dow

2013

Corporate FInancial Management

Muhammad Arslan Yousaf

Executive SummaryDow Chemicals is valuing the Petroquimica Bahia Blanca (PBB) to bid for its privatization. PBB

currently owned by the local government is a producer of chemicals I.e. Ethylene and Polyethylene.

Dow Chemical’s holds leading market position in numerous chemical lines worldwide including

Ethylene and Polyethylene. Dow had long been interested in expanding its interests in Argentina, and

now wants to utilize this opportunity to invest in Argentina. Management has planned to acquire PBB

as part of three stage strategy for expanding operations in Argentina. For each stage, discounted cash

flow techniques is used to value the project. Discount rate used for discounting cash flows was adjusted

for country risk and a range of estimated cost of capital is calculated. So for the bid of PBB, a range of

possible acquisition values is estimated. As the first stage I.e. acquisition of PBB gives the option of

expanding through second and third stage resulting in higher cash flows, so the bid for PBB can be

raised to as high as $873 Million.

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Ethylene produced from oil or natural gas was used to produce Polyethylene, the world’s most widely

used plastic. Dow generated revenues in three major business; chemical, plastics and agricultural

products. And it accounted for 7% of global capacity and actively expanded globally by locating large

scale chemical complexes in emerging economies. Acquisition of PBB, was also planned as part of

expanding strategy in Argentina. In 1994, PBB and Polisur, being only local players controlled 70%

share of Argentina Polyethylene market. As part of new economic policies by the Argentina’s

Government, PBB was up for privatization. Approximately, 90% of state owned companies were

privatized with proceeds exceeding USD 19 Billion. On October 2, 1995 the Argentine Government

announced a public bidding to execute sale of 51% of PBB. The supermarkets and packaging industries

have experienced dramatic growth, increasing demand for polyethylene. This made the acquisition of

PBB more attractive for DOW. Dow planned to not only acquire PBB, but also planned to acquire Polisur

and then make another major investment in the coming years so that it can produce for the local

market but also for Mercosur and especially Brazil.

Dow management had challenge to place value on PBB’s acquisition taking into consideration the

nature of Political and economic risk of Argentina. Given other strong interested parties, and possibility

of higher cash flows through further expansion via acquisition of Polisur and investment in new plants,

it was difficult to measure how much extra value should be placed on PBB.

Cash Flows As part of stage 1, the plan was to take control of PBB which comprised of ethylene cracker and

polyethylene plant and then upgrading the facility in order to make them internationally competitive.

For ethylene cracker, revenues are based upon the assumption that full capacity of the cracker will be

utilized starting from 90%. Although investment of USD 128.9 MM will be made to upgrade the facility,

however the efficiency of plant is assumed to be content as a pessimistic estimate. The capacity

however will be increased by 66 MM lb to 606 MM lb. Raw material amount utilized is calculated

assuming constant plant efficiency. Rest of the variable and fixed costs are assumed as percentage of

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sales. Cash flows are also adjusted for investment which is to be made for upgrading the pant. Cash

flows for ethylene plant are shown in exhibit 2.

For Polyethylene plant, there will be no increase in capacity, however USD 28 MM will be invested to

upgrade the plant. Plant’s efficiency is assumed to be constant which is again a pessimistic assumption.

The price for the Polyethylene and raw material Ethylene is again the forecast international price in

USD. Rest of the variable and fixed costs are assumed as percentage of sales. Duties and Freight costs,

however is calculated differently, based upon gross sales price rather than net. Cash flows are also

adjusted for the investment in net working capital and any increase is deducted from the cash flows.

Cash flows for polyethylene plant are shown in exhibit 3.

As part of stage 2, Polisur Polyethylene will be acquired. Entire Plant production is assumed to be sold

in the local market which is safe assumption given the gap in local production and demand as shown in

exhibit 1. Freight and duties are again calculated as percentage of Gross Price. The variable and fixed

costs will be less than that of PBB costs, given the greater efficiency of Polisur plant. However,

investment of USD 45.8 MM will be made to increase the competiveness of the plant which is adjusted

in the cash flows over the years. Cash flows for Polisur polyethylene plant are shown in exhibit 4.

