----------------------------------------------------------------------
----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1997 Commission file number: 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 (614) 225-4482
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Depositary Units Representing Common Units New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein. [ ]
__________________________________
Aggregate market value in thousands of the Common Units held by non-
affiliates of the Registrant based upon the average sale price of such Units on
February 27, 1998 was approximately $289 million.
Number of Common Units outstanding as of the close of business on February 27,
1998: 36,750,000.
----------------------------------------------------------------------
----------------------------------------------------------------------
The Exhibit Index is located herein at sequential page 41.
1
PART I
ITEM I. BUSINESS
- ----------------
GENERAL
Borden Chemicals and Plastics Limited Partnership (the "Company" or
"Partnership") is a limited partnership formed in 1987 to acquire, own and
operate polyvinyl chloride resins ("PVC"), methanol and other chemical plants
located in Geismar, Louisiana, and Illiopolis, Illinois, that were previously
owned and operated by Borden, Inc. ("Borden"). The three principal product
groups manufactured at these facilities are (i) PVC Polymers Products, which
consist of PVC resins and feedstocks (such as vinyl chloride monomer ("VCM") and
acetylene), (ii) Methanol and Derivatives, which consist of methanol and
formaldehyde, and (iii) Nitrogen Products, which consist of ammonia and urea.
During 1997, PVC Polymers Products, Methanol and Derivatives and Nitrogen
Products accounted for 66%, 24% and 10%, respectively, of the Company's
revenues.
On May 2, 1995, the Company, 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 ("Addis Facility"). After incremental capacity expansions, the
Addis Facility has an annual capacity of 600 million pounds per year, which
increased the Company's stated annual capacity for PVC resin production by
approximately 62%. The cash purchase price for the Addis Facility was $100.4
million (see "Acquisition").
The Company seeks to increase its productive capacity through selective
expansions of its existing facilities and "debottlenecking" of production
facilities at its plants. From 1988 to 1997, the Company increased overall
capacity of its facilities by 28.3% through various expansions and
"debottlenecking" projects.
The Company's production complex at Geismar, Louisiana, its plant at
Illiopolis, Illinois, and the Addis Facility produce products for the following
applications:
- --------------------------------------------------------------------------------
PRODUCTS LOCATION PRINCIPAL APPLICATIONS
- --------------------------------------------------------------------------------
PVC POLYMERS PRODUCTS
PVC Geismar Water distribution pipe, residential
Illiopolis siding, wallcoverings, vinyl
Addis flooring
VCM Geismar Raw material for the Company's
PVC operations
METHANOL AND DERIVATIVES
Methanol Geismar Formaldehyde, MTBE, adhesives and
fibers or raw materials for the
Company's formaldehyde operations
Formaldehyde Geismar Pressed wood products, adhesives,
fibers
NITROGEN PRODUCTS
Ammonia Geismar Fertilizers, fibers, plastics,
explosives
Urea Geismar Fertilizers, animal feeds, adhesives
plastics
2
The Company's plants generally can be operated at rates in excess of stated
capacity to take advantage of market opportunities without undue adverse
effects. References to capacity assume normal operating conditions, including
downtime and maintenance. The Company's objective is to operate the Geismar,
Illiopolis and Addis plants at or near full capacity because of the reduced
operating costs per unit of output at full operation.
The integrated design of the Company's plants provides it with a high degree
of flexibility to shift production volumes according to market conditions
efficiently utilize by-product streams. The Company's products are produced
through the highly integrated lines described below.
PVC POLYMERS PRODUCTS
PVC Resins - PVC is the second largest volume plastic material produced in the
world. The Company produces general purpose and specialty purpose PVC resins at
three plants - one located at the Geismar complex, one at Illiopolis and another
at Addis - with stated annual capacities of 575 million, 400 million and 600
million pounds of PVC resins, respectively. The PVC resin plants operated at
approximately 90% and 95% of combined capacity in 1997 and 1996, respectively.
Although there have been year-to-year fluctuations in product mix, the Company
has over time concentrated on the higher margin grades of PVC resin and reduced
its dependence on commodity pipe grade PVC resins, which have historically
experienced lower margins. Based on data from the Society of the Plastics
Industry, the Company believes its production currently accounts for
approximately 10% of total industry domestic capacity of PVC resins.
The PVC resin industry experienced strong demand through the first half of
1995. As a result, published prices for PVC resins increased to an average of
$0.40 per pound during the third quarter of 1995. Buildup of PVC inventories
worldwide by converters resulted in reduced PVC purchases during the second half
of 1995. Prices for PVC improved somewhat during the first half of 1996, but
then declined due to the competitive market conditions experienced in the second
half of 1996. Published prices for PVC during the fourth quarter of 1996
declined to an average of approximately $0.32 per pound. PVC prices repeated
this pattern again in 1997, with prices increasing through the second quarter of
1997 but declining in the second half of the year to prices similar to the
fourth quarter of 1996.
During 1997 and 1996, approximately 3% and 7%, respectively, of the Company's
total production of PVC resins was sold to Borden for use in its downstream
vinyl conversion operations. The balance was purchased by many customers, none
of which accounted for more than 11% of total PVC sales dollars during either
year. Unless there is a shortage of PVC resin capacity in the industry, demand
for PVC resins generally tends to be seasonal with higher demand during spring
months and lower demand during winter months.
Production Process. PVC resins are produced by the polymerization of VCM, a
raw material produced by the Company. The production by the Company of certain
specialty grades of PVC resins also involves the use of certain quantities
(approximately 11.2 million pounds in 1997) of vinyl acetate monomer, a raw
material not produced by the Company. The Company purchases quantities of vinyl
acetate monomer from Borden (which in turn purchases such raw material in bulk
from third parties) or from unrelated third parties. Purchases from Borden have
been and will be at prices that do not
3
exceed the market price of vinyl acetate monomer.
All the VCM used by the Company's Geismar PVC resin plant and most of the VCM
used by the Company's Illiopolis PVC resin plant is obtained from the Company's
two Geismar VCM plants discussed below. Substantially all of the production of
these VCM plants is consumed by the Company's PVC resins plants at Geismar and
Illiopolis. The Geismar PVC resin plants obtain VCM from the Company's adjacent
VCM plants in the Geismar complex and the Illiopolis PVC resin plant obtains VCM
from the Company's Geismar plant via rail. The VCM requirement at the Addis
Facility is currently supplied by OxyChem which has arranged for physical
delivery to the Addis Facility by pipeline via exchange, but which may also be
supplied by rail car from OxyChem's plant in Deer Park, Texas or from OxyChem's
joint venture facility ("OxyMar") in Corpus Christi, Texas.
VCM is principally used in the production of PVC resins. The Company produces
VCM by two processes: an ethylene process and an acetylene process. The
finished product of both of these processes is essentially identical but the
production costs vary depending on the cost of raw materials and energy. The
ability to produce VCM by either process allows the Company the flexibility of
favoring the process that results in the lower cost at any particular time.
Ethylene-Based VCM. Ethylene-based VCM ("VCM-E") is produced by the Company
at a 650 million pound stated annual capacity plant at the Geismar complex. The
plant operated at approximately 94% and 98% of capacity during 1997 and 1996,
respectively. Substantially all of the production of the VCM-E plant is
consumed by the Company's PVC resin plants at the Geismar complex and
Illiopolis.
Ethylene and chlorine constitute the principal feedstocks used in the
production of VCM-E. Both feedstocks are purchased by the Geismar plant from
outside sources.
Acetylene-Based VCM. Acetylene-based VCM ("VCM-A") is produced at a 320
million pound stated annual capacity plant at the Geismar complex. During 1997
and 1996, the plant operated at approximately 76% and 79% of capacity
respectively. All of the VCM-A produced at the Geismar complex is consumed by
the PVC resin plants at Geismar and Illiopolis.
The Geismar complex contains the only VCM-A plant in the United States. The
integration of the VCM-A plant with the other plants on site provides stability,
cost and efficiency benefits to the plants located at the Geismar complex.
Although ethylene has generally been regarded as a lower cost feedstock for the
production of VCM, the VCM-A plant reduces the overall processing costs of the
Geismar complex because the acetylene plant produces as a by-product acetylene
off-gas, which is used as a feedstock in the production of methanol. In
addition, hydrochloric acid, a feedstock used in the production of VCM-A, is
produced as a by-product by the adjacent VCM-E plant. Furthermore, certain
industrial plants located near the Geismar complex have excess supplies of
hydrochloric acid that the Company is generally able to purchase at relatively
low cost.
In addition to hydrochloric acid, acetylene is a primary feedstock used in the
production of VCM-A.
4
Acetylene. Acetylene is primarily used as a feedstock for VCM-A and for
other chemical intermediates. The Company has a 50% interest in a 200 million
pound stated annual capacity acetylene plant at the Geismar complex, with the
remaining 50% interest held by BASF Corporation ("BASF"). The Partnership has
agreed to purchase BASF's interest in the acetylene plant. See Item 7, "Capital
Expenditures". During 1997 and 1996, the plant operated at approximately 90%
and 96%, respectively, of capacity, with all production being consumed by either
the Company or BASF.
During 1997, approximately 59% of the total production of the acetylene plant
was used internally as a principal feedstock of the Geismar VCM-A plant. BASF
accounted for approximately 41% of the plant's 1997 production, less than its
full 50% share of production. Acetylene not required by BASF is available to
the Company at cost.
The principal feedstocks used in the production of acetylene are natural gas
and oxygen. Oxygen is obtained from certain air separation units and related
air compression systems, which are jointly owned by the Company, BASF and Air
Liquide America Corporation pursuant to joint venture arrangements. For a
description of the Company's arrangements for the purchase of natural gas, see
"Raw Materials".
- --------------
As long as a subsidiary of Borden is the general partner of the Company, the
acetylene plant will be operated and managed by employees of such general
partner pursuant to an operating agreement with BASF. The agreement provides
that, if a Borden subsidiary ceases to be the general partner, BASF will have
the exclusive right to become the operator of the plant and the personnel
necessary to operate the plant will be encouraged to accept employment with
BASF. The Company's interest in the acetylene plant and the air separation
systems is subject to certain rights of first refusal and limitations on
transfer. In addition, the Company and the third parties who hold the other
interests in such assets have mutual rights under certain circumstances, to
require the other party to purchase its interests.
The Company's principal competitors in the sale of PVC include Shintech,
Formosa Plastics, OxyChem and Geon.
METHANOL AND DERIVATIVES
Methanol - Methanol is used primarily as a feedstock in the production of
other chemicals. Such chemicals include formaldehyde, which is used in the
manufacture of wood building products and adhesives, and MTBE, which is used as
a gasoline additive. During the fourth quarter of 1995, the Company completed
an expansion of its existing methanol plant. This expansion increased the
Company's stated annual capacity by 30 million gallons to 330 million gallons
per year. During 1997 and 1996, the plant operated at approximately 96% and
92%, respectively, of capacity.
Strong demand for methanol in early 1995 resulted from limited growth in the
supply of methanol and industry consolidation during the past several years as
well as strong demand for MTBE and formaldehyde. Methanol sales prices declined
during the first half of 1996 but began improving in the latter part of the
year. Industry announcements indicated sales at contract prices of approximately
$0.50 per gallon toward the end of 1996. Supply disruptions in the industry
served to improve methanol pricing during 1997, with contract prices ending the
year at $0.58 per gallon. As supply is
5
normalized and additional production capacity is brought on-line in 1998,
selling prices will face significant downward pressure during the year.
The Company believes its stated annual capacity represents approximately 14%
of total domestic capacity. The Company's main competitors in the sale of
methanol include Methanex, Terra Industries, Hoechst Celanese and Lyondell.
In 1997, approximately 39% of methanol volume was sold to third parties (other
than Borden). Borden accounted for approximately 37% of such production for its
downstream formaldehyde production. Approximately 17% of production was used
internally in the production of formaldehyde and the remaining approximately 7%
was used primarily to satisfy tolling and exchange arrangements. No customer
(other than Borden) accounted for more than 16% of total methanol sales dollars
in 1997.
The primary raw material feedstock used in the production of methanol is
natural gas. The efficiency of the Geismar methanol plant has been enhanced by
using the by-product of the Geismar acetylene plant, acetylene off-gas, as a
partial substitute feedstock for purchased natural gas. Natural gas represented
approximately 72% of the Company's total cost of producing methanol during 1997.
Formaldehyde. Formaldehyde is a chemical intermediate used primarily in the
production of plywood and other pressed wood products. The Company produces
50%-concentration formaldehyde (which is 50% formaldehyde and 50% water) at
three units at the Geismar complex. The formaldehyde plants have annual
capacities of 280, 190 and 180 million pounds per year, respectively, for the
50%-concentration formaldehyde. During 1997 and 1996, the three plants operated
at approximately 91% and 100%, respectively, of combined capacity. The smaller
plant also is capable of producing urea-formaldehyde concentrate for the
fertilizer industry. If operated for production of urea-formaldehyde, the
smaller plant's stated annual capacity would be 125 million pounds.
Formaldehyde demand generally is influenced by the construction industry and
housing starts. Total United States production capacity of 50%-concentration
formaldehyde is approximately 7.8 billion pounds, with the formaldehyde units at
the Geismar complex representing 650 million pounds, approximately 9%, of such
total. Major competitors of the Company include Georgia Pacific and Neste.
During 1997, approximately 37% of formaldehyde production was sold to Borden
and approximately 4% was utilized by the Company in the production of urea-
formaldehyde concentrate for the fertilizer industry. The remaining 59% was
purchased by an unaffiliated third party pursuant to a ten-year supply contract
signed in 1989. The contract requires the Company to supply in the future up to
78% of its annual capacity to the third party to the extent necessary to satisfy
that party's formaldehyde requirements.
The principal feedstock used in the production of formaldehyde is methanol.
The Geismar formaldehyde plants obtain all such feedstock from the adjacent
methanol plant.
Borden produces formaldehyde and urea-formaldehyde concentrate at other
facilities located in the United States and facilities outside the United
States. The Company does not have any interest in such other facilities
6
and, accordingly, Borden may be a competitor of the Company with respect to
formaldehyde and urea-formaldehyde concentrate. The Partnership Agreement
provides that the Company may not significantly expand the capacity of the
Geismar formaldehyde plants without special approval. The Company is intended
to be a limited purpose partnership and the Partnership Agreement provides that
the General Partner shall have no duty to propose or approve, and in its sole
discretion may decline to propose or approve, any such expansion.
NITROGEN PRODUCTS
Ammonia. Ammonia is a commodity chemical used primarily for fertilizer
applications and as an intermediate for other agricultural chemicals such as
pesticides and herbicides. Approximately 85% of domestic ammonia production is
consumed directly or indirectly in fertilizer applications. The Company
produces ammonia at a 400,000 ton stated annual capacity plant located at the
Geismar complex. During 1997 and 1996, the Company operated at approximately
95% and 106%, respectively, of capacity.
During 1995 and 1996, the worldwide supply of ammonia experienced a series of
disruptions and reductions due to plant shutdowns, operating problems and
interruptions in the supply of natural gas, the primary feedstock in the
production of ammonia. At the same time, demand for ammonia, particularly in
Asia (China, India and Pakistan), increased for both industrial and fertilizer
applications. These factors combined to cause occasional shortages of ammonia
in the United States, which is a net importer of nitrogen products, and to
increase selling prices for ammonia. However, an increase in the worldwide
production capacity of ammonia, along with more aggressive pricing by producers
in the former Soviet Union, have put downward pressure on ammonia prices during
1997. Contract prices for ammonia decreased from $225 per ton in December 1996
to $140 per ton in December 1997.
Demand for ammonia is seasonal, with prices tending to be higher in the spring
and fall months than during the remainder of the year. In addition, fertilizer
demand is sharply affected by swings in crop acreage.
During 1997, approximately 65% of ammonia production was sold to third parties
(other than Borden), approximately 31% of production was used by the Company's
adjacent urea plant, and approximately 2% of production was sold to Borden.
