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As filed with the Securities and Exchange Commission on September 15, 2011

Registration No. 333-173804

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TPC Group LLC

(Exact name of registrant as specified in its charter)

 

 

 

Texas   2860   74-1778313

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Numbers)

5151 San Felipe, Suite 800

Houston, Texas 77056

(713) 627-7474

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Rishi A. Varma

Vice President and General Counsel

TPC Group LLC

5151 San Felipe, Suite 800

Houston, Texas 77056

(713) 627-7474

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

Copies to:

M. Breen Haire

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable following the effectiveness of this Registration Statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨     Accelerated filer     ¨  
Non-accelerated filer     x     (Do not check if a smaller reporting company)   Smaller reporting company     ¨  

If applicable, place an X in the box to designate the appropriate rule provision relied upon conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

Exact Name of Registrant as Specified in its Charter(1)

   State or Other Jurisdiction of
Incorporation or Organization
   I.R.S. Employer
Identification
Number
 

TP Capital Corp.

   Delaware      20-0926248   

Port Neches Fuels, LLC

   Delaware      68-0631641   

Texas Butylene Chemical Corporation

   Texas      76-0107440   

Texas Olefins Domestic-International Sales Corporation

   Texas      74-2054241   

 

(1) The address, including zip code, and telephone number, including area code, of each of the additional Registrants’ principal executive offices is c/o TPC Group LLC, 5151 San Felipe, Suite 800, Houston, Texas 77056, (713) 627-7474.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not commence the exchange offer or sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities or a solicitation of an offer to buy these securities in any state where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 2011

PROSPECTUS

LOGO

TPC Group LLC

Offer to Exchange

Up to $350,000,000 Principal Amount of

8 1/4% Senior Secured Notes due 2017

for

a Like Principal Amount of

8 1/4% Senior Secured Notes due 2017

that have been registered under the Securities Act of 1933

This Exchange Offer will expire at 5:00 P.M.,

New York City time, on [                    ], 2011, unless extended.

TPC Group LLC is offering to exchange registered 8 1/4% Senior Secured Notes due 2017, or the “exchange notes,” for any and all of its unregistered 8 1/4% Senior Secured Notes due 2017, or the “original notes,” that were issued pursuant to a private placement on October 5, 2010. We refer to the original notes and the exchange notes together in this prospectus as the “notes.” We refer to this exchange as the “exchange offer.” The exchange notes are substantially identical to the original notes, except the exchange notes are registered under the Securities Act of 1933, as amended (the “Securities Act”), and the transfer restrictions and registration rights, and related special interest provisions, applicable to the original notes will not apply to the exchange notes. The exchange notes will represent the same debt as the original notes and we will issue the exchange notes under the same indenture used in issuing the original notes.

Terms of the exchange offer:

 

   

The exchange offer expires at 5:00 p.m., New York City time, on [                    ], 2011, unless we extend it.

 

   

The exchange offer is subject to customary conditions, which we may waive.

 

   

We will exchange all outstanding original notes that are validly tendered and not withdrawn prior to the expiration of the exchange offer for an equal principal amount of exchange notes. All interest due and payable on the original notes will become due on the same terms under the exchange notes.

 

   

You may withdraw your tender of original notes at any time prior to the expiration of the exchange offer.

 

   

The exchange of original notes for exchange notes should not be a taxable transaction for U.S. federal income tax purposes, but you should see the discussion under the caption “U.S. Federal Income Tax Considerations” on page 218 for more information.

See “Risk Factors” beginning on page 20 for a discussion of risks you should consider in connection with the exchange offer and an investment in the exchange notes.

Each broker-dealer that receives exchange notes pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for original notes where such original notes were acquired as a result of market-making activities or other trading activities. We have agreed to make this prospectus available to such broker-dealers upon reasonable request for the period required by the Securities Act. See “The Exchange Offer — Purpose and Effects of the Exchange Offer” and “Plan of Distribution.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is [                    ], 2011.


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TABLE OF CONTENTS

 

     Page  

Forward-Looking Statements

     ii   

Market and Industry Data

     ii   

Prospectus Summary

     1   

Risk Factors

     20   

The Exchange Offer

     38   

Use of Proceeds

     48   

Capitalization

     49   

Selected Historical Consolidated Financial Data

     50   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52   

Business

     92   

Management

     109   

Corporate Governance

     115   

Executive Compensation

     122   

Security Ownership of Certain Beneficial Owners and Management

     149   

Certain Relationships and Related Transactions

     151   

Description of Other Indebtedness

     153   

Description of Exchange Notes

     155   

Book-Entry, Delivery and Form

     215   

U.S. Federal Income Tax Considerations

     218   

Plan of Distribution

     223   

Legal Matters

     224   

Experts

     224   

Available Information

     224   

Financial Statements

     F-1   

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY OTHER OR DIFFERENT INFORMATION. IF YOU RECEIVE ANY UNAUTHORIZED INFORMATION, YOU MUST NOT RELY ON IT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO EXCHANGE THE ORIGINAL NOTES FOR THE EXCHANGE NOTES AND THIS PROSPECTUS IS NOT AN OFFER TO EXCHANGE OR A SOLICITATION TO EXCHANGE THE ORIGINAL NOTES FOR THE EXCHANGE NOTES IN ANY JURISDICTION WHERE AN OFFER OR EXCHANGE WOULD BE UNLAWFUL. YOU SHOULD ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS.

 

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FORWARD-LOOKING STATEMENTS

This prospectus may contain forward-looking statements that do not directly or exclusively relate to historical facts. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “should,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other words of similar import. Forward-looking statements include information concerning possible or assumed future results of our operations, including the following:

 

   

business strategies;

 

   

operating and growth initiatives and opportunities;

 

   

competitive position;

 

   

market outlook and trends in our industry;

 

   

expected financial condition;

 

   

future cash flows;

 

   

financing plans;

 

   

expected results of operations;

 

   

future capital and other expenditures;

 

   

availability of raw materials and inventories;

 

   

the business cyclicality of the petrochemicals industry;

 

   

plans and objectives of management;

 

   

future compliance with orders and agreements with regulatory agencies;

 

   

expected outcomes of legal, environmental or regulatory proceedings and their expected effects on our results of operations; and

 

   

any other statements regarding future growth, future cash needs, future operations, business plans and future financial results.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above, as well as those discussed under “Risk Factors” included in this prospectus. Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

MARKET AND INDUSTRY DATA

Market and industry data used throughout this prospectus is based on the good faith estimates of management, which in turn are based upon management’s review of internal surveys, independent industry surveys and publications and other publicly available information.

 

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PROSPECTUS SUMMARY

This summary highlights selected information about us and the exchange offer contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that may be important to you or that you should consider before participating in the exchange offer or making an investment in the exchange notes. You should read carefully the entire prospectus.

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the terms “we,” “our,” “us” and the “Company” generally refer to TPC Group Inc. and its consolidated subsidiaries, including TPC Group LLC. However, with respect to rights and obligations under the notes, the related indenture, the registration rights agreement and the security agreements described in this prospectus, references to “we,” “our,” “us” and the “Company” refer to TPC Group LLC and not to any of its subsidiaries. TPC Group Inc. is a holding company that conducts substantially all of its business through its wholly-owned direct subsidiary, TPC Group LLC, and subsidiaries of TPC Group LLC. The financial information presented in this prospectus is that of TPC Group LLC and its consolidated subsidiaries. On July 15, 2010, TPC Group Inc.’s board of directors and TPC Group LLC’s managers each approved a fiscal year end change from June 30 to December 31, which was effective as of January 1, 2011. The intent of the change was to align the reporting of our financial results more closely with our peers and to better synchronize our management processes and business cycles with those of our suppliers and customers. References in this prospectus to fiscal 2010, fiscal 2009 and fiscal 2008 indicate the twelve month periods ended June 30, 2010, 2009 and 2008, respectively.

Overview

Our Business

We are a leading producer of value-added products derived from niche petrochemical raw materials such as C4 hydrocarbons. Our products are sold to producers of a wide range of performance, specialty and intermediate products, including synthetic rubber, fuels, lubricant additives, plastics and surfactants. We are a leader in North America across our major product lines, including our position as the largest producer by production capacity of finished butadiene, the second largest active merchant producer by production capacity of isobutylene and the sole merchant producer of highly reactive polyisobutylene, a major component of dispersants for the fuel and lubricant additive markets. We operate as a value-added merchant processor and marketer, linking our raw material providers with our diverse customer base of chemical consumers. We believe this market position has resulted in stable supplier and customer bases and has enhanced our growth and expansion opportunities.

We operate in two principal business segments, C4 Processing and Performance Products. In the C4 Processing segment, we process the crude C4 stream into several higher value components, namely butadiene, butene-1, raffinates and methyl tertiary-butyl ether (“MTBE”). In our Performance Products segment, we produce high purity isobutylene, and we process isobutylene to produce higher-value derivative products such as polyisobutylene and diisobutylene. We also process refinery grade propylene into nonene, tetramer and associated by-products as a part of our Performance Products segment. Prior to the third quarter of fiscal 2008, MTBE was a third operating segment, but since that time MTBE has been included in our C4 Processing segment, as we produce MTBE solely as a by-product of our C4 processing operations following the shutdown of our dehydrogenation units in fiscal 2008. The contemplated restart of one of the dehydrogenation units would provide us with the flexibility to produce MTBE for sale into international markets.

The primary products in our C4 Processing segment include:

 

   

butadiene, primarily used to produce synthetic rubber that is mainly used in tires and other automotive products;

 

   

butene-1, primarily used in the manufacture of plastic resins and synthetic alcohols;

 

 

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raffinates, primarily used in the manufacturing of alkylate, a component of premium unleaded gasoline; and

 

   

MTBE, primarily used as a gasoline blending stock.

The primary products in our Performance Products segment include:

 

   

high purity isobutylene (“HPIB”), primarily used in the production of synthetic rubber, lubricant additives, surfactants and coatings;

 

   

conventional polyisobutylenes (“PIB”) and highly reactive polyisobutylenes (“HR-PIB”), primarily used in the production of fuel and lubricant additives, caulks, adhesives, sealants and packaging;

 

   

diisobutylene (“DIB”), primarily used in the manufacture of surfactants, plasticizers and resins; and

 

   

nonene and tetramer, primarily used in the production of plasticizers, surfactants and lubricant additives.

We have three principal processing facilities, all of which we own, located in Houston, Texas, Port Neches, Texas and Baytown, Texas. The Houston and Port Neches facilities, which process crude C4 into butadiene and related products, are strategically located near most of the significant petrochemical consumers in Texas and Louisiana. Our Baytown facility primarily produces nonene and tetramer. All three locations provide convenient access to other Gulf Coast petrochemicals producers and are connected to several of our customers and raw materials suppliers through an extensive pipeline network. In addition, our Houston and Port Neches facilities are serviced by rail, tank truck, barge and ocean-going vessel.

Our Competitive Strengths

Our overarching competitive strength is our focus on specific market segments, unlike most of our competitors whose focus is divided among many broader market segments. Within our key focus area, C4 hydrocarbons, the number of competitors is generally much lower as compared to many other petrochemicals.

We have market-leading production capabilities in our major product lines. Through our C4 processing operations, we are the largest producer by production capacity of finished butadiene and butene-1 in North America. We are one of only two North American crude C4 processors that can separate and purify butene-1 from crude C4. In addition, we are the sole producer of chemical grade DIB in North America and the second largest merchant producer by production capacity of HPIB in North America.

Our business model is designed to mitigate risk through index-based pricing which links our feedstock and finished product prices to similar commodity price indices. The pricing of our raw material is usually linked to a commodity market index (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene) or to the price at which we sell the finished product. The prices at which we sell our products are also typically linked to a commodity index, and in many cases, the indices used match those in the corresponding supply agreement. Such linkage of purchases of feedstocks and sales of finished products mitigates, to varying degrees, our exposure to volatility in commodity prices.

Our differentiated technology enables us to capitalize on niche market opportunities. We hold several patents related to the production of HR-PIB and are the sole merchant producer in North America of this specialized product. Our leadership in our product lines has contributed to economies of scale and long-term relationships with many of our major customers and suppliers. We believe the performance of our patented HR-PIB product is a key reason for the increase in our PIB market share (measured by volume) from 0% in 2000 to approximately 50% through the six months ended December 31, 2010. We expect continued market share growth driven by what we believe to be superior performance that better meets customer needs.

 

 

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Our large and flexible production capabilities make us an attractive business partner for our customers and suppliers. The customers for our products increasingly are motivated to reduce their number of vendors and obtain the largest product quantities possible from the vendors they engage. Our position as a large producer (if not the largest producer) by production capacity of many of our products allows us to deliver quantities that many of our competitors may not be able to match. Additionally, the flexibility of our facilities and equipment gives us the ability to be a reliable purchaser of feedstocks from our suppliers. Many of our suppliers rely on us to purchase the feedstocks they produce so that they are not left to process those streams themselves. We believe we are able to satisfy our suppliers’ needs more consistently than many of our competitors, in large part because our facilities are sufficiently adaptable that we can process widely varying qualities and quantities of crude C4 and other feedstocks. We can process a wider range of feedstocks than most of our competitors because of more extensive hardware that allows cost-effective separations. This is an important advantage since the quality of feedstocks changes with time even from the same supplier. Variability in feedstock quality is expected to continue and possibly increase over time. We believe our reputation as a reliable purchaser gives us an advantage in obtaining feedstocks in periods of tight supply.

Operating as an independent merchant processor gives us a competitive advantage. Our status as an independent merchant processor gives our business partners an option to purchase from or sell to an entity that is not a competitor to them, unlike many of the large chemical companies and integrated petroleum companies with whom we compete. Additionally, because we are independent and for the most part do not rely on internally-generated feedstocks, our production capacity is fully available to meet the requirements of our suppliers. This gives us an advantage over producers whose crude C4 streams are generated primarily as a by-product of their own ethylene production. The amount of crude C4 produced by non-independent processors varies according to the quantity and means of production of ethylene, thus limiting the capacity such producers are able to dedicate to outside suppliers’ needs.

We add value for our customers and suppliers by our extensive logistics network. We employ a flexible, extensive logistics footprint to streamline the delivery of feedstocks to our facilities and the delivery of products to our customers, and to provide terminaling and storage services. Unlike many of our competitors, we are unique in owning two deep-sea docks with extensive supporting pipelines and storage. Additionally, our railcar logistics capability uniquely allows us to source crude C4 from sources not economic to other processors. We own approximately 264 miles of product and feedstock pipelines, which gives us the ability to directly connect many of our facilities, docks and product terminals to our suppliers and customers. For example, for our butadiene customers, we own a proprietary pipeline system connecting several facilities, allowing us to serve many of our large customers independent of the Texas Butadiene Pipeline Corridor, which is controlled by ExxonMobil and upon which other suppliers must rely for transportation. In addition, our Houston and Port Neches facilities are serviced by rail, tank truck, barge and ocean-going vessel. We also own and operate storage and terminal assets at our Baytown facility and in Lake Charles, Louisiana for several parties. We also have 20 million pounds of butadiene storage capability at our Houston facility, constituting the largest butadiene storage capacity on the Gulf Coast.

We have strong long-term relationships with large, established customers and feedstock suppliers. We sell to a large number of chemical producers and refiners, including our largest customer, The Goodyear Tire and Rubber Company, as well as several others such as The Dow Chemical Company, PMI Trading LTD, Afton Chemical Corporation, Lanxess Corporation, Invista S.àr.l., Bridgestone/Firestone Inc., Valero Energy Corporation, Motiva Enterprises LLC and SI Group Inc. We purchase our raw material feedstocks from a large number of suppliers, including The Dow Chemical Company, Nova Chemicals Corporation, ExxonMobil Corporation, Chevron Phillips Chemical Company LLC, Lyondell Chemical Company, Flint Hills Resources, LP, Formosa Plastics Corporation, Trammochem, and Total Petrochemicals USA Inc. We have strong, long-tenured relationships with most of these customers and suppliers.

 

 

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Our Business Strategy

Our strategy is to create value via superior execution and sharp focus on the specific markets where we believe we can achieve and maintain competitive advantage. Such niches are typically too narrow to be attractive to larger petrochemical producers. We believe both our C4 Processing and Performance Products segments capitalize on these market dynamics. We have a combination of large scale, leading market share in many of our products, strong infrastructure, differentiated technology in certain of our products, and a business model generally free of conflicts with our suppliers and customers. Collectively, this combination is unique in the C4 hydrocarbons industry. We believe it provides us with strong opportunities for growth.

Our execution focuses on improving our existing businesses through commercial, operational and financial excellence, pursuing product line and geographic extensions and acquiring complementary businesses or assets which enhance our existing business. Specifically, we intend to:

 

   

Maintain our position as a market leader. We seek to maintain our position as one of the leading producers by production capacity of each of our products by maximizing the use of our existing processing capacity and the value of our customer and supplier relationships. We continually seek new opportunities and uses for our facilities.

 

   

Grow our HR-PIB business (within our Performance Products segment). Demand for HR-PIB is growing at a faster rate than the overall PIB market due to economic and performance advantages that result from its use by our customers. To capitalize on this demand in the HR-PIB marketplace, we brought our second production unit online at our Houston facility in October 2008 and have been focused on moving commercial HR-PIB production volumes from that unit into the marketplace. As customer demand for this product globalizes, we intend to expand production and sales into foreign markets.

 

   

Maintain a disciplined approach to cost management and preserve financial flexibility. Because our industry is cyclical and subject to fluctuations in demand, pricing and profitability, we believe that it is important to maintain a balance sheet that preserves our ability to respond to such changes and the flexibility to consider the long-term performance of our investments. In fiscal 2009, in response to the global economic downturn, we aggressively implemented initiatives to reduce capital and discretionary spending and reduce costs through headcount reductions and other means. Since fiscal 2009, we have continued to maintain this disciplined approach to spending, while continuing to make baseline expenditures and select expansion opportunities to preserve operational reliability and enhance our reputation as a dependable, high-quality producer. We have also taken steps to strengthen our balance sheet while returning capital to TPC Group Inc.’s stockholders through purchases of TPC Group Inc.’s common stock. In April 2010, we amended our ABL Revolver to increase overall capacity from $140 million to $175 million, subject to borrowing base calculations, and extended the maturity date from June 2011 to April 2014. In October 2010 we refinanced our Term Loan by issuing the original notes and thereby extended the maturity from June 2013 to October 2017. As of June 30, 2011, we had no outstanding borrowings under our ABL Revolver with the ability to access its full availability of $175.0 million, and TPC Group Inc. had cash on hand of $66.1 million. We expect that our cash flow, available borrowings and cash on hand will provide sufficient capital to fund our near-term growth and maintenance plans.

 

   

Pursue growth initiatives as part of our efforts to increase profitability. We continually assess opportunities for asset acquisitions and corporate transactions with the potential to enhance our earnings and optimize our asset portfolio. Additionally, over the past several years we have been reinvesting cash from operations to build on and expand our product offerings into high-margin businesses closely related to our core competencies. These initiatives include the production of nonene and tetramer from our previously idle Baytown facility and the expansion of polyisobutylene

 

 

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operations at our facility in Houston. In addition, in February 2011 we commenced a detailed engineering study to begin the process toward restarting certain of our dehydrogenation assets at our Houston facility, which would provide isobutylene feedstock for our rapidly growing fuels products and performance products. We intend to continue to pursue similar growth initiatives as part of our efforts to diversify our product mix and increase profitability.

2011 Developments

In February 2011, we undertook a process toward restarting one of the dehydrogenation units at our Houston facility. We own two independent, world scale dehydrogenation units with technology that allows the production of a single, targeted olefin from natural gas liquid feedstock, as opposed to steam cracking technology which generates a wide range of various olefins.

The dehydrogenation units, which were previously used to produce isobutylene, were idled in October 2007 in conjunction with the completion of a capital project which allowed us to externally source isobutylene feedstock at our Houston facility. From the time the assets were idled and through the first three quarters of fiscal 2009, the carrying value of the assets was not considered to be impaired because there were a number of realistic and probable alternative uses for the assets by which the carrying value would have been recovered. However, during the fourth quarter of fiscal 2009, due in large part to the decreased availability of financing and lack of opportunities for alternative uses of the units attributable to the ongoing global economic recession, and the fact that the assets had been idled for almost two years, we concluded that it was no longer likely that market conditions necessary to justify a significant investment in the assets would occur in the foreseeable future. Consequently, the likelihood of recovery of the carrying amount of these assets had been substantially reduced and, in the fourth quarter of fiscal 2009, we recorded an asset impairment charge of $6.0 million to write down the carrying value of these assets to zero.

At the time we recorded the impairment we were purchasing isobutylene under a supply contract that contained pricing terms that were more advantageous than the cost of producing isobutylene from our own dehydrogenation units, taking into account startup costs. Subsequently, the supply contract under which we were purchasing isobutylene was revised, as a result of bankruptcy proceedings by the supplier, which resulted in an increase in isobutylene costs under the contract, such that self-supplying isobutylene from the dehydrogenation units became more advantageous.

The engineering study described above contemplates the restart of one of these units. The isobutylene produced from the refurbished dehydrogenation unit will provide an additional strategic source of feedstock for our rapidly growing fuel products and performance products businesses. We estimate the refurbished dehydrogenation unit will produce approximately 650 million pounds of isobutylene per year from isobutane, a natural gas liquid whose production volumes continue to increase as a result of U.S. shale gas development, allowing us to evaluate a variety of sourcing options.

Subsequently, on July 13, 2011, TPC Group Inc. announced that (1) we received the Texas Commission on Environmental Quality (TCEQ) air permit necessary to proceed with the planned refurbishment, upgrade to air emissions controls, and restart one of our idled dehydrogenation units; (2) construction of the required new components for the system, along with refurbishment of the existing unit, began promptly following receipt of the permit; (3) we completed the primary phase of engineering on the project that commenced in January of this year; and (4) TPC Group Inc.’s Board of Directors approved the next phase of engineering, which is expected to be completed by the end of 2011. The refurbished dehydrogenation unit is projected to be operational in the first quarter of 2014.

On February 21, 2011, TPC Group Inc. announced the election of Eugene Allspach as a new member of its Board of Directors, which increased its size from seven to eight members. Mr. Allspach currently serves as

 

 

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President of E.R. Allspach & Associates, LLC, a consulting company to new business development activities in the petrochemical industry and has nearly 38 years of experience in the plastics and chemical industries.

On March 3, 2011, TPC Group Inc. announced that its Board of Directors had approved a stock purchase program for up to $30.0 million of TPC Group Inc.’s common stock. Purchases of common stock under the program have been and will be executed periodically in the open market or in privately negotiated transactions in accordance with applicable securities laws. The stock purchase program does not obligate TPC Group Inc. to purchase any dollar amount or number of shares of common stock, does not have an expiration date and may be limited or terminated at any time by TPC Group Inc.’s Board of Directors without prior notice. As of June 30, 2011, TPC Group Inc. had purchased 282,532 shares under the program in the open market at an average of $27.59 per share, for a total of $7.8 million. TPC Group Inc. did not purchase any shares during the second quarter of 2011. The shares purchased were immediately retired and any additional shares to be purchased under the program will be retired immediately. Any future purchases will depend on many factors, including the market price of the shares, our business and financial position and general economic and market conditions.

