WESTLAKE CHEMICAL CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File No. 001-32260

Westlake Chemical Corporation

(Exact name of Registrant as specified in its charter)

Delaware

76-0346924

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

2801 Post Oak Boulevard, Suite 600

Houston, Texas 77056

(Address of principal executive offices, including zip code)

(713) 960-9111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

The number of shares outstanding of the registrant’s sole class of common stock, as of May 10, 2005, was 64,995,129.

INDEX


Item		Page
PART I. FINANCIAL INFORMATION
	1) Financial Statements	3
	2) Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	3) Quantitative and Qualitative Disclosures about Market Risk	25
	4) Controls and Procedures	25

PART II. OTHER INFORMATION
	1) Legal Proceedings	27
	2) Unregistered Sale of Equity Securities and Use of Proceeds	27
	6) Exhibits	27

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2005			December 31, 2004
	(in thousands of dollars, except par values and share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	46,635		$	43,396
Accounts receivable, net		286,129			234,247
Inventories, net		318,181			319,816
Prepaid expenses and other current assets		7,138			8,689
Deferred income taxes		53,999			65,790

Total current assets		712,082			671,938
Property, plant and equipment, net		853,872			855,052
Equity investment		18,005			18,082
Other assets, net		44,350			47,381

Total assets	$	1,628,309		$	1,592,453

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	168,081		$	146,890
Accrued liabilities		92,677			102,125
Current portion of long-term debt		1,200			1,200

Total current liabilities		261,958			250,215
Long-term debt		266,589			296,889
Deferred income taxes		234,641			235,161
Other liabilities		35,657			40,791

Total liabilities		798,845			823,056

Commitments and Contingencies (Notes 10 and 13)
Stockholders’ equity
Preferred stock, nonvoting, noncumulative, $0.01 par value, 50,000,000 shares authorized		—			—
Common stock, $0.01 par value, 150,000,000 shares authorized; 64,995,129 and 64,896,489 shares issued and outstanding in 2005 and 2004, respectively		650			649
Additional paid-in capital		420,513			420,124
Retained earnings		408,451			348,689
Minimum pension liability, net of tax		(1,739	)		(1,739	)
Cumulative translation adjustment		1,589			1,674

Total stockholders’ equity		829,464			769,397

Total liabilities and stockholders’ equity	$	1,628,309		$	1,592,453

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2005			2004
	(in thousands of dollars, except per share data and share amounts)
Net sales	$	618,616		$	400,894
Cost of sales		498,833			362,087

Gross profit		119,783			38,807
Selling, general and administrative expenses		18,075			11,892

Income from operations		101,708			26,915
Interest expense		(6,154	)		(10,752	)
Debt retirement cost		(646	)		—
Other income (expense), net		715			(73	)

Income before income taxes		95,623			16,090
Provision for income taxes		34,480			5,405

Net income	$	61,143		$	10,685

Basic and diluted earnings per share	$	0.94		$	0.22

Weighted average shares outstanding:
Basic		64,938,137			49,499,395
Diluted		65,292,170			49,499,395

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2005			2004
	(in thousands of dollars)
Cash flows from operating activities
Net income	$	61,143		$	10,685

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,083			20,898
Provisions for (recovery of) bad debts		482			(778	)
Amortization of debt issue costs		387			552
Loss (gain) from disposition of fixed assets		267			(231	)
Deferred tax expense		11,271			5,144
Equity income (loss) of unconsolidated subsidiary		77			(532	)
Write off of debt retirement costs		646			—
Changes in operating assets and liabilities
Accounts receivable		(52,364	)		2,275
Inventories		1,635			(17,540	)
Prepaid expenses and other current assets		1,552			896
Accounts payable		21,191			1,038
Accrued liabilities		(9,448	)		(12,157	)
Other, net		(5,666	)		(453	)

Total adjustments		(8,887	)		(888	)

Net cash provided by operating activities		52,256			9,797

Cash flows from investing activities
Additions to property, plant and equipment		(17,336	)		(11,045	)
Proceeds from disposition of assets		—			1,006

Net cash used for investing activities		(17,336	)		(10,039	)

Cash flows from financing activities
Dividends paid		(1,381	)		—
Repayment of borrowings		(30,300	)		(300	)

Net cash used for financing activities		(31,681	)		(300	)

Net increase in cash and cash equivalents		3,239			(542	)
Cash and cash equivalents at beginning of period		43,396			37,381

Cash and cash equivalents at end of period	$	46,635		$	36,839

The accompanying notes are an integral part of these consolidated financial statements.

WESTLAKE CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands of dollars, except per share data)

1. Basis of Financial Statements

The accompanying unaudited consolidated interim financial statements were prepared with generally accepted accounting principles and in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnotes required for complete financial statements under generally accepted accounting principles in the United States have not been included pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the December 31, 2004 financial statements and notes thereto of Westlake Chemical Corporation (the Company) included in the annual report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 16, 2005. These financial statements have been prepared in conformity with the accounting principles and practices as disclosed in the notes to the consolidated financial statements of the Company for the fiscal year ended December 31, 2004.

In the opinion of the Company’s management, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial position as of March 31, 2005, the results of operations for the three months ended March 31, 2005 and 2004 and the changes in its cash position for the three months ended March 31, 2005 and 2004.

Results of operations and changes in cash position for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2005 or any other interim period. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

2. Accounts Receivable

Accounts receivable consist of the following:


	March 31, 2005			December 31, 2004
Accounts receivable — trade	$	288,331		$	230,554
Accounts receivable — affiliates		1,344			966
Allowance for doubtful accounts		(6,508	)		(6,106	)

	$	283,167		$	225,414
Taxes receivable		560			328
Accounts receivable — other		2,402			8,505

	$	286,129		$	234,247

3. Inventories

Inventories consist of the following:


	March 31, 2005			December 31, 2004
Finished product	$	189,315		$	172,056
Feedstock, additives and chemicals		110,347			129,715
Materials and supplies		26,931			26,552

		326,593			328,323

Allowance for inventory obsolescence		(8,412	)		(8,507	)

Net inventory	$	318,181		$	319,816

4. Property, Plant and Equipment

Depreciation expense on property, plant and equipment of $18,173 and $17,484 is included in cost of sales in the consolidated statement of operations for the three months ended March 31, 2005 and 2004, respectively.

5. Other Assets

Amortization expense on other assets of $3,297 and $3,967 is included in the consolidated statement of operations for the three months ended March 31, 2005 and 2004, respectively.

6. Derivative Commodity Instruments

The Company had a net gain of $187 in connection with commodity derivatives for the three months ended March 31, 2005 compared to a net loss of $1,164 for the three months ended March 31, 2004. Risk management asset balances of $728 and $825 were included in prepaid expenses and other current assets, and risk management liability balances of $447 and $3,765 were included in accrued liabilities in the Company’s balance sheets as of March 31, 2005 and December 31, 2004, respectively.

