UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended March 31, 2006
or
For the Transition Period from to
Commission File No. 001-32260
Westlake Chemical Corporation
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2801 Post Oak Boulevard, Suite 600
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 960-9111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
The number of shares outstanding of the registrant’s sole class of common stock, as of May 1, 2006, was 65,166,401.
INDEX
Item
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
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Item 1. Financial Statements
WESTLAKE CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2006
December 31,
2005
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Equity investment
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Commitments and Contingencies (Notes 10 and 13)
Stockholders’ equity
Preferred stock, nonvoting, noncumulative, $0.01 par value, 50,000,000 shares authorized
Common stock, $0.01 par value, 150,000,000 shares authorized; 65,169,299 and 65,121,850 shares issued and outstanding in 2006 and 2005, respectively
Additional paid-in capital
Retained earnings
Minimum pension liability, net of tax
Unearned compensation on restricted stock
Cumulative translation adjustment
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest expense
Debt retirement cost
Other income, net
Income before income taxes
Provision for income taxes
Net income
Basic and diluted earnings per share
Weighted average shares outstanding:
Basic
Diluted
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provisions for (recovery of) bad debts
Amortization of debt issue costs
Loss (gain) from disposition of fixed assets
Deferred tax expense
Equity in (income) loss of joint venture
Write-off of debt issuance costs
Changes in operating assets and liabilities
Accounts receivable
Inventories
Other, net
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment
Settlements of derivative instruments
Net cash used for investing activities
Cash flows from financing activities
Proceeds from the exercise of stock options
Dividends paid
Proceeds from borrowings
Repayment of borrowings
Capitalized debt costs
Net cash used for financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
1. Basis of Financial Statements
The accompanying unaudited consolidated interim financial statements were prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. Certain information and footnotes required for complete financial statements under generally accepted accounting principles in the United States have not been included pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the December 31, 2005 financial statements and notes thereto of Westlake Chemical Corporation (the Company) included in the annual report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on February 23, 2006. These financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the notes to the consolidated financial statements of the Company for the fiscal year ended December 31, 2005.
In the opinion of the Company’s management, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial position as of March 31, 2006, the results of operations for the three months ended March 31, 2006 and 2005 and the changes in its cash position for the three months ended March 31, 2006 and 2005.
Results of operations and changes in cash position for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2006 or any other interim period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
2. Stock-Based Compensation
The Board of Directors of the Company has adopted, and the stockholders have approved, the Westlake Chemical Corporation 2004 Omnibus Incentive Plan (the “2004 Plan”). Under the 2004 Plan, all employees of the Company, as well as certain individuals who have agreed to become the Company’s employees, are eligible for awards. Shares of common stock may be issued as authorized in the 2004 Plan. At the discretion of the administrator of the 2004 Plan, employees and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, stock awards or cash awards (any of which may be a performance award). The total compensation expense related to the 2004 Plan was $429 for the three months ended March 31, 2006, and the realized excess tax benefit from exercised options during that period was $76.
Prior to January 1, 2006, the Company accounted for its stock-based compensation plan in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and complied with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), for disclosure purposes. Under these provisions, no compensation expense was recognized for stock options because the exercise price for all options was equal to the market price at the grant date, and any compensation expense resulting from restricted stock was recognized ratably over the associated vesting term. The Company provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” as if the fair value method defined by SFAS 123 had been applied to its stock options.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated results of prior periods. Under this transition method, stock-based compensation expense for the first quarter of fiscal 2006 includes compensation expense of all stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs on a straight-line basis over the requisite service period of the award for only those shares expected to vest. In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Upon adoption of SFAS 123R on January 1, 2006, amounts previously recorded in stockholders’ equity under APB 25 at December 31, 2005 related to unearned compensation for restricted stock awards have been reversed against paid-in capital and will be expensed over the vesting period in accordance with SFAS 123R. As a result of adopting SFAS 123R, the impact to the consolidated statement of operations for the three months ended March 31, 2006 on income before income taxes and net income was a decrease of $269 and $170, respectively, from the amount that would be reported if the Company had continued to account for stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for the three months ended March 31, 2006 was less than $0.01 per share.
The pro forma table below reflects net income and basic and diluted earnings per share for the first quarter of 2005, had the Company applied the fair value recognition provisions of SFAS 123:
March 31, 2005
Net income, as reported
Pro forma stock option compensation expense
Provision for income taxes on pro forma stock option expense
Pro forma net income
As reported:
Pro forma:
Option activity and changes during the three months ended March 31, 2006 were as follows:
Outstanding at December 31, 2005
Granted
Exercised
Cancelled
Outstanding at March 31, 2006
Exercisable at March 31, 2006
The aggregate intrinsic value in the table represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised for the three months ended March 31, 2006 was $511.
As of March 31, 2006, $1,960 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.0 years.
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The Company used the Black-Scholes option pricing model to value its options. The table below presents the weighted average value and assumptions used in developing each option’s fair value. Volatility was calculated using historical trends of the Company’s common stock price.
Weighed average fair value
Risk-free interest rate
Expected life in years
Expected volatility
Expected dividend yield
Non-vested restricted stock awards as of March 31, 2006 and changes during the three months ended March 31, 2006 were as follows:
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 2005
Vested
Forfeited
Non-vested at March 31, 2006
As of March 31, 2006 there was $1,490 of unrecognized stock-based compensation expense related to non-vested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.7 years.