On March 18, 2011, TPC Group Inc. announced that its Board of Directors elected Michael T. McDonnell as President and Chief Executive Officer and appointed him to the Board of Directors, each effective March 22, 2011. Mr. McDonnell replaced Charles W. Shaver in those roles. Mr. Shaver retired as President and Chief Executive Officer on March 22, 2011, and retired from the Board of Directors effective on that date.

On March 28, 2011, Kenneth E. Glassman, a former member of the Board of Directors of TPC Group Inc., notified TPC Group Inc. that he would not stand for reelection as a director upon the expiration of his term at TPC Group Inc.’s 2011 Annual Meeting of Stockholders.

Effective June 6, 2011, the Board of Directors of TPC Group Inc. elected Rishi Varma as Vice President and General Counsel. Mr. Varma replaced Christopher A. Artzer, who resigned from those roles on March 11, 2011.

On August 9, 2011, TPC Group Inc. announced that its Board of Directors approved funding for the next phase of engineering to produce on-purpose butadiene, targeting the restart of the second dehydrogenation unit at our Houston facility, coupled with construction of a TPC Group OXO-DTM production unit. Normal butane, a natural gas liquid whose production volumes continue to increase as a result of U.S. shale gas development, has been selected as the primary feedstock. Utilization of the TPC Group OXO-DTM technology allows highly efficient on-purpose butadiene production, and is expected to yield up to 600 million pounds per year of product with this project and to have the capability to expand as needed through additional phases as the market grows. This engineering phase is expected to be completed by the end of the first quarter 2012.

As previously discussed, the dehydrogenation asset referred to above was one of two that were idled in October 2007. During the fourth quarter of fiscal 2009, due in large part to the decreased availability of financing and lack of opportunities for alternative uses of the units attributable to the ongoing global economic recession, and the fact that the assets had been idled for almost two years, we concluded that it was no longer likely that market conditions necessary to justify a significant investment in the assets would occur in the foreseeable future. Consequently, the likelihood of recovery of the carrying amount of these assets had been substantially reduced and, in the fourth quarter of fiscal 2009, we recorded an asset impairment charge of $6.0 million to write down the carrying value of these assets to zero. We have undertaken the restart project described above to realize potential improvements in feedstock costs. After completion of the project, the dehydrogenation unit, utilizing butane feed, will be used to produce butadiene in order to meet growing market demand in North America. As discussed above, butane is in good supply in the U.S. due to shale gas development, as compared to the ongoing structural shortage of supply of our traditional crude C4 supply due to light cracking at ethylene crackers. Light cracking, and the resulting tightness in crude C4 supply, has become more prevalent since the time we recorded the impairment.

On August 29, 2011, TPC Group Inc. and Luis E. Batiz, Senior Vice President of Operations, mutually agreed that Mr. Batiz will retire effective January 1, 2012.

 

 

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Corporate Information

TPC Group LLC is a Texas limited liability company and a wholly-owned subsidiary of TPC Group Inc., a Delaware corporation. Our executive offices are located at 5151 San Felipe, Suite 800, Houston, Texas 77056 and our telephone number at that location is (713) 627-7474. Our website address is www.tpcgrp.com. The information on our website is not a part of this prospectus.

 

 

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The Exchange Offer

On October 5, 2010, TPC Group LLC completed an unregistered offering of the original notes. As part of that offering, we entered into a registration rights agreement with the initial purchasers of the original notes, which we refer to as the registration rights agreement, in which we agreed, among other things, to offer to exchange the original notes for the exchange notes. The following is a summary of the principal terms of the exchange offer. A more detailed description is contained in the section of this prospectus entitled “The Exchange Offer.”

 

Original Notes

8 1/4% Senior Secured Notes due October 1, 2017, which were issued by TPC Group LLC in a private placement on October 5, 2010.

 

Exchange Notes

8 1/4% Senior Secured Notes due October 1, 2017, issued by TPC Group LLC. The terms of the exchange notes are substantially identical to the terms of the original notes, except that the exchange notes are registered under the Securities Act, and the transfer restrictions and registration rights, and related special interest provisions, applicable to the original notes will not apply to the exchange notes.

 

Exchange Offer

Pursuant to the registration rights agreement, we are offering to exchange up to $350.0 million principal amount of our exchange notes that have been registered under the Securities Act for an equal principal amount of our original notes.

 

  The exchange notes will evidence the same debt as the original notes, including principal and interest, and will be issued under and be entitled to the benefits of the same indenture that governs the original notes. Holders of the original notes do not have any appraisal or dissenter’s rights in connection with the exchange offer. Because the exchange notes will be registered, the exchange notes will not be subject to transfer restrictions and holders of original notes that tender and have their original notes accepted in the exchange offer will no longer have registration rights or the right to receive the related special interest under the circumstances described in the registration rights agreement.

 

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on [                    ], 2011, which we refer to as the Expiration Date, unless we decide to extend it or terminate it early. We do not currently intend to extend the exchange offer. A tender of original notes pursuant to this exchange offer may be withdrawn at any time on or prior to the Expiration Date if we receive a valid written withdrawal request before the expiration of the exchange offer.

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions, which we may, but are not required to, waive. Please see “The Exchange Offer—Conditions to the Exchange Offer” for more information regarding the conditions to the exchange offer.

 

 

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Procedures for Tendering Original Notes

Unless you comply with the procedures described below under “The Exchange Offer—Procedures for Tendering Original Notes—Guaranteed Delivery,” to participate in the exchange offer, on or prior to the Expiration Date you must tender your original notes by using the book-entry transfer procedures described in “The Exchange Offer—Procedures for Tendering Original Notes—Tenders of Original Notes; Book-Entry Delivery Procedure,” including transmission or delivery to the exchange agent of an agent’s message or a properly completed and duly executed letter of transmittal, with any required signature guarantee. In order for a book-entry transfer to constitute a valid tender of your original notes in the exchange offer, Wells Fargo Bank, National Association, as registrar and exchange agent, must receive a confirmation of book-entry transfer of your original notes into the exchange agent’s account at The Depository Trust Company prior to the Expiration Date.

 

  By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things:

 

   

you are acquiring exchange notes in the ordinary course of your business;

 

   

you have no arrangement or understanding with any person or entity to participate in a distribution of the exchange notes;

 

   

you are not our or any subsidiary guarantor’s “affiliate” as defined in Rule 405 of the Securities Act;

 

   

if you are not a broker-dealer, that you are not engaged in, and do not intend to engage in, the distribution of the exchange notes; and

 

   

if you are a broker-dealer that will receive exchange notes for your own account in exchange for original notes that were acquired by you as a result of market-making or other trading activities, that you will deliver a prospectus in connection with any resale of such exchange notes.

 

  If you are a broker-dealer, you may not participate in the exchange offer as to any original notes you purchased directly from us.

 

Guaranteed Delivery Procedures

If you wish to tender your original notes in the exchange offer, but they are not immediately available or if you cannot deliver your original notes and the other required documents prior to the expiration date, then you may tender original notes by following the procedures described below under “The Exchange Offer—Procedures for Tendering Original Notes—Guaranteed Delivery.”

 

Withdrawal; Non-Acceptance

You may withdraw any original notes tendered in the exchange offer by sending the exchange agent written notice of withdrawal at any time prior to 5:00 p.m., New York City time, on the Expiration Date. If we decide for any reason not to accept any original notes tendered

 

 

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for exchange or to withdraw the exchange offer, the original notes will be returned promptly after the expiration or termination of the exchange offer. For further information regarding the withdrawal of tendered original notes, please see “The Exchange Offer—Withdrawal of Tenders.”

 

United States Federal Income Tax Considerations

The exchange of original notes for exchange notes in the exchange offer should not be a taxable event for U.S. federal income tax purposes. Please see “U.S. Federal Income Tax Considerations” for more information regarding the tax consequences to you of the exchange offer.

 

Use of Proceeds

The issuance of the exchange notes will not provide us with any new proceeds. We are making this exchange offer solely to satisfy our obligations under the registration rights agreement we entered into with the initial purchasers of the original notes.

 

Fees and Expenses

We will pay all expenses incident to the exchange offer.

 

Exchange Agent

We have appointed Wells Fargo Bank, National Association as our exchange agent for the exchange offer. You can find the address and telephone number of the exchange agent elsewhere in this prospectus under the caption “The Exchange Offer—Exchange Agent.”

 

Resales of Exchange Notes

Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, we believe that the exchange notes you receive in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act so long as certain conditions are met. See “The Exchange Offer—Purpose and Effects of the Exchange Offer” and “Plan of Distribution” for more information regarding resales.

 

Not Exchanging Your Original Notes

If you do not exchange your original notes in this exchange offer, you will continue to hold unregistered original notes and you will no longer be entitled to registration rights or the special interest provisions related thereto, except in the limited circumstances set forth in the registration rights agreement. See “The Exchange Offer—Consequences of Failure to Exchange.” In addition, you will not be able to resell, offer to resell or otherwise transfer your original notes unless you do so in a transaction exempt from the registration requirements of the Securities Act and applicable state securities laws or unless we register the offer and resale of your original notes under the Securities Act. Following the exchange offer, we will be under no obligation to, and we do not intend to, register your original notes, except under the limited circumstances set forth in the registration rights agreement.

 

 

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Additional Documentation; Further Information; Assistance

Any questions or requests for assistance or additional documentation regarding the exchange offer may be directed to the exchange agent. Beneficial owners of original notes should contact their broker, dealer, commercial bank, trust company or other nominee for assistance in tendering their original notes in the exchange offer.

Description of Exchange Notes

The terms of the exchange notes and those of the outstanding original notes are substantially identical, except that the exchange notes are registered under the Securities Act, and the transfer restrictions and registration rights, and related special interest provisions, applicable to the original notes will not apply to the exchange notes. The exchange notes represent the same debt as the original notes for which they are being exchanged. Both the original notes and the exchange notes are governed by the same indenture.

 

Issuer

TPC Group LLC

 

Exchange Notes Offered

$350.0 million aggregate principal amount of 8 1/4% senior secured notes due 2017.

 

Maturity

October 1, 2017.

 

Interest Payment Dates

April 1 and October 1 of each year, commencing April 1, 2011.

 

Guarantees

The exchange notes initially will be guaranteed, jointly and severally, by all of TPC Group LLC’s material domestic subsidiaries. See “Description of Exchange Notes—Guarantees.” TPC Group Inc. will not guarantee the exchange notes.

 

  TPC Group Inc. and one of its subsidiaries are not guarantors of the exchange notes. Neither of these entities contributed to our revenues or EBITDA for the twelve-month period ended June 30, 2010, the six-month transition period ended December 31, 2010 or the six-month period ended June 30, 2011. In addition, these non-guarantors represented less than 1% of our assets and liabilities as of June 30, 2011, excluding incremental cash received from the offering of notes after repayment of our Term Loan.

 

Collateral

The exchange notes and the guarantees will be secured by a first-priority lien on substantially all of TPC Group LLC’s and the guarantors’ present and future assets (other than the ABL Collateral (as defined below)), including equipment, real property, all present and future shares of capital stock or other equity interests of each of our and each guarantor’s directly owned domestic restricted subsidiaries and 65% of the present and future shares of capital stock or other equity interests of each of our and each guarantor’s directly owned foreign restricted subsidiaries, in each case subject to certain exceptions and customary permitted liens.

In addition, the exchange notes and the guarantees will be secured by a second-priority lien on all of TPC Group LLC’s and the guarantors’ present and future assets that secure our obligations under our existing asset-based revolving credit facility (the “ABL Revolver”),

 

 

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including accounts receivable, inventory, all payments and receivables in respect thereof and all general intangibles relating thereto (the “ABL Collateral”). This second-priority lien is subject to a first-priority lien securing the ABL Revolver and other customary liens permitted under such facility, until such facility and obligations are paid in full.

 

  In addition, to the extent necessary and for so long as required for such guarantor not to be subject to any requirement pursuant to Rule 3-16 of Regulation S-X under the Securities Act to file separate financial statements with the Securities and Exchange Commission (SEC) (or any other governmental agency), the capital stock and other securities of such guarantor shall not be included in the collateral with respect to the notes (or any permitted additional pari passu obligations outstanding) so affected and shall not be subject to the liens securing such notes and any permitted additional pari passu obligations. In the event that Rule 3-16 of Regulation S-X under the Securities Act requires or is amended, modified or interpreted by the SEC to permit (or is replaced with another rule or regulation, or any other law, rule or regulation is adopted, which would permit) such guarantor’s capital stock and other securities to secure the notes in excess of the amount then pledged without the filing with the SEC (or any other governmental agency) of separate financial statements of such guarantor, then the capital stock and other securities of such guarantor will automatically be deemed to be a part of the collateral for the notes but only to the extent necessary to not be subject to any such financial statement requirement.

 

  The value of collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. The liens on the collateral may be released without the consent of the holders of exchange notes if collateral is disposed of in a transaction that complies with the indenture and security documents, including in accordance with the provisions of an intercreditor agreement entered into relating to the ABL Collateral. In the event of a liquidation of the collateral, the proceeds may not be sufficient to satisfy the obligations under the exchange notes.

 

Ranking

The exchange notes and guarantees will constitute senior secured debt of TPC Group LLC and the guarantors. They will rank:

 

   

equally in right of payment with all of TPC Group LLC’s and the guarantors’ existing and future senior debt, including amounts outstanding under the ABL Revolver;

 

   

senior in right of payment to all of TPC Group LLC’s and the guarantors’ future subordinated debt;

 

   

effectively subordinated to all of TPC Group LLC’s and the guarantors’ obligations under the ABL Revolver, to the extent of the value of the ABL Collateral;

 

 

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effectively senior to all of TPC Group LLC’s and the guarantors’ obligations under the ABL Revolver, to the extent of the value of the assets subject to first-priority liens securing the notes (the “Notes Collateral,” and, together with the ABL Collateral, the “Collateral”);

 

   

effectively senior to all of TPC Group LLC’s and the guarantors’ existing and future senior unsecured indebtedness, to the extent of the value of the Collateral; and

 

   

structurally subordinated to all existing and future indebtedness and other liabilities of TPC Group LLC’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to TPC Group LLC or one of its guarantor subsidiaries).

 

  As of June 30, 2011, TPC Group LLC’s only outstanding debt consisted of $347.9 million in original notes, with no outstanding borrowings under the ABL Revolver. In addition, TPC Group LLC had the ability to access the full availability of $175.0 million under the ABL Revolver, all of which is secured by a first-priority lien on the ABL Collateral.

 

Intercreditor Agreement

The trustee and the collateral agent under the indenture governing the notes and the administrative agent and collateral agent under the ABL Revolver have entered into an intercreditor agreement as to the relative priorities of their respective security interests in the ABL Collateral and the Notes Collateral and certain other matters relating to the administration of security interests. The terms of the intercreditor agreement are set forth under “Description of Exchange Notes—Intercreditor Agreement.”

 

Optional Redemption

TPC Group LLC may redeem the exchange notes, in whole or in part, at any time on or after October 1, 2013 at the redemption prices set forth in this prospectus plus accrued and unpaid interest, if any. Prior to October 1, 2013, TPC Group LLC may redeem up to 10% of the initial aggregate principal amount of the exchange notes in any twelve-month period at a price equal to 103% of the aggregate principal amount thereof plus any accrued and unpaid interest thereon, if any. TPC Group LLC also may redeem any of the exchange notes at any time prior to October 1, 2013 at a price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest thereon, if any. See “Description of Exchange Notes—Optional Redemption.”

 

Optional Redemption after Equity Offering

At any time (which may be more than once) before October 1, 2013, TPC Group LLC may redeem up to 35% of the aggregate principal amount of exchange notes issued with the net proceeds that TPC Group Inc. raises in one or more equity offerings, as long as:

 

   

TPC Group LLC pays 108.25% of the face amount of the exchange notes, plus accrued and unpaid interest to the date of redemption;

 

 

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TPC Group LLC redeems the exchange notes within 120 days of completing the equity offering; and

 

   

at least 65% of the aggregate principal amount of exchange notes issued remains outstanding afterwards.

 

Change of Control

If a change of control occurs with respect to TPC Group LLC or TPC Group Inc., TPC Group LLC must give holders of the exchange notes the opportunity to sell TPC Group LLC their notes at 101% of their face amount, plus accrued and unpaid interest. For more details, you should read “Description of Exchange Notes—Change of Control.”

 

Mandatory Offer to Repurchase Following Certain Asset Sales

If TPC Group LLC or its subsidiaries engage in certain asset sales, TPC Group LLC must either invest the net cash proceeds from such event in our business within a specified period of time, prepay senior debt or make an offer to purchase a principal amount of the exchange notes equal to the excess net cash proceeds. The purchase price of the exchange notes will be 100% of their principal amount, plus accrued and unpaid interest. See “Description of Exchange Notes—Certain Covenants—Asset Sales.”

 

Covenants

The indenture governing the exchange notes, among other things, limits TPC Group LLC’s ability and the ability of its restricted subsidiaries to:

 

   

pay dividends or distributions, repurchase equity, prepay subordinated debt or make certain investments;

 

   

incur additional debt or issue certain disqualified stock and preferred stock;

 

   

incur additional liens on assets;

 

   

merge or consolidate with another company or sell all or substantially all assets;

 

   

enter into transactions with affiliates; and

 

   

allow to exist certain restrictions on the ability of the guarantors to pay dividends or make other payments to us.

 

  These covenants are subject to important exceptions and qualifications as described under “Description of Exchange Notes—Certain Covenants.”

 

No Prior Market

The exchange notes will generally be freely transferable but are also new securities for which there initially will not be a market. We do not intend to apply for a listing of the exchange notes on any securities exchange or for their inclusion on any automated dealer quotation system. Accordingly, we cannot assure you as to the development or liquidity of any market for the exchange notes.

 

Risk Factors

See “Risk Factors” and the other information in this prospectus for a discussion of the factors you should carefully consider before deciding to invest in the notes.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth summary historical consolidated financial data (amounts in thousands, except for ratios) for TPC Group LLC and its consolidated subsidiaries, at the dates and for the periods indicated. The summary historical consolidated financial data as of and for the six months ended December 31, 2010 and as of and for the fiscal years ended June 30, 2010, 2009 and 2008 have been derived from our historical consolidated financial statements and related notes included elsewhere in this prospectus, which have been audited by Grant Thornton LLP. Summary historical consolidated financial data as of and for the six months ended June 30, 2011 and 2010 and as of and for the six months ended December 31, 2009 are derived from our unaudited consolidated financial statements.

The summary historical consolidated financial data should be read in conjunction with “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto and the other financial information included in this prospectus.

 

    Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
       
    2011     2010     2010     2009     2010     2009     2008  
    (unaudited)           (unaudited)                    

Statements of Operations Data:

             

Revenue

  $ 1,348,483      $ 932,559      $ 985,505      $ 755,925      $ 1,688,484      $ 1,376,874      $ 2,016,198   

Cost of sales (excludes items listed below)

    1,153,173        794,988        855,043        649,169        1,444,156        1,194,173        1,752,191   

Operating expenses

    74,248        68,172        67,068        65,009        133,181        132,268        131,191   

General and administrative expenses

    15,419        16,549        12,735        13,282        29,834        32,756        36,656   

Depreciation and amortization

    20,366        19,651        19,762        20,117        39,769        41,899        35,944   

Asset impairment

    —          —          —          —          —          5,987        —     

Loss on sale of assets

    —          —          —          —          —          —          1,092   

Business interruption insurance recoveries

    —          —          —          (17,051     (17,051     (10,000     —     

Unauthorized freight (recoveries) payments

    —          —          —          —          —          (4,694     499   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    85,277        33,199        30,897        25,399        58,595        (15,515     58,625   

Interest expense, net

    17,056        7,513        11,411        7,494        15,007        16,817        18,876   

Write-off term loan debt issuance cost

    —          —          2,959        —          —          —          —     

Unrealized (gain) loss on derivatives

    —          (2,092     —          (1,372     (3,464     3,710        (99

Other (income) expense, net

   
(949

    (1,238     (779     (1,047     (2,287     (1,623     (1,394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    69,170        29,016        17,306        20,324        49,339        (34,419     41,242   

Income tax expense (benefit)

    23,418        10,465        5,152        8,238        18,702        (11,817     14,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 45,752      $ 18,551      $ 12,154      $ 12,086      $ 30,637      $ (22,602   $ 26,786   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statements of Cash Flows Data:

             

Cash (used in) provided by operating activities

  $ 10,479      $ 129,253      $ (22,550   $ (2,828   $ 126,427      $ 47,170      $ 57,729   

Cash used in investing activities

    (20,845     (9,830     (13,151     (4,570     (14,400     (16,128     (156,313

Cash provided by (used in) financing activities

    (68,605     (8,645     8,413        1,262        (7,384     (25,124     89,695   

 

 

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    June 30,     December 31,     June 30,  
    2011     2010     2010     2009     2010     2009     2008  
    (unaudited)           (unaudited)                    

Balance Sheet Data:

             

Cash and cash equivalents

  $ 4,887      $ 111,146      $ 83,858      $ 367      $ 111,146      $ 6,503      $ 585   

Working capital(1)

    193,009        54,666        116,303        96,031        54,666        48,668        84,340   

Property, plant and equipment, net

    484,993        491,082        484,492        500,871        491,082        516,377        545,972   

Total assets

    1,022,882        873,622        913,747        805,479        873,622        714,841        905,895   

Long-term debt (includes current portion)

    347,912        269,470        347,786        271,223        269,470        272,570        297,113   

Members’ equity

    245,224        315,038        267,227        297,039        315,038        284,323        301,427   

 

(1) Working capital is defined as trade accounts receivable plus inventory less accounts payable.

 

     Six Months Ended
June 30,
     Six Months Ended
December 31,
     Fiscal Year Ended
June 30,
 
     2011      2010      2010      2009      2010      2009     2008  

Other Financial Data:

                   

Ratio of Adjusted EBITDA to Interest Expense, Net(1)

     6.2         7.5         4.5         4.1         5.8         0.9        5.2   

Ratio of Net Debt to Adjusted EBITDA(1)(2)

     N/A         N/A         N/A         N/A         3.1         17.5        3.0   

Ratio of Earnings to Fixed Charges

     5.0         4.8         2.2         3.7         4.2         —   (3)      2.7   

 

(1) See below for additional information about Adjusted EBITDA, a non-GAAP financial measure.
(2) Net debt is calculated as total debt, net, less cash and cash equivalents.
(3) The deficiency in the fiscal year ended June 30, 2009 was $35,437.