7. Earnings per Share

There are no adjustments to “Net income” for the diluted earnings per share computations.

The following table reconciles the denominator for the basic and diluted earnings per share computations shown in the consolidated statements of operations:


	Three Months Ended March 31,
	2005	2004
	(in thousands)
Weighted average common shares—basic	64,938	49,499
Plus incremental shares from assumed conversions:
Options	267	—
Restricted stock units	87	—

Weighted average common shares—diluted	65,292	49,499

8. Stock Based Compensation

The Company’s 2004 Omnibus Incentive Plan (the Plan) authorizes the Board of Directors to make stock option awards to executives and other key employees. The Plan also provides for the granting of stock awards, restricted stock and stock units to employees and directors that consist of grants of common stock or units denominated in common stock. The Company granted 156,800 restricted stock units, valued at $14.50 per unit, in the third quarter of 2004 to employees. These units vested in the first quarter of 2005. The Company also granted options to purchase 475,716 shares of common stock in the third quarter of 2004. The exercise price of the options was the market price on the date of grant ($14.50). The options become exercisable in equal amounts on the first, second and third anniversaries of the grant date and expire on the tenth anniversary of the grant date.

The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies with SFAS No. 123, “Accounting for Stock-Based Compensation,” for disclosure purposes. Under these provisions, no compensation expense has been recognized for the Company’s stock option plan. For SFAS No. 123 purposes, the fair value of each stock option has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	Three Months Ended March 31, 2005
Risk-free interest rate	4	%
Expected life	10
Expected volatility	28	%
Expected dividend yield	0.6	%

Using the above assumptions, additional compensation expense for stock option grants under the fair value method prescribed by SFAS No. 123 would be:


	Three Months Ended March 31, 2005
Compensation expense	$	248
Provision for income taxes		90

Total, net of taxes	$	158

Had compensation expense been determined consistently with the provisions of SFAS 123, utilizing the assumptions previously detailed, the Company’s net income and earnings per common share would have been the following pro forma amounts:


	Three Months Ended March 31, 2005
Net income
As reported	$	61,143
Pro forma compensation expense, net of taxes		158

Pro forma	$	60,985

Basic and diluted earnings per share
As reported:
Basic	$	0.94
Diluted	$	0.94
Pro forma:
Basic	$	0.94
Diluted	$	0.93

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 and does not expect the impact to be significant.

9. Pension and Post Retirement Benefits

Components of Net Periodic Costs are as follows:


	Three Months Ended March 31,
	Pension Benefits						Other Benefits
	2005			2004			2005		2004
Service cost	$	275		$	258		$	97	$	102
Interest cost		455			405			103		105
Expected return on plan assets		(482	)		(352	)		—		—
Amortization of transition obligation		—			—			28		28
Amortization of prior service cost		80			56			67		67
Amortization of net loss		69			65			62		54

Net periodic benefit cost	$	397		$	432		$	357	$	356

In the first quarters of 2005 and 2004, the Company has contributed $6,074 and $225 to the Salaried and Wage pension plans, respectively. The Company is not scheduled to contribute any additional funds to the pension plans during the fiscal year ending December 31, 2005.

10. Commitments and Contingencies

The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. Such commitments are at prices not in excess of market prices. Certain feedstock purchase commitments require taking delivery of minimum volumes at market-determined prices.

Environmental Matters

The Company is subject to environmental laws and regulations that can impose civil and criminal sanctions and that may require it to remove or mitigate the effects of the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. Because several of the Company’s production sites have a history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on the Company in the future. As is typical for chemical businesses, soil and groundwater contamination has occurred in the past at some of the Company’s sites and might occur or be discovered at other sites in the future. The Company has typically conducted extensive soil and groundwater assessments either prior to acquisitions or in connection with subsequent permitting requirements. The Company’s investigations have not revealed any contamination caused by the Company’s operations that would likely require the Company to incur material long-term remediation efforts and associated liabilities.

Calvert City

Contract Litigation with Goodrich and PolyOne. In connection with the 1990 and 1997 acquisitions of the Goodrich Corporation chemical manufacturing complex in Calvert City, Goodrich agreed to indemnify the Company for any liabilities related to preexisting contamination at the site. In addition, the Company agreed to indemnify Goodrich for contamination attributable to the ownership, use or operation of the plant after the closing date. The soil and groundwater at the manufacturing complex, which does not include the polyvinyl chloride facility in Calvert City, had been extensively contaminated by Goodrich’s operations. In 1993, the Geon Corporation was spun off from Goodrich, and Geon assumed the responsibility to operate the site-wide remediation system and the indemnification obligations for any liabilities arising from preexisting contamination at the site. Subsequently, Geon’s name was changed to PolyOne. Part of the former Goodrich facility, which the Company did not acquire and on which it does not operate and that it believes is still owned by either Goodrich or PolyOne, is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA. The investigation and remediation of contamination at the Company’s manufacturing complex is currently being coordinated by PolyOne.

Given the scope and extent of the underlying contamination at the Company’s manufacturing complex, the remediation will likely take a number of years. The costs incurred to treat contaminated groundwater collected from beneath the site were $2,836 in 2004, and the Company expects this level of expenditures to continue for the life of the remediation. For the past several years, PolyOne has suggested that the Company’s actions after its acquisition of the complex have contributed to or otherwise exacerbated the contamination at the site. The Company denied those allegations and has retained technical experts to evaluate its position. Goodrich has also asserted claims similar to those of PolyOne. In addition, Goodrich has asserted that the Company is responsible for a portion of the ongoing costs of treating contaminated groundwater being pumped from beneath the site and, since May 2003, has withheld payment of 45% of the costs that the Company incurs to operate Goodrich’s pollution control equipment located on the property. The Company met with Goodrich representatives in July and August of 2003 to discuss Goodrich’s assertions.

In October 2003, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky for unpaid invoices related to the groundwater treatment, which totaled approximately $2,206 as of March 31, 2005. Goodrich filed an answer and counterclaim in which it alleges that the Company is responsible for contamination at the facility. The Company denied those allegations and filed a motion to dismiss Goodrich’s counterclaim. By order dated April 9, 2004, the court dismissed part of Goodrich’s counterclaim while retaining the remainder. Goodrich also filed a third-party complaint against PolyOne. PolyOne in turn filed motions to dismiss, filed counterclaims against Goodrich and filed third-party claims against the Company in which it alleged that both Goodrich and the Company had conspired to defraud PolyOne. On June 8, 2004, the Company filed a motion for summary judgment on its contract claim against Goodrich. On June 16, 2004, the Company filed a motion to dismiss PolyOne’s claim. Discovery in the case commenced on July 15, 2004. By order dated February 24, 2005, the court extended the procedural schedule, with the trial date now set for June 2006. By order dated March 9, 2005, the court granted the Company’s motion to dismiss both of PolyOne’s cross-claims against the Company. On March 29, 2005, the court granted the Company’s motion for summary judgment on the Company’s claims against Goodrich. On April 12, 2005 Goodrich filed a motion for reconsideration of the order granting summary judgment. The case will continue with respect to Goodrich’s counterclaims against the Company.