As part of stage 3, new ethylene cracker and new polyethylene plant will be established once Dow

establishes PBB plant and the market in Argentina. Investment of USD 376.3 MM will be made in

Ethylene Cracker and investment of USD 160 MM will be made in Polyethylene plant. Both the

investments will be depreciated over 10 years, 37.6 Million for ethylene cracker and 16 Million for

polyethylene plant. Cash flows for new ethylene and ploethylene plants are shown in exhibit 5.

Discount RateDow has previously used the discount rate of 8 to 10 % for discounting the cash flows for similar

projects. Given better prospoects of chemical industry in Argentina in terms of high demand and

flourishing economy, a lower discount rate can be used. However given the plotical and country specific

currency risks as seen in the recent credit crisis, it would be safer to assume discount rate of 9% and

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then adjust it for the country risk. However to give a range os possible bid values discount rate of 8%

and 10 % are adjusted fir country specific risk.

For adjusting for country specific risk, modern approach discussed by Bekaert, Harvey, Lundblad, and

Siegel (2012) is used. Using the EMBI index values for Argentina and US, country risk premium of 1000

basis points for Argentina was calculated. Using the narrow ratio of 11% and wide ratio of 36% for

Argentina as proposed in the paper by Bekaert, Harvey, Lundblad, and Siegel, the country risk premium

was adjusted. The adjusted value of country risk premium provides a proxy for catering for country

specific political and economic risk. This risk premium is added to discount rate to calculate the cost of

capital for the project as shown in exhibit 6. As narrow and wide ratio discussed in the paper by

Bekaert, Harvey, Lundblad, and Siegel (2012) is based upon date form 1994 untill 2009, it is assumed to

be a good proxy for using in the calculation for country specific political and economic risk premium.

Valuation:The terminal value of the cash flows for each stage was calculated using the constant discount rate of

3.30% and the cost of capital computed above (12.70% and 14070%).

Using the cash flow forecast for PBB’s ethylene and polyethylene, the cumulative cash flows were

discounted using the best case and worst case cost of capital which gives the range of PBB value from

USD 434.74 MM to USD 521.61 MM as shown in exhibit 7.

As acquisition of PBB, gives the option of further expansion via acquiring Polisur and investment into

new ethylene and polyethylene plants, the value of these expansions can be incorporated in evulation

of the PBB bid value. Combining the cash flows from PBB, Polisur and new plants gives the value of the

acquisition from USD 976.30 MM to USD 1275.43 MM.

However, for the second stage of the project, the acquisition price of Polisur plant is not incorporate in

the valuation of the option. If we value the Polisur plant alone, the range of Polsiur value is USD 139.25

MM to 273.67 MM. Assuming we will pay this amount for the acquisition of Polisur as well, the cash

flows of Polisur can be ignored in combining the cash flows for 3 stages of the project.

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For calculating the bid value of PBB, the cash flows for PBB and option of the expanding in 3rd stage is

valued. By the combining the cash flows or first and third stage, the bid value for PBB ranges from USD

745.01 MM to 1001.75 MM. As investment required for New Ethylene and polyethylene plants have

been incorporated in stage 3 cash flows, the present value of the combined cash flows gives the range in

which bid can be made for PBB. If we assign equal probability to best and worst case scenario, the bid

value for PBB should be USD 873.38 MM.

RecommendationWith the progress in Argentina’s economy, the demand for plastic products have increased making

ethylene and polyethylene market lucrative to invest. Since Dow had been long been interested in

expanding into Argentina, this privatization opportunity presented by the government should be

realized. Given for other interested parties, only PBB future cash flows will be relevant but Dow has the

option to expand and realize higher cash flows, Dow’s valuation of PBB is higher and can bid as higher

as 788 MM and realize market potential of Argentina.

