THE CHEMICAL A N D CHEMICAL PROCESS INDUSTRIES C. P. NEIDIG, White, Weld & Co., 40 Wall St., New York 5, Ν. Υ.
Financing the Chemical Industry . .
expansion in 1952 required
more than could be supplied by internal funds, the traditional source for chemical financing
W ITHIN the past several years the chemical industry has been involved in a tremendous expansion program—and 1952 w a s certainly no exception. In fact, pre liminary figures released by the Securities a n d E x c h a n g e Commission indicate that capital expenditures for chemical a n d allied p r o d u c t s were expected to exceed $1.5 billion in 1952, highest in history, and over $300 million greater t h a n in 1951. It now seems that 1952 will be a peak year, reflecting t h e completion of many of the new plants b e g u n shortly after t h e Korean War. Most chemical companies anticipate that capital expenditures in 1953 will be somewhat less than 1952 although there a r e some exceptions. It is not surprising t h a t external sources of capital w e r e n e e d e d for much of this n e w expansion. Although the chemical industry traditionally uses internal funds to finance its new plants, the present high tax rates have sharply reduced the capital available from retained earnings. F u r t h e r more, t h e present high costs of construc tion h a v e rendered depreciation reserves inadequate for replacement of existing plants. During 1952 earnings of most of t h e chemical companies w e r e reduced, partly as a result of the sales decline, c o u p l e d with lower profit margins, brought about t o some extent b y price controls at t h e same t i m e t h a t costs of labor, trans portation, a n d r a w materials were rising. F o r a variety of reasons, therefore, retained e a r n i n g s and depreciation reserves h a v e proved inadequate, and outside financing was u s e d by many chemical companies. T a b l e I summarizes chemical company financing during 1952. Of the
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million raised during the year, $494.8 million or 7 9 % was by debt financing; $10.4 million or 1.7% through sale of preferred stock; and $121.3 million or 19.3% through sale of common stock. T h e fact that interest on debt capital is paid before income taxes whereas both p r e ferred a n d common stock dividends are paid from earnings available after taxes was certainly one of the motivating rea sons for the popularity of the debt type of financing. Actually the choice as to whether the financing is to b e through debt, preferred, or common stock is detennined to a major extent b y the present capital structure of the company. While there are no rigid limits, even the most aggressive manage ment realizes that the capitalization must be kept in balance. T h e questions of the magnitude of t h e expansion, t h e amount of the outside financing needed, the timing of the external financing, and t h e like are, of course, quite involved a n d d e p e n d on a number of factors, not the least of which is the status of t h e "money market" at any particular time. During 1952 t h e money market was generally favorable although tighter than in some previous years. Certificates of Necessity The Government began to issue certifi cates of necessity after the outbreak of the Korean W a r which permitted com panies t o amortize a portion of their new plants over a five-year period. O n e of t h e principal reasons for this move, which was also d o n e during World W a r I I , was to encourage the use of private capital rather t h a n government funds in t h e con
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struction of t h e many new plants thought to b e necessary in the emergency. T h e certificates permitted varying percentages of t h e total cost of t h e new facilities to b e written off over t h e five-year period, t h e percentage depending on a n u m b e r of factors including t h e importance of t h e new plant to the military, t h e expected value of t h e product in a civilian economy after the emergency, and others. As of Nov. 12, 1952, a total of 14,514 n e w fa cilities costing $23.3 billion h a d received certificates of necessity of which 6 1 % or $14.3 billion is eligible for rapid deprecia tion. It was estimated in D e c e m b e r b y the Manufacturing Chemists' Association t h a t the chemical industry h a d received certificates for some 789 projects expected to cost $2.3 billion. There are some real advantages to these certificates although, as might b e expected, there are also some disadvantages. In t h e past several years t h e very high taxes, par ticularly excess profits taxes, have sharply reduced earnings w h i c h , after payment of dividends, are available for construction of n e w facilities. Under such conditions t h e use of certificates of necessity greatly in creases the cash flow. Depreciation charges are deducted before income taxes, a n d under ordinary circumstances, a com p a n y may figure depreciation at 6 to 7 % of the original cost of the plant. If half t h e cost of the n e w plant can be amor tized at 2 0 % , the allowable depreciation charges are obviously substantially in creased. In effect, the amount of taxes p a i d is lower since t h e pretax earnings h a v e been reduced by the amount of ac celerated amortizatiori,