Administrative Proceedings and Related Litigation. In addition, there are several administrative proceedings in Kentucky involving Goodrich and PolyOne. On September 23, 2003, the Kentucky State Cabinet re-issued Goodrich’s Resource Conservation and Recovery Act, or RCRA, permit which requires Goodrich to remediate contamination at the Calvert City manufacturing complex. Goodrich was named as the sole permittee. Both Goodrich and PolyOne have challenged that determination. Goodrich filed an appeal (Goodrich I) of that permit on October 23, 2003, and PolyOne filed a separate challenge (PolyOne I) on November 13, 2003. In both proceedings, Goodrich and PolyOne are seeking to shift Goodrich’s cleanup responsibilities under Goodrich’s RCRA permit to other parties, including the Company. The Company has either intervened directly or been named as a party in both of these proceedings. Mediation was conducted in these proceedings during 2004 but was unsuccessful. However, settlement discussions on these matters may start again. On September 27, 2004, the Kentucky State Cabinet sent PolyOne a determination requiring PolyOne to be added to the Goodrich RCRA permit due to PolyOne’s operation of the site remediation system. On October 22, 2004, PolyOne filed an appeal. The Company filed a motion on December 14, 2004 to intervene in that proceeding (PolyOne II). In this second proceeding, PolyOne is challenging the state’s determination that PolyOne is required to submit a major modification to the Goodrich permit and assume the regulatory status of an operator under the permit. PolyOne makes a number of charges against the Company that, if proven, might cause the Kentucky State Cabinet to demand that the Company also be added to the Goodrich permit.

On January 24, 2005, Goodrich filed a challenge (Goodrich II) to the Kentucky State Cabinet’s determination which rejected a Goodrich proposal to perform a particular soil remediation procedure. The Company has moved to intervene in PolyOne II and Goodrich II.

Goodrich and PolyOne have alleged in Goodrich I and PolyOne I that Goodrich cannot be held responsible for contamination on property they do not own. Both Goodrich and PolyOne have also alleged that the Company is responsible for contamination at the manufacturing complex, which the Company has denied. Discovery in Goodrich I and PolyOne I is just beginning.

On March 18, 2005, the Goodrich I and II and PolyOne I and II proceedings were consolidated and the hearing for the consolidated case was set for September 12, 2006.

On March 22, 2005, PolyOne filed a RCRA citizen suit against the Company in the United States District Court for the Western District of Kentucky, which covers the same issues raised in the Goodrich and PolyOne administrative proceedings. The Company’s answer in the citizen suit is due on May 22, 2005.

In January 2004, the Kentucky State Cabinet notified the Company by letter that, due to its ownership of a closed landfill (known as Pond 4) at the manufacturing complex, the Company would be required to submit a post-closure permit application under RCRA. This could require the Company to bear the responsibility and cost of performing remediation work on the pond and solid

waste management units and areas of concern located on property adjacent to the pond that is owned by the Company. The Company acquired Pond 4 from Goodrich in 1997 as part of the acquisition of other facilities. Under the contract, the Company has the right to reconvey title to Pond 4 back to Goodrich, which the Company has done. On March 21, 2005, the Company filed suit against Goodrich in the United States District Court for the Western District of Kentucky to require Goodrich to accept the reconveyance.

The Company has also filed an appeal with the Kentucky State Cabinet regarding its letter. Goodrich and PolyOne have both filed motions to intervene in this appeal. On July 1, 2004, the Company notified the Kentucky State Cabinet that the Company would prefer to conduct a clean-closure equivalency determination, or CCED, of Pond 4 rather than pursue a permit. The proposal to conduct the CCED was rejected by the Kentucky State Cabinet. By letter dated, December 21, 2004, the Kentucky Cabinet directed the Company to file a post-closure permit application for Pond 4. On February 23, 2005, the Company filed a motion for stay of the order requiring the Company to file the permit application pending the outcome of the litigation. On February 18, 2005, the Company also sent a demand letter to the Kentucky State Cabinet that it enforce the Goodrich RCRA permit against Goodrich since the RCRA permit requires Goodrich to address Pond 4. On March 25, 2005, the Kentucky State Cabinet issued a new determination allowing the Company until September 26, 2005 to file the permit application.

Monetary Relief. None of the parties involved in the proceedings relating to the disputes with Goodrich and PolyOne and the Kentucky State Cabinet described above has formally quantified the amount of monetary relief that they are seeking from the Company (except Goodrich, which is withholding 45% of the groundwater treatment costs that are being charged to them), nor has the court or the Kentucky State Cabinet proposed or established an allocation of the costs of remediation among the various participants. As of March 31, 2005, the aggregate amount withheld by Goodrich was approximately $2,206. Any monetary liabilities that the Company might incur with respect to the remediation of contamination at the manufacturing complex in Calvert City would likely be spread out over an extended period. While the Company has denied responsibility for any such remediation costs and is actively defending its position, the Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows.

Environmental Investigations. In March and June 2002, the EPA’s National Enforcement Investigations Center, or NEIC, conducted an environmental investigation of the Company’s manufacturing complex in Calvert City consisting of the ethylene dichloride (“EDC”)/vinyl chloride monomer (“VCM”), ethylene and chlor-alkali plants. In May 2003, the Company received a report prepared by the NEIC summarizing the results of that investigation. Among other things, the NEIC concluded that the requirements of several regulatory provisions had not been met. The Company analyzed the NEIC report and identified areas where it believes that erroneous factual or legal conclusions, or both, may have been drawn by the NEIC. The Company has held a number of discussions with the EPA concerning its conclusions. In February 2004, representatives of the EPA orally informed the Company that the agency proposed to assess monetary penalties against it and to require it to implement certain injunctive relief to ensure compliance. In addition, the EPA’s representatives informed the Company that the EPA, the NEIC and the Kentucky State Cabinet would conduct an inspection of its polyvinyl chloride (“PVC”) facility in Calvert City, which is separate from the manufacturing complex and was not visited during the 2002 inspection. That additional inspection took place in late February 2004. The Company has not yet received a written report from the agencies regarding the actions that they propose to take in response to that visit. The EPA has submitted to the Company an information request under Section 114 of the Clean Air Act and has issued a Notice of Violation, both pertaining to the inspection of the EDC/VCM plant. The Notice of Violation does not propose any specific penalties. The Company met with the EPA on June 8 and 9, 2004 and is continuing to have settlement discussions with the agency. The EPA has also issued to the Company information requests under Section 3007 of RCRA and Section 114 of the Clean Air Act regarding the PVC plant inspection. It is likely that monetary penalties will be imposed, that capital expenditures for installation of environmental controls will be required, or that other relief will be sought, or all or some combination of the preceding, by either the EPA or the Kentucky State Cabinet as a result of the environmental investigations in Calvert City. In such case, the Company expects that, based on the EPA’s past practices, the amount of any monetary penalties would be reduced by a percentage of the expenditures that the Company would agree to make for certain “supplemental environmental projects.” The Company is not in a position at this time to state what effect, if any, these proceedings could have on the Company’s financial condition, results of operations, or cash flows. However, the Company has recorded an accrual for a probable loss related to monetary penalties. Although the ultimate amount of liability is not ascertainable, the Company believes that any amounts exceeding the recorded accruals should not materially affect the Company’s financial condition. It is possible, however, that the ultimate resolution of this matter could result in a material adverse effect on the Company’s results of operations for a particular reporting period.

