UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2008

 

Commission file number 1-32669

 

TRONOX INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

 

 

One Leadership Square, Suite 300

211 N. Robinson Ave, Oklahoma City, Oklahoma 73102

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:

(405) 775-5000

 

 

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 requirement for the past 90 days.  Yes þ     No o

 

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

 

               (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of October 31, 2008, 18,556,127 shares of the company’s Class A common stock and 22,889,431 shares of the company’s Class B common stock were outstanding.

 

 

Tronox Incorporated

 

Form 10-Q

 

Table of Contents

 

 

 

TRONOX INCORPORATED

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

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

TRONOX INCORPORATED

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

 

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

TRONOX INCORPORATED

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

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

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Tronox Incorporated (the “company”), a Delaware Corporation was formed on May 17, 2005, in preparation for the contribution and transfer by Kerr-McGee Corporation (“Kerr-McGee”) of certain entities, including those comprising substantially all of its chemical business (the “Contribution”). The company has one reportable segment representing the company’s pigment business. The pigment segment primarily produces and markets titanium dioxide pigment (“TiO₂”) and has production facilities in the United States, Australia, Germany and The Netherlands. The pigment segment also includes heavy minerals production operated through our joint venture. The heavy minerals production is integrated with our Australian pigment plant, but also has third-party sales of minerals not utilized by the company’s pigment operations. Electrolytic and other chemical products (which does not constitute a reportable segment) represents the company’s other operations which are comprised of electrolytic manufacturing and marketing operations, all of which are located in the United States. The company has in the past operated or held businesses or properties, or currently holds properties, that do not relate to the current chemical business.

 

The terms “Tronox” or “the company” are used interchangeably in these condensed consolidated financial statements to refer to the consolidated group or to one or more of the companies that are part of the consolidated group.

 

Formation

 

The Contribution was completed in November 2005, along with the recapitalization of the company, whereby common stock held by Kerr-McGee converted into approximately 22.9 million shares of Class B common stock. An initial public offering (“IPO”) of Class A common stock was completed on November 28, 2005. On March 8, 2006, Kerr-McGee’s Board of Directors declared a dividend of the company’s Class B common stock owned by Kerr-McGee to its stockholders (the “Distribution”). The Distribution was completed on March 30, 2006, resulting in Kerr-McGee having no ownership or voting interest in the company.

 

 

These statements should be read in conjunction with the audited consolidated and combined financial statements and the related notes which are included in the company’s annual report on Form 10-K for the year ended December 31, 2007. The interim condensed consolidated financial information furnished herein is unaudited. The information reflects all adjustments (which include normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in the report. These adjustments also include those made to record an impairment of goodwill (see Note 4), to classify debt as current (see Note 7) and to adjust the estimated forfeiture rate for compensation expenses recognized for stock based awards (see Note 12).

 

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced significant losses in recent periods and continue to generate negative cash flows from operations. As we continue to generate losses and negative cash flows, this raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend upon our ability to generate positive cash flows, restructure our capital structure including, among other alternatives, obtaining additional financing and mitigating the legacy environmental liabilities carried by the company. Failure to address these issues could result in, among other things, the depletion of available funds and our not being able to pay our obligations when they become due, as well as defaults under our debt obligations. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets.

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“SFAS No. 109”). The company adopted FIN No. 48 as of January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. FIN No. 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The guidance required application through recognition of a cumulative effect adjustment to opening retained earnings in the period of adoption (2007), with no charge to current earnings for prior periods. As a result of the adoption of FIN No. 48, the company recognized a $9.3 million charge to the January 1, 2007, balance of retained earnings. The total amount of unrecognized tax positions at January 1, 2007, was $46.5 million.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) FAS 157-2 “Effective Date of FASB Statement No. 157” which amends SFAS No. 157 to defer its effective date to fiscal years beginning after November 15, 2008, and for interim periods within such years. The delayed effective date applies to all assets and liabilities except financial assets or financial liabilities (as defined). The company has adopted the provisions of SFAS No. 157 for its financial assets and liabilities effective January 2008 with no material impact on its condensed consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 159”). The company did not elect to adopt the provisions of this statement.

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” which will change the accounting for business combinations such that an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction, at the acquisition date fair value with limited exceptions. SFAS No. 141 also changes the accounting treatment for certain specific items such as expensing acquisition costs versus capitalizing them, recording in process research and development as an indefinite lived intangible asset and expensing restructuring costs after the acquisition date. SFAS No. 141 also includes additional disclosure requirements. The statement applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The company does not expect the provisions of SFAS No. 160 to have a material impact on its condensed consolidated financial statements.

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of other income (expense), net are as follows:

 

 

 

 

The following tables set forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated.

 

 

 

Approximately 1,507,000 stock options outstanding with an average exercise price of $9.06 at September 30, 2008, were “out of the money,” thus, antidilutive. Since the company incurred a loss from continuing operations for the three months and nine months ended September 30, 2008, no dilution of the loss per share would result from an additional 2.0 million potentially dilutive stock options and restrictive shares outstanding at September 30, 2008. Approximately 734,000 stock options outstanding with an average exercise price of $14.68 at September 30, 2007,

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

were “out of the money,” thus, antidilutive. Since the company incurred a loss from continuing operations for the three months and nine months ended September 30, 2007, no dilution of the loss per share would result from an additional 1.4 million potentially dilutive stock options and restrictive shares outstanding at September 30, 2007.