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C&EN'S A N N U A L REVIEW OF DEVELOPMENTS I N
TABLE I. CHEMICAL INDUSTRY FINANCING IN 1952 Allied Chemical & D y e American Cyanamid American Metallic Chemicals American Potash & Chemical Ansui Chemical Chase Chemical Columbia-Southern Chemical Corp.1* Davison Chemical D e w e y & Almy D o w Chemical Foote Mineral Guardian Chemical Gulf Sulphur Hooker Electrochemical International Minerals Koppers Leslie Salt EH Lilly Lone Star Sulphur Metal Hydrides Metals & Chemicals Mexican Gulf Sulphur Mississippi Chemical Monsanto Chemical National Alfalfa Dehydrating & Milling National Chlorophyll sk Chemical Newport Industries Pan American Sulphur Pennsalt Pittsburgh Coke & Chemical Keichhold Chemicals Rohm & Haas Sharp and D o h m e Shaw Oil & Chemical Smith Douglas Southern Oxygen Standard Sulphur Co. Sterling D r u g Tennessee Products & Chsniical Texas City Chemicals Thurston Chemical Trubeck Laboratories Virginia-Carolina Chemical Virginia Smelting Wilson Organic Chemicals
Debt a $50,000,000 75,000,000
Preferred Stock
20
300 5 00O
Total $50,000,000 75,000,000 1,350,000 3,000,000 1,000,000 291,000 15,000,000 22,200,000 5,500,000 184,100,000 1,973,000 300,000 625,000 20,000,000 20,000,000 11,250,000 6,500,000 10,000,000 360,000 800,000 600,000 1,875,000 10,000,000 105,200,000 610,000 6S3,00O 6,000,000 6,664,000 7,534,090 5,000,000 5,000,000 8,600,000 5,000,000 300,000 7,800,000 1,400,000 1,250,000 3,500,000 5,000,000 7,210,000 1,000,000 500,000 5,000,000 1,250,000 300,000
121,278,000
$626,540,000
1,350,000
.. 3,000,000 1,000,000
291,000
.. 15,000,000 10,000,000 5,500,000 150,000,000 1,973,000
6,400,000
5,800,000° 34,100,000°
.
•
300,000 625,000 20,000,000 20,000,000 11,250,000 6,500,000 10,000,000 360,000 800,000 600,000 1,875,000 66,000,000
10,000,000 39,200,000 610,000 698,000
..
6,000,000 3,664,000
3,000,000° 7,534,000
5,000,000 5,000,000 8,600,000 5,000,000
.. ..
300,000 1,800,000
6,000,000 1,400,000
.. 1,250,000
3,500,000 5,000,000 6,000,000
.. .. 1,210,000 1,000,000
.«
500,000 5,000,000 1,250,000
··
.. .. · •
Total $494,762,000 10,400,000 "Includes total amounts arranged for whether or not actually issued during t h e year. "* Subsidiary of Pittsburgh Plate Glass. ' Approximate. It is possible within several years t i m e that depreciation plus emergency amortization will have grown large enougL· to virtually sustain a continued heavy expansion program. D o w Chemical C o . is probably the outstanding example of this. In its fiscal year ending May 3 1 , 1 9 5 0 , just prior to the outbreak of the Korean War, Dow's depreciation charges amounted to $20.3 million. As a result of the n e e d for expanded production facilities, D o w has spent $236 million in the past two
Common Stock
years, and anticipates spending roughly $100 million per year for the next three years. Since part of these n e w facilities is covered by certificates of necessity, the cash flow has been building up, a n d by 1955 Dow estimates that approximately $60 million per year will b e available from ordinary depreciation and accelerated amortization. Many of the large chemical companies have applied for and received certificates of necessity covering substantial new plants. Some of these are listed as follows:
CHEMICAL
APPROXIMATE A M O U N T S U B J E C T TO ACCELERATED AMORTIZATION
COMPANY Millions of Dollars Union Carbide 250 Dow ChemicrS! 170 Allied Chemical 110 E . ï. du Pont de Nemours 70 Monsanio Chemical 69 American Cyanamid 66 Mp.thieson Chemical" 61 Commercial Solvents 24 Hercules Powder 9 a Including E . R. Squibb & Sons
AND
ENGINEERING
NEWS