Legal Matters

In October 2003, the Company filed suit against CITGO Petroleum Corporation in state court in Lake Charles, Louisiana, asserting that CITGO had failed to take sufficient hydrogen under two successive contracts pursuant to which the Company has supplied and the Company supplies to CITGO hydrogen that the Company generates as a co-product in its ethylene plants in Lake

Charles. In December 2003, CITGO responded with an answer and a counterclaim against the Company, asserting that CITGO had overpaid the Company for hydrogen due to the Company’s allegedly faulty sales meter and that the Company is obligated to reimburse CITGO for the overpayments. In January 2004, the Company filed a motion to compel arbitration of CITGO’s counterclaim and to stay all court proceedings relating to the counterclaim. In May 2004, the parties filed a joint motion with the court to provide for CITGO’s counterclaim to be resolved by arbitration. The Company’s claim against CITGO is approximately $8,100 plus interest at the prime rate plus two percentage points and attorneys’ fees. CITGO’s claim against the Company is approximately $7,800 plus interest at the prime rate plus two percentage points and attorneys’ fees. The parties held a mediation conference in April 2004 at which they agreed to conduct further discovery with a view towards holding another mediation conference to attempt to settle their disputes. Subsequently, the parties have held high-level executive discussions regarding a settlement. The Company can offer no assurance that a settlement can be achieved, and if no settlement is achieved, the Company intends to vigorously pursue its claim against CITGO and its defense of CITGO’s counterclaim.

In December 2003, the Company was served with a petition as a defendant in a suit in state court in Denver, Colorado, brought by International Window – Colorado, Inc. (“IWC”) against several other parties. As the suit relates to the Company, IWC claimed that the Company breached an exclusive license agreement by supplying window-profiles products into a restricted territory and that the Company improperly assisted a competitor of IWC, resulting in lost profits to IWC and a collapse of IWC’s business. IWC claimed damages against the Company of approximately $5,400, subsequently reduced to approximately $1,700. The Company settled this case with IWC for a lesser amount on February 16, 2005.

In addition to the matters described above, the Company is involved in various routine legal proceedings incidental to the conduct of its business. The Company does not believe that any of these routine legal proceedings will have a material adverse effect on its financial condition, results of operations or cash flows.

11. Segment Information

The Company operates in two principal business segments: Olefins and Vinyls. These segments are strategic business units that offer a variety of different products. The Company manages each segment separately as each business requires different technology and marketing strategies.


	Three Months Ended March 31,
	2005			2004
Net sales to external customers
Olefins
Polyethylene	$	169,487		$	121,720
Ethylene, styrene and other		207,180			138,156

Total olefins		376,667			259,876
Vinyls
Fabricated finished goods		126,651			73,523
VCM, PVC and other		115,298			67,495

Total vinyls		241,949			141,018

	$	618,616		$	400,894

Intersegment sales
Olefins	$	26,972		$	10,640
Vinyls		277			141

	$	27,249		$	10,781

Income (loss) from operations
Olefins	$	62,412		$	30,974
Vinyls		41,652			(3,261	)
Corporate and other		(2,356	)		(798	)

	$	101,708		$	26,915

Depreciation and amortization
Olefins	$	12,754		$	13,162
Vinyls		8,329			7,527
Corporate and other		—			209

	$	21,083		$	20,898

Other income (expense), net
Olefins	$	299		$	(1,163	)
Vinyls		30			10
Corporate and other		386			1,080

		715			(73	)
Debt retirement cost		(646	)		—

	$	69		$	(73	)

Capital expenditures
Olefins	$	4,338		$	2,590
Vinyls		12,153			8,437
Corporate and other		845			18

	$	17,336		$	11,045

A reconciliation of total segment income from operations to consolidated income before taxes is as follows:


	Three Months Ended March 31,
	2005			2004
Income from operations	$	101,708		$	26,915
Interest expense		(6,154	)		(10,752	)
Debt retirement cost		(646	)		—
Other income (expense), net		715			(73	)

Income (loss) before taxes	$	95,623		$	16,090


	March 31, 2005		December 31, 2004
Total Assets
Olefins	$	968,644	$	958,493
Vinyls		520,963		486,197
Corporate and other		138,702		147,763

	$	1,628,309	$	1,592,453

12. Comprehensive Income Information


	Three Months Ended March 31,
	2005			2004
Net income	$	61,143		$	10,685
Other comprehensive income (loss):
Change in foreign currency translation		(85	)		(142	)

Comprehensive income	$	61,058		$	10,543

13. Long-Term Debt

Long-term indebtedness consists of the following:


	March 31, 2005			December 31, 2004
8 3/4% Senior notes due 2011	$	247,000		$	247,000
Term loan		9,900			40,200
Loan related to tax-exempt revenue bonds		10,889			10,889

Total debt		267,789			298,089
Less current portion		(1,200	)		(1,200	)

Long-term debt	$	266,589		$	296,889

In the first quarter of 2005, the Company repaid $30,300 of its senior term loan and incurred an additional $646 of non-operating expense related to the write off of previously capitalized debt issuance costs.

14. Subsequent Event

On May 3, 2005, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission for the offering from time to time of up to $750 million in gross proceeds of senior or subordinated debt securities, preferred stock, common stock and warrants to purchase debt securities, preferred stock and common stock. The registration statement has not been declared effective by the Securities and Exchange Commission.

15. Guarantor Disclosures

The Company’s payment obligations under its 8 3/4% senior notes are fully and unconditionally guaranteed by each of its current and future restricted subsidiaries (the “Guarantor Subsidiaries”). Each Guarantor Subsidiary is 100% owned by the parent company. These guarantees are the joint and several obligations of the Guarantor Subsidiaries. The following unaudited condensed consolidating financial information presents the financial condition, results of operations and cash flows of Westlake Chemical Corporation, the Guarantor Subsidiaries and the remaining subsidiaries that do not guarantee the notes (the “Non-Guarantor Subsidiaries”), together with consolidating adjustments necessary to present the Company’s results on a consolidated basis.