 

 

Accounts receivable, net of allowance for doubtful accounts, consist of the following:

 

 

 

 

The company executed an accounts receivable securitization program (“the Program”) in September 2007 with an initial term of one year. Initial terms under the program allowed financing to be extended for an additional two years in the form of a securitization or a secured borrowing as determined by the sponsoring institution, ABN AMRO Bank N.V. (“ABN”). Under the Program, all receivables owned by the company’s U.S. subsidiaries (“transferor subsidiaries”) are sold on a recurring basis by the company to Tronox Funding LLC (“Funding”), a wholly owned special purpose subsidiary of the company. Funding, in turn, sells to either Amsterdam Funding Corporation (“AFC”), an asset-backed multi-seller commercial paper conduit sponsored by ABN or to ABN directly (both AFC and ABN collectively referred to herein as “Amsterdam”) an undivided percentage ownership interest in the pool of receivables Funding acquires from the transferor subsidiaries. At September 30, 2008, the balance in receivables sold by the transferor subsidiaries to Funding totaled $105.7 million, of which $65.6 million was sold to Amsterdam in the form of the purchased participation interest, resulting in a subordinated retained interest held by Funding with a fair value of $39.7 million.

 

The receivables sale agreement contains cross default provisions with the company’s debt agreements. In June 2008, the company obtained a waiver under the agreement which, due to a default under the company’s Credit Agreement at May 31, 2008, would have otherwise prevented Funding from purchasing additional receivables from the transferor subsidiaries. In July 2008, the receivables sale agreement was amended resulting in the elimination of the two-year extension option described above and reducing the program size to $75.0 million. In September 2008, the receivables sale agreement was amended resulting in extension of the program’s termination date to October 31, 2008. In October 2008, the company, AFC and The Royal Bank of Scotland plc (as successor to ABN) (“RBS”) entered into a waiver and amendment to the receivables sale agreement in which RBS waived certain defaults under the company’s credit agreement, and, among other things, extended the program’s termination date to November 25, 2008. There is no assurance that further extensions will be granted beyond November 25, 2008. In the event that RBS elects not to provide further extensions, the program will enter into a termination phase. During this phase, all collections on receivables owned by Funding will be remitted to RBS up to the outstanding amount of RBS’s purchased participating interest along with any outstanding fees. If the program is not extended, there would be no

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

further sales of receivables under this program and cash flows from operations would decrease during the termination phase.

 

For the three month periods ended September 30, 2008 and 2007, the company incurred losses in connection with the sale of receivables under the Program of $0.9 million and $0.7 million, respectively, along with interest income accreted on the collections of receivables of $0.6 million and nil, respectively, for a net of $0.3 million and $0.7 million, respectively. For the nine month periods ended September 30, 2008 and 2007, the company incurred losses in connection with the sale of receivables under the Program of $4.0 million and $0.7 million, respectively, along with interest income accreted on the collections of receivables of $2.2 million and nil, respectively, for a net of $1.8 million and $0.7 million, respectively. Interest income accreted on collections of receivables was nil in the prior year as the program was implemented in September 2007. The net expense associated with the company’s securitization program is included in other income, net, in the Condensed Consolidated Statements of Operations.

 

Inventories, net of allowance for obsolete inventories and supplies, consist of the following:

 

 

 

 

Property, plant and equipment, net, consist of the following:

 

 

 

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Other long-term assets consist of the following:

 

 

 

 

Accrued liabilities consist of the following:

 

 

Other long-term liabilities consist of the following:

 

 

 

 

Goodwill and intangible assets

 

During the second quarter of 2008, as a result of its annual impairment review of goodwill and indefinite-lived intangible assets, the company recorded an impairment of goodwill in its pigment segment. The impairment was attributable to continued cost escalations and compressed margins. The $13.5 million charge is reflected in the

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Consolidated Statements of Operations for the nine months ended September 30, 2008. The analysis indicated no impairment to the company’s indefinite-lived intangible assets related to proprietary technology.

 

Fair value measurement

 

As stated in Note 2, Basis of Presentation and Accounting Policies, the company adopted the methods of fair value as described in SFAS No. 157 to value its financial assets and liabilities effective January 2008. As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

In measuring fair value on a recurring basis, the company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

 

Financial assets and liabilities carried at fair value as of September 30, 2008 are classified in the table below in one of the three categories described above:

 

 

 

 

The fair value estimate of the subordinated retained interest includes a present value discount that incorporates commercial paper borrowing rates and a risk premium based on the subordinated position of the retained interest. Servicing costs and anticipated credit losses based on the performance history of transferred receivables are also incorporated into the fair value calculation. Collectively, the present value discount, anticipated servicing cost and anticipated credit loss comprise an unrealized loss on the retained interest that is subtracted from the face value to

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

arrive at its fair value. Other than commercial paper rates, most of the fair value losses above are calculated from unobservable inputs which conform to a Level 3 measurement.

 

 

The company has investments in Basic Management, Inc. and Subsidiaries (a corporation in which the company has an approximate 31% interest, whose combined financial statements include The LandWell Company, L.P., a limited partnership in which the company has an approximate 29% direct interest). The company’s share in the net earnings of these investees is disclosed in Note 3. Summarized unaudited income statement information of the significant investees is as follows:

 

 

 

On May 22, 2008, the company announced an involuntary work force reduction program as part of its ongoing efforts to reduce costs. As a result of the program, the company’s U.S. work force was reduced by 31 employees. An additional 38 positions that were vacant prior to the work force reduction will not be filled. There were no costs associated with the elimination of vacant positions. The program was substantially completed by the end of the second quarter. Qualifying employees terminated under this program were eligible for special termination benefits under the company’s pension plan along with severance payments. In connection with the program, the company incurred pretax charges during the second quarter of $1.5 million for severance and other employee related costs and $2.7 million for special termination benefits under its pension plan. The total charge attributable to the company’s reportable pigment segment was nil as the restructuring charges were primarily attributable to “corporate and nonoperating sites” (see Note 15).

 

On August 19, 2008, the company announced a voluntary work force reduction program at its Uerdingen, Germany, pigment facility as part of its ongoing efforts to reduce costs. The program reached its numerical cap of 30 employees by September 30, 2008. Approximately half of those employees were terminated by September 30, 2008, with the remainder departing by the end of the year. Qualifying employees voluntarily terminated under this program are eligible for severance payments and the company has incurred pretax charges during the third quarter of $2.8 million for severance and other employee related costs all of which is attributable to the company’s reportable pigment segment.