The Company's stated annual capacity represents just under 2% of total North
American capacity. The Company's major competitors include PCS, Farmland
and Terra Industries.
Urea. Urea is a commodity chemical which is used primarily in fertilizer
applications. Approximately 80% of domestic production of urea is consumed in
fertilizer applications. Urea's high nitrogen content (46%) makes it an
effective and popular dry nitrogen fertilizer. In addition, urea is used in the
production of urea-formaldehyde resins used in the wood building products
industry.
The Company produces granular urea at a 270,000 ton stated annual capacity
plant at the Geismar complex. During 1997 and 1996, the plant operated at
approximately 75% and 110% respectively, of capacity.
7
Because of the importance of the agricultural chemical industry as a market
for urea, demand is affected sharply by swings in crop acreage. In addition,
like ammonia, demand for urea is seasonal, with prices tending to be higher in
the spring and fall months than during the remainder of the year. Worldwide
urea production has expanded rapidly over the past 20 years, particularly in
countries with abundant supplies of low cost natural gas. Like ammonia, urea
demand has suffered during recent years from reduced United States fertilizer
demand. It also has been affected even more severely than ammonia by imports
from third world countries because storage and shipping of urea is easier and
less costly than is the case with ammonia.
Urea prices remained relatively stable in 1996 due to many of the same factors
which influenced the price of ammonia. However, increases in production
capacity and a decrease in imports of urea into China have caused selling prices
to significantly decline during 1997. Contract prices for urea decreased from
$185 per ton in December 1996 to $105 per ton in December 1997.
During 1997, approximately 42% of the Company's urea sales were to third
parties and approximately 58% were to Borden. A small portion of the Company's
urea production was used internally by the Company in the production of urea-
formaldehyde concentrate.
The Company's stated annual capacity represents approximately 3% of total
North American capacity. The Company's major competitors include PCS,
Unocal and CF Industries.
The principal feedstocks used in the production of urea are ammonia and carbon
dioxide, which the Company obtains from its adjacent ammonia plant.
RAW MATERIALS
The principal purchased raw material used in the Company's operations is
natural gas. In 1997, the Company purchased over 63.5 million MMBTUs of natural
gas for feedstock and as an energy source. Currently, the Company is one of the
largest industrial purchasers of natural gas in the state of Louisiana. Natural
gas is supplied by pipeline to the Geismar complex by six major natural gas
suppliers. In 1997, natural gas represented 83%, 75% and 72% of total
production costs for acetylene, ammonia and methanol, respectively, and 24% of
the Company's total production costs. The Company purchases the majority of its
natural gas under fixed-term, market sensitive supply contracts. The cost of
purchasing natural gas is, in general, greater in winter months, reflecting
increased demand for natural gas by consumers and industry during such months.
During 1996, the Company experienced unprecendented natural gas costs as the
cash price and NYMEX prices, which normally determine the Company's natural gas
purchase prices, reached record highs. Market conditions were similar in 1997,
and, as a result, the average natural gas cost for the year was only slightly
less than the 1996 average. Although the Company has diversified its suppliers
and does not currently anticipate any difficulty in obtaining adequate natural
gas supplies, there can be no assurance that the Company will in the future be
able to purchase adequate supplies of natural gas at acceptable price levels.
8
The Company purchases other raw materials for its operations, principally
ethylene and chlorine. Ethylene is currently supplied by pipeline to the Geismar
facility by several suppliers. Chlorine is supplied by rail car to the Geismar
complex by various suppliers. The major raw material for the Illiopolis PVC
plant, VCM, is supplied by rail car from the Geismar facility. In addition, in
connection with the production of certain specialty grades of PVC resins, the
Company purchases certain quantities of vinyl acetate monomer. See "-PVC
Polymers Products-Production Process". The Company purchases its VCM
requirements for the Addis Facility under a VCM supply agreement entered into
with OxyChem at the closing of the Acquisition. The Company does not believe
that the loss of any present supplier would have a material adverse effect on
the production of any particular product because of numerous, competitive
alternate suppliers.
Because raw materials have accounted for a high percentage of the Company's
total production costs, and are expected to continue to represent a high
percentage of such costs for the Company, the Company's ability to pass on
increases in costs of these raw material feedstocks will have a significant
impact on operating results. The ability to pass on increases in feedstock and
fuel costs is, to a large extent, dependent on the then existing market
conditions. Because of the large volume of purchases of natural gas, any
increase in the price of natural gas or a shortage in its availability could
materially adversely affect the Company's income and cash flow from operations
and its ability to service its debt obligations.
INSURANCE
The Company maintains property, business interruption and casualty insurance
which it believes is in accordance with customary industry practices, but it is
not fully insured against all potential hazards incident to its business. The
Company also maintains pollution legal liability insurance coverage. However,
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 its pollution legal liability insurance, or any
other insurance that the Company has, may cover environmental claims against the
Company. Insurance, however, generally does not cover penalties or the costs of
obtaining permits. See "Legal Proceedings".
The Company is included in Borden's master insurance program, which includes
property damage and liability insurance. Under its risk retention program,
Borden maintains deductibles of $2.5 million, $0.5 million and $0.5 million per
occurrence for property and related damages at the Geismar, Illiopolis and Addis
facilities, respectively, and deductibles ranging from $0.1 million to $3.0
million per event for liability insurance.
MARKETING
The Company's PVC resin sales are conducted through a professional staff of
seven trained personnel geographically located in seven territories. In
addition to the regional sales managers, there are three product managers
performing marketing functions. All are employees of Borden.
The Company's other products are similarly marketed through a
9
professional field sales organization of two Borden employees and two additional
marketing managers under the management of the director of non-PVC resins sales
and marketing located at Geismar. The professionals involved in this sales
function are geographically positioned in three locations covering the United
States.
The Company's sales activity is based on customer contact on a regular basis
to secure and maintain long-term supply relationships. A substantial portion of
the Company's sales is made under contracts with annual negotiations relating to
specific conditions of sales.
UTILITIES
The Geismar complex operates three high thermal efficiency co-generation units
providing the site with low cost electricity, steam and high temperature
reformer combustion air. Each unit is composed of a natural gas burning
turbine/generator unit combined with a steam producing heat recovery system
(i.e., the "co-generation" of electricity and steam).
The co-generation units are designed to provide a significant portion of the
electricity and steam, and a portion of the reformer combustion air requirements
of the Geismar complex at full production levels. These units have electrical
outputs of 20, 35 and 35 megawatts, respectively. The electricity is supplied by
the units through a substation owned by Monochem, Inc. ("Monochem"), a
corporation of which the Partnership owns 50% of the capital stock. The
Company's interest in Monochem is subject to certain rights of first refusal and
limitations on transfer.
Water requirements at the Geismar complex are obtained through Monochem from
the Mississippi River. At Illiopolis, a municipal water company supplies the
facility with its water requirements. Because the Illiopolis facility
represents a significant portion of the demand for water supply from the
municipal water company, the Company manages the operations of the water company
on a cost-reimbursed basis. The Addis Facility obtains its electricity and water
requirements from local public utilities. Natural gas is purchased by pipeline
from various intrastate suppliers.
PURCHASE AND PROCESSING AGREEMENTS
In connection with the formation of the Company in 1987, Borden entered into
certain purchase agreements ("Purchase Agreements") and processing agreements
("Processing Agreements") with the Company covering the following products: PVC
resins, methanol, ammonia, urea, formaldehyde and urea-formaldehyde concentrate.
The Purchase and Processing Agreements expire in November 2002, subject to
termination by Borden in the event BCPM ceases to be the general partner of the
Company, other than by reason of (i) the withdrawal of BCPM as general partner
under circumstances where such withdrawal violates the Partnership Agreement,
(ii) removal of BCPM as general partner by the Unitholders under circumstances
where cause exists or (iii) any other event except (x) voluntary withdrawal by
BCPM as general partner of the Company under circumstances where such withdrawal
does not violate the Partnership Agreement and such withdrawal is approved by a
Majority Interest or (y) the removal of BCPM as general partner of the Company
by action of the Unitholders under circumstances where cause does
10
not exist.
The Purchase Agreements require Borden to purchase from the Company and
the Company to supply to Borden, subject to certain monthly quantity limits, at
least 85% (and at the option of Borden up to 100%) of the quantities of PVC
resins, methanol, ammonia and urea required by Borden for use in its plants in
the continental United States. Under the Purchase Agreements, the price for PVC
resins, ammonia, urea and methanol generally will be an amount equal to the
monthly weighted average price per unit that the Company charges its lowest-
priced major customer (other than Borden). If the Company does not make any
sales to any major customers other than Borden, then the price to Borden will be
the lowest prevailing price in the relevant geographic area. The Purchase
Agreements also provide that the Company is required to meet competitive third-
party offers or let Borden purchase the lower-priced product from such third
parties in lieu of purchases under the Purchase Agreements.
The Processing Agreements for formaldehyde and urea-formaldehyde concentrate
essentially require Borden to utilize the processing capacity of the
formaldehyde plants so that the formaldehyde plants operate at no less than 90%
of capacity, after taking into account the purchases of formaldehyde by an
unaffiliated third party under a long-term requirements contract. Although such
third party's current requirements for formaldehyde exceed 200 million pounds
per year, in the event that such third party's annual requirements are less than
such amount, Borden has the option of reducing or terminating its obligation to
utilize such processing capacity. Under the Processing Agreements, Borden is
required to pay the Company a fee for each pound of formaldehyde and urea-
formaldehyde concentrate processed equal to the Company's processing costs plus
a per pound charge. The per-pound charge is subject to increase or decrease
based on changes in the Consumer Price Index from October 1987. The Processing
Agreements also require the Company to meet competitive third party offers
covering formaldehyde unless meeting such offer would impose a significant
economic penalty on the Company, in which case Borden will be permitted to
accept such offer and reduce its obligations under the Processing Agreements by
a corresponding amount.
The Company believes that the pricing formulas set forth in the Purchase and
Processing Agreements have in the past provided aggregate prices and processing
charges that Borden would have been able to obtain from unaffiliated suppliers,
considering the magnitude of Borden's purchases, the long-term nature of such
agreements and other factors. The Company believes that this will continue to
be the case in the future. There may be conditions prevailing in the market at
various times, however, under which the prices and processing charges set under
the Purchase and Processing Agreements could be higher or lower than those
obtainable from unaffiliated third parties.
The Company is free to sell or otherwise dispose of, as it deems appropriate,
any quantities of PVC resins, ammonia, urea, methanol or formaldehyde which
Borden is not required to purchase. In addition, the Purchase and Processing
Agreements do not cover acetylene, VCM or industrial gases, which are either
consumed internally by the Company or have not been historically purchased by
Borden.
Because the foregoing Purchase and Processing Agreements are requirements
contracts, sales of products thereunder are dependent on Borden's requirements
for such products. Such requirements could be
11
affected by a variety of factors, including a sale or other disposition by
Borden of all or certain of its manufacturing plants to unaffiliated purchasers
(in which event such agreements shall not apply to such purchasers unless
otherwise agreed to by such purchasers). In the event that, whether as a result
of the change of control of Borden or otherwise, Borden were to sell or
otherwise dispose of all or certain of its plants or otherwise reorient its
businesses, Borden's requirements for products sold or processed by the Company
under the Purchase and Processing Agreements could be diminished or eliminated.
The Company anticipates that if Borden were to sell all or certain of its
chemical manufacturing facilities, a purchaser may be interested in negotiating
the continuation of all or certain of the Purchase and Processing Agreements.
COMPETITION
The business in which the Company operates is highly competitive. The Company
competes with major chemical manufacturers and diversified companies, a number
of which have revenues and capital resources exceeding those of the Company.
Because of the commodity nature of the Company's products, the Company is not in
a position to protect its position by product differentiation and is not able to
pass on cost increases to its customers to the extent its competitors do not
pass on such costs. In addition to price, other significant factors in the
marketing of the products are delivery, quality and, in the case of PVC resins,
technical service. The Company believes that the overall efficiency,
integration and optimization of product mix of the facilities at Geismar,
Illiopolis, and Addis make the Company well positioned to compete in the markets
it serves.
Borden has agreed that, so long as BCP Management, Inc. ("BCPM") is the
general partner of the Company, Borden will not engage in the manufacture or
sale in the United States of methanol, ammonia, urea, acetylene, VCM or PVC
resins. However, if BCPM (i) is removed as general partner by the Unitholders
under circumstances where cause exists or (ii) withdraws as general partner
under circumstances where such withdrawal violates the existing partnership
agreements ("Partnership Agreements"), Borden shall not engage in such
manufacture or sale for a period of two years from the date of such removal or
withdrawal. If Borden were to sell any of its manufacturing facilities to an
unaffiliated purchaser that is not a successor to Borden, the purchasers of such
facilities would be free to compete with the Company.
TRADEMARKS
The Company entered into a Use of Name and Trademark License Agreement ("Use
of Name and Trademark License Agreement") with Borden pursuant to which the
Company is permitted to use in its name the Borden name and logo. The Use of
Name and Trademark License Agreement and the right to use the Borden name and
logo shall terminate in the event that BCPM ceases to be the General Partner.
MANAGEMENT
The General Partner, BCPM, manages and controls the activities of the Company
and the Holding Company and the General Partner's activities are limited to such
management and control. Neither the Holding Company nor
12
the Unitholders participate in the management or control of the Company. The
General Partner has fiduciary duties to Unitholders. Notwithstanding any
limitation on obligations or duties, the General Partner will be liable, as
general partner, for all the debts of the Company (to the extent not paid by the
Company) other than any debt incurred by the Company that is made specifically
nonrecourse to the General Partner.
The Company does not directly employ any of the persons responsible for
managing or operating the business of the Company, but instead relies on the
officers of the General Partner and employees of Borden who provide support to
or perform services for the General Partner and reimburses Borden (on its own or
on the General Partner's behalf) for their services.
ENVIRONMENTAL AND SAFETY REGULATIONS
General. The Company's operations are subject to federal, state and local
environmental, health and safety laws and regulations, including laws relating
to air quality, hazardous and solid wastes, chemical management and water
quality. The Company has expended substantial resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements, and anticipates that it will continue to do so in the future.
Although the Company believes that its operations generally are in material
compliance with these requirements, there can be no assurance that significant
costs, civil and criminal penalties, and liabilities will not be incurred. The
Company holds various environmental permits for operations at each of its
plants. In the event a governmental agency were to deny a permit application or
permit renewal, or revoke or substantially modify an existing permit, such
agency action could have a material adverse effect on the Company's ability to
continue the affected plant operations. Plant expansions are subject to
securing necessary environmental permits. Environmental laws and regulations
have changed substantially and rapidly in recent years, and the Company
anticipates continuing changes. The trend in environmental regulations is to
place more restrictions and limitations on activities that may affect the
environment, such as emissions of pollutants and the generation and disposal of
wastes. Increasingly strict environmental regulations have resulted in
increased operating costs for the Company, and it is possible that the costs of
compliance with environmental, health and safety laws and regulations will
continue to increase. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources-
Environmental Expenditures."
The Company maintains an environmental and industrial safety and health
compliance program and conducts internal regulatory audits at its Geismar,
Illiopolis and Addis plants. The Company's plants have had a history of
involvement in regulatory, enforcement and variance proceedings in connection
with safety, health and environmental matters. Risks of substantial costs and
liabilities are inherent in certain plant operations and certain products found
at and produced by the plants, as they are with other enterprises engaged in the
chemical business, and there can be no assurance that significant costs and
liabilities will not be incurred.
Air Quality. The Geismar, Illiopolis and Addis plants emit air contaminants
and are subject to the requirements of the Clean Air Act and comparable state
statutes. Many of the existing requirements under these laws are embodied in
permits issued to the plants by state environmental agencies. The Company
believes that the Geismar, Illiopolis and Addis plants generally are in material
compliance with these requirements.
13
The 1990 Amendments to the Clean Air Act (the "1990 Clean Air Act Amendments")
substantially revised and expanded the air pollution control requirements
throughout the United States. As discussed below, certain of these new or
revised requirements may impact the Geismar, Illiopolis and Addis plants.
