2013 Dow Chemical’s for the Privatization of PBB in Argentina CORPORATE FINANCIAL MANAGEMENT MUHAMMAD ARSLAN YOUSAF E
Views 159 Downloads 1 File size 415KB
2013
Dow Chemical’s for the Privatization of PBB in Argentina CORPORATE FINANCIAL MANAGEMENT MUHAMMAD ARSLAN YOUSAF
Executive Summary Dow Chemicals is valuing the Petroquimica Bahia Blanca (PBB) to bid for its privatization. PBB currently owned by the local government is a producer of chemicals I.e. Ethylene and Polyethylene. Dow Chemical’s holds leading market position in numerous chemical lines worldwide including Ethylene and Polyethylene. Dow had long been interested in expanding its interests in Argentina, and now wants to utilize this opportunity to invest in Argentina. Management has planned to acquire PBB as part of three stage strategy for expanding operations in Argentina. For each stage, discounted cash flow techniques is used to value the project. Discount rate used for discounting cash flows was adjusted for country risk and a range of estimated cost of capital is calculated. So for the bid of PBB, a range of possible acquisition values is estimated. As the first stage I.e. acquisition of PBB gives the option of expanding through second and third stage resulting in higher cash flows, so the bid for PBB can be raised to as high as $873 Million.
1|Page
Ethylene produced from oil or natural gas was used to produce Polyethylene, the world’s most widely used plastic. Dow generated revenues in three major business; chemical, plastics and agricultural products. And it accounted for 7% of global capacity and actively expanded globally by locating large scale chemical complexes in emerging economies. Acquisition of PBB, was also planned as part of expanding strategy in Argentina. In 1994, PBB and Polisur, being only local players controlled 70% share of Argentina Polyethylene market. As part of new economic policies by the Argentina’s Government, PBB was up for privatization. Approximately, 90% of state owned companies were privatized with proceeds exceeding USD 19 Billion. On October 2, 1995 the Argentine Government announced a public bidding to execute sale of 51% of PBB. The supermarkets and packaging industries have experienced dramatic growth, increasing demand for polyethylene. This made the acquisition of PBB more attractive for DOW. Dow planned to not only acquire PBB, but also planned to acquire Polisur and then make another major investment in the coming years so that it can produce for the local market but also for Mercosur and especially Brazil. Dow management had challenge to place value on PBB’s acquisition taking into consideration the nature of Political and economic risk of Argentina. Given other strong interested parties, and possibility of higher cash flows through further expansion via acquisition of Polisur and investment in new plants, it was difficult to measure how much extra value should be placed on PBB.
Cash Flows As part of stage 1, the plan was to take control of PBB which comprised of ethylene cracker and polyethylene plant and then upgrading the facility in order to make them internationally competitive. For ethylene cracker, revenues are based upon the assumption that full capacity of the cracker will be utilized starting from 90%. Although investment of USD 128.9 MM will be made to upgrade the facility, however the efficiency of plant is assumed to be content as a pessimistic estimate. The capacity however will be increased by 66 MM lb to 606 MM lb. Raw material amount utilized is calculated assuming constant plant efficiency. Rest of the variable and fixed costs are assumed as percentage of
2|Page
sales. Cash flows are also adjusted for investment which is to be made for upgrading the pant. Cash flows for ethylene plant are shown in exhibit 2. For Polyethylene plant, there will be no increase in capacity, however USD 28 MM will be invested to upgrade the plant. Plant’s efficiency is assumed to be constant which is again a pessimistic assumption. The price for the Polyethylene and raw material Ethylene is again the forecast international price in USD. Rest of the variable and fixed costs are assumed as percentage of sales. Duties and Freight costs, however is calculated differently, based upon gross sales price rather than net. Cash flows are also adjusted for the investment in net working capital and any increase is deducted from the cash flows. Cash flows for polyethylene plant are shown in exhibit 3. As part of stage 2, Polisur Polyethylene will be acquired. Entire Plant production is assumed to be sold in the local market which is safe assumption given the gap in local production and demand as shown in exhibit 1. Freight and duties are again calculated as percentage of Gross Price. The variable and fixed costs will be less than that of PBB costs, given the greater efficiency of Polisur plant. However, investment of USD 45.8 MM will be made to increase the competiveness of the plant which is adjusted in the cash flows over the years. Cash flows for Polisur polyethylene plant are shown in exhibit 4. As part of stage 3, new ethylene cracker and new polyethylene plant will be established once Dow establishes PBB plant and the market in Argentina. Investment of USD 376.3 MM will be made in Ethylene Cracker and investment of USD 160 MM will be made in Polyethylene plant. Both the investments will be depreciated over 10 years, 37.6 Million for ethylene cracker and 16 Million for polyethylene plant. Cash flows for new ethylene and ploethylene plants are shown in exhibit 5.
