Document
Table of Contents                        

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-71
_______________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13056963&doc=11
  HEXION INC.
(Exact name of registrant as specified in its charter)
________________________________________
New Jersey
 
13-0511250
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
180 East Broad St., Columbus, OH 43215
 
614-225-4000
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
 
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  o   No  x
Explanatory Note:  While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, it has filed all reports required to be filed by such filing requirements during the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
  
Accelerated filer
 
o
 
 
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  o

Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 1, 2019: 82,556,847


Table of Contents                        

HEXION INC.
INDEX
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Hexion Inc. Condensed Consolidated Financial Statements (Unaudited Debtor-In-Possession)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

Table of Contents                        

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
HEXION INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
June 30,
2019
 
December 31,
2018
Assets
 
 

Current assets:
 
 

Cash and cash equivalents (including restricted cash of $15)
$
96

 
$
128

Accounts receivable (net of allowance for doubtful accounts of $16)
499

 
412

Inventories:
 
 

Finished and in-process goods
242

 
240

Raw materials and supplies
109

 
94

Other current assets
69

 
57

Total current assets
1,015

 
931

Investment in unconsolidated entities
20

 
19

Other long-term assets
42

 
34

Property and equipment:
 
 

Land
90

 
89

Buildings
287

 
285

Machinery and equipment
2,320

 
2,293


2,697

 
2,667

Less accumulated depreciation
(1,870
)
 
(1,826
)

827

 
841

Operating lease assets (see Note 10)
95

 

Goodwill
108

 
109

Other intangible assets, net
24

 
27

Total assets
$
2,131

 
$
1,961

Liabilities and Deficit
 
 

Current liabilities:
 
 

Accounts payable
$
293

 
$
384

Debt payable within one year
438

 
3,716

Interest payable
7

 
82

Income taxes payable
6

 
5

Accrued payroll and incentive compensation
38

 
52

Current portion of operating lease liabilities (see Note 10)
21

 

Financing fees payable
104

 

Other current liabilities
106

 
106

Total current liabilities
1,013

 
4,345

Long-term liabilities:
 
 

Liabilities subject to compromise
3,672

 

Long-term debt
90

 
99

Long-term pension and post employment benefit obligations
184

 
221

Deferred income taxes
15

 
15

Operating lease liabilities (see Note 10)
74

 

Other long-term liabilities
164

 
195

Total liabilities
5,212

 
4,875

Commitments and contingencies (see Note 11)
 
 

Deficit
 
 

Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2019 and December 31, 2018
1

 
1

Paid-in capital
526

 
526

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Accumulated other comprehensive loss
(26
)
 
(18
)
Accumulated deficit
(3,285
)
 
(3,125
)
Total Hexion Inc. shareholder’s deficit
(3,080
)
 
(2,912
)
Noncontrolling interest
(1
)
 
(2
)
Total deficit
(3,081
)
 
(2,914
)
Total liabilities and deficit
$
2,131

 
$
1,961

See Notes to Condensed Consolidated Financial Statements

3

Table of Contents                        

HEXION INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2019
 
2018
 
2019
 
2018
Net sales
$
892

 
$
995

 
$
1,778

 
$
1,941

Cost of sales
757

 
829

 
1,507

 
1,618

Gross profit
135

 
166

 
271

 
323

Selling, general and administrative expense
61

 
77

 
152

 
159

Gain on disposition

 

 

 
(44
)
Asset impairments

 

 

 
25

Business realignment costs
11

 
5

 
15

 
14

Other operating expense, net
8

 
11

 
16

 
20

Operating income
55

 
73

 
88

 
149

Interest expense, net (contractual interest expense of $83 and $163 for the three and six months ended June 30, 2019, respectively)
9

 
84

 
89

 
167

Other non-operating (income) expense, net
(10
)
 
8

 
(11
)
 
7

Reorganization items, net
156

 

 
156

 

Loss before income tax and earnings from unconsolidated entities
(100
)
 
(19
)
 
(146
)
 
(25
)
Income tax expense
8

 
3

 
15

 
11

Loss before earnings from unconsolidated entities
(108
)
 
(22
)
 
(161
)
 
(36
)
Earnings from unconsolidated entities, net of taxes
1

 
1

 
2

 
2

Net loss
(107
)
 
(21
)
 
(159
)
 
(34
)
Net income attributable to noncontrolling interest
(1
)
 
(1
)
 
(1
)
 
(1
)
Net loss attributable to Hexion Inc.
$
(108
)
 
$
(22
)
 
$
(160
)
 
$
(35
)
See Notes to Condensed Consolidated Financial Statements

4

Table of Contents                        

HEXION INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2019

2018
 
2019
 
2018
Net loss
$
(107
)
 
$
(21
)
 
$
(159
)
 
$
(34
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(8
)
 
(16
)
 
(8
)
 
(2
)
Other comprehensive loss
(8
)
 
(16
)
 
(8
)
 
(2
)
Comprehensive loss
(115
)
 
(37
)
 
(167
)
 
(36
)
Comprehensive income attributable to noncontrolling interest
(1
)
 
(1
)
 
(1
)
 
(1
)
Comprehensive loss attributable to Hexion Inc.
$
(116
)
 
$
(38
)
 
$
(168
)
 
$
(37
)
See Notes to Condensed Consolidated Financial Statements

5

Table of Contents                        

HEXION INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended June 30,
(In millions)
2019

2018
Cash flows used in operating activities

 

Net loss
$
(159
)
 
$
(34
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
52

 
58

Non-cash asset impairments

 
25

Non-cash reorganization items, net
139

 

Loss on sale of assets
3

 
2

Gain on disposition

 
(44
)
Amortization of deferred financing fees

 
8

Unrealized foreign currency (gains) losses
(7
)
 
12

DIP Facility financing fees included in net loss
13

 

Other non-cash adjustments
(2
)
 
(2
)
Net change in assets and liabilities:

 
 
Accounts receivable
(88
)
 
(27
)
Inventories
(19
)
 
(40
)
Accounts payable
(28
)
 
12

Income taxes payable
8

 
1

Other assets, current and non-current
(8
)
 
(18
)
Other liabilities, current and long-term
(17
)
 
5

Net cash used in operating activities
(113
)
 
(42
)
Cash flows (used in) provided by investing activities

 

Capital expenditures
(43
)
 
(43
)
Proceeds from disposition, net

 
49

Proceeds from sale of assets, net
1

 
1

Net cash (used in) provided by investing activities
(42
)
 
7

Cash flows provided by financing activities

 

Net short-term debt borrowings
(4
)
 
3

Borrowings of long-term debt
667

 
294

Repayments of long-term debt
(527
)
 
(243
)
DIP facility financing fees
(13
)
 

Long-term debt and credit facility financing fees paid

 
(1
)
Net cash provided by financing activities
123

 
53

Effect of exchange rates on cash and cash equivalents, including restricted cash

 
(3
)
Change in cash and cash equivalents, including restricted cash
(32
)
 
15

Cash, cash equivalents and restricted cash at beginning of period
128

 
115

Cash, cash equivalents and restricted cash at end of period
$
96

 
$
130

Supplemental disclosures of cash flow information

 

Cash paid for:

 

Interest, net
$
66

 
$
159

Income taxes, net
10

 
10

Reorganization items, net
17

 

See Notes to Condensed Consolidated Financial Statements

6

Table of Contents                        

HEXION INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT (Unaudited)

(In millions)
Common
Stock
 
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total Hexion Inc. Deficit
 
Noncontrolling Interest
 
Total
Balance at March 31, 2018
$
1

 
$
526

 
$
(296
)
 
$
6

 
$
(2,976
)
 
$
(2,739
)
 
$
(1
)
 
$
(2,740
)
Net (loss) income

 

 

 

 
(22
)
 
(22
)
 
1

 
(21
)
Other comprehensive loss

 

 

 
(16
)
 

 
(16
)
 

 
(16
)
Balance at June 30, 2018
$
1

 
$
526

 
$
(296
)
 
$
(10
)
 
$
(2,998
)
 
$
(2,777
)
 
$

 
$
(2,777
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
1

 
$
526

 
$
(296
)
 
$
(8
)
 
$
(2,964
)
 