Condensed Consolidating Financial Information as of March 31, 2005


	Westlake Chemical Corporation		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Balance Sheet
Current assets
Cash and cash equivalents	$	42,017	$	87		$	4,531	$	—		$	46,635
Accounts receivable, net		325,209		269,617			3,431		(312,128	)		286,129
Inventories, net		—		308,429			9,752		—			318,181
Prepaid expenses and other current assets		10		5,687			1,441		—			7,138
Deferred income taxes		53,189		—			810		—			53,999

Total current assets		420,425		583,820			19,965		(312,128	)		712,082
Property, plant and equipment, net		41		844,302			9,529		—			853,872
Equity Investment		911,895		15,300			18,005		(927,195	)		18,005
Other assets, net		44,560		30,618			5,200		(36,028	)		44,350

Total assets	$	1,376,921	$	1,474,040		$	52,699	$	(1,275,351	)	$	1,628,309

Current liabilities
Accounts payable	$	10,604	$	156,854		$	622	$	1		$	168,081
Accrued liabilities		31,959		58,450			2,144		124			92,677
Current portion of long-term debt		1,200		—			—		—			1,200

Total current liabilities		43,763		215,304			2,766		125			261,958
Long-term debt		255,700		354,044			5,128		(348,283	)		266,589
Deferred income taxes		235,156		(1,405	)		890		—			234,641
Other liabilities		12,838		22,820			—		(1	)		35,657
Stockholders’ equity		829,464		883,277			43,915		(927,192	)		829,464

Total liabilities and stockholders’ equity	$	1,376,921	$	1,474,040		$	52,699	$	(1,275,351	)	$	1,628,309

Condensed Consolidating Financial Information as of December 31, 2004


	Westlake Chemical Corporation		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Balance Sheet
Current assets
Cash and cash equivalents	$	39,312	$	70		$	4,014	$	—		$	43,396
Accounts receivable, net		378,436		218,523			4,698		(367,410	)		234,247
Inventories, net		—		311,789			8,027		—			319,816
Prepaid expenses and other current assets		10		7,331			1,348		—			8,689
Deferred income taxes		65,790		—			—		—			65,790

Total current assets		483,548		537,713			18,087		(367,410	)		671,938
Property, plant and equipment, net		41		845,273			9,738		—			855,052
Equity Investment		814,248		15,300			18,082		(829,548	)		18,082
Other assets, net		44,982		32,406			6,022		(36,029	)		47,381

Total assets	$	1,342,819	$	1,430,692		$	51,929	$	(1,232,987	)	$	1,592,453

Current liabilities
Accounts payable	$	16,302	$	129,916		$	672	$	—		$	146,890
Accrued liabilities		21,114		79,788			1,377		(154	)		102,125
Current portion of long-term debt		1,200		—			—		—			1,200

Total current liabilities		38,616		209,704			2,049		(154	)		250,215
Long-term debt		286,000		408,899			5,275		(403,285	)		296,889
Deferred income taxes		235,968		(1,406	)		599		—			235,161
Other liabilities		12,838		27,953			—		—			40,791

Stockholders’ equity		769,397		785,542			44,006		(829,548	)		769,397

Total liabilities and stockholders’ equity	$	1,342,819	$	1,430,692		$	51,929	$	(1,232,987	)	$	1,592,453

Condensed Consolidating Financial Information for the Three Months Ended March 31, 2005


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	614,014		$	7,912		$	(3,310	)	$	618,616
Cost of sales		—			494,983			7,160			(3,310	)		498,833

		—			119,031			752			—			119,783
Selling, general and administrative expenses		624			16,723			728			—			18,075

Income (loss) from operations		(624	)		102,308			24			—			101,708
Interest expense		(1,011	)		(5,143	)		—			—			(6,154	)
Other income (expense), net		61,987			548			25			(62,491	)		69

Income (loss) before income taxes		60,352			97,713			49			(62,491	)		95,623
Provision for (benefit from) income taxes		(791	)		35,178			93			—			34,480

Net income (loss)	$	61,143		$	62,535		$	(44	)	$	(62,491	)	$	61,143

Condensed Consolidating Financial Information for the Three Months Ended March 31, 2004


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Operations
Net sales	$	—		$	396,034		$	5,459		$	(599	)	$	400,894
Cost of sales		—			358,105			4,581			(599	)		362,087

		—			37,929			878			—			38,807
Selling, general and administrative expenses		332			10,896			664			—			11,892

Income (loss) from operations		(332	)		27,033			214			—			26,915
Interest expense		(5,195	)		(5,557	)		—			—			(10,752	)
Other income (expense), net		14,344			(761	)		644			(14,300	)		(73	)

Income (loss) before income taxes		8,817			20,715			858			(14,300	)		16,090
Provision for (benefit from) income taxes		(1,868	)		7,888			(615	)		—			5,405

Net income (loss)	$	10,685		$	12,827		$	1,473		$	(14,300	)	$	10,685

Condensed Consolidating Financial Information for the Three Months Ended March 31, 2005


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Cash Flows
Net income (loss)	$	61,143		$	62,535		$	(44	)	$	(62,491	)	$	61,143
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		387			20,443			640			—			21,470
Provision for bad debts		—			464			18			—			482
(Gain) loss from disposition of fixed assets		—			267			—			—			267
Deferred tax expense		(791	)		12,579			(517	)		—			11,271
Equity income (loss) of unconsolidated subsidiary		—			—			77			—			77
Write off of debt retirement costs		646			—			—			—			646
Net changes in working capital and other		(79,608	)		(26,933	)		950			62,491			(43,100	)

Net cash provided by (used for) operating activities		(18,223	)		69,355			1,124			—			52,256
Additions to property, plant and equipment		—			(16,877	)		(459	)		—			(17,336	)

Net cash used for investing activities		—			(16,877	)		(459	)		—			(17,336	)
Intercompany financing		52,609			(52,461	)		(148	)		—			—
Dividends paid		(1,381	)		—			—			—			(1,381	)
Repayments of borrowings		(30,300	)		—			—			—			(30,300	)

Net cash used for financing activities		20,928			(52,461	)		(148	)		—			(31,681	)
Net increase (decrease) in cash and cash equivalents		2,705			17			517			—			3,239
Cash and cash equivalents at beginning of period		39,312			70			4,014			—			43,396

Cash and cash equivalents at end of period	$	42,017		$	87		$	4,531		$	—		$	46,635

Condensed Consolidating Financial Information for the Three Months Ended March 31, 2004


