Attached files
file | filename |
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10-K - FORM 10-K - AVIENT CORP | l38676e10vk.htm |
EX-32.2 - EX-32.2 - AVIENT CORP | l38676exv32w2.htm |
EX-23.1 - EX-23.1 - AVIENT CORP | l38676exv23w1.htm |
EX-99.2 - EX-99.2 - AVIENT CORP | l38676exv99w2.htm |
EX-31.1 - EX-31.1 - AVIENT CORP | l38676exv31w1.htm |
EX-23.3 - EX-23.3 - AVIENT CORP | l38676exv23w3.htm |
EX-21.1 - EX-21.1 - AVIENT CORP | l38676exv21w1.htm |
EX-23.2 - EX-23.2 - AVIENT CORP | l38676exv23w2.htm |
EX-32.1 - EX-32.1 - AVIENT CORP | l38676exv32w1.htm |
EX-31.2 - EX-31.2 - AVIENT CORP | l38676exv31w2.htm |
EX-10.51 - EX-10.51 - AVIENT CORP | l38676exv10w51.htm |
EX-10.12 - EX-10.12 - AVIENT CORP | l38676exv10w12.htm |
Exhibit 99.1
Report of Independent Registered Public Accounting Firm
To the Partners
Oxy Vinyls, LP.:
Oxy Vinyls, LP.:
We have audited the accompanying consolidated statements of operations, changes in partners
capital and cash flows of Oxy Vinyls, LP and subsidiaries (the Partnership) for the six months
ended June 30, 2007. These consolidated financial statements are the responsibility of the
Partnerships management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Partnerships internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of the operations and the cash flows of Oxy Vinyls, LP and
subsidiaries for the six months ended June 30, 2007, in conformity with U.S. generally accepted
accounting principles.
As explained in Note 3 to the consolidated financial statements, the Partnership retrospectively
changed its method of accounting for noncontrolling interests in 2009.
KPMG LLP
Dallas, Texas
February 29, 2008, except with respect to the updated disclosures pertaining to the retrospective
application of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of ARB No. 51, as described in Note 3 to the
consolidated financial statements, as to which the date is February 18, 2010.
OXY VINYLS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2007
(Amounts in thousands)
Six Months Ended | ||||
6/30/2007 | ||||
REVENUES: |
||||
Net sales |
$ | 1,107,393 | ||
COSTS AND OTHER DEDUCTIONS: |
||||
Cost of sales |
1,087,327 | |||
Selling, general and administrative and other operating expenses, net |
9,400 | |||
Gain on sale of assets |
(887 | ) | ||
Interest expense, net |
6,275 | |||
INCOME FROM OPERATIONS BEFORE TAXES AND
OTHER ITEMS |
5,278 | |||
Provision for income taxes |
3,773 | |||
NET INCOME |
1,505 | |||
Less: Net income attributable to noncontrolling interest |
(3,552 | ) | ||
NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST |
(2,047 | ) | ||
Other comprehensive loss on postretirement liability adjustment |
(2,688 | ) | ||
COMPREHENSIVE LOSS ATTRIBUTABLE TO CONTROLLING INTEREST |
$ | (4,735 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
1
OXY VINYLS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
For the Six Months Ended June 30, 2007
(Amounts in thousands)
Occidental | Occidental | 1999 PVC | Noncontrolling | |||||||||||||||||||||||||||||
PVC LP Inc. | PVC LLC | Partner Inc. | Interest | Total | ||||||||||||||||||||||||||||
Partners Capital | ||||||||||||||||||||||||||||||||
Accumulated | Accumulated | Accumulated | Including Accumulated | |||||||||||||||||||||||||||||
Other | Other | Other | Other Comprehensive | |||||||||||||||||||||||||||||
Partners | Comprehensive | Partners | Comprehensive | Partners | Comprehensive | Loss and Noncontrolling | ||||||||||||||||||||||||||
Capital | Loss | Capital | Loss | Capital | Loss | Interest | ||||||||||||||||||||||||||
Balance at December
31, 2006 |
$ | 865,197 | $ | (8,576 | ) | $ | 11,541 | $ | (115 | ) | $ | 276,857 | $ | (2,744 | ) | $ | 114,442 | $ | 1,256,602 | |||||||||||||
Net (loss) income |
(1,535 | ) | (21 | ) | (491 | ) | 3,552 | 1,505 | ||||||||||||||||||||||||
Increase in
liability for
unfunded
postretirement
benefit obligation |
| (2,016 | ) | | (27 | ) | | (645 | ) | | (2,688 | ) | ||||||||||||||||||||
Balance at June 30,
2007 |
$ | 863,662 | $ | (10,592 | ) | $ | 11,520 | $ | (142 | ) | $ | 276,366 | $ | (3,389 | ) | $ | 117,994 | $ | 1,255,419 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
OXY VINYLS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2007
(Amounts in thousands)
Six Months Ended | ||||
6/30/2007 | ||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||
Net income |
$ | 1,505 | ||
Adjustments to reconcile net income to net cash
used by operating activities: |
||||
Depreciation and amortization |
68,878 | |||
Other noncash charges to income, net |
1,203 | |||
Loss on retirement of assets, net |
1,831 | |||
Gain on sale of assets |
(887 | ) | ||
Changes in operating assets and liabilities: |
||||
Increase in trade and other receivables |
(68,208 | ) | ||
Increase in inventories |
(4,115 | ) | ||
Decrease in prepaid expenses |
45 | |||
Increase in major maintenance spending |
(2,718 | ) | ||
Decrease in
accounts payable, property taxes and other accrued liabilities |
(17,182 | ) | ||
Increase in current foreign income taxes payable |
57 | |||
Increase in foreign income taxes payable |
1,443 | |||
Increase in payable to Occidental Chemical Corporation, net |
19,222 | |||
Increase in receivable from PolyOne Corporation, net |
(12,607 | ) | ||
Other operating, net |
(1,825 | ) | ||
Net cash used by operating activities |
(13,358 | ) | ||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||
Capital expenditures |
(34,746 | ) | ||
Proceeds from sale of assets |
1,655 | |||
Net cash used by investing activities |
(33,091 | ) | ||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||
Payments of long-term debt |
(24,750 | ) | ||
Increase in loans payable to Occidental Petroleum Investment Co. |
83,151 | |||
Net cash provided by financing activities |
58,401 | |||
Increase in cash and cash equivalents |
11,952 | |||
Cash and cash equivalents, beginning of period |
517 | |||
Cash and cash equivalents, end of period |
$ | 12,469 | ||
The accompanying notes are an integral part of these consolidated financial statements.
