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Dow Chemical: Risks for Investors
Presentation to Analysts April 21st 2004
Marc BrammerSenior Analyst
4 Times Square 3rd FloorTel. 646-237-0217
1
Presentation Agenda
• Introduction• Bhopal Resolution
• History of Bhopal • Key Points for Shareholders
• Business Risks from Organochlorines• Environmental Liability Overview
• Midland Michigan• Agent Orange• Other Risks
• Disclosure Issues
2
Shareholder Resolution Text
• Supporting StatementThe proponents believe that such report should also assess the impacts that the Bhopal matter may reasonably pose on the company, its reputation, its finances and its expansion in Asia and elsewhere.
• Resolvedthat shareholders request the
management of Dow Chemical to prepare a report to shareholders by October 2004, at reasonable cost and excluding confidential information, describing new initiatives instituted by the management to address the specific health, environmental and social concerns of the survivors.
3
• Dow dialogue process with survivors and concerned shareholders begun at time of purchase and actively explored into 2002
• Survivors’ Issues:• Clean up contamination• Health monitoring and care including disclosure of
internal Carbide Health studies• Social support - widows and orphans due to disaster
10, 000 persons widowed or orphaned • Economic rehabilitation of those unable to work
40,000 severely disabled survivors
Bhopal Survivors, Shareholders and Dow Chemical
4
• Shareholders’ Issues:• Financial risk from cases still pending• Reputational risk and impacts • Transparency/undisclosed liabilities with
parallels: • asbestos• agent orange• dioxin
• Dialogues halted by Dow when Stavropoulosbecame CEO
Bhopal Survivors, Shareholders and Dow Chemical
5
The Bhopal Disaster
DECEMBER 2-3, 1984UNION CARBIDE PESTICIDE PLANTBHOPAL, INDIA
CHEMICAL RELEASE:methyl isocyanate
3,000 - 7,000 deathsovernight
Hundreds of thousandswith long term injury
6
Issues of Fault and LiabilityRaised After the Incident
• UCC: 51% owner Union Carbide India Ltd.
• Management claim: sabotage - disputed in other studies and in litigation against UCC
• Safety system failures also necessary for release to occur -examples:
• refrigeration off• capture systems under scaled
• Allegations of degree of UCC control and UCCunderinvestment
7
• Indian Government and Union Carbide pursuant to Bhopal Gas Disaster Relief Act
• Legally: only covers victims liabilities for the disaster • not contamination (existed prior to the
disaster)• not criminal case
• Survivors say amount was too low - based on drastic underestimate of victims and no long term health care
$470m Settlement
8
• Criminal case against Union Carbide and 11 other defendants continues - charges against Carbide are “criminal homicide not amounting to murder”
• By law, penalties, including victims restitution, are limited to ability of defendant to pay
India Criminal Case
9
Lasting HealthImpacts
20,0007000-8000+
NGO Estimates
16,000600,000Claims filed with Indian Government
50,000100,0002000+Congressional Research Service
14,400+50,0002,500+Indian Government – ICMR
Long-term mortality
PermanentDisabilities
Initial Injuries
Initial Deaths
Deaths, Injuries and Long Term Mortality
10
• Drinking water contamination, groundwater, site• Contamination due primarily to prior operation, not to
the gas release • Government is seeking to require UCC/Dow to clean
up
Contamination Continues at the Site Today
11
12
• Absconder status of UCC and Warren Anderson• Company position: No Indian jurisdiction• Government position: UCC responsible under law• Asset status: Several Dow Chemical India
subsidiaries• Petition filed February 2004 by Bhopal survivors to
summon Dow Chemical to produce Carbide
India Criminal Case & Dow’s Positions
13
14
Failed Attempt to Shed Assets and Liability
• November 1994: Union Carbide sold its interest in Union Carbide India Limited. Union Carbide then asserted that it retained no interest in or liability for Bhopal.