Discount Rate Dow has previously used the discount rate of 8 to 10 % for discounting the cash flows for similar projects. Given better prospoects of chemical industry in Argentina in terms of high demand and flourishing economy, a lower discount rate can be used. However given the plotical and country specific currency risks as seen in the recent credit crisis, it would be safer to assume discount rate of 9% and 3|Page
then adjust it for the country risk. However to give a range os possible bid values discount rate of 8% and 10 % are adjusted fir country specific risk. For adjusting for country specific risk, modern approach discussed by Bekaert, Harvey, Lundblad, and Siegel (2012) is used. Using the EMBI index values for Argentina and US, country risk premium of 1000 basis points for Argentina was calculated. Using the narrow ratio of 11% and wide ratio of 36% for Argentina as proposed in the paper by Bekaert, Harvey, Lundblad, and Siegel, the country risk premium was adjusted. The adjusted value of country risk premium provides a proxy for catering for country specific political and economic risk. This risk premium is added to discount rate to calculate the cost of capital for the project as shown in exhibit 6. As narrow and wide ratio discussed in the paper by Bekaert, Harvey, Lundblad, and Siegel (2012) is based upon date form 1994 untill 2009, it is assumed to be a good proxy for using in the calculation for country specific political and economic risk premium.
Valuation: The terminal value of the cash flows for each stage was calculated using the constant discount rate of 3.30% and the cost of capital computed above (12.70% and 14070%). Using the cash flow forecast for PBB’s ethylene and polyethylene, the cumulative cash flows were discounted using the best case and worst case cost of capital which gives the range of PBB value from USD 434.74 MM to USD 521.61 MM as shown in exhibit 7. As acquisition of PBB, gives the option of further expansion via acquiring Polisur and investment into new ethylene and polyethylene plants, the value of these expansions can be incorporated in evulation of the PBB bid value. Combining the cash flows from PBB, Polisur and new plants gives the value of the acquisition from USD 976.30 MM to USD 1275.43 MM. However, for the second stage of the project, the acquisition price of Polisur plant is not incorporate in the valuation of the option. If we value the Polisur plant alone, the range of Polsiur value is USD 139.25 MM to 273.67 MM. Assuming we will pay this amount for the acquisition of Polisur as well, the cash flows of Polisur can be ignored in combining the cash flows for 3 stages of the project. 4|Page
For calculating the bid value of PBB, the cash flows for PBB and option of the expanding in 3rd stage is valued. By the combining the cash flows or first and third stage, the bid value for PBB ranges from USD 745.01 MM to 1001.75 MM. As investment required for New Ethylene and polyethylene plants have been incorporated in stage 3 cash flows, the present value of the combined cash flows gives the range in which bid can be made for PBB. If we assign equal probability to best and worst case scenario, the bid value for PBB should be USD 873.38 MM.
Recommendation With the progress in Argentina’s economy, the demand for plastic products have increased making ethylene and polyethylene market lucrative to invest. Since Dow had been long been interested in expanding into Argentina, this privatization opportunity presented by the government should be realized. Given for other interested parties, only PBB future cash flows will be relevant but Dow has the option to expand and realize higher cash flows, Dow’s valuation of PBB is higher and can bid as higher as 788 MM and realize market potential of Argentina.
5|Page
Appendix Exhibit 1 Total Polyethylene (MM lb) ARGENTINA Demand Production Shortfall
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
755 531 224
847 595 252
944 594 350
1,035 665 370
1,139 665 474
1,256 666 590
1,371 782 589
1,499 1,602 -103
1,643 1,602 41
1,804 1,602 202
1,984 1,602 382
BRAZIL Demand Production Shortfall
2,414 2,680 -266
2,577 2,784 -207
2,740 3,104 -364
2,937 2,976 -39
3,155 3,379 -224
3,396 3,783 -387
3,621 3,795 -174
3,869 4,798 -929
4,140 4,810 -670
4,438 4,822 -384
4,765 4,834 -69
MERCOSUR Demand Production Shortfall
3,221 3,211 10
3,479 3,379 100
3,743 3,699 44
4,035 3,641 394
4,361 4,045 316
4,724 4,449 275
5,068 4,577 491
5,449 6,401 -952
5,869 6,412 -543
6,334 6,424 -90
6,848 6,436 412
TOTAL LATIN AMERICA Demand Production Shortfall
6,579 4,972 1607
7,314 5,251 2063
7,913 5,796 2117
8,470 6,516 1954
9,084 6,931 2153
9,762 7,721 2041
10,417 8,262 2155
11,135 9,832 1303
11,922 10,867 1055
12,785 11,515 1270
13,735 12,233 1502
Based upon Data Source: Dow Quimíca Argentina S.A.
