmental matters
were approximately $55 million, $46 million and $46 million in 2003, 2002 and
2001, 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 $9 million, $17 million and $19
million in 2003, 2002 and 2001, 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 2003 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, in December 2000, 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. 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. The TCEQ plans to make a final
review of these rules, with final rule revisions to be adopted by October 2004.
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. This result could
potentially affect cash distributions from Equistar to the Company. Equistar's
spending through December 31, 2003 totaled $69 million. Equistar is still
assessing the impact of the new HRVOC control requirements. 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 range between $0.01 million for several small sites and $22
million for the Kalamazoo River Superfund Site in Michigan. A subsidiary of the
Company is named as one of four PRPs at the Kalamazoo River Superfund Site. 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
20
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 of approximately $73 million. The five remedial options
considered in the Draft Study range from no action to total dredging of the
river and off-site disposal of the dredged materials. In February 2001, the
PRPs, at the request of the State of Michigan, also evaluated nine additional
potential remedies. The cost for these remedial options ranged from $0 to $2.5
billion; however, the Company strongly believes that the likelihood of the cost
being either $0 or $2.5 billion is remote. 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 negative comments to the EPA on the Draft Study, the EPA has
yet to comment. The Company estimated its liability at this site based upon the
KRSG Draft Study's recommended remedy. Based upon an interim allocation, the
Company is paying 35% of costs related to studying and evaluating the
environmental condition of the river. Guidance as to how the EPA will likely
proceed with any further evaluation and remediation at the Kalamazoo site is not
expected until late 2004 at the earliest. At the point in time when the EPA
announces how it intends to proceed with any such evaluation and remediation,
the Company's estimate of its liability at the Kalamazoo site will be
re-evaluated. The Company's ultimate liability for the Kalamazoo site will
depend on many other 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. Recently, the EPA identified 14 private entities and 7 municipalities
and sent them formal requests for information regarding their possible
connection with the Kalamazoo site.
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). Equistar has reached a tentative settlement with
the State of Illinois, which includes a civil penalty in the amount of $175,000,
and is finalizing the settlement decree with the State of Illinois. The Company
is responsible for paying this amount pursuant to the agreement under which
Equistar was formed on December 1, 1997.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, is between $53 million and $78 million and has accrued
$61 million as of December 31, 2003. 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
Senior Executive Officers
The following individuals serve as senior executive officers of the
Company:
Name Position
- --------------------- --------------------------------------------------------
Robert E. Lee........ President and Chief Executive Officer
John E. Lushefski.... Executive Vice President and Chief Financial Officer
C. William Carmean... Senior Vice President, General Counsel and Secretary
Timothy E. Dowdle.... Senior Vice President - Manufacturing, Supply Chain and
Research and Development
Marie S. Dreher...... Senior Vice President - Strategic and Corporate
Development
Myra J. Perkinson.... Senior Vice President - Human Resources
Mr. Lee, 47, has served as the President and Chief Executive Officer of the
Company since July 2003. He was the Executive Vice President - Growth and
Development of the Company from March 2001 to July 2003. 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.
Lee is a member of the Equistar Partnership Governance Committee.
Mr. Lushefski, 48, has served as Executive Vice President and Chief
Financial Officer of the Company since July 2003. He was Senior Vice President
and Chief Financial Officer of the Company from the Demerger in 1996 to July
2003. 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.
Mr. Carmean, 51, 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. Carmean is a member of the Equistar Partnership Governance Committee.
Mr. Dowdle, 52, has served as Senior Vice President - Manufacturing, Supply
Chain and Research and Development of the Company since July 2003. He was Senior
Vice President - Manufacturing, Operational Excellence Businesses of the Company
from March 2001 to July 2003. 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, 45, has served as Senior Vice President - Strategic and
Corporate Development of the Company since July 2003. She was Senior Vice
President - Strategic Development of the Company from January 2003 to July 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 joined Hanson Industries in 1994 as Assistant Corporate
Controller, and was appointed Director - Planning and Budgeting in 1995.
22
Ms. Perkinson, 52, 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. Ms. Perkinson joined Millennium Petrochemicals in 1973.
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) and its mineral sands mine, all of which are owned. 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, France........................... TiO[u]2
Mataraca, Paraiba, Brazil**................ Ilmenite (generally consumed in
the Salvador TiO[u]2 plant),
zircon and natural rutile
titanium ore
Rockingham, Western Australia.............. Zirconium-based compounds and
chemicals
Salvador, Bahia, Brazil**.................. TiO[u]2
Stallingborough, United Kingdom............ TiO[u]2
Thann, France.............................. TiO[u]2, TiCl[u]4 and ultra-fine
TiO[u]2
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
Millennium Brasil, which owns 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 95 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) in
Texas, Illinois, and Indiana. Millennium Petrochemicals is responsible for these
premises-based cases as a result of its indemnification obligations under the
Company's
23
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. Millennium Inorganic Chemicals is one of a number of defendants in 80
premises-based asbestos cases filed in late 2003 in Baltimore County, Maryland.
Approximately half of these claims are on the active docket and half are on an
inactive docket of claims for which no legal obligations attach and no defense
costs are being incurred. With respect to the active docket claims, at the
current rate, cases filed in 2003 are not likely to be scheduled to be tried for
at least 10 years. To date, no premises-based asbestos case has been tried in
the State of Maryland. Defunct indirect Company subsidiaries are among a
number of defendants in 65 premises-based asbestos cases in Texas. 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; Mark
Ludwigsen Walters v. NL Industries, Inc., et al., commenced on July 18, 2002, in
the Supreme Court, County of Kings, New York; 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; William Russell, et al. v. NL
Industries, et al., commenced in the Circuit Court of LeFlore County,
Mississippi on December 30, 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.
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 Industries 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 was whether lead
pigment in paint in and on public and private Rhode Island buildings constituted
a "public nuisance." This case is tentatively set to be retried on April 6,
2005. An order is anticipated from the court specifying the additional issues to
be considered by the jury in the retrial beyond the public nuisance questions
considered by the jury in the first trial. Another legal proceeding is
tentatively set for trial on June 1, 2004; Herman Frederick Jackson, Billye Raye
Ishee, Gaiey Ducksworth, Jr. and Roy Lee Merrick v. Phillips Building Supply of
Laurel, et al., commenced in the Circuit Court of Jones County, Mississippi on
January 14, 2002. The complaint alleges that three former painters, two of whom
are living, have work histories of painting, sanding, and scraping paints,
including lead-containing paints. The complaint asserts three counts including
strict liability, negligence, and fraud/misrepresentation/conspiracy.
Legal proceedings relating to lead pigment or paint dismissed after motions
to dismiss or for summary judgment were 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; and In Re Lead Paint Litigation,
consolidated on February 11, 2002, in the Superior Court of New Jersey, Law
Division: Middlesex County, Case Code 702. There are two cases in which the
court entered summary judgment on behalf of all defendants, and notices of
appeal have been filed: 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; and City of Chicago v. American
Cyanamid Company, et al., commenced on September 5, 2002, in the Circuit Court,
Cook County, Illinois. One case relating to lead pigment or paint was
voluntarily dismissed by the plaintiffs in 2003: 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.
24
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;