• The Chief Judicial Magistrate for Bhopal held that Union Carbide Corp.’s transfer of shares was not bona fide because it was done to evade potential liabilities arising out of the ongoing criminal case in Bhopal.
15
Statements of Position by Dow Management
• when Dow acquired Union Carbide's shares in February of 2001, "the company conducted an exhaustive assessment to ensure that there was absolutely no outstanding liability in relation to Bhopal. There was none; the company that Dow acquired retained absolutely no responsibility for either the tragedy or for the Bhopal site.” - Dow website
• "We respect that for some people, responsibility for the Bhopal tragedy continues to be an unresolved issue.. …upon acquiring Union Carbide, Dow inherited no responsibility. Still, some people would have us take action to resolve their concerns. But, we are aware of potentially significant legal risks associated with such actions and we will not compromise our obligation to protect our shareholder interests.” - Global Report
Dow Chemical Acquisition of Union Carbide
16
Evaluating Statements of Position by Dow Management
• Dow says “no outstanding liability”• Dow also says “potentially significant legal risks
associated with such actions”
• These statements appear inconsistent - is there a liability risk or not?
• These statements appear misleading in light of ongoing criminal case in which UCC is a leading defendant, and given government efforts to ensure remediation by UCC/Dow.
• Where is the balancing of interests - legal vs. business/market loss in India?
Dow Chemical Acquisition of Union Carbide
17
18
Dow and India• India is a growing player in the globalized chemical
industry and it would be harmful to Dow to be constrained by “substantial legal risk”* issues in such a large and growing market.
• The Indian economy is projected to grow by 7.2% in 2004.
• It boasts the world’s 12th largest chemical industry in terms of production, which is valued at Rs 1200 Billion ($26 bn) and is growing at twice the rate of Asia’s overall chemical market since 1998.
• In the late 1990’s India became a net exporter of chemicals.
India’s Increased Economic Importance
* Source: Dow’s statement about Bhopal on the company’s website.
19
Dow and India
• India’s Agricultural market, a key constituency for the chemical industry, is projected to grow at twice the rate of India’s economy as a whole –13.8%
• Chlorpyrifos (Marketed by Dow under the “Dursban” trademark) a widely used pesticide was found in Coke & Pepsi products in India, causing further reputational damage to Dow. Dow is creating a negative image for itself in a large and growing market
India’s Increased Economic Importance
20
Dow and India
Source: William S. Stravropoulos, Chairman and CEO, Dow Chemical, Presentation to Morgan Stanley Conference, Feb. 24,2004
As a growing net export market in chemicals, India will be an important player in Asia where Dow has 12% of revenues but only 2% of Fixed Assets. Potential legal liability could be a factor in physical expansion in India by Dow. Thus Bhopal represents a financial constraint for Dow’s presence in India due to risk of asset attachment by Indian courts should Dow become a party to Bhopal suits.
Revenue
Asia12%
Latin America9%
United States41%
Europe33%
Canada5%
Fixed Assets
Canada9%
Europe25%
United States57%
Latin America7%
Asia2%
21
Key Points
• Management should act consistent with prior dialogue with shareholders and survivors
• Management should engage in proper disclosure to investors• not misleading• materially complete• identifying opportunity costs of
continued Bhopal controversy
22
Business Risks
Risks associated with Organochlorinechemicals.
• Bio accumulating Toxins – Dioxins and other chemicals
• Increasing economic viability of alternatives• Reoccurring tort claims liability and site
liability to the manufacture, sale and disposal of toxic chemicals and byproducts.
23
Uses of Industrially Produced Chlorine.
Pulp & Paper, 6%
Chlorinated Solvents, 6%
Water, 6%
Organics, 21%
Vinyl, 34%Other, 27%
Source: Chlorine Chemistry Council
24
The Chemical Structure of Dioxin and Related Compounds
3,3',4,4',5,5'-Hexachlorobiphenyl
2,3,7,8-Tetrachlorodibenzo
furan
2,3,7,8-Tetrachlorodibenzo-
p-dioxin
25
Dow Dioxin Reduction Goals
40.25
22.00
16.79 15.9517.53
8.68
4.05
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Gra
ms
per Y
ear (
TEQ
)
Dow states that the chlorine industry is only 3% of dioxin emissions.