6|Page
Exhibit 2 (in millions of US dollars) STAGE 1-PBB Ethylene Cracker
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
540.1
540.1
540.1
606
606
606
606
606
606
606
606
606
606
606
606
REVENUE Ethylene Production Capacity (MM lb)
540.1
Operating rate
90.2%
Ethylene Volum e Production (MM lbs)
487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00
606.00
606.00
606.00
0.229
0.261
0.304
0.346
0.306
133.00 106.45 135.03 118.82 115.14 134.53 172.71 216.95 179.98 149.68 132.11 138.77
158.17
184.22
209.68
185.44
Ethylene International Net Sales Price (US$/lb) Ethylene revenue
0.273
By product credit sales TOTAL REVENUES
90.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%
5
0.219 5.4
0.25 5.7
0.22 6.1
0.19 9.2
0.222 8.4
0.285 8.4
0.358 8.3
0.297 8.5
0.247 8.9
0.218 9
606.00
9.6
9.9
10.2
10.4
10.7
138.00 111.85 140.73 124.92 124.34 142.93 181.11 225.25 188.48 158.58 141.11 148.37
168.07
194.42
220.08
196.14
0.0625 0.0638 0.0625 0.0617 0.0625 0.0743 0.0776
0.0979
COSTS Ethane international price (US$/lb)
0.0979
0.0979
0.0979
1.267
1.267
1.267
1.267
1.267
487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00
606.00
606.00
606.00
606.00 75.17
Ethane ratio Ethylene Volume Production (MM lbs)
1.267
Ethane cost Other variable costs (5% of sales) Total variable costs Total fixed costs Depreciation
1.267
1.267
1.267
1.267
1.267
1.267
0.081 0.0844 0.0878 0.0911 0.0945 1.267
1.267
1.267
1.267
38.58
39.29
42.77
42.22
47.99
57.05
59.58
62.19
64.80
67.41
69.95
72.56
75.17
75.17
75.17
6.90
5.59
7.04
6.25
6.22
7.15
9.06
11.26
9.42
7.93
7.06
7.42
8.40
9.72
11.00
9.81
45.48
44.89
49.81
48.47
54.20
64.19
68.64
73.45
74.23
75.34
77.00
79.98
83.57
84.89
86.17
84.97
25.2
26.1
18.3
14.5
14.8
15.3
14.5
15
15.4
15.9
16.3
16.9
17.4
18
18.5
19.1
4.2
4.9
12.2
14.1
15.3
16.3
17
17.8
18.6
19.5
16.1
16.3
9.9
9
8.8
8.9
PROFIT BEFORE TAX
63.12
35.97
60.42
47.85
40.04
47.14
80.97 118.99
47.84
31.71
35.20
57.19
82.53
106.60
19.6
11.2
18.7
14.8
12.4
17.0
29.2
42.8
28.9
17.2
11.4
12.7
20.6
29.7
38.4
29.9
43.55
24.82
41.69
33.02
27.62
30.17
51.82
76.16
51.36
30.62
20.29
22.53
36.60
52.82
68.23
53.22
Tax (31% until 1999 then 36%) PROFIT AFTER TAX Plus: Depreciation Less: Change in w orking capital (6% of sales) Less: Investments
83.16 -
4.2
4.9
12.2
14.1
15.3
16.3
17
17.8
18.6
19.5
16.1
16.3
9.9
9
8.8
8.9
8.28
-1.57
1.73
-0.95
-0.03
1.12
2.29
2.65
-2.21
-1.79
-1.05
0.44
1.18
1.58
1.54
-1.44 10.2
0
7.5
72.9
18.5
12
9.9
7.6
7.9
8.1
8.4
8.7
9
9.2
9.5
9.8
74
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
113.47
23.79
-20.74
29.57
30.96
35.45
58.93
83.41
64.07
43.51
28.74
29.39
36.12
50.74
65.69
53.36
Plus: PBB Positive Cash Treasury Position U.S.$ CASH FLOW ETHYLENE - Stage 1
-
80.26
Based upon Data Source: Dow Quimíca Argentina S.A.