$
(2,741
)
 
$
(1
)
 
$
(2,742
)
Net (loss) income

 

 

 

 
(35
)
 
(35
)
 
1

 
(34
)
Other comprehensive loss

 

 

 
(2
)
 

 
(2
)
 

 
(2
)
Impact of change in accounting policy

 

 

 

 
1

 
1

 

 
1

Balance at June 30, 2018
$
1

 
$
526

 
$
(296
)
 
$
(10
)
 
$
(2,998
)
 
$
(2,777
)
 
$

 
$
(2,777
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
$
1

 
$
526

 
$
(296
)
 
$
(18
)
 
$
(3,177
)
 
$
(2,964
)
 
$
(2
)
 
$
(2,966
)
Net (loss) income

 

 

 

 
(108
)
 
(108
)
 
1

 
(107
)
Other comprehensive loss

 

 

 
(8
)
 

 
(8
)
 

 
(8
)
Balance at June 30, 2019
$
1

 
$
526

 
$
(296
)
 
$
(26
)
 
$
(3,285
)
 
$
(3,080
)
 
$
(1
)
 
$
(3,081
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
1

 
$
526

 
$
(296
)
 
$
(18
)
 
$
(3,125
)
 
$
(2,912
)
 
$
(2
)
 
$
(2,914
)
Net (loss) income

 

 

 

 
(160
)
 
(160
)
 
1

 
(159
)
Other comprehensive loss

 

 

 
(8
)
 

 
(8
)
 

 
(8
)
Balance at June 30, 2019
$
1

 
$
526

 
$
(296
)
 
$
(26
)
 
$
(3,285
)
 
$
(3,080
)
 
$
(1
)
 
$
(3,081
)

See Notes to Condensed Consolidated Financial Statements

7

Table of Contents                        

(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except share data)
1. Background and Basis of Presentation
Based in Columbus, Ohio, Hexion Inc. (“Hexion” or the “Company”) serves global adhesive, coatings, composites and industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company’s business is organized based on the products offered and the markets served. At June 30, 2019, the Company had three reportable segments: Epoxy, Phenolic and Coating Resins; Forest Products Resins; and Corporate and Other.
As a result of the Company’s reorganization and emergence from Chapter 11 (as defined below) on July 1, 2019, the Company’s direct parent is Hexion Intermediate Holding 2, Inc., a holding company and wholly owned subsidiary of Hexion Intermediate Holding 1, Inc., a holding company and wholly owned subsidiary of Hexion Holdings Corporation, the ultimate parent of Hexion (“Hexion Holdings”). Prior to its reorganization, the Company’s parent was Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (now known as Hexion TopCo, LLC), the ultimate parent entity of Hexion, which was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). See Note 2 for more information.
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.
Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in the Company’s most recent Annual Report on Form 10-K.
Going Concern
The Company previously disclosed, based on its financial condition and its projected operating results, the defaults under its debt agreements, and the risks and uncertainties surrounding its Chapter 11 proceedings (see Note 2), that there was substantial doubt as to the Company’s ability to continue as a going concern as of the issuance of the Company’s 2018 Annual Report on Form 10-K. The Company’s ability to continue as a going concern at June 30, 2019 was contingent upon its ability to comply with the financial and other covenants contained in the DIP Term Loan Facility, the DIP ABL Facility and its ability to successfully implement the Plan (defined in Note 2), among other factors. After the Company’s emergence from Chapter 11 on July 1, 2019, based on its new capital structure, liquidity position and projected operating results, the Company expects to continue as a going concern for the next twelve months. See Note 2 for more information.
Financial Reporting in Reorganization
Effective on April 1, 2019, the Company applied Accounting Standard Codification, No. 852, “Reorganizations,” (“ASC No. 852”) which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as “Reorganization items, net” in the Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish debtor pre-petition liabilities subject to compromise (“LSTC”) from liabilities of non-filing entities, pre-petition liabilities that are not subject to compromise and post-petition liabilities in the accompanying Condensed Consolidated Balance Sheet. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. See Note 3 for more information.
The accompanying Condensed Consolidated Balance Sheet as of December 31, 2018 included in this Quarterly Report on Form 10-Q has been prepared under the basis of accounting assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has made certain adjustments to the Condensed Consolidated Balance Sheet as of December 31, 2018 including the reclassification of certain outstanding debt to current liabilities and the write-off of unamortized deferred financing costs related to such debt.
2. Chapter 11 Bankruptcy Filing
Bankruptcy Petitions and Emergence from Chapter 11
On April 1, 2019 (the “Petition Date”), the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the "Bankruptcy Court"). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

8

Table of Contents                        

On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On July 1, 2019 (the “Effective Date”), in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”).
Debtor-in-Possession Financing
DIP Term Loan Facility
In connection with the filing of the Bankruptcy Petitions, on April 3, 2019, the Company entered into a New York law-governed senior secured term loan agreement (the “DIP Term Loan Facility”), among Hexion LLC (“Holdings”), the Company, Hexion International Holdings B.V. (the “Dutch Borrower”), which was amended on April 17, 2019, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent and collateral agent (the “Term Loan Agent”). The proceeds of the DIP Term Loan Facility were loaned by the Dutch Borrower to the Company pursuant to an intercompany loan agreement (the “Intercompany Loan Agreement”) and were used in part to repay in full the outstanding obligations under the Company’s existing asset-based revolving credit agreement ABL Facility (“ABL Facility”). As of June 30, 2019, the Company had $350 borrowings outstanding under DIP Term Loan Facility. The Company’s remaining obligations under the DIP Term Loan Facility were repaid in full and the DIP Term Loan Facility was terminated upon consummation of the Plan by the Company on July 1, 2019.
DIP ABL Facility
In connection with the filing of the Bankruptcy Petitions, on April 3, 2019, Holdings, the Company and certain of its subsidiaries (collectively, the “Borrowers”), the lenders party thereto, JPMorgan, as administrative agent, and JPMorgan, as collateral agent (the “DIP ABL Collateral Agent” and together with the DIP Term Loan Facility, the “Credit Facilities”), entered into an amended and restated senior secured debtor-in-possession asset-based revolving credit agreement, which was further amended on May 10, 2019 (the “DIP ABL Facility”), which amended and restated the Company’s ABL Facility among Holdings, the Company, the Borrowers, the lenders party thereto, JPMorgan, as administrative agent, and JPMorgan, as collateral agent. As of June 30, 2019, the Company had no outstanding borrowings under the DIP ABL Facility and the DIP ABL Facility was terminated upon consummation of the Plan by the Company on July 1, 2019.
Restructuring Support Agreement
On April 1, 2019, the Debtors entered into a Restructuring Support Agreement (the “Support Agreement”) with equityholders that beneficially owned more than a majority of the Company’s outstanding equity (the “Consenting Sponsors”) and creditors that held more than a majority of the aggregate outstanding principal amount of each of the Company’s 6.625% Notes and 10.00% Notes, (the “1L Notes”), 13.750% 1.5 lien notes due 2022 (the “1.5L Notes”), 9.00% second lien notes due 2020 (the “2L Notes”), 9.20% Debentures due 2021 and/or 7.875% Debentures due 2023 issued by Borden, Inc. (the “Unsecured Notes”) (the “Consenting Creditors” and, together with the Consenting Sponsors, the “Consenting Parties”). The Support Agreement incorporated the economic terms regarding a restructuring of the Debtors agreed to by the parties reflected in the Support Agreement. The restructuring transactions were effectuated through the Plan.
Equity Backstop Agreement
On April 25, 2019, the Debtors entered into the Equity Backstop Commitment Agreement, as subsequently amended (the “Equity BCA”), among the Debtors and the equity backstop parties party thereto (the “Equity Backstop Parties”). The Equity BCA provides that upon the satisfaction of certain terms and conditions, including the confirmation of the Plan, the Company will have the option to require the Equity Backstop Parties to backstop the common stock of the reorganized Company (the “New Common Stock”) that is not otherwise purchased in connection with the $300 rights offerings for New Common Stock to be made in connection with the Plan (the “Unsubscribed Shares”) on a several, and not joint and several, basis. In consideration for their commitment to purchase the Unsubscribed Shares, the Equity Backstop Parties will be paid a Premium of 8% of the Rights Offering Amount (the “Equity BCA Premium”), which premium was earned in full upon entry of the Equity BCA Approval Order and which is payable either in Cash or in New Common Equity at the option of each Equity Backstop Party. Pursuant to the terms of the Equity BCA, the Equity BCA Premium was deemed earned, nonrefundable and non-avoidable upon entry of the approval order by the Court. The Company recognized a $24 liability for the Equity BCA Premium as of June 30, 2019, under the guidance for accounting for liability instruments. This amount is included in “Reorganization items, net” in the unaudited Condensed Consolidated Statements of Operations and “Financing fees payable” in the unaudited Condensed Consolidated Balance Sheets.