 

All charges associated with the voluntary and involuntary work force reduction were included in restructuring charges in the Condensed Consolidated Statements of Operations. In the third quarter, the company recognized a restructuring credit of $2.8 million as a result of changes in the estimated timing of expenditures on asset retirement obligations at former pigment facilities.

 

Payments made in the first nine months of 2008 related to the work force reduction programs implemented in 2008 and 2007 were $3.2 million with a remaining balance of $1.6 million at September 30, 2008, reflected in accrued liabilities in the Condensed Consolidated Balance Sheets.

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

As discussed below, following a waiver of non-compliance, the company classified its debt as current as of September 30, 2008. Debt outstanding at September 30, 2008, and December 31, 2007, consisted of the following:

 

 

 

 

The terms of the Credit Agreement (variable-rate term loan and revolving credit facility) provide for customary representations and warranties, affirmative and negative covenants, and events of default. In February 2008, the company requested and obtained approval for an amendment to the 2008 and 2009 financial covenants under the Credit Agreement. On June 27, 2008, the company received a waiver for a potential default on the Consolidated Total Leverage Ratio (as defined) for the fiscal quarter ended June 30, 2008. In July 2008, the company obtained approval for an amendment to the Consolidated Total Leverage ratio (as defined) for the second, third and fourth quarters of 2008. The limitations on capital expenditures have not been modified and are $130 million in 2008 and $100 million in 2009 and thereafter. We incurred amendment fees of approximately $2.5 million for each of the amendments in February 2008 and July 2008. These costs are being amortized over the remaining life of the debt. The margin applicable to LIBOR borrowings at September 30, 2008 was 450 basis points. On October 29, 2008, the company received a waiver under the Credit Agreement as a result of a default for failure to comply with the amended Consolidated Total Leverage Ratio (as defined) for the fiscal quarter ended September 30, 2008. The waiver is effective through November 25, 2008. In conjunction with the waiver, the company’s lending group appointed Credit Suisse as successor administrative agent under the credit agreement, at such time that the current administrative agent, Lehman Brothers, shall resign. Under the terms of the waiver, the company cannot borrow additional funds during the waiver period. Based on current projections, which are conditioned on realizing trade receivables under normal trade terms, continuation of the securitization program and settling payables in the normal course of business, the company believes it will have enough cash and cash flow from operations to continue operating throughout the waiver period.

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table presents the Total Leverage Ratio and the Interest Coverage Ratio as specified under the company’s credit agreement, as amended.

 

 

As a result of the company’s noncompliance and subsequent waiver with respect to its financial covenants discussed above, accounting guidance requires the company to demonstrate that it is not probable that the company will be in default on its financial covenants in the next twelve months in order for the company to classify its debt as noncurrent obligations. Due to the continued uncertainty of the economic environment, the company was unable to demonstrate such compliance with reasonable certainty over the next twelve months and hence the outstanding balances on the company’s credit agreement are classified as current obligations at September 30, 2008. The company’s senior notes contain cross default provisions such that if a default on the credit agreement were to occur and remain uncured, this would trigger a default on the senior notes as well. Although the company received a waiver, effectively curing the cross default, the same accounting guidance as discussed above applies to the senior notes as well. As a result, the entire $350.0 million balance on the senior notes is classified as a current obligation at September 30, 2008.

 

 

Comprehensive income (loss), net of taxes, consists of the following:

 

 

 

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The reconciliation of the federal statutory rate to the effective income tax rate applicable to loss from continuing operations is as follows:

 

 

The company recorded changes to the valuation allowances of certain U.S. and foreign deferred tax assets during the three and nine month periods ended September 30, 2008, due to changes in the unrecognized prior service cost component of the company’s postretirement plan as well as current year changes to deferred tax assets and deferred tax liabilities. Additionally, during the three month period ending September 30, 2008, the company recorded a valuation allowance of $8.1 million related to a net operating loss in The Netherlands that the company does not expect to utilize prior to expiration.

 

The company adopted the provisions of FIN No. 48 as of January 1, 2007. The gross amount of unrecognized tax positions at September 30, 2008, was $52.2 million, compared to $54.6 million at December 31, 2007. This change was primarily related to foreign currency translation and interest accruals. Excluded from the balances are valuation allowances and indirect tax benefits which net to $7.5 million and $2.6 million at September 30, 2008, and December 31, 2007, respectively. At September 30, 2008, the net benefit associated with approximately $58.2 million of the reserve for unrecognized tax benefits, if recognized, would affect the effective income tax rate. The equivalent amount at December 31, 2007, was $55.6 million.

 

As a result of ongoing negotiations with tax authorities, it is reasonably possible that the company’s gross unrecognized tax benefits balance may decrease within the next twelve months by a range of zero to $15.7 million.

 

The company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three and nine months ended September 30, 2008, the company recognized approximately $0.1 million and $2.7 million, respectively, in gross interest and penalties in the Condensed Consolidated Statement of Operations. As of December 31, 2007, the company had approximately $12.6 million accrued for the gross payment of interest and penalties. The equivalent amount at September 30, 2008, was $14.6 million, including the effects of foreign currency translation.

 

The company was included in the U.S. federal income tax returns of Kerr-McGee Corporation and Subsidiaries for tax periods ending in 2005 and prior. The Internal Revenue Service has completed its examination of the Kerr-McGee Corporation and Subsidiaries’ federal income tax returns for all years through 2002 and is currently under examination for the years 2003 through 2005. The years through 2002 have been closed with the exception of issues for which a refund claim has been filed and is being pursued in United States Court of Federal Claims. The

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

company believes it has made adequate provisions for any amounts that may become payable to Kerr-McGee under the tax sharing agreement with respect to these closed years.

 

A German audit is being conducted for the years 1998 through 2001. A Dutch audit is being conducted for the years 2001 through 2005. Only the year 2002 has closed with respect to Australia, and no periods have closed with respect to Germany, Switzerland or the Netherlands (periods subsequent to the acquisition in 2000). The company believes that it has made adequate provision for income taxes that may be payable with respect to years open for examination; however, the ultimate outcome is not presently known and, accordingly, additional provisions may be necessary and/or reclassifications of noncurrent tax liabilities to current may occur in the future.