7|Page
Exhibit 3 (in millions of US dollars) STAGE 1- PBB PO LYETHYLENE PLANT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
VOLUME Polyethylene Production Capacity (MM lbs)
202.8
202.8
Operating rate
65.0%
65.0%
65.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Polyethylene Volum e Production (MM lbs)
131.82
131.82
131.82
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
Polyethylene Sales Breakdow n Sold locally
100.00% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Exports Mercosur
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Export Latin America
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Export Extra Zone
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Polyethylene Total Volume Production (MM lbs) Sold locally
131.82
131.82
131.82
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
Exports Mercosur
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Export Latin America
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Export Extra Zone
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
131.82
131.82
131.82
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
0.581
0.483
0.522
0.486
0.45
0.491
0.561
0.641
0.56
0.494
0.461
0.475
0.514
0.565
0.616
0.571
Total PRICE Polyethylene Gross Sales Price (US$/lb) Polyethylene Freight & Duties cost:
2.93%
Sold locally
0.017
0.014
0.015
0.014
0.013
0.014
0.016
0.019
0.016
0.014
0.013
0.014
0.015
0.017
0.018
0.017
Exports Mercosur
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
0.054
Export Latin America
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Export Extra Zone Polyethylene International Net Sales Price (US$/lb) Sold locally
0.56
0.47
0.51
0.47
0.44
0.48
0.54
0.62
0.54
0.48
0.45
0.46
0.50
0.55
0.60
0.55
Exports Mercosur
0.527
0.428
0.468
0.432
0.396
0.437
0.506
0.587
0.506
0.439
0.406
0.421
0.46
0.51
0.561
0.516
Export Latin America
0.504
0.406
0.445
0.409
0.373
0.414
0.484
0.564
0.483
0.417
0.384
0.398
0.437
0.488
0.538
0.493
Export Extra Zone
0.482
0.383
0.423
0.386
0.35
0.391
0.461
0.541
0.46
0.394
0.361
0.376
0.414
0.465
0.516
0.471
TOTAL REVENUE
74.35
61.81
66.80
95.68
88.59
96.66
110.44
126.19
110.25
97.25
90.76
93.51
101.19
111.23
121.27
112.41
Based upon Data Source: Dow Quimíca Argentina S.A.
8|Page
Exhibit 3B: (in millions of US dollars) STAGE 1- PBB PO LYETHYLENE PLANT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
TOTAL REVENUE
74.35
61.81
66.80
95.68
88.59
96.66 110.44 126.19 110.25
97.25
90.76
93.51 101.19 111.23 121.27 112.41
0.273
0.219
0.25
0.22
0.19
0.222
0.285
0.358
0.297
0.247
0.218
0.229
0.261
0.304
0.346
0.306
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
1.007
131.82 131.82 131.82
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
202.8
COSTS Ethylene international net price US$/lb (A) Ethylene ratio Polyethylene Total Volume Production (MM lbs) Ethylene cost
36.24
29.07
33.19
44.93
38.80
45.34
58.20
73.11
60.65
50.44
44.52
46.77
53.30
62.08
70.66
62.49
7.43
6.18
6.68
9.57
8.86
9.67
11.04
12.62
11.02
9.73
9.08
9.35
10.12
11.12
12.13
11.24
43.67
35.25
39.87
54.50
47.66
55.00
69.25
85.73
71.68
60.17
53.60
56.12
63.42
73.21
82.79
73.73
10.6
13.6
9
6.8
6.9
6.4
5.9
6.1
6.3
6.5
6.7
6.9
7.1
7.3
7.6
7.8
8.8
9.1
9.9
10.6
10.9
11.2
11.5
11.6
11.7
11.9
3.2
3.1
2.5
1.9
1.7
1.6
11.27
3.85
8.03
23.78
23.13
24.06
23.80
22.76
20.57
18.68
27.26
27.39
28.17