The 1990 Clean Air Act Amendments require more stringent controls on volatile
organic compounds ("VOC") emissions in ozone non-attainment areas and also
require, subject to certain exceptions, the control of nitrogen oxide ("NOx")
emissions in such areas. The Geismar and Addis plants are located in a
"nonattainment area" for ozone under the 1990 Clean Air Act Amendments.
Additional capital expenditures may be required at the Geismar and Addis plants
in order to upgrade existing pollution control equipment and/or install
additional control equipment to comply with the new, more stringent regulations
for VOC and NOx.
The 1990 Clean Air Act Amendments and state laws and regulations also require
certain sources to control emissions of hazardous air pollutants, including
vinyl chloride. In particular, the EPA promulgated a rule in April 1994, which
may require the modification of the existing emission control equipment at the
Geismar facility. Capital expenditures may be necessary to comply with these
control standards.
The 1990 Clean Air Act Amendments further require "enhanced monitoring" of the
emissions from certain pieces of equipment. Although monitoring systems are
already in place at the Geismar, Illiopolis and Addis plants, capital
expenditures may be necessary to upgrade the systems to comply with the
"enhanced monitoring" requirement.
In late 1996 the Illiopolis plant discovered through emission stack testing
that the actual emissions from a specific dryer were higher than calculated
using emission factors and engineering estimates. These new emission numbers
were reported to the Illinois Environmental Protection Agency, and the plant
currently anticipates that an air pollution control device known as a baghouse
will be installed on the unit in 1998 at a cost of approximately $1.3 million.
Based on the information currently available to the Company, the Company does
not believe that the capital expenditures that may be required at the Geismar,
Illiopolis and Addis plants to comply with the 1990 Clean Air Act Amendments and
corresponding state regulations will be material. However, because all the
regulatory requirements under the 1990 Clean Air Act Amendments are not yet
final, and the Company is continuing to evaluate the impact of such amendments
on it, there can be no assurance that the actual costs will not exceed the
Company's estimates.
In March 1998, the United States Department of Justice ("DOJ") and the
Partnership reached an agreement in principle to resolve an enforcement
proceeding brought against the Company and BCPM, at the request of the
Environmental Protection Agency ("EPA"), for alleged violation of the Clean Air
Act, and other environmental statutes, at the Geismar facility. See "Legal
Proceedings".
OSHA and Community Right to Know. The Geismar, Illiopolis and Addis plants
are subject to the requirements of the federal Occupational Safety and Health
Act ("OSHA") and comparable state statutes. The Company
14
believes that the Geismar, Illiopolis, and Addis plants generally are in
material compliance with OSHA requirements, including general industry
standards, vinyl chloride exposure requirements, recordkeeping requirements and
chemical process safety standards. It is possible that changes in safety and
health regulations, or a finding of noncompliance with current regulations,
could result in additional capital expenditures or operating expenses for the
Geismar, Illiopolis and Addis plants.
The OSHA hazard communication standard and the EPA community right-to-know
regulations under the Emergency Planning and Community Right-to-Know Act
("EPCRA") require the Company to organize information about the hazardous
materials in the plants and to communicate that information to employees and
certain governmental authorities. The Company has prepared a detailed hazard
communication program and will continue this program as a part of its industrial
safety and health compliance program. The Company is a member of the Community
Awareness and Emergency Response ("CAER") program of the Chemical Manufacturers
Association, as well as the Association's Responsible Care initiative. At
Geismar, membership in such programs includes participation in the Geismar Area
Mutual Aid organization, which maintains a community warning system for
notification of chemical releases through the local sheriff's department. The
Company believes that it generally is in material compliance with EPCRA.
Solid and Hazardous Waste. The Geismar, Illiopolis and Addis plants generate
hazardous and nonhazardous solid waste and are subject to the requirements of
RCRA and comparable state statutes. The Company believes that the Geismar,
Illiopolis and Addis plants generally are in material compliance with RCRA.
However, see "Legal Proceedings".
A primary trigger for RCRA requirements is the designation of a substance as a
"hazardous waste". It is anticipated that additional substances will in the
future be designated as "hazardous waste", which likely would result in
additional capital expenditures or operating expenses for the Company.
In March 1998, the DOJ and the Partnership reached an agreement in principle
to resolve an enforcement proceeding against the Company and BCPM for alleged
violations of RCRA, and other environmental statutes, at the Geismar facility.
As part of the settlement, the Partnership has agreed to apply for a RCRA permit
for its valorization of chlorinated residuals ("VCR") unit. See "Legal
Proceedings".
During the early 1990s, the Company 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 Louisiana
Department of Environmental Quality ("LDEQ") determined that the partially
depleted catalyst was not a hazardous waste, although LDEQ reversed this
position in 1994. The Company disagrees with this reversal. See "Legal
Proceedings."
Superfund. CERCLA, also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of the disposal site or sites where the release occurred and the
companies that disposed, or arranged for the disposal of, the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may
15
be subject to joint and several liability for the costs of cleaning up the
hazardous substances and for damages to natural resources. In the ordinary
course of the Company's operations, substances are generated that fall within
the CERCLA definition of "hazardous substance". If such wastes have been
disposed of at sites which are targeted for cleanup by federal or state
regulatory authorities, the Company may be among those responsible under CERCLA
or analogous state laws for all or part of the costs of such cleanup. The
Geismar, Illiopolis and Addis plants have in the past and are expected to
continue to generate hazardous substances and dispose of such hazardous
substances at various offsite disposal sites.
In March 1998, the DOJ and the Partnership reached an agreement in principle
to resolve an enforcement proceeding against the Company and BCPM for alleged
violation of CERCLA's reporting requirements, and other environmental
requirements, at the Geismar facility. See "Legal Proceedings".
Toxic Substances Control Act. The Company is subject to the Toxic Substances
Control Act ("TSCA"), which regulates the development, manufacture, processing,
distribution, importation, use, and disposal of thousands of chemicals. Among
other requirements, TSCA provides that a chemical cannot be manufactured,
processed, imported or distributed in the United States until it has been
included on the TSCA Chemical Inventory. Other important TSCA requirements
govern recordkeeping and reporting. For example, TSCA requires a company to
maintain records of allegations of significant adverse reactions to health or
the environment caused by chemicals or chemical processes. The Company believes
that it generally is in material compliance with TSCA. Violations of TSCA can
result in significant penalties.
Water Quality. The Geismar, Illiopolis and Addis plants maintain wastewater
discharge permits for their facilities pursuant to the Federal Water Pollution
Control Act of 1972 and comparable state laws. Where required, the Company also
applied for and received permits to discharge stormwater. The Company believes
that the Geismar, Illiopolis and Addis plants generally are in material
compliance with the Federal Water Pollution Act of 1972 and comparable state
laws. In cases where there are excursions from the permit requirements, the
Geismar and Illiopolis plants are taking action to achieve compliance, are
working in cooperation with the appropriate agency to achieve compliance or are
in good faith pursuing their procedural rights in the permitting process.
The EPA has issued effluent regulations specifying amounts of pollutants
allowable in direct discharges and in discharges to publicly owned treatment
works. The Geismar, Illiopolis and Addis plants manufacture or use as raw
materials a number of chemicals subject to additional regulation. Both federal
and state authorities continue to develop legislation and regulations to control
the discharge of certain toxic water pollutants. Passage of such legislation or
regulations could necessitate additional capital expenditures to reduce
discharges of these substances into the environment either during routine or
episodic events. The Company does not believe that these legislative
developments would have a material adverse impact on the Company's operations.
It is common for chemical plants from time to time to encounter areas of
groundwater contamination during the ordinary course of business.
16
Typically, some of these contamination events are historical and cannot be
documented as to the causal circumstances. While some contamination events have
been identified at the Company's plants, it is the Company's policy, where
possible and appropriate, to address and resolve these contamination events. The
Company believes that environmental indemnities available to it would cover a
substantial portion of these known or unknown contamination events. The Company
does not believe that the known contamination events will have material adverse
impact on the Company's operations. The Company believes that the Geismar,
Illiopolis and Addis plants generally are in material compliance with all laws
with respect to known groundwater contamination events. At the Geismar complex,
Borden and the Company have complied with the Settlement Agreement with the
state of Louisiana for groundwater remediation. See "Legal Proceedings" for
further discussion.
Present and Future Environmental Capital Expenditures. Although it is the
Company's policy to comply with all applicable environmental, health and safety
laws and regulations, in many instances the implementing regulations have not
been finalized. Even where regulations or standards have been adopted, they are
subject to varying and conflicting interpretations and implementation. In many
cases, compliance with environmental regulations or standards can only be
achieved by capital expenditures, some of which may be significant. Capital
expenditures for environmental control facilities were approximately $7.4
million in 1997 and $5.9 million in 1996. Capital expenditures for environmental
control facilities are expected to total approximately $15.0 million in 1998
(although such estimate could vary substantially depending on the outcome of the
various proceedings and matters discussed herein, and no assurance can be given
that greater expenditures on the part of the Company will not be required as to
matters not covered by the environmental indemnity from Borden).
BORDEN ENVIRONMENTAL INDEMNITY
Under the Environmental Indemnity Agreement, subject to certain conditions,
Borden has agreed to indemnify the Company and the Holding Company 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
by Borden of the Geismar and Illiopolis plants to the Company (the "Transfer
Date"). The Company 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 Company 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 $0.5 million 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 met the aggregate amount of $3.5 million as of December 31, 1996.
17
ADDIS ENVIRONMENTAL INDEMNITY
OxyChem has indemnified the Company for environmental liabilities arising from
the manufacture, generation, treatment, storage, handling, processing, disposal,
discharge, loss, leak, escape or spillage of any product, waste or substance
generated or handled by OxyChem prior to the closing of the Acquisition, any
condition resulting therefrom relating to acts, omissions or operations of
OxyChem prior to such date, and any duty, obligation or responsibility imposed
on OxyChem prior to such date under environmental laws in effect prior to such
date to address such condition. However, except with regard to claims arising
from OxyChem's disposal of waste at sites other than the Addis Facility, OxyChem
has no indemnification obligation if the claim for indemnification is the result
of a change in applicable law after the closing of the Acquisition. OxyChem's
obligation to indemnify the Company for environmental liabilities is subject to
certain limitations. There can be no assurance that the indemnification provided
by OxyChem will be sufficient to cover all environmental liabilities existing or
arising at the Addis Facility.
PRODUCT LIABILITY AND REGULATION
As a result of the Company's manufacture, distribution and use of different
chemicals, the Company is, and in the future may be, subject to various lawsuits
and claims, such as product liability and toxic tort claims, which arise 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 harms. See "Legal Proceedings-General Proceedings". New or different
types of claims arising from the Company's various chemical operations may be
made in the future.
The United States Food and Drug Administration ("FDA") is proposing new
regulations providing for the safe use of vinyl chloride polymers in food-
contact articles. According to the FDA, such regulations are required because
vinyl chloride monomer, a component of vinyl chloride polymer, has been shown to
be a carcinogen. However, the FDA concludes in its proposal that there is a
reasonable certainty of no harm from the exposure to the small amounts of vinyl
chloride monomer that may result from the use of vinyl chloride polymers in food
packaging which complies with the FDA's proposed regulations. Thus, the FDA
proposal would continue to allow substantially all presently allowable uses,
including all products currently made using products produced by the Company.
While the FDA has tentatively concluded that such action will not have a
significant effect on the human environment, it is considering whether to
develop a full environmental impact statement to consider the potential effect
on the environment of the disposal of these food-contact articles. The EPA has
authority with respect to the safe use of vinyl chloride polymer pipe in
municipal water systems and has not imposed any restrictions on its use. It is
possible, however, that the FDA, the EPA, or other federal and state agencies
may seek to impose additional restrictions on the use or disposal of vinyl
chloride polymer. Moreover, while Borden has agreed to indemnify the Company in
respect of liabilities arising from products (including but not limited to vinyl
chloride polymer) shipped prior to November 1987, the Company will be
responsible for any subsequent product liabilities.
18
EMPLOYEES
The Partnership does not directly employ any of the persons responsible for
managing and operating the Partnership, but instead reimburses BCPM for their
services. On December 31, 1997 BCPM employed approximately 800 individuals.
CASH DISTRIBUTIONS
The Partnership distributes 100% of its Available Cash as of the end of each
quarter on or about 45 days after the end of such quarter to Unitholders of
record as of the applicable record date and to the General Partner. "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 cash disbursements and net additions to reserves in such quarter.
The General Partner has broad discretion in establishing reserves, and its
decisions regarding reserves could have a significant impact on the amount of
Available Cash. The timing and amounts of additions and reductions to reserves
may impact the amount of incentive distributions payable to the General Partner.
As a result, distributions to Unitholders may over time be reduced from levels
which would have been distributed if the General Partner were not able to
control the timing of additions and reductions to reserves.
Distributions by the Partnership of Available Cash are generally made 98% to
the Unitholders and 2% to the General Partner, subject to the payment of an
incentive distribution to the General Partner to the extent that a target level
of cash distributions to the Unitholders is achieved for any quarter. The
Amended and Restated Agreement of Limited Partnership of the Partnership dated
as of December 15, 1988, as amended (the "Partnership Agreement") provides that,
after an amount equal to $0.3647 per Unit (the "Target Distribution") has been
distributed for any quarter to Unitholders, the General Partner will receive 20%
of any then remaining Available Cash for such quarter as an incentive
distribution (in addition to its 2% regular distribution).
In August 1997, legislation was enacted which extends indefinitely the
Company's treatment as a partnership for federal income tax purposes provided
that the Company elects to be subject to a 3.5% tax on taxable gross income
beginning on January 1, 1998 (the treatment as a partnership had been scheduled
to expire on December 31, 1997). The Company has made such an election. The
requirement to pay this tax will reduce the amount of cash available at the end
of each quarter for distribution to unitholders.
FORWARD-LOOKING STATEMENTS
Certain statements in the Form 10-K, including, in particular, certain
statements under "Item 1. Business", "Item 3. Legal proceeedings" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation", are forward-looking. These can be identified by the use of
forward-looking words or phrases such as "believe", "expect", "anticipate",
"should", "plan", "estimate" and "potential" among others. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for such
forward-looking statements. While these forward-looking statements are based on
the Partnership's reasonable current expectations, a variety of risks,
uncertainties and other factors, including many which are outside the control of
the Partnership, could cause the Partnership's actual results to differ
materially from the ancticipated results of expectations expressed in such
forward-looking statements. The risks, uncertainties and other factors that may
affect the operations, performance, development and results of the Partnership
include changes in the demand for and pricing of its commodity products, changes
in industry production capacities, changes in the supply of and costs of its
significant raw materials, and changes in applicable environmental, health and
safety laws and regulations.
ITEM 2. PROPERTIES
- ------------------
Construction of the Geismar complex began over thirty years ago. Acetylene,
methanol and VCM-A plants were completed in the early 1960s and ammonia and urea
plants were added during the period 1965 to 1967. A VCM-E plant and a
formaldehyde plant were added in the mid 1970s, a second formaldehyde plant was
brought on stream in 1986, and a third formaldehyde plant was brought on stream
in 1991. In 1983 Borden completed construction of a PVC resin plant at the
Geismar complex. During the early 1980s, the methanol, ammonia, and urea plants
were modernized, which reduced energy consumption and expanded capacity. The
urea plant was further modified to produce granular rather than prill product in
1993. The PVC resin facility at Illiopolis became operational in 1962, and was
significantly upgraded in
19
the late 1980s. The Addis Facility began operations in 1979.
The Geismar complex is located on approximately 490 acres in Ascension Parish,
Louisiana, adjacent to the Mississippi River between Baton Rouge and New
Orleans. The Illiopolis PVC resin facility is located on approximately 45 acres
in central Illinois between Springfield and Decatur. The Addis Facility is
located on approximately 40 acres of a 220 acre site adjacent to the Mississippi
River, approximately 20 miles from the Geismar complex.