3
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation and operations -
Oxy Vinyls, LP (OxyVinyls or the Partnership), a Delaware limited partnership, was formed
on April 6, 1999, pursuant to a Limited Partnership Agreement among Occidental PVC LP, Inc. (the
Oxy Limited Partner) and Occidental PVC, LLC (the Oxy General Partner), wholly-owned
subsidiaries of Occidental Chemical Corporation (OCC) and 1999 PVC Partner Inc., (the PolyOne
Limited Partner), a subsidiary of PolyOne Corporation (PolyOne). The contributions and related
transactions described in this Note were effective, and the Partnership commenced operations, as of
April 30, 1999, at which time the Limited Partnership Agreement was amended pursuant to a First
Amended and Restated Limited Partnership Agreement dated as of April 30, 1999 (collectively with
the Limited Partnership Agreement, the Partnership Agreement). Through the Oxy General Partner
and the Oxy Limited Partner, OCC indirectly owned a 76 percent interest in the Partnership. OCC is
an indirect, wholly-owned subsidiary of Occidental Petroleum Corporation (OPC). Through the
PolyOne Limited Partner, PolyOne indirectly owned a 24 percent interest in the Partnership. See
Note 15 for ownership changes and related transactions subsequent to June 30, 2007.
The Partnership owns and operates polyvinyl chloride (PVC), vinyl chloride
monomer (VCM) and chlor-alkali manufacturing facilities in the United States and Canada that were
contributed on behalf of the Oxy General Partner and the Oxy Limited Partner by OCC, and on behalf
of the PolyOne Limited Partner, by PolyOne. A 50 percent equity interest in OXYMAR (OxyMar),
which was a Texas general partnership between Oxy VCM Corporation (Oxy VCM), an indirect
wholly-owned subsidiary of OCC, and U.S. VCM Corporation (U.S. VCM), a wholly-owned subsidiary of
Marubeni Corporation (Marubeni), a Japanese corporation, was contributed to the Partnership at
formation through the merger of Oxy VCM into the Oxy General Partner and the subsequent transfer by
the Oxy General Partner of its equity interest in OxyMar to the Partnership. OxyVinyls
consolidates OxyMar under the provisions of Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities (FIN No. 46). (See
Principles of consolidation section below and Note 2.) As of April 30, 2004, Marubeni exercised
its option to put its interest in OxyMar to OCC. (See Note 2.)
Under terms of the Partnership Agreement, net income is allocated pro-rata among the partners
based on their percentage ownership of the Partnership. Distributions to the partners and any
additional cash contributions required by the Partnership are also based on the partners
percentage ownership of the Partnership.
Principles of consolidation -
The consolidated financial statements include the accounts of OxyVinyls, OxyMar (as discussed
below), LaPorte Chemicals Corporation (LaPorte), OxyVinyls Export Sales LLC and OxyVinyls Canada
Inc. (OxyVinyls Canada), whose functional currency is the U.S. dollar. All intercompany accounts
and transactions have been eliminated.
OxyMar is 50 percent owned by OxyVinyls and 50 percent owned and operated by OCC. The
consolidated financial statements include 100 percent of the accounts of OxyMar. OCCs 50 percent
interest in OxyMar and OxyMars results of operations have been reflected as a noncontrolling
interest. (See Note 2.)
Certain financial statement and notes data have been reclassified to conform to the June 30, 2007 presentation.
Certain financial statement and notes data have been reclassified to conform to the June 30, 2007 presentation.
4
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks and uncertainties -
The process of preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates
primarily relate to unsettled transactions and events as of the date of the consolidated financial
statements. Accordingly, upon settlement, actual results may differ from estimated amounts, but
generally not by material amounts. Management believes that these estimates and assumptions
provide a reasonable basis for the fair presentation of OxyVinyls financial position and results
of operations.
The carrying value of OxyVinyls property, plant and equipment (PP&E) is based on the cost
incurred to acquire the PP&E, net of accumulated depreciation and any impairment charges.
OxyVinyls performs impairment tests on its assets whenever events or changes in circumstances lead
to a reduction in the estimated useful lives or estimated future cash flows that would indicate
that the carrying amount may not be recoverable, or when managements plans change with respect to
those assets. Under the provisions of Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No.
144), OxyVinyls must compare the undiscounted future cash flows of an asset to its carrying value.
(See Note 5.)