28.82
29.18
29.28
Tax (31% until 1999 then 36%)
3.49
1.20
2.49
7.37
7.17
8.66
8.57
8.19
7.40
6.73
9.81
9.86
10.14
10.38
10.51
10.54
PROFIT AFTER TAX
7.78
2.66
5.54
16.41
15.96
15.40
15.23
14.57
13.16
11.96
17.45
17.53
18.03
18.45
18.68
18.74
8.8
9.1
9.9
10.6
10.9
11.2
11.5
11.6
11.7
11.9
3.2
3.1
2.5
1.9
1.7
1.6
14.87
-2.51
1.00
5.78
-1.42
1.61
2.76
3.15
-3.19
-2.60
-1.30
0.55
1.54
2.01
2.01
-1.77
0
2.6
8.2
7.3
3.1
6.8
7.5
1.3
1.4
1.4
1.5
1.5
1.6
1.6
1.7
1.7
CASH FLOW POLYETHYLENE - Stage 1
1.71
11.67
6.24
13.93
25.18
18.18
16.47
21.72
26.65
25.06
20.45
18.58
17.39
16.74
16.67
20.41
CONSOLIDATED PBB CASH FLOWS - STAGE 1
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
23.79 -20.74
29.57
30.96
35.45
58.93
83.41
64.07
43.51
28.74
29.39
36.12
50.74
65.69
53.36
11.67
6.24
13.93
25.18
18.18
16.47
21.72
26.65
25.06
20.45
18.58
17.39
16.74
16.67
20.41
35.45 -14.50
43.50
56.14
53.64
75.40 105.13
90.72
68.57
49.19
47.97
53.52
67.48
82.36
73.77
Other variable costs (10% of sales) Total variable costs Total fixed costs Depreciation PROFIT BEFORE TAX
Plus: Depreciation Less: Change in w orking capital (20% of sales) Less: Investments
Cash flow ethylene Cash flow polyethylene TOTAL CASH FLOW - STAGE 1
113.47 1.71 115.18
Based upon Data Source: Dow Quimíca Argentina S.A.
9|Page
Exhibit 4: (in millions of US dollars) STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
462.6
463
463
463
463
463
463
463
463
463
463
463
463
463
463
463
86.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
100.0%
100.0%
100.0%
100.0%
463
463
463
463
VOLUME Polyethylene Production Capacity (MM lb) Operating rate Polyethylene Volum e Production (MM lbs)
397.836
463
463
463
463
463
463
463
463
463
463
463
Sold locally
84.0%
85.0%
89.0%
91.0%
95.0%
Exports Mercosur
16.0%
15.0%
11.0%
9.0%
5.0%
2.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Export Latin America
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Export Extra Zone
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
334.18224 393.55 412.07 421.33 439.85 453.74
Polyethylene Sales Breakdow n 98.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%
Polyethylene Total Volume Production (MM lbs) Sold locally
463
463
463
463
463
463
463
463
463
463
63.65376
69.45
50.93
41.67
23.15
9.26
0
0
0
0
0
0
0
0
0
0
Export Latin America
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Export Extra Zone
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
397.836
463
463
463
463
463
463
463
463
463
463
463
463
463
463
463
0.522
0.486
0.45
0.491
0.561
0.641
0.56
0.494
0.461
0.475
0.514
0.565
0.616
0.571 0.017
Exports Mercosur
Total PRICE Polyethylene Gross Sales Price (US$/lb)
0.581
0.483
2.93%
9.29%
0.017
0.014
0.015
0.014
0.013
0.014
0.016
0.019
0.016
0.014
0.013
0.014
0.015
0.017
0.018
0.05
0.04
0.05
0.05
0.04
0.05
0.05
0.06
0.05
0.05
0.04
0.04
0.05
0.05
0.06
0.05
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.077
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.564
0.469
0.507
0.472
0.437
0.477
0.545
0.622
0.544
0.480
0.448
0.461
0.499
0.548
0.598
0.554
0.53
0.44
0.47
0.44
0.41
0.45
0.51
0.58
0.51
0.45
0.42
0.43
0.47
0.51
0.56
0.52
Export Latin America
0.504
0.406
0.445
0.409
0.373
0.414
0.484
0.564
0.483
0.417
0.384
0.398
0.437
0.488
0.538
0.493
Export Extra Zone
0.482
0.383
0.423
0.386
0.35
0.391
0.461
0.541
0.46
0.394
0.361
0.376
0.414
0.465