 

Tax Sharing Agreement and Tax Allocations — The company entered into a tax sharing agreement with Kerr-McGee that governs Kerr-McGee’s and the company’s respective rights, responsibilities and obligations subsequent to the IPO with respect to taxes for tax periods ending in 2005 and prior. Generally, taxes incurred or accrued prior to the IPO that are attributable to the business of one party will be borne solely by that party. Payables or receivables may result under the tax sharing agreement as the IRS completes its examination of the Kerr-McGee Corporation and Subsidiaries’ U.S. federal income tax returns for tax periods ending in 2005 and prior.

 

The company may incur certain restructuring taxes as a result of the separation from Kerr-McGee. A restructuring tax is any tax incurred as a result of any restructuring transaction undertaken to effectuate the separation other than the IPO, the Distribution and entering into the senior secured credit facility, which in the judgment of the parties is currently required to be taken into account in determining the tax liability of Kerr-McGee or Tronox (or their respective subsidiaries) for any pre-deconsolidation period as defined in the tax sharing agreement. The tax sharing agreement provides that Kerr-McGee will be responsible for 100% of the restructuring taxes up to, but not to exceed, $17.0 million. To date, Kerr-McGee has reimbursed the company approximately $0.7 million under this provision all of which was received during 2008. The company is responsible for any restructuring taxes in excess of $17.0 million, however, the company does not expect the restructuring taxes to exceed $17.0 million. In addition, the company is required to indemnify Kerr-McGee for any tax liability incurred by reason of the Distribution being considered a taxable transaction to Kerr-McGee as a result of a breach of any representation, warranty or covenant made by the company in the tax sharing agreement.

 

Under U.S. federal income tax laws, the company and Kerr-McGee are jointly and severally liable for Kerr-McGee’s U.S. federal income taxes attributable to the periods prior to and including the 2005 taxable year of Kerr-McGee. If Kerr-McGee fails to pay the taxes attributable to it under the tax sharing agreement for periods prior to and including the 2005 taxable year of Kerr-McGee, the company may be liable for any part, including the whole amount, of these tax liabilities. The company has not provided for taxes relating to Kerr-McGee that it would not otherwise be liable for under the terms of the tax sharing agreement.

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table presents pretax (income) loss from discontinued operations by type of cost and total after-tax (income) loss from discontinued operations for the periods indicated:

 

 

 

 

 

The following table presents the components of net periodic pension and postretirement cost and total retirement expense for the periods indicated:

 

 

 

 

 

TRONOX INCORPORATED

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

The company is obligated under the Master Separation Agreement (“MSA”) to maintain the Material Features (as defined in the employee benefits agreement of the MSA) of the U.S. postretirement plan without change for a period of three years following the Distribution date. During the third quarter of 2007, the company announced that effective April 1, 2009, certain features will change, including the cost-sharing provisions between the company and plan participants, life insurance benefits and certain retirement eligibility criteria. This announcement resulted in a plan remeasurement, which was performed by the company’s actuary in August 2007. A new discount rate of 6.25% was selected by management for this remeasurement due to changes in certain economic indicators since the previous measurement as of December 31, 2006. The remeasurement reduced the company’s postretirement benefit obligation by $93.1 million, impacted the unrecognized prior service cost component of other comprehensive income by $47.7 million, net of taxes, and impacted the unrecognized actuarial loss component of other comprehensive income by $10.3 million, net of taxes.

 

On June 30, 2008, the company announced additional changes to the cost-sharing provisions between the company and plan participants to take effect beginning on April 1, 2009. This announcement resulted in another plan remeasurement, which was performed by the company’s actuary in June 2008. A new discount rate of 6.75% was selected by management for this remeasurement due to changes in certain economic indicators since the previous measurement as of December 31, 2007. The remeasurement reduced the company’s postretirement benefit obligation by $28.2 million. The changes in plan benefits impacted the unrecognized prior service cost component of other comprehensive income by $13.4 million, net of taxes, and the change in the discount rate assumption along with the change in claims estimates impacted the unrecognized actuarial loss component of other comprehensive income by $4.2 million, net of taxes. The remeasurement reduced 2008 estimated annual net periodic cost by approximately $2.1 million in the second half of 2008.

 

During the first half of 2008, lump sum payments under the company’s U.S. nonqualified benefit plan were made as a result of certain employee retirements. The total amount of lump sum payments was sufficiently large to require the company to record a partial settlement on that plan in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS No. 88”). The partial settlement resulted in a plan remeasurement, which was performed by the company’s actuary in June 2008. A new discount rate of 6.75% was selected by management for this remeasurement due to changes in certain economic indicators since the previous measurement as of December 31, 2007. The

 

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remeasurement reduced the company’s projected benefit obligation by $0.3 million and impacted the unrecognized actuarial loss component of other comprehensive income by $0.2 million, net of taxes. In addition, the company recorded a settlement loss of $1.2 million during the second quarter of 2008. As a result of additional payments to retired employees, a second remeasurement and settlement loss was recorded in the third quarter. Management selected a discount rate of 7.75% for the second remeasurement which reduced the company’s projected benefit obligation by $1.2 million and impacted the unrecognized actuarial loss component of other comprehensive income by $0.7 million, net of taxes. The associated settlement loss in the third quarter of 2008 was $0.3 million. Settlement losses are reflected in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2008.

 

Effective January 1, 2008, the company’s U.S. qualified defined benefit plan was amended to reflect certain changes, including prospective changes to retirement eligibility criteria, early retirement factors and the final average pay calculation. These changes are reflected in the company’s financial statements as a reduction in the service cost component of net periodic cost for 2008 and future periods.