The following table provides revenues and Adjusted EBITDA by reportable segment (amounts in thousands) for the six months ended June 30, 2011 and 2010, the six months ended December 31, 2010 and 2009 and the three most recent fiscal years ended June 30, 2010, 2009 and 2008. Revenues in the table below for the six months ended December 31, 2010 and the fiscal years ended June 30, 2010, 2009 and 2008 have been derived from our historical consolidated financial statements and related notes included elsewhere in this prospectus, which have been audited by Grant Thornton LLP. All information presented for the six months ended June 30, 2011 and 2010 and the six months ended December 31, 2009 are derived from our unaudited consolidated financial statements.

Adjusted EBITDA is not a measure computed in accordance with generally accepted accounting principles in the United States (GAAP). A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets, or statements of cash flows (or equivalent statements); or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

Adjusted EBITDA is presented and discussed because management believes it enhances understanding by investors and lenders of the Company’s operating performance. As a complement to financial measures provided in accordance with GAAP, management believes that Adjusted EBITDA assists investors and lenders who follow the practice of some investment analysts who adjust GAAP financial measures to exclude items that may obscure underlying performance outlook and trends and distort comparability. In addition, management believes a presentation of Adjusted EBITDA on a segment and consolidated basis enhances overall understanding of our performance by providing a higher degree of transparency for such items and providing a level of disclosure that helps investors understand how management plans, measures and evaluates our operating performance and

 

 

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allocates capital. Since Adjusted EBITDA is not a measure computed in accordance with GAAP, it is not intended to be presented herein as a substitute to operating income or net income as indicators of the Company’s operating performance. Adjusted EBITDA is the primary performance measurement used by our senior management and TPC Group Inc.’s Board of Directors to evaluate operating results and to allocate capital resources between our business segments.

We calculate Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization (EBITDA), which is then adjusted to remove or add back certain items. These items are identified below in the reconciliation of Adjusted EBITDA to Net Income (Loss), the GAAP measure most directly comparable to Adjusted EBITDA.

As shown in the table below, during the six months ended December 31, 2010, we revised our previous definition of Adjusted EBITDA for the C4 Processing segment for the periods indicated to remove the effect of business interruption insurance recoveries and unauthorized freight recoveries/payments. We have concluded that removal of these items, which we consider to be non-recurring in nature, enhances the period-to-period comparability of our operating results and is more useful to securities analysts, investors and other interested parties in their understanding of our operating performance. In addition, as also shown in the table below, during the first quarter of 2011 we further revised our previous definition of Adjusted EBITDA for the periods indicated to no longer remove the effect of non-cash stock-based compensation and unrealized gains and losses on derivative financial instruments, because they are recurring in nature. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies; therefore, it may not be comparable to other companies.

 

    Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
    2011     2010     2010     2009     2010     2009     2008  
    (unaudited)           (unaudited)                    

Revenues:

             

C4 Processing

  $ 1,093,398      $ 724,277      $ 792,427      $ 604,410      $ 1,328,687      $ 1,061,939      $ 1,483,736   

Performance Products

    255,085        208,282        193,078        151,515        359,797        314,935        466,352   

MTBE(1)

    —          —          —          —          —          —          66,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,348,483      $ 932,559      $ 985,505      $ 755,925      $ 1,688,484      $ 1,376,874      $ 2,016,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA—as previously defined(2):

             

C4 Processing

        $ 50,407      $ 91,225      $ 37,391      $ 82,624   

Performance Products

          8,391        36,974        27,736        43,485   

MTBE(1)

          —          —          —          6,207   

Corporate

          (11,604     (26,362     (24,822     (28,767
       

 

 

   

 

 

   

 

 

   

 

 

 
        $ 47,194      $ 101,837      $ 40,305      $ 103,549   
       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA—as previously defined during six months ended December 31, 2010(2):

             

C4 Processing(4)

  $ 97,453      $ 40,818      $ 39,516      $ 33,356      $ 74,174      $ 22,697      $ 83,123   

Performance Products

    23,608        28,581        23,879        8,391        36,974        27,736        43,485   

MTBE(1)

    —          —          —          —          —          —          6,207   

Corporate

    (13,619     (14,756     (11,256     (11,604     (26,362     (24,822     (28,767
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 107,442      $ 54,643      $ 52,139      $ 30,143      $ 84,786      $ 25,611      $ 104,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)—current definition(2)(3):

             

C4 Processing(4)

  $ 97,453      $ 40,818      $ 39,516      $ 33,356      $ 74,174      $ 22,697      $ 83,123   

Performance Products

    23,608        28,581        23,879        8,391        36,974        27,736        43,485   

MTBE(1)

    —          —          —          —          —          —          6,207   

Corporate

    (14,469     (13,219     (11,956     (10,863     (24,084     (34,843     (35,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 106,592      $ 56,180      $ 51,439      $ 30,884      $ 87,064      $ 15,590      $ 97,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(1) As reported in the above table, the “MTBE” segment represents MTBE produced by our Houston dehydrogenation units. In conjunction with the start-up of our isobutylene processing unit in the first quarter of fiscal 2008, the dehydrogenation units were idled, and all MTBE produced from those units was sold by the end of the second quarter of fiscal 2008. Beginning with third quarter of fiscal 2008, MTBE production as a byproduct of the crude C4 isobutylene process was insignificant, and related revenues and operating results were included in the C4 Processing segment.
(2) See above for a discussion of Adjusted EBITDA and the revision during the six months ended December 31, 2010 of our previous definition of Adjusted EBITDA to remove from Adjusted EBITDA the effect of the business interruption insurance recoveries and the unauthorized freight payments/recoveries. See below for reconciliations of Adjusted EBITDA to Net Income (Loss) for the periods presented. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations.
(3) See above for a discussion of Adjusted EBITDA and the further revision during the first quarter of 2011 of our previous definition of Adjusted EBITDA to no longer remove the effect of non-cash stock-based compensation and unrealized gains and losses on derivative financial instruments, because they are recurring in nature. See below for reconciliations of Adjusted EBITDA to Net Income (Loss) for the periods presented. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations.
(4) In accordance with our current definition of Adjusted EBITDA, as described above, the business interruption insurance recoveries in fiscal 2010 and 2009 and the unauthorized freight recoveries and payments in fiscal 2009 and 2008 have been removed from C4 Processing segment Adjusted EBITDA for purposes of this presentation, since we believe inclusion of these items in Adjusted EBITDA would distort comparability between the periods presented.

 

 

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The following table provides a reconciliation of Adjusted EBITDA (current definition) to Net Income (Loss) (in thousands) for the six months ended June 30, 2011 and 2010, the six months ended December 31, 2010 and 2009 and the three most recent fiscal years ended June 30, 2010, 2009 and 2008. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations and Comprehensive Income.

 

     Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
     2011     2010     2010     2009     2010     2009     2008  
     (unaudited)           (unaudited)                    

Net income (loss)

   $ 45,752      $ 18,551      $ 12,154      $ 12,086      $ 30,637      $ (22,602   $ 26,786   

Income tax expense (benefit)

     23,418        10,465        5,152        8,238        18,702        (11,817     14,456   

Interest expense, net

     17,056        7,513        14,371 (1)      7,494        15,007        16,817        18,876   

Depreciation and amortization

     20,366        19,651        19,762        20,117        39,769        41,899        35,944   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     106,592        56,180        51,439        47,935        104,115        24,297        96,062   

Impairment of assets

     —          —          —          —          —          5,987        —     

Loss on sale of assets

     —          —          —          —          —          —          1,092   

Non-cash stock-based compensation

     850        555        700        631        1,186        6,311        6,494   

Unrealized (gain) loss on derivatives

     —          (2,092     —          (1,372     (3,464     3,710        (99
        

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as previously defined

           47,194        101,837        40,305        103,549   

Unauthorized freight (recoveries) payments

     —          —          —          —          —          (4,694     499   

Business interruptions insurance recoveries

     —          —          —          (17,051     (17,051     (10,000     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as previously defined during six months ended December 31, 2010

     107,442        56,643        52,139        30,143        84,786        25,611        104,048   

Non-cash stock-based compensation

     (850     (555     (700     (631     (1,186     (6,311     (6,494

Unrealized gain on derivatives

     —          2,092        —          1,372        3,464        (3,710     99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA—current definition

   $ 106,592      $ 56,180      $ 51,439      $ 30,884      $ 87,064      $ 15,590      $ 97,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $3.0 million write-off of previously deferred debt issuance costs related to the Term Loan discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

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RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained under “Forward-Looking Statements” and elsewhere in this prospectus before deciding to participate in the exchange offer. This prospectus contains forward-looking statements that involve risks and uncertainties. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your original investment.

Risks Related to Our Business

Cyclicality in the petrochemicals industry may result in reduced volumes or operating margins.

The petrochemicals industry is cyclical and has historically experienced periodic downturns. Profitability is highly sensitive to supply and demand cycles and product prices. The cycles are generally characterized by periods of strong demand, leading to high operating rates and margins, followed by periods of oversupply relative to demand, primarily resulting from significant capacity additions or decreases in demand, leading to reduced operating rates and lower margins. Any significant downturn in the end markets for our products or in general economic conditions could result in a material reduction in demand and margins for our products and could harm our business. We are unable to predict with certainty supply and demand balances, market conditions and other factors that will affect industry operating margins in the future. In addition, because we compete in limited segments of the petrochemicals industry and have less diversified operations than most of our competitors, a downturn in one or more of those specific segments may affect us more severely than our competitors who compete more broadly in the industry as a whole.

We may reduce production at or idle a facility for an extended period of time or discontinue a product line because of an oversupply of a particular product and/or a lack of demand for that particular product, or high feedstock prices that make production uneconomical. In fiscal year 2009, we idled or shut down certain processing capability at our Houston and Port Neches facilities for reasons described above. Temporary idling or shutdowns sometimes last for several quarters or, in certain cases, longer, and cause us to incur costs, including the expenses of maintaining and restarting these facilities. Factors such as increases in feedstock costs or lower demand in the future may cause us to further reduce capacity, idle facilities or discontinue product lines.

Our efforts to obtain suitable quantities or qualities of raw material feedstock may not be successful, in which case our financial condition, results of operations and cash flows may be adversely affected.

We are subject to risks associated with fluctuations in feedstock supply in both our C4 Processing and our Performance Products businesses. Most of our contracts with our crude C4 suppliers obligate us to purchase a percentage of the output from a given facility, as opposed to a fixed volume. The contracts contain volume estimates, but the actual amount purchased varies on what is actually produced by the supplier. Even for supply contracts that specify a fixed volume of feedstocks, as is the case for some agreements in our Performance Products segment, the suppliers are not always able to meet the fixed volume.

The amounts our suppliers can produce are not tied to the amounts our customers need. If customer demand drops without a corresponding drop in supplier production, inventories may dramatically increase and result in significantly increased exposure to commodity price volatility. Similarly, if supplier production decreases without a corresponding drop in customer demand, inventories may dramatically decrease, forcing us to allocate our production and putting us at risk of default in our customer contracts. Moreover, to the extent that we are unable to obtain additional feedstock from current suppliers or other sources, our ability to grow our business could be constrained.

 

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Even if we can obtain raw material feedstock at cost effective prices, the quantity and type of such feedstock may not be sufficient to meet our production needs. Composition of the raw material feedstock varies greatly by source. In particular, crude C4 can be created by a variety of means, each resulting in a different mixture of the sub-component compounds vital to our production methods. A disproportionate amount of one sub-component over another in raw material feedstock can directly affect the types and quantities of products we can produce from our operations. While we contractually obligate our suppliers to certain minimum amounts of four-carbon compounds in the raw material feedstocks, there is typically an allowed margin of variability. Furthermore, some contracts do not specify a minimum amount of one sub-component over another due to the variation in crude C4 production by our suppliers. This creates uncertainty as to whether we will have enough of a particular sub-component to meet our production needs. Finally, there is no guarantee that new sources of raw material feedstocks will have the same sub-component makeup as existing sources.

The volume of crude C4 produced by the ethylene production process is driven by both the volume of ethylene produced and the composition of the steam cracker feedstock. When light feedstocks, such as NGLs, are inexpensive relative to heavier feedstocks such as naphtha, ethylene crackers conduct primarily light cracking, resulting in lower volumes of crude C4 available in the market. This situation, which existed throughout fiscal 2009, fiscal 2010, the six months ended December 31, 2010 and the six months ended June 30, 2011, occasionally results in our inability to meet 100% of our contractual butadiene and butene-1 sales commitments. When this occurs, we typically invoke force majeure clauses that exist in almost all of our butadiene and butene-1 sales contracts, allowing us to reduce, or “allocate,” the amount of product we deliver. From time to time since the latter part of fiscal 2009, we were forced to operate, and may again be forced to operate in the future, on a product allocation basis as a result of limited crude C4 feedstock supply. Moreover, due to continued light cracking and reduced operating rates of ethylene crackers, in April 2009 we undertook cost reductions initiatives that included a reduction of our active C4 processing and butadiene production capacity. We shut down one of the two trains processing crude C4 at our Port Neches facility and temporarily idled some capacity at our Houston facility, also reducing associated headcount. We have periodically reactivated the temporarily idled production capacity at our Houston facility, but we do not expect to operate the idled trains at Port Neches again until feedstock supply conditions improve. We anticipate that the relatively high cost of crude oil compared to the cost of natural gas that we have seen over the past three to four years will continue, especially in light of the abundance of shale natural gas being discovered and developed in the U.S., and will drive continuation of light cracking well into the future.

An inability to produce sufficient quantity of our products, or a decline in production of our products due to a change in sub-component composition of our crude C4 feedstocks, could result in a failure to meet our obligations to our customers, and in turn could adversely impact our financial condition, results of operations, and cash flows.

We may not have access to capital in the future due to changes in general economic conditions.

We may need new or additional financing in the future to conduct our operations, expand our business, make acquisitions or refinance existing indebtedness. As of June 30, 2011, we had the ability to access the full availability under our ABL Revolver of $175.0 million. Because our ABL Revolver is asset-based, the availability under the facility will decrease if the value of our trade accounts receivable, inventories and other assets decrease. Any sustained weakness in general economic conditions and/or financial markets in the United States or globally could adversely affect our ability to raise capital on favorable terms or at all.

Longer term volatility and disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation of financial institutions, reduced alternatives or failure of significant financial institutions could adversely affect our access to the liquidity needed for our businesses in the longer term. Such disruptions could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Disruptions in the capital and credit markets could result in higher interest rates on debt securities and increased costs under credit facilities. Any further disruptions could increase our interest expense and capital costs and could adversely affect our results of operations and financial position, including our ability to grow our business through acquisitions.

 

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Finally, in periods of low demand or decreased feedstock supply, the negative effect on our financial condition may cause the feedstock suppliers with whom we do business to require shorter payment terms or require letters of credit to secure payment. Complying with shorter payment terms or providing letters of credit would reduce our cash and/or the availability under our ABL Revolver. Either of these outcomes would impact our liquidity, and could cause us to decrease our feedstock purchases or other expenditures, or otherwise negatively affect our financial condition and results of operations.

Volatility in the petrochemicals industry may result in reduced material margin percentage or operating losses.

Prices for our feedstocks and our finished products are related to the prices in the energy market as a whole, and, as such, can be volatile. The cost of our raw material feedstock purchases is usually determined by application of index-based formulas contained in many of our raw material supply contracts. Through these index-based formulas our raw material costs are linked to commodity market indices (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene) or to the selling price of the related finished product. The selling prices for our finished products are also typically determined from index-based formulas contained in many of our sales contracts and, in most cases, the indices used to determine finished product selling prices are the same indices used to determine the cost of the corresponding raw material feedstock. The linkage between the costs of our raw material feedstocks and the selling prices of our finished products to the same indices mitigates, to varying degrees, our exposure to volatility in our material margin percentage (which we define as the difference between average revenue per pound and average raw material cost per pound as a percentage of average revenue per pound). Although these index-based pricing formulas provide relative stability in our material margin percentage over time, it is not perfectly constant due to various factors, including those listed below:

 

   

Although most of our supply and sales contracts contain index-based formulas, varying proportions of our raw material purchases and finished product sales are done on a spot basis or otherwise negotiated terms. In addition, while many of the index-based formulas in our contracts are simply based on a percentage of the relevant index, others apply adjustment factors to the market indices that do not fluctuate with changes in the underlying index. In periods when market indices are high, the use of non-fluctuating adjustment factors tends to reduce the material margin percentage; and conversely, in periods when market indices are low the non-fluctuating adjustment factors tend to increase the material margin percentage.

 

   

We may purchase raw material feedstocks in one period based on market indices for that period, and then sell the related finished products in a later period based on market indices for the later period. Changes in selling prices of finished products, based on changes in the underlying market indices between the period the raw material feedstocks are purchased and the related finished products are sold, lessens the effect of the matching indices and causes variation in our material margin percentage. The magnitude of the effect on material margin percentage depends on the magnitude of the change in the underlying indices between the period the raw material is purchased and the period the finished product is sold and the quantity of inventory impacted by the change.

 

   

Finished product selling price formulas under some of our sales contracts, primarily in the Performance Products segment, are based on commodity indices not for the period in which the sale occurs but for either a prior or subsequent period. The effect on profit margins of these selling price formulas is diminished during times of relatively stable market indices, but can have a substantial effect during times of rapidly increasing or decreasing market indices, which can impact our material margin percentage.

 

   

In times of rapidly declining market indices, the selling price of finished products inventory could fall below the carrying cost, which may result in lower-of-cost or market adjustments in periods before the finished products are sold. This has occurred in the past, primarily related to fuel-based inventory being devalued by other than short-term declines in unleaded regular gasoline prices, which is the market

 

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index upon which the fuel-related product selling prices are based. Recognition of lower-of-cost-or-market adjustments would negatively impact the material margin percentage in the period recognized.

Because our contractual arrangements do not insulate us from all changes in commodity prices, volatile petrochemicals and unleaded gasoline markets can materially and adversely affect our material margin percentage and results of operations.

Our industry is highly competitive and, if we are unable to compete successfully, our financial condition, results of operations and cash flows will be adversely affected.

The petrochemicals industry is, generally, highly competitive. Due to the commodity nature of many of our products, competition in our industry is based primarily on price and to a lesser extent on customer service, technology, reliability, product quality, product deliverability and product performance. As a result, we generally are not able to protect our market position for these products by product differentiation. Moreover, we compete with other companies in our industry for the feedstocks we need to produce our products. If our production costs are higher than our competitors due to supply-side competition or other factors, we may have difficulty recovering those higher costs from our customers due to the commodity nature of our products.

Many of our competitors are larger and have greater financial resources than we do. Among our competitors are some of the world’s largest chemical companies and major integrated petroleum companies that have their own raw materials resources. In addition, a significant portion of our business is based on widely available technology. Accordingly, barriers to entry, apart from capital availability, may be low in the commodity product section of our business, and the entrance of new competitors may reduce our ability to maintain profit margins in circumstances where capacity utilization in the industry is diminishing. Also, some petroleum-rich countries have recently become more significant participants in the petrochemicals industry and may expand their petrochemicals operations significantly in the future. Any significant increases in competition from existing or new industry participants could have a material adverse impact on our financial condition, results of operations and cash flows.

The loss of a large customer, or failure to retain contracts with an existing customer, could significantly reduce our profitability and cash flows.

A small number of our customers account for a significant percentage of our total sales. For the six months ended December 31, 2010 and fiscal 2010 and 2009, our top five customers accounted for an aggregate of 48.0%, 44.6% and 45.6%, respectively, of our total sales. During the six months ended December 31, 2010, Firestone Polymers LLC and Invista S.àr.l.l accounted for 11% and 10%, respectively, of our total sales. We could lose a large customer for a variety of reasons, including as a result of a merger, consolidation or bankruptcy. In addition, customers are increasingly pursuing arrangements with suppliers that can meet a larger portion of their needs on a more global basis. The loss of one or more of our large customers could have a material adverse impact on our financial condition, results of operations and cash flows. The only customer which accounted for 10% or greater of our sales during fiscal 2010 was The Goodyear Tire and Rubber Company.

The loss of a large supplier, or failure to retain contracts with an existing supplier, could significantly reduce our profitability and cash flows.

A small number of suppliers for our feedstocks account for a significant percentage of our feedstock purchases. Our top five suppliers accounted for an aggregate of 39.3%, 35.7% and 34.6% of our total vendor purchases for the six months ended December 31, 2010 and fiscal 2010 and 2009, respectively. We could lose a large supplier for a variety of reasons, including as a result of a merger or consolidation. In addition, suppliers in our industry are increasingly pursuing arrangements with customers that can off take a larger portion of their production streams on a more global basis. The loss of one or more of our large suppliers could have a material adverse impact on our financial condition, results of operations and cash flows. In fiscal 2010 one supplier accounted for 10% of total vendor purchases and no other individual supplier accounted for more than 10%.

 

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The organizational documents of TPC Group Inc. and our investment agreement give certain of our large stockholders the ability to prevent us from taking certain actions that our Board of Directors or a majority of our stockholders determine are in our best interests.

In connection with its emergence from Chapter 11 bankruptcy in 2004, TPC Group Inc. adopted organizational documents and entered into an investment agreement that granted certain consent rights to two of its large stockholders, Castlerigg Master Investments, Ltd. (“Castlerigg”) and RCG Carpathia Master Fund, Ltd. (“RCG”). As a result, for so long as these stockholders collectively hold at least 10% of the outstanding stock of TPC Group Inc., we may not, among other things, increase the number of shares of stock we are authorized to issue, issue preferred stock, adopt provisions in our organizational documents that could make an acquisition of our company more onerous or costly, or change other specified provisions in our organizational documents, in each case without each of Castlerigg’s and RCG’s consent. According to SEC filings made by these stockholders prior to the date of this prospectus, Castlerigg beneficially owned approximately 5.5% of TPC Group Inc.’s outstanding stock and, an affiliate of RCG beneficially owned approximately 9.3% of TPC Group Inc.’s outstanding stock.

The organizational documents of TPC Group Inc. and the investment agreement allow Castlerigg and RCG to exercise their consent rights in their sole discretion and in their self- interest. If either of these stockholders were to elect to withhold their consent with respect to a potential transaction or other initiative, we might be prevented from effecting that transaction or initiative even if the Board of Directors of TPC Group Inc. or a majority of its stockholders determine that doing so would benefit us or our stockholders.

For example, we will be required to obtain the consent of Castlerigg and RCG to increase the authorized common stock or to authorize the issuance of preferred stock of TPC Group Inc. Currently the certificate of incorporation of TPC Group Inc. authorizes the issuance of up to 25 million shares of common stock, of which approximately 17.1 million shares have been issued or are reserved for issuance, or are subject to outstanding stock awards. Accordingly, the ability of TPC Group Inc. to issue equity currently is limited to approximately 7.9 million authorized shares of common stock, and no shares of preferred stock. If Castlerigg and RCG withheld their consent to increase our authorized stock, our liquidity and access to capital, and/or our ability to consummate strategic transactions, could be adversely affected.

Global economic conditions may have impacts on our business and financial condition that we currently cannot predict.