0.516
0.471
222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49
231.02
253.94
276.86
256.64
Polyethylene Freight & Duties cost: Sold locally Exports Mercosur Export Latin America Export Extra Zone Polyethylene International Net Sales Price (US$/lb) Sold locally Exports Mercosur
TOTAL REVENUE
Based upon Data Source: Dow Quimíca Argentina S.A
10 | P a g e
Exhibit 4B: (in millions of US dollars) STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS TOTAL REVENUE
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49
231.02
253.94
276.86
256.64
COSTS Ethylene international price (US$/Lb)
0.273
0.219
0.25
0.22
0.19
0.222
0.285
0.358
0.297
0.247
0.218
0.229
0.261
0.304
0.346
0.306
Ethylene ratio
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
0.979
397.836
463
463
463
463
463
463
463
463
463
463
463
463
463
463
463
99.27 113.32
99.72
98.81 103.80
118.31
137.80
156.83
138.70
Polyethylene Total Volume Production (MM lbs) Ethylene cost Other variable costs Total variable costs Total fixed costs
106.33 25.6
31.1
32.9
31.1
86.12 100.63 129.18 162.27 134.62 111.96
40.3
41.5
42.7
43.9
45.4
131.93 130.37 146.22 130.82 118.22 133.73 163.08 196.97 170.72 149.66 137.91 144.10
32.1
33.1
33.9
34.7
36.1
37.7
39.1
159.81
180.50
200.73
184.10
15.1
15.1
15.5
15.9
16.3
16.6
17
17.4
17.9
18.3
18.7
19.2
19.6
20.1
20.6
21.1
2.1
4.3
4.9
5.6
6.4
7.1
4.4
5.9
6.5
7.1
7.7
8.3
9
6.8
6.9
7
PROFIT BEFORE TAX
72.90
65.18
66.30
64.82
60.67
62.96
67.66
67.83
56.57
46.97
42.88
41.89
42.61
46.54
48.63
44.43
Tax (31% until 1999 then 36%)
22.60
20.21
20.55
20.10
18.81
22.67
24.36
24.42
20.37
16.91
15.44
15.08
15.34
16.76
17.51
16.00
PROFIT AFTER TAX
50.30
44.98
45.75
44.73
41.86
40.30
43.30
43.41
36.20
30.06
27.45
26.81
27.27
29.79
31.12
28.44
Depreciation
Plus: Depreciation Less: Change in w orking capital (20% of sales) Less: Investments CASH FLOW POLYETHYLENE - Stage 2
2.1
4.3
4.9
5.6
6.4
7.1
4.4
5.9
6.5
7.1
7.7
8.3
9
6.8
6.9
7
44.40
-1.41
3.59
-3.16
-3.11
3.76
6.35
7.19
-7.28
-5.93
-2.97
1.26
3.51
4.58
4.58
-4.05
0
10.1
6.8
7
7.3
14.6
15.4
5.5
5.7
5.9
6.1
6.3
6.4
6.6
6.7
6.9
7.99
40.59
40.25
46.48
44.07
29.04
25.95
36.62
44.29
37.19
32.01
27.55
26.37
25.40
26.74
32.58
Based upon Data Source: Dow Quimíca Argentina S.A.
11 | P a g e
Exhibit 5: (in millions of US dollars) Stage 3 - New Ethylene Cracker
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
REVENUES Ethylene Production Capacity (MM lb)
-
-
-
116.8
937
937
937
937
937
937
937
937
937
937
Operating rate
-
-
-
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Ethylene Volum e Production (MM lbs)
-
-
-
116.8
937
937
937
937
937
937
937
937
937
937
Ethylene International Net Sales Price (US$/lb)
-
-
-
0.2223
0.2849
0.3579
0.2974
0.2473
0.2178
0.2292
0.2612
0.3036
0.346
0.3061
Ethylene revenues
-
-
-
25.96
266.95
335.35
278.66
231.72
204.08
214.76
244.74
284.47
324.20
286.82
By product credit sales
-
-
-
0.5
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
TOTAL REVENUES
-
-
-
26.46
270.75
339.15
282.46
235.52
207.88
218.56
248.54
288.27
328.00
290.62
1.23
1.23
1.23
1.23
1.23
1.23
1.23
1.23
1.23
1.23
1.23
Ethylene Volume Production (MM lbs)
-
-
-
116.8
937
937
937
937
937
937
937
937
937
937
Ethane international price (US$/lb)
-
-
-
0.074
0.078
0.081
0.084
0.088
0.091
0.095
0.098
0.098
0.098
0.098
Ethane cost
-
-
-
10.63
89.90
93.35
96.81
101.42