 

In July 2008, the company announced a temporary suspension of benefits to be accrued under its U.S. nonqualified benefit plan effective July 1, 2008. The company estimates that the suspension will result in lower expense of approximately $0.2 million for the second half of 2008.

 

The determination of net periodic cost and the funded status for the company’s defined benefit retirement plans is dependent upon assumptions, including expected return on plan assets and the discount rate, which are discussed in the company’s audited consolidated and combined financial statements and the related notes included in the company’s annual report on Form 10-K for the year ended December 31, 2007. These assumptions are typically updated annually as part of the annual valuation of the plans as prepared by the company’s actuaries. Consistent with overall market performance, year-to-date pension investment returns on plan assets are below the long-term investment return assumption. If this trend continues through the remainder of the year, it would have an unfavorable impact on next year’s net pension benefit costs and funding requirements, the amount of which will depend on actual investment performance through the balance of 2008.

 

 

The company’s Long Term Incentive Plan (“LTIP”) authorizes the issuance of certain stock-based awards including fixed-price stock options, restricted stock awards and performance awards, among others. In January 2008, the compensation committee of the Board of Directors authorized the issuance of approximately 260,000 stock options, 273,000 restricted stock-based awards and 4,174,000 performance units. Additional ad-hoc awards were granted in the third quarter of 2008 to certain newly appointed officers of the company which included 325,000 stocks options, 62,800 restricted stock-based awards and 667,800 performance units. Performance units are awards that management intends to settle in cash at the end of a three-year performance cycle (as defined in the LTIP). The contractual life and vesting period for performance units directly relate to the performance cycle and are generally three years. Performance units are liability awards (as defined by applicable accounting guidance) and are based on achievement of specified shareholder return targets, including a comparison to the returns of peer group companies for the same performance period. Liability awards are required to be remeasured on a quarterly basis until the settlement date at the end of the vesting period. Employees terminating their employment due to retirement, death or disability, retain the right to receive a pro-rata payout under the performance unit awards.

 

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The company estimates valuation assumptions for stock option and performance unit awards. For stock options the company uses the Black-Scholes option-pricing model and significant inputs and assumptions are summarized in the table below.

 

 

 

 

For performance units, the company uses a Monte Carlo simulation model to estimate fair value at the end of each reporting period. This model uses multiple input variables to determine the probability of satisfying the award’s market conditions. Inputs into the model include the following for Tronox and peer group companies: total shareholder return from the beginning of the performance cycle through the measurement date, volatility, risk-free rates and correlation of Tronox’s and peer group companies’ total shareholder return. The inputs are based on historical capital market data. The total fair-value-based obligation associated with awards expected to vest is further adjusted to reflect the extent to which employee services necessary to earn the awards have been rendered. Compensation cost for any given period equals the increase or decrease in the liability for awards outstanding and expected to vest.

 

For the three months ended September 30, 2008 and 2007, compensation expense related to all stock-based awards was a credit of $1.4 million and expense of $0.8 million, respectively. For the nine months ended September 30, 2008 and 2007, compensation expense related to all stock-based awards totaled $2.2 million and $5.7 million, respectively. Due to recent employee turnover, during the third quarter the company reviewed and updated its forfeiture assumptions to include actual forfeitures as well as revised projections for forfeitures over the remaining life of the awards. As a result, a cumulative favorable adjustment of $2.1 million was recorded and is reflected in selling, general and administrative expenses.

 

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The following table summarizes the contingency reserve balances, provisions, payments and settlements for the nine months ended September 30, 2008, as well as balances, accruals and receipts of reimbursements of environmental costs from other parties.

 

 

 

 

Management believes, after consultation with its internal legal counsel, that currently the company is reserved adequately for the probable and reasonably estimable costs of known environmental matters and other contingencies. However, additions to the reserves may be required as additional information is obtained that enables the company to better estimate its liabilities, including liabilities at sites now under review. At this time, however, the company cannot reliably estimate a range of future additions to the reserves for any individual site or for all sites collectively. Reserves for environmental sites are based, among other factors, on assumptions regarding the volumes of contaminated soils and groundwater involved, as well as associated excavation, transportation and disposal costs.

 

The company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. It is not possible for the company to reliably estimate the amount and timing of all future expenditures related to environmental and legal matters and other contingencies because, among other reasons:

 

 

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Current and former operations of the company require the management of regulated materials and are subject to various environmental laws and regulations. These laws and regulations will obligate the company to clean up various sites at which petroleum, chemicals, low-level radioactive substances and/or other materials have been contained, disposed of or released. Some of these sites have been designated Superfund sites by the U.S. Environmental Protection Agency (the “EPA”), pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) or state equivalents. Similar environmental laws and regulations and other requirements exist in foreign countries in which the company operates.

 

The table below presents environmental reserve provisions during the nine-month period ending September 30, 2008 and reserve balances as of that date, for major sites, followed by discussion of those major sites. Although actual costs may differ from current estimates reflected in the reserve balances, the amount of any further revisions in remediation costs cannot be reasonably estimated at this time.

 

 

 

 

Following are discussions regarding certain environmental sites and litigation of the company.

 

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Environmental

 

Henderson, Nevada

 

In 1998, Tronox LLC decided to exit the ammonium perchlorate business. At that time, Tronox LLC curtailed operations and began preparation for the shutdown of the associated production facilities in Henderson, Nevada, that produced ammonium perchlorate and other related products. Manufacture of perchlorate compounds began at Henderson in 1945 in facilities owned by the U.S. government. The U.S. Navy expanded production significantly in 1953 when it completed construction of a plant for the manufacture of ammonium perchlorate. The U.S. Navy continued to own the ammonium perchlorate plant, as well as other associated production equipment at Henderson, until 1962, when the plant was purchased by a predecessor of the company. The ammonium perchlorate produced at the Henderson facility was used primarily in federal government defense and space programs. Perchlorate that may have originated, at least in part, from the Henderson facility has been detected in nearby Lake Mead and the Colorado River, which contribute to municipal water supplies in Arizona, Southern California and Southern Nevada.