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Table of Contents                        

Debt Backstop Agreement
On April 25, 2019, the Debtors entered into the Debt Backstop Commitment Agreement, as subsequently amended (the “Debt BCA”), among the Debtors and the debt backstop parties party thereto (the “Debt Backstop Parties”). The Debt BCA provides that upon satisfaction of certain terms and conditions, including the confirmation of the Plan, the Debt Backstop Parties will backstop the New Long-Term Debt on a several, and not joint and several, basis of an amount equal to such Debt Backstop Party’s commitment percentage, in exchange for (a) the Debt Backstop Premium of 3.375% of the backstop commitments thereunder payable either in Cash or in New Common Equity at the option of each Debt Backstop Party and (b) for certain Debt Backstop Parties, the Additional Debt Backstop Premium of 1.5% of the backstop commitments thereunder payable in Cash, both of which premiums (described in (a) and (b)) were earned in full upon entry of the Debt BCA Approval Order. Pursuant to the terms of the Debt BCA, the BCA Commitment Premium was deemed earned, nonrefundable and non-avoidable upon entry of the approval order by the Court. The Company recognized a $80 liability for the BCA Commitment Premium as of June 30, 2019, under the guidance for accounting for liability instruments. This amount is included in “Reorganization items, net” in the unaudited Condensed Consolidated Statements of Operations and “Financing fees payable” in the unaudited Condensed Consolidated Balance Sheets.

Pre-Petition Claims
On June 7, 2019, the Debtors filed schedules of assets and liabilities and statements of financial affairs with the Court, which were amended on June 14, 2019. Pre-petition claims will be disposed of in accordance with the Plan. As the Company had not emerged from Chapter 11 bankruptcy as of June 30, 2019, all such amounts are classified as “Liabilities subject to compromise” in the unaudited Condensed Consolidated Balance Sheets. See Note 3 for more information.
The Debt Instruments provide that as a result of the Bankruptcy Petitions the principal and interest due thereunder shall be immediately
due and payable. Any efforts to enforce such payment obligations under the Debt Instruments are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. Upon Emergence on July 1, 2019, these automatic stay provisions are no longer in effect.
Subsequent Events
Emergence from Chapter 11 Bankruptcy
On July 1, 2019 (“the Effective Date”), the Plan became effective and the Debtors emerged from the Chapter 11 proceedings.
On or following the Effective Date, and pursuant to the terms of the Plan, the following occurred or is in the process of occurring:
The restructuring of the Debtors’ pre-petition funded debt obligations with the proceeds of $1,658 in new long-term debt (“New Long-term Debt”) (see Note 9) and a $300 rights offering for new common equity of Hexion Holdings (the “Rights Offering”);
A percentage of the Rights Offering was issued in the form of warrants (“New Warrants”), these warrants represented 15% of the Rights Offering which are exercisable for shares of Common Stock, issued by Hexion Holdings under the Plan, and referred to as New Warrants under the Plan (together with New Common Stock, “Registrable Securities”);
Certain of the Debtors entering into the $350 ABL Facility (see Note 9) ;
General unsecured claims being paid in full or otherwise continuing unimpaired;
Holders of claims with respect to the 1L Notes receiving their pro rata share of (a) cash in the amount of $1,450 (less the sum of adequate protection payments paid on account of the 1L Notes during the Chapter 11 cases), (b) 72.5% of new common equity of Hexion Holdings (“New Common Equity”) (subject to the Agreed Dilution), and (c) 72.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering. The dilution of the New Common Equity (the “Agreed Dilution”) resulted from the Rights Offering, the Management Incentive Plan (as defined in the Plan, 10% of the fully-diluted equity of the Company is to be reserved for grant to key members of management and independent, non-employee members of the Board of Directors, the details and allocation of which shall be determined by the new board of directors; and the Management Incentive Plan has not been finalized as of filing date of this Quarterly Report on Form 10-Q );
Holders of claims with respect to the 1.5L Notes, 2L Notes, and Unsecured Notes receiving their pro rata share of (a) 27.5% of the New Common Equity (subject to the Agreed Dilution) and (b) 27.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering;
Holders of equity interests (i.e., any class of equity securities) in Hexion Holdings LLC receiving no distributions and all such Equity Interests being cancelled;
Reorganized Hexion issuing a $2.5 settlement note to the Consenting Sponsors; and
Appointment of a new board of directors.

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Issuance of New Common Stock
    
On the Effective Date, all previously issued and outstanding equity interests in Hexion Holdings LLC were cancelled. Upon effectiveness of the Plan, Hexion Holdings issued 58,410,731 shares of a new class of common stock, par value $0.01 per share (“New Common Stock”), pursuant to the Rights Offering. The shares of New Common Stock were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 1145 of the Bankruptcy Code, which generally exempts from such registration requirements the issuance of securities under a plan of reorganization.
    
New Warrant Agreement

In addition, Hexion Holdings entered into a warrant agreement (the “Warrant Agreement”) and upon effectiveness of the Plan, Hexion Holdings issued 10,307,778 New Warrants as a part of the Rights Offering on the Effective Date. The New Warrants represented 15% of the Rights Offering which are exercisable to purchase shares of New Common Stock. These New Warrants may be exercised, at any time on or after the initial exercise date for exercise price per share of the New Common Stock of $0.01. The Warrant Agreement contains customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions.

The holder or group of holders (the “Attribution Parties”) of New Warrants shall be permitted to exercise these New Warrants, at any time, in part or in whole, in amounts sufficient for the holder and Attribution Parties to maintain in the aggregate no less than the beneficial ownership limitation of 9.9% of the fully diluted shares outstanding. Fully diluted shares outstanding is calculated as (x) the aggregate number of shares of New Common Stock issued and outstanding plus (y) the aggregate number of shares of common stock issuable upon the conversion of any other issued and outstanding securities or rights convertible into, or exchangeable for (in each case, directly or indirectly), common stock (excluding, for the avoidance of doubt, any unexercised warrants or options to purchase common stock).

The New Warrants do not entitle the holder or group of holders of the New Warrants to any voting rights, dividends or other rights as a stockholder of the Company prior to exercise of the held New Warrants. If any shares of common stock are listed on a trading market, Hexion Holdings shall use its reasonable best efforts to cause the New Warrants shares issued upon exercise of these New Warrants to also be listed on such trading market, in accordance with the Warrant Agreement.

Registration Rights Agreement

On the Effective Date, Hexion Holdings entered into a registration rights agreement with certain of its stockholders (the “Registration Rights Agreement”).

Under the Registration Rights Agreement, upon delivery of a written notice by one or more stockholders holding, individually or in the aggregate, at least a majority of the outstanding Registrable Securities and New Warrants, voting together (as if such New Warrants had been exercised), Hexion Holdings is required to file a registration statement and effect an initial public offering and listing of its common stock, so long as the total offering size is at least $100 million (a “Qualified IPO”).
 
Hexion Holdings is also required to file a registration statement at any time following 180 days after the closing of a Qualified IPO upon the delivery of a written notice by one or more stockholders proposing to sell, individually or in the aggregate, at least $50 million of Registrable Securities. In addition, under the Registration Rights Agreement, Hexion Holdings is required to file a shelf registration statement as soon as practicable following the closing of a Qualified IPO to register the resale, on a delayed or continuous basis, of all Registrable Securities that have been timely designated for inclusion by the holders (specified in the Registration Rights Agreement). Any individual holder or holders of our outstanding common stock party thereto can demand up to four “shelf takedowns” in any 12-month period which may be conducted in underwritten offerings so long as the total offering size is at least $50 million. Furthermore, each stockholder party to the Registration Rights Agreement has unlimited piggyback registration rights with respect to underwritten offerings, subject to certain exceptions and limitations.