3. Accounts Receivable
Accounts receivable consist of the following:
Accounts receivable — trade
Accounts receivable — affiliates
Allowance for doubtful accounts
Accounts receivable — other
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4. Inventories
Inventories consist of the following:
Finished product
Feedstock, additives and chemicals
Materials and supplies
Allowance for inventory obsolescence
Net inventory
5. Property, Plant and Equipment
Depreciation expense on property, plant and equipment of $18,075 and $18,173 is included in cost of sales in the consolidated statement of operations for the three months ended March 31, 2006 and 2005, respectively.
6. Other Assets
Amortization expense on other assets of $2,687 and $3,297 is included in the consolidated statement of operations for the three months ended March 31, 2006 and 2005, respectively.
7. Derivative Commodity Instruments
The Company had a net gain of $5,204 in connection with trading activity for the three months ended March 31, 2006 compared to a net gain of $187 for the three months ended March 31, 2005. Risk management asset balances of $368 and $0 were included in “Accounts receivable, net” and risk management liability balances of $0 and $31,891 were included in current liabilities in the Company’s balance sheets as of March 31, 2006 and December 31, 2005, respectively. During the three months ended March 31, 2006, the Company paid a net amount of $27,445 in settlement of derivative instruments.
8. Earnings per Share
There are no adjustments to “Net income” for the diluted earnings per share computations.
The following table reconciles the denominator for the basic and diluted earnings per share computations shown in the consolidated statements of operations:
Weighted average common shares—basic
Plus incremental shares from assumed conversions:
Options
Restricted stock
Weighted average common shares—diluted
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9. Pension and Post Retirement Benefits
Components of Net Periodic Costs are as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
In the first quarters of 2006 and 2005, the Company contributed $0 and $6,074 to the Salaried and Wage pension plans, respectively. On April 3, 2006, the Company contributed $2,498 to the pension plans and is not scheduled to contribute any additional funds to the plans during the fiscal year ending December 31, 2006.
10. Commitments and Contingencies
Environmental Matters
The Company is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require it to remove or mitigate the effects of the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. Because several of the Company’s production sites have a history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on the Company in the future. As is typical for chemical businesses, soil and groundwater contamination has occurred in the past at some of the Company’s sites and might occur or be discovered at other sites in the future. The Company has typically conducted extensive soil and groundwater assessments either prior to acquisitions or in connection with subsequent permitting requirements. The Company’s investigations have not revealed any contamination caused by the Company’s operations that would likely require the Company to incur material long-term remediation efforts and associated liabilities.
Calvert City
Contract Litigation with Goodrich and PolyOne. In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation chemical manufacturing complex in Calvert City, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. In addition, the Company agreed to indemnify Goodrich for contamination attributable to the ownership, use or operation of the plant after the closing dates. The soil and groundwater at the manufacturing complex, which does not include the Company’s polyvinyl chloride facility in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation was spun off from Goodrich, and Geon assumed the responsibility to operate the site-wide remediation system and Goodrich’s indemnification obligations for any liabilities arising from preexisting contamination at the site. Subsequently, Geon’s name was changed to PolyOne. Part of the former Goodrich facility, which the Company did not acquire and on which it does not operate and that it believes is still owned by either Goodrich or PolyOne, is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. The investigation and remediation of contamination at the Company’s manufacturing complex is currently being coordinated by PolyOne.
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Given the scope and extent of the underlying contamination at the Company’s manufacturing complex, the remediation will likely take a number of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $4,556 in 2005, and the Company expects this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has asserted that the Company’s actions after its acquisition of the complex have contributed to or otherwise exacerbated the contamination at the site. The Company denied those allegations. Goodrich has also asserted claims similar to those of PolyOne. In addition, Goodrich has asserted that the Company is responsible for a portion of the ongoing costs of treating contaminated groundwater being pumped from beneath the site. In May 2003, Goodrich began withholding payment of 45% of the monthly costs incurred by the Company to operate certain pollution control equipment owned by Goodrich at the site.
In October 2003, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky for breach of contract to recover unpaid invoices related to the Company’s operation of groundwater treatment equipment. Goodrich filed an answer and counterclaim in which it alleged that the Company was responsible for contamination at the facility. The Company denied those allegations and filed a motion to dismiss Goodrich’s counterclaim. By order dated April 9, 2004, the court dismissed part of Goodrich’s counterclaim while retaining the remainder. Goodrich also filed a third-party complaint against PolyOne. PolyOne in turn filed motions to dismiss, filed counterclaims against Goodrich and filed cross-claims against the Company in which it alleged breach of contract and that Goodrich and the Company had conspired to defraud PolyOne. On June 8, 2004, the Company filed a motion for summary judgment on its breach of contract claim against Goodrich. On June 16, 2004, the Company filed a motion to dismiss PolyOne’s cross-claims. By order dated March 9, 2005, the court granted the Company’s motion to dismiss PolyOne’s cross-claims. On March 29, 2005, the court granted the Company’s motion for summary judgment on the Company’s breach of contract claim against Goodrich. On April 12, 2005, Goodrich filed a motion for reconsideration of the order granting summary judgment. On July 5, 2005, Goodrich and the Company entered a Non-Waiver Agreement pursuant to which Goodrich paid the Company all past due amounts, including interest, in the amount of $3,132. This reimbursement is reflected in the consolidated statement of operations for the year ended December 31, 2005 resulting in a $2,606 reduction of selling, general and administrative expenses and $526 of interest income. Goodrich further agreed to make all future payments for services on a timely basis. Pursuant to the Non-Waiver Agreement, both parties retained all rights and legal arguments, including Goodrich’s right to pursue its motion for reconsideration. The granting of such motion could result in the Company being required to repay Goodrich for the amounts paid by Goodrich under the Non-Waiver Agreement. The case is continuing with respect to Goodrich’s counterclaims against the Company, and Goodrich’s third-party claims against PolyOne and PolyOne’s counterclaims against Goodrich. Extensive discovery is ongoing and the trial is set for December 2006.