 

Tronox LLC began decommissioning the facility and remediating associated perchlorate contamination, including surface impoundments and groundwater, when it decided to exit the business in 1998. In 1999 and 2001, Tronox LLC entered into consent orders with the Nevada Division of Environmental Protection (the “NDEP”) that require it to implement both interim and long-term remedial measures to capture and remove perchlorate from groundwater. In April 2005, Tronox LLC entered into an amended consent order with the NDEP that requires, in addition to the capture and treatment of groundwater, the closure of a certain impoundment related to the past production of ammonium perchlorate, including treatment and disposal of solution and sediment contained in the impoundment.

 

A separate consent agreement reached in 1996 with the NDEP also requires Tronox LLC to conduct an Environmental Conditions Assessment (“ECA”) to test for various potential contaminants at the site. The ECA is ongoing and NDEP has required a two-phase characterization of all potential source areas on the site. The second phase of the site investigation including preparation of a risk assessment is expected to be completed by mid-2009. The $6.2 million reserve provision shown above covers increased costs for the expanded soil and groundwater investigation required by NDEP. NDEP has conditionally approved five of six work plans submitted by Tronox. Results of testing may lead to further site characterization and remediation, the costs of which, if any, are not currently included in the financial reserves discussed below.

 

In 1999, Tronox LLC initiated the interim measures required by the consent orders. A long-term remediation system is operating in compliance with the consent orders. Initially, the remediation system was projected to operate through 2007. However, studies of the decline of perchlorate levels in the groundwater indicate that Tronox LLC may need to operate the system through 2011. The scope, duration and cost of groundwater remediation likely will be driven in the long term by drinking water standards regarding perchlorate, which to date have not been formally established by applicable state or federal regulatory authorities. The U.S. Congress, the EPA and state agencies continue to evaluate the health and environmental risks associated with perchlorate as part of the process for ultimately setting drinking water standards. Also, the EPA has established a reference dose for perchlorate, which is a preliminary step to setting drinking water standards. The establishment of applicable drinking water standards could materially affect the scope, duration and cost of the long-term groundwater remediation that Tronox LLC is required to perform. The long-term scope, duration and cost of groundwater remediation and impoundment closure are uncertain and, therefore, additional costs beyond those accrued may be incurred in the future. However, the amount of additional costs, if any, cannot be reasonably estimated at this time.

 

Litigation — In 2000, Tronox LLC initiated litigation against the United States seeking contribution for its Henderson response costs. The suit was based on the fact that the government owned the plant in the early years of its operation, exercised significant control over production at the plant and the sale of products produced at the plant, even while not the owner, and was the largest consumer of products produced at the plant. Before trial, the

 

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parties agreed to a settlement of the claims against the United States. The settlement was memorialized in a consent decree approved by the court on January 13, 2006. In February 2006, under the consent decree, the United States paid Tronox LLC $20.5 million in contribution for past costs. Commencing January 1, 2011, the United States will be obligated to pay 21% of Tronox LLC’s remaining response costs at Henderson, if any, related to perchlorate.

 

Insurance Reimbursement — In 2001, Tronox LLC purchased a 10-year, $100 million environmental cost cap insurance policy for groundwater and other remediation at Henderson. The insurance policy provides coverage after Tronox LLC exhausts a self-insured retention of approximately $62.3 million ($61.3 million self-insured retention, plus an additional $1.0 million retention for certain additional coverage under the policy) and covers only those costs incurred to achieve a cleanup level specified in the policy. As noted above, federal and applicable state agencies have not established a drinking water standard and, therefore, it is possible that Tronox LLC may be required to achieve a cleanup level more stringent than that covered by the policy. If so, the amount recoverable under the policy may be less than the ultimate cleanup cost.

 

At September 30, 2008, the company had received $21.1 million of cost reimbursement under the insurance policy. It expects that an estimated aggregate cleanup cost of $106.9 million less the $62.3 million self-insured retention and the amounts already received will be covered by the policy (for a net amount of $23.5 million in potential reimbursement). The company believes that additional reimbursements of approximately $23.5 million are probable, and, accordingly, has recorded a receivable in the financial statements for that amount.

 

West Chicago, Illinois

 

In 1973, Tronox LLC closed a facility in West Chicago, Illinois, that processed thorium ores for the federal government and for certain commercial purposes. Historical operations had resulted in low-level radioactive contamination at the facility and in surrounding areas. The original processing facility is regulated by the State of Illinois (the “State”), and four vicinity areas are designated as Superfund sites on the National Priorities List (the “NPL”).

 

Closed Facility — Pursuant to agreements reached in 1994 and 1997 among Tronox LLC, the City of West Chicago and the State regarding the decommissioning of the closed West Chicago facility, Tronox LLC has substantially completed the excavation of contaminated soils and has shipped those soils to a licensed disposal facility. Surface restoration was completed in 2004, except for areas designated for use in connection with the Kress Creek and Sewage Treatment Plant remediation discussed below. Groundwater remediation is expected to continue for approximately six years. Groundwater monitoring is expected to continue for approximately ten years.

 

Vicinity Areas — The EPA has listed four areas in the vicinity of the closed West Chicago facility on the NPL and has designated Tronox LLC as a PRP in these four areas. Tronox LLC received letters of completion from the EPA in June 2008 for Reed-Keppler Park and in August 2008 for the Upland Sewage Treatment Plant indicating Tronox has met site remediation requirements for these two NPL sites. Remedial work is substantially complete for the Residential Areas. In June 2007, a Chicago-area newspaper published articles suggesting that certain Residential Area properties were not cleaned up adequately in the 1980s or the 1990s. The company believes the cleanup of a significant portion of the Residential Area properties to be adequate, as the EPA was involved indirectly in the cleanup. One property was identified that required additional assessment and cleanup. The company is currently completing cleanup of this property under an approved EPA work plan. The EPA is in the process of verifying the work done on the remaining residential properties. The company has established a reserve for the work that has been identified. Future requirements that may result from the planned EPA work cannot be estimated at this time.

