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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, 1996 COMMISSION FILE NUMBER: 1-9699
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BORDEN CHEMICALS AND PLASTICS
LIMITED PARTNERSHIP
Delaware 31-1269627
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(State of organization) (I.R.S. Employer Identification No.)
Highway 73, Geismar, Louisiana 70734 (614) 225-4482
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(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
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Depositary Units Representing New York Stock Exchange
Common Units
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein. [X]
__________________________________
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 14, 1997 was approximately $420 million.
Number of Common Units outstanding as of the close of business on February 14,
1997: 36,750,000.
_______________________________________________________________________________
_______________________________________________________________________________
The Exhibit Index is located herein at sequential page 33.
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PART I
ITEM I. BUSINESS
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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 1996, PVC Polymers Products, Methanol and Derivatives and Nitrogen
Products accounted for 65%, 21% and 14%, 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 production capacity of 625 million pounds
per year, which has increased the Company's stated annual capacity for PVC resin
production by approximately 71%. 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 1996, the Company increased overall
capacity of its facilities by 25.7% through various expansions and
"debottlenecking" projects at a cost of approximately $56 million.
The Company's production complex at Geismar, Louisiana, its plant at
Illiopolis, Illinois, and the Addis Facility produce products for the following
applications:
<TABLE>
<CAPTION>
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PRODUCTS LOCATION PRINCIPAL APPLICATIONS
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<S> <C> <C>
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
</TABLE>
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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 set 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 500 million, 380 million and 625
million pounds of PVC resins, respectively. The PVC resin plants operated at
approximately 95% and 98% of combined capacity in 1996 and 1995, 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 during 1994 and the first
half of 1995. Producer inventories during this time were reduced to minimal
levels, while plants were operating at maximum capacities. As a result,
published prices for PVC resins increased from an average of $0.32 per pound
during the fourth quarter of 1993 to an average of $0.40 per pound during the
third quarter of 1995. Beginning in the fourth quarter of 1994, the continued
buildup of PVC inventories worldwide by converters peaked resulting 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.
During 1996 and 1995, approximately 7% and 10%, 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. 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 10.0 million pounds annually) 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 exceed the market price of vinyl acetate
monomer.
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All the VCM used by the Company's Geismar and Illiopolis PVC resin plants is
obtained from the Company's two Geismar VCM plants discussed below.
Substantially all of the production of such 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 630 million pound stated annual capacity plant at the Geismar complex. The
plant operated at approximately 98% and 106% of capacity during 1996 and 1995,
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 1996
and 1995, the plant operated at approximately 79% and 88% 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.
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"). During 1996 and 1995,
the plant
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operated at approximately 96% and 103%, respectively, of capacity, with all
production being consumed by either the Company or BASF.
During 1996, approximately 57% 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 43% of the plant's 1996 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".
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As long as a subsidiary of Borden is the general partner of the Company, the
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 1996 and 1995, the plant operated at approximately 92% and
108%, respectively, of capacity.
From early 1994 through early 1995, market conditions for methanol improved
significantly due to 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. The outlook for methanol continues to be uncertain, but the Company
believes that its methanol sales prices during 1997 are likely to remain at
current levels. 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 1996, approximately 43% of methanol volume was sold to third parties (other
than Borden). Borden accounted for approximately 34% of such production for its
downstream formaldehyde production. Approximately 18% of production was used
internally in the production of formaldehyde and the remaining approximately 5%
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was used primarily to satisfy tolling and exchange arrangements. No customer
(other than Borden) accounted for more than 13% of total methanol sales dollars
in 1996.
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 74% of the Company's total cost of producing methanol during 1996.
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 270, 190 and 180 million pounds per year, respectively, for the
50%-concentration formaldehyde. During 1996 and 1995, the three plants operated
at approximately 100% and 102%, 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 7.4 billion pounds, with the formaldehyde units at
the Geismar complex representing 640 million pounds, approximately 9%, of such
total. Major competitors of the Company include Georgia Pacific and Neste.
During 1996, approximately 32% of formaldehyde production was sold to Borden
and approximately 3% was utilized by the Company in the production of urea-
formaldehyde concentrate for the fertilizer industry. The remaining 65% 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 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
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ammonia at a 400,000 ton stated annual capacity plant located at the Geismar
complex. During 1996 and 1995, the Company operated at approximately 106% and
109%, respectively, of capacity.
In the latter half of 1993 and continuing throughout 1994, 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 increase selling prices for ammonia.
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 1996, approximately 60% of ammonia production was sold to third parties
(other than Borden), approximately 38% of production was used by the Company's
adjacent urea plant, and approximately 2% of production was sold to Borden.
During 1996, no ammonia customer accounted for more than 2% of total Company
sales dollars.
The Company's stated annual capacity represents just under 2% of total North
American capacity. The Company's major competitors include Arcadian, 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 250,000 ton stated annual capacity
plant at the Geismar complex. During 1996 and 1995, the plant operated at
approximately 110% and 103% respectively, of capacity.
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. Competition from imports has
moderated recently as the declining value of the United States dollar has made
United States markets less attractive.
Urea prices remained relatively stable in 1996 due to many of the same factors
which influenced the price of ammonia. However, unlike ammonia, the supply of
urea has increased during this time period as several new world scale plants
came on stream. This factor has kept urea prices at relatively stable levels in
spite of the increasing demand.
During 1996, approximately 56% of the Company's urea was sold to third
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parties, approximately 43% to Borden, and the remaining approximately 1% 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 Arcadian,
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 1996, the Company purchased over 64 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 1996, natural gas represented 70%, 73% and 74% of total
production costs for acetylene, ammonia and methanol, respectively, and 33% of
the Company's total production costs. The Company purchases the majority of its
natural gas under long-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 determines the Company's natural gas
purchase prices, reached record highs. 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.
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.
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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
nine trained personnel geographically located in nine territories, supported by
a regional sales office located in Northbrook, Illinois. In addition to the
regional sales managers, there are three product sales managers performing
marketing functions. All are employees of Borden.
The Company's other products are similarly marketing through a professional
field sales organization of three 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 100% of the electricity, a
significant portion of the 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
supplied by the units through a substation owned by Monochem, Inc. ("Monochem"),
a corporation of which the Partnership owns 50% of the capital stock, usually
exceeds the requirement of the Geismar complex with the excess production being
sold to Gulf States Utilities at its "avoided cost" rate. The Company's
interest in Monochem is subject to certain rights of first refusal and
limitations on transfer.
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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 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
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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 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
11
<PAGE>
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 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
12
<PAGE>
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.
