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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
Commission File No. 1-9699
BORDEN CHEMICALS AND PLASTICS
LIMITED PARTNERSHIP
Delaware 31-1269627
(State of organization) (I.R.S. Employer Identification No.)
Highway 73, Geismar, Louisiana 70734 504-673-6121
(Address of principal executive offices) (Registrant's telephone number)
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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 was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
--- ---
Number of Common Units outstanding as of the close of business on August
10, 1995: 36,750,000.
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
(In thousands except per Unit data) June 30, 1995 June 24, 1994
------------- -------------
Revenues
Net trade sales $157,043 $119,661
Net affiliated sales 30,620 30,010
-------- --------
Total revenues 187,663 149,671
-------- --------
Expenses
Cost of goods sold
Trade 106,867 88,831
Affiliated 22,612 22,906
Marketing, general and administrative expenses 5,588 5,059
Interest expense 4,716 4,108
Incentive distribution to General Partner 9,818 2,654
Other (income) and expense, including
minority interest 1,308 849
-------- --------
Total expenses 150,909 124,407
-------- --------
Income before extraordinary item 36,754 25,264
Extraordinary loss on early extinguishment of
debt (6,912) 0
-------- --------
Net income $ 29,842 $ 25,264
======== ========
PER UNIT DATA, NET OF 1% GENERAL PARTNER INTEREST:
Income per Unit before extraordinary loss $ 0.99 $ 0.68
Extraordinary loss per Unit (0.19) 0.00
-------- --------
Net income per Unit $ 0.80 $ 0.68
======== ========
Average # of Units outstanding during the period 36,750 36,750
======== ========
Cash distributions declared per Unit $ 1.42 $ 0.65
======== ========
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Six Months
Ended Ended
(In thousands except per Unit data) June 30, 1995 June 24, 1994
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Revenues
Net trade sales $319,531 $214,482
Net affiliated sales 82,938 54,170
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Total revenues 402,469 268,652
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Expenses
Cost of goods sold
Trade 189,035 175,321
Affiliated 48,935 43,321
Marketing, general and administrative expenses 11,119 9,565
Interest expense 8,801 7,902
Incentive distribution to General Partner 22,893 2,654
Other (income) and expense, including
minority interest 1,445 997
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Total expenses 282,228 239,760
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Income before extraordinary item 120,241 28,892
Extraordinary loss on early extinguishment of
debt (6,912) 0
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Net income $113,329 $ 28,892
======== ========
PER UNIT DATA, NET OF 1% GENERAL PARTNER INTEREST:
Income per Unit before extraordinary loss $ 3.24 $ 0.78
Extraordinary loss per Unit (0.19) 0.00
-------- --------
Net income per Unit $ 3.05 $ 0.78
======== ========
Average # of Units outstanding during the
period 36,750 36,750
======== ========
Cash distributions declared per Unit $ 3.19 $ 0.86
======== ========
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
(In thousands) June 30, 1995 June 24, 1994
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CASH FLOWS FROM OPERATIONS
Net Income $113,329 $ 28,892
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on early extinguishment
of debt 6,912 0
Depreciation 23,447 21,845
Decrease (increase) in receivables 10,660 (17,989)
(Increase) decrease in inventories, net of
effect from acquired business (14,406) 2,122
Increase in payables 1,125 4,059
(Decrease) increase in incentive distribution
payable (2,047) 2,654
Increase (decrease) in accrued interest 1,322 (270)
Other, net 878 2,804
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141,220 44,117
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CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition (100,376) 0
Capital expenditures (5,822) (9,451)
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(106,198) (9,451)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 200,000 0
Proceeds from short-term borrowings 65,000 0
Payment of debt issuance costs (7,466) 0
Repayment of long-term debt, including
prepayment penalty (156,912) 0
Cash distributions paid (126,835) (14,478)
-------- --------
(26,213) (14,478)
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Increase in cash and equivalents 8,809 20,188
Cash and equivalents at beginning of period 74,126 9,054
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Cash and equivalents at end of period $ 82,935 $ 29,242
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid during the period $ 7,479 $ 8,172
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31
(In thousands) 1995 1995
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ASSETS
Cash and equivalents $ 82,935 $ 74,126
Accounts receivable
Trade 90,016 84,330
Affiliated 20,955 37,301
Inventories
Finished goods 37,669 19,591
Raw materials 9,197 8,540
Other current assets 1,783 2,831
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Total current assets $242,555 $226,719
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Investments in and advances to affiliated companies 4,074 3,772
Other assets 37,624 29,094
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41,698 32,866
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Land 16,370 12,051
Buildings 45,894 37,931
Machinery and equipment 608,942 523,517