Since OxyVinyls major products are commodities, significant changes in the prices of chemical
products could have a significant impact on OxyVinyls results of operations for any particular
period. OxyVinyls also depends on feedstocks and energy to produce chemicals, both of which are
commodities subject to significant price fluctuations. OxyVinyls had two major customers during
the period presented, which accounted for 25.9 percent of total sales for the six months ended June
30, 2007.
Substantially all key raw materials are supplied by related parties. (See Notes 13 and 15.)
Revenue recognition -
Revenue from product sales is recognized after the product is shipped and title has passed to
the customer. Prices are fixed at the time of shipment. Customer incentive programs provide for
payments or credits to be made to customers based on the volume of product purchased over a defined
period. Total customer incentive payments over a given period are estimated and recorded as a
reduction to revenue ratably over the contract period. Such estimates are evaluated and revised as
warranted.
Income taxes -
The Partnership is generally not subject to income taxes except for Canadian income taxes
related to its consolidated subsidiary, OxyVinyls Canada, as well as certain U.S. state and federal
income taxes associated with OxyVinyls wholly-owned subsidiary, LaPorte. In addition, OxyVinyls
is subject to the Texas Legislatures House Bill 3 (Texas Margin Tax), which was enacted in May
2006 and amended in May 2007. (See Note 12.)
5
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
taxes - (continued)
The Partnership follows SFAS No. 109, Accounting for Income Taxes, pursuant to which the
liability method is used in accounting for taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax basis of assets
and liabilities, and are measured using the enacted tax rates and regulations that will be in
effect when the differences are expected to reverse.
Foreign currency transactions -
The functional currency applicable to OxyVinyls Canadian operations is the U.S. dollar since
cash transactions are principally denominated in U.S. dollars. The effect of exchange rate changes
on transactions denominated in nonfunctional currencies generated a gain of $.2 million for the six
months ended June 30, 2007.
Cash and cash equivalents -
Cash equivalents consist of highly liquid certificates of deposits with initial maturities of
three months or less.
Interest income on deposits with unrelated parties was minimal in the six months ended June
30, 2007.
Other assets -
Other assets are net of accumulated amortization and include certain tangible assets and
deferred charges that are amortized over the estimated periods to be benefited (three to ten
years).
Major maintenance expenditures -
Prior to 2007, OxyVinyls used the accrue-in-advance method to account for major maintenance
turnaround expenditures. Under this method, an estimate was made of the costs expected to be
incurred in connection with the next planned major maintenance shutdown. That estimate was then
accrued on a straight-line basis over the period of time until the next planned major maintenance
shutdown occurs. Effective January 1, 2007, OxyVinyls changed the accounting method for major
maintenance turnaround expenditures to the deferral method. (See Note 3.)
Asset retirement obligations -
In accordance with SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No.
143), OxyVinyls recognizes the fair value of a liability for an asset retirement obligation in the
period in which the liability
is incurred or becomes reasonably estimable and if there is a legal obligation to dismantle the
asset and reclaim or remediate the property at the end of its useful life. The liability amounts
are based on future retirement cost estimates and incorporate many assumptions such as time to
abandonment, future inflation rates and the adjusted risk free rate of interest. When the
liability is initially recorded, OxyVinyls capitalizes the cost by increasing the related property,
plant and equipment balances. Over time the liability is increased and expense is recognized for
the change in its present value, and the initial capitalized cost is depreciated over the useful
life of the asset. No market risk premium has been included in OxyVinyls liability since no
reliable estimate can be made at this time.
6
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Exchanges -
Finished product exchange transactions, which involve homogeneous commodities held for sale in
the ordinary course in the same line of business and do not involve the payment or receipt of cash,
are not accounted for as purchases and sales. Any resulting volumetric exchange balances are
accounted for as inventory in accordance with established inventory valuation policy.
Research and development costs -
Research and development costs, which are charged to selling, general and administrative and
other operating expenses as incurred, were $1.5 million for the six months ended June 30, 2007.
Supplemental cash flow information -
Cash payments for income taxes totaled $.8 million during the six months ended June 30, 2007.
Net interest paid totaled $8.2 million during the six months ended June 30, 2007.
Fair value of financial instruments -
OxyVinyls values financial instruments as required by SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. The carrying amounts of cash and cash equivalents approximate
fair value because of the short maturity of those instruments. OxyVinyls estimates the fair value
of its long-term debt based on the quoted market prices for the same or similar issues or on the
yields offered to OxyVinyls for debt of similar rating and similar remaining maturities. The
estimated fair value of OxyMars bonds referenced in Note 6 was $6.8 million at June 30, 2007,
compared with a carrying value of $6.8 million at June 30, 2007. The carrying value of all other
financial instruments approximates fair value.
(2) OXYMAR
OxyMar is a partnership that is 50 percent owned by OxyVinyls and 50 percent owned by Oxy VCM,
LP, an indirectly wholly-owned subsidiary of OCC. OxyMar owns a VCM manufacturing facility at
Ingleside, Texas, which is operated on OxyMars behalf by OCC pursuant to an operating agreement.
OxyMar is not subject to federal income taxes because its income is directly reportable by the
individual partners. OxyVinyls consolidates its
investment in OxyMar under FIN No. 46, which requires a company to consolidate a variable
interest entity (VIE) if it is designated as the primary beneficiary of that entity even if the
company does not have a majority of the VIEs voting interests. A VIE is generally defined as an
entity whose equity is unable to finance its activities or whose owners lack the risks and rewards
of ownership. The statement also imposes disclosure requirements for all the VIEs of a company,
even if the company is not the primary beneficiary.