THE CHEMICAL A N D CHEMICAL PROCESS INDUSTRIES Major Chemical Companies It is anticipated that the six largest chemical companies will have expended approximately $600 million during 1952 in new facilities, nearly 4 0 % of the total for the industry. Of the six, only Du Pont was able to finance its expansion without the need for outside capital. D u Pont anticipates that its capital expenditures during 1952 will total $125 million. Much of this will be spent for synthetic fibers including a 30 million pound Orion plant, additional expansion in nylon fiber and raw materials, and construction of a plant to produce Dacron. As previously mentioned, Du Pont will finance these expenditures entirely from internal sources. During 1951, cash flow available for expansions totaled $133 million of which $49 million was from earnings available after the payment of dividends and nearly $84 million from depreciation charges. This latter figure reflects the Du Pont policy in its report to stockholders of deducting depreciation from income in amounts greater than that allowed for tax purposes, recognizing the increasing high cost of replacement of existing facilities. Capital expenditures by Union Carbide are estimated at $150 million for the 1952 year. The principal amount of this is being spent at Marietta, Ohio, for the completion of its huge new ferroalloy plant. Chemical projects included in the Carbide expansions include polyethylene, synthetic phenol, ethylene oxide, and other miscellaneous chemicals. While retained earnings and depreciation reserves were sufficient for much of this expansion. Carbide took down an estimated $100 million from the long-term loan negotiated in late 1951. In its agreement with the two insurance companies, Carbide actually arranged for $300 million at 3.75% for 100 years with the provision that the total could be taken when, as, and if needed. Carbide pays a standby fee for any amount not taken down which is less than the interest rate. For the first time in recent history, Allied Chemical resorted to outside capital by borrowing $50 million at 3 % for three years from a group of New York banks. Heretofore, Allied has always financed its expansion from internal funds, but its capital program for the next two years is of such magnitude that additional funds are required. In 1952 approximately $80 million will be emended which is considerably higher than for any previous year. Much of the new facilities will be for expansion in sulfuric acid and coal tar chemicals including phenol and phthalic anhydride. Allied is also building a large new chlorine-caustic soda plant at Moundsville, W. Va. and enlarging its chlorine facilities at other plants. Its huge ammonia plants at Hopewell, Va., and South Point, Ohio, are being enlarged and are also being modernized so that natural gas will be used as the source of hydrogen rather than coke. The Semet-Solvay DiVOLUME
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vision of Allied is building a $7 million plant at Buffalo to make polyethylene waxes. During the fiscal year which ended May 31, 1952, Dow spent roughly $145 million for new plants and currently anticipates that it will expend approximately $100 million in the fiscal year ending May 31, 1953. Much of this new capacity is for additional ethylene, chlorine, styrene, and phenol plants. In addition, Dow is also expanding physical facilities principally for power generation units. During the year, Dow sold $100 million of 3% convertible subordinate debentures which represented the largest financing of this type ever done by the chemical industry. Dow also sold common stock to employees and, through rights, to stockholders in January of 1952, which brought in over $14 million. In November, Dow authorized an additional 625,000 shares for employees and stockholders which, if completely subscribed, will bring in slightly over $19 million. Dow also increased its short-term bank loans by an additional $50 million during the year. American Cyanamid negotiated a 35year, 3.75% loan with 18 insurance companies for $75 million early in the year. Like the Union Carbide agreement, not all of the money was made available immediately but could be taken as needed. This was to finance a number of projects, the principal of which is the $50 million acetylene, ammonia, and acrylonitrile plant near New Orleans. In addition, Cyanamid has also recently expanded production facilities for aureomycin as well as some industrial chemicals. It is expected that Monsanto's expenditures during 1952 will reach $70 million. The most important of the projects is located at Texas City where Monsanto is expanding the styrene unit and is also building an acetylene plant based on natural gas. The acetylene in turn is to be used as a starting point for acrylonitrile and vinyl chloride. Monsanto sold $66 million of 3.75% income debentures to six insurance companies in January 1952. These notes, which expire in the year 2002 provide that interest will only be paid if earned, represent one of the few financings of this type used by chemical companies. In addition, Monsanto also issued 400,000 shares of common stock early in the year at a price of $98 per share, representing an additional $39 million before underwriting and other expenses. Other Chemical Companies While Mathieson completed most of its capital expansion early in 1952 with the initial operation of their Doe Run, Ky. ethylene oxide—ethylene glycol plant, the merger with E. R. Squibb & Sons was one of the chief items of interest in the chemical and financial fields. With this acquisition, Mathieson's sales are expected to be approximately $220 to $230 million a year. The merger was accomplished by the
