2013

Dow Chemicals for the

Privatization of PBB in
Argentina
CORPORATE FINANCIAL MANAGEMENT
MUHAMMAD ARSLAN YOUSAF

Executive Summary
Dow Chemicals is valuing the Petroquimica Bahia Blanca (PBB) to bid for its privatization. PBB
currently owned by the local government is a producer of chemicals I.e. Ethylene and Polyethylene.
Dow Chemicals holds leading market position in numerous chemical lines worldwide including
Ethylene and Polyethylene. Dow had long been interested in expanding its interests in Argentina, and
now wants to utilize this opportunity to invest in Argentina. Management has planned to acquire PBB
as part of three stage strategy for expanding operations in Argentina. For each stage, discounted cash
flow techniques is used to value the project. Discount rate used for discounting cash flows was adjusted
for country risk and a range of estimated cost of capital is calculated. So for the bid of PBB, a range of
possible acquisition values is estimated. As the first stage I.e. acquisition of PBB gives the option of
expanding through second and third stage resulting in higher cash flows, so the bid for PBB can be
raised to as high as $873 Million.

1|Page

Ethylene produced from oil or natural gas was used to produce Polyethylene, the worlds most widely
used plastic. Dow generated revenues in three major business; chemical, plastics and agricultural
products. And it accounted for 7% of global capacity and actively expanded globally by locating large
scale chemical complexes in emerging economies. Acquisition of PBB, was also planned as part of
expanding strategy in Argentina. In 1994, PBB and Polisur, being only local players controlled 70%
share of Argentina Polyethylene market. As part of new economic policies by the Argentinas
Government, PBB was up for privatization. Approximately, 90% of state owned companies were
privatized with proceeds exceeding USD 19 Billion. On October 2, 1995 the Argentine Government
announced a public bidding to execute sale of 51% of PBB. The supermarkets and packaging industries
have experienced dramatic growth, increasing demand for polyethylene. This made the acquisition of
PBB more attractive for DOW. Dow planned to not only acquire PBB, but also planned to acquire Polisur
and then make another major investment in the coming years so that it can produce for the local
market but also for Mercosur and especially Brazil.
Dow management had challenge to place value on PBBs acquisition taking into consideration the
nature of Political and economic risk of Argentina. Given other strong interested parties, and possibility
of higher cash flows through further expansion via acquisition of Polisur and investment in new plants,
it was difficult to measure how much extra value should be placed on PBB.

Cash Flows
As part of stage 1, the plan was to take control of PBB which comprised of ethylene cracker and
polyethylene plant and then upgrading the facility in order to make them internationally competitive.
For ethylene cracker, revenues are based upon the assumption that full capacity of the cracker will be
utilized starting from 90%. Although investment of USD 128.9 MM will be made to upgrade the facility,
however the efficiency of plant is assumed to be content as a pessimistic estimate. The capacity
however will be increased by 66 MM lb to 606 MM lb. Raw material amount utilized is calculated
assuming constant plant efficiency. Rest of the variable and fixed costs are assumed as percentage of

2|Page

sales. Cash flows are also adjusted for investment which is to be made for upgrading the pant. Cash
flows for ethylene plant are shown in exhibit 2.
For Polyethylene plant, there will be no increase in capacity, however USD 28 MM will be invested to
upgrade the plant. Plants efficiency is assumed to be constant which is again a pessimistic assumption.
The price for the Polyethylene and raw material Ethylene is again the forecast international price in
USD. Rest of the variable and fixed costs are assumed as percentage of sales. Duties and Freight costs,
however is calculated differently, based upon gross sales price rather than net. Cash flows are also
adjusted for the investment in net working capital and any increase is deducted from the cash flows.
Cash flows for polyethylene plant are shown in exhibit 3.
As part of stage 2, Polisur Polyethylene will be acquired. Entire Plant production is assumed to be sold
in the local market which is safe assumption given the gap in local production and demand as shown in
exhibit 1. Freight and duties are again calculated as percentage of Gross Price. The variable and fixed
costs will be less than that of PBB costs, given the greater efficiency of Polisur plant. However,
investment of USD 45.8 MM will be made to increase the competiveness of the plant which is adjusted
in the cash flows over the years. Cash flows for Polisur polyethylene plant are shown in exhibit 4.
As part of stage 3, new ethylene cracker and new polyethylene plant will be established once Dow
establishes PBB plant and the market in Argentina. Investment of USD 376.3 MM will be made in
Ethylene Cracker and investment of USD 160 MM will be made in Polyethylene plant. Both the
investments will be depreciated over 10 years, 37.6 Million for ethylene cracker and 16 Million for
polyethylene plant. Cash flows for new ethylene and ploethylene plants are shown in exhibit 5.