Conditions in the global economy and global capital markets may adversely affect our results of operations, financial condition, and cash flows. Our customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products and may not be able to fulfill their obligations in a timely fashion. A significant adverse change in a customer relationship or in a customer’s financial position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer’s receivables or limit our ability to collect accounts receivable from that customer, all of which could have a material adverse effect on our business, results of operations, financial condition and liquidity. Further, suppliers may be experiencing similar conditions, which could impact their ability to fulfill their obligations to us or to deliver the quantity of feedstocks we expect.

Our C4 Processing business is subject to seasonality.

The pricing under our supply contracts and sales contracts is usually tied to a commodity price index, such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene, or to the price at which we sell the finished product. The price for unleaded regular gasoline, typically used in pricing for butene-1, MTBE and raffinates, varies seasonally as a result of increased demand during the spring and summer months of the year and decreased demand during the fall and winter months of the year. In addition, we

 

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typically have greater demand for our raffinates and MTBE products during the spring and summer months. As a result, we generally have increased volumes and margins for these products during the spring and summer and decreased volumes and margins during the fall and winter.

Our operations and assets are subject to extensive environmental, health and safety laws and regulations.

We are subject to extensive federal, state and local laws, regulations, rules and ordinances relating to pollution and protection of the environment, including those relating to the generation, handling, transportation, treatment, storage, disposal and cleanup of hazardous substances and wastes, the discharges of waste water, and the emission of air pollutants or contaminants. In the ordinary course of business, we undertake frequent environmental inspections and monitoring and are subject to investigations by governmental enforcement authorities. Our production facilities require a number of environmental permits and authorizations that are subject to renewal, modification and, in certain circumstances, revocation. Actual or alleged violations of environmental laws or permit requirements or the discovery of releases of hazardous substances at or from our facilities could result in restrictions or prohibitions on plant operations and product distribution/sales, significant remedial expenditures, substantial civil or criminal sanctions, as well as, under some environmental laws, the assessment of strict liability and/or joint and several liability.

In addition, we cannot accurately predict future developments, such as increasingly strict environmental laws or regulations, and inspection and enforcement policies, as well as resulting higher compliance costs, which might affect the handling, manufacture, or use of our products or the handling, use, emission, disposal and/or cleanup of other materials or hazardous and non-hazardous waste, and we cannot predict with certainty the extent of our future liabilities and costs under environmental, health and safety laws and regulations. Those liabilities and costs may be material.

The operation of any chemical manufacturing plant entails risk of adverse environmental events, including exposure to chemical products and byproducts from operations, and we can provide no assurance that material costs or liabilities will not be incurred to rectify any such damage. Our operations are inherently subject to accidental spills, discharges or other releases of hazardous substances that may make us liable to governmental entities or private parties. This may involve contamination associated with our current and former facilities, facilities to which we sent wastes or by-products for treatment or disposal and other contamination. Accidental discharges may occur in the future, future action may be taken in connection with past discharges, governmental agencies may assess damages or penalties against us in connection with any past or future contamination, or third parties may assert claims against us for damages allegedly arising out of any past or future contamination. In addition, we may be liable for existing contamination related to certain of our facilities for which, in some cases, we believe third parties are liable in the event such third parties fail to perform their obligations.

For more detailed information relating to the environment and safety regulations to which our operations are subject, please read “Business—Environmental and Safety Matters.”

Regulation of GHG emissions may have impacts on our business and financial condition that we currently cannot predict.

Passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict GHG emissions in areas in which we conduct business could adversely affect the demand for our products, and depending on the particular program adopted, could increase the costs of our operations, including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to our GHG emissions and/or administer and manage a GHG emissions program. These costs may be material and could have a material adverse effect on our business and results of operations.

 

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We are subject to claims associated with our production of MTBE.

Through our Houston, Texas processing facility, we have been one of the leading producers by production capacity of MTBE in North America. Our Port Neches, Texas facility was, prior to its acquisition by us, also a significant producer of MTBE. MTBE is a gasoline blending stock which reduces carbon monoxide and volatile organic compound emissions and enhances the octane content of unleaded gasoline. MTBE came into high demand in the 1990s to meet the oxygenate mandate imposed on domestic unleaded gasoline requirements under the Clean Air Act of 1990. As a result of the enactment of the energy bill in August 2005, the oxygenate mandate has been eliminated from the regulatory framework for unleaded gasoline. As a result, most U.S. domestic refiners have discontinued their use of MTBE in unleaded gasoline in the United States. We no longer sell MTBE in the United States market, focusing instead on opportunistic sales in export markets. We no longer produce MTBE at our Port Neches facility, and at our Houston facility we produce MTBE only as a by-product of our C4 processing operations, rather than from dedicated dehydrogenation units. The contemplated restart of one of the dehydrogenation units would provide us with the flexibility to produce MTBE for sale into international markets.

From time to time, legal actions may be initiated against us for alleged property damage and/or costs of remediation and replacement of water supplies due to the potential presence of MTBE, generally as a result of unleaded gasoline leakage from underground storage tanks. Please see “Business—Legal Proceedings” for a description of legal proceedings against or affecting us arising from MTBE. There can be no assurance, as to when lawsuits and related issues may arise or be resolved or the degree of any adverse affect these matters may have on our financial condition and results of operations. A substantial settlement payment or judgment could result in a significant decrease in our working capital and liquidity and recognition of a loss in our Consolidated Statement of Operations and Comprehensive Income.

New regulations concerning the production, transportation, use and disposal of hazardous chemicals and the security of chemical manufacturing facilities could result in higher operating costs.

Some of the raw materials we use and products we generate are considered hazardous materials or substances. For example, butadiene has been identified as a carcinogen in laboratory animals at high doses and is being studied for its potential adverse health effects on humans. Effective February 1997, the Occupational Safety and Health Administration substantially lowered the permissible employee exposure limit for butadiene. Future studies on the health effects of butadiene may result in additional regulations that further restrict the use of, and exposure to, butadiene. Additional regulation of butadiene or other products or materials used in or generated by our operations could require us to change our operations, and these changes could have a material adverse effect on our financial condition, results of operations and cash flows.

In addition, targets such as chemical manufacturing facilities may be at greater risk of terrorist attacks than other targets in the United States. The chemical industry responded to the issues surrounding the terrorist attacks of September 11, 2001 through initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States. In addition, local, state and federal governmental authorities have instituted various regulatory processes that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Any substantial increase in costs attributable to complying with such new regulations could have a material adverse effect on our financial condition, results of operations and cash flows.

Our operations depend on a limited number of key facilities, and the loss or shutdown of operations at one or more of these facilities would have a material adverse impact on our financial condition, results of operations and cash flows.

We have three significant processing facilities, which are located in Houston, Texas, Port Neches, Texas and Baytown, Texas. The loss or shutdown of operations over an extended period of time at one or more of these facilities would have a material adverse effect on our financial condition, results of operations and cash flows. Our operations, and those of our customers and suppliers, are subject to the usual hazards associated with

 

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chemical manufacturing and the related storage and transportation of feedstocks, products and wastes, including explosions, fires, inclement weather, natural disasters (including hurricanes and flooding), mechanical failure, pipeline leaks and ruptures, unscheduled downtime, transportation interruptions, chemical spills, discharges or releases of toxic or hazardous substances or gases and other environmental risks. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. We maintain property, business interruption and casualty insurance at levels which we believe are in accordance with customary industry practice, but there can be no assurance that we will not incur losses beyond the limits or outside the coverage of our insurance policies.

Further, as a part of normal recurring operations, certain of our processing units may be completely shut down from time to time, for a period typically lasting two to four weeks, to replace catalysts and perform major maintenance work required to sustain long-term production. These shutdowns are commonly referred to as “turnarounds.” While actual timing is subject to a number of variables, turnarounds typically occur every three to four years.

We may be liable for damages based on product liability claims brought against our customers.

Many of our products provide critical performance attributes to our customers’ products that are in turn sold to consumers. These consumers could potentially bring product liability suits in which we could be named as a defendant or which could cause our customers to seek contribution from us. A successful product liability claim or series of claims against us in excess of our applicable insurance coverage could have a material adverse effect on our financial condition, results of operations and cash flows.

Portions of our businesses depend on our intellectual property. If we are not able to protect our intellectual property rights, these businesses could be materially adversely affected.

We presently own, control or hold rights to 20 U.S. patents and 51 foreign patents, and we seek patent protection for our proprietary processes where feasible to do so. We have several patented processes and applications, such as our patents related to HR-PIB and the catalyst mechanism for the polymerization of PIB and DIB, that give certain products differentiated features. With technology being a key competitive factor in the markets served by our Performance Products segment and a significant driver to producing the best quality products, these patented processes and licenses enhance our product offerings to our customers.

We may be unable to prevent third parties from using our intellectual property without authorization. Proceedings to protect these rights could be costly and we may not prevail. While a presumption of validity exits with respect to patents issued to us, our patents may be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, as patents expire, the products and processes described and claimed under those patents become generally available for use by competitors. In addition, patent rights may not prevent our competitors from developing, using or selling products that are similar or functionally equivalent to our products and processes. Any of these occurrences could materially impact our business, particularly with respect to our HR-PIB product and our Performance Products segment generally.

Failure to adequately protect critical data and technology systems could materially affect our operations.

Information technology system failures, network disruptions and breaches of data security could disrupt our operations by causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, processing transactions and reporting financial results, resulting in the unintentional disclosure of customer or our information, or damage to our reputation. While management has taken steps to address these concerns by implementing network security and internal control measures, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and operating results.

 

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Any acquisitions we make may be unsuccessful if we incorrectly predict operating results, are unable to identify and complete future acquisitions, fail to successfully integrate acquired assets or businesses we acquire, or are unable to obtain financing for acquisitions on acceptable terms.

We believe that attractive acquisition opportunities may arise from time to time, and any such acquisition could be significant. At any given time, discussions with one or more potential sellers may be at different stages. However, any such discussions may not result in the consummation of an acquisition transaction, and we may be unable to obtain financing for acquisitions on acceptable terms or at all. We may not be able to identify or complete any acquisitions. In addition, we cannot predict the effect, if any, that any announcement or consummation of an acquisition would have on the trading price of the common stock of TPC Group Inc.

Any future acquisition could present a number of risks, including:

 

   

the risk of incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

 

   

the risk of failing to integrate the operations or management of any acquired operations or assets successfully and timely; and

 

   

the risk of diversion of management’s attention from existing operations or other priorities.

If we are unsuccessful in completing acquisitions of other operations or assets, our financial condition could be adversely affected and we may be unable to implement an important component of our business strategy successfully. In addition, if we are unsuccessful in integrating our acquisitions in a timely and cost-effective manner, our financial condition, results of operations and cash flows could be adversely affected.

Our business may be adversely affected by the loss of senior management personnel.

The success of our business is largely dependent on our senior management, as well as our ability to attract and retain other qualified personnel. We can provide no assurance that we will be able to attract and retain the personnel necessary for the continued development of our businesses. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our financial condition, results of operations and cash flows. We do not maintain “key person” life insurance on any of our key employees.

If we are unable to complete capital projects at their expected costs and in a timely manner, or if the market conditions assumed in our project economics deteriorate, our business, financial condition, results of operations and cash flows could be adversely affected.

Delays or cost increases related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities, such as our recently-announced initiative to restart our dehydrogenation assets at our Houston facility) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we make. Such delays or cost increases may arise as a result of unpredictable factors, many of which are beyond our control, including:

 

   

denial or delay in issuing requisite regulatory approvals and/or permits;

 

   

unplanned increases in the cost of construction materials or labor;

 

   

disruptions in transportation of components or construction materials;

 

   

adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors and suppliers;

 

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shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;

 

   

market-related increases in a project’s debt or equity financing costs; and

 

   

nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors.

Any one or more of these factors could have a significant impact on our ongoing capital projects. If we were unable to make up the delays associated with such factors or to recover the related costs, or if market conditions change, it could materially and adversely affect our business, financial condition, results of operations and cash flows.

A portion of our workforce is unionized, and we may face labor disruptions that could materially and adversely affect our operations.

Some of the employees at our Port Neches facility are covered by collective bargaining agreements that expire in February 2012. To the extent that we experience work stoppages in the future as a result of labor disagreements, a prolonged labor disturbance at one or more of our facilities could have a material adverse effect on our operations.

Risks Related to Our Indebtedness

We have a substantial amount of indebtedness, which could have a material adverse effect on our financial health and our ability to obtain financing in the future and to react to changes in our business.

As of June 30, 2011, we had outstanding debt consisting of $347.9 million of the original notes and no outstanding borrowings under our ABL Revolver. We also had the ability to access the full availability of $175.0 million under our ABL Revolver, which, if borrowed, would effectively rank senior to the notes to the extent of the collateral securing the ABL Revolver on a first-priority basis. In addition, the terms of our ABL Revolver and the indenture permit us to incur additional indebtedness, subject to our ability to meet certain borrowing conditions.

Our significant debt could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:

 

   

limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;

 

   

limit our ability to refinance our indebtedness on terms acceptable to us or at all;

 

   

require us to dedicate a significant portion of our cash flow from operations to paying the principal of and interest on our indebtedness, thereby reducing funds available for other corporate purposes; and

 

   

make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures.

The agreements and instruments governing our debt place specified limitations on incurrence of additional debt. Despite current indebtedness levels, we and our subsidiaries may be able to incur additional indebtedness in the future. If new debt is added to our current debt levels, the related risks would intensify.

The indenture governing the notes and the agreement governing the ABL Revolver impose significant operating and financial restrictions on us, which may prevent us from capitalizing on business opportunities.

The indenture governing the notes and the agreement governing the ABL Revolver impose restrictions on us which limit our ability, among other things, to:

 

   

incur additional indebtedness or issue certain disqualified stock and preferred stock;

 

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pay dividends or certain other distributions on TPC Group Inc.’s stock or repurchase TPC Group Inc.’s stock;

 

   

make certain investments or other restricted payments;

 

   

place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;

 

   

engage in transactions with affiliates;

 

   

sell certain assets or merge with or into other companies;

 

   

guarantee indebtedness; and

 

   

create liens.

As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is highly sensitive to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally, the indenture governing the notes and the credit agreement governing the ABL Revolver will limit the use of the proceeds from any disposition; as a result, we may not be allowed, under these documents, to use proceeds from such dispositions to satisfy all current debt service obligations.

Risks Related to the Notes

Lenders under the ABL Revolver, which will be secured by a first-priority lien on our trade accounts receivable, inventory, all payments and receivables in respect thereof and all general intangibles relating thereto (the “ABL Collateral”), will have rights senior to the rights of the holders of the notes with respect to the collateral securing the ABL Revolver.

As of June 30, 2011, we had the ability to access the full availability under the ABL Revolver of $175.0 million, all of which would be secured if borrowed and would effectively rank senior to the notes to the extent of the value of the first-priority ABL Collateral. Obligations under the ABL Revolver will be secured by a first-priority lien on the ABL Collateral, and a second-priority lien on the collateral securing the notes and related guarantees. Any rights to payment and claims by the holders of the notes will, therefore, be effectively junior to any rights to payment or claims by our creditors under the ABL Revolver with respect to distributions of such

 

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collateral. Only when our obligations under the ABL Revolver are satisfied in full will the proceeds of these assets be available, subject to other permitted liens, to satisfy obligations under the notes and guarantees. The notes will also be effectively junior to any other indebtedness collateralized by a higher-priority lien on our assets, to the extent of the realizable value of such collateral.

The proceeds from the sale of the collateral securing the notes may not be sufficient to satisfy all our obligations under the notes.

Obligations under the notes are secured by (i) a first-priority lien on substantially all of our and the guarantors’ existing assets (other than assets securing the ABL Revolver with a first-priority lien), subject to exceptions more fully described herein, and (ii) a second-priority lien on the ABL Collateral that secures the ABL Revolver on a first-priority basis. In the event of foreclosure on the collateral securing the ABL Revolver, the proceeds from the sale of the collateral securing the ABL Revolver on which the notes have a second-priority lien may not be available to satisfy the notes because proceeds from a sale of such collateral would, under the intercreditor agreement, be first applied to satisfy indebtedness and all other obligations under the ABL Revolver before any such proceeds are applied to satisfy our obligations in respect of the notes. Only after all of our obligations under the ABL Revolver have been satisfied will proceeds from the sale of such collateral be available to holders of the notes, at which time such proceeds will be applied ratably to satisfy our obligations under the notes.

The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. By its nature, some or all of the collateral may be illiquid and may have no readily ascertainable market value. The value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic conditions, competition or other future trends. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, no assurance can be given that the proceeds from any sale or liquidation of the collateral will be sufficient to pay our obligations under the notes, in full or at all, after first satisfying our obligations in full under first-priority claims. There also can be no assurance that the collateral will be saleable and, even if saleable, the timing of its liquidation would be uncertain. To the extent that liens, rights or easements granted to third parties encumber assets located on property owned by us, such third parties have or may exercise rights and remedies with respect to the property subject to such liens that could adversely affect the value of the collateral and the ability of the collateral agent to foreclose on the collateral. Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the notes. Any claim for the difference between the amount, if any, realized by holders of the notes from the sale of the collateral securing the notes and the obligations under the notes will rank equally in right of payment with all of our other unsecured unsubordinated indebtedness and other obligations, including trade payables.

The indenture permits us to incur additional indebtedness secured by a lien that ranks equally with the notes. Any such indebtedness may further limit the recovery from the realization of the value of such collateral available to satisfy holders of the notes.

It may be difficult to realize the value of the collateral pledged to secure the notes.

Our obligations under the notes and the guarantors’ obligations under the guarantees are secured only by the collateral described in this prospectus. The trustee’s ability to foreclose on the collateral on your behalf may be subject to perfection, priority issues, state law requirements and practical problems associated with the realization of the trustee’s security interest or lien in the collateral, including cure rights, foreclosing on the collateral within the time periods permitted by third parties or prescribed by laws, obtaining third party consents, making additional filings, statutory rights of redemption, and the effect of the order of foreclosure. We cannot assure you that the consents of any third parties and approvals by governmental entities will be given when required to facilitate a foreclosure on such assets. Therefore, we cannot assure you that foreclosure on the collateral will be sufficient to make all payments on the notes.

 

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Rights of holders of notes in the collateral may be adversely affected by the failure to perfect liens on certain collateral acquired in the future.

Applicable law requires that certain property and rights acquired after the grant of a general security interest or lien can only be perfected at the time such property and rights are acquired and identified. There can be no assurance that the trustee or the collateral agent will monitor, or that we will inform the trustee or the collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the lien on such after-acquired collateral. The collateral agent for the notes has no obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interests therein. Such failure may result in the loss of the practical benefits of the liens thereon or of the priority of the liens securing the notes.

We were not and are not required to deliver updated surveys with respect to the real property collateral for the notes, and there is no independent assurance that the mortgages create liens on the real property intended to constitute collateral for the notes.

In connection with the offering of original notes and this exchange offer, we were not and are not required to deliver updated surveys with respect to the owned real properties intended to secure the notes. As a result, other than coverage to be afforded by title insurance policies (which policies may contain exceptions from coverage for matters which an accurate survey of the covered real properties would disclose), there is no independent assurance that, among other things, (i) the real property encumbered by each mortgage includes the real property owned by the Company or the applicable guarantor granting such mortgage or (ii) no encroachments, adverse possession claims, zoning or other use restrictions exist with respect to such real property which could result in a material adverse effect on the value or utility of such real property.

State law may limit the ability of the trustee and the holders of the notes to foreclose on real property and improvements included in the collateral.

The notes are secured by, among other things, liens on the real property and improvements. State laws may limit the ability of the collateral agent and the holders of the notes to foreclose on improved real property collateral. State laws govern the perfection, enforceability and foreclosure of mortgage liens against real property which secure debt obligations such as the notes. These laws may impose procedural requirements for foreclosure different from and necessitating a longer time period for completion than the requirements for foreclosure of security interests in personal property. Debtors may have the right to reinstate defaulted debt (even if it has been accelerated) before the foreclosure date by paying the past due amounts and a right of redemption after foreclosure. Governing law may also impose security first and one form of action rules, which rules can affect the ability to foreclose or the timing of foreclosure on real and personal property collateral regardless of the location of the collateral and may limit the right to recover a deficiency following a foreclosure.

The holders of the notes and the trustee also may be limited in their ability to enforce a breach of the “no liens” covenant. Some decisions of certain state courts have placed limits on a lender’s ability to accelerate debt as a result of a breach of this type of a covenant. Under these decisions, a lender seeking to accelerate debt secured by real property upon breach of covenants prohibiting the creation of certain junior liens or leasehold estates may need to demonstrate that enforcement is reasonably necessary to protect against impairment of the lender’s security or to protect against an increased risk of default. Although the foregoing court decisions may have been preempted, at least in part, by certain federal laws, the scope of such preemption, if any, is uncertain. Accordingly, a court could prevent the trustee and the holders of the notes from declaring a default and accelerating the notes by reason of a breach of this covenant, which could have a material adverse effect on the ability of holders to enforce the covenant.

 

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The rights of holders of the notes to the collateral securing the ABL Revolver and their ability to enforce rights related to the collateral securing the ABL Revolver are materially limited by the Intercreditor Agreement.

Certain of our assets secure our ABL Revolver with a first lien and the notes with a second lien. The lenders under our ABL Revolver, as holders of first-priority lien obligations in such collateral, will control substantially all matters related to such collateral that secures the ABL Revolver with a first lien, pursuant to the terms of the intercreditor agreement. The holders of such first priority lien obligations may cause the collateral agent thereunder (the “first lien agent”) to dispose of, release, or foreclose on, or take other actions with respect to, the first-lien ABL Collateral (including amendments of and waivers under the security documents) with which holders of the notes may disagree or that may be contrary to the interests of holders of the notes, even after a default under the notes. To the extent first-lien ABL Collateral is released from securing the first-priority lien obligations, the intercreditor agreement provides that in certain circumstances, the second-priority liens securing the notes will also be released. In addition, the security documents related to the second-priority lien generally provide that, so long as such first-priority lien obligations are in effect, the holders of the first-priority lien obligations may change, waive, modify or vary the security documents governing such first-priority liens without the consent of the holders of the notes (except under certain limited circumstances) and that the security documents governing the second-priority liens will be automatically changed, waived and modified in the same manner. Further, the security documents governing the second-priority liens may not be amended in any manner adverse to the holders of the first-priority obligations without the consent of the first-lien agent until the first priority lien obligations are paid in full. The security agreement governing the second-priority liens prohibits second priority lienholders from foreclosing on the first-lien ABL Collateral until payment in full of the first priority lien obligations. We cannot assure you that in the event of a foreclosure by the holders of the first-priority lien obligations, the proceeds from the sale of first-lien ABL Collateral would be sufficient to satisfy all or any of the amounts outstanding under the notes after payment in full of the obligations secured by first-priority liens on the first-lien ABL Collateral.

In the event of our bankruptcy, the ability of the holders of the notes to realize upon the collateral will be subject to certain bankruptcy law limitations.