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671,206 573,499
Less accumulated depreciation (311,874) (290,180)
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359,332 283,319
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$643,585 $542,904
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LIABILITIES AND PARTNERS' CAPITAL
Accounts and drafts payable $ 51,831 $ 50,706
Cash distributions payable 52,811 60,999
Short-term borrowing 65,000 0
Current portion of long-term debt 0 30,000
Incentive distribution payable to General Partner 9,818 11,865
Accrued interest 3,167 1,845
Other accrued liabilities 12,973 14,330
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Total current liabilities 195,600 169,745
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Long-term debt 200,000 120,000
Minority interest in consolidated subsidiary 1,899 1,953
Other long-term liabilities 5,669 5,471
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207,568 127,424
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Partners' capital
Common Unitholders 239,407 244,443
General Partner 1,010 1,292
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Total partner's capital 240,417 245,735
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$643,585 $542,904
======== ========
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
(In thousands)
LIMITED GENERAL
PARTNERS PARTNER TOTAL
-------- ------- ---------
Balances December 31, 1993 $ 228,862 $ 1,343 $ 230,205
Net income 28,603 289 28,892
Cash distributions declared (31,605) (346) (31,951)
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Balances June 24, 1994 $ 225,860 $ 1,286 $ 227,146
========= ======== =========
Balances December 31, 1994 $ 244,443 $ 1,292 $ 245,735
Net income 112,196 1,133 113,329
Cash distributions declared (117,232) (1,415) (118,647)
--------- -------- ---------
Balances June 30, 1995 $ 239,407 $ 1,010 $ 240,417
========= ======== =========
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except Unit and per Unit data)
1. Interim Financial Statements
The accompanying unaudited interim consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments, which
in the opinion of Borden Chemicals and Plastics Management, Inc. (the "General
Partner") are necessary for a fair statement of the results for the interim
periods. Results for the interim periods are not necessarily indicative of the
results for the full year.
Per Unit data in the accompanying financial statements is derived by
subtracting the General Partner's 1% interest from the income captions and
dividing the results by the Average Units Outstanding.
2. Acquisition and Financing
On May 2, 1995, the Partnership, through its subsidiary operating
partnership ("the Operating Partnership"), completed the purchase of Occidental
Chemical Corporation's ("OxyChem") Addis, Louisiana PVC manufacturing facility
and related assets. The Addis Facility has an annual proven production capacity
of 450 million pounds per year, which will increase the Operating Partnership's
stated annual capacity for PVC resin production by approximately 50%. The cash
purchase price for the Addis assets was $100,376, subject to certain customary
post closing adjustments.
On May 1, 1995 the Operating Partnership issued $200,000 aggregate
principal amount of senior unsecured notes (the Senior Notes). The net proceeds
from this offering were used to prepay the previously outstanding $150,000
aggregate principal amount of existing notes plus related prepayment premium of
$6,912 reflected as an extraordinary loss in the second quarter of 1995, and
accrued interest. The remaining proceeds were used to fund a portion of the
purchase price of the Addis Facility.
A $100 million revolving credit facility was obtained during the
quarter. Borrowings under this facility were $65 million at June 30, 1995.
The following pro forma financial information gives effect to the
transactions discussed above on the results of operations for the six months
ended June 30, 1995 and June 24, 1994 as if the transactions occurred on
January 1, 1994.
Six Months Ended
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June 30, 1995 June 24, 1994
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Total Revenues $457,275 $333,316
Income before extraordinary item:
Income $124,602 $ 28,940
Income per Unit $ 3.36 $ 0.78
3. Environmental and Legal Proceedings
On October 27, 1994, the U.S. Department of Justice (DOJ), at the
request of the U.S. Environmental Protection Agency (the EPA), filed an action
against the Partnership and the General Partner in the U.S. District Court for
the Middle District of Louisiana. The complaint seeks facility-wide corrective
action and civil penalties for alleged violations of the federal Resource,
Conservation and Recovery Act (RCRA), the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), and the Clean Air Act at the
Geismar
complex. If the Partnership is unsuccessful in this proceeding, or otherwise
subject to RCRA permit requirements, it may be subject to three types of costs:
(i) corrective action; (ii) penalties; and (iii) costs needed to obtain a RCRA
permit. Portions of such costs could be subject to the Environmental Indemnity
Agreement (EIA) discussed below.
The Partnership is subject to extensive federal, state and local
environmental laws and regulations which impose limitations on the discharge of
pollutants into the air and water, establish standards for the treatment,
storage, transportation and disposal of solid and hazardous wastes, and impose
obligations to investigate and remediate contamination in certain circumstances.