Discount Rate
Dow has previously used the discount rate of 8 to 10 % for discounting the cash flows for similar
projects. Given better prospoects of chemical industry in Argentina in terms of high demand and
flourishing economy, a lower discount rate can be used. However given the plotical and country specific
currency risks as seen in the recent credit crisis, it would be safer to assume discount rate of 9% and
3|Page

then adjust it for the country risk. However to give a range os possible bid values discount rate of 8%
and 10 % are adjusted fir country specific risk.
For adjusting for country specific risk, modern approach discussed by Bekaert, Harvey, Lundblad, and
Siegel (2012) is used. Using the EMBI index values for Argentina and US, country risk premium of 1000
basis points for Argentina was calculated. Using the narrow ratio of 11% and wide ratio of 36% for
Argentina as proposed in the paper by Bekaert, Harvey, Lundblad, and Siegel, the country risk premium
was adjusted. The adjusted value of country risk premium provides a proxy for catering for country
specific political and economic risk. This risk premium is added to discount rate to calculate the cost of
capital for the project as shown in exhibit 6. As narrow and wide ratio discussed in the paper by
Bekaert, Harvey, Lundblad, and Siegel (2012) is based upon date form 1994 untill 2009, it is assumed
to be a good proxy for using in the calculation for country specific political and economic risk premium.

Valuation:
The terminal value of the cash flows for each stage was calculated using the constant discount rate of
3.30% and the cost of capital computed above (12.70% and 14070%).
Using the cash flow forecast for PBBs ethylene and polyethylene, the cumulative cash flows were
discounted using the best case and worst case cost of capital which gives the range of PBB value from
USD 434.74 MM to USD 521.61 MM as shown in exhibit 7.
As acquisition of PBB, gives the option of further expansion via acquiring Polisur and investment into
new ethylene and polyethylene plants, the value of these expansions can be incorporated in evulation
of the PBB bid value. Combining the cash flows from PBB, Polisur and new plants gives the value of the
acquisition from USD 976.30 MM to USD 1275.43 MM.
However, for the second stage of the project, the acquisition price of Polisur plant is not incorporate in
the valuation of the option. If we value the Polisur plant alone, the range of Polsiur value is USD 139.25
MM to 273.67 MM. Assuming we will pay this amount for the acquisition of Polisur as well, the cash
flows of Polisur can be ignored in combining the cash flows for 3 stages of the project.
4|Page

For calculating the bid value of PBB, the cash flows for PBB and option of the expanding in 3rd stage is
valued. By the combining the cash flows or first and third stage, the bid value for PBB ranges from USD
745.01 MM to 1001.75 MM. As investment required for New Ethylene and polyethylene plants have
been incorporated in stage 3 cash flows, the present value of the combined cash flows gives the range in
which bid can be made for PBB. If we assign equal probability to best and worst case scenario, the bid
value for PBB should be USD 873.38 MM.

Recommendation
With the progress in Argentinas economy, the demand for plastic products have increased making
ethylene and polyethylene market lucrative to invest. Since Dow had been long been interested in
expanding into Argentina, this privatization opportunity presented by the government should be
realized. Given for other interested parties, only PBB future cash flows will be relevant but Dow has the
option to expand and realize higher cash flows, Dows valuation of PBB is higher and can bid as higher
as 788 MM and realize market potential of Argentina.