The foregoing registration rights are subject to certain cutback provisions and customary suspension/blackout provisions. Hexion Holdings has agreed to pay all registration expenses under the Registration Rights Agreement.

Generally, “Registrable Securities” under the Registration Rights Agreement includes New Common Stock issued under the Plan, except that “Registrable Securities” does not include securities that have been sold under an effective registration statement or Rule 144 under the Securities Act.
    

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Fresh Start Accounting
Upon emergence from bankruptcy, the Company will be required to apply fresh start accounting to its financial statements because (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting will be applied to the Company’s consolidated financial statements as of July 1, 2019, the date it emerged from bankruptcy. Under the principles of fresh start accounting, a new reporting entity was considered to have been created, and, as a result, the Company will allocate the reorganization value of the Company to its individual assets, including property, plant and equipment, based on their estimated fair values. The process of estimating the fair value of the Company’s assets, liabilities and equity upon emergence is currently ongoing and, therefore, such amounts have not yet been finalized. In support of the Plan, the enterprise value of the Successor Company was estimated at $3,100 , and for financial reporting purposes is estimated to be in the range of approximately $2,900 - $3,300 as of the Effective Date. The face value of the Company’s long-term debt issued at emergence was a stated amount of $1,658.
As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the financial statements on or after July 1, 2019 will not be comparable with the financial statements prior to that date. Upon the application of fresh start accounting, the Company will allocate the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the the fair value of identified tangible and intangible assets will be reported as goodwill.
3. Liabilities Subject to Compromise
Liabilities subject to compromise represent unsecured liabilities that have been accounted for under the Plan. As a result of the Bankruptcy Petitions, actions to enforce or otherwise effect payment of pre-petition liabilities are generally stayed. These liabilities represent the amounts which have been allowed on known claims which were resolved through the Chapter 11 process, and have been approved by the Court as a result of the Confirmation Order.
Subsequent to the Petition Date, the Company received approval from the Court to pay or otherwise honor certain pre-petition unsecured obligations generally designed to stabilize the Company’s operations, such as certain employee wages, salaries and benefits, certain taxes and fees, customer obligations, obligations to logistics providers, operating lease obligations and pre-petition amounts owed to certain critical vendors. As a result of the Court approvals, these obligations are excluded from LSTC in the unaudited Condensed Consolidated Balance Sheets. In addition, the Company has honored payments to vendors and other providers in the ordinary course of business for goods and services received after the Petition Date.
The following table summarizes pre-petition liabilities that are classified as “Liabilities subject to compromise” in the unaudited Condensed Consolidated Balance Sheets:
 
As of June 30, 2019
Debt
$
3,420

Interest payable
99

Accounts payable
56

Environmental reserve
43

Pension and other post employment benefit obligations
33

Dividends payable to parent
13

Other
8

Total
$
3,672

The Bankruptcy Petitions constituted an event of default under the ABL Facility and the indentures that govern the Company’s notes (see Note 9). Interest payable reflects pre-petition accrued interest related to the debt classified as LSTC. Other liabilities subject to compromise primarily include accrued liabilities for utilities and legal items.
Liabilities subject to compromise related to debt and its related interest payable were disposed of in accordance with the Plan, as applicable, on or shortly after the Company emerged from Chapter 11 bankruptcy on July 1, 2019. As of July 1, 2019, all remaining liabilities subject to compromise were not impaired and remain on the Company’s Condensed Consolidated Balance Sheets, and these obligations are treated consistently with the Company’s policies under its ordinary course of business.

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4. Reorganization Items, Net
Incremental costs incurred directly as a result of the Bankruptcy Petitions and adjustments to the expected amount of allowed claims for liabilities subject to compromise are classified as “Reorganization items, net” in the unaudited Condensed Consolidated Statements of Operations. The following table summarizes reorganization items, net for the three and six months ended June 30, 2019:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Financing fees payable
$
104

 
$
104

Professional fees
39

 
39

DIP ABL Facility fees
13

 
13

Total
$
156

 
$
156

5. Summary of Significant Accounting Policies
Revenue Recognition—The Company follows the principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as risk and title to the product transfer to the customer. Sales, value add, and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. Contract terms for certain transactions, including sales made on a consignment basis, result in the transfer of control of the finished product to the customer prior to the point at which the Company has the right to invoice for the product. In these cases, timing of revenue recognition will differ from the timing of invoicing to customers and will result in the Company recording a contract asset. A contract asset balance of $11 is recorded within “Other current assets” at both June 30, 2019 and December 31, 2018 in the unaudited Condensed Consolidated Balance Sheet. Refer to Note 14 for additional discussion of the Company’s net sales by reportable segment disaggregated by geographic region.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Subsequent Events—The Company has evaluated events and transactions subsequent to June 30, 2019 through the date of issuance of its unaudited Condensed Consolidated Financial Statements.
Cash and Cash Equivalents— The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. The Company’s restricted cash balance of $15 as of both June 30, 2019 and December 31, 2018 represent deposits to secure certain bank guarantees issued to third parties to guarantee potential obligations of the Company primarily related to the completion of tax audits and environmental liabilities. These balances will remain restricted as long as the underlying exposures exist and are included in the Consolidated Balance Sheets as a component of “Cash and cash equivalents.”
Recently Issued Accounting Standards
Newly Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes the existing lease guidance in Topic 840. According to the new guidance, all leases, with limited scope exceptions, will be recorded on the balance sheet in the form of a liability to make lease payments (lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. The guidance was effective for annual and interim periods beginning on or after December 15, 2018.
The Company adopted ASU 2016-02 using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative Condensed Consolidated Statement of Operations and the Condensed Consolidated Balance Sheets. The Company also determined that there was no cumulative-effect adjustment to beginning retained earnings on the Condensed Consolidated Balance Sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, “Leases”. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward its historical lease classification. The Company also elected the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new standard resulted in the recording of right of use assets and offsetting lease liabilities of $105 as of January 1, 2019.
In February 2018, the FASB issued Accounting Standards Board Update No. 2018-02: Income Statement-Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”). ASU 2018-02 was issued in response to the United States tax reform legislation, the Tax Cuts and Jobs Act (“Tax Reform”), enacted in December 2017. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the new tax legislation. The guidance is effective for annual and interim periods beginning on or after December 15, 2018, and early adoption is permitted. The Company adopted ASU 2018-02 as of January 1, 2019 and it did not have a material impact on the financial statements.
    

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Newly Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13: Financial Instruments - Credit Losses (Topic 820): “Measurement of Credit Losses on Financial Instruments," (“ASU 2016-13”). The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. New disclosures are also required with this standard. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the potential impact of adopting this standard.
In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted and an entity can elect to apply the new guidance on a prospective or retrospective basis. The Company is currently assessing the potential impact of adopting this standard.
6. Restructuring & Business Realignment
    
Restructuring Activities

In November 2017, the Company initiated new restructuring actions with the intent to optimize its cost structure. The total one-time cash costs expected to be incurred for these restructuring activities are estimated at $27, consisting primarily of workforce reduction costs.
    
