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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-
Commission File No. 1-9699
BORDEN CHEMICALS AND PLASTICS
LIMITED PARTNERSHIP
Delaware 31-1269627
(State of organization) (I.R.S. Employer Identification No.)
Highway 73, Geismar, Louisiana 70734 614-225-4482
(Address of principal executive offices) (Registrant's telephone number)
---------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
---------
Number of Common Units outstanding as of the close of business on August
12, 1999: 36,750,000.
================================================================================
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per Unit data)
Three Months Ended
-------------------
June 30, June 30,
1999 1998
-------- --------
Revenues
Net trade sales...................................... $108,249 $126,116
Net sales to related parties......................... 18,957 20,196
-------- --------
Total revenues................................. 127,206 146,312
-------- --------
Expenses
Cost of goods sold
Trade.......................................... 102,961 121,462
Related parties................................ 20,663 20,483
Marketing, general & administrative expense.......... 6,020 6,637
Interest expense..................................... 5,629 5,565
Tax on gross margin.................................. 313 66
Equity on loss of affiliate.......................... 182 0
Other expense (income), including minority interest.. 216 (80)
-------- --------
Total expenses............................ 135,984 154,133
-------- --------
Net loss............................................. (8,778) (7,821)
Less 1% General Partner interest................ 88 78
-------- --------
Net loss applicable to Limited Partners'
interest....................................... $ (8,690) $ (7,743)
======== ========
Per Unit data-basic, net of 1% General Partner interest
Net loss per Unit.................................... $ (0.24) $ (0.21)
======== ========
Average number of Units outstanding during the period 36,750 36,750
======== ========
Cash distributions declared per Unit................. $ 0.00 $ 0.00
======== ========
See Notes to Consolidated Financial Statements
2
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per Unit data)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
<S> <C> <C>
June 30, June 30,
1999 1998
-------- ---------
Revenues
Net trade sales......................................... $208,073 $ 254,252
Net sales to related parties............................ 34,567 45,571
-------- ---------
Total revenues.................................... 242,640 299,823
-------- ---------
Expenses
Cost of goods sold
Trade............................................. 194,519 248,409
Related parties................................... 36,994 44,832
Marketing, general & administrative expense............. 12,181 12,369
Interest expense........................................ 11,658 10,392
Tax on gross margin.................................... 733 189
Equity on loss of affiliate............................. 383 95
Other expense (income), including minority interest..... 641 (318)
-------- ---------
Total expenses............................... 257,109 315,968
-------- ---------
Net loss................................................ (14,469) (16,145)
Less 1% General Partner interest................... 145 161
-------- ---------
Net loss applicable to Limited Partners'
interest.......................................... $(14,324) $ (15,984)
======== =========
Per Unit data-basic, net of 1% General Partner interest
Net loss per Unit....................................... $ (0.39) $ (0.43)
======== =========
Average number of Units outstanding during the period... 36,750 36,750
======== =========
Cash distributions declared per Unit.................... $ 0.00 $ 0.00
======== =========
</TABLE>
See Notes to Consolidated Financial Statements
3
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------
June 30, June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operations
Net loss....................................................... $(14,469) $(16,145)
Adjustments to reconcile net loss income to net cash
provided by operating activities:
Depreciation................................................. 17,982 16,198
Increase (decrease) in cash from
changes in certain assets and liabilities:
Receivables, net.......................................... (3,461) 11,195
Inventories............................................... (3,217) 9,171
Payables.................................................. 4,235 (16,165)
Accrued Interest.......................................... (12) (5)
Other, net................................................ (361) (7,447)
-------- --------
697 (3,198)
-------- --------
Cash Flows Used In Investing Activities
Capital expenditures......................................... (7,647) (14,954)
-------- --------
Cash Flows Used In Financing Activities
Proceeds from borrowings..................................... 3,500 35,000
Cash distributions paid...................................... 0 (3,712)
-------- --------
3,500 31,288
-------- --------
(Decrease) increase in cash and equivalents.................... ( 3,450) 13,136
Cash and equivalents at beginning of period.................... 8,703 7,528
-------- --------
Cash and equivalents at end of period.......................... $ 5,253 $ 20,664
======== ========
Supplemental Disclosures of Cash Flow Information