5|Page

Appendix
Exhibit 1
Total Polyethylene
(MM lb)
ARGENTINA
Demand
Production
Shortfall

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

755
531
224

847
595
252

944
594
350

1,035
665
370

1,139
665
474

1,256
666
590

1,371
782
589

1,499
1,602
-103

1,643
1,602
41

1,804
1,602
202

1,984
1,602
382

BRAZIL
Demand
Production
Shortfall

2,414
2,680
-266

2,577
2,784
-207

2,740
3,104
-364

2,937
2,976
-39

3,155
3,379
-224

3,396
3,783
-387

3,621
3,795
-174

3,869
4,798
-929

4,140
4,810
-670

4,438
4,822
-384

4,765
4,834
-69

MERCOSUR
Demand
Production
Shortfall

3,221
3,211
10

3,479
3,379
100

3,743
3,699
44

4,035
3,641
394

4,361
4,045
316

4,724
4,449
275

5,068
4,577
491

5,449
6,401
-952

5,869
6,412
-543

6,334
6,424
-90

6,848
6,436
412

TOTAL LATIN
AMERICA
Demand
Production
Shortfall

6,579
4,972
1607

7,314
5,251
2063

7,913
5,796
2117

8,470
6,516
1954

9,084
6,931
2153

9,762
7,721
2041

10,417
8,262
2155

11,135
9,832
1303

11,922
10,867
1055

12,785
11,515
1270

13,735
12,233
1502

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

6|Page

Exhibit 2
(in millions of US dollars)
STAGE 1-PBB Ethylene Cracker

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

540.1

540.1

540.1

606

606

606

606

606

606

606

606

606

606

606

606

REVENUE
Ethylene Production Capacity (MM lb)

540.1

Operating rate

90.2%

Ethylene Volum e Production (MM lbs)

487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00

606.00

606.00

606.00

0.229

0.261

0.304

0.346

0.306

133.00 106.45 135.03 118.82 115.14 134.53 172.71 216.95 179.98 149.68 132.11 138.77

158.17

184.22

209.68

185.44

Ethylene International Net Sales Price (US$/lb)

Ethylene revenue

0.273

By product credit sales

TOTAL REVENUES

90.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%

0.219
5.4

0.25
5.7

0.22
6.1

0.19
9.2

0.222
8.4

0.285
8.4

0.358
8.3

0.297
8.5

0.247
8.9

0.218
9

606.00

9.6

9.9

10.2

10.4

10.7

138.00 111.85 140.73 124.92 124.34 142.93 181.11 225.25 188.48 158.58 141.11 148.37

168.07

194.42

220.08

196.14

0.0625 0.0638 0.0625 0.0617 0.0625 0.0743 0.0776

0.0979

COSTS
Ethane international price (US$/lb)

0.0979

0.0979

0.0979

1.267

1.267

1.267

1.267

1.267

487.17 486.09 540.10 540.10 606.00 606.00 606.00 606.00 606.00 606.00 606.00 606.00

606.00

606.00

606.00

606.00
75.17

Ethane ratio
Ethylene Volume Production (MM lbs)

1.267

Ethane cost
Other variable costs (5% of sales)
Total variable costs
Total fixed costs
Depreciation

1.267

1.267

1.267

1.267

1.267

1.267

0.081 0.0844 0.0878 0.0911 0.0945

1.267

1.267

1.267

1.267

38.58

39.29

42.77

42.22

47.99

57.05

59.58

62.19

64.80

67.41

69.95

72.56

75.17

75.17

75.17

6.90

5.59

7.04

6.25

6.22

7.15

9.06

11.26

9.42

7.93

7.06

7.42

8.40

9.72

11.00

9.81

45.48

44.89

49.81

48.47

54.20

64.19

68.64

73.45

74.23

75.34

77.00

79.98

83.57

84.89

86.17

84.97

25.2

26.1

18.3

14.5

14.8

15.3

14.5

15

15.4

15.9

16.3

16.9

17.4

18

18.5

19.1

4.2

4.9

12.2

14.1

15.3

16.3

17

17.8

18.6

19.5

16.1

16.3

9.9

8.8

8.9

PROFIT BEFORE TAX

63.12

35.97

60.42

47.85

40.04

47.14

80.97 118.99

47.84

31.71

35.20

57.19

82.53

106.60

19.6

11.2

18.7

14.8

12.4

17.0

29.2

42.8

28.9

17.2

11.4

12.7

20.6

29.7

38.4

29.9

43.55

24.82

41.69

33.02

27.62

30.17

51.82

76.16

51.36

30.62

20.29

22.53

36.60

52.82

68.23

53.22

Tax (31% until 1999 then 36%)

PROFIT AFTER TAX
Plus: Depreciation
Less: Change in w orking capital (6% of sales)
Less: Investments