The Partnership has expended substantial resources, both financial and
managerial, and it anticipates that it will continue to do so in the future.
Failure to comply with the extensive federal, state and local environmental laws
and regulations could result in significant civil or criminal penalties, and
remedation costs.
Under the EIA, Borden has agreed, subject to certain specified
limitations, to indemnify the Partnership in respect of environmental
liabilities arising from facts or circumstances that existed and requirements in
effect prior to November 30, 1987, the date of the initial sale of the Geismar
and Illiopolis plants to the Partnership. The Partnership is responsible for
environmental liabilities arising from facts or circumstances that existed and
requirements that become effective on or after such date. With respect to
certain environmental liabilities that may arise from facts or circumstances
that existed and requirements in effect both prior to and after such date,
Borden and the Partnership will share liabilities on an equitable basis
considering all of the facts and circumstances including, but not limited to,
the relative contribution of each of the matter and the amount of time each has
operated the assets in question (to the extent relevant). No claims can be made
under the EIA after November 30, 2002, and no claim can, with certain
exceptions, be made with respect to the first $500 of liabilities which Borden
would otherwise be responsible for thereunder in any year, but such excluded
amounts shall not exceed $3,500 in the aggregate. Excluded amounts under the
EIA have aggregated approximately $2,700 through June 30, 1995.
In connection with potential environmental matters, a $4,000 provision
was included in the Partnership's third quarter 1994 operating results. Because
of various factors (including the nature of any settlement with appropriate
regulatory authorities or the outcome of any proceeding, actual environmental
conditions, the scope of the application of the EIA and the timing of actions,
if any, required to be taken by the Partnership), the Partnership cannot
reasonably estimate the full range of costs it might incur with respect to the
environmental matters discussed herein. The costs incurred in any quarter or
year could be material to the Partnership's results of operations for such
quarter or year, although, on the basis of the relevant facts and circumstances,
management believes this to be unlikely. However, management believes that such
costs should not have a material adverse effect on the Partnership's financial
position.
In addition, the Partnership is subject to various other legal
proceedings and claims which arise in the ordinary course of business. In the
opinion of the management of the Partnership, based upon the information it
presently possesses, the amount of the ultimate liability for these proceedings
and claims taking into account its insurance coverage, including its risk
retention program and the EIA with Borden, would not materially affect the
financial position or results of operations of the Partnership.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1995 COMPARED TO QUARTER ENDED JUNE 24, 1994
Total Revenues
Total revenues during the second quarter of 1995 increased $38.0 million
or 25.4% to $187.7 million from $149.7 million in the second quarter of 1994.
This increase was the net result of a $41.5 million increase in PVC Polymers
Products revenues, an $8.3 million decrease in Methanol and Derivatives and a
$4.8 million increase in Nitrogen Products revenues.
Total revenues for PVC Polymers increased 49.5% as a result of a 19%
increase in selling prices and a 26% increase in sales volumes. These increases
were due to the purchase of the Addis facility and the increased demand for PVC
resins resulting from strength in the construction and automotive industries, as
well as other industries.
Total revenues for Methanol and Derivatives decreased 17.6% as a result
of a 12% decrease in selling prices and a 7% decrease in sales volumes. The
decreases in price and volume were due to a significant drop in demand for MTBE,
a downstream application of methanol as a gasoline additive.
Total revenues for Nitrogen Products increased 25% as a result of a 39%
increase in selling prices offset by a 10% decrease in sales volumes. Ammonia
selling prices increased significantly fueled primarily by strong domestic
demand and the worldwide tightness in the ammonia market. Urea volumes declined
due to reduced domestic demand as a fertilizer caused by poor weather; however,
selling prices remained well over 1994 levels.
Costs of Goods Sold
Total cost of goods sold increased 16.9% to $129.5 million in the
current period from $111.7 million in the year-ago period. The increase was a
result of the increased volumes discussed above with raw material costs
remaining constant as unit cost decreases for chlorine and natural gas were
offset by increased ethylene costs. Expressed as a percentage of total revenues,
cost of goods sold decreased to 69% of total revenues in 1995 from 75% in 1994,
resulting in improved gross margins and net income for the Partnership.
Gross margins for PVC Polymers Products increased 124% as a result of
the improved selling prices and volumes discussed above, partially offset by a
net increase in raw material costs.
Gross margins for Methanol and Derivatives decreased 14% as a result of
the decreased volumes and selling prices discussed above, offset by reduced
natural gas costs.
Gross margins for Nitrogen Products increased 26% on the strength of
significantly improved urea and ammonia selling prices and reduced natural gas
costs.