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
have been reported to the Illinois Environmental Protection Agency, and the
plant currently anticipates that an air pollution control device known as a
baghouse will likely be installed on the unit in 1997 at a cost of one to two
million dollars.
On February 7, 1997, the Illinois Attorney General's office sent the Company
an enforcement letter regarding certain alleged violations of the Illinois air
pollution regulations arising out of two releases of vinyl chloride from the
Company's Illiopolis, Illinois plant. In a subsequent meeting, the Attorney
General's office made a penalty demand of $80,000. The Company and the Attorney
General's office are currently discussing this matter, and the Company hopes to
reach an agreed settlement in the future.
13
<PAGE>
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.
The United States Department of Justice ("DOJ"), at the request of the
Environmental Protection Agency ("EPA"), has brought an enforcement proceeding
against the Company and BCPM 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 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.
The Company is currently subject to a proceeding for alleged violations at the
Illiopolis facility of release reporting requirements under EPCRA. This
proceeding is discussed under "Legal Proceedings".
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.
The Geismar complex is operating under RCRA interim status and has filed a
permanent RCRA permit application for its valorization of chlorinated residuals
("VCR") unit and related tanks. However, the Company does not believe that the
14
<PAGE>
Geismar facility must obtain a RCRA permit and is challenging the applicability
of the RCRA permit requirements to it. The Company's challenge to those permit
requirements, the potential permitting costs, civil penalties and corrective
action costs that it may incur if that challenge is unsuccessful, are discussed
under "Legal Proceedings".
The DOJ, at the request of the EPA, has brought an enforcement proceeding
against the Company and BCPM for alleged violations of RCRA, and other
environmental statutes, at the Geismar facility. 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 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.
The DOJ, at the request of the EPA, has brought 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 and
the Addis Facility also have applied for 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
15
<PAGE>
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. 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 $5.9
million in 1996 and $1.4 million in 1995. To the extent estimates are
available, capital expenditures for environmental control facilities are
expected to total approximately $8.0 million in 1997 (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
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<PAGE>
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 have met the aggregate amount of $3.5 million through December 31,
1996.
If the United States is successful in requiring the Company to perform
corrective action at the Geismar facility or the LDEQ requires the Company to
take further remedial measures in connection with the Settlement Agreement (see
"Legal Proceedings"), the Company anticipates that a substantial portion of its
corrective action costs would be covered by the Environmental Indemnity
Agreement. The extent to which any penalties or permit costs that the Company
may incur as a result of pending environmental proceedings will be subject to
the Environmental Indemnity Agreement will depend, in large part, on whether
such penalties or costs are attributable to facts or circumstances that existed
and requirements in effect prior to the Transfer Date.
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
17
<PAGE>
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 the Transfer Date, the Company will be
responsible for any subsequent product liabilities.
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, 1996 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 (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).
Under current tax law, the Company's status as a tax exempt master limited
partnership expires at the end of 1997 and the Company will be taxed as a
corporation beginning January 1, 1998. The requirement to pay income taxes would
substantially reduce the amount of cash available at the end of each quarter for
distribution to unitholders.
In anticipation of this change in tax status, management is studying various
structural alternatives open to the Company. See Note 2 regarding income taxes
in the Notes to Consolidated Financial Statements.
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
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<PAGE>
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 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.
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.
<TABLE>
<CAPTION>
1988 1996
ANNUAL STATED CAPACITY ANNUAL STATED CAPACITY 7 YEAR CAPACITY
PLANTS (STATED IN MILLIONS) (STATED IN MILLIONS) PERCENTAGE INCREASE
- ------------------------------ ----------------------- -------------------- --------------------
<S> <C> <C> <C>
Geismar, LA:
PVC Polymers Products
PVC Resins................ 400 lbs. 500 lbs. 25.0%
Acetylene-based VCM...... 320 lbs. 320 lbs. --
Ethylene-based VCM........ 550 lbs. 630 lbs. 14.5%
Acetylene(1).............. 190 lbs. 200 lbs. 5.3%
Methanol and Derivatives
Methanol.................. 230 gals. 330 gals. 43.5%
Formaldehyde I............ 210 lbs. 270 lbs. 28.6%
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 .25 tons 13.6%
Illiopolis, IL:
PVC Resins.................. 350 lbs. 380 lbs. 8.6%
Addis, LA:
PVC Resins.................. 450 lbs. 625 lbs. 38.9%
Total equivalent lbs.(3)...... 5,395 6,783 25.7%
</TABLE>
(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
- ------- -----------------
LOUISIANA GROUNDWATER REMEDIATION SETTLEMENT AGREEMENT
- ------------------------------------------------------
In 1985, 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,
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<PAGE>
including ethylene dichloride ("EDC"). Also during this time frame, Borden
commenced closure of various units identified to have been contributors to the
EDC contamination underlying the Geismar complex. Borden and the Company have
implemented the Settlement Agreement, and have worked in cooperation with the
LDEQ to remediate the groundwater and soil contamination. The Settlement
Agreement contemplated, among other things, that Borden would install a series
of groundwater monitoring and recovery wells, and recovery trench systems. The
Company is addressing issues raised by LDEQ concerning whether the extent of the
groundwater contamination has been identified. Borden has paid substantially
all of the costs to date associated with the Settlement Agreement. It is
unknown how long the remediation program will continue or whether the LDEQ will
require the Company to incur costs to take further remedial measures in response
to data generated by the planned additional testing. If the LDEQ requires the
Company to take further remedial measures, the Company anticipates that a
portion of such costs would be covered by the Environmental Indemnity Agreement.
The extent to which any costs for further remedial measures required by LDEQ
will be covered by the Environmental Indemnity Agreement will depend, in large
part, on whether such remedial measures respond to facts or circumstances that
existed and requirements in effect prior to November 30, 1987, the date of the
initial sale by Borden of the Geismar and Illiopolis plants to the Partnership.
See Item 1 "Borden Environmental Indemnity."
FEDERAL ENVIRONMENTAL ENFORCEMENT PROCEEDING
- --------------------------------------------
On October 27, 1994, the DOJ, acting at the request of the EPA, filed an
action against the Operating Partnership, the Partnership, and the General
Partner in the United States District Court for the Middle District of Louisiana
("Geismar Enforcement Proceeding"). The complaint seeks civil penalties for
alleged violations of RCRA, CERCLA and the Clean Air Act at the Geismar
facility, as well as corrective action at that facility. Prior to the filing of
the complaint, the Company and DOJ had engaged in settlement discussions, and
the Company expects that such discussion will continue.