83.16
-

4.2

4.9

12.2

14.1

15.3

16.3

17

17.8

18.6

19.5

16.1

16.3

9.9

8.8

8.9

8.28

-1.57

1.73

-0.95

-0.03

1.12

2.29

2.65

-2.21

-1.79

-1.05

0.44

1.18

1.58

1.54

-1.44
10.2

7.5

72.9

18.5

12

9.9

7.6

7.9

8.1

8.4

8.7

9.2

9.5

9.8

74

113.47

23.79

-20.74

29.57

30.96

35.45

58.93

83.41

64.07

43.51

28.74

29.39

36.12

50.74

65.69

53.36

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

CASH FLOW ETHYLENE - Stage 1

80.26

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

7|Page

Exhibit 3
(in millions of US dollars)
STAGE 1- PBB PO LYETHYLENE PLANT

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

VOLUME
Polyethylene Production Capacity (MM lbs)

202.8

202.8

Operating rate

65.0%

65.0%

65.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Polyethylene Volum e Production (MM lbs)

131.82

131.82

131.82

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

Polyethylene Sales Breakdow n

Sold locally

100.00% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Exports Mercosur

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

Export Latin America

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

Export Extra Zone

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

Polyethylene Total Volume Production (MM lbs)

Sold locally

131.82

131.82

131.82

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

Exports Mercosur

Export Latin America

Export Extra Zone

131.82

131.82

131.82

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

0.581

0.483

0.522

0.486

0.45

0.491

0.561

0.641

0.56

0.494

0.461

0.475

0.514

0.565

0.616

0.571

Total
PRICE
Polyethylene Gross Sales Price (US$/lb)
Polyethylene Freight & Duties cost:

2.93%

Sold locally

0.017

0.014

0.015

0.014

0.013

0.014

0.016

0.019

0.016

0.014

0.013

0.014

0.015

0.017

0.018

0.017

Exports Mercosur

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

0.054

Export Latin America

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

Export Extra Zone

Polyethylene International Net Sales Price (US$/lb)
Sold locally

0.56

0.47

0.51

0.47

0.44

0.48

0.54

0.62

0.54

0.48

0.45

0.46

0.50

0.55

0.60

0.55

Exports Mercosur

0.527

0.428

0.468

0.432

0.396

0.437

0.506

0.587

0.506

0.439

0.406

0.421

0.46

0.51

0.561

0.516

Export Latin America

0.504

0.406

0.445

0.409

0.373

0.414

0.484

0.564

0.483

0.417

0.384

0.398

0.437

0.488

0.538

0.493

Export Extra Zone

0.482

0.383

0.423

0.386

0.35

0.391

0.461

0.541

0.46

0.394

0.361

0.376

0.414

0.465

0.516

0.471

TOTAL REVENUE

74.35

61.81

66.80

95.68

88.59

96.66

110.44

126.19

110.25

97.25

90.76

93.51

101.19

111.23

121.27

112.41

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

8|Page

Exhibit 3B:
(in millions of US dollars)
STAGE 1- PBB PO LYETHYLENE PLANT

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

TOTAL REVENUE

74.35

61.81

66.80

95.68

88.59

96.66 110.44 126.19 110.25

97.25

90.76

93.51 101.19 111.23 121.27 112.41

0.273

0.219

0.25

0.22

0.19

0.222

0.285

0.358

0.297

0.247

0.218

0.229

0.261

0.304

0.346

0.306

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

1.007

131.82 131.82 131.82

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

202.8

COSTS
Ethylene international net price US$/lb (A)
Ethylene ratio
Polyethylene Total Volume Production (MM lbs)
Ethylene cost

36.24

29.07

33.19

44.93

38.80

45.34

58.20

73.11

60.65

50.44

44.52

46.77

53.30

62.08

70.66

62.49

7.43

6.18

6.68

9.57

8.86

9.67

11.04

12.62

11.02

9.73

9.08

9.35

10.12

11.12

12.13

11.24

43.67

35.25

39.87

54.50

47.66

55.00

69.25

85.73

71.68

60.17

53.60

56.12

63.42

73.21

82.79

73.73

10.6

13.6

6.8

6.9

6.4

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.6

7.8

8.8

9.1

9.9

10.6

10.9

11.2

11.5

11.6

11.7

11.9

3.2

3.1

2.5

1.9

1.7

1.6

11.27

3.85

8.03

23.78

23.13

24.06

23.80

22.76

20.57

18.68

27.26

27.39

28.17

28.82

29.18

29.28

Tax (31% until 1999 then 36%)