Under the terms of the Third Amended and Restated Partnership Agreement effective April 30,
2004, net income is allocated among the partners pro-rata based on their percentage interest in the
results of OxyMar. Distributions to the partners are also based on the partners percentage
interest in OxyMar.
All intercompany accounts and transactions between OxyVinyls and OxyMar have been
eliminated.
7
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(3) ACCOUNTING CHANGES
Recently adopted accounting changes -
On January 1, 2009, OxyVinyls retrospectively adopted new accounting standards affecting the
presentation and disclosure requirements related to noncontrolling interests in subsidiaries. SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160) requires that
a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements but separate from the
parents equity and it requires the amount of consolidated net income attributable to both the
controlling interest and noncontrolling interest to be disclosed separately on the face of the
statement of operations. OxyVinyls previously reported noncontrolling interests as minority
interest in its consolidated financial statements. OxyVinyls adopted SFAS 160 prospectively,
except for the presentation and disclosure requirements which were applied retrospectively to all
periods presented. SFAS 160 was issued in December 2007 and had no material impact on OxyVinyls
consolidated financial statements upon adoption.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN No. 48). This interpretation
specifies that benefits from tax positions should be recognized in the financial statements only
when it is more-likely-than-not that the tax position will be sustained upon examination by the
appropriate taxing authority having full knowledge of all relevant information. A tax position
meeting the more-likely-than-not recognition threshold should be measured at the largest amount of
benefit for which the likelihood of realization upon ultimate settlement exceeds 50 percent.
OxyVinyls adopted FIN No. 48 on January 1, 2007 and there was no material effect on the financial
statements upon adoption.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) 108, Financial Statements Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires
quantification of the impact of all prior year misstatements from both a consolidated statement of
operations and a consolidated balance sheet perspective to determine if the misstatements are
material. SAB 108 is effective for financial statements issued for fiscal years ending after
November 15, 2006. OxyVinyls adopted SAB 108 effective December 31, 2006, and there was no
material effect on the financial statements upon adoption.
Certain OxyVinyls executives participate in OPC stock-based incentive plans that are described
in Note 10. On July 1, 2005, OPC early adopted the fair value recognition provisions of SFAS No.
123R, Share-Based Payments (SFAS No. 123R), under the modified prospective transition method.
Prior to July 1, 2005, OPC applied the Accounting Principles Board (APB) Opinion No. 25 intrinsic
value accounting method for its stock incentive plans. Under the modified prospective transition
method, the fair value recognition provisions apply only to new awards or awards modified after
July 1, 2005. Additionally, the fair value of existing unvested awards at the date of adoption is
recorded in compensation expense over the remaining requisite service period. OPC adopted this
statement in the third quarter of 2005 and the adoption did not have a material impact on the
consolidated financial statements of OxyVinyls. (See Note 10.)
8
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(4) INVENTORIES
Inventories are valued at the lower of cost or market. The last-in, first-out (LIFO) method
was used to determine the cost of $82 million of OxyVinyls U.S. inventories at June 30, 2007. The
remaining inventories in Canada and OxyMar are accounted for using the first-in, first-out (FIFO)
and weighted-average-cost methods.
(5) PROPERTY, PLANT AND EQUIPMENT
Property additions and major renewals and improvements are capitalized at cost.
Interest costs incurred in connection with major capital expenditures are capitalized and
depreciated over the lives of the related assets. OxyVinyls capitalized $1.4 million of interest
during the six months ended June 30, 2007.
The estimated useful lives of OxyVinyls assets, which range from three years to 50 years, are
used to compute depreciation expense and are also used in impairment tests. The estimated useful
lives used for the facilities are based on the assumption that OxyVinyls will provide an
appropriate level of annual expenditures to ensure that productive capacity is maintained. Without
these continued expenditures, the useful lives of these plants could significantly decrease. Other
factors that could change the estimated useful lives of OxyVinyls plants include sustained higher
or lower product prices, which are particularly affected by both domestic and foreign competition,
feedstock costs, energy prices, environmental regulations, competition and technological changes.
OxyVinyls performs impairment tests on its assets whenever events or changes in circumstances
lead to a reduction in the estimated useful lives or estimated future cash flows that would
indicate that its carrying amount may not be recoverable, or when managements plans change with
respect to those assets. Under the provisions of SFAS No. 144, OxyVinyls compares the undiscounted
future cash flows of an asset to its carrying value. The key factors that could significantly
affect future cash flows are future product prices, which are particularly affected by both
domestic and foreign competition, feedstock costs, energy costs, regulations and remaining
estimated useful life. Impaired assets are written down to their estimated fair values.
OxyVinyls plants are depreciated using either the unit-of-production or straight-line method
based upon the estimated useful life of the facilities.
(6) CURRENT MATURITIES OF LONG-TERM DEBT AND NOTE PAYABLE TO OCC
In 1996, OxyMar issued bonds with an aggregate principal amount of $165 million, which bear
interest at 7.5 percent per year and are due in 2016 (the Bonds). Proceeds, net of amortizable
financing fees and original issue discount, totaled $163.3 million. Semiannual interest payments
are due on February 15 and August 15.
OPC unconditionally guarantees OxyMars obligation to pay interest and principal on the Bonds.
OPC had
purchased $108.7 million of the Bonds as of December 31, 2005. During the second quarter of 2006,
OxyMar retired the Bonds purchased by OPC in the amount of $108.7 million through capital
contributions from its partners. As part of this transaction, OPC loaned $54.9 million to
OxyVinyls, who in turn contributed the $54.9 million to OxyMar for use in retiring the Bonds. (See
Note 7.)