20
The following table sets forth the approximate annual capacity of each of the
principal manufacturing plants at the Geismar complex and the PVC plants at
Illiopolis and Addis, all of which are owned by the Company except as noted.
1988 1997
ANNUAL STATED CAPACITY ANNUAL STATED CAPACITY 8 YEAR CAPACITY
PLANTS (STATED IN MILLIONS) (STATED IN MILLIONS) PERCENTAGE INCREASE
- ------ --------------------- ---------------------- -------------------
Geismar, LA:
PVC Polymers Products
PVC Resins.................. 400 lbs. 575 lbs. 43.8%
Acetylene-based VCM......... 320 lbs. 320 lbs. --
Ethylene-based VCM.......... 550 lbs. 650 lbs. 18.2%
Acetylene (1)............... 190 lbs. 200 lbs. 5.3%
Methanol and Derivatives
Methanol.................... 230 gals. 330 gals. 43.5%
Formaldehyde I.............. 210 lbs. 280 lbs. 33.3%
Formaldehyde II(2).......... 160 lbs. 180 lbs. 12.5%
Formaldehyde III............ -- 190 lbs. N/M
Nitrogen Products
Ammonia..................... .40 tons .40 tons --
Urea........................ .22 tons .27 tons 22.7%
Illiopolis, IL:
PVC Resins.................... 350 lbs. 400 lbs. 14.3%
Addis, LA:
PVC Resins.................... 450 lbs. 600 lbs. 33.3%
Total equivalent lbs.(3)........ 5,395 6,923 28.3%
(1) 50% owned by the Company
(2) Also capable of producing urea-formaldehyde concentrate at an annual
stated capacity of 125 million pounds.
(3) Equivalent pounds is based on 6.63 pounds per gallon of methanol.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
FEDERAL ENVIRONMENTAL ENFORCEMENT PROCEEDING
- --------------------------------------------
On March 11, 1998, the Partnership and the DOJ reached an agreement (the
"Consent-Decree") in principle to resolve the enforcement action brought by the
DOJ against the Operating Partnership, the Partnership and the General Partner
in October 1994, and the Declaratory Judgement Action brought by the Partnership
against the United States. The complaint sought 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. More specifically, the federal
government's primary allegations included claims that (i) the Company's export
to South Africa of a partially depleted mercuric chloride catalyst for recycling
violated RCRA (see "Export of Partially Depleted Mercuric Chloride Catalyst");
--------------------------------------------------------
(ii) the Company should have applied for a RCRA permit for operation of its VCR
unit and related tanks before August 1991; and (iii) the Company 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 included 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.
21
The settlement provides for payment of a civil penalty of $3.6 million and
funding of $0.4 million for community based environmental programs, but it does
not include any admission of wrongdoing. The terms of the settlement also
provide for a specific and detailed program of groundwater and other remediation
at the Geismar facility that is consistent with various actions undertaken
previously, currently being undertaken, and planned to be undertaken in the
future, by the Partnership. Under certain circumstances, the EPA and the LDEQ
may require investigation and remediation beyond the specific terms of the
agreement. The Partnership, however, believes that the technical information and
knowledge regarding the nature of contamination at the site, and the need for
remediation, make it unlikely that investigation and remediation beyond that
which the Partnership has already planned for and is contemplated by the Consent
Decree will be required. The agreement also provides that the Partnership will
undertake a Supplemental Environmental Project to decommission its underground
injection wells and instead subject the waste to innovative source reduction.
The estimated cost of the project to the Partnership is $3.0 million. The
Partnership also agreed to apply for a RCRA permit for its VCR unit and related
tanks.
In 1985, the LDEQ and Borden entered into a settlement agreement ("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"). Borden and the Company implemented the
Settlement Agreement, and 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. Borden has paid substantially
all the costs to date associated with the Settlement Agreement under the
provisions of the Environmental Indemnity Agreement. The Consent Decree that
will result from the agreement with the DOJ will establish new guidelines for
remediation of groundwater and soil contamination that was identified by the
Settlement Agreement; all future remediation of this groundwater and soil
contamination will be performed under the terms of the Consent Decree.
Remediation costs incurred under the Consent Decree, which are expected to be
several million dollars, will continue to be paid by Borden.
The terms of the Consent Decree also will settle all federal and state civil
issues regarding the export of partially depleted mercuric chloride catalyst.
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 court granted a limited
intervention on November 15, 1995 and the Company is vigorously defending
against this intervention.
In April 1996 and April 1997, adjoining landowners filed separate tort actions
asserting personal injury and property value diminution as a result of releases
of hazardous materials from the Geismar complex. The Company plans to vigorously
defend against these actions.
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 Company.
22
EXPORT OF PARTIALLY DEPLETED MERCURIC CHLORIDE CATALYST
- -------------------------------------------------------
During the early 1990s, the Company 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 Company disagrees with this
reversal. The Company did not send mercury-containing sludge to the Thor
facility.
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 approximately 2,900 drums of
partially depleted catalyst at the facility which had been shipped by the
Company to Thor. In addition, in the spring of 1994 there were approximately
7,400 drums of other materials at the Thor facility which the Company had not
sent there.
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 and 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 for 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, which is
equivalent to approximately $2,700. The Partnership is aware that a case
instituted in the United Kingdom by the relatives of two deceased Thor employees
together with a number of Thor Chemical employees allegedly suffering from
mercury poisoning, has been settled by the Thor Chemicals parent company. The
settlement involved a payment of R9,4 million (approximately $1.9 million) by
the Thor Chemicals parent company to the claimants. The Partnership is further
aware that a second group of Thor Chemicals employees has recently instituted
action against the Thor Chemicals parent company in the British High Court for
damages allegedly arising out of mercury poisoning.
A Commission of Inquiry, appointed by the President of South Africa,
commenced hearings in February 1996, and published the following terms of
reference: (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; (3) to report the results of the Commission's inquiry to the President
of the Republic of South Africa as soon as conveniently possible; (4) to
investigate deficiencies in the regulation and enforcement relating to the
monitoring and control of mercury processing; and (5) to recommend steps which
could contribute to the minimization of risk and to the protection of workers
and the environment. The First Phase Report of the Commission of Inquiry was
handed to the President of South Africa on March 12, 1997 and was released to
the public in late April 1997. The brief of this First Phase of the
Report was to investigate the history and background of the acquisition of
23
spent mercury catalyst stockpiled by Thor Chemicals as well as additional
mercury containing sludge on the premises and to report on the further
utilization or disposal thereof; and to recommend on the best practical
environmental option to deal with the problem of mercury dust containing
catalyst and/or waste currently present on Thor's premises.
The Report places the responsibility for the stockpile of spent mercury
catalyst as well as any environmental damage arising out of the operations of
the Thor Chemicals plant jointly in the hands of various South African
government officials responsible for administration and protection of the
environment and Thor Chemicals itself. The Report considers the return of the
stockpiled catalyst to the senders of the catalyst but concludes that this would
not be a satisfactory option for the disposal of the catalyst. The Commission
found that the only viable option is to treat the mercury waste in an
environmentally friendly manner by recycling it via incineration or roasting, at
the Thor Chemicals plant, once various environmental requirements have been met
by this plant. The commission finds that the cost of this incineration should
be born by Thor Chemicals.
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 Company.
The contract between the Company and Thor provides that title to, risk of
loss, and all other incidents of ownership of the partially depleted catalyst
would pass from the Company to Thor when the catalyst reached South Africa. The
Company does not believe that it is liable for disposing of the approximately
2,900 drums of partially depleted catalyst remaining at the Thor facility. This
is confirmed by the findings of the Commission of Inquiry thus far which place
no liability on the Partnership. The recommendations of the Commission of
Inquiry are, however, not binding on the South African Government. In the event
that the Company should be required to dispose of the approximately 2,900 drums
at the facility shipped by the Company, the Company estimates that such cost
would not be in excess of $4 million.
With regard to the environmental condition of the Thor facility, the
Commission of Inquiry has not, thus far, placed any liability on the Partnership
for any contamination or other conditions at that facility, nor has the
Partnership been notified by the South African Government of any such liability.
The findings of the Commission of Inquiry are of a non-binding nature and it is
impossible to determine what, if any, allegations any party may make during the
course of any further sittings of the Commission of Inquiry or generally 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 Company, and the Company would vigorously defend
against any such allegations.
In connection with a federal grand jury investigation in the U.S. District
Court in New Jersey, the Company is providing documents and other
information with respect to the partially depleted catalyst matter. The
24
Company 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 Company does not
anticipate that it would incur material additional expenditures to continue to
manage the partially depleted catalyst as a hazardous waste.
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 EPCRA by failing to report certain relief valve
releases, which occurred between February 1987 and July 1989, that the Company
believes are exempt from CERCLA and EPCRA reporting. The Company's petition for
reconsideration was denied, a penalty hearing has been scheduled, settlement
negotiations are ongoing 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 results of operations for the Company. 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 ("EIA"), subject to certain
conditions, Borden has agreed to indemnify the Company 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 Company (the "Transfer Date"). The
Company 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 Company 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 EIA 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 EIA have aggregated approximately $3.5 million through
December 31, 1996.
FEDERAL WASTEWATER PERMIT
- -------------------------
The Geismar facility has a permit for each of its two wastewater outfalls. As
previously reported, the Company challenged conditions in one of these permits.
The challenged permit expired and, prior to the expiration, the Company applied
for a new permit. The Company has resolved the permit issues, and the
administrative matter is now closed.
OTHER LEGAL PROCEEDINGS
- -----------------------
The Company manufactures, distributes and uses many different chemicals in its
business. As a result of its chemical operations the Company is
subject to various lawsuits in the ordinary course of business which seek
25
compensation for physical injury, pain and suffering, costs of medical
monitoring, property damage and other alleged harm. New or different damage
claims arising from the Company's various chemical operations may be made in the
future.
In addition, the Company is subject to various other legal proceedings and
claims which arise in the ordinary course of business. The management of the
Company believes, based upon the information it presently possesses, that the
realistic range of liability to the Partnership of these other matters, taking
into account the Partnership's insurance coverage, including its risk retention
program, and the Indemnity Agreement with Borden, would not have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matter was submitted during the fourth quarter of 1997 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ------ -----------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The high and low sales prices for the Common Units on February 27, 1998 were
$7 7/8 and 7 13/16 respectively. As of December 31, 1997, there were
approximately 37,900 holders of record of Common Units.
The following table sets forth the 1996 and 1995 quarterly Common Unit data:
1997 QUARTERS
----------------------------------
First Second Third Fourth
----- ------ ----- ------
Cash distribution declared $ 0.10 $ 0.45 $ 0.18 $ 0.10
Market price range:
High 12 1/4 11 5/8 11 15/16 9 15/16
Low 8 1/4 9 3/4 9 7 9/16
1996 QUARTERS
--------------------------------
First Second Third Fourth
----- ------ ----- ------
Cash distributions declared $0.10 $0.00 $0.15 $0.10
Market price range:
High 16 15 7/8 10 5/8 10 3/8
Low 12 5/8 10 8 9/16 8 1/8
26
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table sets forth selected historical financial information for
the Company for each of the five years ended December 31, 1997.
1997 1996 1995 1994 1993
---- ------ ------ ------- -----
(in thousands except per Unit data, which is
net of 1% General Partner interest)
Net revenues $737,129 $709,203 $739,587 $657,752 $433,297
Income (loss) before
extraordinary item 5,597 4,828 150,926 146,405 (1,435)
Net income (loss) 5,597 4,828 144,014 146,405 (1,435)
Income (loss) per unit
before extra-
ordinary item - basic 0.15 0.13 4.07 3.94 (.04)
Net income (loss)
per Unit - basic 0.15 0.13 3.88 3.94 (.04)
Cash distributions
declared per Unit 0.83 0.35 4.66 3.52 .78
Total assets 500,186 525,705 568,507 542,904 444,304
Long-term debt 225,000 200,000 200,000 120,000 150,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
OVERVIEW AND OUTLOOK
The Partnership's revenues are derived from three principal product groups:
(1) PVC Polymers Products, which consist of PVC resins, VCM, the principal
feedstock for PVC resins, and acetylene, (ii) Methanol and Derivatives and (iii)
Nitrogen Products, which consist of ammonia and urea.
The markets for and profitability of the Partnership's products have been, and
are likely to continue to be, cyclical. Periods of high demand, high capacity
utilization and increasing operating margins tend to result in new plant
investment and increased production until supply exceeds demand, followed by
periods of declining prices and declining capacity utilization until the cycle
is repeated. In addition, markets for the Partnership's products are affected
by general economic conditions and a downturn in the economy could have a
material adverse effect on the Partnership, including, but not limited to, its
ability to service its debt obligations. The demand for the Partnership's PVC
products is primarily dependent on the construction and automotive industries.
Methanol demand is also dependent on the construction industry, as well as the
demand for MTBE. Demand for the Partnership's Nitrogen Products is dependent
primarily on the agricultural and industrial industries.
The principal raw material feedstock is natural gas, the price of which has
been volatile in recent years and at recent historical high levels during the
past two years. The other principal feedstocks are ethylene and chlorine.
Prices for these raw materials may change significantly from
year to year.
27
The Partnership experienced strong demand for its PVC Polymers Products in the
first half of 1995, particularly for its rigid and general purpose resins.
Increased activity in the construction industry resulted in increased demand for
rigid grade resin for end use in pipe and siding production. The automotive
industry requirements resulted in increased demand for general purpose resins.
However, during this period PVC customers began to build up their PVC inventory
in anticipation of rising PVC sales prices. This inventory buildup peaked
during the second quarter of 1995, resulting in reduced PVC purchases during the
second half of 1995. This led to a sharp decrease in PVC sales prices which
continued through the end of 1995. Prices for PVC improved somewhat during the
first half of 1996, but then declined due to competitive market conditions
experienced in the second half of 1996. Published prices for PVC during the
fourth quarter of 1996 declined to an average of approximately $0.32 per pound.
PVC prices repeated this trend again in 1997, with prices increasing through the
second quarter of 1997 but declining in the second half of the year to prices
similar to the fourth quarter of 1996. General competitive conditions and
reduced demand for PVC in the Far East will keep downward pressure on selling
prices through 1998.
In early 1995, due to strength in the construction industry, the Partnership
experienced increased demand for methanol and formaldehyde in downstream
applications, such as adhesives for plywood and other pressed wood products.
Methanol demand has also been affected by the use of MTBE to comply with certain
requirements of the Clean Air Act. The Partnership experienced continued strong
demand for methanol products throughout 1996. Supply disruptions in the industry
served to improve methanol pricing during 1997, with contract prices ending the
year at $0.58 per gallon. As supply is normalized and additional production
capacity is brought on-line in 1998, selling prices will face significant
downward pressure during the year.
Selling prices for ammonia and urea remained strong in 1995 and 1996 with
prices consistent with 1994 levels. Demand for ammonia and urea in India and
China, as well as worldwide supply disruptions, caused relatively tight markets
during the period. However, in 1997 worldwide production capacity for ammonia
and urea increased and China, a significant importer of urea, significantly
reduced urea imports. These conditions, along with more aggressive pricing by
producers in the former Soviet Union, have forced selling prices downward in
1997. These market conditions are expected to continue in 1998 which, along
with scheduled capacity increases during the year, will put continued downward
pressure on selling prices during the year.
28
RESULTS OF OPERATIONS
The following table sets forth the dollar amount of revenues and the
percentage of total revenues for each of the principal product groups of the
Partnership (in thousands):
1997 1996 1995
--------- ----------- ------------
PVC Polymers Products $486,189 66% $464,496 65% $449,657 61%
Methanol and Derivatives 177,475 24% 145,982 21% 187,126 25%
Nitrogen Products 73,465 10% 98,725 14% 102,804 14%
-------- ---- ------ ---- ------- ---
Total Revenues $737,129 100% $709,203 100% $739,587 100%
======== ==== ======== ==== ======== ====
29
The following table summarizes indices of relative average selling prices
received per unit of product sold per period for the three principal product
groups of the Partnership and relative average raw material costs per unit for
the principal raw materials (using 1985 = 100 as the base year for all products
sold or purchased per period). The price indices in the table reflect changes
in the mix and volume of individual products sold as well as changes in selling
prices.