Incentive Distribution to General Partner
An incentive distribution to the General Partner of $9.8 million was
generated in the second quarter of 1995 as a result of cash distribution to
Unitholders of $1.42 per Unit exceeding $0.3647 per Unit ("the Target
Distribution"). The distributions generated in the second quarter of 1994 of
$0.65 per Unit resulted in an incentive distribution of $2.7 million to the
General Partner.
Extraordinary Loss on Early Extinguishment of Debt
The Partnership incurred a loss of $6.9 million, or 19 cents per Unit,
in the second quarter of 1995 as a result of a prepayment premium on $150
million in debt retired in the quarter. See Acquisition and Financing.
Net Income
Net income was $29.8 million compared to $25.3 million in 1994. As
discussed above, the primary reasons for the improved operating performance were
significant selling price increases and volume improvements in PVC resins and
nitrogen products, offset partially by declines in methanol and derivatives,
increased incentive distribution of the General Partner, and the extraordinary
loss.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 24, 1994
Total Revenues
Total revenues during the first six months of 1995 increased $133.8
million or 49.8% to $402.5 million from $268.7 million in the first six months
of 1994. This increase was the result of a $76.4 million increase in PVC
Polymers Products revenues, a $37.8 million increase in Methanol and Derivatives
revenues and a $19.7 million increase in Nitrogen Products revenues.
Total revenues for PVC Polymers Products increased 50.0% as a result of
a 23% increase in selling prices and a 22% increase in sales volumes. These
increases were due to the purchase of the Addis facility and the increased
demand for PVC resins resulting from strength in the construction and automotive
industries, as well as other industries.
Total revenues for Methanol and Derivatives increased 45.1% as a net
result of a 48% increase in selling prices and a 2% decline in sales volumes.
These results reflect the historically high selling prices of the first quarter
of 1995 that decreased dramatically during the second quarter as demand for
MTBE declined.
Total revenues for Nitrogen Products increased 61.7% as a result of a
50% increase in selling prices and an 8% increase in sales volumes. Ammonia
selling prices increased significantly fueled primarily by strong domestic
demand and the worldwide tightness in the ammonia market. Urea selling prices
also showed significant improvements.
Cost of Goods Sold
Total cost of goods sold increased 8.9% to $238.0 million in the current
period from $218.6 million in the year ago period. The increase was a result of
the increased volumes discussed above substantially offset by an aggregate raw
material cost decrease of approximately 4% comprised of unit cost decreases for
chlorine and natural gas offset by increased ethylene costs. Expressed as a
percentage of total revenues, cost of goods sold decreased to 59% of total
revenues in 1995 from 81% in 1994, resulting in greatly improved gross margins
and net income for the Partnership.
Gross margins for PVC Polymers Products increased 262% as a result of
the improved selling prices and volumes discussed above, partially offset by a
net increase in raw material costs.
Gross margins for Methanol and Derivatives increased 164% as a result of
the increased volumes and significantly higher selling prices discussed above,
combined with reduced natural gas costs.
Gross margins for Nitrogen Products improved from a near break-even
position in 1994 to a profitable position in 1995 on the strength of
significantly improved urea and ammonia selling prices, improved volumes and
reduced natural gas costs.
Incentive Distribution to General Partner
The incentive distribution to the General Partner of $22.9 million was
generated in the first two quarters of 1995 as a result of the respective
quarters cash distributions to Unitholders exceeding the Target Distribution.
The distributions generated in the first quarter of 1994 did not exceed the
Target Distribution, resulting in no incentive distribution to the General
Partner; however, the second quarter distribution did exceed the Target
Distribution resulting in an incentive distribution of $2.7 million.
Extraordinary Loss on Early Extinguishment of Debt
The Partnership incurred a loss of $6.9 million, or 19 cents per Unit,
in the second quarter of 1995 as a result of a prepayment premium on $150
million in debt retired in the quarter. See Acquisition and Financing.
Net Income
Net income was $113.3 million compared to $28.9 million in 1994. As
discussed above, the primary reasons for the improved operating performance were
significant selling price increased in all product lines and volume improvements
in PVC resins and nitrogen products, and a net decrease in raw material costs.
Partially offsetting these improvements were the significant increase in the
incentive distribution to the General Partner and the extraordinary loss
incurred in the second quarter of 1995.
Liquidity and Capital Resources
Cash Flows from Operations. Cash provided by operations increased to
$141.2 million for the first half of 1995, as compared to $44.1 million for the
first half of 1994. The increase was primarily attributable to the improved
operating performance discussed above.