The following table summarizes restructuring information by reporting segment:
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Corporate and Other
 
Total
Total restructuring costs expected to be incurred
$
14

 
$
9

 
$
4

 
$
27

Total restructuring costs incurred through June 30, 2019
$
14

 
$
8

 
$
4

 
$
26

 
 
 
 
 
 
 
 
Accrued liability at December 31, 2018
$
2

 
$
2

 
$
2

 
$
6

Restructuring charges
1

 

 

 
1

Payments
(2
)
 
(1
)
 
(1
)
 
(4
)
Accrued liability at June 30, 2019
$
1

 
$
1

 
$
1

 
$
3


Oilfield
    
During the first quarter of 2018, the Company indefinitely idled an oilfield manufacturing facility within its Epoxy, Phenolic and Coating Resins segment, and production was shifted to another facility within the oilfield manufacturing group. This represented a triggering event resulting in an impairment evaluation of the fixed and intangible assets within the U.S. oilfield asset group. As a result, an asset impairment of $20 was recorded in the first quarter of 2018 related to the fixed assets at the idled manufacturing facility. In addition, the remaining U.S. oilfield asset group was evaluated for impairment utilizing a discounted cash flow approach, resulting in an additional impairment of $5 that was recorded during the first quarter of 2018 related to an existing customer relationship intangible asset. Overall, the Company incurred $25 of total impairment related to these assets, which is included in “Asset impairments” in the unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2018.
7. Related Party Transactions
Transactions with Apollo
Management Consulting Agreement
The Company was party to a Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) pursuant to which the Company received certain structuring and advisory services from Apollo and its affiliates. Apollo was entitled to an annual fee equal to the greater of $3 or 2% of the Company’s Adjusted EBITDA. Apollo elected to waive charges of any portion of the annual management fee due in excess of $3 for the calendar year 2018.
During the three and six months ended June 30, 2018, the Company recognized expense under the Management Consulting Agreement of $1 and $2, respectively. This amount is included in “Other operating expense, net” in the unaudited Condensed Consolidated Statements of Operations. In conjunction with the Company’s Chapter 11 proceedings and the Support Agreement filed on April 1, 2019, Apollo agreed to waive its annual management fee for 2019. In connection with the Company’s emergence from Chapter 11, the Management Consulting Agreement was terminated pursuant to the Confirmation Order, as of the Effective Date.
    

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Support Agreement
Pursuant to the Support Agreement, Apollo will receive a $2.5 senior unsecured note maturing on March 31, 2020, payable upon an initial public offering or listing on NYSE or NASDAQ.
Transactions with MPM
As of May 15, 2019, MPM is no longer under the common control of Apollo and no longer a related party to the Company.
Shared Services Agreement
On October 1, 2010, the Company entered into a shared services agreement with Momentive Performance Materials Inc. (“MPM”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary of Hexion Holdings LLC), as amended in October 2014 (the “Shared Services Agreement”). Under this agreement, the Company provided to MPM, and MPM provided to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The Shared Services Agreement established certain criteria upon which the costs of such services are allocated between the Company and MPM.
On February 11, 2019, MPM provided notice of its intention to terminate the Shared Services Agreement, effective March 14, 2019. The termination triggers a period of up to 14 months during which time the parties will work together to facilitate an orderly transition of services provided under the Shared Services Agreement.
Pursuant to the Shared Services Agreement, the Company had accounts receivable from MPM of $2 at December 31, 2018. The below table summarizes the transactions between the Company and MPM:
 
Six Months Ended June 30,
 
2019
2018
Total cost pool - Hexion (1)
$
15

 
$
19

Total cost pool - MPM (1)
14

 
14

(1)     Included in the net costs incurred during the six months ended June 30, 2019 and 2018, were net billings from Hexion to MPM of $11 and $9, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable agreed upon allocation percentage.

Sales and Purchases of Products with MPM
The Company also sells products to, and purchases products from, MPM. There were no products sold during the three and six months ended June 30, 2019 and during the three months ended June 30, 2018, the Company sold $1 of products to MPM. During the six months ended June 30, 2019 and 2018, the Company earned less than $1 from MPM as compensation for acting as distributor of products. The Company had $3 of accounts payable to MPM as of December 31, 2018. Refer to the below table for the summary of the purchases of products with MPM:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
2018
 
2019
2018
Purchases from MPM (1)
$
3

 
$
9

 
$
10

 
$
16

(1)      Purchases from MPM are through May 15, 2019 and only reflect the time period when MPM was a related party.
Purchases and Sales of Products and Services with Apollo Affiliates
The Company sells products to various Apollo affiliates. These sales were $1 for the three and six months ended June 30, 2019 and $1 six months ended June 30, 2018. There were no sales for the three months ended June 30, 2018. Accounts receivable from these affiliates were less than $1 at both June 30, 2019 and December 31, 2018.

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Other Transactions and Arrangements
The Company sells products and provides services to, and purchases products from, its joint ventures which are recorded under the equity method of accounting. Refer to the below table for a summary of the sales and purchases with the Company and its joint ventures which are recorded under the equity method of accounting:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
2018
 
2019
 
2018
Sales to joint ventures
$
1

 
$
3

 
$
2

 
$
6

Purchases from joint ventures
1

 
3

 
2

 
5

 
June 30, 2019
 
December 31, 2018
Accounts receivable from joint ventures
$
3

 
$
2

Accounts payable to joint ventures
1

 
<1

In addition to the accounts receivable from joint ventures disclosed above, the Company had a loan receivable of $7 as of both June 30, 2019 and December 31, 2018, respectively, from its unconsolidated forest products joint venture in Russia.
8. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.
Recurring Fair Value Measurements
As of June 30, 2019, the Company had derivative liabilities related to foreign exchange, electricity and natural gas contracts of less than $1, which were measured using Level 2 inputs, and consisted of derivative instruments transacted primarily in over-the-counter markets. There were no transfers between Level 1, Level 2 or Level 3 measurements during the six months ended June 30, 2019 or 2018.
The Company calculates the fair value of its Level 2 derivative liabilities using standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At both June 30, 2019 and December 31, 2018, no adjustment was made by the Company to reduce its derivative position for nonperformance risk.
When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.
Forward Contract
On June 26, 2019, the Company entered into a foreign exchange forward contract (the “FX Contract”) to manage the foreign currency risk associated with the euro denominated tranche of the new Term Loan Facility in an aggregate notional amount of €425M, in connection with the completion of the Plan on July 1, 2019 (see Note 9). The FX Contract commits the counterparty to exchange euro denominated currency for U.S. dollar currency on July 1, 2019, the funding date of the Term Loan Facility. At June 30, 2019, the FX Contract had an unrealized mark-to-market loss of $1, which was measured using Level 2 inputs.

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Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
 
 
Carrying Amount(1)
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,948

 
$

 
$
2,499

 
$
63

 
$
2,562

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,815

 
$

 
$
2,679

 
$
66

 
$
2,745

(1)    As of June 30, 2019, $3,420 is included in liabilities subject to compromise (see Note 9).
Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Level 3 amounts represent finance leases and sale leaseback financing arrangements whose fair value is determined through the use of present value and specific contract terms. The carrying amount and fair value of the Company’s debt is exclusive of unamortized deferred financing fees. The carrying amounts of cash and cash equivalents, short term investments, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.
9. Debt Obligations
Debt outstanding at June 30, 2019 and December 31, 2018 is as follows:
 
 
June 30, 2019
 
December 31, 2018
 
 
Liabilities Subject to Compromise (1)
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
ABL Facility
 
$

 
$

 
$

 
$

 
$
137

DIP Facilities:
 
 
 
 
 
 
 
 
 
 
DIP ABL Facility
 

 

 

 

 

DIP Term Loan Facility
 

 

 
350

 

 

Senior Secured Notes:
 
 
 
 
 
 
 
 
 
 
6.625% First-Priority Senior Secured Notes due 2020 (2)
 
1,507

 

 

 

 
1,550

10.00% First-Priority Senior Secured Notes due 2020(2)
 
306

 

 

 

 
315

10.375% First-Priority Senior Secured Notes due 2022(2)
 
545

 

 

 

 
560

13.75% Senior Secured Notes due 2022
 
225

 

 

 

 
225

9.00% Second-Priority Senior Secured Notes due 2020
 
574

 

 

 

 
574

Debentures:
 
 
 
 
 
 
 
 
 
 
9.2% debentures due 2021
 
74

 

 

 

 
74

7.875% debentures due 2023
 
189

 

 

 

 
189

Other Borrowings:
 
 
 
 
 
 
 
 
 
 
Australia Facility due 2021
 

 
29

 
3

 
30

 
4

Brazilian bank loans
 

 
10

 
41

 
12

 
41

Lease obligations(3)
 

 
51

 
12

 
56

 
10

Other
 

 

 
32

 
1

 
37

Total
 
$
3,420


$
90

 
$
438

 
$
99

 
$
3,716

(1)    Liabilities subject to compromise include the 1L Notes, the 1.5L Notes, the 2L Notes, and the Unsecured Notes as a result of the Company’s Bankruptcy Petitions. See Note 2 for more information. These amounts are classified as “Liabilities subject to compromise” in the unaudited Condensed Consolidated Balance Sheets as of June 30, 2019.
(2)    In April 2019, in connection with the Plan, the Company made an adequate protection payment of $67 to the First-Priority Senior Secured Notes. This payment reduced the outstanding principal on the First-Priority Senior Secured Notes.
(3)    Lease obligations include finance leases and sale leaseback financing arrangements. Amounts reflected for December 31, 2018 represent capital lease obligations and sale leaseback financing arrangements as recorded under ASC 840.
    