Year Ended December 31,
1997 1996 1995
---- ---- ----
Average price received per
unit sold
PVC Polymers Products 117 111 133
Methanol and Derivatives 126 99 134
Nitrogen Products 119 138 149
Raw material costs per unit purchased
Natural Gas 105 109 69
Ethylene 136 151 173
Chlorine 137 99 92
Production volumes (1)
(in millions of pounds)
PVC Polymers Products 2,447 2,490 2,312
Methanol and Derivatives 2,696 2,663 2,805
Nitrogen Products 1,168 1,397 1,389
(1) Includes the production of intermediate products.
1997 COMPARED TO 1996
Total Revenues
Total revenues for 1997 increased $27.9 million or 4% to $737.1 million from
$709.2 million in 1996. This increase was the net result of a $21.7 million
increase in revenues from PVC Polymers Products, a $31.5 million increase in
Methanol and Derivatives revenues and a $25.3 million decrease in Nitrogen
Products revenues.
Total revenues for PVC Polymers Products increased 5% as a result of a 5%
increase in selling prices. Sales volume was essentially unchanged from 1996 to
1997.
Total revenues for Methanol and Derivatives increased 22% as a result of a
25% increase in selling prices, partially offset by a 2% decrease in sales
volumes. The increase in selling prices was due to the circumstances described
above.
30
Total revenues for Nitrogen Products decreased 26% as a result of a 14%
decrease in selling prices and a 13% decrease in sales volumes. The softening of
the markets for ammonia and urea in 1997 was due to the worldwide changes in
demand and pricing described above.
Cost of Goods Sold
Total cost of goods sold increased 4% to $682.0 million in 1997 from $656.6
million in 1996. Expressed as a percentage of total revenues, cost of goods
sold remained at 93% of total revenues from 1996 to 1997.
Gross profit for PVC Polymers Products decreased 54% from 1996 to 1997. The
increase in selling prices for PVC in 1997 described above were more than offset
by increases in the cost of raw materials during the year, particularly vinyl
chloride monomer and chlorine. The cost of these raw materials increased 9% and
36%, respectively, from 1996 to 1997. These cost increases were partially
offset by a 16% decrease in the cost of ethylene year to year. Gross profit for
Methanol and Derivatives increased 184% from 1996 to 1997 primarily due to the
increase in selling prices described above. Gross margins for Nitrogen Products
decreased 98% primarily due to the decrease in selling prices described above.
Interest Expense
Interest expense during 1997 decreased $798 to $20.9 million from $21.7
million in 1996 due to a reduction in the average outstanding amounts borrowed
under the Partnership's credit facility from 1996 to 1997.
Incentive Distribution to General Partner
The General Partner incentive of $794 reflects the incentive distribution
declared in the second quarter of 1997. No quarterly incentive distributions
were declared during 1996.
Other Expense, Including Minority Interest
Other expense increased $1.3 million from 1996 to 1997, primarily due to the
write-off of costs associated with the Partnership's planned conversion to
corporate form which was terminated in the third quarter of 1997 due to a change
in federal tax law regarding master limited partnerships.
1996 COMPARED TO 1995
Total Revenues
Total revenues for 1996 decreased $30.4 million or 4% to $709.2 million from
$739.6 million in 1995. This decrease was the net result of a $14.8 million
increase in revenues from PVC Polymers Products, offset by decreases in revenues
from Methanol and Derivatives of $41.1 million and from Nitrogen Products of
$4.1 million.
Total revenues for PVC Polymers Products increased 3% as a result of a 23%
increase in volume offset by a 16% decrease in selling prices. The
31
volume increase was due to the full year effect in 1996 of the Addis Facility
that was purchased May 1, 1995 and to generally strong demand for PVC resins.
Industry capacity expansions and continued softness in the export markets more
than offset the increased demand for PVC resins, the combination of which caused
the significant decrease in selling prices in 1996 for the industry and the
Partnership.
Total revenues for Methanol and Derivatives decreased 22% as a result of a 3%
increase in volume offset by a 25% decrease in selling prices. Methanol selling
prices remained stable in 1996, but on average were significantly below 1995
selling prices, which benefited from very high prices in early 1995 as discussed
above.
Total revenues for Nitrogen Products decreased 4% as a result of a 4% increase
in volume offset by an 8% decrease in selling prices. Although selling prices
declined from 1995 levels, generally strong market conditions for ammonia and
urea continued during 1996.
Costs of Goods Sold
Total costs of goods sold increased 27% to $656.6 million in 1996 from $516.5
million in 1995. The increase is partially attributable to increased PVC volumes
but is substantially due to an aggregate raw material cost increase of
approximately 24% comprised of significantly higher natural gas unit costs,
slightly higher chlorine costs, and ethylene costs that were lower than the high
1995 unit costs. Unit costs for natural gas increased 58% in 1996, adding
approximately $63 million to the Partnership's cost structure. The increase was
caused by the severe weather conditions in early 1996 combined with low industry
storage levels. This combination created elevated natural gas costs throughout
1996. As a percentage of total revenues, cost of goods sold increased to 93% of
revenues in 1996 from 70% in 1995, resulting in greatly reduced gross margins
and net income for the Partnership.
Interest Expense
Interest expense in 1996 increased 14% to $21.7 million due to the debt
associated with the acquisition of the Addis Facility.
Incentive Distribution to General Partner
No incentive distribution to the General Partner was generated in 1996 as no
quarterly cash distribution to Unitholders exceeded the Target Distribution. In
1995, each quarter's cash distribution exceeded the Target Distribution.
Extraordinary Charge on Early Extinguishment of Debt
The Partnership incurred a charge of $6.9 million, or 19 cents per Unit, in
1995 as a result of a prepayment premium on $150 million in debt retired during
the year. See Acquisition and Financing and Notes to Consolidated Financial
Statements, Note 5.
Net Income
Net income declined to $4.8 million in 1996 from $144.0 million in 1995.
32
As discussed above, the decline is attributable to increased raw material
natural gas costs and reduced selling prices in all three principal product
groups of the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations. Cash provided by operations increased to $46.9
million for 1997 from $38.5 million for 1996 primarily due to a slight increase
in net income and a favorable change in working capital. Cash provided by
operations for the year ended December 31, 1996 decreased to $38.5 million from
$225.6 million for 1995. The decrease was due to a significant decrease in net
income and an unfavorable change in working capital, primarily relating to
changes in accounts receivable and accounts payable.
Cash Flows from Investing Activities. Capital expenditures totaled $19.4
million and $14.6 million for 1997 and 1996, respectively. These expenditures
were primarily for environmental projects and other non-discretionary capital
expenditures consisting of a large number of relatively small projects.
The Partnership paid $100.4 million for the acquisition of a PVC manufacturing
facility in 1995. See Acquisition and Financing. Other capital expenditures
during 1995 totaled $27.0 million, $13.6 million for the expansion of facilities
and for other discretionary capital projects, and $13.4 million of which related
to non-discretionary projects and environmental and safety related projects.
Non-discretionary capital expenditures vary from year to year with normal
equipment renovation requirements.
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 distributions and net additions to
reserves in such quarter. These reserves are retained 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 $30.8
million were made during 1997 compared to $30.5 million in 1996 and $213.1
million in 1995.
As discussed under Item 1 "Business" herein, 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,
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, 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
interest
33
payments, 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 cash purchase price for the Addis
assets was $100.4 million.
On May 1, 1995, the Partnership issued $200 million aggregate principal amount
of senior unsecured notes. The net proceeds from this offering were used to
prepay $150 million aggregate principal amount of outstanding notes plus a
related prepayment premium of $6.9 million reflected as an extraordinary charge
in 1995, and accrued interest. 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 provided a line of
credit for capital expenditures (including the acquisition), working capital and
general partnership purposes. Borrowings under this facility were $25.0 million
at December 31, 1996.
In December 1997, the Partnership entered into a new $100 million revolving
credit facility with generally more favorable terms than the previous facility.
The Partnership borrowed $25.0 million under the new facility, the proceeds of
which were used to repay the amount outstanding under the existing facility,
which was then terminated. The new credit facility expires in December 2002.
The new revolving credit agreement along with the senior unsecured notes
contain a number of financial and other covenants that management believes are
customary in lending transactions of these types, including restrictions on
quarterly cash distributions if compliance with certain covenants is not
maintained.
As discussed in Item 1, "Cash Distributions", the Partnership has elected to
be subject to a 3.5% tax on taxable gross income so as to extend indefinitely
its treatment as a partnership for federal income tax purposes. The requirement
to pay this tax will reduce the amount of cash available at the end of each
quarter for distribution to unitholders.
Capital Expenditures
The Partnership currently believes that the level of annual base capital
expenditures over the next several years will be in the range of $25 to $35
million per year. Total capital expenditures for 1998 are anticipated to be $30
to $35 million. Future capital expenditures would vary substantially if the
Partnership is required to undertake corrective action or incur other
environment compliance costs in connection with the proceedings discussed under
Item 3 "Legal Proceedings."
34
The Partnership has agreed to purchase its joint venture partner's ownership
share of the acetylene plant and certain other facilities at the Geismar complex
on December 31, 1999. The purchase price is $10,000 payable over three years
plus the undepreciated value of the joint venture partner's share of capital
spent on the facilities from November 1997 to December 31, 1999, which is
estimated to be $7 to $9 million based on current plans.
Similar to other business entities, the Partnership will be impacted by the
inability of its computer application software programs to properly identify the
year 2000 due to a commonly used programming convention of using only two digits
to identify a year. Unless modified or replaced, these programs could fail or
create erroneous results when referencing the year 2000. Management is
assessing the extent and impact of this issue and is developing an action plan
to mitigate the possibility of business interruption or other risks. These
actions include the replacement of applications or programs that are unable to
properly identify the year 2000. The anticipated costs associated with the
implementation of new software applications, including the associated hardware,
is approximately $16,200, of which $8,644 is committed at December 31, 1997.
Management currently does not anticipate any significant business interruption
or other adverse impacts related to the year 2000 issue.
Environmental Expenditures
Annual environmental capital expenditures for 1995-1997 ranged from $1.4 to
$7.4 million. The 1998 budget for environmental capital expenditures is
approximately $15.0 million, and is included in the budget of $30 to $35 million
discussed above.
Annual non-capital environmental expenditures for 1995-1997 ranged from $17.9
to $21.6 million. The 1998 budget for non-capital environmental expenditures is
approximately $20 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------
Sequential
Index to Financial Statements Page
- ----------------------------- ----------
Report of Independent Accountants 51
Consolidated Statements of Operations for the years
ended December 31 1997, 1996 and 1995 52
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 53
Consolidated Balance Sheets as of December 31, 1997
and 1996 54
Consolidated Statements of Changes in Partners'
Capital for the years ended December 31, 1997,
1996 and 1995 55
Notes to Consolidated Financial Statements 56
35
Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(in thousands except per Unit data, which is net of 1% General
Partner interest)
1997 QUARTERS
_________________________________________
First Second Third Fourth
------- -------- ------- --------
Revenues $194,682 $189,776 $180,890 $171,781
Gross Profit 6,645 34,146 12,434 1,920
Net Income (loss) (4,407) 21,246 (1,062) (10,180)
Net Income (loss)
per Unit - basic (0.12) 0.57 (0.03) (0.27)
1996 QUARTERS
________________________________________
First Second Third Fourth
------- -------- ------- --------
Revenues $170,585 $179,227 $182,814 $176,577
Gross Profit 5,766 14,002 17,571 15,304
Net Income loss (6,097) 1,505 5,381 4,039
Net Income (loss)
per Unit - basic (0.16) 0.04 0.14 0.11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
and Financial Disclosure
------------------------
No Form 8-K was issued by the Company for the two most recent years ended
December 31, 1997 reporting a change in or disagreement with accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The Partnership is a limited partnership (of which BCPM is the General
Partner) and has no directors or officers. The directors, officers and
employees of the General Partner perform management and non-supervisory
functions for the Partnership.
Management Organization - Joseph M. Saggese is Chairman, President and Chief
Executive Officer of BCPM. He is also an Executive Vice President of Borden and
President and Chief Executive Officer of Borden Chemicals, Inc. Wayne P.
Leonard, as Executive Vice President and Chief Operating Officer of BCPM,
reports directly to Mr. Saggese, and is responsible for the Partnership's
marketing and manufacturing operations.
Independent Committee - BCPM is required to maintain an Independent Committee
of its Board of Directors, which shall be composed of at least three directors,
each of whom is neither an officer, employee or director of Borden nor an
officer or employee of BCPM. Certain actions require special approval from the
Independent Committee. Such actions include an
36
expansion of the scope of business of the Partnership, the making of material
capital expenditures, the material curtailment of operations of any plant, the
material expansion of capacity of any plant, and the amendment of or entry into
by the Partnership of any agreement with Borden. The members of the Independent
Committee are Edward H. Jennings, George W. Koch, and E. Linn Draper, Jr.
Mr. Koch is Of Counsel in Kirkpatrick & Lockhart, a law firm which represents
the Partnership and its affiliates, Borden and Borden Chemical, Inc., in
connection with environmental, insurance, and other matters. The Partnership
believes that the terms of such services are on terms no less favorable to the
Partnership and its affiliates than if such services were procured from any
other law firm competent to handle the same matters.
As sole stockholder of BCPM, Borden elects directors of BCPM on an annual
basis. Set forth below is certain information concerning the directors and
officers of BCPM.
Section 16 of the Securities Exchange Act of 1934 requires directors, certain
officers and owners of more than ten percent of a registered class of Company's
equity securities to report their holdings and transactions in BCP units.
Previously, certain rights payable only in cash were excluded from these
reporting requirements; however, that exclusion was rescinded as of August 15,
1996.
Following a legal analysis of the BCP Management 1995 Long-Term Incentive
Plan, it was determined that the phantom units and Unit Appreciation Rights
involved in that Plan should be reported by directors and certain officers.
Accordingly, filings for Messrs. Dieker, Draper, Jennings, Koch, Leonard, and
Saggese were reported on Form 4 filed in July 1997, later than required under
the SEC rules. Filings for Mr. John L. Russ III and Mr. James O. Stevning,
formerly the Executive Vice President-Sales and Marketing and Vice President,
Chief Financial Officer and Treasurer, respectively, of BCPM also were filed in
July 1997, later than required under SEC rules. In addition, an Initial
Statement of Beneficial ownership of securities on Form 3 for Mr. Nagel was
filed late following his election as Chief Financial Officer.
37
Served in
Age on Present
Position and Office Dec. 31, Position
Name with General Partner 1997 Since
----------------- ----------------------------- ------- ---------
Joseph M. Saggese Director, Chairman, President
and Chief Executive Officer 66 1990
George W. Koch Director 71 1987
Edward H. Jennings Director 60 1989
E. Linn Draper, Jr. Director 55 1996
William H. Carter Director 44 1995
Clifton S. Robbins Director 39 1996
William F. Stoll,Jr. Director 49 1996
Wayne P. Leonard Executive Vice President,
Chief Operating Officer 56 1987
Christopher L. Nagel Vice President, Chief Financial
Officer and Treasurer 35 1997
Marshall D. Owens, Jr. Vice President - Manufacturing 54 1997
Lawrence L. Dieker Vice President, Secretary,
and General Counsel 59 1987
Joseph M. Saggese has been Chairman of the Board of Directors, President and
Chief Executive Officer of BCPM since July 1990. In July 1990, he was named
Vice President of Borden and President of the former Chemicals Division of
Borden. In January 1996 he was named President and Chief Executive Officer of
Borden Chemical, Inc., the successor to a major portion of the former Chemicals
Division of Borden.
George W. Koch is a director of BCPM. He has been Of Counsel in the law firm
of Kirkpatrick & Lockhart since January 1992. Prior to that he was a partner of
Kirkpatrick & Lockhart since April 1990.