	Westlake Chemical Corporation			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Statement of Cash Flows
Net income (loss)	$	10,685		$	12,827		$	1,473		$	(14,300	)	$	10,685
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		552			20,356			542			—			21,450
Provision for bad debts		—			(778	)		—			—			(778	)
Gain from disposition of fixed assets		—			(231	)		—			—			(231	)
Deferred tax expense		(1,868	)		7,796			(784	)		—			5,144
Equity income (loss) of unconsolidated subsidiary		—			—			(532	)		—			(532	)
Net changes in working capital and other		124,547			(164,283	)		(505	)		14,300			(25,941	)

Net cash provided by (used for) operating activities		133,916			(124,313	)		194			—			9,797
Additions to property, plant and equipment		—			(8,952	)		(2,093	)		—			(11,045	)
Other		—			1,006			—			—			1,006

Net cash provided by (used for) investing activities		—			(7,946	)		(2,093	)		—			(10,039	)
Intercompany financing		(132,120	)		132,304			(184	)		—			—
Repayments of borrowings		(300	)		—			—			—			(300	)

Net cash used for financing activities		(132,420	)		132,304			(184	)		—			(300	)
Net increase in cash and cash equivalents		1,496			45			(2,083	)		—			(542	)
Cash and cash equivalents at beginning of period		32,101			44			5,236			—			37,381

Cash and cash equivalents at end of period	$	33,597		$	89		$	3,153		$	—		$	36,839

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with information contained in the accompanying unaudited consolidated interim financial statements of Westlake Chemical Corporation and the notes thereto and the December 31, 2004 financial statements and notes thereto of Westlake Chemical Corporation included in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The following discussion contains forward-looking statements. Please read “Forward-Looking Statements” for a discussion of limitations inherent in such statements.

Westlake Chemical Corporation is a vertically integrated manufacturer and marketer of petrochemicals, polymers and fabricated products. Our two principal business segments are Olefins and Vinyls. We use the majority of our internally-produced basic chemicals to produce higher value-added chemicals and fabricated products.

RECENT DEVELOPMENTS

Geismar Start-Up

We have begun a phased start-up of the VCM and PVC portions of our facilities in Geismar, Louisiana. We acquired the EDC, VCM, and PVC plants at Geismar in December 2002 and have been operating the EDC plant since November 2003. The VCM and PVC plants each have an estimated rated capacity of 600 million pounds per year. The PVC plant is comprised of two trains. The first phase of the PVC and VCM start-up, which commenced in December 2004, consisted of starting up the VCM plant and one train of the PVC plant. We expect that the majority of the first phase of the PVC start-up production will be consumed internally as a result of the acquisition of three PVC pipe plants from Bristolpipe Corporation. In addition to a graduated start-up of the VCM and PVC operations, we will also be investing in technological modifications in the EDC plant at Geismar. These technological modifications are expected to expand total EDC capacity by an estimated 25%. Start-up of the second phase will be determined by market conditions at the time. The cost of capital expenditures and pre-operating expenses in connection with the start-up was approximately $17.8 million in 2004 and is expected to be approximately $13.9 million in 2005.

RESULTS OF OPERATIONS

First Quarter 2005 Compared with First Quarter 2004

Net Sales. Net sales increased by $217.7 million, or 54.3%, to $618.6 million in the first quarter of 2005 from $400.9 million in the first quarter of 2004. This increase was primarily due to price increases throughout our Olefins and Vinyls segments and higher sales volumes in ethylene, styrene, VCM, caustic, PVC resin and PVC pipe. Higher selling prices largely resulted from stronger demand for our products and higher raw material costs that were passed through to customers. PVC pipe sales were higher due to the acquisition of the assets of Bristolpipe Corporation, which was completed on August 2, 2004.

Gross Margin. Gross margins increased to 19.2% in the first quarter of 2005 from 9.7% in the first quarter of 2004. This increase was primarily due to higher selling prices throughout our Olefins and Vinyls segments and higher sales volumes for ethylene, styrene, VCM, caustic, PVC resin and PVC pipe. These increases were partially offset by higher raw material costs for ethane, propane and benzene. Our raw materials costs in both segments normally track industry prices, which experienced an increase of 21.2% for ethane, 20.0% for propane and 66.8% for benzene as compared to the first quarter of 2004.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $6.2 million, or 52.0%, in the first quarter of 2005 as compared to the first quarter of 2004. The increase was primarily due to costs related to compliance with the Sarbanes-Oxley Act, higher compensation expenses, increased provision for doubtful accounts, increased sales commissions and increased costs resulting from the Bristolpipe acquisition. First quarter 2005 costs also increased as compared to the first quarter 2004 due to the receipt of $1.5 million in the first quarter of 2004 resulting from a legal settlement with a customer.

Interest Expense. Interest expense in the first quarter of 2005 decreased by $4.6 million to $6.2 million from $10.8 million in the first quarter of 2004 due to lower average debt balances, which were partially offset by slightly higher average interest rates. The average monthly debt balance decreased by $252.5 million to $284.7 million as of March 31, 2005 from $537.2 million as of March 31, 2004.

Debt Retirement Cost. We recognized $0.6 million in non-operating expense in the first quarter of 2005 resulting from a write-off in previously capitalized debt issuance cost in connection with the repayment of $30.3 million of our term loan.

Other Income (Expense), Net. Other income (expense), net increased by $0.8 million from an expense of $0.1 million in the first quarter of 2004 to income of $0.7 million in the first quarter of 2005. The increase was primarily due to a derivative gain of $0.3 million in the first quarter of 2005 as compared to a derivative loss of $1.2 million in the first quarter of 2004. This gain was partially offset by lower income from unconsolidated subsidiaries.

Income Taxes. The effective income tax rate was 36.1% in the first quarter of 2005 as compared to 33.6% in the first quarter of 2004. The first quarter of 2005 rate is higher than the statutory rate primarily due to state income taxes and reflects a tax benefit of approximately 1% related to the new domestic manufacturing deduction. The effective tax rate in the first quarter of 2004 was below the statutory rate mainly due to a reduction in the Canadian statutory tax rate.

Olefins Segment

Net Sales. Net sales increased by $116.8 million, or 44.9%, to $376.7 million in the first quarter of 2005 from $259.9 million in the first quarter of 2004. This increase was primarily due to price increases for ethylene, polyethylene and styrene and higher sales volumes for ethylene and styrene. Average selling prices for the Olefins segment increased by 30.2% in the first quarter of 2005 as compared to the first quarter of 2004. These increased prices and sales volumes were mainly due to higher industry demand. Selling prices were also higher due to higher raw material costs that were largely passed through to customers.

Income from Operations. Income from operations increased by $31.4 million to $62.4 million in the first quarter of 2005 from $31.0 million in the first quarter of 2004. This increase was primarily due to price increases for ethylene, polyethylene and styrene and higher sales volumes for ethylene and styrene. These increases were partially offset by higher raw material costs for ethane, propane and benzene and higher energy costs.