Administrative Proceedings and Related Litigation. In addition, there are several administrative proceedings in Kentucky involving Goodrich and PolyOne. On September 23, 2003, the Kentucky State Cabinet re-issued Goodrich’s Resource Conservation and Recovery Act, or RCRA, permit which requires Goodrich to remediate contamination at the Calvert City manufacturing complex. Goodrich was named as the sole permittee. Both Goodrich and PolyOne have challenged that determination. Goodrich filed an appeal (Goodrich I) of that permit on October 23, 2003, and PolyOne filed a separate challenge (PolyOne I) on November 13, 2003. In both proceedings, Goodrich and PolyOne are seeking to shift Goodrich’s cleanup responsibilities under Goodrich’s RCRA permit to other parties, including the Company. The Company has either intervened directly or been named as a party in both of these proceedings. Mediation was conducted in these proceedings during 2004 but was unsuccessful. On September 27, 2004, the Kentucky State Cabinet sent PolyOne a determination requiring PolyOne to be added to the Goodrich RCRA permit due to PolyOne’s operation of the site remediation system. On October 22, 2004, PolyOne filed an appeal (PolyOne II). In this second proceeding, PolyOne is challenging the State’s determination that PolyOne is required to submit an application for a major modification of the Goodrich permit and assume the regulatory status of an operator under the permit. PolyOne makes a number of charges against the Company that, if proven, might cause the Kentucky State Cabinet to demand that the Company also be added to the Goodrich permit. Goodrich and PolyOne have alleged in Goodrich I and PolyOne I that Goodrich cannot be held responsible for contamination on property they do not own. Both Goodrich and PolyOne have also alleged that the Company is responsible for contamination at the manufacturing complex, which the Company has denied.
On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which had rejected a Goodrich proposal to perform a particular soil remediation procedure. The Company’s motion to intervene in PolyOne II and Goodrich II was subsequently granted.
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On March 18, 2005, the Goodrich I and II and PolyOne I and II proceedings were consolidated and the hearing for the consolidated case was set for September 12, 2006. Subsequently, the Kentucky State Cabinet agreed to allow Goodrich to perform a test of the soil remediation procedure. Goodrich then withdrew its complaint and the Goodrich II proceeding was dismissed. By order dated January 19, 2006, the hearing for the consolidated administrative proceedings was rescheduled to April 3, 2007.
On March 22, 2005, after the court had dismissed PolyOne’s cross-claims against the Company, PolyOne filed a separate RCRA citizen suit against the Company in the United States District Court for the Western District of Kentucky, which covers the same issues raised in the Goodrich and PolyOne administrative proceedings. On May 23, 2005 the Company filed a motion to dismiss the PolyOne complaint, which PolyOne responded to on June 7, 2005. The Company filed its reply to PolyOne’s response on June 21, 2005, and the motion is pending.
In January 2004, the Kentucky State Cabinet notified the Company by letter that, due to its ownership of a closed landfill (known as Pond 4) at the manufacturing complex, the Company would be required to submit a post-closure permit application under RCRA. This could require the Company to bear the responsibility and cost of performing remediation work at Pond 4 and solid waste management units and areas of concern located on property adjacent to Pond 4 that is owned by the Company. The Company acquired Pond 4 from Goodrich in 1997 as part of the acquisition of other facilities. Under the 1997 contract, the Company has the right to reconvey title to Pond 4 back to Goodrich, which the Company has tendered. On March 21, 2005, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the tendered reconveyance and to indemnify the Company for its costs incurred in connection with Pond 4. On May 20, 2005, Goodrich filed a motion to dismiss portions of the Company’s complaint. On June 27, 2005, the Company filed a response in opposition to Goodrich’s motion to dismiss, and Goodrich filed its reply on July 18, 2005. In addition, on June 6, 2005, Goodrich filed a third-party complaint against PolyOne, seeking to hold PolyOne responsible for any of Goodrich’s Pond 4 liabilities to the Company. PolyOne moved to dismiss Goodrich’s third-party complaint on August 30, 2005. Goodrich responded to PolyOne’s motion on October 7, 2005, and PolyOne filed its reply on October 21, 2005. Finally, the Company filed a motion for partial summary judgment on Goodrich’s liability for the Company’s costs incurred in connection with Pond 4 on August 9, 2005. Goodrich responded to the Company’s motion on September 6, 2005, and the Company replied on September 27, 2005. The motion is now pending.