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AppendixExhibit 1

Total Polyethylene (MM lb) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

ARGENTINA

Demand 755 847 9441,03

5 1,139 1,256 1,371 1,499 1,643 1,804 1,984

Production 531 595 594 665 665 666 782 1,602 1,602 1,602 1,602

Shortfall 224 252 350 370 474 590 589 -103 41 202 382

BRAZIL

Demand 2,414 2,577 2,7402,93

7 3,155 3,396 3,621 3,869 4,140 4,438 4,765

Production 2,680 2,784 3,1042,97

6 3,379 3,783 3,795 4,798 4,810 4,822 4,834

Shortfall -266 -207 -364 -39 -224 -387 -174 -929 -670 -384 -69

MERCOSUR

Demand 3,221 3,479 3,7434,03

5 4,361 4,724 5,068 5,449 5,869 6,334 6,848

Production 3,211 3,379 3,6993,64

1 4,045 4,449 4,577 6,401 6,412 6,424 6,436

Shortfall 10 100 44 394 316 275 491 -952 -543 -90 412 TOTAL LATIN AMERICA

Demand 6,579 7,314 7,9138,47

0 9,084 9,76210,41

7 11,13511,92

2 12,785 13,735

Production 4,972 5,251 5,7966,51

6 6,931 7,721 8,262 9,83210,86

7 11,515 12,233

Shortfall 1607 2063 2117 1954 2153 2041 2155 1303 1055 1270 1502Based upon Data Source: Dow Quimíca Argentina S.A.

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Exhibit 2

STAGE 1-PBB Ethylene Cracker 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

REVENUE

Ethylene Production Capacity (MM lb) 540.1 540.1 540.1 540.1 606 606 606 606 606 606 606 606 606 606 606 606

Operating rate 90.2% 90.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%

Ethylene Volume Production (MM lbs) 487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00

Ethylene International Net Sales Price (US$/lb) 0.273 0.219 0.25 0.22 0.19 0.222 0.285 0.358 0.297 0.247 0.218 0.229 0.261 0.304 0.346 0.306

Ethylene revenue 133.00 106.45 135.03 118.82 115.14 134.53 172.71 216.95 179.98 149.68 132.11 138.77 158.17 184.22 209.68 185.44

By product credit sales 5 5.4 5.7 6.1 9.2 8.4 8.4 8.3 8.5 8.9 9 9.6 9.9 10.2 10.4 10.7

TOTAL REVENUES 138.00 111.85 140.73 124.92 124.34 142.93 181.11 225.25 188.48 158.58 141.11 148.37 168.07 194.42 220.08 196.14

COSTS

Ethane international price (US$/lb) 0.0625 0.0638 0.0625 0.0617 0.0625 0.0743 0.0776 0.081 0.0844 0.0878 0.0911 0.0945 0.0979 0.0979 0.0979 0.0979

Ethane ratio 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267 1.267

Ethylene Volume Production (MM lbs) 487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00

Ethane cost 38.58 39.29 42.77 42.22 47.99 57.05 59.58 62.19 64.80 67.41 69.95 72.56 75.17 75.17 75.17 75.17

Other variable costs (5% of sales) 6.90 5.59 7.04 6.25 6.22 7.15 9.06 11.26 9.42 7.93 7.06 7.42 8.40 9.72 11.00 9.81

Total variable costs 45.48 44.89 49.81 48.47 54.20 64.19 68.64 73.45 74.23 75.34 77.00 79.98 83.57 84.89 86.17 84.97

Total fixed costs 25.2 26.1 18.3 14.5 14.8 15.3 14.5 15 15.4 15.9 16.3 16.9 17.4 18 18.5 19.1

Depreciation 4.2 4.9 12.2 14.1 15.3 16.3 17 17.8 18.6 19.5 16.1 16.3 9.9 9 8.8 8.9

- -

PROFIT BEFORE TAX 63.12 35.97 60.42 47.85 40.04 47.14 80.97 118.99 80.26 47.84 31.71 35.20 57.19 82.53 106.60 83.16

- -

Tax (31% until 1999 then 36%) 19.6 11.2 18.7 14.8 12.4 17.0 29.2 42.8 28.9 17.2 11.4 12.7 20.6 29.7 38.4 29.9