The federal government's primary allegations for which it seeks penalties
include claims that (i) the Company's international export to South Africa of a
partially depleted mercuric chloride catalyst for recycling violated RCRA; (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 include other claims related to these and other alleged RCRA
violations, as well as claims of alleged violations of immediate release
reporting requirements under CERCLA and requirements governing particulate
matter emissions under the Clean Air Act. The Company plans to vigorously
defend itself against all of the above allegations.
During the early 1990's, the Company sent partially depleted mercuric chloride
catalyst to a facility in South Africa for recovery of the mercury. See the
following "Export of Partially Depleted Mercuric Chloride Catalyst." In 1993,
-------------------------------------------------------
LDEQ had determined that the catalyst was not a hazardous waste. However,
because of a belief by the EPA that the partially depleted catalyst could be a
hazardous waste and a reversal of LDEQ's 1993 determination, and pending the
outcome of the Geismar Enforcement Proceeding, the 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
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<PAGE>
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.
In 1991, as a protective filing, the Company applied for a hazardous waste
permit for the VCR unit and related tanks. In January 1994, in response to a
petition from the Company to LDEQ for a determination that the VCR unit does not
require a RCRA permit, LDEQ determined that the VCR unit is subject to RCRA.
The Company continues to maintain that the VCR unit is not subject to RCRA and
has filed appeals of LDEQ's determination in Louisiana State Courts.
In May 1994, the Company filed a Complaint for Declaratory Judgment in the
U.S. District Court in Baton Rouge seeking a determination that (i) the
partially depleted mercuric chloride catalyst was not a hazardous waste when it
was exported for recycling, (ii) the materials entering the VCR unit and related
tanks are not hazardous waste and (iii) the north trench sump does not require a
RCRA permit.
In May 1995, certain adjoining landowners at the Geismar complex filed a
motion to intervene in the Geismar Enforcement Proceedings claiming rights under
CERCLA and RCRA to protect their property interests. The court granted a limited
intervention on November 15, 1995 and the Company is vigorously defending
against this intervention.
In April 1996, adjoining landowners filed a separate tort action asserting
personal injury and property value diminution as a result of releases of
hazardous materials from the Geismar complex. The Company removed the case to
the U. S. District Court in Baton Rouge. The Company's motion to consolidate
this action with the Geismar Enforcement Proceedings, and the landowners' motion
to remand are pending. The Company plans to vigorously defend against this
action.
If the Company is unsuccessful in prosecuting its May 1994 Declaratory
Judgment Action, or in defending itself against the Geismar Enforcement
Proceedings, it could be subject to three types of costs: (i) penalties, (ii)
corrective action, and (iii) costs needed to obtain a RCRA permit. As to
penalties, although the maximum statutory penalties that would apply in a
successful enforcement action by the United States would be in excess of $150.0
million, the Company believes that, assuming the Company is unsuccessful and
based on information currently available to it and an analysis of relevant case
law and administrative decisions, the more likely amount of any liability for
civil penalties would not exceed several million dollars.
If the Company is unsuccessful in either the Declaratory Judgement Action or
the Geismar Enforcement Proceedings, it may also be subject to costs for
corrective action. The federal government can also require corrective action
for a facility subject to RCRA permit requirements. Corrective action could
require the Company to conduct investigatory and remedial activities at the
Geismar complex concurrently with the groundwater monitoring and remedial
program that the Company is currently conducting under the Settlement Agreement
with LDEQ. The DOJ is seeking facility-wide corrective action to address the
contamination at the Geismar complex. EPA has indicated that it intends to
evaluate the adequacy of the existing groundwater remediation project performed
under the Settlement Agreement with LDEQ, and to determine the potential for
other areas of contamination on or near the Geismar complex. The cost of any
corrective action could be material, depending on the scope of such corrective
action. However, the actual cost of a facility-wide
21
<PAGE>
corrective action cannot be identified until the EPA provides substantially more
information to the Company or until additional studies are done.
If the Company is unsuccessful in either proceeding concerning its challenge
to the applicability of the RCRA permit requirements to the VCR unit and related
tanks, or the north trench sump, it will have to incur additional permitting
costs. The Company estimates that its costs to complete the permitting process
for the VCR unit and related tanks would be approximately $1.0 million. The
Company believes that the costs for amending its pending RCRA permit application
to include the north trench sump would not be material.
Because of the complex nature of environmental insurance coverage and the
rapidly developing case law concerning such coverage, no assurance can be given
concerning the extent to which insurance may cover environmental claims against
the Company. However, insurance generally does not cover penalties or the cost
of obtaining permits.
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 R13,500.00, which is
equivalent to approximately $3,800. The Company is aware that relatives of two
deceased Thor employees and a number of Thor employees allegedly suffering from
mercury poisoning, have filed suit in the United Kingdom against Thor's parent
company for negligence.
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
22
<PAGE>
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. 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. It is expected
that the Commission of Inquiry's report will be published in mid-1997 after
submission to the President of South Africa.
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.
Nonetheless, 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 Company
has not been notified by the Government of South Africa that the Company would
be liable for any contamination or other conditions at that facility, although
it is impossible to determine what, if any, allegations any party may make in
connection with the Thor facility in the future. It is unclear under current
South African environmental law as to whether any such allegations, if made,
would be sustained against the 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.
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
23
<PAGE>
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.
If the United States is successful in requiring the Company to perform
corrective action at the Geismar facility or the LDEQ requires the Company to
take further remedial measures in connection with the Settlement Agreement, the
Company anticipates that a substantial portion of its corrective action costs
would be covered by the EIA. The extent to which any penalties or permit costs
that the Company may incur as a result of pending environmental proceedings will
be subject to the EIA will depend, in large part, on whether such penalties or
costs are attributable to facts or circumstances that existed and requirements
in effect prior to the Transfer Date.
FEDERAL WASTEWATER PERMIT
- -------------------------
The Geismar facility has a permit for each of its two wastewater outfalls. 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 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 1996 to a vote of
security holders, through the solicitation of proxies or otherwise.
24
<PAGE>
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 14, 1997 were
$11 5/8 and $11 1/4, respectively. As of December 31, 1996, there were
approximately 6,200 holders of record of Common Units.