The Company has also filed an appeal with the Kentucky State Cabinet regarding its January 2004 letter. Goodrich and PolyOne have both filed motions to intervene in this appeal. On July 1, 2004, the Company notified the Kentucky State Cabinet that the Company would prefer to conduct a clean-closure equivalency determination, or CCED, of Pond 4 rather than pursue a post-closure care RCRA permit. The proposal to conduct the CCED was rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky State Cabinet directed the Company to file a post-closure permit application for Pond 4. On February 23, 2005, the Company filed a motion for stay of the order requiring the Company to file the permit application. On February 18, 2005, the Company also sent a letter to the Kentucky State Cabinet demanding that it enforce the Goodrich RCRA permit against Goodrich since the RCRA permit requires Goodrich to address Pond 4. On March 25, 2005, the Kentucky State Cabinet granted the Company an extension until September 26, 2005 to file the permit application. On August 19, 2005, the Kentucky Cabinet granted an additional extension until March 25, 2006 to file the permit application. On March 27, 2006, the Kentucky Cabinet granted another extension until September 20, 2006 to file the permit application.
Monetary Relief. None of the parties involved in the proceedings relating to the disputes with Goodrich and PolyOne and the Kentucky State Cabinet described above has formally quantified the amount of monetary relief that they are seeking from the Company, nor has the court or the Kentucky State Cabinet proposed or established an allocation of the costs of remediation among the various participants. Any monetary liabilities that the Company might incur with respect to the remediation of contamination at the manufacturing complex in Calvert City would likely be spread out over an extended period. While the Company has denied responsibility for any such remediation costs and is actively defending its position, the Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows.
Environmental Investigations. In March and June 2002, the EPA’s National Enforcement Investigations Center, or NEIC, conducted an environmental investigation of the Company’s manufacturing complex in Calvert City consisting of the ethylene dichloride (“EDC”)/vinyl chloride monomer (“VCM”), ethylene and chlor-alkali plants. In May 2003, the Company received a report prepared by the NEIC summarizing the results of that investigation. Among other things, the NEIC concluded that the requirements of
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several regulatory provisions had not been met. The Company analyzed the NEIC report and identified areas where it believed that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. The Company held a number of discussions with the EPA concerning its conclusions. In February 2004, representatives of the EPA orally informed the Company that the agency proposed to assess monetary penalties against it and to require it to implement certain injunctive relief to ensure compliance. In addition, the EPA’s representatives informed the Company that the EPA, the NEIC and the Kentucky State Cabinet would conduct an inspection of its polyvinyl chloride (“PVC”) facility in Calvert City, which is separate from the manufacturing complex and was not visited during the 2002 inspection. That additional inspection took place in late February 2004. The Company has not yet received a written report from the agencies regarding the actions that they propose to take in response to that visit. The EPA submitted to the Company an information request under Section 114 of the Clean Air Act and issued a Notice of Violation, both pertaining to the inspection of the EDC/VCM plant. The Notice of Violation does not propose any specific penalties. The EPA also issued to the Company information requests under Section 3007 of RCRA and Section 114 of the Clean Air Act regarding the PVC plant inspection. The Company and the EPA met in June 2004 and have continued to hold settlement discussions pursuant to which the EPA has indicated it will impose monetary penalties and will require plant modifications that will require capital expenditures. The Company expects that, based on the EPA’s past practices, the amount of any monetary penalties would be reduced by a percentage of the expenditures that the Company would agree to make for certain “supplemental environmental projects.” The Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows. However, the Company has recorded an accrual for a probable loss related to monetary penalties. Although the ultimate amount of liability is not ascertainable, the Company believes that any amounts exceeding the recorded accruals should not materially affect the Company’s financial condition. It is possible, however, that the ultimate resolution of this matter could result in a material adverse effect on the Company’s results of operations or cash flows for a particular reporting period.
Legal Matters
In October 2003, the Company filed suit against CITGO Petroleum Corporation in state court in Lake Charles, Louisiana, asserting that CITGO had failed to take sufficient hydrogen under two successive contracts pursuant to which the Company has supplied and the Company supplies to CITGO hydrogen that the Company generates as a co-product in its ethylene plants in Lake Charles. In December 2003, CITGO responded with an answer and a counterclaim against the Company, asserting that CITGO had overpaid the Company for hydrogen due to the Company’s allegedly faulty sales meter and that the Company is obligated to reimburse CITGO for the overpayments. In January 2004, the Company filed a motion to compel arbitration of CITGO’s counterclaim and to stay all court proceedings relating to the counterclaim. In May 2004, the parties filed a joint motion with the court to provide for CITGO’s counterclaim to be resolved by arbitration. The Company’s claim against CITGO is approximately $8,100 plus interest at the prime rate plus two percentage points and attorneys’ fees. CITGO’s claim against the Company is approximately $7,800 plus interest at the prime rate plus two percentage points and attorneys’ fees. The parties held a mediation conference in April 2004 at which they agreed to conduct further discovery with a view towards holding another mediation conference to attempt to settle their disputes. Subsequently, the parties have held discussions regarding a settlement. The Company can offer no assurance that a settlement can be achieved, and if no settlement is achieved, the Company intends to vigorously pursue its claim against CITGO and its defense against CITGO’s counterclaim.