9
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(6) CURRENT MATURITIES OF LONG-TERM DEBT AND NOTE PAYABLE TO OCC (continued)
OxyMar was obligated to make semiannual principal repayments on the Bonds of a minimum of $8.3
million beginning August 2006. OxyMar opted to pay an increased principal amount of $24.7 million
at each of August 15, 2006 and February 15, 2007. OxyMar has committed to pay the remaining $6.8
million in outstanding principal, which is shown as a current liability on the accompanying
consolidated balance sheet, on August 15, 2007. (See Note 15.)
Interest expense related to the Bonds was $.5 million for the six months ended June 30, 2007.
(7) CASH MANAGEMENT AND CREDIT AND DEPOSIT FACILITIES AGREEMENTS WITH OPC
OxyVinyls participates in OPCs centralized cash management system for its domestic
operations through OPCs affiliate, Occidental Petroleum Investment Co. (OPIC), and maintains a
concentration account to collect cash receipts and fund disbursements. OPIC funds any negative
cash balances and collects any excess cash balances on a daily basis in the concentration account
under the terms of a Cash Management and Credit and Deposit Facilities Agreement between OPIC and
OxyVinyls (the Agreement).
Under the terms of the Agreement, OPIC committed to loan OxyVinyls, on a revolving basis, up
to $104 million. A new Cash Management and Credit and Deposit Facilities Agreement (the New
Agreement), replaced the original Agreement in 2003, which was subsequently replaced by the First
Amended and Restated Cash Management and Credit and Deposit Facilities Agreement (the Amended
Agreement) as of May 1, 2006. Effective May 1, 2007, the Amended Agreement was extended through
April 30, 2008. The Amended Agreement may be terminated at any time by OxyVinyls, at which date
any outstanding loans and any accrued interest and fees payable become due.
Under the terms of the first amendment to the New Agreement, loans payable to OPIC accrued
interest at the one-month London Interbank Offered Rate (LIBOR) plus a margin rate on loans
payable to OPIC of 500 basis points from April 2004 through April 2006. Loans receivable from OPIC
accrued interest at the one-month LIBOR. The Amended Agreement changed the margin rate to 400
basis points effective May 1, 2006. Net interest expense was $1.4 million for the six months ended
June 30, 2007.
In April 2003, OPIC provided a loan of $179.6 million (the LaPorte Loan) to fund the
purchase of the leased LaPorte VCM plant. Under terms of the Amended Agreement, mandatory
prepayment of outstanding debt is required when distributable cash is available, at an amount equal
to 25 percent of distributable cash. OxyVinyls prepaid $46.9 million during 2004, $37.5 million
during 2005, and $62.5 million during 2006, which reduced the LaPorte Loan balance to $32.7
million. The outstanding loan balance was $32.7 million at June 30, 2007. The LaPorte Loan
accrues interest under the same terms as the revolving credit facility above. Interest expense was
$1.5 million for the six months ended June 30, 2007.
On June 16, 2006, OxyVinyls borrowed an additional $54.9 million from OPIC (the OBR Loan)
under the terms of the Amended Agreement. The outstanding principal accrues interest at 6.2
percent per annum. The first principal payment of $9.0 million is payable to OPIC in August 2007.
Interest expense on the OBR Loan was $1.7 million for the six months ended June 30, 2007.
10
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(7) CASH MANAGEMENT AND CREDIT AND DEPOSIT FACILITIES AGREEMENTS WITH OPC (continued)
OxyMar also participates in OPCs centralized cash management system through OPIC. Under the
terms of a Cash Management and Credit Facilities Agreement (the Original Agreement) with OxyMar,
OPIC makes loans each business day in an amount equal to the funds required to eliminate any
negative balance in OxyMars bank account plus any payments due to OPIC. In addition, OxyMar
transfers any excess funds at the end of each business day from its bank account to OPIC. The
Original Agreement and subsequent amendments were replaced by the First Amended and Restated Cash
Management and Credit and Deposit Facilities Agreement (the OPIC Revolver) effective May 1, 2006.
Effective May 1, 2007, the Amended Agreement was extended through April 30, 2008. The credit
facility limit was $150 million at June 30, 2007. Interest is calculated at the LIBOR rate plus
the applicable credit facility margin, which was 400 basis points as of June 30, 2007. Interest
expense on the OPIC Revolver was $2.3 million for the six months ended June 30, 2007.
(8) ENVIRONMENTAL LIABILITIES
OxyVinyls voluntarily entered into a consent decree with the U.S. Environmental Protection
Agency, the State of New Jersey and the Louisville Metropolitan Air Pollution Control District
regarding contested compliance allegations at four manufacturing facilities. The decree was
entered by the U.S. District Court for the Northern District of Texas in July 2006. Under the
terms of the decree, OxyVinyls paid penalties of approximately $.3 million in August 2006 to
resolve alleged state and federal law violations, and paid $.1 million in October 2006 toward a
dust control study in New Jersey as a supplemental environmental project. In addition, OxyVinyls
is undertaking emission reduction projects expected to reduce vinyl chloride emissions at a cost of
approximately $1.1 million as supplemental environmental projects under the decree.