Interest paid during the period, net of capitalization......... $ 11,670 $ 10,774
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
ASSETS June 30, 1999 December 31, 1998
------ ------------- -----------------
<S> <C> <C>
Cash and equivalents............................................ $ 5,253 $ 8,703
Accounts receivable (less allowance for doubtful accounts
of $405 and $672, respectively)
Trade......................................................... 60,199 57,909
Related parties............................................... 13,798 12,627
Inventories
Finished and in process goods................................. 25,319 21,978
Raw materials and supplies.................................... 6,450 6,574
Other current assets............................................ 4,361 2,694
--------- ---------
Total current assets.......................................... 115,380 110,485
--------- ---------
Investments in and advances to affiliated companies............. 7,867 8,442
Other assets.................................................... 52,108 54,469
--------- ---------
59.975 62,911
--------- ---------
Plant, property and equipment
Land.......................................................... 16,308 16,308
Buildings..................................................... 45,604 45,604
Machinery and equipment....................................... 697,743 690,096
--------- ---------
759,655 752,008
Less accumulated depreciation................................. (481,690) (463,708)
--------- ---------
Net plant, property and equipment............................. 277,965 288,300
--------- ---------
Total assets................................................ $ 453,320 $ 461,696
========= =========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Accounts and drafts payable..................................... $ 46,119 $ 41,884
Accrued interest................................................ 3,178 3,190
Other accrued liabilities....................................... 12,189 13,702
--------- ---------
Total current liabilities..................................... 61,486 58,776
Long-term debt.................................................. 255,300 251,800
Deferred tax on gross margin.................................... 5,800 5,800
Other liabilities............................................... 1,980 1,949
Minority interest in consolidated subsidiary.................... 752 900
--------- ---------
Total liabilities............................................. 325,318 319,225
--------- ---------
Partners' capital
Limited Partners.............................................. 128,193 142,517
General Partner............................................... (191) (46)
--------- ---------
Total partners' capital.................................... 128,002 142,471
--------- ---------
Total liabilities and partners' capital..................... $ 453,320 $ 461,696
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
5
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
-------- ------- -----
<S> <C> <C> <C>
Balance at December 31, 1997................................ $ 182,718 $ 360 $ 183,078
Net loss................................................. ( 15,984) ( 161) ( 6,145)
Cash distributions declared.............................. 0 0 0
--------- ------ ---------
Balance at June 30, 1998.................................... $ 166,734 $ 199 $ 166,933
========= ====== =========
Balance at December 31, 1998................................ $ 142,517 $( 46) $ 142,471
Net loss................................................. ( 14,324) ( 145) (14,469)
Cash distributions declared.............................. 0 0 0
--------- ------ ---------
Balance at June 30, 1999.................................... $ 128,193 $( 191) $ 128,002
========= ====== =========
</TABLE>
See Notes to Consolidated Financial Statements
6
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BORDEN CHEMICALS AND PLASTICS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except Unit and per Unit data)
1. Interim Financial Statements
The accompanying unaudited interim consolidated condensed financial statements
of Borden Chemicals and Plastics Limited Partnership (the "Partnership") contain
all adjustments, consisting only of normal recurring adjustments, which in the
opinion of BCP Management, Inc. (the "General Partner") are necessary for a fair
statement of the results for the interim periods. Results for the interim
periods are not necessarily indicative of the results for the full year.
Basic income per unit is computed by dividing net income, after subtracting the
General Partner's 1% interest, by the weighted average number of units
outstanding. Currently, there are no potentially dilutive securities;
accordingly, basic income per unit and diluted income per unit are equivalent.
Effective for the quarter ended March 31, 1998, the Partnership adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". There were no items of other comprehensive income for
the six months ended June 30, 1999 and 1998, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective in 2001 for the Partnership. The statement requires that all
derivatives be recorded in the balance sheet as either assets or liabilities and
be measured at fair value. The accounting for changes in fair value of a
derivative depends on the intended use of derivative and the resulting
designation. The Partnership is in the process of assessing the impact that
SFAS No. 133 will have on the consolidated financial statements.
