HUN

Business Context and Reporting Period

Company: Huntsman Corporation and Huntsman International LLC (wholly-owned subsidiary).

Reporting Period: Fiscal year ended December 31, 2007.

Overview: Huntsman is a global manufacturer of differentiated chemical products operating in four primary segments: Polyurethanes, Materials and Effects, Performance Products, and Pigments. The company completed the sale of its commodity chemical businesses (Polymers and Base Chemicals) in 2007, classifying their results as discontinued operations. A significant corporate event during the period was the pending merger with Hexion Specialty Chemicals, Inc., approved by stockholders in October 2007 but subject to regulatory review.

Key Financial Metrics

Debt to Total Capitalization: Approximately 66% as of December 31, 2007.

Liquidity: Combined cash and unused borrowing capacity totaled approximately $773.5 million as of year-end.

Material Changes vs. Prior Period

• Net Loss vs. Net Income: The company reported a net loss of $172.1 million in 2007 compared to net income of $229.8 million in 2006. This reversal was primarily driven by non-recurring items and discontinued operations.
• Merger Expenses: Expenses associated with the pending Hexion merger totaled $209.8 million in 2007, a new line item not present in 2006.
• Discontinued Operations: Loss from discontinued operations increased to $217.1 million in 2007 (from $132.9 million in 2006), largely due to losses on the disposal of the U.S. Base Chemicals and North American Polymers businesses ($339.0 million loss on disposal).
• Revenue Growth: Revenues increased 11% to $9.65 billion, driven by higher sales volumes in Polyurethanes and Performance Products, and the full-year impact of the Textile Effects acquisition.
• EBITDA Decline: Consolidated EBITDA fell 64% to $374.8 million, impacted significantly by the merger expenses and losses in discontinued operations.

Guidance, Outlook, and Risks

Merger Status: The merger with Hexion is pending regulatory approval (FTC "second request" received). The termination date was extended to July 4, 2008. If the merger fails, the company faces risks of stock price decline and potential termination fees (up to $325 million including reimbursement of prior fees).

Capital Expenditures: The company expects to spend approximately $480 million on capital projects in 2008, including the completion of the Port Arthur, Texas facility rebuild and expansion of the Greatham, U.K. pigments facility.

Key Risks and Contingencies:

• MTBE Litigation: Named as a defendant in approximately nine lawsuits regarding groundwater contamination; potential exposure is currently unquantifiable.
• Port Arthur Fire Insurance: Disputes remain with reinsurers regarding the April 2006 plant fire. The company has received $325 million in advances but claims an additional $216 million is due.
• Raw Material Volatility: Significant exposure to cyclical and volatile prices for crude oil and natural gas feedstocks.
• Environmental Liabilities: Accrued environmental liabilities were $7.2 million as of December 31, 2007.

Investor Verification Checklist

• Merger Closing Probability: Verify the status of FTC and EU regulatory approvals and the likelihood of the Hexion merger closing by the July 2008 deadline.
• Discontinued Operations Impact: Confirm that the $339 million loss on disposal of U.S. petrochemical assets is fully recognized and assess the impact on future cash flows from the remaining portfolio.
• Insurance Recovery: Monitor the resolution of the Port Arthur fire insurance litigation and the potential for additional recoveries beyond the $325 million already advanced.
• Debt Covenants: Review compliance with debt covenants, particularly given the high leverage (66% debt-to-capitalization) and the restrictive covenants in the Merger Agreement.
• MTBE Exposure: Assess the potential financial impact of ongoing MTBE groundwater contamination litigation, which remains unquantified by management.