Cash Flows from Investing Activities. The Partnership paid $100.4
million for the acquisition of a PVC manufacturing facility in the second
quarter of 1995. See Acquisition and Financing. 1994 capital expenditures
reflect the completion of the urea granulation and expansion project.
Cash Flows from Financing Activities. The Partnership makes quarterly
distributions to Unitholders and the General Partner of 100% of its Available
Cash. Available Cash means generally, with respect to any quarter, the sum of
all cash receipts of the Partnership plus net reductions to reserves established
in prior quarters, less all of its cash disbursements and net additions to
reserves in such quarter. The General Partner may establish reserves to provide
for the proper conduct of the Partnership's business, to stabilize distributions
of cash to Unitholders and the General Partner and as necessary to comply with
the terms of any agreement or obligation of the Partnership.
Cash distributions of $126.8 million were made during the first half
1995 compared to $14.5 million in the year-ago period. These amounts reflect the
payment of cash distributions declared for the two immediately proceeding
quarters. Cash distributions with respect to interim periods are not necessarily
indicative of cash distributions with respect to a full year. Moreover, due to
the cyclical nature of the Partnership's business, past cash distributions are
not necessarily indicative of future cash distributions.
There are various seasonality factors affecting results of operations
and, therefore, cash distributions. In addition, the amount of Available Cash
constituting Cash from Operations for any period does not necessarily correlate
directly with net income for such period because various items and transactions
affect net income and Available Cash constituting Cash from Operations
differently. For example, depreciation reduces net income but does not affect
Available Cash constituting Cash from Operations, while changes in working
capital items (including receivables, inventories, accounts payable and other
items) generally do not affect net income but do affect such Available Cash.
Moreover, as provided for in the Partnership Agreements with respect to the
Partnership and the Operating Partnership, certain reserves may be established
which affect Available Cash constituting Cash from Operations but do not affect
cash balances in financial statements. Such reserves have generally been used to
set cash aside for debt service, capital expenditures and other accrued items.
Acquisition and Financing
On May 2, 1995, the Partnership, through the Operating Partnership,
completed the purchase of Occidental Chemical Corporation's Addis, Louisiana PVC
manufacturing facility and related assets. The Addis Facility has an annual
proven production capacity of 450 million pounds per year, which will increase
the Operating Partnership's stated annual capacity for PVC resin production by
approximately 50%. The cash purchase price for the Addis assets was $100.4
million.
On May 1, 1995, the Operating Partnership issued $200,000 aggregate
principal amount of senior unsecured notes (the Senior Notes). The proceeds from
this offering, net of $7.5 million of debt issuance costs, were used to prepay
the previously outstanding $150,000 aggregate principal amount of existing
notes plus a related $6.9 million prepayment premium. The remaining proceeds
were used to fund a portion of the purchase price of the Addis Facility.
Liquidity
The Partnership expects to satisfy its cash requirements, including the
requirements of the Addis Facility, through internally generated cash and
borrowings. In connection with the acquisition of the Addis Facility, the
Partnership entered into a Revolving Credit Facility which provides a $100.0
million line of credit for capital expenditures (including the acquisition),
working capital and general partnership purposes. Borrowings under the Revolving
Credit Facility were $65.0 million at June 30, 1995. The amount available under
the facility reduces to $75.0 million on January 1, 1996, $50.0 million on
January 1, 1997 and terminates December 31, 1997. The facility may be extended
for one year with the consent of the lenders. The Partnership has terminated its
previous $20.0 million credit facility.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
Louisiana Groundwater Remediation Settlement Agreement
------------------------------------------------------
In 1985, LDEQ and Borden, Inc. ("Borden") entered into a settlement
agreement (the "Settlement Agreement") that called for the implementation of a
long term groundwater and soil remediation program at the Geismar complex to
address contaminants, including ethylene dichloride ("EDC"). Also during this
time frame, Borden commenced closure of various units identified to have been
contributors to the EDC contamination underlying the Geismar complex. Borden and
the Partnership have implemented the Settlement Agreement, and have worked in
cooperation with the LDEQ to remediate the groundwater and soil contamination.