On March 30, 2006, Westlake Vinyls, Inc., a subsidiary of the Company, received notice that Royal Polymers Limited (“Royal”), a customer, had commenced a lawsuit against it in the Superior Court of Justice, Toronto, Ontario, Canada. Royal is seeking a declaration that the 2004 vinyl chloride monomer (VCM) supply agreement between Royal, as buyer, and Westlake Vinyls, Inc., as seller, is void and unenforceable as a result of the elimination of a published industry price factor which comprises one factor of a multi-factor pricing formula. Sales to Royal accounted for 16% of the net sales of the Company’s Vinyls segment and 7% of the Company’s consolidated net sales in 2005. Westlake Vinyls, Inc. continues to supply VCM to Royal and Royal continues to take VCM, although the parties are not in agreement as to the price of the VCM. In March 2006, Royal began short-paying invoices for VCM purchased, which shortfall aggregated a total of $3,283 as of March 31, 2006, making payments at prices lower than those the Company believes are called for under the agreement (the reduced payments were retroactive to January 1, 2006). The Company has deferred recognition of a majority of the amount withheld pending a settlement. On April 6, 2006, Westlake Vinyls, Inc. commenced a lawsuit against Royal in the same Ontario court seeking a declaration that the supply agreement is valid and binding, and an interim order requiring Royal to pay any shortfall amounts into the court. A hearing on the Company’s request for the interim order on the payment of the shortfall into the court has been set for May 10, 2006, while a hearing on Royal’s suit to declare the contract void has
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been set for June 8, 2006. The Company plans to vigorously pursue all available legal remedies to preserve its rights under the agreement. If the agreement is found by the court to be void, the Company could seek to find internal uses for the VCM or to sell the VCM to external customers, although this market has a limited number of participants. In the event of such a finding, the Company’s results of operations and cash flows could be materially adversely affected. The parties are engaged in discussions to try to resolve the underlying dispute on a commercial basis and to make interim arrangements regarding the shortfall amount. There can be no assurance that any such resolutions can be achieved, nor can the terms of any settlements or their effect on the Company be predicted.
In addition to the matters described above, in both “Environmental Matters” and “Legal Matters,” the Company is involved in various routine legal proceedings incidental to the conduct of its business. The Company does not believe that any of these routine legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.
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11. Segment Information
The Company operates in two principal business segments: Olefins and Vinyls. These segments are strategic business units that offer a variety of different products. The Company manages each segment separately as each business requires different technology and marketing strategies.
Net sales to external customers
Olefins
Polyethylene
Ethylene, styrene and other
Total olefins
Vinyls
Fabricated finished goods
VCM, PVC and other
Total vinyls
Intersegment sales
Income (loss) from operations
Corporate and other
Other income (expense), net
Capital expenditures
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A reconciliation of total segment income from operations to consolidated income before taxes is as follows:
Income before taxes
Total Assets
12. Comprehensive Income Information
Other comprehensive income (loss):
Change in foreign currency translation
Comprehensive income
13. Long-Term Debt
Long-term indebtedness consists of the following:
6 5/8% Senior notes due 2016
8 3/4% Senior notes due 2011
Term loan
Loan related to tax-exempt revenue bonds
Total debt
Less current portion
In the first quarter of 2006, the Company issued $250,000 aggregate principal amount of 6 5/8% senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem all of the Company’s 8 3/4% senior notes due 2011 and repay the
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Company’s term loan. The 6 5/8 % senior notes were issued with an original issue discount of $815. As a result of the early redemption of the 8 3/4% senior notes and the repayment of the term loan, the Company recognized $25,853 of debt retirement costs in the first quarter of 2006 consisting of a pre-payment premium on the 8 3/4% senior notes of $22,230 and a write-off of $3,623 in previously capitalized debt issuance cost. The issuance of the 6 5/8% senior notes resulted in the capitalization of $4,084 related to debt issuance cost.
14. Subsequent Events
The Company has agreed with the other owners of Suzhou Huasu Plastics Co. Ltd, the Company’s joint venture in China, to purchase additional interests in the joint venture. The transaction will result in an increase in the Company’s ownership percentage from approximately 43% to approximately 58%. All governmental approvals were obtained as of April 30, 2006, and the transaction is expected to close in the second quarter of 2006.
On May 2, 2006, TTWF LP, the Company’s controlling stockholder, completed a public offering of 5.5 million shares of the Company’s outstanding common stock at a price to the public of $31.25 per share. TTWF LP received all the proceeds from the sale of the stock.
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15. Guarantor Disclosures
The Company’s payment obligations under its 6 5/8% senior notes are fully and unconditionally guaranteed by each of its current and future domestic restricted subsidiaries that guarantee other debt of the Company or of another guarantor of the 6 5/8% senior notes in excess of $5,000 (the “Guarantor Subsidiaries”). Each Guarantor Subsidiary is 100% owned by the parent company. These guarantees are the joint and several obligations of the Guarantor Subsidiaries. The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of Westlake Chemical Corporation, the Guarantor Subsidiaries and the remaining subsidiaries that do not guarantee the notes (the “Non-Guarantor Subsidiaries”), together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.
Condensed Consolidating Financial Information as of March 31, 2006
Westlake
Chemical
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Balance Sheet
Total liabilities and stockholders’equity
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Condensed Consolidating Financial Information as of December 31, 2005
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Condensed Consolidating Financial Information for the Three Months Ended March 31, 2006
Statement of Operations
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Condensed Consolidating Financial Information for the Three Months Ended March 31, 2005
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Statement of Cash Flows
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for bad debts
Gain from disposition of fixed assets
Equity in income of joint venture
Write-off of debt isuance costs
Net changes in working capital and other
Net cash provided by (used for) operating activities
Settlements of futures contracts
Intercompany financing
Proceeds from exercise of stock options
Repayments of borrowings
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Loss from disposition of fixed assets
Equity in loss of joint venture
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with information contained in the accompanying unaudited consolidated interim financial statements of Westlake Chemical Corporation and the notes thereto and the consolidated financial statements and notes thereto of Westlake Chemical Corporation included in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The following discussion contains forward-looking statements. Please read “Forward-Looking Statements” for a discussion of limitations inherent in such statements.