2. Environmental and Legal Proceedings
Under an Environmental Indemnity Agreement (the "EIA") with Borden Inc.
("Borden"), 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.
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.
The Partnership is subject to legal proceedings and claims which may 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
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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.
3. Segment Information
The Partnership's internal reporting is organized on the basis of products.
Each of the following products is considered to be an operating segment of the
business: polyvinyl chloride ("PVC"), vinyl chloride monomer ("VCM"),
acetylene, methanol, formaldehyde, ammonia and urea. These operating segments
have been aggregated into three reportable segments according to the nature and
economic characteristics of the products, production processes and other
similarities. The segments are (i) PVC Polymers Products, which consist of PVC
resins and feedstocks (VCM and acetylene), (ii) Methanol and Derivatives, which
consist of PVC resins and feedstocks (VCM and acetylene), (ii) Methanol and
Derivatives, which consist of methanol and formaldehyde, and (iii) Nitrogen
Products, which consist of ammonia and urea.
The Partnership evaluates performance of the segments and allocates resources to
them based upon contributing margin, which is gross margin net of distribution
expense.
Financial information for each of the reportable segments for the second
quarters and first six months of 1999 and 1998 is provided in the following
table.
- --------------------------------------------------------------------------------
PVC Methanol
Polymers and Nitrogen Consolidated
Products Derivatives Products Totals
- --------------------------------------------------------------------------------
Second Quarter
- --------------
1999
Revenues $ 95,111 $ 22,536 $ 9,559 $ 127,206
Contributing Margin 9,335 (2,278) (3,475) 3,582
1998
Revenues $ 101,798 $ 26,837 $ 17,678 $ 146,312
Contributing Margin 3,339 167 862 4,367
First Six Months
- ----------------
1999
Revenues $ 178,236 $ 42,353 $ 22,051 $ 242,640
Contributing Margin 18,431 (2,220) (5,084) 11,127
1998
Revenues $ 207,890 $ 62,731 $ 29,203 $ 299,823
Contributing Margin 1,371 8,031 (2,819) 6,582
- --------------------------------------------------------------------------------
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A reconciliation of the total segment consolidated contributing margin to the
total consolidated loss before tax on gross income taxes, for the quarters and
six months ended June 30, 1999 and 1998 as follows:
Second Quarter Six Months
-------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Total segment contributing margin $ 3,582 $ 4,367 $ 11,127 $ 6,582
Marketing, general and
Administrative expense (6,020) (6,637) (12,181) (12,369)
Interest expense (5,629) (5,565) (11,658) (10,392)
Other misc. (expense) income, net (711) 14 (1,757) 34
Consolidated loss before
tax on gross income $(8,778) $(7,821) $(14,469) $(16,145)
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Revenues
Total revenues during the second quarter of 1999 decreased $19.1 million or 13%
to $127.2 million from $146.3 million in the second quarter of 1998. This
decrease was the result of a $6.7 million decrease in PVC Polymers Products
revenues, a $4.3 million decrease in Methanol and Derivatives revenues and a
$8.1 million decrease in Nitrogen Products revenues.
Total revenues for PVC Polymers Products decreased $6.7 million as a result of a
1% increase in selling prices, offset by a 7% decrease in sales volumes. The
sales volume decrease was the result of a planned plant changeover necessary to
upgrade our product mix to higher yielding PVC Polymers products.
Total revenues for Methanol and Derivatives decreased $4.3 million as a result
of a 8% decrease in selling prices, and a 19% decline in sales volumes. Excess
capacity and soft demand has put severe downward pressure on selling prices.
Total revenues for Nitrogen Products decreased $8.1 million as a result of a 22%
decrease in sales prices and 31% decrease in volume. Domestic usage of Nitrogen
products for the 1999 planting season was dramatically reduced when compared to
the prior year. This along with a decrease in imports of urea into the China
market continued to put downward pressure on selling prices.
