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Exhibit 99.2
Audited Financial Statements
SunBelt Chlor Alkali Partnership
Years Ended December 31, 2008 and 2007
With Report of Independent Registered Public Accounting Firm
Years Ended December 31, 2008 and 2007
With Report of Independent Registered Public Accounting Firm
SunBelt Chlor Alkali Partnership
Audited Financial Statements
Years Ended December 31, 2008 and 2007
Contents
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| Audited Financial Statements | ||||
| 2 | ||||
| 3 | ||||
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Table of Contents
Report of Independent Registered Public Accounting Firm
The Partners
SunBelt Chlor Alkali Partnership
SunBelt Chlor Alkali Partnership
We have audited the accompanying balance sheets of SunBelt Chlor Alkali Partnership as of December 31, 2008 and 2007, and the related statements of income, partners’ capital (deficit), and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the 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. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SunBelt Chlor Alkali Partnership at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
| /s/ ERNST & YOUNG LLP | ||||
Cleveland, Ohio
February 20, 2009
February 20, 2009
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SunBelt Chlor Alkali Partnership
Balance Sheets
| December 31 | ||||||||
| 2008 | 2007 | |||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 13,230 | $ | 1,000 | ||||
| Receivable from OxyVinyls, LP | 2,142,230 | 6,026,774 | ||||||
| Receivables from partners | 17,351,616 | 18,807,135 | ||||||
| Inventories | 1,804,600 | 1,813,647 | ||||||
| Prepaid expenses and other current assets | 1,130,608 | 1,133,302 | ||||||
| Total current assets | 22,442,284 | 27,781,858 | ||||||
| Property, plant, and equipment, net | 106,956,187 | 108,811,756 | ||||||
| Deferred financing costs, net | 721,330 | 801,478 | ||||||
| Total assets | $ | 130,119,801 | $ | 137,395,092 | ||||
Liabilities and partners’ capital | ||||||||
| Current liabilities: | ||||||||
| Amounts payable to partners | $ | 7,466,830 | $ | 8,837,007 | ||||
| Current portion of long-term debt | 12,187,500 | 12,187,500 | ||||||
| Total current liabilities | 19,654,330 | 21,024,507 | ||||||
| Long-term debt | 97,500,000 | 109,687,500 | ||||||
| Partners’ capital | 12,965,471 | 6,683,085 | ||||||
| Total liabilities and partners’ capital | $ | 130,119,801 | $ | 137,395,092 | ||||
See accompanying notes.
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SunBelt Chlor Alkali Partnership
Income Statements
| Year Ended December 31 | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
| Revenues | $ | 173,019,093 | $ | 180,555,764 | $ | 186,742,652 | ||||||
| Operating costs and expenses: | ||||||||||||
| Cost of sales | 70,475,462 | 62,255,321 | 56,316,784 | |||||||||
| Depreciation and amortization | 15,163,235 | 14,866,744 | 14,554,150 | |||||||||
| Loss on disposal of assets | 2,125,117 | 118,249 | 282,062 | |||||||||
| Administrative and general expenses | 11,663,995 | 12,042,123 | 11,308,994 | |||||||||
| 99,427,809 | 89,282,437 | 82,461,990 | ||||||||||
| Operating income | 73,591,284 | 91,273,327 | 104,280,662 | |||||||||
| Other income | 372,631 | — | — | |||||||||
| Interest expense | (8,811,563 | ) | (9,692,719 | ) | (10,573,875 | ) | ||||||
| Interest income | 374,620 | 802,271 | 853,823 | |||||||||
| Income before taxes | 65,526,972 | 82,382,879 | 94,560,610 | |||||||||
| State income tax expense | (435,000 | ) | (376,271 | ) | — | |||||||
| Net income | $ | 65,091,972 | $ | 82,006,608 | $ | 94,560,610 | ||||||
See accompanying notes. | ||||||||||||
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SunBelt Chlor Alkali Partnership
Statements of Partners’ Capital (Deficit)
| Partners | ||||||||||||
| Olin | 1997 | |||||||||||
| SunBelt Inc. | Venture, Inc. | Total | ||||||||||
| Balance at December 31, 2005 | $ | (2,291,000 | ) | $ | (2,291,000 | ) | $ | (4,582,000 | ) | |||
| Cash distributions to partners | (47,602,274 | ) | (47,602,274 | ) | (95,204,548 | ) | ||||||
| Net income | 47,280,305 | 47,280,305 | 94,560,610 | |||||||||
| Balance at December 31, 2006 | (2,612,969 | ) | (2,612,969 | ) | (5,225,938 | ) | ||||||
| Cash distributions to partners | (35,048,793 | ) | (35,048,793 | ) | (70,097,585 | ) | ||||||
| Net income | 41,003,304 | 41,003,304 | 82,006,608 | |||||||||
| Balance at December 31, 2007 | 3,341,542 | 3,341,542 | 6,683,085 | |||||||||
| Cash distributions to partners | (29,404,793 | ) | (29,404,793 | ) | (58,809,586 | ) | ||||||
| Net income | 32,545,986 | 32,545,986 | 65,091,972 | |||||||||
| Balance at December 31, 2008 | $ | 6,482,735 | $ | 6,482,735 | $ | 12,965,471 | ||||||
See accompanying notes.