The Settlement Agreement contemplated, among other things, that Borden would
install a series of groundwater monitoring and recovery wells, and recovery
trench systems. The Partnership believes that it already has sufficiently
identified the extent of the groundwater plume. Nevertheless, the Partnership
intends to do additional drilling and testing for the purpose of addressing
issues raised by LDEQ concerning whether the extent of the groundwater
contamination has been identified. Borden has paid substantially all of the
costs to date of the Settlement Agreement. It is unknown how long the
remediation program will continue or whether the LDEQ will require the
Partnership to incur costs to take further remedial measures in response to data
generated by the planned additional testing. If the LDEQ requires the
Partnership to take further remedial measures, the Partnership anticipates that
a portion of such costs would be covered by an Environmental Indemnity
Agreement. The extent to which any costs for further remedial measures required
by LDEQ will be covered by the Environmental Indemnity Agreement will depend, in
large part, on whether such remedial measures respond to facts or circumstances
that existed and requirements in effect prior to November 30, 1987, the date of
the initial sale by Borden of the Geismar and Illiopolis plants to the
Partnership.
Federal Environmental Enforcement Proceeding
--------------------------------------------
On October 27, 1994, the U.S. DOJ acting at the request of the EPA filed
an action against the Operating Partnership, the Partnership, and the General
Partner in the United States District Court for the Middle District of Louisiana
("Geismar enforcement proceeding"). The complaint seeks civil penalties for
alleged violations of RCRA, CERCLA and the Clean Air Act at the Geismar
facility, as well as corrective action at that facility. Prior to the filing of
the complaint, the Partnership and DOJ had engaged in settlement discussions,
and the Partnership expects that such discussions will continue.
The federal government's primary allegations for which it seeks
penalties include claims that (i) the Partnership's export to South Africa of a
partially depleted mercuric chloride catalyst for recycling violated RCRA; (ii)
the Partnership should have applied for RCRA permit for operation of its
valorization of chlorinated residual ("VCR") unit and related tanks before
August 1991; and (iii) the Partnership should have applied for a RCRA permit for
the north trench sump at the Geismar complex because such sump allegedly stored,
or disposed of, hazardous waste. The government's allegations include other
claims related to these and other alleged RCRA violations, as well as claims of
alleged violations of immediate release reporting requirements under CERCLA and
requirements governing particulate matter emissions under the Clean Air Act. The
Partnership plans to vigorously defend all of the above allegations.
During the early 1990's, the Partnership sent partially depleted
mercuric chloride catalyst to a facility in South Africa for recovery of the
mercury. See the following "Export of Partially Depleted Mercuric Chloride
----------------------------------------------
Catalyst." In 1993, LDEQ had determined that the catalyst was to a hazardous
--------
waste. However, because of a belief by the EPA that the partially depleted
catalyst could be a hazardous waste and a reversal of LDEQ's 1993 determination,
and pending the outcome of the Geismar enforcement proceeding, the Partnership
has ceased exporting the partially depleted mercuric chloride catalyst for
recycling and is currently handling it as if it were a hazardous waste.
Accordingly, even if a court should determine that the partially depleted
catalyst was a hazardous waste when it was exported, the Partnership does not
anticipate that it would incur material additional expenditures to continue to
manage the partially depleted catalyst as a hazardous waste.
In 1991, as a protective filing, the Partnership applied for a hazardous
waste permit for the VCR unit and related tanks. In January 1994, in response to
a petition from the Partnership to LDEQ for a determination that the VCR unit
does not require a RCRA permit, LDEQ determined that the VCR unit is subject to
RCRA. The Partnership continues to maintain that the VCR unit is not subject to
RCRA and has filed appeals of LDEQ's determination in Louisiana State Courts.
In May 1994, the Partnership filed a Complaint for Declaratory Judgment
in the U.S. District Court in Baton Rouge seeking a determination that (i) the
partially depleted mercuric chloride catalyst was not a hazardous waste when it
was exported for recycling, (ii) the materials entering the VCR unit and related
tanks are not hazardous waste and (iii) the north trench sump does not require a
RCRA permit.
In May 1995, certain adjoining landowners at the Geismar complex filed a
motion to intervene in the Geismar enforcement proceedings claiming rights under
CERCLA and RCRA to protect their property interests. The Partnership plans to
vigorously defend against this intervention.
If the Partnership is unsuccessful in prosecuting its Declaratory
Judgment Action, or in defending itself against the Geismar enforcement
proceeding, it could be subject to three types of costs: (i) penalties, (ii)
corrective action, and (iii) costs needed to obtain a RCRA permit.
As to penalties, although the maximum statutory penalties that would
apply in a successful enforcement action by the United States would be in excess
of $150.0 million, the Partnership believes that, assuming the Partnership is
unsuccessful and based on information currently available to it and an analysis
of relevant case law and administrative decisions, the more likely amount of any
liability for civil penalties would not exceed several million dollars.
