Exhibit 99.2
AUDITED FINANCIAL STATEMENTS
SunBelt Chlor Alkali Partnership
December 31, 2004
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SunBelt Chlor Alkali Partnership
Audited Financial Statements
Years Ended December 31, 2004 and 2003
CONTENTS
Audited Financial Statements
Report of Independent Registered Public Accounting Firm .................. 1
Balance Sheets ........................................................... 2
Statements of Operations ................................................. 3
Statements of Partners' Deficit .......................................... 4
Statements of Cash Flows ................................................. 5
Notes to Financial Statements ............................................ 6
Report of Independent Registered Public Accounting Firm
The Partners
SunBelt Chlor Alkali Partnership
We have audited the accompanying balance sheets of SunBelt Chlor Alkali
Partnership as of December 31, 2004 and 2003, and the related statements of
operations, partners' deficit, and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SunBelt Chlor Alkali
Partnership at December 31, 2004 and 2003, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
February 11, 2005
Cleveland, Ohio
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SunBelt Chlor Alkali Partnership
Balance Sheets
December 31, 2004 and 2003
2004 2003
------------ ------------
ASSETS
Current assets:
Cash $ 22,609 $ 11,600
Receivable from Oxy Vinyls, LP 7,261,416 3,427,331
Receivables from partners 8,429,290 6,388,811
Inventories 2,111,018 2,482,776
Prepaids and other current assets 1,116,377 959,720
------------ ------------
Total current assets 18,940,710 13,270,238
Property, plant, and equipment, net 124,415,109 134,187,252
Deferred financing costs, net 1,041,922 1,122,069
------------ ------------
Total assets $144,397,741 $148,579,559
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Amounts payable to partners $ 5,811,337 $ 6,557,559
Current portion of long-term debt 12,187,500 12,187,500
------------ ------------
Total current liabilities 17,998,837 18,745,059
Long-term debt 146,250,000 158,437,500
Partners' deficit (19,851,096) (28,603,000)
------------ ------------
Total liabilities and partners' deficit $144,397,741 $148,579,559
============ ============
See notes to financial statements.
2
SunBelt Chlor Alkali Partnership
Statements of Operations
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
Revenues $105,764,129 $ 97,021,661 $ 65,158,183
Operating costs and expenses:
Cost of sales 45,281,281 41,699,987 38,945,085
Depreciation and amortization 14,150,729 13,632,976 13,426,621
Administrative and general 10,701,137 9,744,589 9,688,129
------------ ------------ ------------
70,133,147 65,077,552 62,059,835
------------ ------------ ------------
Operating income 35,630,982 31,944,109 3,098,348
Interest expense (12,336,188) (13,217,344) (14,098,500)
Interest income 161,168 69,215 --
------------ ------------ ------------
Net income (loss) $ 23,455,962 $ 18,795,980 $(11,000,152)
============ ============ ============
See notes to financial statements.
3
SunBelt Chlor Alkali Partnership
Statements of Partners' Deficit
For the Years Ended December 31, 2004, 2003 and 2002
PARTNERS
----------------------------
1997
OLIN SUNBELT CHLOR ALKALI
INC. VENTURE, INC. TOTAL
------------ ------------- ------------
Balance at December 31, 2001 $(21,122,607) $(21,122,607) $(42,245,214)
Cash contributions by partners 38,682,831 38,682,831 77,365,662
Cash distributions to partners (31,833,245) (31,833,245) (63,666,490)
Net loss (5,500,076) (5,500,076) (11,000,152)
------------ ------------ ------------
Balance at December 31, 2002 (19,773,097) (19,773,097) (39,546,194)
Cash contributions by partners 10,883,627 14,069,753 24,953,380
Asset contributions by partner 3,186,126 -- 3,186,126
Cash distributions to partners (17,996,146) (17,996,146) (35,992,292)
Net income 9,397,990 9,397,990 18,795,980
------------ ------------ ------------
Balance at December 31, 2003 (14,301,500) (14,301,500) (28,603,000)
Cash distributions to partners (7,352,029) (7,352,029) (14,704,058)
Net income 11,727,981 11,727,981 23,455,962
------------ ------------ ------------
Balance at December 31, 2004 $ (9,925,548) $ (9,925,548) $(19,851,096)
============ ============ ============
See notes to financial statements.