Vinyls Segment

Net Sales. Net sales increased by $100.9 million, or 71.6%, to $241.9 million in the first quarter of 2005 from $141.0 million in the first quarter of 2004. This increase was primarily due to higher selling prices and volumes for all of our vinyls products. Average selling prices for the Vinyls segment increased by 48.1% in the first quarter of 2005 as compared to the first quarter of 2004. These increases were largely due to stronger industry demand for our products and higher raw material costs for propane that were passed through to our customers. PVC pipe sales volume increased due to the acquisition of the assets of Bristolpipe Corporation, which was completed on August 2, 2004.

Income (Loss) from Operations. Income from operations increased by $45.0 million to $41.7 million in the first quarter of 2005 from a $3.3 million loss in the first quarter of 2004. This increase was primarily due to higher selling prices and volumes for all of our vinyls products. These increases were partially offset by higher energy costs and higher raw material costs for propane. The first quarter 2004 earnings were adversely impacted by a fire at the Calvert City ethylene plant. We estimate that the impact on operating income from the outage relating to the fire was approximately $12.5 million.

CASH FLOW DISCUSSION FOR THREE MONTHS ENDED MARCH 31, 2005 AND 2004

Cash Flows

Operating Activities

Operating activities provided cash of $52.3 million in the first three months of 2005 compared to $9.8 million in the same period in 2004. The $42.5 million increase in cash flows from operating activities was primarily due to improvements in income from operations, as described above, partially offset by unfavorable changes in working capital. Income from operations increased by $74.8 million in the first three months of 2005 as compared to the first three months of 2004. Changes in components of working capital, which we define for purposes of this cash flow discussion as accounts receivable, inventories, prepaid expense and other current assets less accounts payable and accrued liabilities, used cash of $37.4 million in the first three months of 2005, compared to $25.5 million of cash used in the first three months of 2004, an increase in cash use of $11.9 million. In the first three months of 2005, receivables increased by $52.4 million largely due to higher selling prices and sales volumes while inventory remained flat. Accounts payable and accrued liabilities increased by $11.7 million during the first quarter of 2005. The primary reason for the $25.5 million use of cash in the first three months of 2004 related to working capital components was a $17.5 million increase in inventories and a $11.1 million decrease in accounts payable and accrued liabilities partially offset by an decrease in receivables of $2.3 million and prepaids and other current assets of $0.9 million. The increase in inventories was primarily due to higher production and higher feedstock and energy prices.

Investing Activities

Net cash used in investing activities was $17.3 million in the first three months of 2005 as compared to $10.0 million in the first three months of 2004. Capital expenditures in the first quarter of 2005 and 2004 were $17.3 million and $11.0 million, respectively, and were primarily related to maintenance, safety and environmental projects. The first quarter 2004 capital spending was partially offset by $1.0 million of proceeds from the disposition of assets.

Financing Activities

Net cash used by financing activities during the first three months of 2005 was $31.7 million. During the first three months of 2005 we used $30.3 million to repay debt and $1.4 million to pay dividends. In the first three months of 2004, net cash used by financing activities was $0.3 million, which was used to repay debt.

Liquidity and Capital Resources

Liquidity and Financing Arrangements

Our principal sources of liquidity are from cash and cash equivalents, cash from operations, short-term borrowings under our revolving credit facility and our long-term financing.

Cash

Cash balances were $46.6 million at March 31, 2005 compared to $43.4 million at December 31, 2004. We believe the March 31, 2005 cash levels are adequate to fund our short-term cash requirements.

Debt

Our present debt structure is used to fund our business operations, and our revolving credit facility is a source of liquidity. At March 31, 2005, our long-term debt, including current maturities, totaled $267.8 million, consisting of $247.0 million principal amount of 8³/4% senior notes due 2011, a $9.9 million senior secured term loan due in 2010 and a $10.9 million loan from the proceeds of tax-exempt revenue bonds (supported by a $11.3 million letter of credit). Debt outstanding under the term loan and the tax-exempt bonds bore interest at variable rates. In the first quarter of 2005, we recognized $0.6 million in non-operating expense resulting from the write off in previously capitalized debt issuance costs in connection with the repayment of $30.3 million of our term loan.

On August 16, 2004 we completed our initial public offering (“IPO”). Net proceeds from the IPO were $181.2 million. We used the proceeds from the IPO along with available cash on hand to redeem $133.0 million aggregate principal amount of our 8³/4% senior notes due July 15, 2011, to repay $28.0 million of our senior secured term loan maturing in July 2010 and to repay in full a $27.0 million bank loan. As a result of the early payment on the 8³/4% senior notes, we recognized $14.7 million in non-operating expense in the third quarter of 2004 consisting of a repayment premium on the notes of $11.6 million and a write-off of $3.1 million in previously capitalized debt issuance cost.

On July 31, 2003, we completed a refinancing of substantially all of our outstanding long-term debt. As a result of the refinancing, we recognized $11.3 million in non-operating expense in the first quarter of 2004 consisting of the $4.0 million make-whole premium and a write off of $7.3 million in previously capitalized debt issuance expenses.

The refinancing consisted of:

•

$380.0 million in aggregate principal amount of 8³/4% senior notes due 2011;

•

$120.0 million senior secured term loan due in 2010; and

•

$21.0 million in borrowings under a new $200.0 million senior secured working capital revolving credit facility due in 2007.

We incurred approximately $14.1 million in costs associated with the refinancing that were capitalized and that will be amortized over the term of the new debt.

The 8³/4% senior notes are unsecured. There is no sinking fund and no scheduled amortization of the notes prior to maturity. The notes are subject to redemption and holders may require us to repurchase the notes upon a change of control. All restricted subsidiaries are guarantors of the senior notes.

At inception the term loan bore interest at either the Eurodollar Rate plus 3.75% or prime rate plus 2.75%. Quarterly principal payments of $0.3 million are due on the term loan beginning on September 30, 2003, with the balance due in four equal quarterly installments in the seventh year of the loan. We used the proceeds from the IPO to prepay $28.0 million of the term loan in August 2004, which prepayment was applied to and reduced the final installment of the term loan. Mandatory prepayments are due on the term loan with the proceeds of asset sales and casualty events subject, in some instances, to reinvestment provisions. The term loan also required prepayment with 50% of excess cash flow as determined under the term loan agreement. The term loan is collateralized by our Lake Charles and Calvert City facilities and some related intangible assets. Effective September 30, 2004, we and our lenders entered into an amendment to the term loan that reduced the applicable interest rate so that the term loan now bears interest at either the Eurodollar Rate plus 2.25% or prime rate plus 1.25%. The amendment also eliminated the requirement to use excess cash flow to repay the term loan.

