UpdateUS Anadarko denies role in bankrupt Tronox fraud lawsuit

13 May 2009 20:40  [Source: ICIS news]

Tronox plant(Adds new first paragraph, Anadarko response, paragraphs 3-6)

HOUSTON (ICIS news)--Anadarko Petroleum was not responsible for the financial state of Tronox, the US oil explorer said on Wednesday in response to fraud allegations made by the bankrupt pigment producer.

Tronox sued Anadarko Petroleum and former parent Kerr-McGee, accusing them of saddling it with more than 70 years worth of environmental liabilities while misleading investors and creditors about the magnitude of those costs.

Tronox said it was burdened with debt and legacy liabilities from its outset and as a result was "destined to fail".

Anadarko was sued because it acquired Kerr-McGee in 2006, the same year that Kerr-McGee spun off Tronox.

"We conduct our business with the utmost integrity, and we are not responsible for Tronox's financial condition," Anadarko said in a statement. "The market demonstrates that Tronox was solvent and adequately capitalised at the time of its [initial public offering], as Tronox was able to issue stock at approximately $14/share, and it was also able to enter into a credit facility and issue unsecured bonds."

In fact, Tronox's regulatory filings attributed its deteriorating financial health to the downturn in the housing and construction markets, Anadarko said.

"These difficult times are unfortunate but are unrelated to Anadarko, Kerr-McGee and the [initial public offering]," Anadarko said. "Tronox is not a unique case in these challenging economic times.

In its lawsuit, Tronox describes what it called a fraudulent scheme, under which Kerr-McGee dumped its liabilities into its former chemical subsidiary. Once freed from those liabilities, Kerr-McGee sold itself for a lucrative profit.

Since its founding in 1929, Kerr-McGee had accumulated substantial environmental, tort and retirement liabilities, estimated at $400m-900m (€292m-657m), Tronox said. Over the years, Kerr-McGee had treated wood products; produced rocket fuel; refined and sold petroleum products; and mined, milled and processed nuclear materials.

Already, US regulators wanted $178.8m for the clean up of Kerr-McGee's former wood-treatment plant in Manville, New Jersey, Tronox said.

Such environmental costs were frustrating Kerr-McGee's plans to sell itself in a merger-and-acquisition (M&A) deal, Tronox said.

To make itself more attractive, Kerr-McGee adopted a strategy, under which it would protect its valuable oil and gas assets while transferring its legacy liabilities into its chemical business, Tronox said.

Many of those liabilities had nothing to do with its chemical business, which primarily made titanium dioxide (TiO2), Tronox said. The TiO2 subsidiary was now liable for former petroleum terminals, offshore drilling operations, gasoline stations, wood-treatment sites and agrochemical operations, Tronox said.

At first, the liabilities overwhelmed Kerr-McGee's chemical business, Tronox said. To address the problem, Kerr-McGee rushed through a $400m TiO2 buying spree, paying too much for pigment plants and ignoring any potential environmental issues attached to those acquisitions, Tronox said.

By 2005, Kerr-McGee was ready to shed its chemical business, together with its legacy liabilities, Tronox said. It presented bidders with what Tronox called inflated projections and understated liabilities.

The sales pitch did not work, Tronox said. One potential bidder called the pitch "criminal", Tronox said. Another lowered its initial bid by 75%.

With the sales strategy failing, Kerr-McGee decided to spin off the subsidiary, Tronox said. Kerr-McGee could then dictate the terms of the deal; avoid any third-party due diligence; and eliminate any standard representations and warranties regarding its environmental liabilities.

Before the spin-off, Kerr-McGee stripped away cash from the company while assigning it debt, Tronox said. Kerr-McGee then transferred high-level executives out of the subsidiary's pension fund - since a future bankruptcy could jeopardise their retirements.

Kerr-McGee completed the spin off on 31 March 2006, Tronox said. Less than three months later, Andarko made a $18bn to buy Kerr-McGee.

The deal closed on 10 August 2006, and Kerr-McGee management enjoyed a windfall, Tronox said. The chief executive (Luke Corbett) pocketed more than $200m, and the chief financial officer Robert Wohleber got $20m.

The newly formed Tronox did not have a chance to survive while inheriting massive liabilities with little capital, the company said.

Following the spin-off, Tronox had just one profitable quarter, the result of proceeds from a settlement, the company said.

Earlier this year, Tronox's US operations filed for bankruptcy protection.

($1 = €0.73)

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By: Al Greenwood
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