Cost of Goods Sold
Total cost of goods sold decreased $18.3 million to $123.6 million in the
current period from $141.9 million in the year ago period. The decrease was due
to declines in sales volumes along with decreases in the cost of chlorine and
VCM. These cost decreases were partially offset by an increase in ethylene when
compared to the prior year. Expressed as a percent of revenue, cost of goods
sold was 97% for both reporting periods.
PVC Polymers Products contributing margin improved upon prior year's
profitability to a profit of $9.3 million. This is a result of both a decrease
in major raw material costs, led by chlorine, a slight increase in selling
prices, and a higher yielding product mix.
Contributing margin of Methanol and Derivatives decreased $2.4 million from the
same period a year ago. Equivalent natural gas costs were offset by an 8%
decline in selling prices.
Nitrogen Products generated a $3.5 million loss in second quarter of 1999,
compared to a positive $0.9 contributing margin for the second quarter of 1998.
Natural gas prices were stable but selling prices were 22% lower than the same
period last year.
Net Income (Loss)
Net loss for the second quarter of 1999 was $8.8 million compared to $7.8
million loss for the second quarter of 1998. As discussed above, the primary
reasons for the $1.0 million decrease from prior year was the results of modest
raw material costs decline, not being able to offset a 10% decrease in selling
prices.
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Results of Operations
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
Total revenues for the first six months of 1999 decreased $57.2 million or 19%
to $242.6 million from $299.8 million in the first six months of 1998. This
decrease was the result of declines in selling prices and volumes in all three
product groups.
Total revenues for PVC Polymers Products decreased $29.6 million as a result of
8% decrease in selling prices and a 7% decrease in sales volumes. Excess supply
of PVC in the first quarter of 1999 and the planned plant changeover to higher
yielding PVC Polymer products caused sales volume and selling prices,
respectively, to decline versus a like prior year period.
Total revenues for Methanol and Derivatives decreased $20.4 million as a result
of a 20% decrease in selling prices and a 16% decrease in sales volume. Excess
capacity and customer turnarounds adversely affected both selling price and
sales volumes, respectively.
Total revenues for Nitrogen Products decreased $7.2 million as a result of a 20%
decrease in selling prices along with a 6% decrease in sales volumes.
Additional world wide capacity, a decrease of urea imports into China, and a
decrease in domestic usage in the 1999 planting season all contributed to the
downward pressure on selling prices and reduction in sales volume of Nitrogen
products.
Cost of Goods Sold
Total cost of good sold decreased 21% to $231.5 million in the first six months
of 1999 from $293.2 million in the first six months of 1998, primarily due to
the decrease in sales volumes previously noted and a decline in certain raw
material costs. During the first six months of 1999, the cost of natural gas,
the Partnership's largest raw material, decreased 11% when compared to the same
period in 1998. The costs of other major material such as chlorine and vinyl
chloride monomer also declined for the like period. These cost decreases were
partially offset by an increase in the cost of ethylene compared to the prior
year. Expressed as a percentage of revenue, cost of goods sold was 95% and 98%
of sales revenue in the first six months of 1999 and the first six months of
1998, respectively.
Contributing margins for PVC Polymers Products increased to $18.4 million due to
substantial decreases in chlorine and VCM costs, an upgrade in product mix,
offset by decreases in sales prices and volume.
Contributing margins for Methanol and Derivatives decreased significantly to a
loss of $2.2 million as declines in selling prices and volume were not able to
be offset by a decrease in natural gas costs.
Contributing margins for Nitrogen Products, a loss of $5.1 million during the
first six months of 1999 compared unfavorably to the like six month period of
1998, a loss of $2.8 million, due to selling price and volume declines
previously noted, partially offset by a decrease in natural gas costs.
Net Loss
Net loss was $14.5 million for the first six months of 1999 compared to a net
loss of $16.1 million for the first six months of 1998. As discussed above,
the primary reasons for the improvement is the operating performance of the PVC
Polymers Product segment.
Liquidity and Capital Resources
Cash Flows from Operations. Cash provided by operations for the first six
months of 1999 totaled $0.7 million, an improvement of $3.9 million primarily
due to an increase in net income and a favorable change in working capital.