        

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As discussed in Note 1, there was substantial doubt as to the Company’s ability to continue as a going concern as of as of the issuance of the Company’s 2018 Annual Report on Form 10-K. The Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under its ABL Facility and 1L Notes, the 1.5L Notes, the 2L Notes, and the Unsecured Notes. As such, all outstanding debt as of December 31, 2018 related to these debt instruments were classified as “Debt payable within one year” in the audited Consolidated Balance Sheets and related footnote disclosures.
    
As of June 30, 2019, all outstanding debt related to the DIP Term Loan Facility has been classified as “Debt payable within one year” in the unaudited Consolidated Balance sheets. As of June 30, 2019, all amounts related to the 1L Notes, the 1.5L Notes, the 2L Notes, and the Unsecured Notes are classified in the “Liabilities subject to compromise” in the unaudited Consolidated Balance Sheets. These debt instruments provided that as a result of the Bankruptcy Petitions, the principal and interest due thereunder were immediately due and payable; however, any efforts to enforce such payment obligations under these instruments are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of these instruments are subject to the applicable provisions of the Bankruptcy Code. Additionally, as a result of the Bankruptcy Filing, the Company ceased accruing interest on the Debtor’s unsecured debt in April 2019.

Debtor-in-Possession Financing
    
DIP ABL Facility and DIP Term Loan Facility

In connection with the Bankruptcy Petitions, in April 2019, the Company, Hexion LLC and certain of its subsidiaries entered into the DIP ABL Facility and the DIP Term Loan Facility, as further described in Note 2. The proceeds of the DIP Term Loan Facility were used in part to repay in full the outstanding obligations under the Company’s existing ABL Facility. As of June 30, 2019, the Company had no outstanding borrowings and no outstanding letters of credit under the DIP ABL Facility. The DIP Term Loan Facility was terminated upon completion of the Plan by the Company on July 1, 2019. All amounts outstanding under the DIP Term Loan Facility as of such date were repaid in full.

Subsequent Events

New Credit Facilities and Senior Notes

ABL Facility

On July 1, 2019, in connection with the Emergence, the Company, Hexion Canada Inc., a Canadian corporation (the “Canadian ABL Borrower”), Hexion B.V., a company organized under the laws of The Netherlands (the “Dutch ABL Borrower”), Hexion GmbH, a company organized under the laws of Germany (the “German ABL Borrower”), Hexion UK Limited, a corporation organized under the laws of England and Wales ( the “U.K. ABL Borrower” and, together with the Company, the Canadian ABL Borrower, the Dutch ABL Borrower and the German ABL Borrower, the “ABL Borrowers”) entered into a senior secured ABL Facility with the lenders and other parties thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, in an aggregate principal amount of $350, under which the ABL Borrowers may borrow funds from time to time and up to $150 amount of which is available through a subfacility in the form of letters of credit, in each case subject to a borrowing base, as further described below. In addition, the Company may request one or more incremental facilities in an aggregate amount equal to the greater of (i) $100 and (ii) the excess of the borrowing base over $350.

The ABL Facility will mature and the commitments thereunder will terminate on July 1, 2024 and bears interest based on an adjusted LIBOR rate, EURIBOR or an alternate base rate (depending on the currency of the borrowing), in each case plus an applicable initial margin of 1.50% or, in the case of the alternate base rate, 0.50%, which margin may increase or decrease depending on the average availability under the ABL Facility.

The borrowing base is, at any time of determination, an amount (net of reserves) equal to the sum of:
in the case of the borrowing base for the Company’s U.S., U.K., Dutch and Canadian subsidiaries, 85% of the amount of eligible receivables (or 90% of the amount of “investment grade” eligible receivables) (including trade receivables), plus
in the case of the borrowing base for the Company’s U.S., U.K., Dutch and Canadian subsidiaries, the lesser of (i) 70% of the amount of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory, plus
in the case of the borrowing base for the Company’s U.K., Dutch, Canadian and German subsidiaries, the lesser of (i) the sum of (a) 80% of the amount of eligible machinery and equipment appraised on a net orderly liquidation basis and (b) 75% of the appraised fair market value of eligible real property of the loan parties in Canada, England and Wales, the Netherlands and Germany and (ii) the lesser of (x) 20% of the total commitments and (y) 20% of the borrowing base of the borrowers without giving effect to the additional borrowing base from the eligible machinery and equipment and eligible real property, plus
in the case of the borrowing base for the Company’s U.S. and Canadian subsidiaries, 100% of unrestricted cash, in each case held in an account subject to the springing control of the agent; provided, that the cash component of the borrowing base shall not constitute more than the lesser of (x) 15.0% of the total commitments and (y) 15.0% of the borrowing base of the borrowers (calculated prior to giving effect to such limitation).

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The borrowing base of the U.K., Dutch and German subsidiaries may not exceed the greater of 50% of the total commitments and 50% of the borrowing base of the ABL Borrowers. On the closing date of the ABL Facility, as adjusted for the consummation of the Plan and related transactions, the borrowing base reflecting various required reserves was determined to be approximately $350.

In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee to the lenders in respect of the unutilized commitments thereunder at a rate equal to 0.50% or 0.375% per annum depending on the average utilization of the commitments. The Company also pays a customary letter of credit fee, including a fronting fee of 0.125% per annum of the daily average stated amount of each outstanding letter of credit, and customary agency fees.

Outstanding loans under the ABL Facility may be voluntarily repaid at any time without premium or penalty, other than customary “breakage” costs with respect to eurocurrency loans.

The obligations of the Company under the ABL Facility are unconditionally guaranteed by the Company’s direct parent, Hexion Intermediate Holding 2, Inc. (“Hexion Intermediate”), and each of the Company’s existing and future wholly-owned material U.S. subsidiaries, which the Company refers to as the “U.S. ABL Guarantors.” In addition, all obligations of the foreign subsidiary borrowers under the ABL Facility are guaranteed by the U.S. ABL Guarantors and certain other direct and indirect wholly-owned foreign subsidiaries, which the Company refers to collectively as the “Foreign ABL Guarantors” and, together with the U.S. ABL Guarantors, the “ABL Guarantors.”
    
New Senior Secured Term Loan Facility

Additionally, in connection with the completion of the Plan, on July 1, 2019, the Company and Hexion International Cooperatief U.A., a company organized under the laws of the Netherlands (the “Dutch Term Loan Borrower” and, together with the Company, the “Term Loan Borrowers”), entered into a senior secured term loan facility with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Term Loan Facility”), which consists of (i) a USD denominated tranche in an aggregate principal amount of $725 (“Senior Secured Term Loan - USD”) borrowed by the Company and (ii) a EUR denominated tranche in an aggregate principal amount of €425 (“Senior Secured Term Loan - EUR”) borrowed by the Dutch Term Loan Borrower. In addition, the Company may request one or more incremental facilities in an aggregate amount up to the sum of $425 and amounts that may be incurred pursuant to certain leverage and coverage ratios.

The Term Loan Facility will mature on July 1, 2026 and bears interest based on (i) in the case of the USD tranche, at the Company’s option, an adjusted LIBOR rate or an alternate base rate, in each case plus an applicable margin equal to 3.50% or, in the case of the alternate base rate, 2.50% and (ii) in the case of the EUR tranche, EURIBOR plus an applicable margin equal to 4.00%.

The obligations of the Company under the Term Loan Facility are unconditionally guaranteed by Hexion Intermediate and each of the Company’s existing and future wholly owned material U.S. subsidiaries, which subsidiaries the Company refers to collectively as “U.S. Term Guarantors.” In addition, all obligations of the Dutch Term Loan Borrower under the Term Loan Facility are guaranteed by Hexion Intermediate, the Company, the U.S. Term Guarantors and certain other direct and indirect wholly-owned foreign subsidiaries, which foreign subsidiaries the Company collectively refers to as the “Foreign Term Guarantors” (together with the U.S. Term Guarantors, the “Subsidiary Term Guarantors” and, together with Hexion Intermediate, the “Term Guarantors”).