3.49

1.20

2.49

7.37

7.17

8.66

8.57

8.19

7.40

6.73

9.81

9.86

10.14

10.38

10.51

10.54

PROFIT AFTER TAX

7.78

2.66

5.54

16.41

15.96

15.40

15.23

14.57

13.16

11.96

17.45

17.53

18.03

18.45

18.68

18.74

8.8

9.1

9.9

10.6

10.9

11.2

11.5

11.6

11.7

11.9

3.2

3.1

2.5

1.9

1.7

1.6

14.87

-2.51

1.00

5.78

-1.42

1.61

2.76

3.15

-3.19

-2.60

-1.30

0.55

1.54

2.01

2.01

-1.77

2.6

8.2

7.3

3.1

6.8

7.5

1.3

1.4

1.4

1.5

1.5

1.6

1.6

1.7

1.7

CASH FLOW POLYETHYLENE - Stage 1

1.71

11.67

6.24

13.93

25.18

18.18

16.47

21.72

26.65

25.06

20.45

18.58

17.39

16.74

16.67

20.41

CONSOLIDATED PBB CASH FLOWS - STAGE 1

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

23.79 -20.74

29.57

30.96

35.45

58.93

83.41

64.07

43.51

28.74

29.39

36.12

50.74

65.69

53.36

11.67

6.24

13.93

25.18

18.18

16.47

21.72

26.65

25.06

20.45

18.58

17.39

16.74

16.67

20.41

35.45 -14.50

43.50

56.14

53.64

75.40 105.13

90.72

68.57

49.19

47.97

53.52

67.48

82.36

73.77

Other variable costs (10% of sales)

Total variable costs
Total fixed costs
Depreciation
PROFIT BEFORE TAX

Plus: Depreciation
Less: Change in w orking capital (20% of sales)
Less: Investments

Cash flow ethylene

Cash flow polyethylene
TOTAL CASH FLOW - STAGE 1

113.47
1.71
115.18

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

9|Page

Exhibit 4:
(in millions of US dollars)
STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

462.6

463

463

463

463

463

463

463

463

463

463

463

463

463

463

463

86.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

100.0%

100.0%

100.0%

100.0%

463

463

463

463

VOLUME
Polyethylene Production Capacity (MM lb)
Operating rate
Polyethylene Volum e Production (MM lbs)

397.836

463

463

463

463

463

463

463

463

463

463

463

Sold locally

84.0%

85.0%

89.0%

91.0%

95.0%

Exports Mercosur

16.0%

15.0%

11.0%

9.0%

5.0%

2.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Export Latin America

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Export Extra Zone

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

334.18224 393.55 412.07 421.33 439.85 453.74

Polyethylene Sales Breakdow n

98.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.00% 100.00% 100.00% 100.00%

Polyethylene Total Volume Production (MM lbs)

Sold locally

463

463

463

463

463

463

463

463

463

463

63.65376

69.45

50.93

41.67

23.15

9.26

Export Latin America

Export Extra Zone

397.836

463

463

463

463

463

463

463

463

463

463

463

463

463

463

463

0.522

0.486

0.45

0.491

0.561

0.641

0.56

0.494

0.461

0.475

0.514

0.565

0.616

0.571
0.017

Exports Mercosur

Total
PRICE
Polyethylene Gross Sales Price (US$/lb)

0.581

0.483

2.93%

9.29%

0.017

0.014

0.015

0.014

0.013

0.014

0.016

0.019

0.016

0.014

0.013

0.014

0.015

0.017

0.018

0.05

0.04

0.05

0.05

0.04

0.05

0.05

0.06

0.05

0.05

0.04

0.04

0.05

0.05

0.06

0.05

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.077

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.564

0.469

0.507

0.472

0.437

0.477

0.545

0.622

0.544

0.480

0.448

0.461

0.499

0.548

0.598

0.554

0.53

0.44

0.47

0.44

0.41

0.45

0.51

0.58

0.51

0.45

0.42

0.43

0.47

0.51

0.56

0.52

Export Latin America

0.504

0.406

0.445

0.409

0.373

0.414

0.484

0.564

0.483

0.417

0.384

0.398

0.437

0.488

0.538

0.493

Export Extra Zone

0.482

0.383

0.423

0.386

0.35

0.391

0.461

0.541

0.46

0.394

0.361

0.376

0.414

0.465

0.516

0.471

222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49

231.02

253.94

276.86

256.64

Polyethylene Freight & Duties cost:

Sold locally
Exports Mercosur
Export Latin America
Export Extra Zone
Polyethylene International Net Sales Price (US$/lb)
Sold locally
Exports Mercosur

TOTAL REVENUE

Based upon Data Source: Dow Quimca Argentina S.A

10 | P a g e

Exhibit 4B:
(in millions of US dollars)
STAGE 2- POLISUR- 2 POLYETHYLENE PLANTS
TOTAL REVENUE

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

222.02 214.95 232.92 217.14 201.59 220.39 252.14 288.10 251.69 222.03 207.20 213.49

231.02

253.94

276.86

256.64

COSTS
Ethylene international price (US$/Lb)

0.273

0.219

0.25

0.22

0.19

0.222

0.285

0.358

0.297

0.247

0.218

0.229

0.261

0.304

0.346

0.306

Ethylene ratio

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

0.979

397.836

463

463

463

463

463

463

463

463

463

463

463

463

463

463

463

99.27 113.32

99.72

98.81 103.80

118.31

137.80

156.83

138.70

Polyethylene Total Volume Production (MM lbs)

Ethylene cost
Other variable costs
Total variable costs
Total fixed costs

106.33
25.6

31.1

32.9

31.1

86.12 100.63 129.18 162.27 134.62 111.96

40.3

41.5

42.7

43.9

45.4

131.93 130.37 146.22 130.82 118.22 133.73 163.08 196.97 170.72 149.66 137.91 144.10

32.1

33.1

33.9

34.7

36.1

37.7

39.1

159.81

180.50

200.73

184.10

15.1

15.1

15.5

15.9

16.3

16.6

17

17.4

17.9

18.3

18.7

19.2

19.6

20.1

20.6

21.1

2.1

4.3

4.9

5.6

6.4

7.1

4.4

5.9

6.5

7.1

7.7

8.3

6.8

6.9

PROFIT BEFORE TAX

72.90

65.18

66.30

64.82

60.67

62.96

67.66

67.83

56.57

46.97

42.88

41.89

42.61

46.54

48.63

44.43

Tax (31% until 1999 then 36%)

22.60

20.21

20.55

20.10

18.81

22.67

24.36

24.42

20.37

16.91

15.44

15.08

15.34

16.76

17.51

16.00

PROFIT AFTER TAX

50.30

44.98

45.75

44.73

41.86

40.30

43.30

43.41

36.20

30.06

27.45

26.81

27.27

29.79

31.12

28.44

Depreciation

Plus: Depreciation
Less: Change in w orking capital (20% of sales)
Less: Investments
CASH FLOW POLYETHYLENE - Stage 2

2.1

4.3

4.9

5.6

6.4

7.1

4.4

5.9

6.5

7.1

7.7

8.3

6.8

6.9

44.40

-1.41

3.59

-3.16

-3.11

3.76

6.35

7.19

-7.28

-5.93

-2.97

1.26

3.51

4.58

4.58

-4.05

10.1

6.8

7.3

14.6

15.4

5.5

5.7

5.9

6.1

6.3

6.4

6.6

6.7

6.9

7.99

40.59

40.25

46.48

44.07

29.04

25.95

36.62

44.29

37.19

32.01

27.55

26.37

25.40

26.74

32.58

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

11 | P a g e

Exhibit 5:
(in millions of US dollars)
Stage 3 - New Ethylene Cracker

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

REVENUES
Ethylene Production Capacity (MM lb)

116.8

937

937

937

937

937

937

937

937

937

937

Operating rate

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Ethylene Volum e Production (MM lbs)

116.8

937

937

937

937

937

937

937

937

937

937

Ethylene International Net Sales Price (US$/lb)

0.2223

0.2849

0.3579

0.2974

0.2473

0.2178

0.2292

0.2612

0.3036

0.346

0.3061

Ethylene revenues

25.96

266.95

335.35

278.66

231.72

204.08

214.76

244.74

284.47

324.20

286.82

By product credit sales

0.5

3.8

3.8

3.8

3.8

3.8

3.8

3.8

3.8

3.8

3.8

TOTAL REVENUES

26.46

270.75

339.15

282.46

235.52

207.88

218.56

248.54

288.27

328.00

290.62

1.23

1.23

1.23

1.23

1.23

1.23

1.23

1.23

1.23

1.23

1.23

Ethylene Volume Production (MM lbs)