Pursuant to the terms of the asset contribution agreements with OxyVinyls, each partner is
responsible for the environmental remediation costs and associated claims arising out of, in
connection with or relating to conditions that existed prior to the formation of OxyVinyls with
respect to the assets contributed by that partner. This responsibility extends to, among other
things, environmental remediation of conditions identified before forming
OxyVinyls and conditions first identified within 10 years after the formation date, except to the
extent, if any, that OxyVinyls exacerbates or accelerates the condition as provided in the
contribution agreements. OxyVinyls has not created environmental conditions that currently require
ongoing remediation pursuant to applicable laws, and has not exacerbated or accelerated any such
environmental conditions. Since May 1, 1999, OxyVinyls has manufactured, processed, handled, used,
reused, recycled, treated, stored and/or disposed of materials at or from its facilities in the
ordinary course of its business. The possibility that the actions of OxyVinyls may require future
remediation at any particular site is currently considered remote. Since OxyVinyls itself has no
environmental remediation responsibilities that are probable and can be reasonably estimated, no
accrual by OxyVinyls for environmental remediation is warranted.
11
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(9) COMMITMENTS AND CONTINGENCIES
Leases -
At June 30, 2007, future net minimum rental commitments under noncancelable operating leases
with terms in excess of one year are as follows (in thousands):
July 1 through December 31, 2007 |
$ | 9,475 | ||
January 1 through December 31, 2008 |
27,881 | |||
2009 |
13,219 | |||
2010 |
18,079 | |||
2011 |
5,285 | |||
2012 |
1,975 | |||
Thereafter |
5,865 | |||
$ | 81,779 | |||
OxyVinyls has commitments for guaranteed residual values on leased equipment that totaled
approximately $6.6 million as of June 30, 2007.
Rent expense was approximately $10.1 million for the six months ended June 30, 2007, and is
included in cost of sales and selling, general and administrative and other operating expenses, net
in the consolidated statements of operations.
Other -
OxyVinyls has certain other contractual commitments to purchase electrical power, raw
materials and other obligations, all in the ordinary course of business and at market prices.
The Partnership also becomes involved in certain legal proceedings in the normal course of
business. Management believes that the outcome of such matters will not significantly affect the
Partnerships consolidated financial position or results of operations.
Also see Notes 1 and 12 related to income taxes and Notes 6, 7 and 13 regarding related
parties.
(10) STOCK-BASED
INCENTIVE PLANS
Certain OxyVinyls executives and senior managers participate in several OPC plans that provide
for stock-based awards in the form of options, restricted stock (RSUs), stock appreciation rights
(SARs), performance stock awards (PSAs) and dividend equivalents.
12
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(10) STOCK-BASED INCENTIVE PLANS (continued)
As discussed in Note 3, on July 1, 2005, OPC changed its method of accounting for stock-based
compensation from the APB Opinion No. 25 intrinsic value accounting method to the fair value
recognition provisions of SFAS No. 123R. Prior to July 1, 2005, OxyVinyls had already been
expensing its SARs, RSUs and PSAs charges from OPC. On July 1, 2005, OxyVinyls began expensing its
OPC options and recording compensation expense for all other OPC stock-based incentive awards using
fair value amounts on the date of grant in accordance with SFAS No. 123R. OPC measures the fair
values of options and stock settled SARs on the date of grant using the Black-Scholes option
valuation model. The fair values of the stock-settled portions of PSAs are measured on the date of
grant using a Monte Carlo simulation model. The fair value of the underlying OPC stock as of the
grant dates of the PSAs granted in the six months ended June 30, 2007 was $39.69. The fair value
of the cash-settled portion of PSAs is also estimated using a Monte Carlo simulation model each
quarter, through vesting, using updated assumptions. Change in the fair value of the cash-settled
portion of the PSAs is recorded as compensation expense. The adoption of SFAS No. 123R did not
have a material impact on the consolidated financial statements of OxyVinyls.
OxyVinyls recognized compensation expenses for stock-based incentive plans of $3.5 million
during the six months ended June 30, 2007. As of June 30, 2007, there was $3.4 million of
unrecognized compensation expense related to all unvested stock-based incentive award grants. This
expense is expected to be recognized over a weighted average period of 1.8 years.
(11) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
OxyVinyls participates in various defined contribution retirement plans that provide for
periodic contributions by OxyVinyls based on plan-specific criteria, such as base pay, age level
and/or employee contributions. Certain salaried employees participate in a supplemental retirement
plan that provides restoration of benefits lost due to governmental limitations on qualified
retirement benefits. OxyVinyls expensed approximately $3.5 million in the six months ended June
30, 2007 under the provisions of these defined contribution and supplemental retirement plans.
OxyVinyls provides medical and dental benefits and life insurance coverage for certain active,
retired and disabled employees and their eligible dependents. The benefits generally are funded by
OxyVinyls as the benefits are paid during the year. The cost of providing these benefits is based
on claims filed and insurance premiums paid for the period. The total benefit costs, including the
postretirement costs, were approximately $4.5 million in the six months ended June 30, 2007.
As discussed in Note 3, on December 31, 2006, OxyVinyls adopted the provisions of SFAS No.
158. This statement requires the employer to recognize the over-funded or under-funded amounts of
its defined benefit and other postretirement plans as an asset or liability in its balance sheet
and recognize changes in the funded status of these plans in the year in which the changes occur
through OCI if they are not recognized in the consolidated statement of operations. The statement
also requires companies to use the date of its fiscal year-end to measure the plans.
13
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(11) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (continued)
Obligations and Funded Status -
OxyVinyls uses a measurement date of December 31 for postretirement benefit plans.