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exchange of Mathieson common stock for the Squibb common stock and essentially no outside financing was required. Total capital expenditures during 1952 are estimated at $15 million. Hercules Powder capital expenditures during the year will approximate $18 million. Of this roughly 3 7 % will be for new products, most important of which will be phenol made by t h e new cumene process, 17% is scheduled for units producing necessary raw materials, 2 1 % for cost reduction in existing processes, and the remaining 2 5 % for miscellaneous items. Hercules has continued its policy of financing capital expenditures from retained earnings coupled with depreciation reserves. Commercial Solvents borrowed $25 million in 1951 from five insurance companies at 3.75% to finance expansion. Included is the $20 million synthetic ammonia and methanol expansion which is under construction at Sterlington, La., and the plant to make dexiran, the blood volume expander, which was completed in 1952 at a cost of roughly $1.8 million. Victor Chemical is spending $6 million this year principally for the completion of two new elemental phosphorus furnaces at Silver Bow, Mont. In addition, phosphate chemical facilities are being expanded at several locations. This was financed through the sale of $5 million convertible preferred stock coupled with a $9 million loan from an insurance company in 1951. Two of the principal factors in the synthetic resin business, Reichhold Chemical and Rohm & Haas, borrowed money during 1952 to increase their resin and plastics plants. Reichhold borrowed $5 million and Rohm & Haas, $8.6 million. Fertilizer Companies There was considerable activity and expansion among the leading fertilizer companies and practically all required outside financing. For example, International Minerals sold $20 million of 3.65% subordinate convertible debentures late in 1952. International Minerals has a number of new projects most important of which is the $14 million defluorinated phosphate plant at Bonnie, Fla., which wall produce uranium as a by-product. The output of this plant will be used primarily for animal feed supplements. In addition, some $7 million is to b e spent on the construction of an additional phosphate mine in Florida. Davison Chemical raised slightly over $22 million during the year of which $10 million was through long term debt, $6.4 million through the sale of 4.6% convertible preferred stock, and the balance through the sale of common stock. Davison has two principal new projects including a new synthetic petroleum catalyst plant at Lake Charles, La., and a triple super phosphate plant in Florida. Smith-Douglas acquired Coronet Phosphate Co. and borrowed $6 million at 3.875%? to finance the 21
C&EN'S ANfJUAL REVIEW OF DEVELOPMENTS IN acquisition. In addition, the company raised $1.8 million t h r o u g h t h e sale of common slock to finance expansion at t h e i r Streator, 111-, fertilizer plant a n d at the Coronet phosphate rock plant in Florida. Virginia-Carolina raised $5 million through loans from insurance companies at 3 . 7 9 ^ . T e x a s City Chemicals is a n e w company organized in 1952 to produce reed grade a s well as fertilizer grade dicalcium phosphate. Total capital raised was $7.2 million of which $3.0 million was through bank loans, $3.0 million through subordinate sinking fund debentures, and $1.2 million through common stock. Ammonia Producers With the expansion in ammonia scheduled to increase capacity to nearly 3.4 million tons by 1955 as compared t o the 1951 production of 1,772,000 tons, it is not surprising to find several new companies in t h e field as well as substantial expansion of some of t h e existing producers. Two newcomers have acquired plant sites and have arranged for financing. \V, R. Grace is building a n $18 million ammonia a n d urea plant at Memphis, Tenn. Part of the proceeds from its $35 million, 30-year, 3V*% loan recently negotiated with four insurance companies was earmarked for its initial chemical venture, Deere & Co. is building a $20 million ammonia-urea plant at Pryor, Okla., with a rated capacity of 180 tons of anhydrous ammonia p e r day. D u r i n g 1952 the company raised $22.1 million through t h e sale of commc*n stock and also sold sinking fund debentures. Lion O i l is expanding its capacity b y building a $31 million anhydrous ammonia a n d ammonium nitrate plant at Luling, La. Tin's was financed through &*/*