We are a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are Olefins and Vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.
RECENT DEVELOPMENTS
On April 18, 2006, we announced that we entered into a Memorandum of Understanding (“MOU”) to develop an ethane-based ethylene, polyethylene and other derivatives project in the Republic of Trinidad and Tobago. The Republic of Trinidad and Tobago has expressed an interest in becoming a minority equity partner in the project. As currently envisioned, the project would use 37,500 barrels per day of ethane to produce 570,000 metric tons (1.25 billion pounds) per year of ethylene, which would in turn be used to produce polyethylene and other derivative products. The project could be expanded in the future as more ethane becomes available. The capital cost is initially estimated to be approximately $1.5 billion. The size, scope, and cost of the project are subject to further definition as the parties undertake a detailed feasibility study pursuant to the MOU. It is expected that the project would be financed through a project financing arrangement. The preliminary project schedule contemplates that construction would start in late 2007 and that the project would start operations in late 2010.
On May 2, 2006, TTWF LP, our controlling stockholder, completed the sale of 5.5 million shares of the Company’s outstanding common stock in a public offering at a price to the public of $31.25 per share. TTWF LP received all the proceeds from the sale of the stock.
We have agreed with the other owners of Suzhou Huasu Plastics Co. Ltd., our joint venture in China, to purchase additional interests in the joint venture, subject to the approval of relevant governmental authorities in China. The transaction will result in an increase in our ownership percentage from approximately 43% to approximately 58%. All governmental approvals were obtained as of April 30, 2006, and the transaction is expected to close in the second quarter of 2006.
We are planning major turnarounds in both Calvert City and Lake Charles during 2006. In the second quarter, various units at our Calvert City Vinyls complex will be brought down for maintenance turnaround. The ethylene and VCM units are expected to be down approximately 16 days while the chlor-alkali and PVC units will be down for a shorter period. The turnaround at one of the ethylene units at Lake Charles is planned for the third quarter of 2006 and is expected to last approximately 40 days. During a turnaround, production at the unit is suspended while work on the unit is performed. Sales are expected to continue during the turnaround period at both Lake Charles and Calvert City.
RESULTS OF OPERATIONS
First Quarter 2006 Compared with First Quarter 2005
Net Sales. Net sales increased by $0.2 million to $618.8 million in the first quarter of 2006 from $618.6 million in the first quarter of 2005. This increase was primarily due to price increases for all of our major products and higher sales volumes in PVC resin. These increases were almost entirely offset by lower sales volumes for ethylene, polyethylene, VCM, caustic and PVC pipe. Higher selling prices largely resulted from higher energy and raw material costs that were passed through to our customers. The decreased sales volumes for polyethylene, VCM, caustic and PVC pipe were primarily due to lower demand, while merchant ethylene sales volumes were lower primarily due to the increase in internal ethylene consumption at our Geismar facility. PVC resin sales volumes increased primarily due to the supply of additional volumes from our Geismar facility.
Gross Margin. Gross margin percentage increased to 21.2% in the first quarter of 2006 from 19.4% in the first quarter of 2005. This increase was primarily due to price increases for all of our major products and higher sales volumes for PVC resin. These increases were partially offset by lower sales volumes for ethylene, polyethylene, VCM, caustic and PVC pipe, higher raw material costs of ethane and propane and higher energy costs. Our raw material cost in both segments normally tracks industry prices, which experienced an increase of 9.2% for ethane and 19.6% for propane as compared to the first quarter of 2005.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.1 million, or 11.6%, in the first quarter of 2006 as compared to the first quarter of 2005. The increase was primarily due to higher professional fees, higher environmental consulting costs and increased sales commissions, partially offset by lower provision for doubtful accounts.
Interest Expense. Interest expense in the first quarter of 2006 decreased by $0.2 million to $6.0 million from $6.2 million in the first quarter of 2005. Lower average interest rates were partially offset by higher average debt balances. Debt balances were higher in the first quarter of 2006 due to the issuance of $250.0 million aggregate principal amount of 6 5/8% senior notes on January 13, 2006 while the redemption of the $247.0 million aggregate principal amount of 8 3/4% senior notes was not completed until February 2006.
Debt Retirement Cost. As a result of the redemption of $247.0 million aggregate principal amount of 8 3/4% senior notes due July 15, 2011 and the repayment of $9.0 million of our term loan, we recognized $25.9 million in non-operating expense in the first quarter of 2006, consisting of a pre-payment premium on our 8 3/4% senior notes of $22.2 million and a write-off of $3.7 million in previously capitalized debt issuance cost. We recognized $0.6 million in non-operating expense in the first quarter of 2005 resulting from a write-off in previously capitalized debt issuance cost in connection with the repayment of $30.0 million of our term loan.
Other Income, Net. Other income increased by $1.6 million to $2.3 million in the first quarter of 2006 from $0.7 million in the first quarter of 2005 primarily due to higher interest income and equity in income from our joint venture in China.
Income Taxes. The effective income tax rate was 36.9% in the first quarter of 2006 as compared to 36.1% in the first quarter of 2005. The effective tax rates in 2006 and 2005 are higher than the statutory rate of 35.0% primarily due to state income taxes, partially offset by a tax benefit of approximately 1.0% related to the new domestic manufacturing deduction.