The Credit Facilities contain among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, covenant defaults, events of bankruptcy and a change of control.

In addition, the ABL Facility requires the Company to maintain a minimum fixed charge coverage ratio at any time when the excess availability is less than the greater of (x) $30 and (y) 10.0% of the lesser of (i) the borrowing base at such time and (ii) the aggregate amount of ABL Facility commitments at such time. In that event, the Company must satisfy a minimum fixed charge coverage ratio of 1.0 to 1.0. The Credit Facilities also contain certain other customary affirmative covenants and events of default. If the Company fails to perform its obligations under these and other covenants, the Credit Facilities could be terminated and any outstanding borrowings, together with accrued interest, under the Credit Facilities could be declared immediately due and payable.

7.875% Senior Notes due 2027

The Company entered into an indenture, dated as of July 1, 2019 (the “Indenture”), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee, and issued $450 aggregate principal amount of 7.875% Senior Notes due 2027 (the “Senior Notes”) thereunder. The Senior Notes are unsecured and are guaranteed on a senior basis by the Company’s existing domestic subsidiaries that guarantee its obligations under its Credit Facilities (as defined below) (the “Guarantors”) on a full and unconditional basis. The following is a brief description of the material provisions of the Indenture and the Senior Notes.

The Senior Notes will mature on July 15, 2027. Interest on the Senior Notes will accrue at the rate of 7.875% per annum and will be payable semiannually in arrears on January 15 and July 15, commencing on January 15, 2020.


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Optional Redemption. At any time prior to July 15, 2022, the Company may redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount of the Senior Notes redeemed, plus an applicable “make-whole” premium and accrued and unpaid interest, if any, to the redemption date.

In addition, at any time prior to July 15, 2022, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes at a redemption price of 107.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings; provided that at least 50% of the aggregate principal amount of the Senior Notes originally issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its subsidiaries); and provided, further, that such redemption occurs within 90 days of the date of the closing of such equity offering.

On and after July 15, 2022, the Company may redeem all or a part of the Senior Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:
Year
Percentage
2022
103.94%
2023
101.97%
2024 and thereafter
100.00%

Change of Control. If a change of control (as defined in the Indenture) occurs, holders of the Senior Notes will have the right to require the Company to repurchase all or any part of their Senior Notes at a purchase price equal to 101% of the aggregate principal amount of the Senior Notes repurchased, plus accrued and unpaid interest, if any, to the repurchase date.

Certain Covenants. The Indenture governing the Senior Notes contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. At such time as (1) the Senior Notes have an investment grade rating from both of Moody’s Investors Service, Inc. and Standard and Poor’s Ratings Services and (2) no default has occurred and is continuing under the Indenture, certain of these and other covenants will be suspended and cease to be in effect.

Events of Default. The Indenture also provides for certain customary events of default, including, among others, nonpayment of principal or interest, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, bankruptcy and insolvency events, and cross acceleration, which would permit the principal, premium, if any, interest and other monetary obligations on all the then outstanding Senior Notes to be declared due and payable immediately.

The above description of the Indenture and the Senior Notes is qualified in its entirety by the full text of those documents, which are attached as Exhibits 4.1 and 4.2 to Form 8-K filed on July 2, 2019, and are incorporated herein by reference.

Intercreditor Agreement

On July 1, 2019, in connection with the Emergence, JPMorgan Chase Bank, N.A., as collateral agent under each of the Credit Facilities, and the Company and certain of its subsidiaries entered into an ABL Intercreditor Agreement that, among other things, sets forth the relative lien priorities of the secured parties under the Credit Facilities on the collateral shared by the ABL Facility and the Term Loan Facility.


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Pro Forma Debt Obligations

The following table presents long-term debt at June 30, 2019 adjusted for pro-forma effects of the completion of the Plan on July 1, 2019:
 
Pro Forma as of June 30, 2019
 
Long-Term
 
Due Within One Year
Senior Secured Credit Facilities:
 
 
 
ABL Facility
$

 
$

Senior Secured Term Loan - USD due 2026 (includes $7 of unamortized debt discount)
718

 

Senior Secured Term Loan - EUR due 2026 (includes $5 of unamortized debt discount)
478

 

Senior Notes:
 
 
 
7.875% Senior Notes due 2027
450

 

Other Borrowings:
 
 
 
Australia Facility due 2021
29

 
3

Brazilian bank loans
10

 
41

Lease obligations
51

 
12

Other

 
32

Unamortized debt issuance costs
(18
)
 

Total Debt
$
1,718

 
$
88

10. Leases
The Company leases certain buildings, warehouses, rail cars, land and operating equipment under both operating and finance leases expiring on various dates through 2044. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and non-lease components.
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Lease Costs    
For the three and six months ended June 30, 2019, the Company recorded operating lease expense of $9 and $18, respectively, and short-term lease expense of $2 and $5, respectively. The Company had amortization expense of less than $1 and $1 for the three and six months ended June 30, 2019, respectively, and interest expense from finance leases of less than $1 for the three and six months ended June 30, 2019. Variable lease expense was $1 and $2 for the three and six months ended June 30, 2019, respectively. These expense items are included as components of “Operating income” and “Interest expense, net” within the Condensed Consolidated Statements of Operations.

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Balance Sheet Classification
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheet:
 
 
Classification
 
June 30, 2019(1)
Assets:
 
 
 
 
Operating
 
Operating lease assets
 
$
95

Finance(1)
 
Machinery and Equipment
 
11

           Total leased assets
 
 
 
$
106

Liabilities:
 
 
 
 
Current
 
 
 
 
Operating
 
Current portion of operating lease liabilities
 
$
21

Finance
 
Debt payable within one year
 
3

Noncurrent
 
 
 
 
Operating
 
Operating lease liabilities
 
74

Finance
 
Long-term debt
 
8

           Total leased liabilities
 
 
 
$
106

(1)
Finance lease assets are recorded net of accumulated amortization of $9 as of June 30, 2019.
Other Lease Information
Cash paid for finance leases was $2 and cash paid for operating leases approximated operating lease expense and non-cash right-of-use asset amortization for the three and six months ended June 30, 2019. Right-of-use assets obtained in exchange for operating lease obligations were less than $1 and $1 during the three and six months ended June 30, 2019, respectively. There were $3 right-of-use assets obtained in exchange for finance lease obligations during the three and six months ended June 30, 2019.
The tables below present supplemental information related to leases as of June 30, 2019:
 
 
June 30, 2019
Weighted-average remaining lease term (years)
 
 
Operating leases
 
8.8

Finance leases
 
2.0

Weighted-average discount rate
 
 
Operating leases
 
12.18
%
Finance leases
 
7.42
%
    
The table below reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet as of June 30, 2019:
Year
 
Minimum Rentals Under Operating Leases
 
Minimum Payments Under Finance Leases(1)
Remaining six months of 2019
 
$
16

 
$
2

2020
 
25

 
8

2021
 
20

 
1

2022
 
14

 

2023
 
11

 

2024 and thereafter
 
78

 
1

Total lease payments
 
$
164

 
$
12

Less: Amount representing interest
 
69

 
1

Present value of lease liabilities
 
$
95

 
$
11

(1)     Amounts exclude sale leaseback financing arrangements which are not considered leases under Topic 842.