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SunBelt Chlor Alkali Partnership
Statements of Cash Flows
| Year Ended December 31 | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Operating activities | ||||||||||||
| Net income | $ | 65,091,972 | $ | 82,006,608 | $ | 94,560,610 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 15,163,235 | 14,866,744 | 14,554,150 | |||||||||
| Loss on disposal of assets | 2,125,117 | 118,249 | 282,062 | |||||||||
| Accretion of discount | — | — | (328,493 | ) | ||||||||
| Changes in assets and liabilities: | ||||||||||||
| Receivables from OxyVinyls | 3,884,544 | 1,705,864 | (717,183 | ) | ||||||||
| Receivables from partners | 1,455,519 | (4,503,853 | ) | 3,633,362 | ||||||||
| Inventories | 9,047 | (206,513 | ) | 462,762 | ||||||||
| Amounts payable to partners | (1,370,177 | ) | (1,096,006 | ) | 2,715,700 | |||||||
| Accrued interest on long-term debt | — | — | — | |||||||||
| Prepaid expenses and other assets | 2,694 | 327,468 | (169,169 | ) | ||||||||
| Net cash provided by operating activities | 86,361,951 | 93,218,561 | 114,993,801 | |||||||||
Investing activities | ||||||||||||
| Purchases of property, plant and equipment | (15,352,635 | ) | (10,933,476 | ) | (8,043,515 | ) | ||||||
| Proceeds on sale of property, plant and equipment | — | — | 70,256 | |||||||||
| Purchases of short-term investments | — | — | (22,697,270 | ) | ||||||||
| Proceeds from maturity of short-term investments | — | — | 23,025,763 | |||||||||
| Net cash used by investing activities | (15,352,635 | ) | (10,933,476 | ) | (7,644,766 | ) | ||||||
Financing activities | ||||||||||||
| Cash distributions to partners | (58,809,586 | ) | (70,097,585 | ) | (95,204,548 | ) | ||||||
| Principal payments on long-term debt | (12,187,500 | ) | (12,187,500 | ) | (12,187,500 | ) | ||||||
| Net cash used by financing activities | (70,997,086 | ) | (82,285,085 | ) | (107,392,048 | ) | ||||||
| Net increase (decrease) in cash | 12,230 | — | (43,013 | ) | ||||||||
| Cash at beginning of year | 1,000 | 1,000 | 44,013 | |||||||||
| Cash and cash equivalents at end of year | $ | 13,230 | $ | 1,000 | $ | 1,000 | ||||||
See accompanying notes.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements
December 31, 2008 and 2007
1. Organization
SunBelt Chlor Alkali Partnership (the Partnership) was formed on August 23, 1996 under a Partnership Agreement, between 1997 Chlor Alkali Venture, Inc. and Olin SunBelt Inc. (the Partners). 1997 Chlor Alkali Venture, Inc. is a wholly owned subsidiary of PolyOne Corporation (formerly The Geon Company) and Olin SunBelt Inc. is a wholly owned subsidiary of the Olin Corporation. Each of the Partners has a 50% interest in the Partnership. The Partnership Agreement provides that the capital investment of the Partners will be maintained and the Partnership’s income or loss will be allocated to the Partners based on their ownership interest percentages.
The Partnership was formed for the purpose of construction and operation of a Chlor-Alkali facility. The facility, which is located in McIntosh, Alabama produces chlorine, caustic soda, and hydrogen.
2. Significant Accounting Policies
Cash and Cash Equivalent
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents held by the Partnership as of December 31, 2008 and 2007.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Property, Plant, and Equipment and Depreciation
Property, plant, and equipment are carried at cost. Major renewals and betterments are capitalized. Maintenance and repair expenditures which do not improve or extend the life of the respective assets are expensed as incurred. Depreciation for all plant and equipment is computed using the straight-line method over their estimated useful lives. Depreciation expense is excluded from cost of goods sold and presented with amortization expense separately in the Income Statements. The ranges of estimated useful lives are as follows:
| Land improvements | 20 years | |
| Buildings | 20 years | |
| Machinery and equipment | 5—20 years |
Long-lived assets are assessed for impairment when operating profits for the related business or a significant change in the use of an asset indicate that their carrying value may not be recoverable.
Deferred Financing Costs
The costs incurred by the Partnership in obtaining its long-term debt have been capitalized and are being amortized over the term of the debt using the effective interest method.