PROFIT AFTER TAX 43.55 24.82 41.69 33.02 27.62 30.17 51.82 76.16 51.36 30.62 20.29 22.53 36.60 52.82 68.23 53.22

Plus: Depreciation 4.2 4.9 12.2 14.1 15.3 16.3 17 17.8 18.6 19.5 16.1 16.3 9.9 9 8.8 8.9

Less: Change in w orking capital (6% of sales) 8.28 -1.57 1.73 -0.95 -0.03 1.12 2.29 2.65 -2.21 -1.79 -1.05 0.44 1.18 1.58 1.54 -1.44

Less: Investments 0 7.5 72.9 18.5 12 9.9 7.6 7.9 8.1 8.4 8.7 9 9.2 9.5 9.8 10.2

Plus: PBB Positive Cash Treasury Position U.S.$ 74 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

CASH FLOW ETHYLENE - Stage 1 113.47 23.79 -20.74 29.57 30.96 35.45 58.93 83.41 64.07 43.51 28.74 29.39 36.12 50.74 65.69 53.36

(in millions of US dollars)

Based upon Data Source: Dow Quimíca Argentina S.A.

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Exhibit 3

STAGE 1- PBB POLYETHYLENE PLANT 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

VOLUME

Polyethylene Production Capacity (MM lbs) 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8

Operating rate 65.0% 65.0% 65.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Polyethylene Volume Production (MM lbs) 131.82 131.82 131.82 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8

Polyethylene Sales Breakdow n

Sold locally 100.00% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Exports Mercosur 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Export Latin America 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Export Extra Zone 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Polyethylene Total Volume Production (MM lbs)

Sold locally 131.82 131.82 131.82 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8

Exports Mercosur 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Export Latin America 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Export Extra Zone 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total 131.82 131.82 131.82 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8

PRICE

Polyethylene Gross Sales Price (US$/lb) 0.581 0.483 0.522 0.486 0.45 0.491 0.561 0.641 0.56 0.494 0.461 0.475 0.514 0.565 0.616 0.571

Polyethylene Freight & Duties cost: 2.93%

Sold locally 0.017 0.014 0.015 0.014 0.013 0.014 0.016 0.019 0.016 0.014 0.013 0.014 0.015 0.017 0.018 0.017

Exports Mercosur 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054 0.054

Export Latin America 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077 0.077

Export Extra Zone 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Polyethylene International Net Sales Price (US$/lb)

Sold locally 0.56 0.47 0.51 0.47 0.44 0.48 0.54 0.62 0.54 0.48 0.45 0.46 0.50 0.55 0.60 0.55




TOTAL REVENUE 74.35 61.81 66.80 95.68 88.59 96.66 110.44 126.19 110.25 97.25 90.76 93.51 101.19 111.23 121.27 112.41



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Exhibit 3B:

STAGE 1- PBB POLYETHYLENE PLANT 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

TOTAL REVENUE 74.35 61.81 66.80 95.68 88.59 96.66 110.44 126.19 110.25 97.25 90.76 93.51 101.19 111.23 121.27 112.41

COSTS

Ethylene international net price US$/lb (A) 0.273 0.219 0.25 0.22 0.19 0.222 0.285 0.358 0.297 0.247 0.218 0.229 0.261 0.304 0.346 0.306

Ethylene ratio 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007 1.007

Polyethylene Total Volume Production (MM lbs) 131.82 131.82 131.82 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8 202.8

Ethylene cost 36.24 29.07 33.19 44.93 38.80 45.34 58.20 73.11 60.65 50.44 44.52 46.77 53.30 62.08 70.66 62.49

Other variable costs (10% of sales) 7.43 6.18 6.68 9.57 8.86 9.67 11.04 12.62 11.02 9.73 9.08 9.35 10.12 11.12 12.13 11.24


Total fixed costs 10.6 13.6 9 6.8 6.9 6.4 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 7.6 7.8