116.8

937

937

937

937

937

937

937

937

937

937

Ethane international price (US$/lb)

0.074

0.078

0.081

0.084

0.088

0.091

0.095

0.098

0.098

0.098

0.098

Ethane cost

10.63

89.90

93.35

96.81

101.42

104.88

109.49

112.95

112.95

112.95

112.95

Other variable costs (5% of sales)

1.32

13.54

16.96

14.12

11.78

10.39

10.93

12.43

14.41

16.40

14.53

11.95

103.43

110.31

110.93

113.20

115.27

120.42

125.37

127.36

129.35

127.48
8.4

COSTS
Ethane ratio

Total variable costs

Total fixed costs

7.2

7.4

7.5

7.7

7.9

8.1

8.1

8.2

Depreciation

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

PROFIT BEFORE TAX

-30.09

122.72

184.04

126.53

77.22

47.31

52.64

77.47

115.21

152.86

154.74

Tax (31% until 1999 then 36%)

44.18

66.25

45.55

27.80

17.03

18.95

27.89

41.48

55.03

55.71

PROFIT AFTER TAX

-30.09

78.54

117.79

80.98

49.42

30.28

33.69

49.58

73.74

97.83

99.03

Plus: Depreciation

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

37.6

Less: Change in w orking capital (6% of sales)

1.59

14.66

4.10

-3.40

-2.82

-1.66

0.64

1.80

2.38

2.38

-2.24

Less: Investments
CASH FLOW ETHYLENE - Stage 3

4.5

50.1

247.7

74

-4.50

-50.10

-247.70

-68.08

101.48

151.28

121.98

89.84

69.53

70.65

85.38

108.95

133.04

101.28

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

12 | P a g e

Exhibit 6:
(in millions of US dollars)
STAGE 3-NEW POLYETHYLENE PLANT

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

595.2

595.2

595.2

595.2

595.2

595.2

595.2

595.2

595.2

595.2

VOLUME
Polyethylene Production Capacity in (MM lb)
Operating rate

88.90% 96.30% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Polyethylene Total Volum e Production (MM lbs)

529.13

573.18

595.20

595.20

595.20

595.20

595.20

595.20

595.20

595.20

Sold locally

31.00% 31.00%

32.00%

34.00%

38.00%

42.00%

42.00%

43.00%

43.00%

43.00%

Exports Mercosur

44.00% 44.00%

47.00%

53.00%

58.00%

56.00%

56.00%

56.00%

56.00%

57.00%

Export Latin America

11.00% 11.00%

11.00%

12.00%

4.00%

2.00%

2.00%

1.00%

1.00%

Export Extra Zone

14.00% 14.00%

10.00%

1.00%

0%

0%

0%

0%

0%

0%

Polyethylene Sales Breakdow n

Polyethylene Total Volume Production MM lbs

Sold locally

164.03

177.69

190.46

202.37

226.18

249.98

249.98

255.94

255.94

255.94

Exports Mercosur

232.82

252.20

279.74

315.46

345.22

333.31

333.31

333.31

333.31

339.26

Export Latin America

58.20

63.05

65.47

71.42

23.81

11.90

11.90

5.95

5.95

0.00

Export Extra Zone

74.08

80.24

59.52

5.95

0.00

0.00

0.00

0.00

0.00

0.00

529.133 573.178

595.200

595.200

595.200

595.200 595.200

595.200

Total

595.200 595.200

PRICE
Polyethylene International Gross Sales Price (US$/lb)

0.561

0.641

0.56

0.494

0.461

0.475

0.514

0.565

0.616

0.571

Polyethylene Freight & Duties cost:

Sold locally

3.03%

0.0170

0.0194

0.0170

0.0150

0.0140

0.0144

0.0156

0.0171

0.0187

0.0173

Exports Mercosur

9.63%

0.054

0.062

0.054

0.048

0.044

0.046

0.049

0.054

0.059

0.055

Export Latin America

13.73%

0.077

0.088

0.077

0.068

0.063

0.065

0.071

0.078

0.085

0.078

Export Extra Zone

17.83%

0.100

0.114

0.100

0.088

0.082

0.085

0.092

0.101

0.110

0.102

Polyethylene International Net Sales Price (US$/lb)