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Cash Flows from Investing Activities. First six months capital expenditures
totaled $7.7 million and $15.0 million for 1999 and 1998, respectively. The
1998 amount related primarily to environmental projects and other discretionary
capital expenditures.
Cash Flow from Financing Activities. Pursuant to its Partnership Agreement, the
Partnership is required to make quarterly distributions to Unitholders and the
General Partner of 100% of its Available Cash, if any. Available Cash means
generally, with respect to any quarter, the sum of all cash receipts of the
Partnership plus net reductions to reserves established in prior quarters, less
all of its cash disbursements and net additions to reserves in such quarter.
The General Partner may establish such reserves, as it deems necessary or
appropriate in its reasonable discretion, to provide for the proper conduct of
the business of the Partnership or the Operating Partnership and to stabilize
distributions of cash to Unitholders and the General Partner and such other
reserves as are necessary to comply with the terms of any agreement or
obligation of the Partnership.
A cash distribution of $3.7 million was paid during the first six months of
1998. This amount relates to the cash distribution declared for the first
quarter of 1998. Cash distributions with respect to interim periods are not
necessarily indicative of cash distributions with respect to a full year.
Moreover, due to the cyclical nature of the Partnership's business, past cash
distributions are not necessarily indicative of future cash distributions.
The cyclical nature of the Partnership's business as well as various seasonality
factors have a significant impact on its results of operations and, therefore,
on its ability to make cash distributions on a quarterly basis. 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 but do not affect Available
Cash constituting Cash from Operations, while changes in working capital items
(including receivables, inventories, accounts payable and other items) generally
do not affect net income but do affect such Available Cash. Moreover, as
provided for in the Partnership Agreements with respect to the Partnership and
the Operating Partnership, certain reserves may be established which affect
Available Cash constituting Cash from Operations but do not affect cash balances
in financial statements. Such reserves have generally been used to set cash
aside for debt service, capital expenditures and other accrued items.
Liquidity
Adverse business conditions across the Partnership's three product groups have
considerably reduced its sales revenues and operating margins and caused the
Partnership to incur net losses over the past several quarters. Unless business
conditions broadly improve, industry overcapacity affecting all of the
Partnership's product groups is likely to cause narrow operating margins to
persist throughout the remainder of the year, even if selling prices continue to
improve. These narrow operating margins, combined with the Partnership's
capital expenditure needs (which are anticipated to be in the range of $3 to $6
million per quarter) and debt service requirements, along with restrictions in
the Credit Agreement and Indenture as discussed below, make it unlikely that the
Partnership will resume making quarterly cash distributions in 1999.
The Operating Partnership and several lending institutions are parties to an
amended and restated Credit Agreement (the "Credit Agreement"), dated as of
December 23, 1998 which provides for a revolving credit facility of up to $90
million (the "Revolving Credit Facility"). The new two-year agreement waived
the Operating Partnership's non-compliance with its financial covenants at the
end of the third quarter and reset coverage ratio covenants through December 31,
2000. The Operating Partnership's obligations under the facility are secured by
the Geismar Plant Facility. As of June 30, 1999, the Operating Partnership had
$55.3 million outstanding under the Revolving Credit Facility. A change of
control of the General Partner, the Partnership or the Operating Partnership is
an event of default under the Credit Agreement.
On May 1, 1995, the Operating Partnership issued $200 million aggregate
principal amount of 9.5% Notes due 2005 (the "Notes") pursuant to an Indenture
dated as of May 1, 1995 (the "Indenture"). The Notes are senior unsecured
obligations of the Operating Partnership.
The Notes include restrictions on the Operating Partnership's ability to make
cash distributions, incur additional indebtedness, sell assets, engage in
sale/leasebacks and to take certain other actions. Upon a Change in Control,
the
12
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holders of the Notes may require the Operating Partnership to repurchase their
Notes at a price equal to 101% of the aggregate principal amount plus accrued
and unpaid interest to the date of repurchase.
In December 1998, the Company retained the investment banking firms of Evercore
Partners and Salomon Smith Barney to assist it in exploring strategic
alternatives, including joint ventures, mergers or alliances, or the sale of
some or all of the business. While these efforts are still on-going, to date
they have not resulted in any transaction and there can be no assurances that
they will result in a transaction.