Under applicable U.S. federal bankruptcy laws, which are subject to change from time to time, absent bankruptcy court approval, secured creditors are generally prohibited from repossessing their security from a debtor in a bankruptcy case, and may also be prohibited from disposing of security previously repossessed from such a debtor. Moreover, applicable federal bankruptcy laws generally permit the debtor to continue to retain and to use collateral owned by the debtor, including cash collateral, even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.”

The meaning of the term “adequate protection” may vary according to the circumstances, but is intended generally to protect the value of the secured creditor’s interest in the collateral at the commencement of the bankruptcy case and may include cash payments or the granting of additional security if and at such times as the court, in its discretion, determines that a diminution in the value of the collateral occurs as a result of the stay of the repossession or the disposition of the collateral during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of a U.S. bankruptcy court, we cannot predict whether or when the trustee under the indenture for the notes could foreclose upon or sell the collateral or whether or to what extent holders of notes would be compensated for any delay in payment or loss of value of the collateral.

Moreover, the collateral agent and the indenture trustee may need to evaluate the impact of the potential liabilities before determining to foreclose on collateral consisting of real property, if any, because secured creditors that hold or enforce a security interest in real property may be held liable under environmental laws for the costs of remediating or preventing the release or threatened releases of hazardous substances at such real property. Consequently, the collateral agent may decline to foreclose on such collateral or exercise remedies available in respect thereof if it does not receive indemnification to its satisfaction from the holders of the notes.

 

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The collateral securing the notes may be diluted under certain circumstances.

The collateral that secures the notes by a second-priority lien will secure our obligations under the ABL Revolver by a first-priority lien. In the future this collateral, and the collateral securing the notes on a first-priority basis may secure additional senior indebtedness that the Company is permitted to incur. While the ABL Revolver and the indenture governing the notes contain restrictions on our ability to incur debt and liens in the future, to the extent we do incur any such additional secured debt, your rights to the collateral would be diluted by any increase in the indebtedness secured on a first-priority basis by this collateral.

Any future pledge of collateral might be avoidable in bankruptcy.

Any future pledge of collateral in favor of the trustee, including pursuant to security documents delivered after the date of the indenture governing the notes, might be avoidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including if the pledgor is insolvent at the time of the pledge, the pledge permits the holders of the notes to receive a greater recovery than they would have received in a hypothetical liquidation under Chapter 7 of the U.S. Bankruptcy Code if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90 days following the pledge, or, in certain circumstances, a longer period. To the extent that the grant of any such mortgage or other security interest is avoided as a preference, you would lose the benefit of the mortgage or security interest.

In the event of a bankruptcy of TPC Group LLC, holders of the notes may be deemed to have an unsecured claim to the extent that its obligations in respect of the notes exceed the fair market value of the collateral securing the notes.

In any bankruptcy proceeding with respect to TPC Group LLC or any of the guarantors, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the notes on the date of the bankruptcy filing was less than the then-current principal amount of the notes. Upon a finding by the bankruptcy court that the notes are under-secured, the claims in the bankruptcy proceeding with respect to the notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. In such event, the secured claims of the holders of notes would be limited to the value of the collateral.

Other consequences of a finding that the notes are under-secured would be, among other things, a lack of entitlement on the part of the notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the notes to receive other “adequate protection” under the U.S. Bankruptcy Code. In addition, if any payments of post-petition interest had been made at the time of such a finding that the notes are under-secured, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the notes.

The imposition of certain permitted liens will cause the assets on which such liens are imposed to be excluded from the collateral securing the notes and the guarantees.

The indenture permits liens in favor of third parties to secure additional debt, including purchase money indebtedness and capital lease obligations, and any assets subject to such liens are automatically excluded from the collateral securing the notes and the guarantees. Our ability to incur purchase money indebtedness and capital lease obligations is subject to the limitations as described in “Description of Exchange Notes.” If an event of default occurs and the notes are accelerated, the notes and the guarantees will rank equally with the holders of other unsubordinated and unsecured indebtedness of the relevant entity with respect to such excluded property.

The collateral is subject to casualty risks.

We intend to maintain insurance or otherwise insure against hazards in a manner appropriate and customary for our business. There are, however, certain losses that may be either uninsurable or not economically insurable,

 

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in whole or in part. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any of the pledged collateral, the insurance proceeds may not be sufficient to satisfy all of the secured obligations, including the notes and the guarantees.

U.S. federal and state statutes allow courts, under specific circumstances, to avoid the notes and the guarantees, subordinate claims in respect of the notes and the guarantees and require noteholders to return payments received from us or the guarantors.

Certain of our subsidiaries guarantee the obligations under the notes. Our issuance of the notes and the issuance of the guarantees by the guarantors may be subject to review under state and federal laws if a bankruptcy, liquidation or reorganization case or a lawsuit, including in circumstances in which bankruptcy is not involved, were commenced at some future date by, or on behalf of, our unpaid creditors or the unpaid creditors of a guarantor. Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, a court may avoid or otherwise decline to enforce the notes or a guarantor’s guarantee, or may subordinate the notes or such guarantee to our or the applicable guarantor’s existing and future indebtedness. While the relevant laws may vary from state to state, a court might do so if it found that when the notes were issued, or when the applicable guarantor entered into its guarantee, or, in some states, when payments became due under the notes or such guarantee, the issuer or the applicable guarantor received less than reasonably equivalent value or fair consideration and:

 

   

was insolvent or rendered insolvent by reason of such incurrence;

 

   

was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or

 

   

intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the notes. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an issuer or a guarantor, as applicable, would be considered insolvent if:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of its assets;

 

   

the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

A court might also avoid the notes or a guarantee, without regard to the above factors, if the court found that the notes were issued or the applicable guarantor entered into its guarantee with actual intent to hinder, delay or defraud its creditors. In addition, any payment by us or a guarantor pursuant to the notes or its guarantee could be avoided and required to be returned to us or such guarantor or to a fund for the benefit of our or such guarantor’s creditors, and accordingly the court might direct you to repay any amounts that you had already received from us or such guarantor.

To the extent a court avoids the notes or any of the guarantees as fraudulent transfers or holds the notes or any of the guarantees unenforceable for any other reason, holders of notes would cease to have any direct claim against us or the applicable guarantor. If a court were to take this action, our or the applicable guarantor’s assets would be applied first to satisfy our or the applicable guarantor’s other liabilities, if any, and might not be applied to the payment of the notes. Sufficient funds to repay the notes may not be available from other sources, including the remaining guarantors, if any.

 

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Each subsidiary guarantee contains a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. This provision may not be effective to protect the guarantees from being avoided under applicable fraudulent transfer laws or may reduce the guarantor’s obligation to an amount that effectively makes the guarantee worthless.

We may not be able to repurchase the notes upon a change of control or pursuant to an asset sale offer.

Upon a change of control of TPC Group Inc. or TPC Group LLC, as defined under the indenture governing the notes, the holders of notes will have the right to require us to offer to purchase all of the notes then outstanding at a price equal to 101% of their principal amount plus accrued and unpaid interest. In order to obtain sufficient funds to pay the purchase price of the outstanding notes, we expect that we would have to refinance the notes. We cannot assure you that we would be able to refinance the notes on reasonable terms, if at all. Our failure to offer to purchase all outstanding notes or to purchase all validly tendered notes would be an event of default under the indenture. Such an event of default may cause the acceleration of our other debt. Our other debt also may contain restrictions on repayment requirements with respect to specified events or transactions that constitute a change of control under the indenture.

In addition, in certain circumstances specified in the indenture governing the notes, we will be required to commence an asset sale offer, as defined in the indenture, pursuant to which we will be obligated to purchase the applicable notes at a price equal to 100% of their principal amount plus accrued and unpaid interest. Our other debt may contain restrictions that would limit or prohibit us from completing any such asset sale offer or event of loss offer. Our failure to purchase any such notes when required under the indenture would be an event of default under the indenture.

If a bankruptcy petition were filed by or against us, holders of notes may receive a lesser amount for their claim than they would have been entitled to receive under the indenture governing the notes.

If a bankruptcy petition were filed by or against us under the U.S. Bankruptcy Code after the issuance of the notes, the claim by any holder of the notes for the principal amount of the notes may be limited to an amount equal to the sum of:

 

   

the original issue price for the notes; and

 

   

that portion of the original issue discount (“OID”) that does not constitute “unmatured interest” for purposes of the U.S. Bankruptcy Code.

Any OID that was not amortized as of the date of the bankruptcy filing would constitute unmatured interest. Accordingly, holders of the notes under these circumstances may receive a lesser amount than they would be entitled to under the terms of the indenture governing the notes, even if sufficient funds are available.

Risks Related to the Exchange Offer

If you do not properly tender your original notes, you will continue to hold unregistered notes and your ability to transfer those original notes may be adversely affected.

If you do not exchange your original notes for exchange notes in the exchange offer, you will continue to be subject to the restrictions on transfer of your original notes described in the offering memorandum distributed in connection with the private placement of the original notes. In general, you may only offer or sell the original notes if they are registered under the Securities Act and applicable state securities laws or if they are offered and sold under an exemption from those requirements. We do not plan to register the offer and resale of the original notes under the Securities Act, unless required to do so under the limited circumstances set forth in the registration rights agreement. A sale of the original notes pursuant to an exemption from the registration requirements of the Securities

 

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Act and applicable state securities law may require the delivery of an opinion of counsel to us and the registrar or co-registrar for the original notes. In addition, the issuance of the exchange notes may adversely affect the liquidity of the trading market for untendered, or tendered but unaccepted, original notes. For further information regarding the consequences of not tendering your original notes in the exchange offer, see “The Exchange Offer—Consequences of Failure to Exchange.”

We will only issue exchange notes in exchange for original notes that you timely and properly tender into the exchange offer. Therefore, you should allow sufficient time to ensure timely delivery of your original notes and other required documents to the exchange agent and you should carefully follow the instructions on how to tender your original notes. Neither we nor the exchange agent are required to tell you of any defects or irregularities with respect to your tender of original notes. We may waive any defects or irregularities with respect to your tender of original notes, but we are not required to do so and may not do so.

You may find it difficult to sell your exchange notes as there is no established market for them. If a market does develop, it may be highly volatile.

Because there is no public market for the exchange notes, you may not be able to resell them. The exchange of the original notes for exchange notes will be registered under the Securities Act but the exchange notes will constitute a new issue of securities with no established trading market. We do not intend to have the exchange notes listed on a national securities exchange. There can be no assurance that an active trading market for the exchange notes will develop, or if one does develop, that it will be sustained.

Historically, the market for non-investment grade debt has been highly volatile in terms of price. It is possible that the market for the exchange notes will also be volatile. This volatility in price may affect your ability to resell your exchange notes, the timing of their sale and any amount you receive for them. The trading market for the exchange notes may be adversely affected by:

 

   

changes in the overall market for non-investment grade securities;

 

   

changes in our financial performance or prospects;

 

   

changes in our credit rating;

 

   

changes in members of our management;

 

   

change in our auditors;

 

   

the prospects for companies in our industry generally;

 

   

the number of holders of the exchange notes;

 

   

any acquisitions or business combinations proposed or consummated by us or our competitors;

 

   

the interest of securities dealers in making a market for the exchange notes; and

 

   

prevailing interest rates and general economic conditions.

Prospective investors in the exchange notes should be aware that they may be required to bear the financial risk of their investment for an indefinite period of time.

Some holders who exchange their original notes may be deemed to be underwriters and hence subject to subsequent transfer restrictions.

If you exchange your original notes in the exchange offer for the purpose of participating in a distribution of the exchange notes, you may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction involving the exchange notes. See “The Exchange Offer—Purpose and Effects of the Exchange Offer” and “Plan of Distribution.”

 

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THE EXCHANGE OFFER

This section of the prospectus describes the exchange offer. While we believe that the description covers the material terms of the exchange offer, this summary may not contain all of the information that is important to you. You should carefully read this entire document for a complete understanding of the exchange offer.

Purpose and Effects of the Exchange Offer

The purpose of the exchange offer is to satisfy our obligations under the registration rights agreement that we entered into with the initial purchasers of the original notes. We originally issued and sold $350,000,000 principal amount of original notes in a private placement on October 5, 2010 in accordance with Rule 144A and Regulation S under the Securities Act.

We are offering to exchange up to the entire $350,000,000 principal amount of original notes for a like principal amount of exchange notes.

Under the registration rights agreement, we are required, among other things, to:

 

   

file a registration statement registering the proposed offer and exchange of any and all original notes for registered exchange notes with substantially identical terms;

 

   

keep the exchange offer open for not less than 20 business days after the date notice thereof is mailed to holders of the original notes; and

 

   

complete the exchange offer on or prior to August 1, 2011 (the 300th day after the issue date of the original notes).

In addition, under certain circumstances, we may be required to use commercially reasonable efforts to file a shelf registration statement to cover resales of original notes.

If we fail to comply with the requirements of the registration rights agreement the interest rate on the original notes may increase. Specifically, if (i) the exchange offer is not completed (or, if the exchange offer is not permitted, the shelf registration statement is not declared effective) on or before the date that is 300 days after the closing date (the “Target Registration Date”) or (ii) a shelf registration statement requested by an initial purchaser is not declared effective within 180 days after the request (also a “Target Registration Date”), the annual interest rate borne by the original notes will be increased by 0.25 percent per annum with respect to the first 90 days after the applicable Target Registration Date, and, if the exchange offer is not completed (or, if required, the shelf registration statement is not declared effective) prior to the end of such 90-day period, by an additional 0.25 percent per annum (together with the increase described in the preceding clause, as applicable, the “Additional Interest”), in each case until the exchange offer is completed or the shelf registration statement is declared effective; however, upon the effectiveness of the exchange offer registration statement or a shelf registration statement, Additional Interest on the notes as a result of the provisions of this paragraph will cease to accrue. Notwithstanding the foregoing, in no event will the Additional Interest exceed 1.0 percent per annum in the aggregate.

We have not requested, and do not intend to request, an interpretation by the staff of the SEC with respect to whether the exchange notes may be offered for sale, resold or otherwise transferred by any holder without compliance with the registration and prospectus delivery provisions of the Securities Act. Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, including Exxon Capital Holdings Corp. (available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) and Shearman & Sterling (available July 2, 1993), we believe the exchange notes may be offered for resale, resold and otherwise transferred by any holder without compliance with the registration and prospectus delivery provisions of the Securities Act provided such holder meets the following conditions:

 

   

such holder is not a broker-dealer who purchased original notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act,

 

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such holder is not our or any subsidiary guarantor’s “affiliate,” and

 

   

such holder acquires exchange notes in the ordinary course of its business and has no arrangement or understanding with any person to participate in the distribution of the exchange notes.

If you do not satisfy all of the above conditions, you cannot participate in the exchange offer. Rather, in the absence of an exemption you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a resale of the original notes. Any holder that complies with such registration and prospectus delivery requirements may incur liabilities under the Securities Act for which the holder will not be entitled to indemnification from us.

A broker-dealer that has bought original notes for its own account as part of its market-making or other trading activities must deliver a prospectus in order to resell the exchange notes it receives therefor pursuant to the exchange offer. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer for such purpose, and we have agreed in the registration rights agreement to make this prospectus available to such broker-dealers upon reasonable request for the period required by the Securities Act. See “Plan of Distribution.” Each broker-dealer that receives exchange notes in the exchange offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of exchange notes. The accompanying letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

We are not making the exchange offer to, nor will we accept surrenders for exchange from, holders of original notes in any jurisdiction in which this exchange offer or its acceptance would not comply with applicable state securities laws or applicable laws of a foreign jurisdiction.

Participation in the exchange offer is voluntary and you should carefully consider whether to participate. We urge you to consult your financial and tax advisors in making your decision on whether to participate in the exchange offer.

Consequences of Failure to Exchange

Original notes that are not exchanged for exchange notes in the exchange offer will remain “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, and will therefore continue to be subject to restrictions on transfer. Original notes will remain outstanding and will continue to accrue interest, but holders of such original notes will not be able to require us to register them under the Securities Act, except in the limited circumstances set forth in the registration rights agreement. Accordingly, following completion of the exchange offer any original notes that remain outstanding may not be offered, sold, pledged or otherwise transferred except:

 

  (1) to us, upon redemption thereof or otherwise,

 

  (2) so long as the original notes are eligible for resale pursuant to Rule 144A, to a person whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A, purchasing for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or other transfer is being made in reliance on Rule 144A,

 

  (3) in an offshore transaction in accordance with Regulation S under the Securities Act,

 

  (4) pursuant to an exemption from registration in accordance with Rule 144, if available, under the Securities Act,

 

  (5) in reliance on another exemption from the registration requirements of the Securities Act, or

 

  (6) pursuant to an effective registration statement under the Securities Act.

 

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In all of the situations discussed above, the resale must be in compliance with the Securities Act, any applicable securities laws of any state of the United States and any applicable securities laws of any foreign country. Any resale of original notes will also be subject to certain requirements of the registrar or any co-registrar being met, including receipt by the registrar or co-registrar of a certification and, in the case of (3), (4) and (5) above, an opinion of counsel reasonably acceptable to us and the registrar and any co-registrar.

To the extent original notes are tendered and accepted in the exchange offer, the principal amount of outstanding original notes will decrease with a resulting decrease in the liquidity in the market therefor. Accordingly, the liquidity of the market of the original notes could be adversely affected following completion of the exchange offer. See “Risk Factors—Risks Related to the Exchange Offer—If you do not properly tender your original notes, you will continue to hold unregistered notes and your ability to transfer those original notes may be adversely affected.”

Terms of the Exchange Offer

Upon the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal, a copy of which is attached to this prospectus as Annex A, we will accept any and all original notes validly tendered (and not withdrawn) on or prior to the Expiration Date. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of original notes accepted in the exchange offer. The exchange notes will accrue interest on the same terms as the original notes; however, holders of the original notes accepted for exchange will not receive accrued interest thereon at the time of exchange; rather, all accrued interest on the original notes will become obligations under the exchange notes. Holders may tender some or all of their original notes pursuant to the exchange offer. However, original notes may be tendered only in denominations of $2,000 and integral multiples of $1,000 principal amount in excess thereof.

The form and terms of the exchange notes are the same as the form and terms of the original notes, except that:

 

   

the exchange notes will have been registered under the Securities Act, and the exchange notes will not bear legends restricting their transfer pursuant to the Securities Act, and

 

   

except as otherwise described above, holders of the exchange notes will not be entitled to any rights under the registration rights agreement.

The exchange notes will evidence the same debt as the original notes that they replace, and will be issued under, and be entitled to the benefits of, the indenture which governs the original notes, including the payment of principal and interest.

We are sending this prospectus and the letter of transmittal to holders of the original notes through the facilities of The Depositary Trust Company, or DTC, whose nominee, Cede & Co, is the registered holder of the original notes. The original notes are represented by permanent global notes in fully registered form, without coupons, which have been deposited with the trustee for the notes, as custodian for DTC. Ownership of beneficial interests in each global note is limited to persons who have accounts with DTC, or DTC participants, or persons who hold interests through DTC participants. The term “holder,” as used in this prospectus, means those DTC participants in whose name interests in the global notes are credited on the books of DTC, and those persons who hold interests through such DTC participants. The term “original notes,” as used in this prospectus, means such interests in the global notes. Like the original notes, the exchange notes will be deposited with the trustee for the notes as custodian for DTC, and registered in the name of Cede & Co., as nominee of DTC.

Holders of the original notes do not have any appraisal or dissenter’s rights under Delaware law or the indenture governing the notes in connection with the exchange offer. We intend to conduct the exchange offer in accordance with the requirements of the Exchange Act and the SEC’s rules and regulations thereunder.

 

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We will be deemed to have accepted validly tendered original notes when, as and if we have given written notice thereof to the exchange agent, which is Wells Fargo Bank, National Association. The exchange agent will act as agent for the tendering holders of the original notes for the purposes of receiving the exchange notes. The exchange notes delivered in the exchange offer will be issued promptly following the Expiration Date.

If any tendered original notes are not accepted for exchange because they do not comply with the procedures set forth in this prospectus and the accompanying letter of transmittal, our withdrawal of the exchange offer, the occurrence of certain other events set forth herein or otherwise, such unaccepted original notes will be returned, without expense, to the tendering holder promptly after the Expiration Date or our withdrawal of the exchange offer. Any acceptance, waiver of default or a rejection of a tender of original notes shall be at our discretion and shall be conclusive, final and binding.

Holders who tender original notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of the original notes in the exchange offer. We will pay all charges and expenses, other than certain taxes, in connection with the exchange offer. See “—Fees and Expenses.”

Expiration Date; Extensions; Amendments

The term “Expiration Date” with respect to the exchange offer means 5:00 p.m., New York City time, on [                    ], 2011 unless we, in our sole discretion, extend the exchange offer, in which case the term “Expiration Date” shall mean the latest date and time to which the exchange offer is extended.

If we extend the exchange offer, we will notify the exchange agent of any extension by written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, no later than on the next business day after the previously scheduled Expiration Date. Any notice relating to the extension of the exchange offer will disclose the number of securities tendered as of the date of the notice, as required by Rule 14e-1(d) under the Exchange Act.

We reserve the right, in our sole discretion,

 

   

to extend the exchange offer,

 

   

if any of the conditions set forth below under “—Conditions to the Exchange Offer” have not been satisfied, to terminate the exchange offer or waive any conditions that have not been satisfied, or

 

   

to amend the terms of the exchange offer in any manner.

We may effect any such extension, waiver, termination or amendment by giving written notice thereof to the exchange agent.

Except as specified in the second paragraph under this heading, we will make a public announcement of any such extension, termination, amendment or waiver as promptly as practicable. If we amend or waive any condition of the exchange offer in a manner determined by us to constitute a material change to the exchange offer, we will promptly disclose such amendment or waiver in a prospectus supplement that will be distributed to the holders of the original notes. The exchange offer will then be extended for a period of five to ten business days, as required by law, depending upon the significance of the amendment or waiver and the manner of disclosure to the registered holders.

We will make a timely release of a public announcement of any extension, termination, amendment or waiver to the exchange offer to an appropriate news agency.

 

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Procedures for Tendering Original Notes

Tenders of Original Notes; Book- Entry Delivery Procedure.

All of the original notes are held in book-entry form, and tenders may be made through DTC’s Book-Entry Transfer Facility or the guaranteed delivery procedures set forth below.

The exchange agent will establish an account with respect to the original notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in DTC that wishes to participate in the exchange offer may make book-entry delivery of the original notes by causing DTC to transfer such original notes into the exchange agent’s account in accordance with DTC’s procedures for such transfer. The confirmation of a book-entry transfer into the exchange agent’s account at DTC is referred to as a “Book-Entry Confirmation.” In addition, DTC participants on or before the Expiration Date must either:

 

   

properly complete and duly execute the letter of transmittal (or a facsimile thereof), and any other documents required by the letter of transmittal, and mail or otherwise deliver the letter of transmittal or such facsimile, with any required signature guarantees, to the exchange agent at one or more of its addresses below, or

 

   

transmit their acceptance through DTC’s Automated Tender Offer Program, or ATOP, for which the exchange offer is eligible, and DTC will then edit and verify the acceptance and send an Agent’s Message to the exchange agent for its acceptance.