Sold locally

0.5440

0.6216

0.5430

0.4790

0.4470

0.4606

0.4984

0.5479

0.5973

0.5537

Exports Mercosur

0.507

0.579

0.506

0.446

0.417

0.429

0.465

0.511

0.557

0.516

Export Latin America

0.484

0.553

0.483

0.426

0.398

0.410

0.443

0.487

0.531

0.493

Export Extra Zone

0.461

0.527

0.460

0.406

0.379

0.390

0.422

0.464

0.506

0.469

TOTAL REVENUE

269.59

333.68

304.03

270.63

254.40

263.11

284.71

313.32

341.60

316.78

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

13 | P a g e

Exhibit 7:
(in millions of US dollars)
STAGE 3-NEW POLYETHYLENE PLANT

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

269.59

333.68

304.03

270.63

254.40

263.11

284.71

313.32

341.60

316.78

0.285

0.358

0.297

0.247

0.218

0.229

0.261

0.304

0.346

0.306

0.92

0.92

0.92

0.92

0.92

0.92

0.92

0.92

0.92

0.92

Polyethylene Total Volume Production MM lbs

529.13

573.18

595.20

595.20

595.20

595.20

595.20

595.20

595.20

595.20

Ethylene cost

138.74

188.78

162.63

135.25

119.37

125.40

142.92

166.47

189.46

167.56

21.57

26.69

24.32

21.65

20.35

21.05

22.78

25.07

27.33

25.34

160.31

215.48

186.95

156.90

139.73

146.45

165.70

191.53

216.79

192.90

Total fixed costs

4.9

4.2

4.2

4.1

4.1

4.2

4.2

4.2

Depreciation

16

16

16

16

16

16

16

16

16

16

PROFIT BEFORE TAX

88.39

98.00

96.87

93.63

94.68

96.66

98.91

101.59

104.61

103.68

Tax at 36%

31.82

35.28

34.87

33.71

34.08

34.80

35.61

36.57

37.66

37.32

PROFIT AFTER TAX

56.57

62.72

62.00

59.92

60.59

61.86

63.30

65.02

66.95

66.36

TOTAL REVENUE
COSTS
Ethylene international price (US$/lb)
Ethylene ratio

Other variable costs (8% of sales)

Total variable costs

Plus: Depreciation
Less: Change in w orking capital (20% of sales)
Less: Investments
CASH FLOW POLYETHYLENE - Stage 3

16

16

16

16

16

16

16

16

16

16

53.92

12.82

-5.93

-6.68

-3.25

1.74

4.32

5.72

5.66

-4.96

30

70

60

-30.0

-70.0

-60.0

18.6

65.9

83.9

82.6

79.8

76.1

75.0

75.3

77.3

87.3

1998

CASH FLO W - Stage 3

1997

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Cash flow - ethylene - Stage 3

-4.50 -50.10 -247.70

-68.08

101.48

151.28

121.98

89.84

69.53

70.65

85.38

108.95

133.04

101.28

Cash flow - polyethylene - Stage 3

TOTAL CASH FLOW - Stage 3

-60.00

18.65

65.90

83.93

82.60

79.84

76.12

74.98

75.29

77.29

87.32

-4.50 -80.10 -317.70 -128.08

0.00 -30.00

-70.00

120.13

217.19

205.91

172.44

149.37

146.77

160.37

184.25

210.34

188.59

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

14 | P a g e

Exhibit 8
Rate
Discount Rate
EMBI Spread
Narrow Ratio
N. Risk Premium
Wide Ratio
W. Risk Premium
Adjusted Cost of Capital

Best Case
8.00%
10.00%
11.00%
1.10%
36.00%
3.60%
12.70%

Worst Case
10.00%
10.00%
11.00%
1.10%
36.00%
3.60%
14.70%

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

Exhibit 9
Scenario
Best Case
Worst Case

PBB - Only
$521.61
$434.74

PBB - Combined
$1,275.43
$976.30

(in millions of US dollars)

PBB - Expansion Polisur
$1,001.75
$273.67
$745.01
$139.25

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

15 | P a g e