….But nearly all dioxin is generated by the combustion of chlorinated products produced by the chlorine industry or chlorine production.
Therefore Dow is mis-informing stakeholders and shareholders by representing PRODUCT RISKS as production risks.
Dow’s Dioxin reduction programs have several reporting short-
comings…
-Not verifiable
- Don’t address transfers to solid waste.
26
Avenues of Risk from Bio-monitoring
Incidences of Diseases, Birth Defects, Developmental and Learning Disorders with Unknown or Untraced Causes.
Corresponding Set of Known Health Impacts Caused byOrganochlorines and Other Chemicals.
Bio-monitoring and testing for the presence of chemicals in human tissues will begin to draw connections between chemicals with complex avenues of exposure and human health impacts. It will also facilitate more accurate tracking of chemically exposed
populations such as workers, communities near facilities, and the general public.
27
Risk Screening environmental Indicators (RSEI) –versus TRI
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
AmericanElectric Power
Reliant EnergyInc.
Duke Energy Dynegy Inc. The DowChemcial Co.
Exxon Corp. Ford Motor Boeing
TRI/R
even
ue ($
thou
sand
s)
0
1
2
3
4
5
6
7
8
9
10
RSE
I/Rev
enue
($m
illio
ns)
TRI/RevenueRSEI Score/Revenue
28
Concerns about PBTs or POPs – by political affiliation.
Dem. Women
Dem. Men
All Women
Ind. Women
Ind. Men
Rep. Women
All Men
Rep. Men
Total E
xt./Very
Extrem
ely
VerySom
ewha
t Con
cerne
dNot
Conce
rned
Don't K
now/N
A
0%
10%
20%
30%
40%
50%
60%
70%
80%
29
Environmental Liability Overview
30
• Dioxin Contamination on 22 miles of theTittabawassee River
• 300 plaintiffs suing over property damage from contamination and requesting medical monitoring.
• Up to 2000 properties along the contaminated part of the river.
• Contamination of Dioxin in the Saginaw River and Saginaw Bay – other potential sources present. Study detailing attribution of contamination for Saginaw River and Saginaw Bay due out in June 2007. Remediation is likely to commence beforehand.
Contamination in Midland Michigan
31
Contamination in Midland, MI.
Areas of dioxin contamination on the Tittabawassee River that have been attributed to Dow.
Dioxin contamination has also been documented along the Saginaw River
d i S i B
Fox River PCB Clean up is being examined as a model for Midland - the project is broken into five Operable units (OU).
OU 1.
OU 2.
OU 3.
OU 4.
OU 5.
Comparison of two cases –Green Bay Wisconsin &
Tittabawassee/Saginaw Michigan
32
Another Case…..
GE’s cleanup on the Hudson:
$500 million plus an estimated $200 to
$300 million in legal expenses.
33
$54 million currently accrued. Likely costs as many as 6 times higher…$300 million or more.
34
Agent Orange
35
The 1984 Settlement
29.5%28.6%
19.7%
5.1%
7.2%
2.2%
6.5%
45.5%
19.5%
10.0%
12.0%
6.0%
2.0%
5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Monsanto Dow Hercules DiamondShamrock
T.H. Ag. & Nutrition ThompsonChemicals
Uniroyal
Production Volume
Settlement %
The division of settlement payout among the producers of Agent Orange was determined by Production Volume and dioxin content. Subsequent Studies have shown the dioxin calculations to underestimate the amount of dioxin present. Therefore, were future settlements to be based on dioxin content the payout ratios could differ.
36
Agent Orange Claims
United States Veterans and Agent Orange –Claims to US Government
Number of vets who took exams under the Agent Orange Registry prior to 1984
70,6001
Total number of claims received by 1994 under Payment Program set up in the out of court settlement.