Edward H. Jennings is a director of BCPM. He is also a professor and
President Emeritus of The Ohio State University. He served as president of The
Ohio State University from 1981 to 1990. Mr. Jennings is also a director of
Lancaster Colony, Inc., a manufacturer and marketer of food, automotive and
glass products.
E. Linn Draper, Jr. is a director of BCPM. He is also Chairman, President and
Chief Executive Officer of American Electric Power Company, Inc. and American
Electric Power Service Corporation, positions he has held since 1992. From 1987
to 1992, he was Chairman, President and Chief Executive Officer of Gulf States
Utility Company. Dr. Draper is currently a director of CellNet Data Systems,
Inc.
William H. Carter is a director of BCPM. He is also Executive Vice President
and Chief Financial Officer of Borden, a position he has held since April 1995.
Prior to joining Borden, he was a partner of Price Waterhouse LLP, a position he
held since 1986. He is a director of AEP Industries, Inc.
Clifton S. Robbins is a director of BCPM. He has been a member of KKR & Co.,
LLC since 1996 and was a General Partner of Kohlberg Kravis Roberts & Co. since
1995 and has been a General Partner of KKR Associates, L.P. since January 1995
and an Executive with Kohlberg Kravis Roberts & Co. since 1987. He is also a
Director of AEP Industries, Inc, IDEX Corporation,
38
Kindercare Learning Centers, Inc., Newsquest Capital, PLC and Act III Cinemas,
Inc.
William F. Stoll, Jr. is a director of BCPM. He is also Senior Vice President
and General Counsel of Borden, Inc., a position he has held since July 1996.
Prior to joining Borden, he was Vice President and Deputy General Counsel of
Westinghouse Electric Corporation, a position he held since January 1993. From
January 1985 to January 1993, he was Deputy General Counsel of Westinghouse
Electric Corporation.
Wayne P. Leonard has been Executive Vice President of BCPM since 1995 and was
named Chief Operating Officer of BCPM in July 1997. During 1993 and 1994, Mr.
Leonard served as Vice President of Manufacturing of BCPM.
Christopher L. Nagel is Vice President, Chief Financial Officer and Treasurer
of BCPM, positions he has held since September 1997. From January 1996 to
August 1997 he was Corporate Controller of Borden Foods Corporation. From
August 1995 to December 1995 he was Special Project Director for Borden, Inc.
Prior thereto, he was a Senior Manager for Price Waterhouse LLP, a position he
held since 1993.
Marshall D. Owens, Jr. is Vice President of Manufacturing for BCPM, a position
he has held since October 1997. Prior thereto, he served as Director of
Manufacturing since 1993.
Lawrence L. Dieker is Vice President, General Counsel and Secretary of BCPM.
He is also a Vice President and General Counsel of Borden Chemical, Inc., a
position he has held since January 1996. He was previously Assistant General
Counsel of Borden, a position he held from 1982 to January 1996.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The Partnership has no directors or officers. The directors and officers of
BCPM receive no direct compensation from the Partnership for services to the
Partnership. The Partnership reimburses BCPM for all direct and indirect costs
incurred in managing the Partnership.
During 1997 the three independent directors of BCPM received a retainer of
$15,000 per year plus a fee of $1,000 for each BCPM Board meeting attended. The
Board functions in part through its Independent and Audit Committees. The three
non-employee members of each of these committees are paid a meeting fee of $700
for each committee meeting attended. The committee chairman is also paid an
additional $100 for each committee meeting attended in that capacity. During
1997, the Board met nine times, the Independent Committee met ten times, and the
Independent and Audit Committees met jointly four times.
The following table sets forth all cash compensation paid and accrued by
Borden or BCPM and reimbursed by the Partnership for services rendered during
the three years ended December 31, 1997 by each of the Chief Executive Officer
and the three other executive officers of BCPM whose remuneration exceeded
$100,000 (the "Named Executives"). As indicated in the footnotes to the table,
certain of the executive officers included in the table received compensation in
excess of the amounts indicated from Borden in consideration for services
provided by such individual to Borden for which the Partnership did not
reimburse Borden. The Partnership only reimburses Borden for a portion of the
total compensation paid by Borden to Joseph M. Saggese in consideration for his
services as President and Chief Executive Officer of BCPM, and to Lawrence L.
Dieker in consideration for his services as Vice President, Secretary and
General Counsel. Had the Partnership been obligated to reimburse Borden for the
total compensation paid by Borden to Mr. Dieker, he would have been one of the
four most highly compensated executive officers of BCPM (other than the chief
executive officer) in addition to Messrs. Leonard, Nagel and Owens, Jr.
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
------------------------------------------ -------------------
Securities
Other Annual Underlying
Salary Bonus Compensation Options/SARs
Name of Principal Position Year ($) ($) ($) (a) (#)
- -------------------------------------------------------------------------------------------------------------
Joseph M. Saggese 1995 112,002(b)
Chairman, President and 1996 127,677(b) 6,500
Chief Executive Officer 1997 123,750(b) 6,500
Wayne P. Leonard 1995 175,253 87,720 912 5,500
Executive Vice President, 2,430(c)
Chief Operating Officer 1996 185,711 174,930 8,039 5,500
1997 200,666 0 0 6,000
Christopher L. Nagel 1997 50,000(d) 0 46,680 0
Vice President, Chief
Financial Officer and
Treasurer
Marshall D. Owens, Jr. 1995 130,232 45,971 925 2,000
Vice President - 1,215(c)
Manufacturing 1996 136,863 92,740 6,175 2,500
1997 142,320 0 0 3,000
39
(a) Represents miscellaneous compensation such as executive
perquisities and relocation allowance/reimbursements.
(b) Represents approximate amount of reimbursement paid to Borden by
the Partnership in consideration for services provided by Mr. Saggese to
the Partnership. Mr. Saggese received aggregate salary from Borden of
$495,000, $450,000 and $390,833 for the years 1997, 1996 and 1995,
respectively. Additionally Mr. Sagesse received certain bonuses and other
compensation in consideration for his services rendered to Borden for which
the Partnership did not have any reimbursement obligations.
(c) Represents securities of Borden underlying Options/SARs.
(d) Mr. Nagel served as an officer and employee of BCPM for a portion of
1997. Had he served in his current capacity for the entire year, his annual
compensation would have exceeded $100,000.
The Board of Directors of BCPM has approved a long-term incentive plan for
management and employees of BCPM (and employees of Borden who provide support to
or perform services for BCPM). The plan is intended to provide incentives to the
management and employees of BCPM (and such employees of Borden) to enhance the
market value of the Units. Under the plan, awards of "phantom" appreciation
rights in the Holding Company are made to selected BCPM or Borden officers or
employees on the basis of or in relation to services performed, directly or
indirectly, for the benefit of the Company. Subject to certain restrictions,
such grantees would be entitled to exercise all or any portion of the phantom
appreciation rights granted to
40
them. Upon exercise of any such rights, the grantee would be entitled to receive
from BCPM or Borden, an amount in cash calculated to award the grantee for any
actual appreciation in the market value of the Units in the Holding Company and
actual cash distributions made by the Holding Company in respect of the Units.
The benefits under the plan may be in addition to, and not in lieu of, the
benefits provided to management and employees of BCPM (and such employees of
Borden) under existing plans or employee benefit arrangements. BCPM (or Borden,
on behalf of BCPM) will be reimbursed by the Company for all payments made or
expenses incurred by BCPM (or Borden, on behalf of BCPM) under the plan. Under
the plan, an initial grant of approximately 61,500 phantom appreciation rights
was made during 1995; additional grants of 83,500 and 89,000 phantom
appreciation rights were made during 1996 and 1997, respectively.
The following table sets forth information concerning individual grants of
stock options and free standing unit appreciation rights ("UARs") made during
1997 to each of the Named Executives.
Option/UAR(a) Grants in Last Fiscal Year
----------------------------------------
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------- ---------------------------
Number of Percent Of
Securities Total Option
Underlying SARs Granted Exercise Or Cumulative
Option/SARs To Employees Base Price Expiration Phantom
Name Granted (#) In Fiscal Year ($/Sh) Date 5% ($) 10% ($) Units (b)
- --------------------- ------------- ------------- ----------- ---------- ------ ------ ----------
Saggese, Joseph M. 6,500(c) 7.3 10.25 22-Apr-04 $27,123 $63,208 1,107.7
Leonard, Wayne P. 6,000(c) 6.7 10.25 22-Apr-04 25,037 58,346 3,449.8
Owens, Jr. Marshall D. 3,000(c) 3.4 10.25 22-Apr-04 12,518 29,173 1,373.5
(a) UARs are unit appreciation rights which, (i) in the event the Fair
Market Value of one Unit equals or exceeds the Base Price of such UAR at
the time of exercise of such UAR, entitles the holder thereof to receive,
upon exercise of such UAR, cash in an amount equal to the excess of the
Fair Market Value of one Unit on the date of exercise over the exercise
price of such UAR and (ii) in the event the Fair Market Value of one Unit
is less than the exercise price of such UAR, upon exercise of such UAR,
reduces the cash payable due to the exercise of Phantom Units (as defined
in note (b)) in connection with the exercise of such UAR by an amount equal
to the difference between such Fair Market Value and such exercise price;
the "Fair Market Value" means the average of the high and low transaction
prices of a Unit as reported on the NYSE Composite Transactions on such
date.
(b) Phantom Units are the right receive, upon exercise thereof, cash in
an amount equal to the Fair Market Value of one Unit on the date of
exercise. On the date a cash distribution is made by the Partnership to the
Unit Holders, a credit of Phantom Units is made to each holder of UARs. The
number of Phantom Units credited to each holder's account equals the number
determined by dividing (i) the product of (A) the aggregate number of UARs
and Phantom Units held in such holder's account immediately prior to such
cash distribution multiplied by (B) the amount of the cash distribution per
Unit by (ii) the Fair Market Value of a Unit on the date of the cash
distribution. Upon an exercise of any UARs, Phantom Units which are derived
from such UARs are automatically exercised in connection therewith.
(c) The grants vest 50% after two years, with the balance vesting
after three years.
Fiscal Year-end Option/UAR Values
---------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/UARS At In-the-Money Options/UARs
Fiscal Year-end (#) At Fiscal Year-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Joseph M. Saggese 0/13,000 *
Wayne P. Leonard 2,750/14,250 *
Marshall D. Owens, Jr. 1,000/6,500 *
* None of the UARs were in-the-money
Pension Plan
The executive officers named above are employees of Borden and participate in
Borden's pension plans. The Borden Employees Retirement Income Plan ("ERIP")
41
for salaried employees was amended as of January 1, 1987, to provide benefit
credits of 3% of earnings which are less than the Social Security wage base for
the year plus 6% of earnings in excess of the wage base and an additional 1.5%
and 3% respectively for certain older employees. Earnings include annual
incentive awards paid currently but exclude any long-term incentive awards.
Benefits for service through December 31, 1986 are based on the plan formula
then effect and have been converted to opening balances under the plan. Both
opening balances and benefit credits receive interest credits at one-year
Treasury bill rates until the participant commences receiving benefit payments.
For the year 1997, the interest rate was 5.43%
The Company's supplemental pension plan provides for a grandfathering of
benefits for certain key employees as of January 1, 1983, including certain
executive officers, that, generally speaking, provide for the payment of any
shortfall if the sum of (a) the pension actually payable on retirement under the
ERIP (and any excess of supplemental plans), together with (b) the amount
(converted to a pension equivalent) attributable to Company contributions that
would be standing to the employee's credit at retirement under the Company's
Retirement Savings Plan if the employee had contributed at the maximum permitted
rate eligible for Company matching from December 31, 1983 until retirement, does
no equal or exceed the sum of (c) the retirement income calculated on the basis
of the December 31, 1982, ERIP pension formula (with certain adjustments), and
(d) the amount (converted to a pension equivalent) attributable to company
contribtuions (equal to 3.3% of compensation) that would be standing to the
employee's credit at retirement had the Company's Retirement Savings Plan as in
effect on January 1, 1983, been in effect continuously to retirement. The
projected pension figure for J.M. Saggese appearing at the end of this section
includes the effect of the foregoing grandfathering.
The ERIP contains additional transitional provisions for employees who met
certain age and service requirements on January 1, 1987. The transitional
minimum benefit is a final average pay benefit for service prior to 1988 based
on each year's earning plus a career average pay benefit based on
each year's earning for year 1988 through 1997 (1% of each year's earnings up to
the Social Security wage base plus 1-1/2% of excess).
Benefits vest on a graded five-year schedule for employees hired prior to July
1, 1990. Benefits vest after completion of five years of employment for
employees hired on or after July 1, 1990.
The Company has supplemental plans which will provide those benefits which are
otherwise produced by application of the ERIP formula, but which, under Section
415 or Section 401 (a) (17) of the Internal Revenue Code, are not permitted to
be paid though a qualified plan and its related trust.
The supplemental plan also provides a pension benefit using the ERIP formula
based on deferred incentive compensation awards and certain other deferred
compensation, which are not considered as part of compensation under the ERIP.
The total projected annual benefits payable under the formulas of the ERIP at
age 65 without regard to the Section 415 or 401 (a) (17) limits and recognizing
supplemental pensions as described above, are as follows for the above named
executive officers: Wayne P. Leonard - $50,542, Christopher L. Nagel and -
$28,067, Marshall D. Owens, Jr. - $30,609.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Joseph M. Saggese, Chairman, President and Chief Executive Officer and Wayne P.
Leonard, Executive Vice President and Chief Operating Officer, participate in
compensation decisions affecting executive officers and employees of BCPM.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
Management
----------
Since the Partnership is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Partnership outstanding
within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the
Securities Exhange Act of 1934. To the knowledge of BCPM, no person is the
beneficial owner of more than five percent of the Units. As of December 31,
1997 the beneficial ownership of Units by all directors and officers of BCPM as
a group was approximately 22,630 Units, which represents less than one percent
of the total Units outstanding.
The following table shows for (i) each director, (ii) executive officer named
in the Summary Compensation Table and (iii) for all officers and directors as a
group, the beneficial ownership of Units as of December 31, 1997.
Name of Beneficial Owner Units Percent of Units Held
- ----------------------- ------- ---------------------
Joseph M. Saggese 2,000 *
George W. Koch 14,100 *
Edward H. Jennings 1,000 *
Wayne P. Leonard 5,000 *
William H. Carter 500 *
Marshall D. Owens, Jr. 30 *
-------
All directors and executives officers
as a group 22,630 *
* Represents less than 1% of the outstanding Units
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The Partnership is managed by BCPM pursuant to the Partnership Agreement.
Under the Partnership Agreement BCPM is entitled to reimbursement of certain
costs of managing the Partnership. These costs include compensation and benefits
42
payable to officers and employees of BCPM, payroll taxes, general and
administrative costs and legal and professional fees. Note 4 of Notes to
Consolidated Financial Statements of the Partnership contained on page 55 of
this Form 10-K Annual Report contains information regarding relationships and
related transactions.
As described in Item 1, "Purchasing and Processing Agreements", the
Partnership sells various products to Borden Chemical, Inc. under certain
purchase agreements and processing agreements. Mssrs. Carter, Robbins and
Stoll, Jr., who are directors of BCPM, are also directors of Borden Chemical,
Inc.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
- -------- ----------------------------------------------------
ON FORM 8-K
-----------
(a) 1. Financial Statements
--------------------
a. The Consolidated Financial Statements, together with the report
thereon of Price Waterhouse LLP dated January 20, 1998 are contained
on pages 48 through 60 of this Form 10-K Annual Report.
2. Financial Statement Schedules
-----------------------------
None required.