104.88
109.49
112.95
112.95
112.95
112.95
Other variable costs (5% of sales)
-
-
-
1.32
13.54
16.96
14.12
11.78
10.39
10.93
12.43
14.41
16.40
14.53
11.95
103.43
110.31
110.93
113.20
115.27
120.42
125.37
127.36
129.35
127.48 8.4
COSTS Ethane ratio
Total variable costs Total fixed costs
7
7
7.2
7.4
7.5
7.7
7.9
8.1
8.1
8.2
Depreciation
-
-
-
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
PROFIT BEFORE TAX
-
-
-
-30.09
122.72
184.04
126.53
77.22
47.31
52.64
77.47
115.21
152.86
154.74
Tax (31% until 1999 then 36%)
-
-
-
0
44.18
66.25
45.55
27.80
17.03
18.95
27.89
41.48
55.03
55.71
PROFIT AFTER TAX
0
0
0
-30.09
78.54
117.79
80.98
49.42
30.28
33.69
49.58
73.74
97.83
99.03
Plus: Depreciation
0
0
0
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
37.6
0
Less: Change in w orking capital (6% of sales)
0
0
0
1.59
14.66
4.10
-3.40
-2.82
-1.66
0.64
1.80
2.38
2.38
-2.24
Less: Investments CASH FLOW ETHYLENE - Stage 3
4.5
50.1
247.7
74
0
0
0
0
0
0
0
0
0
0
-4.50
-50.10
-247.70
-68.08
101.48
151.28
121.98
89.84
69.53
70.65
85.38
108.95
133.04
101.28
Based upon Data Source: Dow Quimíca Argentina S.A.
12 | P a g e
Exhibit 6: (in millions of US dollars) STAGE 3-NEW POLYETHYLENE PLANT
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
595.2
595.2
595.2
595.2
595.2
595.2
595.2
595.2
595.2
595.2
VOLUME Polyethylene Production Capacity in (MM lb) Operating rate
88.90% 96.30% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Polyethylene Total Volum e Production (MM lbs)
529.13
573.18
595.20
595.20
595.20
595.20
595.20
595.20
595.20
595.20
Sold locally
31.00% 31.00%
32.00%
34.00%
38.00%
42.00%
42.00%
43.00%
43.00%
43.00%
Exports Mercosur
44.00% 44.00%
47.00%
53.00%
58.00%
56.00%
56.00%
56.00%
56.00%
57.00%
Export Latin America
11.00% 11.00%
11.00%
12.00%
4.00%
2.00%
2.00%
1.00%
1.00%
0
Export Extra Zone
14.00% 14.00%
10.00%
1.00%
0%
0%
0%
0%
0%
0%
Polyethylene Sales Breakdow n
Polyethylene Total Volume Production MM lbs Sold locally
164.03
177.69
190.46
202.37
226.18
249.98
249.98
255.94
255.94
255.94
Exports Mercosur
232.82
252.20
279.74
315.46
345.22
333.31
333.31
333.31
333.31
339.26
Export Latin America
58.20
63.05
65.47
71.42
23.81
11.90
11.90
5.95
5.95
0.00
Export Extra Zone
74.08
80.24
59.52
5.95
0.00
0.00
0.00
0.00
0.00
0.00
529.133 573.178
595.200
595.200
595.200
595.200 595.200
595.200
Total
595.200 595.200
PRICE Polyethylene International Gross Sales Price (US$/lb)
0.561
0.641
0.56
0.494
0.461
0.475
0.514
0.565
0.616
0.571
Polyethylene Freight & Duties cost: Sold locally
3.03%
0.0170
0.0194
0.0170
0.0150
0.0140
0.0144
0.0156
0.0171
0.0187
0.0173
Exports Mercosur
9.63%
0.054
0.062
0.054
0.048
0.044
0.046
0.049
0.054
0.059
0.055
Export Latin America
13.73%
0.077
0.088
0.077
0.068
0.063
0.065
0.071
0.078
0.085
0.078
Export Extra Zone
17.83%
0.100
0.114
0.100
0.088
0.082
0.085
0.092
0.101
0.110
0.102
Polyethylene International Net Sales Price (US$/lb) Sold locally
0.5440
0.6216
0.5430
0.4790
0.4470
0.4606
0.4984
0.5479
0.5973
0.5537
Exports Mercosur
0.507
0.579
0.506
0.446
0.417
0.429
0.465
0.511
0.557
0.516
Export Latin America
0.484
0.553
0.483
0.426
0.398
0.410
0.443
0.487
0.531
0.493
Export Extra Zone
0.461
0.527
0.460
0.406
0.379
0.390
0.422
0.464
0.506
0.469
TOTAL REVENUE
269.59
333.68
304.03
270.63
254.40
263.11
284.71
313.32
341.60
316.78
Based upon Data Source: Dow Quimíca Argentina S.A.