The term “Agent’s Message” means a message transmitted by DTC to, and received by, the exchange agent and forming a part of the Book-Entry Confirmation, which states that DTC has received an express acknowledgment from the participant in DTC tendering the original notes that such participant has received the letter of transmittal and agrees to be bound by the terms of the letter of transmittal, and that we may enforce such agreement against such participant.

Although delivery of original notes is to be effected through book-entry at DTC, the letter of transmittal (or facsimile thereof), with any required signature guarantees, or an Agent’s Message in connection with a book-entry transfer, and any other required documents, must, in any case, be transmitted to and received by the exchange agent at one or more of its addresses set forth below on or prior to the Expiration Date, or compliance must be made with the guaranteed delivery procedures described below. Delivery of the letter of transmittal or other required documents to DTC does not constitute delivery to the exchange agent.

The tender by a holder of original notes pursuant to the procedures set forth above will constitute the tendering holder’s acceptance of all of the terms and conditions of the exchange offer. Our acceptance for exchange of original notes tendered pursuant to the procedures described above will constitute a binding agreement between such tendering holder and us in accordance with the terms and subject to the conditions of the exchange offer. Only holders are authorized to tender their original notes.

The method of delivery of original notes and letters of transmittal, any required signature guarantees and all other required documents, including delivery through DTC and any acceptance or Agent’s Message transmitted through ATOP, is at the election and risk of the persons tendering original notes and delivering letters of transmittal. If you use ATOP, you must allow sufficient time for completion of the ATOP procedures during normal business hours of DTC on or prior to the Expiration Date. Tender and delivery will be deemed made only when actually received by the exchange agent. If delivery is by mail, it is suggested that the holder use properly insured, registered mail, postage prepaid, with return receipt requested, and that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the exchange agent prior to such date.

Except as provided below, unless the original notes being tendered are delivered to the exchange agent on or prior to the Expiration Date (accompanied by a completed and duly executed letter of transmittal or a properly

 

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transmitted Agent’s Message), we may, at our option, reject the tender of such original notes. The exchange of original notes for exchange notes will be made only against the tendered original notes, which must be deposited with the exchange agent prior to or on the Expiration Date, and receipt by the exchange agent of all other required documents prior to or on the Expiration Date.

Tender of Original Notes Held Through a Nominee. If you beneficially own original notes through a bank, depository, broker, trust company or other nominee and wish to tender your original notes, you must instruct such holder to cause your original notes to be tendered on your behalf. A letter of instruction from your bank, depository, broker, trust company or other nominee may be included in the materials provided along with this prospectus, which the beneficial owner may use to instruct its nominee to effect the tender of the original notes of the beneficial owner.

Signature Guarantees. Signatures on all letters of transmittal must be guaranteed by a recognized member of the Medallion Signature Guarantee Program or by any other “eligible guarantor institution,” as that term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing, an “Eligible Institution”), unless the original notes tendered thereby are tendered (1) by a participant in DTC whose name appears on a DTC security position listing as the owner of such original notes who has not completed either the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal, or (2) for the account of an Eligible Institution. See Instructions 5 and 6 of the letter of transmittal. If the original notes are in the name of a person other than the signer of the letter of transmittal or if original notes not accepted for exchange or not tendered are to be returned to a person other than the holder of such original notes, then the signatures on the letter of transmittal accompanying the tendered original notes must be guaranteed by an Eligible Institution as described above. See Instructions 5 and 6 of the letter of transmittal.

Guaranteed Delivery. If you wish to tender your original notes but they are not immediately available or if you cannot deliver your original notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC’s automated tender offer program prior to the Expiration Date, you may tender if:

 

   

the tender is made by or through an eligible institution;

 

   

prior to 5:00 p.m., New York City time, on the Expiration Date, the exchange agent receives from that eligible institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail, courier or overnight delivery or a properly transmitted Agent’s Message relating to a notice of guaranteed delivery:

 

   

stating your name and address, the registration number or numbers of your original notes and the principal amount of original notes tendered;

 

   

stating that the tender is being made thereby;

 

   

guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date of the exchange offer, the letter of transmittal or facsimile thereof or Agent’s Message in lieu thereof, together with the original notes or a book-entry confirmation, and any other documents required by the letter of transmittal, will be deposited by the eligible institution with the exchange agent; and

 

   

the exchange agent receives such properly completed and executed letter of transmittal or facsimile or Agent’s Message, as well as all tendered original notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three New York Stock Exchange trading days after the Expiration Date.

Upon request to the exchange agent, the exchange agent will send a notice of guaranteed delivery to you if you wish to tender your original notes according to the guaranteed delivery procedures described above. See Instruction 2 of the letter of transmittal.

 

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Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered original notes will be determined by us, which determination will be conclusive, final and binding. Alternative, conditional or contingent tenders of original notes will not be considered valid and may be rejected by us. We reserve the absolute right to reject any and all original notes not properly tendered or any original notes our acceptance of which, in the opinion of our counsel, would be unlawful.

We also reserve the right to waive any defects, irregularities or conditions of tender as to particular original notes. The interpretation of the terms of our exchange offer (including the instructions in the letter of transmittal) by us will be conclusive, final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of original notes must be cured within such time as we shall determine.

Although we intend to notify holders of defects or irregularities with respect to tenders of original notes through the exchange agent, neither we, the exchange agent nor any other person is under any duty to give such notice, nor shall they incur any liability for failure to give such notification. Tenders of original notes will not be deemed to have been made until such defects or irregularities have been cured or waived.

Any original notes tendered into the exchange agent’s account at DTC that are not validly tendered and as to which the defects or irregularities have not been cured or waived within the timeframes established by us in our sole discretion, if any, or if original notes are submitted in a principal amount greater than the principal amount of original notes being tendered by such tendering holder, such unaccepted or non-exchanged original notes will be credited back to the account maintained by the applicable DTC participant with such book-entry transfer facility.

Withdrawal of Tenders

Tenders of original notes in the exchange offer may be withdrawn at any time on or prior to the Expiration Date.

To be effective, any notice of withdrawal must specify the name and number of the account at DTC to be credited with such withdrawn original notes and must otherwise comply with DTC’s procedures.

If the original notes to be withdrawn have been identified to the exchange agent, a signed notice of withdrawal meeting the requirements discussed above is effective immediately upon the exchange agent’s receipt of written or facsimile notice of withdrawal even if physical release is not yet effected. A withdrawal of original notes can only be accomplished in accordance with these procedures. Any failure to follow these procedures will not result in any original notes being withdrawn. We and the exchange agent may reject any withdrawal request not in accordance with these procedures.

All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by us, which determination shall be final and binding on all parties. No withdrawal of original notes will be deemed to have been properly made until all defects or irregularities have been cured or expressly waived. Neither we, the exchange agent nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or revocation, nor shall we or they incur any liability for failure to give any such notification. Any original notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer and no exchange notes will be issued with respect thereto unless the original notes so withdrawn are retendered on or prior to the Expiration Date. Properly withdrawn original notes may be retendered by following the procedures described above under “—Procedures for Tendering Original Notes” at any time on or prior to the Expiration Date.

Any original notes which have been tendered but which are not accepted for exchange due to the rejection of the tender due to uncured defects or the prior termination of the exchange offer, or which have been validly

 

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withdrawn, will be returned to the holder thereof unless otherwise provided in the letter of transmittal, promptly following the Expiration Date or, if so requested in the notice of withdrawal, promptly after receipt by us of notice of withdrawal without cost to such holder.

Conditions to the Exchange Offer

The exchange offer will not be subject to any conditions, other than:

 

   

that the exchange offer does not violate applicable law or any applicable interpretations of the staff of the SEC;

 

   

that no action or proceeding shall have been instituted or threatened in any court or by any governmental agency with respect to the exchange offer;

 

   

the due tendering of original notes and the delivery to the exchange agent of the letter of transmittal or an Agent’s Message (and all other required documents), or compliance with the guaranteed delivery procedures, each in accordance with the exchange offer; and

 

   

that each holder of the original notes exchanged in the exchange offer shall have represented (i) that any exchange notes to be received by it will be acquired in the ordinary course of its business, (ii) that at the time of the commencement of the exchange offer it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the exchange notes in violation of the Securities Act, (iii) that it is not an “affiliate” (as defined in Rule 405 promulgated under the Securities Act) of us or any subsidiary guarantor, (iv) if such holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of exchange notes and (v) if such holder is a broker-dealer that will receive exchange notes in exchange for notes that were acquired as a result of market-making or other trading activities, it will deliver a prospectus in connection with any resale of such exchange notes.

If we determine that any of the conditions to the exchange offer are not satisfied in accordance with their terms, we may:

 

   

refuse to accept any original notes and return all tendered original notes to the tendering holders,

 

   

terminate the exchange offer,

 

   

extend the exchange offer and retain all original notes tendered prior to the Expiration Date, subject, however, to the rights of holders to withdraw such original notes, or

 

   

waive such unsatisfied conditions with respect to the exchange offer and accept all validly tendered original notes which have not been withdrawn.

If our waiver of an unsatisfied condition constitutes a material change to the exchange offer, we will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the holders of the original notes, and will extend the exchange offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders, if the exchange offer would otherwise expire during such five to ten business day period.

Exchange Agent

Wells Fargo Bank, National Association has been appointed as exchange agent for the exchange offer. The exchange agent will not be (i) liable for any act or omission unless such act constitutes its own gross negligence or bad faith and in no event will the exchange agent be liable to a security holder, TPC Group LLC or any third party for special, indirect or consequential damages, or lost profits, arising in connection with the exchange offer or its duties and responsibilities related to the exchange offer; (ii) obligated to take any legal action with respect to the exchange offer which might in its judgment involve any expense or liability, unless it will be furnished with indemnity satisfactory to it; and (iii) liable or responsible for any statement contained in this prospectus.

 

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TPC Group LLC will indemnify the exchange agent with respect to certain matters relating to the exchange offer.

You should direct questions and requests for assistance, requests for additional copies of this prospectus, the letter of transmittal or the notice of guaranteed delivery and requests for other documents to the exchange agent as follows:

Delivery by Registered or Certified Mail:

WELLS FARGO BANK, N.A.

Corporate Trust Operations

MAC N9303-121

PO Box 1517

Minneapolis, MN 55480

Regular Mail or Overnight Courier:

WELLS FARGO BANK, N.A.

Corporate Trust Operations

MAC N9303-121

Sixth & Marquette Avenue

Minneapolis, MN 55479

In Person by Hand Only:

WELLS FARGO BANK, N.A.

12th Floor – Northstar East Building

Corporate Trust Operations

608 Second Avenue South

Minneapolis, MN 55402

By Facsimile (for Eligible Institutions only):

(612) 667-6282

For Information or Confirmation by

Telephone:

(800) 344-5128

Fees and Expenses

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail by the exchange agent; however, additional solicitation may be made by telecopy, telephone or in person by our or our affiliates’ officers and regular employees.

No dealer-manager has been retained in connection with the exchange offer and no payments will be made to brokers, dealers or others soliciting acceptance of the exchange offer. However, reasonable and customary fees will be paid to the exchange agent for its services and it will be reimbursed for its reasonable out-of-pocket expenses.

Our out-of-pocket expenses for the exchange offer will include fees and expenses of the exchange agent and the trustee under the indenture governing the notes, accounting and legal fees and printing costs, among others.

Transfer Taxes

We will pay all transfer taxes, if any, applicable to the exchange of the original notes pursuant to the exchange offer. If, however, exchange notes or original notes for principal amounts not tendered or accepted for

 

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exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the original notes, or if tendered original notes are registered in the name of any person other than the person signing the letter of transmittal, or if a transfer tax is imposed for any reason other than the exchange of the original notes pursuant to the exchange offer, then the amount of any such transfer taxes (whether imposed on the tendering holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder.

Accounting Treatment for the Exchange Offer

The exchange notes will be recorded at the carrying value of the original notes and no gain or loss for accounting purposes will be recognized. The expenses of the exchange offer will be amortized over the term of the exchange notes.

 

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USE OF PROCEEDS

The exchange offer is intended to satisfy our obligations under the registration rights agreement relating to the original notes. We will not receive any proceeds from the issuance of the exchange notes in the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive, in exchange, outstanding original notes in like principal amount. We will cancel all original notes tendered in exchange for exchange notes in the exchange offer. The exchange notes will accrue interest on the same terms as the original notes, and all accrued interest on the original notes will become obligations under the exchange notes. As a result, the issuance of the exchange notes will not result in any increase or decrease in our indebtedness or in the early payment of interest.

The net proceeds from the sale of the original notes on October 5, 2010 were $339.0 million after discounts and directly related fees and other costs. Of the total proceeds, $268.8 million were used to repay Term Loan indebtedness and the remaining $70.2 million were designated to partially fund a $130.0 million distribution by TPC Group LLC to TPC Group Inc. Of the total $130.0 million distribution, $62.5 million was used to purchase shares of TPC Group Inc.’s common stock and pay directly related fees and other costs in connection with a tender offer and $30.0 million was approved by TPC Group Inc.’s Board of Directors to be utilized in a stock purchase program. As of June 30, 2011, TPC Group Inc. had purchased 282,532 shares under the program in the open market at an average of $27.59 per share, for a total of $7.8 million. TPC Group Inc. did not purchase any shares during the second quarter of 2011.

 

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CAPITALIZATION

The following table sets forth the capitalization of TPC Group LLC as of June 30, 2011. The issuance of the exchange notes will not result in any change in our outstanding indebtedness. This table should be read in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

     As of June 30, 2011  

(in millions)

      

Cash and cash equivalents

   $ 4.9   
  

 

 

 

Debt:

  

ABL Revolver

     —     

8 1/4% Senior Secured Notes due 2017

     347.9   
  

 

 

 

Total debt

     347.9   

TPC Group LLC members’ equity

     245.2   
  

 

 

 

Total capitalization of TPC Group LLC

   $ 593.1   
  

 

 

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data (amounts in thousands, other than ratios) for TPC Group LLC and its consolidated subsidiaries, at the dates and for the periods indicated. The selected historical consolidated financial data as of and for the six months ended December 31, 2010 and as of and for the fiscal years ended June 30, 2010, 2009, 2008, 2007 and 2006 have been derived from our historical consolidated financial statements and related notes included elsewhere in this prospectus, which have been audited by Grant Thornton LLP. Selected historical consolidated financial data as of and for the six months ended June 30, 2011 and 2010 and as of and for the six months ended December 31, 2009 are derived from our unaudited consolidated financial statements.

The selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto and the other financial information included in this prospectus.

 

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    Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
    2011     2010     2010     2009     2010     2009     2008     2007     2006  
    (unaudited)           (unaudited)                                

Statements of Operations Data:

                 

Revenue

  $ 1,348,483      $ 932,559      $ 985,505      $ 755,925      $ 1,688,484      $ 1,376,874      $ 2,016,198      $ 1,781,520      $ 1,237,745   

Cost of sales (excludes items listed below)

    1,153,173        794,988        855,043        649,169        1,444,156        1,194,173        1,752,191        1,540,097        1,037,495   

Operating expenses

    74,248        68,172        67,068        65,009        133,181        132,268        131,191        124,368        69,335   

General and administrative expenses

    15,419        16,549        12,735        13,282        29,834        32,756        36,656        29,315        29,028   

Depreciation and amortization

    20,366        19,651        19,762        20,117        39,769        41,899        35,944        29,111        14,245   

Asset impairment

    —          —          —          —          —          5,987        —          —          —     

Loss on sale of assets

    —          —          —          —          —          —          1,092        —          —     

Business interruption insurance recoveries

    —          —          —          (17,051     (17,051     (10,000     —          —          —     

Reorganization expenses

    —          —          —          —          —          —          —          —          1,894   

Unauthorized freight (recoveries) payments

    —          —          —          —          —          (4,694     499        6,812        2,543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    85,277        33,199        30,897        25,399        58,595        (15,515     58,625        51,817        83,205   

Interest expense, net

    17,056        7,513        11,411        7,494        15,007        16,817        18,876        17,024        2,327   

Write-off term loan debt issuance cost

    —          —          2,959        —          —          —          —          —          —     

Debt conversion cost

    —          —          —          —          —          —          —          —          20,920   

Unrealized (gain) loss on derivatives

    —          (2,092     —          (1,372     (3,464     3,710        (99     (146     —     

Other (income) expense, net

    (949     (1,238     (779     (1,047     (2,287     (1,623     (1,394     37        (1,183
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    69,170        29,016        17,306        20,324        49,339        (34,419     41,242        34,902        61,141   

Income tax expense (benefit)

    23,418        10,465        5,152        8,238        18,702        (11,817     14,456        11,336        20,332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 45,752      $ 18,551      $ 12,154      $ 12,086      $ 30,637      $ (22,602   $ 26,786      $ 23,566      $ 40,809   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statements of Cash Flows Data:

                 

Cash (used in) provided by operating activities

  $ 10,479      $ 129,253      $ (22,550   $ (2,828   $ 126,427      $ 47,170      $ 57,729      $ 94,863      $ 52,796   

Cash used in investing activities

                 

Capital expenditures

    (20,845     (9,830     (13,151     (4,570     (14,400     (16,128     (87,783     (100,425     (46,206

Purchase of business assets

    —          —          —          —          —          —          (70,000     —          (208,791

Cash flows provided by (used in) financing activities

                 

Proceeds from term loan borrowings

    —          —          —          —          —          —          70,000        —          210,000   

Proceeds from issuance of 8 1/4% Notes Senior Secured Notes

    —          —          347,725        —          —          —          —          —          —     

Repayments on Term Loan

    —          (1,352     (269,470     (1,747     (3,100     (2,744     (2,595     (2,092     —     

Net proceeds from (payments on)—Revolving Credit Facility

    —          (400     —          400        —          (21,800     21,800        —          —     

Debt issuance costs

    —          (4,621     (8,989     —          (4,621     —          —          —          —     

Capital distributions to parent

    (68,605     —          (61,395     —          —          —          —          —          —     

Other Financial Data:

                 

Ratio of Earnings to Fixed Charges(1)

   
3.0
  
    2.9        2.2        3.7        4.2        —   (2)      2.7        2.6        16.2   
    Six Months Ended
June 30,
    December 31,     June 30,  
    2011     2010     2010     2009     2010     2009     2008     2007     2006  
Balance Sheet Data:   (unaudited)           (unaudited)                                

Cash and cash equivalents

  $ 4,887      $ 111,146      $ 83,858      $ 367      $ 111,146      $ 6,503      $ 585      $ 9,474      $ 20,336   

Trade accounts receivable

    291,995        116,407        177,065        139,020        116,407        98,515        200,449        161,364        176,734   

Inventories

    166,345        94,607        89,264        73,387        94,607        36,884        102,462        83,959        72,534   

Property, plant and equipment, net

    484,993        491,082        484,492        500,871        491,082        516,377        545,972        494,030        420,102   

Total assets

    1,022,882        873,622        913,747        805,479        873,622        714,841        905,895        790,773        735,226   

Current liabilities

    311,872        196,731        180,860        140,356        196,731        108,573        248,847        272,588        256,011   

Long-term debt

    347,912        250,421        347,786        268,525        250,421        269,855        294,370        205,837        207,908   

Deferred income taxes

    117,874        111,432        117,874        99,559        111,432        52,090        61,251        44,889        33,289   

Total liabilities

    777,658        558,584        646,520        508,440        558,584        430,518        604,468        523,314        497,208   

 

(1) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before taxes, plus fixed charges, less capitalized interest, and fixed charges consist of interest expense (net of capitalized interest), plus capitalized interest, plus amortized discounts related to indebtedness.
(2) The deficiency in the fiscal year ended June 30, 2009 was $35,437.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

On July 15, 2010, TPC Group Inc.’s Board of Directors and TPC Group LLC’s managers each approved a change in fiscal year end from June 30 to December 31, which was effective as of January 1, 2011. The intent of the change was to align the reporting of our financial results more closely with our peers and to better synchronize our management processes and business cycles with those of our suppliers and customers.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in this prospectus. References in this report to fiscal 2010, 2009 and 2008 indicate the twelve month periods ended June 30, 2010, 2009 and 2008, respectively. Financial information with respect to the six months ended June 30, 2011 and 2010 and the six months ended December 31, 2009 is unaudited.

Overview

We manage our business and conduct our activities in two operating segments, our C4 Processing segment and our Performance Products segment. These two operating segments are our reporting segments. In the C4 Processing segment, we process the crude C4 stream into several higher value components, namely butadiene, butene-1, raffinates and MTBE. In our Performance Products segment, we produce high purity isobutylene and we process isobutylene to produce higher value derivative products, such as polyisobutylene and diisobutylene. We also process refinery grade propylene into nonene, tetramer and associated by-products as a part of our Performance Products segment. We produce steam and electricity for our own use at our Houston facility, and we sell a portion of our steam production as well as excess electricity, which are reported as part of our C4 Processing segment.

The primary driver of our businesses is general economic and industrial growth. Our results are impacted by the effects of economic upturns or downturns on our customers and our suppliers, as well as on our own costs to produce, sell and deliver our products. Our customers generally use our products in their own production processes; therefore, if our customers curtail production of their products, our results could be materially affected. In particular, our feedstock costs and product prices are susceptible to volatility in pricing and availability of crude oil, natural gas and oil-related products such as unleaded regular gasoline. Prices for these products tend to be volatile as well as cyclical, as a result of global and local economic factors, worldwide political events, weather patterns and the economics of oil and natural gas exploration and production, among other things.

Material Industry Trends

We receive most of our crude C4 from steam crackers, which are designed to process naphtha and natural gas liquids (NGLs) as feedstocks for ethylene production. Crude C4 is a byproduct of the ethylene production process, and the volume of crude C4 produced by the process is driven by both the volume of ethylene produced and the composition of the steam cracker feedstock. Some major ethylene producers have the flexibility to vary from light feedstocks, such as NGLs, to heavier feedstocks, such as naphtha, or vice versa depending on the economics of the feedstock. When ethylene producers process heavier feedstock, greater volumes of crude C4 are produced. However, when light feedstocks are inexpensive relative to heavy feedstocks, the producers may choose to process those light feedstocks instead, a process referred to as “light cracking,” which results in lower volumes of crude C4 production. Throughout 2010 and the first half of 2011, NGL prices have remained attractive relative to naphtha; consequently, light cracking has been prevalent and crude C4 supply has been reduced over the same period, which has had a negative impact on our C4 Processing segment production and sales volumes.

 

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The upward trend in petroleum prices, related commodity market indices, general economic conditions and demand that created increasingly favorable market conditions for our products over the course of 2010 continued through the first half of 2011. Since a substantial portion of our product selling prices and raw material costs are linked to commodity indices (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene), we experienced upward trends in both our selling prices and raw material costs during 2010 and the first half of 2011. Over this same period of time our selling prices and margins have also been positively impacted by structurally tight supply and generally strong demand for our products.