Olefins Segment
Net Sales. Net sales decreased by $37.0 million, or 9.8%, to $339.7 million in the first quarter of 2006 from $376.7 million in the first quarter of 2005. This decrease was primarily due to lower sales volumes for polyethylene and ethylene, which were partially offset by price increases throughout the Olefins segment. Average selling prices for the Olefins segment increased by 16.4% in the first quarter of 2006 as compared to the first quarter of 2005. Higher selling prices were primarily the result of higher energy and raw material costs that were passed through to customers. Polyethylene sales volumes decreased slightly due to lower demand and merchant ethylene sales volumes decreased as the internal requirements for ethylene at our Geismar facility increased.
Income from Operations. Income from operations decreased by $2.8 million, or 4.6%, to $59.6 million in the first quarter of 2006 from $62.4 million in the first quarter of 2005. This decrease was primarily due to lower sales volumes for polyethylene and ethylene, higher raw material costs for ethane and propane and higher energy costs. These decreases were partially offset by price increases throughout the Olefins segment.
Vinyls Segment
Net Sales. Net sales increased by $37.2 million, or 15.4%, to $279.1 million in the first quarter of 2006 from $241.9 million in the first quarter of 2005. This increase was primarily due to higher selling prices for most of our Vinyls products and higher sales volumes of PVC resin. Average selling prices for the Vinyls segment increased by 17.2% in the first quarter of 2006 as compared to the first quarter of 2005. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane that were passed through to our customers. PVC resin sales volumes increased largely due to additional volumes from the Geismar facility. These increases were partially offset by lower sales volumes for VCM and PVC pipe. See the discussion regarding the dispute with Royal in Note 10 to the consolidated financial statements.
Income from Operations. Income from operations increased by $12.7 million, or 30.5%, to $54.4 million in the first quarter of 2006 from $41.7 million in the first quarter of 2005. This increase was primarily due to higher selling prices for most of our Vinyls products and higher sales volumes for PVC resin. These increases were partially offset by higher energy and raw material costs for propane.
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CASH FLOW DISCUSSION FOR THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Cash Flows
Operating Activities
Operating activities provided cash of $66.8 million in the first three months of 2006 compared to $52.3 million in the same period in 2005. The $14.5 million increase in cash flows from operating activities was primarily due to improvements in income from operations, as described above, and favorable changes in working capital, which were partially offset by debt retirement costs incurred in the first quarter of 2006 as described above. Income from operations increased by $9.2 million in the first three months of 2006 as compared to the first three months of 2005. Debt retirement cost of $25.9 million was incurred in the first three months of 2006 as compared to $0.6 million incurred in the first three months of 2005. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, used cash of $13.8 million in the first three months of 2006, compared to $37.4 million of cash used in the first three months of 2005, a decrease in cash use of $23.6 million. In the first three months of 2006, accounts receivable decreased by $25.5 million largely due to lower selling prices while inventory decreased by $0.3 million. Accounts payable and accrued liabilities decreased by $39.8 million during the first three months of 2006 primarily due to lower feedstock and energy costs. The primary reasons for the $37.4 million use of cash in the first three months of 2005 related to working capital components was a $52.4 million increase in accounts receivable, which was partially offset by an increase of accounts payable and accrued liabilities of $11.7 million. The increase in first quarter 2005 accounts receivable was primarily due to higher selling prices and volumes.
Investing Activities
Capital expenditures were $28.5 million in the first three months of 2006 as compared to $17.3 million in the first three months of 2005. The increase in capital expenditures was primarily due to a project designed to upgrade the feedstock flexibility in our ethylene plant and a project to expand our ethylene capacity. The remaining capital expenditures in the first quarter of 2006 primarily related to maintenance, safety and environmental projects. The capital expenditures in the first three months of 2005 primarily related to maintenance, safety and environmental projects. In addition, the settlement of derivative instruments in the first three months of 2006 related to derivative losses recognized in 2005.
Financing Activities
Net cash used by financing activities during the first three months of 2006 was $12.3 million as compared to $31.7 million in the first three months of 2005. During the first three months of 2006, we received proceeds from new debt of $249.2 million, which was offset as we repaid debt of $256.0 million and paid dividends of $1.8 million. We also incurred $4.1 million in costs associated with the refinancing that were capitalized and that will be amortized over the term of the new debt. During the first three months of 2005 we used $30.3 million to repay debt and $1.4 million to pay dividends.
Liquidity and Capital Resources
Liquidity and Financing Arrangements
Our principal sources of liquidity are from cash and cash equivalents, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing.
Cash
Cash balances were $236.4 million at March 31, 2006 compared to $237.9 million at December 31, 2005. We believe the March 31, 2006 cash levels are adequate to fund our short-term cash requirements.
Debt
Our present debt structure is used to fund our business operations, and our revolving credit facility is a source of liquidity. On January 6, 2006, we amended our senior secured revolving credit facility to, among other things, increase the commitment from $200.0 million to $300.0 million and generally reduce the interest payable. After the amendment, effective January 6, 2006, the revolving credit facility bore interest at either LIBOR plus 1.00% or prime rate minus 0.50%, and a 0.25% unused commitment fee, all of which are subject to quarterly grid pricing adjustments based on a fixed charge coverage ratio. The maturity of the facility was extended to January 6, 2011.