Financial Instruments
The carrying amount of long-term debt approximates its fair value. The fair value of the debt is estimated based on the present value of the underlying cash flow discounted at the Partnership’s estimated borrowing rate.
Revenue Recognition
The Partnership recognizes revenues at the point of passage of title which is based on shipping terms.
Shipping and Handling Costs
Shipping and handling costs are reflected in costs of sales.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
2. Significant Accounting Policies (continued)
Income Taxes
No provision is made for income taxes other than the Texas state gross margin tax which became effective January 1, 2007, as the Partnership’s results of operations are includable in the tax returns of the Partners. The Partnership paid taxes of $435,000 in 2008 relating to the year ended December 31, 2007. The Partnership paid no taxes for the year ended December 31, 2008.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties
Since the Partnership’s major products are commodities, significant changes in the prices of chemical products could have a significant impact on the results of operations for any particular period. The Partnership had one major chlorine customer, OxyVinyls LP, during the periods presented, which accounted for 31.2%, 38.3%, and 39.9% of total sales for the years ended December 31, 2008, 2007, and 2006, respectively.
3. Inventories
Inventories are comprised as follows:
| December 31 | ||||||||
| 2008 | 2007 | |||||||
| Finished goods | $ | 803,826 | $ | 657,326 | ||||
| Production parts | 1,000,774 | 1,156,321 | ||||||
| $ | 1,804,600 | $ | 1,813,647 | |||||
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
4. Property, Plant, and Equipment, net
Property, plant, and equipment, net are comprised as follows:
| December 31 | ||||||||||||
| 2008 | 2007 | |||||||||||
| Land and land improvements | $ | 4,862,826 | $ | 4,862,826 | ||||||||
| Building | 4,084,254 | 3,869,389 | ||||||||||
| Machinery and equipment | 236,246,567 | 215,630,740 | ||||||||||
| Construction in process | 1,807,849 | 14,173,958 | ||||||||||
| 247,001,496 | 238,536,913 | |||||||||||
| Less allowance for depreciation | 140,045,309 | 129,725,157 | ||||||||||
| $ | 106,956,187 | $ | 108,811,756 | |||||||||
5. Transactions With Affiliates
The Partnership has various management service agreements, dated August 23, 1996, with the Olin Corporation. These agreements, which include compensation for managing the facility, an asset utilization fee, a fleet fee, and a distribution fee, have terms from five to ten years with five year price adjustment renewals. Charges for these services were $8,150,580 $8,309,350 and $7,815,034 for 2008, 2007, and 2006, respectively, and have been included within administrative and general expenses in the income statements. The Partnership’s cash policy was changed during 2003 to not make distributions to the Partners until the cash balance was sufficient to cover both the debt principal payments and interest expense for the year. Contributions from the Partners were discontinued with this policy change and the manufacturing costs were paid from Partnership receipts. The Partnership made distributions to its Partners totaling $58,809,586, $70,097,585, and $95,204,548 in 2008, 2007, and 2006, respectively.
In accordance with the Partnership Operating Agreement, the majority of chlorine produced by the Partnership is sold to OxyVinyls LP which was 24% owned by PolyOne Corporation until July 6, 2007. The remaining chlorine and all of the caustic soda produced by the Partnership is marketed and distributed by the Olin Corporation.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
6. Long-Term Debt
On December 23, 1997, the Partnership borrowed $195,000,000 in a private placement of debt. The debt is secured by the property, plant, equipment, and inventory of the Partnership. The term of the loan is 20 years at an interest rate of 7.23%. The first principal payment of $12,187,500 was paid on December 22, 2002, with equal annual payments due through December 22, 2017. Interest payments are payable semi-annually in arrears on June 22 and December 22 of each year. Interest payments totaled $8,811,563, $9,692,719, and $10,573,875 in 2008, 2007, and 2006, respectively. The debt is guaranteed by the Partners.
7. Leases
The Partnership has operating leases for certain property, machinery, and equipment. At December 31, 2008, future minimum lease payments under noncancelable operating leases are as follows:
| 2009 | $ | 1,688,076 | ||
| 2010 | 1,688,076 | |||
| 2011 | 1,688,076 | |||
| 2012 | 1,688,076 | |||
| 2013 | 1,688,076 | |||
| Thereafter | 3,413,018 | |||
| Total minimum future lease payments | $ | 11,853,398 | ||
Rent expense was $1,743,882, $2,047,601, and $2,150,485 for the years ended December 31, 2008, 2007, and 2006, respectively.
8. Commitments and Contingencies
The Partnership is subject to legal proceedings and claims that arise in the ordinary course of its business. Management evaluates each claim and provides for any potential loss when the loss is probable and reasonably estimable. In the opinion of management, the ultimate liability with respect to these actions will not materially affect the financial condition, results of operations or cash flows of the Partnership.
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