The revolving credit facility bore interest at either LIBOR plus 2.25% or prime rate plus 0.25%, subject to grid pricing adjustment based on a fixed charge coverage ratio after the first year and subject to a 0.5% unused line fee. The revolving credit facility is also subject to a termination fee if terminated during the first two years. The revolving credit agreement was amended February 24, 2004, June 22, 2004 and November 30, 2004 to, among other things, lower the applicable interest rate by 0.5% on the pricing grid, modify the termination fee, extend the maturity date by one year, and revise various definitions and covenants to allow the IPO and the Bristolpipe acquisition and to facilitate our operations. The revolving credit facility is collateralized by accounts receivable and contract rights, inventory, chattel paper, instruments, documents, deposit accounts and related intangible assets. The revolving credit facility matures in 2008. We had standby letters of credit outstanding at March 31, 2005 of $13.7 million. We had $186.3 million of available borrowing capacity at March 31, 2005 under this facility.

The agreements governing the 8³/4% senior notes, the term loan, and the revolving credit facility each contain customary covenants and events of default. Accordingly, these agreements impose significant operating and financial restrictions on us. These restrictions, among other things, limit incurrence of additional indebtedness, payment of dividends, significant investments and sales of assets. These limitations are subject to a number of important qualifications and exceptions. The 8¾% senior notes indenture and the term loan do not allow distributions unless, after giving pro forma effect to the distribution, our fixed charge coverage ratio is at least 2.0 and such distribution, together with the aggregate amount of all other restricted payments since July 31, 2003 is less than the sum of 50% of our consolidated net income for the period from the fourth quarter of 2003 to the end of the most recent quarter for which financial statements have been delivered (the percentage will be increased to 100% if and for so long as the 8¾% senior notes are rated investment grade), plus 100% of net cash proceeds received after July 31, 2003 as a contribution to our common equity capital or from the issuance or sale of equity securities, plus $25 million. The amount under this restriction was $297.1 million at March 31, 2005. Our revolving credit facility also restricts dividend payments unless, after giving effect to such payment, the availability equals or exceeds $100 million. None of the credit agreements require us to generally maintain specified financial ratios, except that our revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 when availability falls below $50 million for three consecutive business days, or below $35 million at any time.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our liquidity needs for the foreseeable future.

Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

OUTLOOK

We continue to see general strength in demand and operating rates for our industry. This strength resulted in improved earnings in the first quarter despite increased raw material and energy costs. Short term results, however, remain vulnerable to raw materials and energy price spikes, quarterly inventory adjustments, global economic swings, political tensions and regional weather conditions. Industry conditions lead us to believe an improving supply/demand balance that began in 2003 will continue in the near term.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Certain of the statements contained in this report are forward-looking statements. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These include such matters as:

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production capacities;

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our ability to borrow additional funds under our credit facility;

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our ability to meet our liquidity needs;

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timing of and capital expenditures related to the Geismar facility startup;

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expected outcomes of legal and administrative proceedings and their expected effects on our financial position, results of operations and cash flows; and

•

compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures and remedial actions.

We have based these statements on assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe were appropriate in the circumstances when the statements were made. These statements are subject to a number of assumptions, risks and uncertainties, including those described in “Risk Factors” in Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the following:

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general economic and business conditions;

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the cyclical nature of the chemical industry;

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the availability, cost and volatility of raw materials and energy;

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uncertainties associated with the United States and worldwide economies, including those due to political tensions in the Middle East and elsewhere;

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current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;

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industry production capacity and operating rates;

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the supply/demand balance for our products;

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competitive products and pricing pressures;

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access to capital markets;

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terrorist acts;

•

operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);

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changes in laws or regulations;

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technological developments;

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our ability to implement our business strategies; and

•

creditworthiness of our customers.

Many of these factors are beyond our ability to control or predict. Any of the factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

Commodity Price Risk

A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. Our strategies include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. We use derivative instruments in certain instances to reduce price volatility risk on feedstocks and products. Based on our open derivative positions at March 31, 2005, a hypothetical $0.10 increase in the price of a gallon of ethane would have increased our income before taxes by $1.3 million and a hypothetical $0.10 increase in the price of a gallon of benzene would have decreased our income before taxes by $0.2 million. Additional information concerning derivative commodity instruments appears in the consolidated financial information appearing elsewhere in this report.

Interest Rate Risk

We are exposed to interest rate risk with respect to fixed and variable rate debt. At March 31, 2005, we had variable rate debt of $20.8 million outstanding. All of the debt under our credit facility, tax exempt revenue bonds, and term loan is at variable rates. We do not currently hedge our variable interest rate debt, but we may do so in the future. The average variable interest rate for our variable rate debt of $20.8 million as of March 31, 2005 was 3.76%. A hypothetical 100 basis point increase in the average interest rate on our variable rate debt would increase our annual interest expense by approximately $0.2 million. Also, at March 31, 2005, we had $247.0 million of fixed rate debt. As a result, we are subject to the risk of higher interest cost if and when this debt is refinanced. If interest rates are 1% higher at the time of refinancing, our annual interest expense would increase by approximately $2.5 million.

Item 4. Controls And Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. In the course of this evaluation, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Beginning with the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our Annual Report on Form 10-K. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for our company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our registered independent public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting. In order to achieve compliance with Section 404 within the prescribed period, management has formed an internal control steering committee, engaged outside consultants and adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, remediate any control weaknesses that may be identified, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As a result of this initiative, we may make changes in our internal control over financial reporting from time to time during the period prior to December 31, 2005.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Westlake Chemical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005, contained a description of various legal proceedings in which we are involved, including environmental proceedings at our facilities in Calvert City, Kentucky. See Note 10 to Consolidated Financial Statements for an update of certain of those proceedings, which information is incorporated by reference herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 2005	—		—	N/A	N/A
February 2005	50,860	$	35.035	N/A	N/A
March 2005	—		—	N/A	N/A

	50,860	$	35.035	N/A	N/A

⁽¹⁾	The shares purchased during the period covered by this report represent shares withheld by us in satisfaction of withholding taxes due upon the vesting of restricted stock granted to our employees under the 2004 Omnibus Plan.

Item 6. Exhibits


Exhibit No.		Exhibit
12.1		Computation of Earnings to Fixed Charges for 2000 – 2004 and the three month period ended March 31, 2005.
31.1		Rule 13a – 14(a) / 15d – 14(a) Certification (Principal Executive Officer).
31.2		Rule 13a – 14(a) / 15d – 14(a) Certification (Principal Financial Officer).
32.1		Section 1350 Certification (Principal Executive Officer and Principal Financial Officer).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WESTLAKE CHEMICAL CORPORATION

Date: May 10, 2005	By:	/s/ Albert Chao
		Albert Chao
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 10, 2005	By:	/s/ Ruth I. Dreessen
		Ruth I. Dreessen
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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