For the period ended June 30, 2007 (in thousands): | ||||
Changes in benefit obligation: |
||||
Benefit obligation beginning of period |
$ | 38,654 | ||
Service cost benefits earned during the period |
492 | |||
Interest cost on projected benefit obligation |
1,096 | |||
Actuarial loss |
3,065 | |||
Benefits paid |
(856 | ) | ||
Benefit obligation end of period |
$ | 42,451 | ||
Funded status: |
||||
Unfunded obligation |
$ | (42,451 | ) | |
Unrecognized net loss |
| |||
Net amount recognized |
$ | (42,451 | ) | |
Accrued benefit liability |
$ | (42,451 | ) | |
Net amount recognized |
$ | (42,451 | ) |
Components of Net Periodic Benefit Cost -
June 30, | ||||
For the periods ended (in thousands): | 2007 | |||
Net periodic benefit cost: |
||||
Service cost benefits earned during the period |
$ | 492 | ||
Interest cost on benefit obligation |
1,096 | |||
Recognized actuarial loss |
377 | |||
Net periodic benefit cost |
$ | 1,965 | ||
The estimated net loss for the postretirement plans that will be amortized from
accumulated OCI into net periodic benefit cost over the next 12 months is $.8 million.
Additional information
OxyVinyls postretirement benefit plan obligations are determined based on various assumptions
and discount rates, as described below. The actuarial assumptions used could change in the near
term as a result of changes in expected future trends and other factors, which, depending on the
nature of the changes, could cause increases or decreases in the liabilities accrued.
14
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(11) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS (continued)
Additional information (continued)
The following table sets forth the discount rates used to determine
OxyVinyls benefit obligation and net periodic benefit cost for postretirement benefit plans:
For the periods ended June 30, 2007: | ||||
Discount rates: |
||||
Benefit obligation |
5.53 | % | ||
Net period benefit cost |
5.53 | % |
The postretirement benefit obligation was determined by application of the terms of medical
and dental benefits and life insurance coverage, including the effect of established maximums on
covered costs, together with relevant actuarial assumptions and healthcare cost trend rates
projected at a Consumer Price Index (CPI) increase of 1.25 percent as of June 30, 2007.
Participants pay for all medical cost increases in excess of increases in the CPI. Consequently,
increases in the assumed healthcare cost trend rates would have no impact on the postretirement
benefit obligation at June 30, 2007.
Estimated future benefit payments, which reflect expected future service, as appropriate, are
expected to be paid as follows for the periods ended December 31, (in thousands):
July 1 through December 31, 2007 |
$ | 856 | ||
January 1 through December 31, 2008 |
1,700 | |||
2009 |
1,900 | |||
2010 |
2,100 | |||
2011 |
2,300 | |||
2012 |
2,500 | |||
2013-2017 |
15,000 |
(12) INCOME
TAXES
At June 30, 2007, OxyVinyls had Canadian federal and provincial net operating loss
carryforwards of approximately $68.2 million. The temporary differences resulting in deferred
foreign and state income tax assets are primarily related to property, plant and equipment.
The state of Texas enacted the Texas Margin Tax during 2006, which affected OxyVinyls in 2007
due to its operations in Texas. OxyVinyls recorded deferred tax expense of $.2 million for the six
months ended June 30, 2007, for the cumulative temporary difference in property, plant and
equipment for OxyVinyls tax versus book liabilities that are apportioned to Texas at the 1 percent
rate for the new tax.
15
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(12) INCOME TAXES (continued)
The provisions (credits) for domestic and foreign income and other taxes from continuing
operations consisted of the following (in millions):
U.S. | State & | |||||||||||||||
Federal | Local | Foreign | Total | |||||||||||||
Six months ended June 30, 2007: |
||||||||||||||||
Current |
$ | .5 | $ | .3 | $ | .2 | $ | 1.0 | ||||||||
Non-current |
| | 1.4 | 1.4 | ||||||||||||
Deferred |
| 1.4 | | 1.4 | ||||||||||||
$ | .5 | $ | 1.7 | $ | 1.6 | $ | 3.8 | |||||||||
OxyVinyls is subject to audit by taxing authorities in various tax jurisdictions. Management
believes that any resulting adjustments to OxyVinyls tax liabilities would not have a material
adverse impact on its financial position or results of operations.
OxyVinyls paid taxes of $.8 million during the six months ended June 30, 2007.
(13) RELATED-PARTY TRANSACTIONS
OxyVinyls sells PVC to PolyOne under the terms of a sales agreement that expires on December
31, 2013. PolyOne has the right to renew this agreement for two five-year periods. The agreement
requires PolyOne and its majority affiliates to purchase their annual PVC requirements in North
America in excess of 290 million pounds from OxyVinyls. For the first 880 million pounds of PVC
supplied in any calendar year, PolyOne will pay a price based upon cost and other market
considerations. PolyOne will purchase all volumes over 880 million pounds in any calendar year at
a competitive market price. (See Note 15.)
OxyVinyls sells VCM to OCC and PolyOne under the terms of separate sales agreements that
expire on December 31, 2013. PolyOne has a right to renew their agreement for two five-year
periods. The agreements require that OCC and PolyOne purchase all of their VCM requirements for
production of PVC in North America from OxyVinyls at market price. Under the terms of the
agreements, PolyOne and OCC receive an integration credit on the first 210 million and 215 million
pounds purchased in any year, respectively, to compensate for surrendered
purchasing power on major feedstocks. Additionally, under the terms of a new agreement entered
into in 2005 that expires on December 31, 2009, OxyVinyls sells a limited quantity of VCM to OCC.
(See Note 15.)
OxyVinyls sales of VCM to OCC under the terms of these agreements were approximately $4.3
million for the six months ended June 30, 2007. OxyVinyls sales of PVC and VCM to PolyOne under
the terms of these agreements were approximately $152 million for the six months ended June 30,
2007.