3. Exhibits
--------
2.1(1) Asset Transfer Agreement dated as of August 12, 1994 and
amended as of January 10, 1995, and March 16, 1995, between
the Borden Chemicals and Plastics Operating Limited
Partnership (the "Operating Partnership") and Occidental
Chemical Corporation ("OxyChem") and the forms of VCM Supply
Agreement and PVC Tolling Agreement annexed thereto
3.0(2) Restated Certificate of Incorporation of BCPM
3.2(3) By-laws of BCPM
3.3(4) Amended and Restated Certificate of Limited Partnership of the
Partnership
3.4(4) Amended and Restated Certificate of Limited Partnership of the
Operating Partnership
3.5(4) Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of December 15, 1988
3.6(5) First Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of April
9, 1997
3.7(6) Second Amendment to the Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of August
14, 1997
3.8(7) Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of November 30, 1987
4.1(8) Form of Depository Receipt for Common Units
4.2(9) Indenture dated as of May 1, 1995 of 9.5% Notes due 2005
between the Operating Partnership and The Chase Manhattan Bank
(National Association), as Trustee
44
4.3(5) Rights Agreement between the Partnership and Harris Trust and
Savings Bank, as Rights Agent, dated as of April 8, 1997.
4.4(6) First Amendment to Rights Agreement between the Partnership
and Harris Trust and Savings Bank, as Rights Agent, dated as
of August 14, 1997.
10.1 Revolving Credit Agreement, dated December 19, 1997, between
the Operating Partnership and the Chase Manhattan Bank, as
Agent and as a lender, and other lenders.
10.5(7) Service Agreement, dated as of November 30, 1987, between
Borden and the Operating Partnership
10.6(7) Intercompany Agreement, dated as of November 30, 1987, among
Borden, BCPM, the Partnership and the Operating Partnership
10.7(4) Borden and BCPM Covenant Agreement, dated as of December 15,
1988, among Borden and the Partnership
10.9(7) PVC Purchase Agreement, dated as of November 30, 1987, between
Borden and the Operating Partnership
10.10(7) Ammonia Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.10.1(4) Amendment Agreement No. 1 to Ammonia Purchase Agreement,
dated as of December 15, 1988, between Borden and the
Operating Partnership
10.11(7) Urea Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.11.1(4) Amendment Agreement No. 1 to Urea Purchase Agreement, dated
as of December 15, 1988, between Borden and the Operating
Partnership
10.12(7) Methanol Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.12.1(4) Amendment Agreement No. 1 to Methanol Purchase Agreement,
dated as of December 15, 1988, between Borden and the
Operating Partnership
10.13(7) Formaldehyde Processing Agreement, dated as of November 30,
1987, between Borden and the
Operating Partnership
10.13.1(4) Amendment Agreement No. 1 to Formaldehyde
45
Processing Agreement, dated as of December 15, 1988 between
Borden and the Operating Partnership
10.14(7) Urea-Formaldehyde Concentrate Processing Agreement, dated as
of November 30, 1987, between Borden and the Operating
Partnership
10.14.1(4) Amendment Agreement No. 1 to Urea-Formaldehyde Concentrate
Processing Agreement, dated as of December 15, 1988, between
Borden and the Operating Partnership
10.15(7) Use of Name and Trademark License Agreement, dated as of
November 30, 1987, among Borden, the Partnership and the
Operating Partnership
10.16(7) Patent and Know-how Agreement, dated November 30, 1987, among
Borden, the Partnership and the Operating Partnership
10.17(7) Environmental Indemnity Agreement, dated as of November 30,
1987, among the Partnership, the Operating Partnership and
Borden
10.18(7) Lease Agreement, dated as of November 30, 1987, between the
Operating Partnership and Borden
10.19(3) Indenture, dated as of June 1, 1962, among Monochem, Inc.,
Borden and Uniroyal Chemical Company, Inc. (as successor to
Uniroyal Inc., which was a successor to United States Rubber
Company)
10.20(3) Amendment to Indenture, dated as of December 30, 1981, among
Monochem, Inc., Borden and Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.)
10.21(3) Restructuring Agreement, dated as of December 9, 1980, among
Borden, Uniroyal Chemical Company, Inc. (as successor to
Uniroyal, Inc.) and Monochem, Inc.
10.22(3) Amendment to Restructuring Agreement, dated as of December 31,
1981, among Borden, Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.) and Monochem, Inc.
10.23(3) Restated Basic Agreement, dated as of January 1, 1982, between
Borden and Uniroyal Chemical Company, Inc. (as successor to
Uniroyal, Inc.)
10.24(3) Restated Operating Agreement, dated as of
46
January 1, 1982, among Borden, Uniroyal Chemical Company, Inc.
(as successor to Uniroyal, Inc.) and Monochem, Inc.
10.25(3) Restated Agreement to Amend Operating Agreement, dated as of
January 1, 1983, among Borden, Uniroyal Chemical Company, Inc.
(as successor to Uniroyal, Inc.) and Monochem, Inc.
10.26(3) Operating Agreement for Oxygen and Acetylene Plants, dated
April 1, 1982, between Borden and BASF Wyandotte Corporation
(subsequently named BASF Corporation) ("BASF")
10.27(3) Amendment to Operating Agreement for Oxygen and Acetylene
Plants, dated August 22, 1984, between Borden and BASF
10.28(3) Second Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated December 14, 1984, between Borden and
BASF
10.29(3) Third Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated as of October 2, 1985, between Borden
and BASF
10.30(3) Fourth Amendment to Operating Agreement, dated August 25,
1987, between Borden and BASF
10.31(3) Fifth Amendment to Operating Agreement, dated November 10,
1987, between Borden and BASF
10.32(4) Sixth Amendment to Operating Agreement, dated February 11,
1988, between the Operating Partnership and BASF
10.33(3) Third Purchase Agreement, dated August 25, 1987, between
Borden and BASF
10.34(3) Operating Agreement, dated December 14, 1984 among Borden,
BASF, Liquid Air Corporation ("LAC") and LAI Properties, Inc.
("LAI")
10.35(3) Amendment No. 1 to Operating Agreement, dated October 2, 1985,
among Borden, BASF, LAC and LAI
10.36(4) Amendment No. 2 to the Operating Agreement, dated February 11,
1988, among Borden, the Operating Partnership, BASF, LAC and
LAI
10.37(3) Second Operating Agreement, dated October 2, 1985, among
Borden, BASF, LAC and LAI
10.38(4) Restated Second Operating Agreement, dated February 11, 1988
among Borden, the
47
Operating Partnership, BASF, LAC and LAI
10.39(4) Acetylene Sales Agreement No. 1, dated February 11, 1988,
between the Operating Partnership and BASF
10.40(4) Acetylene Sales Agreement No. 2, dated February 11, 1988,
between the Operating Partnership and BASF
10.41(7) Railroad Car Master Sublease Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership,
relating to ACF Industries, Incorporated Master Service
Contract
10.42(7) Railroad Car Master Sublease Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership,
relating to Pullman Leasing Company Lease of Railroad
Equipment
10.43(7) Railroad Car Master Sublease Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership,
relating to Union Tank Car Company Service Agreement
10.44(7) Railroad Car Master Sublease Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership,
relating to General Electric Railroad Service Corporation Car
Leasing Agreement
10.45(7) Railroad Car Master Sublease Agreement, dated as of November
30, 1987, between Borden and the Operating Partnership,
relating to General American Transportation Corporation Tank
Car Service Contract
10.46(7) Railroad Car Sublease Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership, relating
to EHF Leasing Corporation Railroad Equipment Lease
10.47(7) Railroad Car Sublease Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership, relating
to Bank of New York Lease of Railroad Equipment (as amended)
10.48(3) Form of Rail Service Agreement between Borden and the
Operating Partnership
10.49(10) Form of Letter Agreement with Directors
48
10.50(7) Illiopolis Indemnity Agreement
10.51(7) 1995 Long-Term Incentive Plan
__________________
(1) Filed as an exhibit to Borden Chemicals and Plastics Limited Partnership's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
Confidential treatment has been granted as to certain provisions.
(2) Filed as an exhibit to Borden Chemicals and Plastics Limited Partnership's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(3) Filed as an exhibit to the Partnership's Registration Statement on Form S-1
(File No. 33-17057) and is incorporated herein by reference in this
Form 10-K Annual Report.
(4) Filed as an exhibit to the joint Registration Statement on Form S-1 and
Form S-3 of the Partnership, Borden, Inc. and Borden Delaware Holdings,
Inc. (File No. 33-25371) and is incorporated herein by reference in this
Form 10-K Annual Report.
(5) Filed as Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated
April 8, 1997 (filed April 1997) (File No. 1-9699) and incorporated herein
by reference.
(6) Filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K dated
August 14, 1997 (filed August 18, 1997) (File No. 1-9699) and incorporated
herein by reference.
(7) Filed as an exhibit to the Partnership's Registration Statement on Form S-1
(File No. 33-18938) and is incorporated herein by reference in this
Form 10-K Annual Report.
(8) Filed as an exhibit to the Registrant's 1992 Form 10-K Annual Report and is
incorporated herein by reference in this Form 10-K Annual Report.
(9) Filed as an exhibit to the Registrant's 1995 Form 10-K Annual Report and is
incorporated herein by reference in this Form 10-K Annual Report.
(10) Filed as an exhibit to the Registrant's 1989 Form 10-K Annual Report and is
incorporated herein by reference in this Form 10-K Annual Report.
(11) Exhibits 10.8, 10.32, 10.36, 10.37 and 10.38, which were previously filed,
contain information which has been deleted pursuant to an application for
confidential treatment pursuant to Rule 406 of the Securities Act of 1933,
with respect to which an order has been granted by the Commission.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the fourth
quarter 1997.
49
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/ Christopher L. Nagel
---------------------------
Christopher L. Nagel
Vice President,
Chief Financial Officer and
Treasurer
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with BCP Management, Inc., General Partner)
indicated, on the date set forth above.
Signature TITLE
--------- -----
/s/ Joseph M. Saggese Director, Chairman, President
- --------------------------
Joseph M. Saggese and Chief Executive Officer
/s/ William H. Carter Director
- ----------------------------
William H. Carter
/s/ E. Linn Draper, Jr. Director
- ----------------------------
E. Linn Draper, Jr.
/s/ Edward H. Jennings Director
- ----------------------------
Edward H. Jennings
/s/ George W. Koch Director
- ---------------------------
George W. Koch
/s/ Clifton S. Robbins Director
- ----------------------------
Clifton S. Robbins
/s/ William F. Stoll, Jr. Director
- ----------------------------
William F. Stoll, Jr.
50
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF BORDEN CHEMICALS
AND PLASTICS LIMITED PARTNERSHIP
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of changes in partners' capital and of cash flows
appearing on pages 52 to 63 present fairly, in all material respects, the
financial position of Borden Chemicals and Plastics Limited Partnership and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Columbus, Ohio
January 20, 1998
51
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Year Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
REVENUES
Net trade sales $602,907 $593,641 $608,070
Net sales to related parties 134,222 115,562 131,517
------- ------- -------
Total revenues 737,129 709,203 739,587
-------- -------- --------
EXPENSES
Cost of goods sold
Trade 562,159 549,315 424,492
Related parties 119,825 107,245 92,035
Marketing, general & administrative expense 24,622 24,167 22,127
Interest expense 20,898 21,696 19,066
General Partner incentive 794 29,783
Other expense,
including minority interest 3,234 1,952 1,158
-------- -------- --------
Total expenses 731,532 704,375 588,661
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 5,597 4,828 150,926
Extraordinary charge on early extinguish-
ment of debt (6,912)
-------- -------- --------
NET INCOME 5,597 4,828 144,014)
Less 1% General Partner interest ( 56) ( 48) (1,440)
-------- -------- ---------
NET INCOME APPLICABLE TO LIMITED
PARTNERS' INTEREST $ 5,541 $ 4,780 $142,574
========= ======== =========
PER UNIT DATA - BASIC, NET OF 1% GENERAL PARTNER
INTEREST
Income per unit before extra-
ordinary item $ 0.15 $ 0.13 $ 4.07
Extraordinary charge per Unit (0.19)
--------
Net income per Unit $ 0.15 $ 0.13 $ 3.88
========= ======== ========
Average number of Units outstanding
during the year 36,750 36,750 36,750
========= ======== ========
Cash distributions declared per Unit $ 0.83 $ 0.35 $ 4.66
========= ======== ========
See notes to consolidated financial statements
52
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-----------------------------------
CASH FLOWS FROM OPERATIONS
Net income $ 5,597 $ 4,828 $ 144,014
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary charge on early extinguish-
ment of debt 6,912
Depreciation 48,569 49,092 49,198
Increase (decrease) in cash from changes
in certain assets and liabilities:
Receivables 596 ( 4,065) 30,641
Inventories 961 ( 890) (10,612)
Payables (4,810) ( 3,080) 14,186
Incentive distribution payable 0 ( 1,910) ( 9,955)
Accrued interest 24 ( 77) 1,417
Other, net (4,031) ( 5,435) ( 213)
-------- ------- -------
46,906 38,463 225,588
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition (100,376)
Capital expenditures (19,426) ( 14,558) ( 27,085)
--------- --------- ---------
(19,426) ( 14,558) (127,461)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of long-
term debt 25,000 200,000
Net (repayments of)
proceeds from short-term borrowings (25,000) ( 15,000) 40,000
Repayment of debt issuance costs ( 9,815)
Repayment of long-term debt, including
prepayment penalty (156,912)
Cash distributions paid (30,819) ( 30,459) (213,105)
-------- --------- ---------
(30,819) ( 45,459) (139,832)
--------------------------------
Decrease in cash and equivalents ( 3,339) ( 21,554) ( 41,705)
Cash and equivalents at beginning of year 10,867 32,421 74,126
-------- --------- ---------
Cash and equivalents at end of year $ 7,528 $ 10,867 $ 32,421
======== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid during the year $20,874 $ 21,773 $ 17,649
======== ========= =========
See notes to consolidated financial statements
53
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Cash and equivalents $ 7,528 $ 10,867
Accounts receivable (less allowance for
doubtful accounts of $475 and $589,
respectively)
Trade 72,718 72,908
Related parties 21,741 22,147
Inventories
Finished and in process goods 33,686 36,174
Raw materials and supplies 9,315 7,788
Other current assets 4,380 2,579
---------- ---------
Total current assets 149,368 152,463
---------- ---------
Investments in and advances to
affiliated companies 7,834 4,366
Other assets 52,784 49,405
---------- ---------
60,618 53,771
---------- ---------
Land 15,952 14,970
Buildings 45,050 44,597
Machinery and equipment 662,050 644,619
---------- ---------
723,052 704,186
Less accumulated depreciation ( 432,852) (384,715)
---------- ---------
Total assets 290,200 319,471
---------- ---------
$ 500,186 $ 525,705
========== =========
LIABILITIES AND
PARTNERS' CAPITAL
Accounts and drafts payable $ 57,002 $ 61,812
Cash distributions payable 3,712 3,712
Short-term borrowing 0 25,000
Accrued interest 3,209 3,185
Other accrued liabilities 21,111 16,516
---------- ---------
Total current liabilities 85,034 110,225
Long-term debt 225,000 200,000
Other liabilities 5,760 5,609
Minority interest in consolidated
subsidiary 1,314 1,571
---------- ---------
Total liabilities 317,108 317,405
---------- ---------
Commitments and contingencies (See Note 9)
Partners' capital
Limited Partners 182,718 207,680
General Partner 360 620
---------- ---------
Total partners' capital 183,078 208,300
---------- ---------
Total liabilities and partners' capital $500,186 $525,705
========== =========
See notes to consolidated financial statements
54
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
LIMITED GENERAL
Partners PARTNER TOTAL
--------- ------- --------
Balances at December 31, 1994 $ 244,443 $ 1,292 $ 245,735
Net income 142,574 1,440 144,014
Cash distributions declared (171,255) (2,030) (173,285)
---------- ------- ---------
Balances at December 31, 1995 215,762 702 216,464
Net income 4,780 48 4,828
Cash distributions declared (12,862) (130) (12,992)
---------- ------- ---------
Balances at December 31, 1996 $ 207,680 $ 620 $ 208,300
Net income 5,541 56 5,597
Cash distribution declared (30,503) (316) (30,819)
---------- ------- ---------
Balances at December 31, 1997 $ 182,718 $ 360 $ 183,078
========== ======= =========
See notes to consolidated financial statements.