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Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a retrospective adoption method at January 1, 2019. See Note 5 for more information. The following is the minimum lease commitments under the previous lease guidance (ASC 840) as of December 31, 2018, as disclosed in the Company’s most recent Annual Report on Form 10-K.
Year
 
Minimum Rentals
Under Operating
Leases
 
Minimum
Payments Under
Capital Leases
2019
 
$
33

 
$
15

2020
 
24

 
20

2021
 
20

 
13

2022
 
13

 
26

2023
 
10

 
9

2024 and thereafter
 
61

 
1

Total minimum payments
 
$
161

 
84

Less: Amount representing interest
 
 
 
(18
)
Present value of minimum payments
 
 
 
$
66

11. Commitments and Contingencies
Environmental Matters
The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at June 30, 2019 and December 31, 2018:
 
Liability(1)
 
Range of Reasonably Possible Costs at June 30, 2019
Site Description
June 30, 2019
 
December 31, 2018
 
Low
 
High
Geismar, LA
$
13

 
$
13

 
$
9

 
$
22

Superfund and offsite landfills – allocated share:
 
 
 
 
 
 
 
Less than 1%
3

 
3

 
2

 
6

Equal to or greater than 1%
6

 
5

 
5

 
14

Currently-owned
5

 
6

 
4

 
11

Formerly-owned:
 
 
 
 
 
 
 
Remediation
21

 
22

 
19

 
39

Monitoring only
1

 
1

 
1

 
4

Total
$
49

 
$
50

 
$
40

 
$
96

(1)     At June 30, 2019, $43 is included in “Liabilities subject to compromise” in the unaudited Condensed Consolidated Balance Sheets.
These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At June 30, 2019, $43 has been included in “Liabilities subject to compromise” in the unaudited Condensed Consolidated Balance Sheets, $5 has been included in “Other current liabilities” with the remaining amount included in “Other long-term liabilities.” At December 31, 2018, $11 has been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with the remaining amount included in “Other long-term liabilities.”
Following is a discussion of the Company’s environmental liabilities and the related assumptions at June 30, 2019:
Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain tasks related to BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.

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A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.
Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 20 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 20 years, is approximately $16. Over the next five years, the Company expects to make ratable payments totaling $5.
Superfund Sites and Offsite Landfills—The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.
The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.
Sites Under Current Ownership—The Company is conducting environmental remediation at a number of locations that it currently owns, of which ten sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.
Formerly-Owned Sites—The Company is conducting, or has been identified as a PRP in connection with, environmental remediation at a number of locations that it formerly owned and/or operated. Remediation costs at these former sites, such as those associated with the Company’s former phosphate mining and processing operations, could be material. The Company has accrued those costs for formerly-owned sites which are currently probable and reasonably estimable. One such site is the Coronet Industries, Inc. Superfund Alternative Site in Plant City, Florida. The current owner of the site alleged that it incurred environmental costs at the site for which it has a contribution claim against the Company, and that additional future costs are likely to be incurred. The Company signed a settlement agreement in 2016 with the current site owner and a past site owner, pursuant to which the Company paid $10 for past remediation costs and accepted a 40% allocable share of specified future remediation costs at this site. The Company estimates its allocable share of future remediation costs to be approximately $13. The final costs to the Company will depend on natural variations in remediation cots, including unforeseen circumstances, agency requests, new contaminants of concern and the ongoing financial viability of the other PRPs.
Monitoring Only Sites—The Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.
Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $2 at June 30, 2019 and December 31, 2018 for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At June 30, 2019 and December 31, 2018, $1 and $2, respectively, have been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with the remaining amount included in “Other long-term liabilities.”
Other Legal Matters—The Company is also involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.

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12. Pension and Postretirement Benefit Plans
The Company’s service cost component of net benefit cost is included in “Operating income” and all other components of net benefit cost are included in “Other non-operating (income) expense, net” within the Company’s unaudited Condensed Consolidated Statements of Operations. Following are the components of net benefit cost recognized by the Company for the three and six months ended June 30, 2019 and 2018:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
Service cost
$
1

 
$
3

 
$

 
$
5

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
2

 
2

 
2

 
2

 

 

 

 

Expected return on assets
(3
)
 
(3
)
 
(3
)
 
(3
)
 

 

 

 

Net expense (benefit)
$

 
$
2

 
$
(1
)
 
$
4

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
Service cost
$
2

 
$
7

 
$
1

 
$
9

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
4

 
4

 
4

 
5

 

 

 

 

Expected return on assets
(6
)
 
(6
)
 
(7
)
 
(6
)
 

 

 

 

Net expense (benefit)
$

 
$
5

 
$
(2
)
 
$
8

 
$

 
$

 
$

 
$

13. Dispositions
ATG
On January 8, 2018, the Company completed the sale of its Additives Technology Group business (“ATG”). ATG was previously included within the Company’s Forest Products Resins segment and included manufacturing sites located in Somersby, Australia and Sungai Petani, Malaysia. The ATG business produced a range of specialty chemical materials for the engineered wood, paper impregnation and laminating industries, including catalysts, release agents and wetting agents.
The Company received gross cash consideration for the ATG business in the amount of $49, which was used for general corporate purposes. The Company recorded a gain on this disposition of $44 which is included in “Gain on disposition” in the unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2018.
14. Segment Information
The Company’s business segments are based on the products that the Company offers and the markets that it serves. At June 30, 2019, the Company had three reportable segments: Epoxy, Phenolic and Coating Resins; Forest Products Resins; and Corporate and Other. A summary of the major products of the Company’s reportable segments follows:
 
Epoxy, Phenolic and Coating Resins: epoxy specialty resins, phenolic encapsulated substrates, versatic acids and derivatives, basic epoxy resins and intermediates and phenolic specialty resins and molding compounds
 
Forest Products Resins: forest products resins and formaldehyde applications

Corporate and Other: primarily corporate general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs.

Reportable Segments
Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

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Table of Contents                        

Net Sales (1):
Following is revenue by reportable segment. Product sales within each reportable segment share economically similar risks. These risks include general economic and industrial conditions, competitive pricing pressures and the Company’s ability to pass on fluctuations in raw material prices to its customers. A substantial number of the Company’s raw material inputs are petroleum-based and their prices fluctuate with the price of oil. Due to differing regional industrial and economic conditions, the geographic distribution of revenue may impact the amount, timing and uncertainty of revenue and cash flows from contracts with customers.
Following is net sales by reportable segment disaggregated by geographic region:
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Epoxy, Phenolic and Coating Resins

Forest Products Resins
 
Total
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
North America
$
216

 
$
259

 
$
475

 
$
237

 
$
294

 
$
531

Europe
212

 
43

 
255

 
249

 
52

 
301

Asia Pacific
84

 
30

 
114

 
77

 
35

 
112

Latin America

 
48

 
48

 
1

 
50

 
51

Total
$
512


$
380

 
$
892

 
$
564

 
$
431

 
$
995

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
North America
$
425

 
$
519

 
$
944

 
$
470

 
$
562

 
$
1,032

Europe
431

 
90

 
521

 
494

 
106

 
600

Asia Pacific
147

 
63

 
210

 
138

 
66

 
204

Latin America

 
103

 
103

 
2

 
103

 
105

Total
$
1,003

 
$
775

 
$
1,778

 
$
1,104

 
$
837

 
$
1,941

(1)     Intersegment sales are not significant and, as such, are eliminated within the selling segment.

Reconciliation of Net Loss to Segment EBITDA:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Reconciliation:
 
 
 
 
 
 
 
Net loss attributable to Hexion Inc.
$
(108
)
 
$
(22
)
 
$
(160
)
 
$
(35
)
Net income attributable to noncontrolling interest
(1
)
 
(1
)
 
(1
)
 
(1
)
Net loss
(107
)
 
(21
)
 
(159
)
 
(34
)
Income tax expense
8

 
3

 
15

 
11

Interest expense, net
9

 
84

 
89

 
167

Depreciation and amortization
26

 
28

 
52

 
58

EBITDA
$
(64
)
 
$
94

 
$
(3
)
 
$
202

Items not included in Segment EBITDA:
 
 
 
 

 

Asset impairments
$

 
$

 
$

 
$
25

Business realignment costs
11

 
5

 
15

 
14

Gain on disposition

 

 

 
(44
)
Transaction costs
3

 
3

 
26

 
6

Realized and unrealized foreign currency (gains) losses
(7
)
 
15

 
(6
)
 
22

Reorganization costs
156

 

 
156

 

Other
13

 
11

 
27

 
21

Total adjustments
176

 
34

 
218

 
44

Segment EBITDA
$
112

 
$
128

 
$
215

 
$
246

 
 
 
 
 


 


Segment EBITDA:
 
 
 
 


 


Epoxy, Phenolic and Coating Resins
$
59

 
$
72

 
$
111