Capital Expenditures
The Partnership has agreed to purchase its partner's 50% share of the Acetylene
Plant at the Geismar complex on December 31, 1999. The purchase price is
approximately $18 million, one-half payable at closing with the remainder
payable in equal monthly installments over three years.
Other than this acquisition, the Partnership currently believes that the level
of annual base capital expenditures over the next two years will be in the range
of $15 to $20 million per year. Total capital expenditures for 1999 are
anticipated to be approximately $15 million with a large portion relating to a
new software system which will improve the computer systems infrastructure and
assist the Company in preparing for the year 2000.
Year 2000
Similar to other business entities, the Partnership will be impacted by the
inability of its computer application software programs, as well as certain
date-sensitive devices, to properly identify the year 2000 due to a commonly
used programming convention of using only two digits to identify a year. Unless
modified or replaced these programs and devices could fail or create erroneous
results when referencing the year 2000.
The Partnership's company-wide Year 2000 Project (Project) to mitigate the
effects year 2000 issues is proceeding on schedule. All facets of the business
have been divided into two primary categories and a Y2K Manager has been
assigned to each. Category 1 is the Enterprise Resource Planning ("ERP") or
Business Systems functions which encompasses Business Applications (software),
End-User (PC's), Technical Infrastructure (hardware), and Communications.
Category 2 consists of those applications which support our Manufacturing, lab,
and R&D functions.
The Project has three phases: (I) Risk Assessment
(II) Detailed Assessment Remediation Planning
(III)Remediation and Resolution
As of October 31, 1998 the Partnership completed Phase I having developed
detailed inventories of related equipment and resources and assigned a relative
risk to each application based on the potential impact to the business and the
specific effects of a material Y2K failure. Material failures are those which
would negatively impact the safety of individuals, property, or environment or
the Partnership's ability to conduct business in a normal fashion.
Phase II consists of the development of a detailed plan for remediation of all
those applications identified in the initial inventory and the assignment of
specific responsibilities for implementing the required changes. The Category 1
Phase II plan was completed in November 1998.
Management believes that the most significant Year 2000 business risk to the
Partnership relates to the current financial system applications. Accordingly,
an enterprise-wide implementation of Year 2000 compliant software and hardware
has been initiated. The anticipated cost associated with the enterprise-wide
implementation is approximately $17.7 million, of which $14.3 million has been
expended through June 30, 1999. In early 1998 the Partnership began converting
its business applications over to a Windows NT based system utilizing Microsoft
SQL Servers and the latest version of Year 2000 compliant J.D. Edwards software.
This conversion continued into 1999 and is expected to be fully operational by
September 1, 1999.
The Category 2 Phase plan II including detailed test plans was completed during
December 1998. Estimated costs associated with the remediation of our
manufacturing, lab, and R&D equipment/systems is approximately $1 million. The
plan consists of repair, replacement, upgrades, and workarounds based on the
ability of the hardware and
13
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software to respond to a specified battery of Year 2000 date testing and the
relative impact to the business as specified above. Phase III was completed on
June 30, 1999.
The Company has also initiated a program to determine the effects of third-party
suppliers and customers on the business with respect to Y2K issues. Over 2000
suppliers were mailed a self-assessment questionnaire with the intent of
identification and, to the extent possible, timely resolution of potential Year
2000 issues. Additionally approximately 150 of the 2000+ suppliers have been
identified as critical vendors. Each is being contacted directly to determine
the status of their Y2K compliance effort and the need, if any to develop a
contingency plan. Inventories, alternate suppliers and forms of transportation,
production and maintenance schedules, etc. are all contingency considerations as
noted below.
While it is expected that the Company will be able to resolve any significant
issues identified in this process, the Partnership has limited or no control
over the actions of third-party suppliers and/or customers. As such we can
provide no assurance that these suppliers will resolve their Year 2000 issues
before the occurrence of a disruption to the business of the Partnership or any
of its customers. Material failure on the part of one of these third parties
could have an adverse affect on the Partnership's business and results of
operations.