If the Partnership is unsuccessful in either the Declaratory Judgment
Action or the Geismar enforcement proceedings, it may also be subject to costs
for corrective action. The federal government also can require corrective action
for a facility subject to RCRA permit requirements. Corrective action could
require the Partnership to conduct investigatory and remedial activities at the
Geismar complex concurrently with the groundwater monitoring and remedial
program that the Partnership is currently conducting under the Settlement
Agreement with LDEQ. The DOJ has advised the Partnership that it intends to seek
facility-wide corrective action to address potential contamination at the
Geismar complex. EPA has indicated that it intends to evaluate the adequacy of
the existing groundwater remediation project performed under the Settlement
Agreement with LDEQ, and to determine the potential for other areas of
contamination on or near the Geismar complex. The cost of any corrective action
could be material, depending on the scope of such corrective action. However,
the actual cost of a facility-wide corrective action cannot be identified until
the EPA provides substantially more information to the Partnership.
If the Partnership is unsuccessful in either proceeding concerning its
challenge to the applicability of the RCRA permit requirements to the VCR unit
and related tanks, or the north trench sump, it will have to incur additional
permitting costs.
The Partnership estimates that its costs to complete the permitting
process for the VCR unit and related tanks would be approximately $1.0 million.
The Partnership believes that the costs for amending its pending RCRA permit
application to include the north trench sump would not be material.
Because of the complex nature of environmental insurance coverage and
the rapidly developing case law concerning such coverage, no assurance can be
given concerning the extent to which insurance may cover environmental claims
against the Partnership. However, insurance generally does not cover penalties
or the costs of obtaining permits.
Export of Partially Depleted Mercuric Chloride Catalyst
--------------------------------------------------------
During the early 1990's, the Partnership shipped partially depleted
mercuric chloride catalyst to the facility of Thor Chemicals S.A. (PTY) Limited
("Thor") in Cato Ridge, South Africa for recovery of mercury. In 1993 the
LDEQ determined that the partially depleted catalyst was not a hazardous waste,
although LDEQ reversed this position in 1994. The Partnership disagrees with
this reversal. The Partnership did not send mercury-containing sludge to the
Thor facility.
The Partnership believes that Thor's operations have included the
production of mercuric chloride catalyst and the recovery of mercury from
partially depleted catalyst. Recovery of mercury at Thor's facility was
discontinued in March 1994 when the Department of Health in South Africa refused
to renew a temporary license that had been granted to Thor. At such time, there
were drums of partially depleted catalyst at the facility which had been shipped
by the Partnership to Thor. In addition, in the spring of 1994 there were drums
of other materials at the Thor facility which the Partnership had not sent
there. According to Thor, less than 25% of the drums of material at the Thor
facility, had been shipped by the Partnership to Thor.
In February 1995, Thor and three of its management personnel were tried
by South Africa for the common law crime of culpable homicide and a number of
alleged violations of the Machinery Occupational Safety Act of 1983 ("MOSA"),
because of the deaths of two Thor employees. The prosecution alleged that the
deaths were the result of mercury poisoning. In exchange of a plea by Thor that
it had violated provisions of MOSA, the prosecution dropped the homicide charges
against Thor and all the charges against Thor's management personnel. The court
has sentenced Thor to a fine of R13,500.00, which is equivalent to approximately
$3,800. The Partnership is aware that relatives of two deceased Thor employees,
and a Thor employee allegedly suffering from mercury poisoning, have filed suit
in the United Kingdom against Thor's parent company for negligence.
On March 24, 1995, the President of South Africa appointed a Commission
of Inquiry and published the following terms of reference for the Commission:
(1) to investigate the history and background of the acquisition of mercury
catalyst stockpiled by Thor as well as additional mercury-containing sludge on
the premises and to report on the further utilization or disposal thereof; (2)
to recommend the best practical environmental option to address the problem of
mercury-containing catalyst and/or waste currently on Thor's premises; and (3)
to report the results of the Commission's inquiry to the President of the
Republic of South Africa as soon as conveniently possible. In addition, the
Minister of Water Affairs and Forestry has instructed his department's regional
office to investigate alleged water pollution at and near the Thor facility. The
Government of South Africa has not made any allegations or asserted any claims
against the Partnership.
The contract between the Partnership and Thor provides that title to,
risk of loss, and all other incidents of ownership of the partially depleted
catalyst would pass from the Partnership to Thor when the catalyst reached South
Africa. The Partnership does not believe that it is liable for disposing of the
drums of partially depleted catalyst remaining at the Thor facility that were
shipped by the Partnership. Nonetheless, in the event that the Partnership
should be required to dispose of the remaining drums at the facility shipped by
the Partnership, the Partnership estimates that such cost would not be in excess
of $4 million.