The following table sets forth the 1996 and 1995 quarterly Common Unit data:
<TABLE>
<CAPTION>
1996 QUARTERS
---------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- -------
<S> <C> <C> <C> <C>
Cash distribution 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
<CAPTION>
1995 QUARTERS
---------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- -------
<S> <C> <C> <C> <C>
Cash distributions declared $ 1.77 $ 1.42 $ 0.90 $ 0.57
Market price range:
High 25 1/2 18 3/8 19 18 1/2
Low 14 3/4 15 1/4 16 1/8 12 1/4
</TABLE>
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, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- --------- --------
(in thousands except per Unit data, which is
net of 1% General Partner interest)
<S> <C> <C> <C> <C> <C>
Net revenues $709,203 $739,587 $657,752 $433,297 $401,803
Income (loss) before
extraordinary item 4,828 150,926 146,405 (1,435) 27,085
Net income (loss) 4,828 144,014 146,405 (1,435) 27,085
Income (loss) per unit before
extraordinary item 0.13 4.07 3.94 (.04) .73
Net income (loss) per Unit 0.13 3.88 3.94 (.04) .73
Cash distributions
declared per Unit 0.35 4.66 3.52 .78 1.59
Total assets 525,705 568,507 542,904 444,304 466,729
Long-term debt 200,000 200,000 120,000 150,000 150,000
</TABLE>
25
<PAGE>
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. The other principal feedstocks are ethylene and
chlorine. Prices for these raw materials may change significantly from year to
year.
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.
Beginning the fourth quarter of 1994, 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. The Partnership anticipates that the current competitive market
conditions for PVC will continue through 1997.
During 1994, 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. Published methanol prices
increased from approximately $0.47 per gallon during the fourth quarter of 1993
to approximately $1.50 per gallon during the fourth quarter of 1994, but there
has been a sharp decline in methanol sales prices
26
<PAGE>
since early 1995 and current published methanol prices are in the range of $.50
to $.55 per gallon. The outlook for methanol continues to be uncertain, but the
Partnership believes that its methanol sales prices during 1997 are likely to
remain at current levels.
In Nitrogen Products, ammonia selling prices increased significantly during
1994 due primarily to a tighter worldwide supply resulting from restricted
production in the former Soviet Union. The decline in non-U.S. production has
significantly increased the price of ammonia imported into the U.S., which is a
net importer of ammonia, and has allowed domestically produced ammonia to rise
significantly in price. In the second half of 1994, urea prices recovered from
depressed levels in 1993 and early 1994 when competition from lower cost imports
forced domestic prices lower. Increased urea purchases overseas, primarily by
India and China, caused global and domestic prices to strengthen. Demand for
ammonia and urea remained strong in 1995 and 1996 with sales prices consistent
with 1994 levels. The Partnership expects the foregoing factors to continue
into 1997 and, accordingly, expects selling prices and volumes for its Nitrogen
Products to remain strong into 1997. However, changes in the market outside of
its control could adversely affect this outlook. The countries comprising the
former Soviet Union control a large portion of worldwide ammonia production
capacity. The unstable economies of these countries could force an increase
from their current production levels in order to receive foreign currency,
causing an increase in product available for import into the U.S. and resulting
in downward pressure on selling prices. In addition, there can be no assurance
that urea purchases by foreign countries will continue at current levels.
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):
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C> <C>
PVC Polymers Products $464,496 65% $449,657 61% $347,122 53%
Methanol and Derivatives 145,982 21% 187,126 25% 236,032 36%
Nitrogen Products 98,725 14% 102,804 14% 74,598 11%
-------- --- -------- --- -------- ---
Total Revenues $709,203 100% $739,587 100% $657,752 100%
======== ==== ======== ==== ======== ====
</TABLE>
27
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Average price received per
unit sold
PVC Polymers Products 111 133 124
Methanol and Derivatives 99 134 166
Nitrogen Products 138 149 120
Raw material costs per unit purchased
Natural Gas 109 69 79
Ethylene 151 173 137
Chlorine 99 92 116
Production volumes (1)
(in millions of pounds)
PVC Polymers Products 2,490 2,312 2,067
Methanol and Derivatives 2,663 2,805 2,660
Nitrogen Products 1,397 1,389 1,221
</TABLE>
(1) Includes the production of intermediate products.
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 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
28
<PAGE>
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.
Net Income
Net income declined to $4.8 million in 1996 from $144.0 million in 1995. 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.
1995 COMPARED TO 1994
Total Revenues
Total revenues for 1995 increased $81.8 million or 12% to $739.6 million in
1995 from $657.8 million in 1994. This increase was the net result of a $102.5
million increase in revenues from PVC Polymers Products, a $48.9 million
decrease in Methanol and Derivatives revenues and a $28.2 million increase in
Nitrogen Products revenues.
Total revenues for PVC Polymers Products increased 30% as a result of a 21%
increase in sales volumes along with a 7% increase in selling prices.
29
<PAGE>
The increase in volume was mainly attributable to the acquisition of the Addis
Facility during 1995.
Total revenues for Methanol and Derivatives decreased 21% as a result of a
19% decrease in selling prices along with a 2% decrease in sales volumes. The
decrease in selling price was due to the circumstances described above.
Total revenues for Nitrogen Products increased 38% as a result of a 24%
increase in selling prices and an 11% increase in sales volumes. Generally
strong market conditions led to increased selling prices and volumes for ammonia
and urea during 1995.
Cost of Goods Sold
Total cost of goods sold increased 16% to $516.5 million in 1995 from $446.2
million in 1994. The increase resulted almost entirely from the additional
sales volumes attributed to the acquisition of the Addis Facility. Expressed as
a percentage of total revenues, cost of goods sold increased to 70% of total
revenues in 1995 from 68% in 1994.
Gross profit for PVC Polymers Products increased 32% as a result of the
significant increase in sales volumes.
Gross profit for Methanol and Derivatives decreased 27% from record level in
1994. Gross margins for Nitrogen Products almost tripled due to increased
selling prices along with reduced natural gas cost.
Interest Expense
Interest expense during 1995 increased 17% to $19.1 million due to the debt
associated with the acquisition of the Addis Facility.
Incentive Distribution to General Partner
During 1995, incentive distribution to the General Partner aggregated $29.8
million compared to $20.6 during 1994 reflecting overall higher quarterly
results.
Other Expense, Including Minority Interest
Other (income) and expense decreased to $1.2 million in 1995 from $7.1
million in 1994 resulting primarily from the absence of the $4.0 million accrual
incurred in 1994 relating to various environmental matters.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations. Cash provided by operations decreased to $38.5
million for 1996, as compared to $225.6 million for 1995,
30
<PAGE>
substantially due to reduced net income for 1996 as compared to 1995. Cash
provided by operations for the year ended December 31, 1995 increased to $225.6
million, as compared to $164.2 million for the prior year. The increase was
primarily attributable to a decrease of $30.6 million in receivables along with
an increase in payables, partially offset by a decrease in distribution payable.
Cash Flows from Investing Activities. The Partnership paid $100.4 million for
the acquisition of a PVC manufacturing facility in 1995. See Acquisition and
Financing.