Depreciation 8.8 9.1 9.9 10.6 10.9 11.2 11.5 11.6 11.7 11.9 3.2 3.1 2.5 1.9 1.7 1.6


Tax (31% until 1999 then 36%) 3.49 1.20 2.49 7.37 7.17 8.66 8.57 8.19 7.40 6.73 9.81 9.86 10.14 10.38 10.51 10.54

PROFIT AFTER TAX 7.78 2.66 5.54 16.41 15.96 15.40 15.23 14.57 13.16 11.96 17.45 17.53 18.03 18.45 18.68 18.74

Plus: Depreciation 8.8 9.1 9.9 10.6 10.9 11.2 11.5 11.6 11.7 11.9 3.2 3.1 2.5 1.9 1.7 1.6

Less: Change in w orking capital (20% of sales) 14.87 -2.51 1.00 5.78 -1.42 1.61 2.76 3.15 -3.19 -2.60 -1.30 0.55 1.54 2.01 2.01 -1.77

Less: Investments 0 2.6 8.2 7.3 3.1 6.8 7.5 1.3 1.4 1.4 1.5 1.5 1.6 1.6 1.7 1.7

CASH FLOW POLYETHYLENE - Stage 1 1.71 11.67 6.24 13.93 25.18 18.18 16.47 21.72 26.65 25.06 20.45 18.58 17.39 16.74 16.67 20.41

CONSOLIDATED PBB CASH FLOWS - STAGE 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cash flow ethylene 113.47 23.79 -20.74 29.57 30.96 35.45 58.93 83.41 64.07 43.51 28.74 29.39 36.12 50.74 65.69 53.36

Cash flow polyethylene 1.71 11.67 6.24 13.93 25.18 18.18 16.47 21.72 26.65 25.06 20.45 18.58 17.39 16.74 16.67 20.41

TOTAL CASH FLOW - STAGE 1 115.18 35.45 -14.50 43.50 56.14 53.64 75.40 105.13 90.72 68.57 49.19 47.97 53.52 67.48 82.36 73.77



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Exhibit 4:

STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

VOLUME

Polyethylene Production Capacity (MM lb) 462.6 463 463 463 463 463 463 463 463 463 463 463 463 463 463 463

Operating rate 86.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Polyethylene Volume Production (MM lbs) 397.836 463 463 463 463 463 463 463 463 463 463 463 463 463 463 463


Sold locally 84.0% 85.0% 89.0% 91.0% 95.0% 98.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%

Exports Mercosur 16.0% 15.0% 11.0% 9.0% 5.0% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Export Latin America 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Export Extra Zone 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Polyethylene Total Volume Production (MM lbs)

Sold locally 334.18224 393.55 412.07 421.33 439.85 453.74 463 463 463 463 463 463 463 463 463 463

Exports Mercosur 63.65376 69.45 50.93 41.67 23.15 9.26 0 0 0 0 0 0 0 0 0 0

Export Latin America 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Export Extra Zone 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total 397.836 463 463 463 463 463 463 463 463 463 463 463 463 463 463 463

PRICE

Polyethylene Gross Sales Price (US$/lb) 0.581 0.483 0.522 0.486 0.45 0.491 0.561 0.641 0.56 0.494 0.461 0.475 0.514 0.565 0.616 0.571

Polyethylene Freight & Duties cost: 2.93% 9.29%

Sold locally 0.017 0.014 0.015 0.014 0.013 0.014 0.016 0.019 0.016 0.014 0.013 0.014 0.015 0.017 0.018 0.017





Sold locally 0.564 0.469 0.507 0.472 0.437 0.477 0.545 0.622 0.544 0.480 0.448 0.461 0.499 0.548 0.598 0.554




TOTAL REVENUE 222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49 231.02 253.94 276.86 256.64


Based upon Data Source: Dow Quimíca Argentina S.A

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Exhibit 4B:

STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

TOTAL REVENUE 222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49 231.02 253.94 276.86 256.64