 

Work continues at the other NPL site known as Kress Creek. The work involves removal of low level insoluble thorium residues principally in streambanks and streambed sediments. Tronox LLC has reached an agreement with the appropriate federal and state agencies and local communities regarding the characterization and cleanup of the sites, past and future government response costs, and the waiver of natural resource damages claims. The agreement is incorporated in consent decrees, which were approved and entered by the federal court in August 2005. The

 

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cleanup work, which began in the third quarter of 2005, is expected to be completed in 2011 and will require excavation of contaminated soils and stream sediments and shipment of excavated materials to a licensed disposal facility. Restoration of affected areas will continue into 2012. Monitoring of the restored areas will continue for three years after restoration is complete.

 

Grand Pier Center LLC, et al. v. Kerr-McGee Chemical LLC 2000-00040.  In 2000, the EPA discovered radioactive materials at the R.M. Chin & Associates property known as the Grand Pier Development, as excavation was beginning for a major commercial and residential project. The property is located in the 200 block of North Columbus Drive in Chicago. The EPA directed Kerr-McGee Chemical (now known as Tronox LLC), property owner River East, and Grand Pier Development to characterize and remove the radioactive materials. This work was completed in 2001. Subsequently, Grand Pier experienced financial difficulty and halted its development project on the site. Grand Pier’s lender foreclosed on the property in 2003. In 2005, Grand Pier filed a lawsuit in the U.S. District Court, Northern District of Illinois, seeking damages, including economic losses of approximately $20 million and recovery of its response costs from Tronox LLC. Grand Pier also filed an action before the Illinois Pollution Control Board, and filed an action against ATC Group Services, Inc. (ATC), its environmental consultant, for ATC’s alleged failure to discover the thorium contamination during the financial due diligence. Tronox believes that the damages claim is hypothetical and unsupportable and intends to vigorously defend the action.

 

Since 2005, the federal court and administrative cases have progressed slowly. Tronox LLC’s motion for summary judgment is pending in the federal court, as is a similar dispositive motion filed by ATC. Discovery has been completed. The court has tentatively set the case for trial in February 2009.

 

Government Reimbursement — Pursuant to Title X, the U.S. Department of Energy (the “DOE”) is obligated to reimburse the company for certain decommissioning and cleanup costs incurred in connection with the West Chicago sites in recognition of the fact that about 55% of the facility’s production was dedicated to U.S. government contracts. The amount authorized for reimbursement under Title X is $365 million plus inflation adjustments. That amount is expected to cover the government’s full share of West Chicago cleanup costs. Through September 30, 2008, the company had been reimbursed approximately $315.5 million under Title X.

 

Reimbursements under Title X are provided by congressional appropriations. Historically, congressional appropriations have lagged the company’s clean-up expenditures. As of September 30, 2008, the government’s share of costs incurred by the company but not yet reimbursed by the DOE totaled approximately $22.7 million, which includes $6.9 million accrued in 2008. The company received $11.3 million from the government in April 2008 and believes that receipt of the remaining $22.7 in due course is probable and has reflected that amount as a receivable in the financial statements. The company will recognize recovery of the government’s share of future remediation costs for the West Chicago sites as it incurs the cash expenditures.

 

Although actual costs may differ from current estimates, the amount of any revisions in remediation costs, if any, cannot be reasonably estimated at this time. The amount of the reserve is not reduced by reimbursements expected from the federal government under Title X of the Energy Policy Act of 1992 (“Title X”).

 

Ambrosia Lake, New Mexico

 

From the late 1950s until 1988, the company operated a uranium mining and milling operation at Ambrosia Lake near Grants, New Mexico, pursuant to a license issued by the Atomic Energy Commission (the “AEC”), now the Nuclear Regulatory Commission (the “NRC”). When the operation was sold, the company retained responsibility for certain environmental conditions existing at the site, including mill tailings, selected ponds and groundwater contamination related to the mill tailings and unlined ponds. Since 1989, the unaffiliated current owner of the site, Rio Algom Mining LLC (“Rio Algom”), has been decommissioning the site pursuant to the license issued by the NRC. Mill tailings, certain impacted surface soils and selected pond sediments have been consolidated in an onsite containment unit. Under terms of the sales agreement, which included provisions capping the liability of Rio Algom, the company became obligated to solely fund the remediation for the items described above when total

 

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expenditures exceeded $30 million, which occurred in late 2000. A decommissioning plan for the remaining impacted soil was submitted by Rio Algom to the NRC in January 2005 and was approved in July 2006. The soil decommissioning plan will take about three years to complete. The NRC has recently mandated additional erosion controls to protect the main tailings pile. This additional work will lengthen the time to complete NRC requirements to mid-2009. Groundwater treatment was discontinued after approval by the NRC in February 2006; however, closure of an associated permit issued by the state of New Mexico is still pending. The state of New Mexico has recently raised issues about certain non-radiological constituents in the groundwater at the site. Discussions regarding these issues are ongoing, and resolution could affect remediation costs and/or delay ultimate site closure.

 

In addition to those remediation activities described above for which reserves have been established, as described below, Rio Algom is investigating soil contamination potentially caused by past discharge of mine water from the site, for which no reserve has been established.

 

Litigation — On January 18, 2006, Rio Algom filed suit against Tronox Worldwide LLC in the U.S. District Court for the District of New Mexico. The suit seeks a determination regarding responsibility for certain labor-related and environmental remediation costs. Though Rio Algom seeks no specific amount in its complaint, it has asserted that future groundwater remediation costs for which it believes Tronox Worldwide LLC has responsibility could be as much as $128 million. Tronox Worldwide LLC believes these costs are hypothetical and unsupportable. Discovery has been completed. Past efforts to reach a settlement have not been successful. No trial date has been set. The parties have filed dispositive motions, which are pending before the court. The company has not provided a reserve for this lawsuit beyond the above-mentioned remediation reserve because at this time, the probability of a loss and the amount of loss, if any, cannot be reasonably estimated.