Capital expenditures for 1996 totaled $14.6 million. This amount was primarily
for environmental projects and other non-discretionary capital expenditures
consisting of a large number of relatively small projects.
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 $30.5
million were made during 1996 compared to $213.1 million in 1995 and $76.6
million in 1994.
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 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.
31
<PAGE>
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 provides a line of
credit for capital expenditures (including the acquisition), working capital and
general partnership purposes. Borrowings under the Revolving Credit Facility
were $25.0 million at December 31, 1996. The amount available under the
facility reduced to $50.0 million on January 1, 1997 from the original $100.0
million and terminates December 31, 1997. The facility may be extended for one
year with the consent of the lenders.
The 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.
Under current tax law, the Partnership's status as a tax exempt master limited
partnership expires at the end of 1997 and the Partnership will be taxed as a
corporation beginning January 1, 1998. The requirement to pay income taxes would
substantially reduce the amount of cash available at the end of each quarter for
distribution to unitholders.
In anticipation of this change in tax status, management is studying various
structural alternatives open to the Partnership. See Note 2 regarding income
taxes in the Notes to Consolidated Financial Statements.
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 $20 to $25
million per year. Total capital expenditures for 1997 are anticipated to be
approximately $20 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."
Environmental Expenditures
Annual environmental capital expenditures for 1994-1996 ranged from $1.4 to
$5.9 million. The 1997 budget for environmental capital expenditures is
approximately $8.0 million, and is included in the budget of approximately $20
million discussed above.
Annual non-capital environmental expenditures for 1994-1996 ranged from $17.9
to $21.6 million. In connection with potential environmental matters, an
additional provision of $4.0 million was reflected in the operating results in
1994. The 1997 budget for non-capital environmental expenditures is
approximately $20 million. The Partnership's actual level of spending would
vary substantially if it is required to undertake corrective action or incur
other environmental compliance costs in connection with the proceedings
discussed under Item 3 "Legal Proceedings."
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Sequential
Index to Financial Statements Page
- ----------------------------- ----------
Report of Independent Accountants 45
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 46
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 47
Consolidated Balance Sheets as of December 31, 1996
and 1995 48
Consolidated Statements of Changes in Partners'
Capital for the years ended December 31, 1996,
1995 and 1994 49
Notes to Consolidated Financial Statements 50
Selected Quarterly Financial Data (Unaudited)
- ---------------------------------------------
(in thousands except per Unit data, which is net of 1% General Partner
interest)
<TABLE>
<CAPTION>
1996 QUARTERS
----------------------------------------------------------
First Second Third Fourth
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $170,585 $179,227 $182,814 $176,577
Gross Profit 5,766 14,002 17,571 15,304
Net Income (6,097) 1,505 5,381 4,039
Net Income per Unit ( 0.16) 0.04 0.14 0.11
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTERS
------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $214,806 $187,663 $186,672 $150,446
Gross Profit 106,315 58,184 39,899 18,662
Income before
extraordinary item 83,487 36,754 23,811 6,874
Net Income 83,487 29,842 23,811 6,874
Income per Unit before
extraordinary loss 2.25 0.99 0.64 0.19
Net Income
per Unit 2.25 0.80 0.64 0.19
</TABLE>
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, 1996 reporting a change in or disagreement with accountants.
33
<PAGE>
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. John L. Russ III
and Wayne P. Leonard, who report directly to Saggese, are responsible for
Partnership marketing and manufacturing operations, respectively.
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 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.
34
<PAGE>
<TABLE>
<CAPTION>
Served in
Age on Present
Position and Office Dec. 31, Position
Name with General Partner 1996 Since
- ----------------------------------- ---------------------------------- --------- -----
<S> <C> <C> <C>
Joseph M. Saggese Director, Chairman, President
and Chief Executive Officer 65 1990
Edward H. Jennings Director 59 1989
George W. Koch Director 70 1987
E. Linn Draper, Jr. Director 54 1996
William H. Carter Director 43 1995
Clifton S. Robbins Director 38 1996
William F. Stoll,Jr. Director 48 1996
Wayne P. Leonard Executive Vice President -
Operations 55 1987
John L. Russ III Executive Vice President-Sales and
Marketing 56 1987
James O. Stevning Vice President, Chief Financial
Officer and Treasurer 37 1996
Lawrence L. Dieker Vice President, Secretary,
and General Counsel 58 1987
</TABLE>
Joseph M. Saggese has been Chairman of the Board of Directors, President and
Chief Executive Officer of BCPM since July 1990. He is also Executive Vice
President of Borden and President and Chief Executive Officer of Borden
Chemical, Inc., the successor to a major portion of the former PIP Division of
Borden and its predecessor division, (collectively with the PIP Division the
"Chemicals Division"). Positions he has held since July 1990. From January 1989
to August 1990 he served as Senior Group Vice President of the Chemicals
Division. He served as a Senior Vice President of the Chemicals Division from
October 1985 to January 1989.
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
Super Foods, Inc., a wholesale grocer, and Lancaster Colony, Inc., a
manufacturer and marketer of food, automotive and glass products.
George W. Koch is a director of BCPM. He is 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. From 1966 to April 1990, he was
President and Chief Executive Officer of the Grocery Manufacturers of America,
Inc., a non-profit organization of the leading grocery manufacturers in the
United States. Mr. Koch is also a director of McCormick & Co., a food products
company.
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. Dr. Draper
is also President of Ohio Valley Electric Corporation. From 1987 to 1992, he was
Chairman, President and Chief Executive Officer of Gulf States Utility Company.
Dr. Draper is currently a director of VECTRA Technologies, Inc., the Nuclear
Energy Institute and the Institute of Nuclear Power Operation.
William H. Carter is a director of BCPM. He is also Executive Vice
35
<PAGE>
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.
He is a director of AEP Industries, Inc.
Clifton S. Robbins is a director of BCPM and also serves as a director of
Borden, Borden Chemical, Inc., Borden Foods Corporation and Borden/Meadow Gold
Dairies Holdings, Inc. He has been a General Partner of Kohlberg Kravis Roberts
& Co. and KKR Associates, L.P. since January 1995 and an Executive with Kohlberg
Kravis Roberts & Co., since 1987. He is a director of AEP Industries, Inc., IDEX
Corporation Kindercare Learning Centers, Inc., and Newsquest Capital, PLC.
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.
Wayne P. Leonard is Executive Vice President of BCPM. From 1984 to 1987, he
was Director of Manufacturing, Basic Chemicals Unit of the Chemicals Division.