COSTS

Ethylene international price (US$/Lb) 0.273 0.219 0.25 0.22 0.19 0.222 0.285 0.358 0.297 0.247 0.218 0.229 0.261 0.304 0.346 0.306

Ethylene ratio 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979 0.979

Polyethylene Total Volume Production (MM lbs) 397.836 463 463 463 463 463 463 463 463 463 463 463 463 463 463 463

Ethylene cost 106.33 99.27 113.32 99.72 86.12 100.63 129.18 162.27 134.62 111.96 98.81 103.80 118.31 137.80 156.83 138.70

Other variable costs 25.6 31.1 32.9 31.1 32.1 33.1 33.9 34.7 36.1 37.7 39.1 40.3 41.5 42.7 43.9 45.4


Total fixed costs 15.1 15.1 15.5 15.9 16.3 16.6 17 17.4 17.9 18.3 18.7 19.2 19.6 20.1 20.6 21.1

Depreciation 2.1 4.3 4.9 5.6 6.4 7.1 4.4 5.9 6.5 7.1 7.7 8.3 9 6.8 6.9 7


Tax (31% until 1999 then 36%) 22.60 20.21 20.55 20.10 18.81 22.67 24.36 24.42 20.37 16.91 15.44 15.08 15.34 16.76 17.51 16.00

PROFIT AFTER TAX 50.30 44.98 45.75 44.73 41.86 40.30 43.30 43.41 36.20 30.06 27.45 26.81 27.27 29.79 31.12 28.44

Plus: Depreciation 2.1 4.3 4.9 5.6 6.4 7.1 4.4 5.9 6.5 7.1 7.7 8.3 9 6.8 6.9 7

Less: Change in w orking capital (20% of sales) 44.40 -1.41 3.59 -3.16 -3.11 3.76 6.35 7.19 -7.28 -5.93 -2.97 1.26 3.51 4.58 4.58 -4.05

Less: Investments 0 10.1 6.8 7 7.3 14.6 15.4 5.5 5.7 5.9 6.1 6.3 6.4 6.6 6.7 6.9

CASH FLOW POLYETHYLENE - Stage 2 7.99 40.59 40.25 46.48 44.07 29.04 25.95 36.62 44.29 37.19 32.01 27.55 26.37 25.40 26.74 32.58



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Exhibit 5:

Stage 3 - New Ethylene Cracker 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

REVENUES

Ethylene Production Capacity (MM lb) - - - 116.8 937 937 937 937 937 937 937 937 937 937

Operating rate - - - 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Ethylene Volume Production (MM lbs) - - - 116.8 937 937 937 937 937 937 937 937 937 937

Ethylene International Net Sales Price (US$/lb) - - - 0.2223 0.2849 0.3579 0.2974 0.2473 0.2178 0.2292 0.2612 0.3036 0.346 0.3061

Ethylene revenues - - - 25.96 266.95 335.35 278.66 231.72 204.08 214.76 244.74 284.47 324.20 286.82

By product credit sales - - - 0.5 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8

TOTAL REVENUES - - - 26.46 270.75 339.15 282.46 235.52 207.88 218.56 248.54 288.27 328.00 290.62

COSTS

Ethane ratio 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23

Ethylene Volume Production (MM lbs) - - - 116.8 937 937 937 937 937 937 937 937 937 937

Ethane international price (US$/lb) - - - 0.074 0.078 0.081 0.084 0.088 0.091 0.095 0.098 0.098 0.098 0.098

Ethane cost - - - 10.63 89.90 93.35 96.81 101.42 104.88 109.49 112.95 112.95 112.95 112.95

Other variable costs (5% of sales) - - - 1.32 13.54 16.96 14.12 11.78 10.39 10.93 12.43 14.41 16.40 14.53

Total variable costs 11.95 103.43 110.31 110.93 113.20 115.27 120.42 125.37 127.36 129.35 127.48