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SunBelt Chlor Alkali Partnership
Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 23,455,962 $ 18,795,980 $(11,000,152)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 14,070,581 13,552,828 13,346,472
Amortization 80,148 80,148 80,148
Loss on disposal of assets 289,883 134,897 520,924
Changes in assets and liabilities:
Receivable from Oxy Vinyls, LP (3,834,085) 1,477,074 (4,360,275)
Receivables from partners (2,040,479) (156,701) 3,143,046
Inventories 371,758 323,839 (225,287)
Amounts payable to partners (746,222) 313,383 (272,559)
Prepaid expenses and other current assets (156,657) (707,898) (42,198)
------------ ------------ ------------
Net cash provided by operating activities 31,490,889 33,813,550 1,190,119
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (4,588,322) (10,575,538) (2,764,252)
Proceeds on sale of property, plant, and equipment -- -- 62,146
------------ ------------ ------------
Net cash used in investing activities (4,588,322) (10,575,538) (2,702,106)
FINANCING ACTIVITIES
Cash contributions by partners -- 24,953,380 77,365,662
Cash distributions to partners (14,704,058) (35,992,292) (63,666,490)
Principal payments on long-term debt (12,187,500) (12,187,500) (12,187,500)
------------ ------------ ------------
Net cash (used in) provided by financing activities (26,891,558) (23,226,412) 1,511,672
------------ ------------ ------------
Net increase (decrease) in cash 11,009 11,600 (315)
Cash at beginning of year 11,600 -- 315
------------ ------------ ------------
Cash at end of year $ 22,609 $ 11,600 $ --
============ ============ ============
See notes to financial statements.
5
SunBelt Chlor Alkali Partnership
Notes to Financial Statements
December 31, 2004 and 2003
1. ORGANIZATION
SunBelt Chlor Alkali Partnership (the Partnership) was formed on August 23, 1996
under a Partnership Agreement, between 1997 Chlor Alkali Venture, Inc. and Olin
SunBelt Inc. (the Partners). 1997 Chlor Alkali Venture, Inc. is a wholly owned
subsidiary of PolyOne Corporation (formerly The Geon Company) and Olin SunBelt
Inc. is a wholly owned subsidiary of the Olin Corporation. Each of the Partners
has a 50% interest in the Partnership. The Agreement provides that the capital
investment of the Partners will be maintained and the Partnership's income or
loss will be allocated to the Partners based on their ownership interest
percentages.
The Partnership was formed for the purpose of construction and operation of a
Chlor-Alkali facility. The facility, which is located in McIntosh, Alabama
produces chlorine, caustic soda and hydrogen.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENT
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT AND DEPRECIATION
Property, plant, and equipment are carried at cost. Major renewals and
betterments are capitalized. Maintenance and repair expenditures which do not
improve or extend the life of the respective assets are expensed as incurred.
Depreciation for all plant and equipment is computed using the straight-line
method over their estimated useful lives. The ranges of estimated useful lives
are as follows:
Land improvements 20 years
Buildings 20 years
Machinery and equipment 15-20 years
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-lived assets are assessed for impairment when operating profits for the
related business or a significant change in the use of an asset indicate that
their carrying value may not be recoverable.
DEFERRED FINANCING COSTS
The costs incurred by the Partnership in obtaining its long-term debt have been
capitalized and are being amortized over the term of the debt using the
effective interest method.
FINANCIAL INSTRUMENTS
The carrying amount of long-term debt approximates its fair value. The fair
value of the debt is estimated based on the present value of the underlying cash
flow discounted at the Partnership's estimated borrowing rate.
REVENUE RECOGNITION
The Partnership recognizes revenues at the point of passage of title which is
based on shipping terms.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are reflected in costs of sales.