105,000
Number of vets receiving VA disability compensation for Agent Orange-related causes.
52,000
Number of vets who’ve taken exams under the Agent Orange registry since March 2000.
297,194
Number of claims filed alleging Agent Orange exposure-related health effects as of 2003.
99,266
The Dallas Morning News, (January 1, 1985) Agent Orange Claims Due dnesday
37
Spraying Agent Orange in Vietnam
“The use of Agent Orange as a defoliant
and herbicide in Vietnam was the largest
chemical warfare operation in history,
producing considerable ecological as well as
public health damage.”
- Dr. Arthur Galston, Professor Emeritus at the Yale School of Forestry & Environmental Studies, who spoke at the Yale University conference, The Ecological and Health Effects
of the Vietnam War
38
Key Points
• Expanded set of health effects known to be related to Agent Orange Exposure. Diabetes, etc…
• Vietnamese citizens filed first suit against manufacturers on Jan. 30th 2004.
• Supreme Court has affirmed veterans right to sue for those left out of the original settlement.
• Original settlement with veterans determined by level of production and dioxin contamination of the chemical – those levels are now known to be higher than previously thought.
• largest chemical warfare operation in history – up 500,000 have died as a result of exposure and 500,000 – 1,000,000 are suffering as a result of exposure.
39
Other Environmental Liabilities
• Semiconductor Liability – Trichlorethylene• Dursban – study showed that Chlorpyrifos stunted fetal growth
and umbilical cord size. Contamination in Indian soft-drinks.• DBCP – sterilization of Banana workers and other agricultural
workers exposed.• Genetic Engineering - Starlink Corn contamination cost Aventis
over $1 Billion. Contamination of US conventional crops by GE crop genes widespread.
40
Additional Risks… Global Warming a.k.a. Climate Change
Dow’s Energy efficiency programs are paying dividends but more may be required.
41
Disclosure Issues
• The EPA found in 2002 that 74% of publicly traded firms violate SEC rules for environmental debt accounting regulations.
42
Dow’s Disclosure of Environmental Liabilities
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2003 2002 2001 2000 1999 1998
$Mill
ions
Superfund Cleanup LiabilitiesEnv. Cleanup Charged to pre-tax incomeUCC Asbestos Defense & ResolutionTotal Costs*Accurals for Env. Liability
Dow’s environmental accruals and expenditures: 1998 - 2003
43
Disclosure Issues – Key Points
• Remediation expenditures difficult to track - Union Carbide and Dow accounted for these issues differently.
• Union Carbide Stated in 2001 that worldwide expenses related to environmental protection, expressed in 2000 dollars, should average about $105 million annually over the next five years.
• These numbers are not reflected in the following years on Dow’s balance sheet.
• Dow is not resolving doubts in favor of disclosure - Dow’s reporting of issues such as Midland are not complete and Agent Orange issues do not appear in the MD&A.
44
Questions for Management• Can management define Bhopal Risks?• How will the management now avoid damage to Dow’s reputation? • How would the company’s reporting of its environmental liabilities change
under the ASTM guidelines?• How has the company’s strategy been adjusted to reflect the lifecycle
impacts of its products and the market and regulatory risks that come with such impacts, such as dioxin pollution?
• Under Sarbanes-Oxley, Dow’s management must have an established protocol for identifying, tracking, estimating and judging the materiality of environmental matters. Will the company publish this protocol for investors and stakeholders?
• Will Dow’s future dioxin assessment reporting include a life-cycle approach?• What is the management’s best estimate for the upper range of costs for
remediation of Midland, the Tittabawassee River, the Saginaw River, and Saginaw Bay?
• What is the company’s assessment of Agent Orange liability?• Can Dow comment more extensively on its outstanding DBCP related
liabilities in the U.S. and other countries? Are there similar liabilities associated with any other pesticides that Dow produces? For example, forDursban?