2011 Developments

In February 2011, we undertook a process toward restarting one of the dehydrogenation units at our Houston facility. We own two independent, world scale dehydrogenation units with technology that allows the production of a single, targeted olefin from natural gas liquid feedstock, as opposed to steam cracking technology which generates a wide range of various olefins.

The dehydrogenation units, which were previously used to produce isobutylene, were idled in October 2007 in conjunction with the completion of a capital project which allowed us to externally source isobutylene feedstock at our Houston facility. From the time the assets were idled and through the first three quarters of fiscal 2009, the carrying value of the assets was not considered to be impaired because there were a number of realistic and probable alternative uses for the assets by which the carrying value would have been recovered. However, during the fourth quarter of fiscal 2009, due in large part to the decreased availability of financing and lack of opportunities for alternative uses of the units attributable to the ongoing global economic recession, and the fact that the assets had been idled for almost two years, we concluded that it was no longer likely that market conditions necessary to justify a significant investment in the assets would occur in the foreseeable future. Consequently, the likelihood of recovery of the carrying amount of these assets had been substantially reduced and, in the fourth quarter of fiscal 2009, we recorded an asset impairment charge of $6.0 million to write down the carrying value of these assets to zero.

At the time we recorded the impairment we were purchasing isobutylene under a supply contract that contained pricing terms that were more advantageous than the cost of producing isobutylene from our own dehydrogenation units, taking into account startup costs. Subsequently, the supply contract under which we were purchasing isobutylene was revised, as a result of bankruptcy proceedings by the supplier, which resulted in an increase in isobutylene costs under the contract, such that self-supplying isobutylene from the dehydrogenation units became more advantageous.

The engineering study described above contemplates the restart of one of these units. The isobutylene produced from the refurbished dehydrogenation unit will provide an additional strategic source of feedstock for our rapidly growing fuel products and performance products businesses. We estimate the refurbished dehydrogenation unit will produce approximately 650 million pounds of isobutylene per year from isobutane, a natural gas liquid whose production volumes continue to increase as a result of U.S. shale gas development, allowing us to evaluate a variety of sourcing options.

Subsequently, on July 13, 2011, TPC Group Inc. announced that (1) we received the Texas Commission on Environmental Quality (TCEQ) air permit necessary to proceed with the planned refurbishment, upgrade to air emissions controls, and restart one of our idled dehydrogenation units; (2) construction of the required new components for the system, along with refurbishment of the existing unit, began promptly following receipt of the permit; (3) we completed the primary phase of engineering on the project that commenced in January of this year; and (4) TPC Group Inc.’s Board of Directors approved the next phase of engineering, which is expected to be completed by the end of 2011. The refurbished dehydrogenation unit is projected to be operational in the first quarter of 2014.

On February 21, 2011, TPC Group Inc. announced the election of Eugene Allspach as a new member of its Board of Directors, which increased its size from seven to eight members. Mr. Allspach currently serves as

 

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President of E.R. Allspach & Associates, LLC, a consulting company to new business development activities in the petrochemical industry and has nearly 38 years of experience in the plastics and chemical industries.

On March 3, 2011, TPC Group Inc. announced that its Board of Directors had approved a stock purchase program for up to $30.0 million of TPC Group Inc.’s common stock. Purchases of common stock under the program have been and will be executed periodically in the open market or in privately negotiated transactions in accordance with applicable securities laws. The stock purchase program does not obligate the Company to purchase any dollar amount or number of shares of common stock, does not have an expiration date and may be limited or terminated at any time by the Board of Directors without prior notice. As of June 30, 2011, TPC Group Inc. had purchased 282,532 shares under the program in the open market at an average of $27.59 per share, for a total of $7.8 million. TPC Group Inc. did not purchase any shares during the second quarter of 2011. The shares purchased were immediately retired and any additional shares to be purchased under the program will be retired immediately. Any future purchases will depend on many factors, including the market price of the shares, our business and financial position and general economic and market conditions.

On March 18, 2011, TPC Group Inc. announced that its Board of Directors elected Michael T. McDonnell as President and Chief Executive Officer and appointed him to the Board of Directors, each effective March 22, 2011. Mr. McDonnell replaced Charles W. Shaver in those roles. Mr. Shaver retired as President and Chief Executive Officer on March 22, 2011, and retired from the Board of Directors effective on that date.

On March 28, 2011, Kenneth E. Glassman, a former member of the Board of Directors of TPC Group Inc., notified TPC Group Inc. that he would not stand for reelection as a director upon the expiration of his term at TPC Group Inc.’s 2011 Annual Meeting of Stockholders.

Effective June 6, 2011, the Board of Directors of TPC Group Inc. elected Rishi Varma as Vice President and General Counsel. Mr. Varma replaced Christopher A. Artzer, who resigned from those roles on March 11, 2011.

On August 9, 2011, TPC Group Inc. announced that its Board of Directors approved funding for the next phase of engineering to produce on-purpose butadiene, targeting the restart of the second dehydrogenation unit at our Houston facility, coupled with construction of a TPC Group OXO-DTM production unit. Normal butane, a natural gas liquid whose production volumes continue to increase as a result of U.S. shale gas development, has been selected as the primary feedstock. Utilization of the TPC Group OXO-DTM technology allows highly efficient on-purpose butadiene production, and is expected to yield up to 600 million pounds per year of product with this project and to have the capability to expand as needed through additional phases as the market grows. This engineering phase is expected to be completed by the end of the first quarter 2012.

As previously discussed, the dehydrogenation asset referred to above was one of two that were idled in October 2007. During the fourth quarter of fiscal 2009, due in large part to the decreased availability of financing and lack of opportunities for alternative uses of the units attributable to the ongoing global economic recession, and the fact that the assets had been idled for almost two years, we concluded that it was no longer likely that market conditions necessary to justify a significant investment in the assets would occur in the foreseeable future. Consequently, the likelihood of recovery of the carrying amount of these assets had been substantially reduced and, in the fourth quarter of fiscal 2009, we recorded an asset impairment charge of $6.0 million to write down the carrying value of these assets to zero. We have undertaken the restart project described above to realize potential improvements in feedstock costs. After completion of the project, the dehydrogenation unit, utilizing butane feed, will be used to produce butadiene in order to meet growing market demand in North America. As discussed above, butane is in good supply in the U.S. due to shale gas development, as compared to the ongoing structural shortage of supply of our traditional crude C4 supply due to light cracking at ethylene crackers. Light cracking, and the resulting tightness in crude C4 supply, has become more prevalent since the time we recorded the impairment.

On August 29, 2011, TPC Group Inc. and Luis E. Batiz, Senior Vice President of Operations, mutually agreed that Mr. Batiz will retire effective January 1, 2012.

 

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Results of Operations

The following table provides sales volumes (unaudited), revenues, cost of sales, operating expenses and Adjusted EBITDA (defined below) by reportable segment (amounts in thousands) for the six months ended June 30, 2011 and 2010, the six months ended December 31, 2010 and 2009 and the three most recent fiscal years ended June 30, 2010, 2009 and 2008. The table also provides a reconciliation of Adjusted EBITDA to Net Income, the GAAP measure most directly comparable to Adjusted EBITDA. Please refer to this information, as well as the selected financial data and our consolidated financial statements and related notes provided in this prospectus when reading our discussion and analysis of results of operations below. Revenues, cost of sales, operating expenses and Adjusted EBITDA in the table below for the six months ended December 31, 2010 and the fiscal years ended June 30, 2010, 2009 and 2008 are derived from our audited Consolidated Statements of Operations and Comprehensive Income. Sales volumes for all periods presented and all information presented for the six months ended June 30, 2011 and 2010 and the six months ended December 31, 2009 constitute unaudited information.

Adjusted EBITDA is not a measure computed in accordance with generally accepted accounting principles in the United States (GAAP). A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets, or statements of cash flows (or equivalent statements); or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

Adjusted EBITDA is presented and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations because management believes it enhances understanding by investors and lenders of the Company’s operating performance. As a complement to financial measures provided in accordance with GAAP, management believes that Adjusted EBITDA assists investors and lenders who follow the practice of some investment analysts who adjust GAAP financial measures to exclude items that may obscure underlying performance outlook and trends and distort comparability. In addition, management believes a presentation of Adjusted EBITDA on a segment and consolidated basis enhances overall understanding of our performance by providing a higher degree of transparency for such items and providing a level of disclosure that helps investors understand how management plans, measures and evaluates our operating performance and allocates capital. Since Adjusted EBITDA is not a measure computed in accordance with GAAP, it is not intended to be presented herein as a substitute to operating income or net income as indicators of the Company’s operating performance. Adjusted EBITDA is the primary performance measurement used by our senior management and TPC Group Inc.’s Board of Directors to evaluate operating results and to allocate capital resources between our business segments.

 

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We calculate Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization (EBITDA), which is then adjusted to remove or add back certain items. These items are identified below in the reconciliation of Adjusted EBITDA to Net Income (Loss), the GAAP measure most directly comparable to Adjusted EBITDA. As shown in the table below, during the six months ended December 31, 2010, we revised our previous definition of Adjusted EBITDA for the C4 Processing segment for the periods indicated to remove the effect of business interruption insurance recoveries and unauthorized freight recoveries/payments. We have concluded that removal of these items, which we consider to be non-recurring in nature, enhances the period-to-period comparability of our operating results and is more useful to securities analysts, investors and other interested parties in their understanding of our operating performance. In addition, as also shown in the table below, during the first quarter of 2011 we further revised our previous definition of Adjusted EBITDA for the periods indicated to no longer remove the effect of non-cash stock-based compensation and unrealized gains and losses on derivative financial instruments, because they are recurring in nature. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies; therefore, it may not be comparable to other companies.

 

     Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
     2011      2010     2010     2009     2010     2009     2008  
     (unaudited)           (unaudited)                    

Sales volumes (unaudited) (lbs)(1):

               

C4 Processing

     1,272,448         1,175,704        1,184,316        1,265,600        2,441,304        2,270,670        2,802,257   

Performance Products

     338,082         311,666        302,593        289,924        601,590        576,550        732,439   

MTBE(2)

     —           —          —          —          —          —          172,596   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,610,530         1,487,370        1,486,909        1,555,524        3,042,894        2,847,220        3,707,292   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues:

               

C4 Processing

   $ 1,093,398       $ 724,277      $ 792,427      $ 604,410      $ 1,328,687      $ 1,061,939      $ 1,483,736   

Performance Products

     255,085         208,282        193,078        151,515        359,797        314,935        466,352   

MTBE(2)

     —           —          —          —          —          —          66,110   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,348,483         932,559      $ 985,505      $ 755,925      $ 1,688,484      $ 1,376,874      $ 2,016,198   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales(3):

               

C4 Processing

   $ 942,581       $ 633,516      $ 705,004      $ 524,384      $ 1,157,899      $ 940,798      $ 1,306,666   

Performance Products

     210,592         161,472        150,039        124,785        286,257        253,375        386,340   

MTBE(2)

     —           —          —          —          —          —          59,185   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,153,173       $ 794,988      $ 855,043      $ 649,169      $ 1,444,156      $ 1,194,173      $ 1,752,191   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(3):

               

C4 Processing

   $ 53,363       $ 49,943      $ 47,907      $ 46,671      $ 96,614      $ 98,442      $ 93,947   

Performance Products

     20,885         18,229        19,161        18,338        36,567        33,826        36,527   

MTBE(2)

     —           —          —          —          —          —          717   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 74,248       $ 68,172      $ 67,068      $ 65,009      $ 133,181      $ 132,268      $ 131,191   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA—as previously defined(4):

               

C4 Processing

          $ 50,407      $ 91,225      $ 37,391      $ 82,624   

Performance Products

            8,391        36,974        27,736        43,485   

MTBE(2)

            —          —          —          6,207   

Corporate

            (11,604     (26,362     (24,822     (28,767
         

 

 

   

 

 

   

 

 

   

 

 

 
          $ 47,194      $ 101,837      $ 40,305      $ 103,549   
         

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
     2011     2010     2010     2009     2010     2009     2008  
     (unaudited)           (unaudited)                    

Adjusted EBITDA—as previously defined during six months ended December 31, 2010(4):

              

C4 Processing(6)

   $ 97,453      $ 40,818      $ 39,516      $ 33,356      $ 74,174      $ 22,697      $ 83,123   

Performance Products

     23,608        28,581        23,879        8,391        36,974        27,736        43,485   

MTBE(2)

     —          —          —          —          —          —          6,207   

Corporate

     (13,619     (14,756     (11,256     (11,604     (26,362     (24,822     (28,767
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 107,442      $ 54,643      $ 52,139      $ 30,143      $ 84,786      $ 25,611      $ 104,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)— current definition(4)(5):

              

C4 Processing(6)

   $ 97,453      $ 40,818      $ 39,516      $ 33,356      $ 74,174      $ 22,697      $ 83,123   

Performance Products

     23,608        28,581        23,879        8,391        36,974        27,736        43,485   

MTBE(2)

     —          —          —          —          —          —          6,207   

Corporate

     (14,469     (13,219     (11,956     (10,863     (24,084     (34,843     (35,162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 106,592      $ 56,180      $ 51,439      $ 30,884      $ 87,064      $ 15,590      $ 97,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Sales volumes represent product sales volumes only and do not include volumes of products delivered under tolling or similar arrangements, in which we do not purchase the raw materials, but process raw materials for another party for a specified fee.
(2) As reported in the above table, the “MTBE” segment represents MTBE produced by our Houston dehydrogenation units. In conjunction with the start-up of our isobutylene processing unit in the first quarter of fiscal 2008, the dehydrogenation units were idled, and all MTBE produced from those units was sold by the end of the second quarter of fiscal 2008. Beginning with third quarter of fiscal 2008, MTBE production as a byproduct of the crude C4 isobutylene process was insignificant, and related revenues and operating results were included in the C4 Processing segment.
(3) Does not include depreciation and amortization expense.
(4) See above for a discussion of Adjusted EBITDA and the revision during the six months ended December 31, 2010 of our previous definition of Adjusted EBITDA to remove from Adjusted EBITDA the effect of the business interruption insurance recoveries and the unauthorized freight payments/recoveries. See below for reconciliations of Adjusted EBITDA to Net Income (Loss) for the periods presented. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations.
(5) See above for a discussion of Adjusted EBITDA and the further revision during the first quarter of 2011 of our previous definition of Adjusted EBITDA to no longer remove the effect of non-cash stock-based compensation and unrealized gains and losses on derivative financial instruments, because they are recurring in nature. See below for reconciliations of Adjusted EBITDA to Net Income (Loss) for the periods presented. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations.
(6) In accordance with our current definition of Adjusted EBITDA, as described above, the business interruption insurance recoveries in fiscal 2010 and 2009 and the unauthorized freight recoveries and payments in fiscal 2009 and 2008 have been removed from C4 Processing segment Adjusted EBITDA for purposes of this presentation, since we believe inclusion of these items in Adjusted EBITDA would distort comparability between the periods presented.

 

 

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The following table provides a reconciliation of Adjusted EBITDA (current definition) to Net Income (Loss) (in thousands) for the six months ended June 30, 2011 and 2010, the six months ended December 31, 2010 and 2009 and the three most recent fiscal years ended June 30, 2010, 2009 and 2008. Net Income (Loss) is the most directly comparable GAAP measure reported in the Consolidated Statements of Operations and Comprehensive Income.

 

    Six Months Ended
June 30,
    Six Months Ended
December 31,
    Fiscal Year Ended June 30,  
    2011     2010     2010     2009     2010     2009     2008  
    (unaudited)           (unaudited)                    

Net income (loss)

  $ 45,752      $ 18,551      $ 12,154      $ 12,086      $ 30,637      $ (22,602   $ 26,786   

Income tax expense (benefit)

    23,418        10,465        5,152        8,238        18,702        (11,817     14,456   

Interest expense, net

    17,056        7,513        14,371 (1)      7,494        15,007        16,817        18,876   

Depreciation and amortization

    20,366        19,651        19,762        20,117        39,769        41,899        35,944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    106,592        56,180        51,439        47,935        104,115        24,297        96,062   

Impairment of assets

    —          —          —          —          —          5,987        —     

Loss on sale of assets

    —          —          —          —          —          —          1,092   

Non-cash stock-based compensation

    850        555        700        631        1,186        6,311        6,494   

Unrealized (gain) loss on derivatives

    —          (2,092     —          (1,372     (3,464     3,710        (99
       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as previously defined

          47,194        101,837        40,305        103,549   

Unauthorized freight (recoveries) payments

    —          —          —          —          —          (4,694     499   

Business interruptions insurance recoveries

    —          —          —          (17,051     (17,051     (10,000     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA as previously defined during six months ended December 31, 2010

    107,442        54,643        52,139        30,143        84,786        25,611        104,048   

Non-cash stock-based compensation

    (850     (555     (700     (631     (1,186     (6,311     (6,494

Unrealized gain on derivatives

    —          2,092        —          1,372        3,464        (3,710     99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA—current definition (unaudited)

  $ 106,592      $ 56,180      $ 51,439      $ 30,884      $ 87,064      $ 15,590      $ 97,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $3.0 million write-off of previously deferred debt issuance costs related to the Term Loan discussed below.

 

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The cost of our raw material feedstock purchases is usually determined by application of index-based formulas contained in many of our raw material supply contracts. Through these index-based formulas our raw material costs are linked to commodity market indices (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene) or to the selling price of the related finished product. The selling prices of our finished products are also typically determined from index-based formulas contained in many of our sales contracts and, in most cases, the indices used to determine finished product selling prices are the same indices used to determine the cost of the corresponding raw material feedstock. The linkage between the costs of our raw material feedstocks and the selling prices of our finished products to the same indices mitigates, to varying degrees, our exposure to volatility in our material margin percentage (which we define as the difference between average revenue per pound and average raw material cost per pound as a percentage of average revenue per pound).

The following table summarizes the primary indices which impact our revenues and raw material costs, by segment.

 

Finished Product

  

Revenues

  

Raw Material Costs

C4 Processing Segment

     

Butadiene

   Butadiene    Butadiene

Butene – 1

   Unleaded regular gasoline    Unleaded regular gasoline

Raffinates

   Unleaded regular gasoline    Unleaded regular gasoline

MTBE

   Unleaded regular gasoline    Unleaded regular gasoline

Performance Products Segment

     

High purity isobutylene

   Butane    Unleaded regular gasoline

Diisobutylene

  

Butane

   Butane

Polyisobutylene

  

Butane

   Butane

Nonene

   Refinery grade propylene    Refinery grade propylene

Tetramer

   Refinery grade propylene    Refinery grade propylene

The following table summarizes the average index prices for each period presented.

 

     Six Months
Ended

June 30,
     Six Months
Ended
December 31,
     Year Ended
June 30,
 
     2011      2010      2010      2009      2010      2009      2008  

Average commodity prices:

                    

Butadiene (cents/lb)(1)

     118.2         79.0         89.5         61.8         70.4         63.7         62.7   

Unleaded regular gasoline (cents/gal)(2)

     284.0         208.6         209.2         186.8         197.7         183.7         247.9   

Butane (cents/gal)(3)

     181.0         149.3         150.2         125.3         137.3         116.8         177.0   

Refinery grade propylene (cents/lb)(1)

     73.4         48.8         46.8         43.3         46.0         34.2         55.3   

 

(1) Industry pricing was obtained through the Chemical Market Associates, Inc.
(2) Industry pricing was obtained through Platts.
(3) Industry pricing was obtained through the Oil Price Information Service.

Six months ended June 30, 2011 versus six months ended June 30, 2010

Revenues

Total revenues for the first six months of 2011 were $1,348.5 million, an increase of $415.9 million, or 45%, compared to total revenues of $932.6 million for the comparable prior year period. The increase in revenues reflected a 34% increase in the overall average unit selling price, due to rising commodity prices across most of our product line portfolio, and an increase of 8% in overall sales volume. The higher average unit selling price for the first half of 2011 reflected the favorable trend over the past year in overall market conditions for our products as well as the upward trend in petroleum prices and related commodity market indices to which a substantial portion of our product selling prices are linked.

 

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C4 Processing segment revenues of $1,093.3 million for the six months ended June 30, 2011 were up $369.1 million, or 51%, compared to the first half of 2010. The increase was driven by both higher selling prices and higher sales volume, which reflected higher commodity prices, growing global demand from our customers and structurally tight supply of our products due to ethylene crackers processing lighter feedstocks. The average unit selling price for the segment was up 40%, which had a positive impact of $309 million, and sales volume was up 8%, which had a positive impact of $60 million. The average unit selling price for butadiene increased 50% compared to the comparable prior year period and average selling prices for butene-1 and our fuel-related products also increased due to a 36% increase in the average price of unleaded regular gasoline. The increased sales volume consisted primarily of an increase in sales of fuel related products.

Performance Products segment revenues for the first half of 2011 were $255.1 million compared to $208.3 million for the comparable prior year period, an increase of $46.8 million, or 23%. The improvement reflected the combined impact of a 13% increase in average unit selling price for the segment and 8% higher sales volume. The higher average unit selling price and higher sales volume contributed $29 million and $18 million, respectively, to the overall improvement. The higher average unit selling price reflected a 21% increase in the average price of butane, which is a major pricing component of our isobutylene derivative products, and an increase of 50% in the average price of refinery grade propylene, which is a major pricing component of our propylene derivative products. The higher sales volume consisted primarily of an increase in sales of propylene derivative products, which reflected both strong demand and plant operating improvements.

Cost of sales

Total cost of sales (which excludes depreciation and amortization expense) was $1,153.2 million for the six months ended June 30, 2011 compared to $795.0 million for the first six months of 2010. The overall $358.2 million, or 45%, increase reflected 38% higher average raw material cost and the 8% increase in sales volume. Total cost of sales represented 86% and 85% of total revenues for the six months ended June 30, 2011 and 2010, respectively.

C4 Processing segment cost of sales was $942.6 million for the first half of 2011 compared to $633.5 million for the first half of 2010, which represents an increase of $309.1 million, or 49%. The increase was driven primarily by 38% higher average unit cost of sales, which increased cost of sales by $257 million and, to a lesser degree, the 8% higher sales volume which had a $52 million impact. Cost of sales for the six months ended June 30, 2011 and 2010 included favorable butadiene inventory effects of approximately $35 million and $14 million, respectively, as average inventory values coming into both periods were lower than the average cost of raw materials purchased during the respective periods. C4 Processing segment cost of sales as a percentage of segment revenues was 86% and 87% for the six month periods ended June 30, 2011 and 2010, respectively.