OxyVinyls sells chlor-alkali and other specialty products to OCC under the terms of a sales
agreement that expires on December 31, 2013. This agreement requires OCC to purchase at a
market-related price all of these products produced by OxyVinyls that are not required for its
internal uses. This agreement further requires OxyVinyls to pay OCC a fee for marketing excess
chlor-alkali products to third parties. OxyVinyls sold $71.1 million of chlor-alkali and specialty
products to OCC during the six months ended June 30, 2007. OxyVinyls paid a marketing fee of $5.5
million to OCC during the six months ended June 30, 2007.
16
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(13) RELATED-PARTY TRANSACTIONS (continued)
OxyVinyls purchases ethylene from Equistar Chemicals LP (Equistar), an affiliate
of Lyondell Chemical Corporation (Lyondell), an available-for-sale cost method investment of OPC
as of June 30, 2007, under the terms of an agreement. OxyVinyls purchases ethylene for the Deer
Park VCM facility and the LaPorte VCM facility based on a market related price, as defined in the
agreement. The agreement expires on December 31, 2018, with decreasing volume requirements in
years 2014 through 2018. OxyVinyls purchased $121.1 million of ethylene from Equistar under the
terms of these agreements during the six months ended June 30, 2007. In addition, OxyMar purchased
ethylene of $159.6 from Equistar during the six months ended June 30, 2007. (See Note 15.)
OxyVinyls purchases chlorine from Sunbelt Chlor Alkali Partnership, an equity investee of
PolyOne (Sunbelt), under the terms of an agreement that expires on December 31, 2094. This
agreement requires OxyVinyls to purchase at a market-related price, less a discount, all chlorine
produced by Sunbelt at its chlorine manufacturing facility in McIntosh, Alabama, up to a maximum of
250 thousand tons per year. OxyVinyls purchased $33.9 million of chlorine from Sunbelt under the
terms of this agreement during the six months ended June 30, 2007. (See Note 15.)
Pursuant to raw material purchase agreements, OxyMar purchases substantially all of its
principal raw materials at approximate market prices from OCC. Total chlorine purchased from OCC
in the six months ended June 30, 2007 was $105.1 million.
OCC is engaged, under the terms of an operating agreement, to operate and maintain OxyMars
manufacturing facility, the cost of which is reimbursed to OCC by OxyMar. OxyMar also reimburses
OCC for steam, electricity, natural gas and other raw materials, along with other operating costs,
which totaled $42.3 million for the six months ended June 30, 2007.
OxyVinyls incurs costs charged by OCC and PolyOne under the terms of various service and
shared facilities agreements. These agreements are in effect generally so long as services
continue to be provided between parties and/or facilities continue to be shared. Under the
provisions of these agreements, OxyVinyls receives from
and makes payments to PolyOne and OCC for shared facilities at Louisville, Kentucky, Pedricktown,
New Jersey and Pasadena, Texas. In some cases, the agreements contain renewal options at
negotiated prices. The net amounts of these costs were approximately $.4 million for the six
months ended June 30, 2007. (See Note 15.) Additionally, OxyVinyls incurred the following costs
payable to OCC and PolyOne (in millions):
OCC | PolyOne | |||||||
Administrative and other support services: |
||||||||
For the six months ended June 30, 2007 |
$ | 10.0 | $ | .7 | ||||
OxyMar support and services fee: |
||||||||
For the six months ended June 30, 2007 |
$ | 2.5 | $ | | ||||
Net railcar rent expense: |
||||||||
For the six months ended June 30, 2007 |
$ | 1.4 | $ | |
17
OXY VINYLS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(14) VALUATION AND QUALIFYING ACCOUNTS
Severance expense of $.2 million was recorded for the six months ended June 30, 2007 for cost
reduction and restructuring programs, and is reflected as selling, general and administrative and
other operating expenses.
The following table presents the activity of certain valuation and qualifying accounts for the
six months ended June 30, 2007 (in millions):
Balance at | Balance at | |||||||||||||||||||
Beginning | Charged to | End of | ||||||||||||||||||
of Period | Expense | Deductions | Adjustment | Period | ||||||||||||||||
For the six months ended June 30, 2007: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 1.3 | $ | | $ | | $ | | $ | 1.3 | ||||||||||
Severance and other obligations |
$ | .6 | $ | .2 | $ | (.7 | )(a) | $ | | $ | .1 | |||||||||
Deferred tax valuation allowance |
$ | 17.9 | $ | 6.3 | $ | | $ | | $ | 24.2 |
(a) | Payments under the Partnerships plan for termination and relocation of certain employees |
(15) SUBSEQUENT EVENTS
On July 6, 2007, OCC PVC Compound purchased the 24 percent interest in OxyVinyls, owned by the
PolyOne Limited Partner, for $261 million. Subsequent to the purchase, OxyVinyls is fully owned by
subsidiaries of OCC.
OxyVinyls retains the existing PVC and VCM supply agreements with PolyOne, as well as various
service and shared facilities agreements. (See Note 13.) OxyVinyls also retains the existing
chlorine supply agreement with Sunbelt. (See Note 13.)
OxyMar paid the outstanding Bond principal of $6.8 million on August 15, 2007. (See Note 6.)
OxyVinyls and OxyMar terminated all loan arrangements with OPIC as of July 31, 2007, at which
time the outstanding loan amounts were settled through capital contributions from the partners of
OxyVinyls and OxyMar. (See Note 7.)
In July 2007, OPC completed the sale of its remaining shares of Lyondell common stock.
OxyVinyls purchases ethylene from Equistar, a related party, which is an affiliate of Lyondell.
(See Note 13.)
18