 

Crescent, Oklahoma

 

Beginning in 1965, Cimarron Corporation (“Cimarron”) operated a facility near Crescent, Oklahoma, at which it produced uranium and mixed oxide nuclear fuels pursuant to licenses issued by the AEC (now the NRC). Operations at the facility ceased in 1975. Since that time, buildings and soils were decommissioned in accordance with the NRC licenses. In limited areas of the site, groundwater is contaminated with radionuclides, and, in 2003, Cimarron submitted to the NRC and the Oklahoma Department of Environmental Quality (the “ODEQ”) a draft remediation work plan addressing the groundwater contamination. In 2005, the company began evaluating available technologies to address remaining groundwater issues. A remediation technology has been selected, and the company submitted for approval an amended plan to the NRC and the ODEQ in December 2006. The plan describes the remediation of the remaining groundwater issues. While there can be no guarantee that the plan will be approved, the company believes the plan represents an appropriate remediation technology. Negotiations with the NRC on the plan approval are ongoing.

 

New Jersey Wood-Treatment Site

 

Tronox LLC was named in 1999 as a potential responsible party (“PRP”) under CERCLA at a former wood-treatment site in New Jersey at which the EPA is conducting a cleanup. On April 15, 2005, Tronox LLC received a letter from the EPA asserting it is liable under CERCLA as a former owner or operator of the site and demanding reimbursement of costs expended by the EPA at the site. The letter made demand for payment of past costs in the amount of approximately $179 million, plus interest. The EPA informed Tronox LLC that as of December 5, 2006, project costs are approximately $244 million, and that it would consider resolving the matter for $239 million. Tronox LLC did not operate the site, which had been sold to a third party before Tronox LLC succeeded to the interests of a predecessor in the 1960s. The predecessor also did not operate the site, which had been closed down before it was acquired by the predecessor. Based on historical records, there are substantial uncertainties about whether or under what terms the predecessor assumed any liabilities for the site. In addition, it appears there are other PRPs who should be liable for the cleanup. Tronox LLC, Tronox Worldwide LLC, Tronox Incorporated, Kerr-McGee Worldwide Corporation and the EPA entered into an agreement to toll the statute of limitations

 

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(“tolling agreement”) on March 28, 2006, and submitted the matter to nonbinding mediation. Mediation sessions and follow-up discussions were held between September 9, 2006, and August 28, 2008.

 

Following the conclusion of mediation discussion, the EPA/DOJ filed a complaint in the United States District Court, District of New Jersey, on August 28, 2008. The EPA did not name other PRPs or Anadarko Petroleum Corporation in the lawsuit. Tronox intends to vigorously defend against the EPA’s claims.

 

On January 16, 2008, the EPA issued a second 104(e) request to Tronox seeking information and documents related to Kerr-McGee’s restructuring of its chemical, legacy and oil and gas entities in 2001 and 2002, Kerr-McGee’s attempted sale and eventual spin-off of its legacy and chemical businesses, and the Master Separation Agreement between the two companies. The EPA issued an identical request for information to Anadarko Petroleum Corporation for Kerr-McGee. The company has responded to the EPA’s request for information.

 

In October 2006, Tronox issued notice letters to two other potential PRPs at the site. On November 14, 2007, two members of the U.S. Senate requested the U.S. Government Accountability Office (“GAO”) investigate EPA’s cleanup of the site. On November 28, 2007, the GAO accepted the request and indicated it would begin its investigation around February 1, 2008. On April 30, 2008, Tronox received notice that the general contractor for the Manville remediation project had sued its subcontractors and project manager for fraud, bribery and other improprieties related to the work done at the site. Investigations by the Inspector General of the EPA and the Inspector General of the Army Corps of Engineers are ongoing.

 

On June 25, 2007, the New Jersey Department of Environmental Protection (“NJDEP”) and the Administrator of the New Jersey Spill Compensation Fund sued Tronox LLC and unnamed others in Superior Court, Law Division, Somerset County, New Jersey. The plaintiffs allege defendants are responsible for releases from the Federal Creosote Superfund Site that damaged the state’s groundwater and seek natural resource damages and reimbursement of costs that the state expended at the site and other similar relief. Tronox LLC has filed an answer in the matter. NJDEP has agreed to dismiss the state court action.

 

MSA Reimbursement — As of September 30, 2008, the company had a receivable of $17.5 million representing 50% of the settlement amount that Anadarko Petroleum Corporation, on behalf of Kerr-McGee, has consented to contribute at or before the time the settlement, if accepted, becomes payable. The receivable has been reflected in other long-term assets in the accompanying Condensed Consolidated Balance Sheets.

 

Sauget, Illinois

 

From 1927 to 1969, Tronox LLC operated a wood-treatment plant on a 60-acre site in the Village of Sauget (formerly known as Monsanto) in St. Clair County, Illinois. Operations on the property resulted in the contamination of soil, sediment, surface water and groundwater at the site with creosote and other substances used in wood treating. In 1988, Tronox LLC entered into a court-approved consent order with the Illinois Attorney General and Illinois Environmental Protection Agency. The investigation and feasibility study for soil and sediments required by the order are complete. Pond sediment removal was completed in 2007 and final pond closure was completed in 2008. Additional groundwater investigation and free product removal are expected to be conducted in 2009.

 

Cleveland, Oklahoma

 

Triple S Refining Corporation (“Triple S”), formerly known as Kerr-McGee Refining Corporation, owned and operated a petroleum refinery near Cleveland, Oklahoma, until the facility was closed in 1972. In 1992, Triple S entered into a Consent Order with the Oklahoma Department of Health (later, the ODEQ), which addresses the remediation of air, soil, surface water and groundwater contaminated by hydrocarbons and other refinery related materials. Facility dismantling and several interim remedial measures have been completed. In 2006, the ODEQ approved the remedial design for soil and waste remediation, which includes construction of an on-site disposal cell. Triple S has completed a reassessment of the expected soil volumes that will require placement in the