Prior thereto, he was manager of the vinyl products sector of the Basic
Chemicals Unit of the Chemicals Division. He has served in the chemical
business thirty years and at all such times he has worked at the Geismar
complex.
John L. Russ III is Executive Vice President of BCPM. From 1986 to 1987, he
was General manager, Thermoplastics Units and Petrochemical Chemicals Division.
He joined Borden in 1982 as director of sales and marketing for the
Thermoplastics Unit of the Chemicals Division. He has served in the PVC resin
business in sales and marketing capacities for over thirty years.
James O. Stevning is Vice President, Chief Financial Officer and Treasurer of
BCPM. From March 1994 until January 1996, he was Controller and Principal
Accounting Officer of BCPM. Prior to that, he had been a Group Controller and an
Assistant Controller of the Chemicals Division.
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 1995. He was previously Assistant General
Counsel of Borden, a position he held from 1982 to January 1995.
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 1996 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
36
<PAGE>
attended. The committee chairman is also paid an additional $100 for each
committee meeting attended in that capacity. During 1996, the Board met four
times, and the Independent and Audit Committees met jointly eight times.
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 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 with an
additional 83,500 phantom appreciation rights made during 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
To the knowledge of BCPM, no person is the beneficial owner of more than five
percent of the Partnership's Units. As of February 14, 1997 the beneficial
ownership of Common Units by all directors and officers of BCPM as a group was
approximately 33,000 Units, which represents less than one percent of the total
Units outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The Partnership is managed by BCPM pursuant to the Amended and Restated
Agreement of Limited Partnership (the "Agreement") dated December 15, 1988.
Under the Agreement BCPM is entitled to reimbursement of certain costs of
managing the Partnership. These costs include compensation and benefits 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 52 of this Form 10-K Annual
Report contains information regarding relationships and related transactions.
37
<PAGE>
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 21, 1997 are contained
on pages 45 through 56 of this Form 10-K Annual Report.
2. Financial Statement Schedules
-----------------------------
None required.
3. Exhibits
--------
2.1(7) 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
2.1.1(7) Third Amendment of Asset Transfer Agreement dated as of May
2, 1995 between the Operating Partnership and OxyChem
3.0(8) Restated Certificate of Incorporation of BCPM
3.2(2) By-laws of BCPM
3.3(1) Amended and Restated Certificate of Limited Partnership of
the Partnership
3.4(1) Amended and Restated Certificate of Limited Partnership of
the Operating Partnership
3.5(1) Amended and Restated Agreement of Limited Partnership of the
Partnership dated as of December 15, 1988
3.6(3) Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of November 30, 1987
4.1(6) Form of Depository Receipt for Common Units
10.1(9) Indenture dated as of May 1, 1995 of 92 Notes due 2005
between the Operating Partnership and The Chase Manhattan
Bank (National Association), as Trustee
38
<PAGE>
10.4(9) Revolving Credit Agreement, dated as of May 2, 1995, between
the Operating Partnership and Credit Suisse, as Agent and as
a lender and Other Lenders
10.5(3) Service Agreement, dated as of November 30, 1987, between
Borden and the Operating Partnership
10.6(3) Intercompany Agreement, dated as of November 30, 1987, among
Borden, BCPM, the Partnership and the Operating Partnership
10.7(1) Borden and BCPM Covenant Agreement, dated as of December 15,
1988, among Borden and the Partnership
10.8(1) Ethylene Dichloride/Vinyl Chloride Monomer Tolling Agreement,
dated as of July 19, 1988, between the Operating Partnership
and Vulcan Chemicals, a division of Vulcan Materials Company
10.9(3) PVC Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.10(3) Ammonia Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.10.1(1) Amendment Agreement No. 1 to Ammonia Purchase Agreement,
dated as of December 15, 1988, between Borden and the
Operating Partnership
10.11(3) Urea Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.11.1(1) Amendment Agreement No. 1 to Urea Purchase Agreement, dated
as of December 15, 1988, between Borden and the Operating
Partnership
10.12(3) Methanol Purchase Agreement, dated as of November 30, 1987,
between Borden and the Operating Partnership
10.12.1(1) Amendment Agreement No. 1 to Methanol Purchase Agreement,
dated as of December 15, 1988, between Borden and the
Operating Partnership
10.13(3) Formaldehyde Processing Agreement, dated as of November 30,
1987, between Borden and the Operating Partnership
10.13.1(1) Amendment Agreement No. 1 to Formaldehyde Processing
Agreement, dated as of December 15,
39
<PAGE>
1988 between Borden and the Operating Partnership
10.14(3) Urea-Formaldehyde Concentrate Processing Agreement, dated as
of November 30, 1987, between Borden and the Operating
Partnership
10.14.1(1) Amendment Agreement No. 1 to Urea-Formaldehyde Concentrate
Processing Agreement, dated as of December 15, 1988, between
Borden and the Operating Partnership
10.15(3) Use of Name and Trademark License Agreement, dated as of
November 30, 1987, among Borden, the Partnership and the
Operating Partnership
10.16(3) Patent and Know-how Agreement, dated November 30, 1987, among
Borden, the Partnership and the Operating Partnership
10.17(3) Environmental Indemnity Agreement, dated as of November 30,
1987, among the Partnership, the Operating Partnership and
Borden
10.18(3) Lease Agreement, dated as of November 30, 1987, between the
Operating Partnership and Borden
10.19(2) 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(2) 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(2) Restructuring Agreement, dated as of December 9, 1980, among
Borden, Uniroyal Chemical Company, Inc. (as successor to
Uniroyal, Inc.) and Monochem, Inc.
10.22(2) 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(2) Restated Basic Agreement, dated as of January 1, 1982,
between Borden and Uniroyal Chemical Company, Inc. (as
successor to Uniroyal, Inc.)
10.24(2) Restated Operating Agreement, dated as of January 1, 1982,
among Borden, Uniroyal Chemical Company, Inc. (as successor
to Uniroyal, Inc.) and Monochem, Inc.
10.25(2) Restated Agreement to Amend Operating Agreement, dated as of
January 1, 1983, among Borden, Uniroyal Chemical Company,
Inc. (as successor to
40
<PAGE>
Uniroyal, Inc.) and Monochem, Inc.