Performance Products segment cost of sales were $210.6 million for the first half of 2011 compared to $161.5 million for the comparable prior year period, which represents an increase of $49.1 million, or 30%. The increase reflected the combined effect of 20% higher average unit cost of sales and 8% higher sales volume. The impact of the higher average unit cost and higher sales volume was $35 million and $14 million, respectively. The higher average unit cost reflected substantially higher raw material costs for all product lines within the segment. High purity isobutylene raw material costs are linked to unleaded regular gasoline prices, which were up 36% over the prior year period. Isobutylene derivatives raw material costs are linked to butane prices, which were up 21%. Propylene derivatives raw material costs are linked to propylene costs, which were up 50%. Performance Products segment cost of sales as a percentage of segment revenues was 83% for the first half of 2011 and 78% for the first half of 2010. During the current year period raw material costs and margins for nonene and tetramer were negatively impacted by an upward trend in refinery grade propylene pricing while the comparable prior year period, in contrast, was positively impacted by a downward trend in propylene pricing. In addition, the current year period high purity isobutylene margins were negatively impacted by an unfavorable relationship between butane and gasoline prices compared to the prior year period. Higher sales volumes of by-product streams which carry near breakeven margins also contributed to the higher percentage in the current year period.

 

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The cost of our raw material feedstock purchases is usually determined by application of index-based formulas contained in many of our raw material supply contracts. Through these index-based formulas our raw material costs are linked to commodity market indices (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene) or to the selling price of the related finished product. The selling prices of our finished products are also typically determined from index-based formulas contained in many of our sales contracts and, in most cases, the indices used to determine finished product selling prices are the same indices used to determine the cost of the corresponding raw material feedstock. The linkage between the costs of our raw material feedstocks and the selling prices of our finished products to the same indices mitigates, to varying degrees, our exposure to volatility in our material margin percentage (which we define as the difference between average revenue per pound and average raw material cost per pound as a percentage of average revenue per pound). Although these index-based pricing formulas provide relative stability in our material margin percentage over time, it is not perfectly constant due to various factors, including those listed below. Please also see “Business—Supplier Purchase Agreements”.

 

   

Although most of our supply and sales contracts contain index-based formulas, varying proportions of our raw material purchases and finished product sales are done on a spot basis or otherwise negotiated terms. In addition, while many of the index-based formulas in our contracts are simply based on a percentage of the relevant index, others apply adjustment factors to the market indices that do not fluctuate with changes in the underlying index. In periods when market indices are high, the use of non-fluctuating adjustment factors tends to reduce the material margin percentage; and conversely, in periods when market indices are low the non-fluctuating adjustment factors tend to increase the material margin percentage.

 

   

We may purchase raw material feedstocks in one period based on market indices for that period, and then sell the related finished products in a later period based on market indices for the later period. Changes in selling prices of finished products, based on changes in the underlying market indices between the period the raw material feedstocks are purchased and the related finished products are sold, lessens the effect of the matching indices and causes variation in our material margin percentage. The magnitude of the effect on material margin percentage depends on the magnitude of the change in the underlying indices between the period the raw material is purchased and the period the finished product is sold and the quantity of the inventory impacted by the change.

 

   

Finished product selling price formulas under some of our sales contracts, primarily in the Performance Products segment, are based on commodity indices not for the period in which the sale occurs but for either a prior or subsequent period. The effect on profit margins of these selling price formulas is diminished during times of relatively stable market indices, but can have a substantial effect during times of rapidly increasing or decreasing market indices, which can impact our material margin percentage.

 

   

In times of rapidly declining market indices, the selling price of finished products inventory could fall below the carrying cost, which may result in lower-of-cost or market adjustments in periods before the finished products are sold. This has occurred in the past, primarily related to fuel-based inventory being devalued by other than short-term declines in unleaded regular gasoline prices, which is the market index upon which the fuel-related product selling prices are based. Recognition of lower-of-cost-or-market adjustments would negatively impact the material margin percentage in the period recognized.

Across-the-board increases in the market indices used in our index-based raw material costs and finished products selling prices for the first half of 2011 versus the comparable prior year period were the drivers behind the higher overall average selling price and the higher overall average raw material cost noted above. The 34% increase in the average selling price equated to $0.21 per pound and the 38% increase in the average raw material cost equated to $0.19 per pound, for an improvement in overall average material margin of $0.02 per pound. As a result of the combination of factors noted above, which have an impact on material margin percentage, the material margin percentage for the six months ended June 30, 2011 declined to 20% from 23% in the prior year period.

 

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Operating expenses

Operating expenses incurred during the first half of 2011 were $74.2 million compared to $68.2 million for the comparable prior year period. The primary components of the $6.1 million, or 9%, increase were higher plant maintenance expenses of $3.2 million, higher personnel costs of $1.2 million, and sales and use tax expense of $1.2 million. The higher maintenance expenses included a write-off of $1.1 million of previously deferred turnaround cost as a result of accelerating the timing of a planned turnaround at the Houston facility. The higher sales and use tax expense compared to the prior year reflected recognition of an estimate of a refund during the first quarter of 2010 with final true-up during the second quarter of 2010 based on results of an audit by the State of Texas that was completed during the second quarter of 2010.

General and administrative expenses

General and administrative expenses of $15.4 million for the six months ended June 30, 2011 were down $1.1 million compared to the prior year period. The overall decline primarily reflected lower costs for contract services and professional fees.

Depreciation and amortization expense

Depreciation and amortization expense was $20.4 million for the first six months of 2011 compared to $19.7 million for the first six months of 2010. The slightly higher depreciation expense reflected depreciation on projects completed over the past year, none of which were individually significant.

Interest expense, net

Interest expense, net for the first six months of 2011 was $17.1 million, compared to $7.5 million for the comparable prior year period. The increase reflected the impact of our long-term debt refinancing in October 2010, in which we repaid the full $268.8 million principal amount of our Term Loan with proceeds from the issuance of $350.0 million of notes, which are due in 2017. For the prior year period the interest rate on the Term Loan was LIBOR plus a spread of 2.50%.

Unrealized gain/loss on derivatives

We had no derivative instruments in place at any time during the six months ended June 30, 2011. We had an unrealized gain of $2.1 million during the first half of 2010 that consisted entirely of a gain on an interest rate swap related to our Term Loan that expired on June 30, 2010.

Other, net

Other, net for the first half of 2011 consisted primarily of income from our investment in Hollywood/Texas Petrochemicals LP, which is accounted for under the equity method. The comparable prior year period includes a comparable amount of income from our investment in Hollywood/Texas Petrochemicals LP as well as income from sale of scrap materials. We and Kirby Inland Marine, Inc. formed this joint venture to operate four barges capable of transporting chemicals.

Income tax expense

Our effective income tax rates for the six month periods ended June 30, 2011 and 2010 were 33.9% and 36.1%, respectively. The effective rate for the first half of 2011 was based on the projected effective rate for the year ending December 31, 2011 and the effective rate for the first half of 2010 was based on the actual effective rate for the fiscal year ended June 30, 2010. The projected effective rate for 2011 was based on the federal statutory tax rate of 35%, adjusted for the impact of projected permanent differences, and state income taxes. The effective rate for the first half of 2011 was lower versus the comparable prior year period due to the effect of a larger projected Domestic Production Deduction for 2011.

 

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Net income

Net income for the first half of 2011 was $45.8 million compared to $18.6 million for the first half of 2010. The primary components of the $27.2 million increase were the positive impacts of higher total revenues of $415.9 million, partially offset by higher cost of sales of $358.2 million, higher operating expenses of $6.1 million, higher interest expense of $9.5 million and higher income tax expense of $13.0 million.

Adjusted EBITDA

Adjusted EBITDA (as currently defined – see below for further discussion of our revisions to our previous definition of Adjusted EBITDA) for the six months ended June 30, 2011 was $106.6 million compared to $56.2 million for the six months ended June 30, 2010. The $50.4 million, or 90%, improvement reflected the favorable trend over the past year in overall market conditions for our products as well as the upward trend in petroleum prices and related commodity market indices to which a substantial portion of our product selling prices are linked.

C4 Processing segment Adjusted EBITDA for the first half of 2011 was $97.5 million, which was $56.6 million, or 139%, higher than the $40.8 million for the first half of 2010. The primary driver behind the increase was improved margin between revenue and cost of sales of $60.0 million, which was partially offset by higher operating expenses of $3.4 million. Higher average unit margin for the segment had a positive impact of $53 million and the 8% higher sales volume had a positive impact of $7 million. The overall C4 Processing segment margin improvement reflected substantial improvements in all product lines. As discussed under cost of sales above, C4 Processing segment Adjusted EBITDA for the six month periods ended June 30, 2011 and 2010 included favorable butadiene inventory effects of approximately $35 million and $14 million, respectively.

Performance Products segment Adjusted EBITDA for the six months ended June 30, 2011 was $23.6 million, which was $5.0 million, or 17%, lower than the $28.6 million for the comparable prior year period. The decrease reflected lower margin between revenue and cost of sales of $2.3 million and higher operating expenses of $2.7 million. The impact on the overall Performance Products margin of the 9% higher volume was $4.0 million while the negative impact of lower average unit margin was $6.3 million. Raw material costs and margins for the first half of 2011 were negatively impacted by an upward trend in refinery grade propylene pricing over the course of the period as well as an unfavorable relationship between butane and gasoline prices compared to the first half of 2010. The prior year period raw material costs and margins were positively impacted by a downward trend in propylene pricing and a more favorable relationship between butane and gasoline prices.

Corporate and other expenses consist of general and administrative expenses, unrealized (gain) loss on derivatives and other, net discussed above.

We have revised the previously reported corporate expense component of Adjusted EBITDA for the prior year six month period ended June 30, 2010 to no longer remove the effect of non-cash stock-based compensation and unrealized gains and losses on derivative financial instruments, because they are recurring in nature. Under the previous definition, non-cash stock-based compensation of $0.9 million would be added to the reported amount for the six months ended June 30, 2011 and Adjusted EBITDA would be $107.4 million, which is the comparable amount to the previously reported amount of $54.6 million for the prior year period.

Six months ended December 31, 2010 versus six months ended December 31, 2009

Revenues

Total revenues for the six months ended December 31, 2010 were $985.5 million, an increase of $229.6 million, or 30%, compared to total revenues of $755.9 million for the six months ended December 31, 2009. The increase in revenues reflected a 36% increase in overall average selling prices partially offset by a 4% decline in overall sales volume. The positive impact of the higher average selling prices was $240 million and the negative

 

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impact of the lower sales volume was $10 million. The higher selling prices in the 2010 period reflected the favorable trend over the past year in overall market conditions for our products as well as the upward trend in petroleum prices and related commodity market indices to which a substantial portion of our product selling prices are linked.

C4 Processing segment revenues of $792.4 million were up $188.0 million for the six months ended December 31, 2010, or 31%, compared to the comparable prior year period. Average selling prices for the segment were up 40%, which had a positive impact of $208 million, while total sales volume was down by 6% and had a $20 million negative impact. The higher average selling prices was driven by higher butadiene pricing and the lower sales volume was mainly due to lower raffinate volumes.

Performance Products segment revenues of $193.1 million were up $41.6 million for the six months ended December 31, 2010, or 27%, versus the comparable prior year period. The improvement reflected the combined impact of 22% higher average selling prices and 4% higher sales volume. The higher selling prices and higher sales volume contributed $32 million and $10 million, respectively, to the overall increase. The higher average selling prices reflect higher prices across all product lines and the higher sales volume reflects improvement in all product lines except propylene derivatives, which was down slightly.

Cost of sales

Total cost of sales (excludes depreciation and amortization expense) was $855.0 million for the six months ended December 31, 2010 versus the comparable prior year period amount of $649.2 million. The overall $205.9 million, or 32%, increase in cost of sales was driven primarily by 39% higher average raw material costs. Total cost of sales represented 87% and 86% of total revenues in the 2010 and the prior year period, respectively.

C4 Processing segment cost of sales was up 34%, from $524.4 million in the 2009 period to $705.0 million in the 2010 period. The $180.6 million increase primarily reflected the impact of 46% higher average raw material costs, primarily for butadiene, which was slightly offset by 6% lower sales volume. C4 Processing segment cost of sales as a percentage of segment revenues was 89% in the 2010 period and 87% in the prior year period.

Performance Products segment cost of sales in the 2010 period were $150.0 million compared to $124.8 million in the prior year period, which represents an increase of $25.2 million, or 20%. The increase reflected the combined effect of 14% higher average raw material costs, which reflected higher costs across all product lines, and 4% higher sales volume. Performance Products segment cost of sales as a percentage of segment revenues was 78% compared to 82% in the 2009 comparable period. The higher percentage in the prior year period reflected the negative impact of plant operating issues which increased logistics costs and resulted in production of off-spec products that were sold at reduced selling prices.

The cost of our raw material feedstock purchases is usually determined by application of index-based formulas contained in many of our raw material supply contracts. Through these index-based formulas our raw material costs are linked to commodity market indices (such as indices based on the price of unleaded regular gasoline, butane, isobutane or refinery grade propylene) or to the selling price of the related finished product. The selling prices of our finished products are also typically determined from index-based formulas contained in many of our sales contracts and, in most cases, the indices used to determine finished product selling prices are the same indices used to determine the cost of the corresponding raw material feedstock. The linkage between the costs of our raw material feedstocks and the selling prices of our finished products to the same indices mitigates, to varying degrees, our exposure to volatility in our material margin percentage (which we define as the difference between average revenue per pound and average raw material cost per pound as a percentage of average revenue per pound). Although these index-based pricing formulas provide relative stability in our material margin percentage over time, it is not perfectly constant due to various factors, including those listed below. Please also see “Business—Supplier Purchase Agreements”.

 

   

Although most of our supply and sales contracts contain index-based formulas, varying proportions of our raw material purchases and finished product sales are done on a spot basis or otherwise negotiated

 

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terms. In addition, while many of the index-based formulas in our contracts are simply based on a percentage of the relevant index, others apply adjustment factors to the market indices that do not fluctuate with changes in the underlying index. In periods when market indices are high, the use of non-fluctuating adjustment factors tends to reduce the material margin percentage; and conversely, in periods when market indices are low the non-fluctuating adjustment factors tend to increase the material margin percentage.

 

   

We may purchase raw material feedstocks in one period based on market indices for that period, and then sell the related finished products in a later period based on market indices for the later period. Changes in selling prices of finished products, based on changes in the underlying market indices between the period the raw material feedstocks are purchased and the related finished products are sold, lessens the effect of the matching indices and causes variation in our material margin percentage. The magnitude of the effect on material margin percentage depends on the magnitude of the change in the underlying indices between the period the raw material is purchased and the period the finished product is sold and the quantity of the inventory impacted by the change.

 

   

Finished product selling price formulas under some of our sales contracts, primarily in the Performance Products segment, are based on commodity indices not for the period in which the sale occurs but for either a prior or subsequent period. The effect on profit margins of these selling price formulas is diminished during times of relatively stable market indices, but can have a substantial effect during times of rapidly increasing or decreasing market indices, which can impact our material margin percentage.

 

   

In times of rapidly declining market indices, the selling price of finished products inventory could fall below the carrying cost, which may result in lower-of-cost or market adjustments in periods before the finished products are sold. This has occurred in the past, primarily related to fuel-based inventory being devalued by other than short-term declines in unleaded regular gasoline prices, which is the market index upon which the fuel-related product selling prices are based. Recognition of lower-of-cost-or-market adjustments would negatively impact the material margin percentage in the period recognized.

Across-the-board increases in the market indices used in our formula-based raw material costs and finished products selling prices for the six months ended December 31, 2010 versus the comparable prior year period were the drivers behind the higher overall average selling price and the higher overall average raw material cost noted above. The 36% increase in the average selling price equated to $0.18 per pound and the 39% increase in the average raw material cost equated to $0.15 per pound, for an improvement in overall average material margin of $0.03 per pound. As a result of a combination of the factors noted above, however, the material margin percentage for the six months ended December 31, 2010 declined from 23% in the prior year period to 21%.

Operating expenses

Operating expenses incurred in the six months ended December 31, 2010 were $67.1 million compared to $65.0 million in the comparable prior year period. The $2.1 million increase reflected moderate increases in both personnel and maintenance expenses.

General and administrative expenses

General and administrative expenses were $12.7 million in the six months ended December 31, 2010 compared to $13.3 million in the comparable prior year period, as higher personnel costs were more than offset by lower contract services and legal expenses.

Depreciation and amortization expense

Depreciation and amortization expense for the six months ended December 31, 2010 was $19.8 million compared to $20.1 million in the comparable prior year period. Depreciation expense for both periods reflected the continuation of baseline capital spending and absence of major capital project spending since the completion of our major capital investment initiatives in early fiscal 2009.

 

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Business interruption insurance recoveries

In the second quarter of fiscal 2010 we received $17.1 million (net of recovery expenses of $0.4 million) as the second and final installment of our business interruption insurance recovery related to Hurricane Ike. Our total settlement of $47.0 million consisted of a $19.5 million deductible, a $10.0 million payment received in the fourth quarter of fiscal 2009 and the final payment of $17.5 million, before expenses.

Interest expense

Interest expense incurred during the six months ended December 31, 2010 was $11.5 million compared to $7.5 million in the prior year period. The $4.0 million increase primarily reflected the combined impact of the higher principal and interest rate on the notes from October through December 2010.

Write-off term loan debt issuance cost

Deferred debt issuance costs of $3.0 million related to the Term Loan were written off in conjunction with the refinancing of the Term Loan with proceeds from the issuance and sale of the $350.0 million of notes in October 2010.

Unrealized gain/loss on derivatives

We had no derivative instruments in place at any time during the six months ended December 31, 2010. The unrealized gain of $1.4 million in the prior year period consisted entirely of a gain on an interest rate swap related to our Term Loan, which swap expired on June 30, 2010.

Other, net

Other, net in both the current and prior year quarters consisted primarily of income from our investment in Hollywood/Texas Petrochemicals LP, which is accounted for under the equity method. We and Kirby Inland Marine, Inc. formed this joint venture to operate four barges capable of transporting chemicals. The lower amount for the six months ended December 31, 2010 reflected lower joint venture earnings.

Income tax expense

Our effective income tax rates for the six-month periods ended December 31, 2010 and 2009 were 29.8% and 40.5%, respectively. The effective rates for both periods reflected the federal statutory rate of 35% and Texas and Delaware franchise taxes. The 2010 period effective rate was reduced by the impact of a credit for increasing research and development activities of $0.9 million based on a study completed during the fourth quarter of calendar 2010 of expenditures incurred during fiscal years ended June 30, 2007, 2008, 2009 and 2010. The effective rate for the prior year period was increased by the impact of a domestic production deduction of $1.0 million originally taken on the fiscal 2006 tax return that was permanently lost as a result of the carry-back of our fiscal 2009 net operating loss, which eliminated fiscal 2006 taxable income.

Net income

Net income was $12.2 million, for the six months ended December 31, 2010 and $12.1 million for the comparable prior year period. Improved margin between revenue and cost of sales of $23.7 million and lower income tax expense of $3.1 million were offset by higher operating expenses of $2.1 million, higher interest expense of $4.0 million, the write-off of term loan deferred debt issuance cost of $3.0 million and the prior year’s business interruption insurance recovery of $17.1 million and unrealized gain on derivatives of $1.4 million.

 

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Adjusted EBITDA

Adjusted EBITDA (as currently defined—see below for further discussion of our revisions to our previous definition of Adjusted EBITDA) for the six months ended December 31, 2010 was $51.4 million compared to $30.9 million for the six months ended December 31, 2009. The 67% improvement reflected the favorable trend over the past year in overall market conditions for our products as well as the upward trend in petroleum prices and related commodity market indices to which a substantial portion of our product selling prices are linked.

C4 Processing segment Adjusted EBITDA for the six months ended December 31, 2010 was $39.5 million, which was 18% higher than the $33.4 million reported for the comparable prior year period. The primary driver behind the increase was improved margin between revenue and cost of sales of $7.4 million. Higher average unit margins had a positive impact of $8 million and lower sales volume had a negative impact of $1 million.

Performance Products segment Adjusted EBITDA for the six months ended December 31, 2010 was up $15.5 million, or 185%, to $23.9 million from $8.4 million in the comparable prior year period. The Adjusted EBITDA improvement primarily reflected better margin between revenue and cost of sales of $16.3 million. Higher average unit margins had a positive impact of $12 million. Higher sales volume had a positive impact of $4 million.

Corporate expenses consist of general and administrative expenses, unrealized (gain) loss on derivatives and other, net discussed above.

We have revised previously defined Adjusted EBITDA for the C4 Processing segment for all prior periods to remove the effect of the business interruption insurance proceeds and the unauthorized freight recoveries/payments. Without giving effect to these prior period revisions, the improvement in overall Adjusted EBITDA would have been 10% ($52.1 million for the 2010 period compared to $47.2 million for the prior year period). Adjusted EBITDA for the C4 Processing segment would have declined 22% ($39.5 million for the 2010 period compared to $50.4 million for the prior year period).

Fiscal year ended June 30, 2010 versus fiscal year ended June 30, 2009

Revenues

Total revenues for fiscal 2010 were $1,688.5 million, an increase of $311.6 million, or 23%, compared to total revenues of $1,376.9 million for fiscal 2009. The overall increase in revenues reflected the positive impact of a 7% increase in overall sales volume as well as better average selling prices, primarily for C4 Processing segment product lines, which in the aggregate were 15% higher. The positive impacts of the higher sales volumes and higher average selling prices were $134 million and $178 million, respectively. Sales volumes in fiscal 2009 were curtailed in the first two months of the year by limited crude C4 availability and subsequently by the aftermath of Hurricane Ike and weakened demand related to the global economic recession. Sales volumes in fiscal 2010 reflected an upward trend in overall demand for our products that has followed the improvement in general economic and market conditions when compared to the previous year. Average selling prices in fiscal 2009 were positively affected by strong demand and high petrochemical and fuel-related prices during the first two months of the fiscal year, and then were negatively affected over the remainder of the fiscal year as a result of the global economic recession. Selling prices for fiscal 2010 have steadily increased over the course of the fiscal year, which reflected strengthening economic conditions that have driven petroleum prices and related commodity market indices upward. Fiscal 2010 average selling prices benefited also from tight market conditions for our products.

Fiscal 2010 revenues for the C4 Processing segment were higher by $266.8 million, or 25%, compared to the previous year. The overall increase reflected the combined effect of 8% higher sales volumes, which increased revenues by $103 million, and 17% higher average selling prices, which increased revenues by $164 million.

 

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Fiscal 2010 revenues for the Performance Products segment were $44.9 million, or 14%, higher than fiscal 2009, which reflected a 4% improvement in sales volume and a 10% improvement in average selling prices. The moderately higher sales volumes reflected the loss of sales volume related to a contract that ended as of December 31, 2008, which was more than offset by higher sales volumes in fiscal 2010 for all other product lines in this segment. The contract that ended on December 31, 2008 contributed 23% of total sales volumes and 20% of total revenues for the segment during fiscal 2009. The higher overall sales volume contributed $31 million of the increase in revenues, while the higher average selling prices contributed $14 million.

Cost of sales

Total cost of sales (excludes depreciation and amortization expense) was $1,444.2 million in fiscal 2010 compared to $1,194.2 million in fiscal 2009. The overall $250.0 million, or 21%, increase in cost of sales was driven by the 7% higher sales volume and higher average raw material cos