With regard to the environmental condition of the Thor facility, the
Partnership has not been notified by the Government of South Africa that the
Partnership would be liable for any contamination or other conditions at that
facility, although it is impossible to determine what, if any, allegations any
party may make in connection with the Thor facility in the future. It is unclear
under current South African environmental law as to whether any such
allegations, if made, would be sustained against the Partnership, and the
Partnership would vigorously defend against any such allegations.
Emergency Planning and Community Right-to-Know Act Proceeding
-------------------------------------------------------------
In February 1993, an EPA Administrative Law Judge held that the
Illiopolis facility had violated CERCLA and the Emergency Planning and Community
Right to Know Act ("EPCRA") by failing to report certain relief valve releases,
which occurred between February 1987 and July 1989, that the Partnership
believes are exempt from CERCLA and EPCRA reporting. The Partnership's petition
for reconsideration was denied, a penalty hearing will be scheduled, and further
appeals are possible. Management does not believe that any ultimate penalty
arising from this proceeding would have a material adverse effect on the
Partnership. The proposed penalty in EPA's administrative complaint initiating
this proceeding in 1991 was $1.0 million.
Borden Environmental Indemnity
------------------------------
Under the Environmental Indemnity Agreement, subject to certain
conditions, Borden has agreed to indemnify the Partnership in respect of
environmental liabilities arising from facts or circumstances that existed and
requirements in effect prior to November 30, 1987, the date of the initial sale
of the Geismar and Illiopolis plants to the Partnership (the "Transfer Date").
The Partnership is responsible for environmental liabilities arising from facts
or circumstances that existed and requirements in effect on or after the
Transfer Date. With respect to certain environmental liabilities that may arise
from facts or circumstances that existed and requirements in effect both prior
to and after the Transfer Date, Borden and the Partnership will share
liabilities on an equitable basis considering all of the facts and circumstances
including, but not limited to, the relative contribution of each to the matter
and the amount of time each has operated the asset in question (to the extent
relevant). No claims can be made under the Environmental Indemnity Agreement
after November 30, 2002, and no claim can, with certain exceptions, be made with
respect to the first $500,000 of liabilities which Borden would otherwise be
responsible for thereunder in any year, but such excluded amounts shall not
exceed $3.5 million in the aggregate. Excluded amounts under the Environmental
Indemnity Agreement have aggregated approximately $2.7 million through June 30,
1995.
If the United States is successful in requiring the Partnership to
perform corrective action at the Geismar facility or the LDEQ requires the
Partnership to take further remedial measures in connection with the Settlement
Agreement, the Partnership anticipates that a portion of its corrective action
costs would be covered by the Environmental Indemnity Agreement. The extent to
which any penalties or permit costs that the Partnership may incur as a result
of pending environmental proceedings will be subject to the Environmental
Indemnity Agreement will depend, in large part, on whether such penalties or
costs are attributable to facts or circumstances that existed and requirements
in effect prior to the Transfer Date.
Federal Wastewater Permit
-------------------------
The Geismar facility has a permit for each of its two wastewater
outfalls. The Partnership is challenging conditions in one of those permits. As
a result of the government's delay in responding to this challenge, the
challenged permit has expired and, prior to the expiration, the Partnership
applied for a new permit. Depending on the result of that permit application,
the Partnership's current permit challenge may be irrelevant.
Other Legal Proceedings
-----------------------
The Partnership manufactures, distributes and uses many different
chemicals in its business. As a result of its chemical operations, the
Partnership is subject to various lawsuits and claims, such as product liability
and toxic tort claims, arising in the ordinary course of business and which seek
compensation for physical injury, pain and suffering, costs of medical
monitoring, property damage, and other alleged harm. New or different claims
arising from the Partnership's various chemical operations may be made in the
future.
In addition, the Partnership is subject to various other legal
proceedings and claims which arise in the ordinary course of business. The
management of the Partnership believes, based upon the information it presently
possesses, that the realistic range of liability of these other matters, taking
into account its insurance coverage, including its risk retention program and
the Environmental Indemnity Agreement with Borden, would not have a material
adverse affect on the financial position and results of operations of the
Partnership.
ITEM 6, EXHIBITS AND REPORTS OF FORM 8-K
----------------------------------------
(a) Exhibits
--------
3.0 Restated to Certificate of Incorporation, dated May 3, 1995
10.0 1995 long term long incentive plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BORDEN CHEMICALS AND PLASTICS LIMITED
PARTNERSHIP
By BCP Management, Inc.
General Partner
By /s/ JAMES O. STEVNING
-------------------------------
James O. Stevning
Controller and Principal
Accounting Officer
Date: August 11, 1995