10.26(2) Operating Agreement for Oxygen and Acetylene Plants, dated
April 1, 1982, between Borden and BASF Wyandotte Corporation
(subsequently named BASF Corporation) ("BASF")
10.27(2) Amendment to Operating Agreement for Oxygen and Acetylene
Plants, dated August 22, 1984, between Borden and BASF
10.28(2) Second Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated December 14, 1984, between Borden and
BASF
10.29(2) Third Amendment to Operating Agreement for Oxygen and
Acetylene Plants, dated as of October 2, 1985, between Borden
and BASF
10.30(2) Fourth Amendment to Operating Agreement, dated August 25,
1987, between Borden and BASF
10.31(2) Fifth Amendment to Operating Agreement, dated November 10,
1987, between Borden and BASF
10.32(1) Sixth Amendment to Operating Agreement, dated February 11,
1988, between the Operating Partnership and BASF
10.33(2) Third Purchase Agreement, dated August 25, 1987, between
Borden and BASF
10.34(2) Operating Agreement, dated December 14, 1984 among Borden,
BASF, Liquid Air Corporation ("LAC") and LAI Properties, Inc.
("LAI")
10.35(2) Amendment No. 1 to Operating Agreement, dated October 2,
1985, among Borden, BASF, LAC and LAI
10.36(1) Amendment No. 2 to the Operating Agreement, dated February
11, 1988, among Borden, the Operating Partnership, BASF, LAC
and LAI
10.37(2) Second Operating Agreement, dated October 2, 1985, among
Borden, BASF, LAC and LAI
10.38(1) Restated Second Operating Agreement, dated February 11, 1988
among Borden, the Operating Partnership, BASF, LAC and LAI
10.39(1) Acetylene Sales Agreement No. 1, dated February 11, 1988,
between the Operating Partnership and BASF
10.40(1) Acetylene Sales Agreement No. 2, dated February 11, 1988,
between the Operating Partnership and BASF
41
<PAGE>
10.41(3) 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(3) 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(3) 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(3) 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(3) 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(3) 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(3) 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(2) Form of Rail Service Agreement between Borden and the
Operating Partnership
10.49(4) Form of Letter Agreement with Directors
10.50(3) Illiopolis Indemnity Agreement
10.51(3) 1995 Long-Term Incentive Plan
__________________
(1) 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.
(2) 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.
(3) Filed as an exhibit to the Partnership's Registration Statement on
42
<PAGE>
Form S-1 (File No. 33-18938) and is incorporated herein by reference in this
Form 10-K Annual Report.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(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.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the fourth
quarter 1996.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BORDEN CHEMICALS AND PLASTICS
LIMITED PARTNERSHIP
By BCP Management, Inc.,
General Partner
By /s/ James O. Stevning
-----------------------------
James O. Stevning
Vice President,
Chief Financial Officer and
Treasurer
Date: March 27, 1997
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
- ------------------------ and Chief Executive Officer
Joseph M. Saggese
/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.
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF BORDEN CHEMICALS
AND PLASTICS LIMITED PARTNERSHIP
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in partners' capital
and of cash flows present fairly, in all material respects, the financial
position of Borden Chemicals and Plastics Limited Partnership at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, 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 21, 1997
45
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per Unit data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
REVENUES
Net trade sales $593,641 $608,070 $514,499
Net sales to related parties 115,562 131,517 143,253
-------- -------- --------
Total revenues 709,203 739,587 657,752
-------- -------- --------
EXPENSES
Cost of goods sold
Trade 549,315 424,492 352,700
Related parties 107,245 92,035 93,516
Marketing, general & administrative expense 24,167 22,127 21,092
Interest expense 21,696 19,066 16,342
General Partner incentive 29,783 20,616
Other expense,
including minority interest 1,952 1,158 7,081
-------- -------- --------
Total expenses 704,375 588,661 511,347
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,828 150,926 146,405
Extraordinary charge on early extinguish-
ment of debt (6,912)
-------- -------- --------
NET INCOME 4,828 144,014 146,405)
Less 1% General Partner interest ( 48) (1,440) (1,464)
-------- -------- --------
NET INCOME APPLICABLE TO LIMITED
PARTNERS' INTEREST $ 4,780 $142,574 $144,941
======== ======== ========
PER UNIT DATA, NET OF 1% GENERAL PARTNER
INTEREST
Income per unit before extra-
ordinary item $ 0.13 $ 4.07 $ 3.94
Extraordinary charge per Unit (0.19)
-------- -------- --------
Net income per Unit $ 0.13 $ 3.88 $ 3.94
======== ======== ========
Average number of Units outstanding
during the year 36,750 36,750 36,750
======== ======== ========
Cash distributions declared per Unit $ 0.35 $ 4.66 $ 3.52
======== ======== ========
</TABLE>
See notes to consolidated financial statements
46
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 4,828 $ 144,014 $146,405
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary charge on early extinguish-
ment of debt 6,912
Depreciation 49,092 49,198 44,305
Increase (decrease) in cash from changes
in certain assets and liabilities:
Receivables (4,065) 30,641 (54,374)
Inventories (890) (10,612) 1,126
Payables (3,080) 14,186 6,298
Incentive distribution payable (1,910) (9,955) 11,865
Accrued interest (77) 1,417
Other, net (5,435) (213) 8,583
-------- --------- -------
38,463 225,588 164,208
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition (100,376)
Capital expenditures (14,558) (27,085) (22,578)
-------- --------- -------
(14,558) (127,461) (22,578)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of long-
term debt 200,000
Net (repayments of)
proceeds from short-term borrowings (15,000) 40,000
Payment of debt issuance costs (9,815)
Repayment of long-term debt, including
prepayment penalty (156,912)
Cash distributions paid (30,459) (213,105) (76,558)
-------- --------- -------
(45,459) (139,832) (76,558)
-------- --------- -------
(Decrease) increase in cash and equivalents (21,554) ( 41,705) 65,072
Cash and equivalents at beginning of year 32,421 74,126 9,054
-------- --------- -------
Cash and equivalents at end of year $ 10,867 $ 32,421 $ 74,126
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid during the year $ 21,773 $ 17,649 $ 16,342
======== ========= ========
</TABLE>
See notes to consolidated financial statements
47
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Cash and equivalents $ 10,867 $ 32,421
Accounts receivable (less allowance for
doubtful accounts of $589 and $457,
respectively)
Trade 72,908 75,788
Related parties 22,147 15,202
Inventories
Finished and in process goods 36,174 33,418
Raw materials and supplies 7,788 9,654
Other current assets 2,579 3,541
--------- ---------
Total current assets 152,463 170,024
--------- ---------
Investments in and advances to
affiliated companies 4,366 4,437
Other assets 49,405 39,415
--------- ---------
53,771 43,852
--------- ---------
Land 14,970 14,106
Buildings 44,597 44,216
Machinery and equipment 644,619 633,484
--------- ---------
704,186 691,806
Less accumulated depreciation ( 384,715) (337,175)
--------- ---------
Total assets 319,471 354,631
--------- ---------
$ 525,705 $ 568,507
========= =========
LIABILITIES AND
PARTNERS' CAPITAL
Accounts and drafts payable $ 61,812 $ 64,892
Cash distributions payable 3,712 21,179
Short-term borrowing 25,000 40,000
Incentive distribution payable to
General Partner 1,910
Accrued interest 3,185 3,262
Other accrued liabilities 16,516 13,468
--------- ---------
Total current liabilities 110,225 144,711
Long-term debt 200,000 200,000
Other liabilities 5,609 5,677
Minority interest in consolidated subsidiary 1,571 1,655
--------- ---------
Total liabilities 317,405 352,043
--------- ---------
Commitments and contingencies (See Note 8)
Partners' capital
Limited Partners 207,680 215,762
General Partner 620 702
--------- ---------
Total partners' capital 208,300 216,464
--------- ---------
Total liabilities and partners'
capital $ 525,705 $ 568,507
========= =========
</TABLE>
See notes to consolidated financial statements
48
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
---------- -------- ---------
<S> <C> <C> <C>
Balances at December 31, 1993 $ 228,862 $ 1,343 $ 230,205
Net income 144,941 1,464 146,405
Cash distributions declared (129,360) (1,515) (130,875)
--------- ------- ---------
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
========= ======= =========
</TABLE>
See notes to consolidated financial statements.