During all three phases of the Project, management has been considering the need
to develop contingency plans for any of the applications which could have a
critical impact on the business. The major focus on contingency planning was
expended in the second quarter of 1999 with the expectation of having any
required plans detailed by the end of the third quarter. The Partnership
expects to fully explore any contingency requirements with its major suppliers
and customers and include possible resolution in its detailed plan. Based on
the Partnership's current plans and efforts to date, the Partnership does not
anticipate that Year 2000 issues will have any material effects on its results
of operations.
The estimates and conclusions herein contain forward-looking statements and are
based on BCPM's best estimates of future events based on the information
available at this time. However, there can be no guarantee that these results
will be achieved and actual results could differ from the plan. Specific
factors that might cause differences from our estimates include, but are not
limited to, availability of resources, the ability to identify and correct all
potential Year 2000 inconsistencies, the ability of suppliers to correct Year
2000 issues in a timely manner, and unanticipated problems identified in our
ongoing Year 2000 project quality assurance review.
Item 2-A Market Risk
- --------------------
Interest Rate Risk - The Company's amended facility provides up to $90,000 under
a revolving credit agreement with a group of banks. The amended credit facility
expires on December 31, 2000, at which time all amounts outstanding must be
repaid. Interest on borrowings under the revolving credit facility are
determined, at the Operating Partnership's option, based on the applicable
Eurodollar rate (one, two, three, six, nine or twelve month periods) plus a
margin. The ABR rate is the greater of (a) the prime rate (b) the Base CD rate
plus 1.00% or (c) the Federal Funds Effective rate plus .5%. At June 30, 1999
borrowings under the amended facility were $55,300 and bore interest at 9.30%.
The Company is exposed to swings in the Eurodollar or ABR rates. A change of
1.00% in the applicable rate would change the Company's interest cost by $553
based on the borrowings at June 30, 1999.
Commodity Risk - The Partnership generally does not use derivatives or other
financial instruments such as futures contracts to manage commodity market risk.
However, at certain times of the year the Partnership will enter into contracts
whereby it agrees to purchase a specified quantity of natural gas (the
Partnership's principal raw material) at a fixed price. Such contracts are
generally not in excess of three months forward, and the Partnership generally
limits such forward purchases to 60% of a month's requirements. In addition,
the Partnership has entered into a fifteen year supply agreement (commencing in
1997) to provide a long-term supply of ethylene, a raw material, and minimize
price volatility. The purchase price for the product varies with the supplier's
raw material and co-product credits costs which are market-driven, as well as
its fixed costs. The Partnership evaluates all such contracts on the basis of
whether committed costs are expected to be realized in light of current and
expected selling prices when the commodities are consumed in manufactured
products.
14
<PAGE>
Foreign Exchange and Equity Risk - The Partnership is not exposed to significant
foreign exchange or equity market risk.
Forward-Looking Statements
Certain statements in this section are forward-looking. These can be identified
by the use of forward-looking words or phrases such as "believe", "expect",
"may" and "potential", among others and include statements regarding the
business outlook for the Operating Partnership and its ability to fund its cash
needs. The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for such forward-looking statements. While these forward-looking
statements are based on the Partnership's reasonable current expectations, a
variety of risks uncertainties and other factors, including many which are
outside the control of the Partnership, could cause the Partnership's actual
results to differ materially from the anticipated results or expectations
expressed in such forward-looking statements. The risks, uncertainties and
other factors that may affect the operations, performance, development and
results of the Partnership include changes in the demand for and pricing of its
commodity products, changes in industry production capacity, changes in the
supply of and costs of its significant raw materials, and changes in applicable
environmental, health and safety laws and regulations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There is incorporated by reference herein the information regarding legal
proceeding in Item 3 of Part 1 of the Partnership's 1998 Annual Report on Form
10-K and Note 2 to the consolidated financial statements in Part 1 hereof.
15
<PAGE>
SIGNATURE
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.,
its General Partner
By: /s/ Francis J. Proto
---------------------------------------
Francis J. Proto
Chief Financial Officer and Treasurer
Principal Accounting Officer
August 12, 1999
16
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