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As of March 31, 2006, our long term debt, including current maturities, totaled $260.1 million, consisting of $249.2 million principal amount of 6 5/8% senior notes due 2016 and a $10.9 million loan from the proceeds of tax-exempt revenue bonds (supported by a $11.3 million letter of credit). Debt outstanding under the tax-exempt bonds bears interest at variable rates.
On January 13, 2006, we issued $250.0 million of 6 5/8% aggregate principal amount of senior notes due 2016, the proceeds of which, together with cash on hand, were used to redeem our 8 3/4% senior notes due 2011 and repay our term loan as follows:
As a result of the early redemption of the 8 3/4% senior notes due 2011 and the repayment of the term loan, we recognized $25.9 million in non-operating expense in the first quarter of 2006 consisting of a pre-payment premium on the 8 3/4 % senior notes of $22.2 million and a write-off of $3.7 million in previously capitalized debt issuance cost.
The 6 5/8% senior notes are unsecured and were issued with an original issue discount of $0.8 million. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and the holders may require us to repurchase the notes upon a change of control. All domestic restricted subsidiaries that guarantee other debt of ours or of another guarantor of the senior notes in excess of $5 million are guarantors of the notes.
The agreements governing the 6 5/8% senior notes and the revolving credit facility each contain customary covenants and events of default. Accordingly, these agreements impose significant operating and financial restrictions on us. These restrictions, among other things, provide limitations on incurrence of additional indebtedness, the payment of dividends, certain investments and acquisitions and sales of assets. These limitations are subject to a number of important qualifications and exceptions, including, without limitation, an exception for the payment of our regular quarterly dividend of up to $0.20 per share. The 6 5/8% senior notes indenture does not allow distributions unless, after giving pro forma effect to the distribution, our fixed charge coverage ratio is at least 2.0 and such payment, together with the aggregate amount of all other distributions after January 13, 2006, is less than the sum of 50% of our consolidated net income for the period from October 1, 2003 to the end of the most recent quarter for which financial statements have been filed, plus 100% of net cash proceeds received after October 1, 2003 as a contribution to our common equity capital or from the issuance or sale of certain securities, plus several other adjustments. The amount allowed under this restriction was $375.1 million at March 31, 2006. The revolving credit facility also restricts dividend payments unless, after giving effect to such payment, the availability equals or exceeds $60.0 million. None of the agreements require us to maintain specified financial ratios, except that the revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $60.0 million. In addition, the 6 5/8% senior notes indenture and the revolving credit facility restrict our ability to create liens, to engage in certain affiliate transactions and to engage in sale-leaseback transactions.
Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our liquidity needs for the foreseeable future.
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FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Certain of the statements contained in this report are forward-looking statements. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as:
We have based these statements on assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe were appropriate in the circumstances when the statements were made. These statements are subject to a number of assumptions, risks and uncertainties, including those described in “Risk Factors” in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and the following:
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Many of these factors are beyond our ability to control or predict. Any of the factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. Our strategies include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. We use derivative instruments in certain instances to reduce price volatility risk on feedstocks and products. Based on our open derivative positions at March 31, 2006, a hypothetical $1.00 increase in the price of a MMBTU of natural gas would have decreased our income before taxes by $3.4 million, a hypothetical $0.10 increase in the price of a gallon of ethane would have increased our income before taxes by $3.1 million, a hypothetical $0.10 increase in the price of a gallon of propane would have increased our income before taxes by $0.6 million and a hypothetical $0.10 increase in the price of a pound of ethylene would have increased our income before taxes by $3.0 million. Additional information concerning derivative commodity instruments appears in the consolidated financial information appearing elsewhere in this report.
Interest Rate Risk
We are exposed to interest rate risk with respect to fixed and variable rate debt. At March 31, 2006, we had variable rate debt of $10.9 million outstanding. All of the debt under our credit facility and tax exempt revenue bonds is at variable rates. We do not currently hedge our variable interest rate debt, but we may do so in the future. The average variable interest rate for our variable rate debt of $10.9 million as of March 31, 2006 was 3.29%. A hypothetical 100 basis point increase in the average interest rate on our variable rate debt would increase our annual interest expense by approximately $0.1 million. Also, at March 31, 2006, we had $249.2 million of fixed rate debt. We are subject to the risk of higher interest cost if and when this debt is refinanced. If interest rates are 1% higher at the time of refinancing, our annual interest expense would increase by approximately $2.5 million.
Item 4. Controls And Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. In the course of this evaluation, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, in all material respects, with respect to (i) the accumulation and communication to our management, including our Chief Executive Officer and our Chief Financial Officer, of information required to be disclosed by us in the reports that we submit under the Exchange Act, and (ii) the recording, processing, summarizing and reporting of such information, within the time periods specified in the SEC’s rules and forms.
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. Legal Proceedings
Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “2005 Form 10-K”), filed on February 23, 2006, contained a description of various legal proceedings in which we are involved, including environmental proceedings at our facilities in Calvert City, Kentucky. See Note 10 to Consolidated Financial Statements for an update of certain of those proceedings, which information is incorporated by reference herein.
Item 1A. Risk Factors
For a discussion of risk factors, please read Item 1A, “Risk Factors” in the 2005 Form 10-K.
Item 6. Exhibits
Exhibit
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SIGNATURES
Pursuant to the requirements 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.
/s/ Albert Chao
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John D. Gibbons
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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