49
<PAGE>
BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(In thousands except Unit and per Unit data)
1. ORGANIZATION
Borden Chemicals and Plastics Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed in 1987 when the Partnership, through
its subsidiary operating partnership, acquired the basic chemicals and polyvinyl
chloride ("PVC") resins operations of Borden, Inc. ("Borden"). The operations
are comprised 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 manufacturing facility in
Addis, Louisiana purchased in 1995 (Note 3). The Partnership conducts its
activities through Borden Chemicals and Plastics Operating Limited Partnership
(the "Operating Partnership"). The Partnership, as the sole limited partner,
owns a 98.9899% interest and BCP Management, Inc. ("BCPM"), a Delaware
corporation and wholly-owned subsidiary of Borden, owns a 1.0101% interest as
the sole general partner ("General Partner") in the Operating Partnership. The
General Partner's interest in the Operating Partnership is reflected in the
accompanying consolidated financial statements as minority interest. BCPM also
owns a 1% general partner interest in the Partnership, resulting in an aggregate
2% interest in the partnerships.
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.
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
proportionate 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.
Other Assets and Liabilities - Included in Other Assets are spare
50
<PAGE>
parts totaling $22,436 and $22,182 at December 31, 1996 and 1995, respectively.
Debt issuance costs are capitalized and are amortized over the term of the
associated debt or credit agreement. Included in other accrued liabilities are
accrued sales discounts of $7,185 and $7,006 at December 31, 1996 and 1995,
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) have 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 $37,091 in 1996, $34,298 in 1995 and $32,144 in 1994
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 - The Partnership is not a separate taxable entity for Federal
and state and local income tax purposes. Accordingly, any taxable income or
loss, which may vary substantially from income or loss reported under generally
accepted accounting principles, is included in the tax returns of the individual
partners. Under current tax law the Partnership will be treated as a
partnership until December 31, 1997; thereafter, it will be taxed as a
corporation. Because of available tax planning strategies which management
intends to implement to "step up" the tax basis of partnership assets to the
generally higher partners' basis in their units, no provision for deferred
income taxes is required for the future reversal of temporary differences
between the book and tax basis of partnership assets.
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 twelve
51
<PAGE>
months ended December 31, 1995 and 1994, respectively, as if the transactions
occurred on January 1, 1994.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
-----------------------------
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
Total revenues $794,393 $795,075
Income before extraordinary item:
Income $155,168 $149,606
Income per Unit, net of 1%
General Partner interest $ 4.18 $ 4.03
</TABLE>
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.
The Partnership is charged for general insurance expense, which includes
liability and property damage insurance, based on calculations made by Borden's
Risk Management Department. Under its risk retention program, Borden maintains
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. The
Partnership has first dollar liability insurance coverage from Borden. The cost
of Borden's corporate information services and corporate staff department
services is allocated to the Partnership based on usage of resources such as
personnel and data processing equipment.
The employees of BCPM (together with employees of Borden 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 $9,189 in 1996,
$11,628 in 1995 and $9,991 in 1994. Management believes the allocation methods
used are reasonable. Although no specific analysis has been undertaken, if the
Partnership were to directly
52
<PAGE>
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 for the year ended December 31, 1996 are $5,688
of PVC sales to the acquiring entity. Of these sales, $4,268 are included in
related party receivables at December 31, 1996. All other related party sales
and receivables are with 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 $218,530 at
December 31, 1996 and $215,493 at December 31, 1995, which was calculated based
on current yields for debt with similar characteristics.
The Partnership obtained a short-term working capital facility of up to
$100,000 under a revolving credit agreement during 1995. Borrowings under this
facility were $25,000 and $40,000 at December 31, 1996 and 1995, respectively.
The total amount available under the revolving credit agreement reduced $50,000
on January 1, 1997 and expires on December 31, 1997 at which time any
outstanding balance is due. A commitment fee of .375% per annum is payable on
the unused portion. Borrowings under the revolving credit agreement bear
interest at rates fixed at the time of each borrowing. The average interest rate
of these borrowings at December 31, 1996 was 6.7%. The Partnership's revolving
credit agreement also allows an additional $20,000 of borrowings outside the
agreement, none of which was utilized during 1996. It provides that no recourse
is available against the General Partner.
The revolving credit agreement and the senior unsecured notes contain a number
of financial and other covenants that management believes are customary in
lending transactions of these types.
53
<PAGE>
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.
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. COMMITMENTS AND CONTINGENCIES
Purchase Commitment:
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, 1996 of minimum payments required under
the agreement is $53,078, with $4,753 per year of minimum payments required for
the next five years.
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:
54
<PAGE>
(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 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
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 has
been 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
55
<PAGE>
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.
56
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,867
<SECURITIES> 0
<RECEIVABLES> 95,055
<ALLOWANCES> 589
<INVENTORY> 43,962
<CURRENT-ASSETS> 152,463
<PP&E> 704,186
<DEPRECIATION> 384,715
<TOTAL-ASSETS> 525,705
<CURRENT-LIABILITIES> 110,225
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 208,300
<TOTAL-LIABILITY-AND-EQUITY> 525,705
<SALES> 709,203
<TOTAL-REVENUES> 709,203
<CGS> 656,560
<TOTAL-COSTS> 656,560
<OTHER-EXPENSES> 26,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,696
<INCOME-PRETAX> 4,828
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,828
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