INCOME TAXES
No provision is made for income taxes as the Partnership's results of operations
are includable in the tax returns of the Partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES
Since the Partnership's major products are commodities, significant changes in
the prices of chemical products could have a significant impact on the results
of operations for any particular period. The Partnership had one major chlorine
customer, OxyVinyls LP, during the periods presented, which accounted for 58.3%,
53.7%, and 47.3% of total sales for the years ended December 31, 2004, 2003, and
2002, respectively.
3. INVENTORIES
Inventories are comprised as follows:
DECEMBER 31
-----------------------
2004 2003
---------- ----------
Finished goods $ 521,364 $ 738,369
Parts 1,589,654 1,744,407
---------- ----------
$2,111,018 $2,482,776
========== ==========
4. PROPERTY PLANT, AND EQUIPMENT
Property, plant, and equipment is comprised as follows:
DECEMBER 31
---------------------------
2004 2003
------------ ------------
Land and land improvements $ 4,862,826 $ 4,862,826
Building 3,507,389 3,242,600
Machinery and equipment 200,964,285 197,859,987
Construction in process 3,968,774 3,728,585
------------ ------------
213,303,274 209,693,998
Less allowance for depreciation 88,888,165 75,506,746
------------ ------------
$124,415,109 $134,187,252
============ ============
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
5. TRANSACTIONS WITH AFFILIATES
The Partnership has various management service agreements, dated August 23,
1996, with the Olin Corporation. These agreements, which include compensation
for managing the facility, an asset utilization fee, a fleet fee and a
distribution fee, have terms from five to ten years with five year price
adjustment renewals. Charges for these services were approximately $7,199,412,
$6,813,237 and $6,423,396 for 2004, 2003, and 2002, respectively, and have been
included within administrative and general expenses in the statement of
operations. The Partnership also received contributions from its partners
totaling $28,139,506 and $77,365,662 in 2003 and 2002, respectively, which were
used for working capital purposes and to pay for costs incurred in constructing
the production facility. The cash policy was changed during 2003 to not make
distributions to the partners until the cash balance was sufficient to cover
both the principal payment and the interest expense for the year. Contributions
from the partners were discontinued with this policy change and the
manufacturing costs were paid from receipts. The Partnership made distributions
to its partners totaling $14,704,058, $35,992,292 and $63,666,490 in 2004, 2003,
and 2002, respectively.
In accordance with the Partnership Operating Agreement, the majority of chlorine
produced by the Partnership is sold to Oxy Vinyls LP, which is 24% owned by
PolyOne Corporation. The remaining chlorine and all of the caustic soda produced
by the Partnership is marketed and distributed by the Olin Corporation.
6. LONG-TERM DEBT
On December 23, 1997, the Partnership borrowed $195,000,000 in a private
placement of debt. The debt is secured by the property, plant, equipment, and
inventory of the Partnership. The term of the loan is 20 years at an interest
rate of 7.23%. The first principal payment of $12,187,500 was paid on December
22, 2002 with equal annual payments due through December 22, 2017. Interest
payments are payable semi-annually in arrears on each June 22 and December 22.
Interest payments totaled $12,336,188, $13,217,344, and 14,098,500 in 2004,
2003, and 2002, respectively. The debt is guaranteed by the Partners.
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SunBelt Chlor Alkali Partnership
Notes to Financial Statements (continued)
7. LEASES
The Partnership has operating leases for certain property, machinery, and
equipment. At December 31, 2004, future minimum lease payments under
noncancelable operating leases are as follows:
2005 $ 633,845
2006 622,345
2007 588,220
2008 305,280
2009 251,460
Thereafter --
----------
Total minimum future lease payments $2,401,150
==========
Rent expense was approximately $599,720, $557,260, and 114,300 for the years
ended December 31, 2004, 2003, and 2002 respectively.
8. COMMITMENTS AND CONTINGENCIES
The Partnership is subject to legal proceedings and claims that arise in the
ordinary course of its business. Management evaluates each claim and provides
for any potential loss when the claim is probable to be paid and reasonably
estimable. In the opinion of management, the ultimate liability with respect to
these actions will not materially affect the financial condition, results of
operations or cash flows of the Partnership.
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