Total fixed costs 7 7 7.2 7.4 7.5 7.7 7.9 8.1 8.1 8.2 8.4

Depreciation - - - 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6

PROFIT BEFORE TAX - - - -30.09 122.72 184.04 126.53 77.22 47.31 52.64 77.47 115.21 152.86 154.74

Tax (31% until 1999 then 36%) - - - 0 44.18 66.25 45.55 27.80 17.03 18.95 27.89 41.48 55.03 55.71

PROFIT AFTER TAX 0 0 0 -30.09 78.54 117.79 80.98 49.42 30.28 33.69 49.58 73.74 97.83 99.03

Plus: Depreciation 0 0 0 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 0

Less: Change in w orking capital (6% of sales) 0 0 0 1.59 14.66 4.10 -3.40 -2.82 -1.66 0.64 1.80 2.38 2.38 -2.24

Less: Investments 4.5 50.1 247.7 74 0 0 0 0 0 0 0 0 0 0

CASH FLOW ETHYLENE - Stage 3 -4.50 -50.10 -247.70 -68.08 101.48 151.28 121.98 89.84 69.53 70.65 85.38 108.95 133.04 101.28



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Exhibit 6:

STAGE 3-NEW POLYETHYLENE PLANT 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

VOLUME

Polyethylene Production Capacity in (MM lb) 595.2 595.2 595.2 595.2 595.2 595.2 595.2 595.2 595.2 595.2

Operating rate 88.90% 96.30% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Polyethylene Total Volume Production (MM lbs) 529.13 573.18 595.20 595.20 595.20 595.20 595.20 595.20 595.20 595.20


Sold locally 31.00% 31.00% 32.00% 34.00% 38.00% 42.00% 42.00% 43.00% 43.00% 43.00%

Exports Mercosur 44.00% 44.00% 47.00% 53.00% 58.00% 56.00% 56.00% 56.00% 56.00% 57.00%

Export Latin America 11.00% 11.00% 11.00% 12.00% 4.00% 2.00% 2.00% 1.00% 1.00% 0

Export Extra Zone 14.00% 14.00% 10.00% 1.00% 0% 0% 0% 0% 0% 0%

Polyethylene Total Volume Production MM lbs

Sold locally 164.03 177.69 190.46 202.37 226.18 249.98 249.98 255.94 255.94 255.94

Exports Mercosur 232.82 252.20 279.74 315.46 345.22 333.31 333.31 333.31 333.31 339.26

Export Latin America 58.20 63.05 65.47 71.42 23.81 11.90 11.90 5.95 5.95 0.00

Export Extra Zone 74.08 80.24 59.52 5.95 0.00 0.00 0.00 0.00 0.00 0.00

Total 529.133 573.178 595.200 595.200 595.200 595.200 595.200 595.200 595.200 595.200

PRICE

Polyethylene International Gross Sales Price (US$/lb) 0.561 0.641 0.56 0.494 0.461 0.475 0.514 0.565 0.616 0.571

Polyethylene Freight & Duties cost:

Sold locally 3.03% 0.0170 0.0194 0.0170 0.0150 0.0140 0.0144 0.0156 0.0171 0.0187 0.0173

Exports Mercosur 9.63% 0.054 0.062 0.054 0.048 0.044 0.046 0.049 0.054 0.059 0.055

Export Latin America 13.73% 0.077 0.088 0.077 0.068 0.063 0.065 0.071 0.078 0.085 0.078

Export Extra Zone 17.83% 0.100 0.114 0.100 0.088 0.082 0.085 0.092 0.101 0.110 0.102


Sold locally 0.5440 0.6216 0.5430 0.4790 0.4470 0.4606 0.4984 0.5479 0.5973 0.5537

Exports Mercosur 0.507 0.579 0.506 0.446 0.417 0.429 0.465 0.511 0.557 0.516

Export Latin America 0.484 0.553 0.483 0.426 0.398 0.410 0.443 0.487 0.531 0.493

Export Extra Zone 0.461 0.527 0.460 0.406 0.379 0.390 0.422 0.464 0.506 0.469

TOTAL REVENUE 269.59 333.68 304.03 270.63 254.40 263.11 284.71 313.32 341.60 316.78



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Exhibit 7:

STAGE 3-NEW POLYETHYLENE PLANT 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

TOTAL REVENUE 269.59 333.68 304.03 270.63 254.40 263.11 284.71 313.32 341.60 316.78

COSTS

Ethylene international price (US$/lb) 0.285 0.358 0.297 0.247 0.218 0.229 0.261 0.304 0.346 0.306

Ethylene ratio 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92

Polyethylene Total Volume Production MM lbs 529.13 573.18 595.20 595.20 595.20 595.20 595.20 595.20 595.20 595.20

Ethylene cost 138.74 188.78 162.63 135.25 119.37 125.40 142.92 166.47 189.46 167.56

Other variable costs (8% of sales) 21.57 26.69 24.32 21.65 20.35 21.05 22.78 25.07 27.33 25.34

Total variable costs 160.31 215.48 186.95 156.90 139.73 146.45 165.70 191.53 216.79 192.90

Total f ixed costs 4.9 4.2 4.2 4.1 4 4 4.1 4.2 4.2 4.2

Depreciation 16 16 16 16 16 16 16 16 16 16

PROFIT BEFORE TAX 88.39 98.00 96.87 93.63 94.68 96.66 98.91 101.59 104.61 103.68

Tax at 36% 31.82 35.28 34.87 33.71 34.08 34.80 35.61 36.57 37.66 37.32

PROFIT AFTER TAX 56.57 62.72 62.00 59.92 60.59 61.86 63.30 65.02 66.95 66.36

Plus: Depreciation 16 16 16 16 16 16 16 16 16 16

Less: Change in w orking capital (20% of sales) 53.92 12.82 -5.93 -6.68 -3.25 1.74 4.32 5.72 5.66 -4.96

Less: Investments 30 70 60 0 0 0 0 0 0 0 0 0 0

CASH FLOW POLYETHYLENE - Stage 3 -30.0 -70.0 -60.0 18.6 65.9 83.9 82.6 79.8 76.1 75.0 75.3 77.3 87.3

CASH FLOW - Stage 3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cash f low - ethylene - Stage 3 -4.50 -50.10 -247.70 -68.08 101.48 151.28 121.98 89.84 69.53 70.65 85.38 108.95 133.04 101.28

Cash f low - polyethylene - Stage 3 0.00 -30.00 -70.00 -60.00 18.65 65.90 83.93 82.60 79.84 76.12 74.98 75.29 77.29 87.32

TOTAL CASH FLOW - Stage 3 -4.50 -80.10 -317.70 -128.08 120.13 217.19 205.91 172.44 149.37 146.77 160.37 184.25 210.34 188.59



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Exhibit 8

Rate Best Case Worst CaseDiscount Rate 8.00% 10.00%EMBI Spread 10.00% 10.00%Narrow Ratio 11.00% 11.00%N. Risk Premium 1.10% 1.10%Wide Ratio 36.00% 36.00%W. Risk Premium 3.60% 3.60%Adjusted Cost of Capital 12.70% 14.70%

Discount rate is assumed from the existing firm’s projects in US. EMBI spread is the difference between US Yield and Argentina Yield. Narrow and Wide ratio is taken from the paper from Bekaert, Harvey, Lundblad, and Siegel (2012). N. Risk premium is the product of EMBI spread and narrow ratio. W. Risk Premium is the product of EMBI spread and wide ratio. Adjusted Cost of Capital is the sum of Discount Rate, N. Risk Premium and W. Risk Premium.

Exhibit 9 (in millions of US dollars)

Scenario PBB - Only PBB - Combined PBB - Expansion Polisur

Best Case $521.61 $1,275.43 $1,001.75$273.6

7

Worst Case $434.74 $976.30 $745.01$139.2

5PBB – Only value incorporates cash flows from PBB alone including both ethylene and polyethylene plan. PBB – Combined incorporates cash flows from PBB, Polisur and new plants, all three stages of the project. PBB – Expansion incorporates cash flows from PBB and expansion into new plants only. Polisur value incorporates cash flows from Polisur Polyethylene plant only

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dow

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