55
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(In thousands except Unit and per Unit data)
1. ORGANIZATION AND BUSINESS
Borden Chemicals and Plastics Limited Partnership (the "Partnership") is a
Delaware limited partnership which owns a 98.9899% limited partner interest as
sole limited partner in Borden Chemicals and Plastics Operating Limited
Partnership (the "Operating Partnership"). BCP Management, Inc. ("BCPM"), a
wholly-owned subsidiary of Borden, Inc. ("Borden"), owns a 1% interest as the
sole general partner in the Partnership and a 1.0101% interest as the sole
general partner ("General Partner") in the Operating Partnership, resulting in
an aggregate 2% ownership interest in the partnerships. The General Partner's
interest in the Operating Partnership is reflected as minority interest in the
accompanying consolidated financial statements.
The Operating Partnership, acquired and operates the basic chemicals and
polyvinyl chloride ("PVC") resins operations of Borden which consist of highly
integrated plants in Geismar, Louisiana which produce basic petrochemical
products, PVC resins and industrial gases; a PVC resins plant located in
Illiopolis, Illinois; and a PVC resins plant in Addis, Louisiana purchased in
1995 (Note 3). The Partnership markets its commodity products to the
manufacturing, chemical and fertilizer industries primarily in the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies summarized below are in conformity with
generally accepted accounting principles; however, this is not the basis for
reporting taxable income to Unitholders.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Partnership and the Operating Partnership after elimination
of interpartnership accounts and transactions.
Revenues - Sales and related cost of sales are recognized upon shipment of
products. Net trade and net related party sales are net of sales discounts and
product returns and allowances.
Cash Equivalents - The Partnership considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Included in cash and equivalents are time deposits of $6,950 and
$9,500 at December 31, 1997 and 1996, respectively.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out methods.
Investments in and advances to affiliated companies - The Partnership's 50%
ownership of a joint venture that provides utilities to the Geismar complex is
accounted for by the equity method. Utilities provided by the joint venture are
allocated to joint venture partners at cost. The cost of the Partnership's
proportionate share of utilities is included in cost of goods sold.
56
The Partnership also owns a 51% interest in another partnership engaged
in manufacturing and marketing vinyl esters. Due to the significance of the
rights held by the minority partner, the Partnership's interest in this
partnership is accounted for using the equity method.
Other Assets and Liabilities - Debt issuance costs are capitalized and are
amortized over the term of the associated debt or credit agreement. Included in
other assets are spare parts totaling $23,400 and $22,436 at December 31, 1997
and 1996, respectively. Included in other accrued liabilities are accrued sales
discounts of $8,604 and $7,185 at December 31, 1997 and 1996, respectively.
Property and Equipment - The amount of the purchase price originally allocated
by the Partnership at its formation to land, buildings, and machinery and
equipment was based upon their relative fair values. Expenditures made
subsequent to the formation of the Partnership have been capitalized at cost
except that the purchase price for Addis assets (Note 3) has been allocated to
properties based upon their relative fair values.
Depreciation is recorded on the straight-line basis by charges to costs and
expenses at rates based on the estimated useful lives of the properties (average
rates for buildings - 4%; machinery and equipment - 8%).
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals totaling $38,937 in 1997, 37,091 in 1996 and $34,298 in 1995 were
expensed as incurred. When properties are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts.
Income Taxes - Prior to December 31, 1997, The Partnership was not a separate
taxable entity for federal and state and local income tax purposes. Accordingly,
any taxable income or loss, which may have varied substantially from income or
loss reported under generally accepted accounting principles, was reflected in
the tax returns of the individual partners. In August, 1997 legislation was
enacted which extends indefinitely the Partnership's treatment as a partnership
for federal income tax purposes provided that the Partnership elects to be
subject to a 3.5% tax on taxable gross income beginning on January 1, 1998 (the
treatment as a partnership had been scheduled to expire on December 31, 1997).
The Partnership has made such an election.
The Partnership has not made any provision for deferred income taxes at
December 31, 1997 since the tax effect of the difference between the book and
tax bases of assets and liabilities affecting the determination of gross income
is not considered material to the Partnership's financial statements.
New Accounting Pronouncements - Effective for the year ended December 31,
1997, the Partnership adopted the method for computing and presenting income per
unit in accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share". Basic income per unit is computed by dividing net
income, after subtracting the General Partner's 1% interest, by the weighted
average number of units outstanding. Currently, there are no potentially
dilutive securities; accordingly, basic income per unit and diluted income per
unit are equivalent.
In June 1997, The Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income", and SFAS No.131
57
"Disclosures about Segments of an Enterprise and Related information". SFAS No.
130 establishes standards for reporting of comprehensive income and its
components. The Partnership is required to adopt the provisions of SFAS No. 130
for its consolidated financial statements for the three months ending March 31,
1998. SFAS No. 131 requires certain disclosures about segment information in
interim and annual financial statements and related information about products
and services, geographic areas and major customers. The Partnership must adopt
the provisions of SFAS No. 131 for its consolidated financial statements for the
year ending December 31, 1998. The adoptions of SFAS No. 130 and SFAS No. 131
will not affect the Partnership's financial position, results of operations or
cash flows; changes in the form and content of its disclosures may be required.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenditures during the
reporting period. Actual results could differ from those estimates.
3. ACQUISITION
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 cash purchase price for the Addis
assets was $100,400 and was financed by a new issue of senior unsecured notes
(Note 5).
The following financial information presents the pro forma effect of the
acquisition on the historical results of operations for the year ended December
31, 1995 as if the transactions occurred on January 1, 1995.
YEAR ENDED
DECEMBER 31, 1995
-----------------
Total revenues $794,393
Income before extraordinary item:
Income $155,168
Income per Unit, net of 1%
General Partner interest $ 4.18
4. RELATED PARTY TRANSACTIONS
The Partnership is managed by the General Partner. Under certain agreements,
the General Partner and Borden are entitled to reimbursement of costs incurred
relating to the business activities of the Partnership. The Partnership is
engaged in various transactions with Borden and its affiliates in the ordinary
course of business. Such transactions include, among other things, the sharing
of certain general and administrative costs, sales of products to and purchases
of raw materials from Borden or its related parties, and usage of rail cars
owned or leased by Borden.
Prior to July 1, 1997 Borden included the Partnership in its general
58
insurance coverage, including liability and property damage coverage. The
Partnership reimbursed Borden for its share of the costs of the general
insurance coverage based on calculations made by Borden's Risk Management
Department. Under its risk retention program, Borden maintained deductibles of
$2,500, $500 and $500 per occurrence for property and related damages at the
Geismar, Illiopolis and Addis facilities, respectively, and deductibles ranging
from $100 to $3,000 per event for liability insurance.
After July 1, 1997 the Partnership participates in general insurance coverage
held in name by a Borden affiliate, however the costs of the coverage are
specifically apportioned to the Partnership by the insurance carriers and the
Partnership pays the premiums for the coverage directly to those carriers. The
deductibles for property and liability coverages are similar to those maintained
under the previous arrangement with Borden.
The employees of BCPM (together with employees providing support to or
services for BCPM) operate the Partnership and participate in various Borden
benefit plans including pension, retirement savings, postretirement other than
pensions and health and life insurance. The Partnership has no direct liability
for such benefits since the Partnership does not directly employ any of the
persons responsible for managing and operating the Partnership, but instead
reimburses Borden (on its own or BCPM's behalf) for their services. Charges to
the Partnership for such services are actuarially determined where appropriate.
The Partnership expenses the full amount of such charges but only reimburses
Borden (on its own or BCPM's behalf) for actual benefits paid. The difference
between cash payments to Borden (on its own or BCPM's behalf) and expense is
accrued on the Partnership's books.
Benefit plan and general insurance expenses, and allocation for usage of
resources such as personnel and data processing equipment were $5,902 in 1997,
$9,189 in 1996, and $11,628 in 1995. Management believes the allocation methods
used are reasonable. Although no specific analysis has been undertaken, if the
Partnership were to directly provide such services and resources at the same
cost as Borden, management believes the allocations would be indicative of costs
that would be incurred on a stand-alone basis.
The Partnership sells methanol, ammonia, urea and PVC resins to, and processes
formaldehyde and urea-formaldehyde concentrate for, Borden and its affiliates at
prices which approximate market.
The Partnership entered into long-term agreements with Borden which require
Borden to purchase from the Partnership at least 85% of Borden's requirements
for PVC resins, ammonia, urea and methanol and to utilize specified percentages
of the Partnership's capacity to process formaldehyde and urea-formaldehyde
concentrate.
On October 11, 1996, Borden sold its packaging division and as a part of the
transaction obtained a 34% ownership interest in the acquiring entity. The
packaging division had been a significant purchaser of PVC resins. After the
acquisition, sales prices remained substantially the same as sales to Borden.
Included in related party sales are sales of PVC to the acquiring entity of
$25,431 and $5,688 for 1997 and 1996, respectively. Included in related party
receivables are amounts due from acquiring entity for these sales of $4,445 and
$4,268 at December 31, 1997 and 1996, respectively. All other related party
sales and receivables are with
59
Borden.
5. DEBT
On May 1, 1995, the Operating Partnership issued $200,000 aggregate principal
amount of senior unsecured 9.5% notes due 2005. The net proceeds from this
offering were used to prepay $150,000 aggregate principal amount of previously
outstanding notes, plus a related prepayment premium of $6,912 reflected as an
extraordinary charge in 1995, and accrued interest. The remaining proceeds were
used to fund a portion of the purchase price of the Addis facility.
The aggregate fair value of the Partnership's outstanding debt was $212,500 at
December 31, 1997 and $204,500 at December 31, 1996 as determined by the market
trading price for the notes at those dates.
On December 22, 1997 the Operating Partnership obtained a revolving credit
facility of up to $100,000 under a revolving credit agreement with a consortium
of banks and borrowed $25,000 under this facility to repay the amount
outstanding under the existing credit facility, which was then terminated. The
new revolving credit facility expires on December 19, 2002, at which time all
amounts outstanding must be repaid in full. Borrowings bear interest at rates
which are fixed at the time of the borrowing based on the current market rate.
A commitment fee tied to the Partnership's public debt rating is payable on the
unused portion of the new facility. At December 31, 1997 borrowings under the
new facility were $25,000 and bore interest at 6.719% while the commitment fee
on the unused portion was 0.25%. The new credit agreement permits certain
additional indebtedness outside of the agreement, none of which was utilized as
of December 31, 1997.
The revolving credit agreement and the senior unsecured notes contain a number
of financial and other covenants, including limitations on liens and sales of
assets. Cash distributions are generally permitted so long as compliance with
certain covenants is maintained.
6. ALLOCATION OF INCOME AND LOSS
Income and loss of the Partnership is allocated in proportion to the partners'
percentage interests in the Partnership, provided that at least 1% of the income
or loss of the Partnership and Operating Partnership is allocated to the General
Partner. For income tax purposes, certain items are specially allocated to
account for differences between the tax basis and fair market value of property
contributed to the Partnership by Borden and to facilitate uniformity of Units.
In addition, the Partnership Agreement generally provides for an allocation of
gross income to the Unitholders and the General Partner to reflect
disproportionate cash distributions, on a per Unit basis.
7. CASH DISTRIBUTIONS
The Partnership makes quarterly distributions to Unitholders and the General
Partner of 100% of its Available Cash. Available Cash each quarter generally
consists of cash receipts less cash disbursements (excluding cash distributions
to Unitholders and the General Partner) and reserves.
60
Distributions of Available Cash are generally made 98% to the Unitholders and
2% to the General Partner, subject to the payment of an incentive distribution
to the General Partner after a target level of cash distributions to the
Unitholders is achieved for the quarter. The incentive distribution is 20% of
any remaining Available Cash for the quarter (in addition to the General
Partner's 2% regular distribution). Incentive distributions are accounted for as
an expense of the Partnership.
8. RIGHTS TO PURCHASE UNITS
On April 8, 1997, the General Partner declared a distribution of one common
unit purchase right (a "Right") for each outstanding common unit of the
Partnership and the number of Rights most closely approximating 1/99th of the
number of the units outstanding with respect to the General Partner's interest
in the Partnership.
The Rights are not exercisable until the earlier to occur of: (i) ten days
following a public announcement that a person or affiliated group of persons (an
"Acquiring Person") have acquired 15% or more of the outstanding units or (ii)
ten days (or such later date as may be determined by the General Partner prior
to someone becoming an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender or exchange offer the
consummation of which would result in a person or affiliated group of persons
acquiring 15% or more of the outstanding units. Until then, The Rights will
trade with the units and a Right will be issued with each additional unit
issued. The number of Rights outstanding at December 31, 1997 was 37, 121,212.
Each Right entitles the holder to purchase from the Partnership one common
unit at a price of $21.00, subject to adjustment in certain circumstances. In
the event an Acquiring Person acquires a 15% or more interest in the
Partnership, each holder of a Right, with the exception of the Acquiring Person,
will have the right to receive upon exercise of the Right at the then exercise
price of the Right, that number of Units having market value of two times such
exercise price. At any time prior to an Acquiring Person becoming such, the
General Partner may redeem the Rights in whole, but not in part, for $0.01 per
Right. The Rights, which do not have voting rights, generally will expire no
later than April 8, 2007.
9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments:
The Partnership has entered into a fifteen year supply agreement for one of
its raw materials commencing in 1997 to assure long-term supply and minimize
price volatility. The purchase price for this product is based on its raw
material and variable costs, as well as fixed costs that will vary based on
economic indices, changes in taxes or regulatory requirements. The aggregate
amount at December 31, 1997 of minimum payments required under the agreement is
$48,325 with $4,753 per year of minimum payments required for the next five
years. Purchases under the agreement totaled $21,753 in 1997.
The Partnership has agreed to purchase its joint venture partner's ownership
share of certain production facilities at the Geismar complex on
61
December 31, 1999. The purchase price is $10,000 payable over three years plus
the undepreciated value of the joint venture partner's share of capital spent on
the facilities from November 1997 to December 31, 1999.
The Partnership has undertaken actions to replace certain computer
applications or programs. The purchase commitment for costs associated with the
implementation of new software applications, including the associated hardware,
is $8,644 at December 31, 1997.
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 Company and BCPM 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 each which could be subject to the Environmental Indemnity
Agreement ("EIA") discussed below. 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 $150,000, management believes that, assuming
the Partnership is unsuccessful, based on information currently available, 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. The Partnership and the DOJ have engaged in settlement discussions but
as of yet have not agreed on the terms of any settlement. The matter is
scheduled for trial in U.S. District Court on March 9, 1998.
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
remediation 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 to the matter and the amount of time each has operated the assets in
62
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
$3,500 through December 31, 1996.
In connection with potential environmental matters, a $4,000 provision was
included in the Partnership's 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.
The Partnership is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of the management of the
Partnership, the amount of the ultimate liability, taking into account its
insurance coverage, including its risk retention program and Environmental
Indemnity Agreement with Borden would not materially affect the financial
position or results of operations of the Partnership.
10. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANT'S REPORT
On March 11, 1998, the Partnership and the DOJ reached an agreement in
principle to resolve the enforcement action brought by the DOJ against the
Operating Partnership, the Partnership and the General Partner in October 1994,
and the Declaratory Judgement Action brought by the Partnership against the
United States. The settlement provides for payment of a civil penalty of $3.6
million and funding of $0.4 million for community based environment programs,
but it does not include any admission of wrongdoing. The terms of the settlement
also provide for a program of groundwater and other remediation at the Geismar
facility. The agreement also provides that the Partnership will undertake a
Supplemental Environmental Project to decommission its underground injections
wells and instead subject the waste to innovative source reduction. The
estimated cost of the project is $3.0 million. In light of the provision
previously established for this matter and Borden's obligation under the EIA to
pay for the remediation program, the settlement will not have a material effect
on the Partnership's financial position or results of operations.
63