13 | P a g e
Exhibit 7: (in millions of US dollars) STAGE 3-NEW POLYETHYLENE PLANT
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
269.59
333.68
304.03
270.63
254.40
263.11
284.71
313.32
341.60
316.78
0.285
0.358
0.297
0.247
0.218
0.229
0.261
0.304
0.346
0.306
0.92
0.92
0.92
0.92
0.92
0.92
0.92
0.92
0.92
0.92
Polyethylene Total Volume Production MM lbs
529.13
573.18
595.20
595.20
595.20
595.20
595.20
595.20
595.20
595.20
Ethylene cost
138.74
188.78
162.63
135.25
119.37
125.40
142.92
166.47
189.46
167.56
21.57
26.69
24.32
21.65
20.35
21.05
22.78
25.07
27.33
25.34
160.31
215.48
186.95
156.90
139.73
146.45
165.70
191.53
216.79
192.90
Total fixed costs
4.9
4.2
4.2
4.1
4
4
4.1
4.2
4.2
4.2
Depreciation
16
16
16
16
16
16
16
16
16
16
PROFIT BEFORE TAX
88.39
98.00
96.87
93.63
94.68
96.66
98.91
101.59
104.61
103.68
Tax at 36%
31.82
35.28
34.87
33.71
34.08
34.80
35.61
36.57
37.66
37.32
PROFIT AFTER TAX
56.57
62.72
62.00
59.92
60.59
61.86
63.30
65.02
66.95
66.36
TOTAL REVENUE COSTS Ethylene international price (US$/lb) Ethylene ratio
Other variable costs (8% of sales) Total variable costs
Plus: Depreciation Less: Change in w orking capital (20% of sales) Less: Investments CASH FLOW POLYETHYLENE - Stage 3
16
16
16
16
16
16
16
16
16
16
53.92
12.82
-5.93
-6.68
-3.25
1.74
4.32
5.72
5.66
-4.96
30
70
60
0
0
0
0
0
0
0
0
0
0
-30.0
-70.0
-60.0
18.6
65.9
83.9
82.6
79.8
76.1
75.0
75.3
77.3
87.3
1998
CASH FLO W - Stage 3
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Cash flow - ethylene - Stage 3
-4.50 -50.10 -247.70
-68.08
101.48
151.28
121.98
89.84
69.53
70.65
85.38
108.95
133.04
101.28
Cash flow - polyethylene - Stage 3 TOTAL CASH FLOW - Stage 3
-60.00
18.65
65.90
83.93
82.60
79.84
76.12
74.98
75.29
77.29
87.32
-4.50 -80.10 -317.70 -128.08
0.00 -30.00
-70.00
120.13
217.19
205.91
172.44
149.37
146.77
160.37
184.25
210.34
188.59
Based upon Data Source: Dow Quimíca Argentina S.A.
14 | P a g e
Exhibit 8 Rate Discount Rate EMBI Spread Narrow Ratio N. Risk Premium Wide Ratio W. Risk Premium Adjusted Cost of Capital
Best Case 8.00% 10.00% 11.00% 1.10% 36.00% 3.60% 12.70%
Worst Case 10.00% 10.00% 11.00% 1.10% 36.00% 3.60% 14.70%
Discount rate is assumed from the existing firm’s projects in US. EMBI spread is the difference between US Yield and Argentina Yield. Narrow and Wide ratio is taken from the paper from Bekaert, Harvey, Lundblad, and Siegel (2012). N. Risk premium is the product of EMBI spread and narrow ratio. W. Risk Premium is the product of EMBI spread and wide ratio. Adjusted Cost of Capital is the sum of Discount Rate, N. Risk Premium and W. Risk Premium.
Exhibit 9 Scenario Best Case Worst Case
PBB - Only $521.61 $434.74
PBB - Combined $1,275.43 $976.30
(in millions of US dollars) PBB - Expansion Polisur $1,001.75 $273.67 $745.01 $139.25
PBB – Only value incorporates cash flows from PBB alone including both ethylene and polyethylene plan. PBB – Combined incorporates cash flows from PBB, Polisur and new plants, all three stages of the project. PBB – Expansion incorporates cash flows from PBB and expansion into new plants only. Polisur value incorporates cash flows from Polisur Polyethylene plant only
15 | P a g e