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

Form 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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
  Exact Name of Registrant as Specified in its Charter, Principal Office
Address and Telephone Number
  State of Incorporation
or Organization
  I.R.S. Employer
Identification No.
 
  001-32427   Huntsman Corporation
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
    Delaware     42-1648585  

 

333-85141

 

Huntsman International LLC
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700

 

 

Delaware

 

 

87-0630358

 



         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.

Huntsman Corporation   YES ý   NO o
Huntsman International LLC   YES ý   NO o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Huntsman Corporation   YES ý   NO o
Huntsman International LLC   YES o   NO o

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

Huntsman Corporation

  Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Huntsman International LLC

  Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý   Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Huntsman Corporation   YES o   NO ý
Huntsman International LLC   YES o   NO ý



         On October 28, 2010, 239,215,142 shares of common stock of Huntsman Corporation were outstanding and 2,728 units of membership interests of Huntsman International LLC were outstanding. There is no established trading market for Huntsman International LLC's units of membership interests. All of Huntsman International LLC's units of membership interests are held by Huntsman Corporation.



         This Quarterly Report on Form 10-Q presents information for two registrants: Huntsman Corporation and Huntsman International LLC. Huntsman International LLC is a wholly owned subsidiary of Huntsman Corporation and is the principal operating company of Huntsman Corporation. The information reflected in this Quarterly Report on Form 10-Q is equally applicable to both Huntsman Corporation and Huntsman International LLC, except where otherwise indicated. Huntsman International LLC meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and, to the extent applicable, is therefore filing this form with a reduced disclosure format.


Table of Contents

HUNTSMAN CORPORATION AND SUBSIDIARIES
HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTMEBER 30, 2010

TABLE OF CONTENTS

 
   
   
  Page

PART I

 

FINANCIAL INFORMATION

 
3

ITEM 1.

 

Financial Statements:

 
3

 

Huntsman Corporation and Subsidiaries:

 
3

     

Condensed Consolidated Balance Sheets (Unaudited)

 
3

     

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

 
4

     

Condensed Consolidated Statements of Cash Flows (Unaudited)

 
6

     

Condensed Consolidated Statements of Equity (Unaudited)

 
8

 

Huntsman International LLC and Subsidiaries:

 
9

     

Condensed Consolidated Balance Sheets (Unaudited)

 
9

     

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

 
10

     

Condensed Consolidated Statements of Cash Flows (Unaudited)

 
11

     

Condensed Consolidated Statements of Equity (Unaudited)

 
13

 

Huntsman Corporation and Subsidiaries and Huntsman International LLC and Subsidiaries:

 
14

     

Notes to Condensed Consolidated Financial Statements (Unaudited)

 
14

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 
75

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 
105

ITEM 4.

 

Controls and Procedures

 
106

PART II

 

OTHER INFORMATION

 
107

ITEM 1.

 

Legal Proceedings

 
107

ITEM 1A.

 

Risk Factors

 
107

ITEM 6.

 

Exhibits

 
107

Table of Contents


PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

        


HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In Millions, Except Share and Per Share Amounts)

 
  September 30,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents(a)

  $ 1,003   $ 1,745  
 

Restricted cash(a)

    8     5  
 

Accounts and notes receivable (net of allowance for doubtful accounts of $56 each), ($647 and nil pledged as collateral, respectively)(a)

    1,611     1,018  
 

Accounts receivable from affiliates

    9     1  
 

Inventories(a)

    1,375     1,184  
 

Prepaid expenses(a)

    57     42  
 

Deferred income taxes

    36     36  
 

Other current assets(a)

    146     109  
           
   

Total current assets

    4,245     4,140  

Property, plant and equipment, net(a)

    3,594     3,516  

Investment in unconsolidated affiliates

    234     250  

Intangible assets, net(a)

    112     125  

Goodwill

    94     94  

Deferred income taxes(a)

    108     138  

Notes receivable from affiliates

    7     8  

Other noncurrent assets(a)

    472     355  
           
   

Total assets

  $ 8,866   $ 8,626  
           

LIABILITIES AND EQUITY

             

Current liabilities:

             
 

Accounts payable(a)

  $ 817   $ 730  
 

Accounts payable to affiliates

    28     25  
 

Accrued liabilities(a)

    626     623  
 

Deferred income taxes

    2     2  
 

Current portion of debt(a)

    384     431  
           
   

Total current liabilities

    1,857     1,811  

Long-term debt(a)

    3,953     3,781  

Notes payable to affiliates

    4     5  

Deferred income taxes

    336     289  

Other noncurrent liabilities(a)

    828     875  
           
   

Total liabilities

    6,978     6,761  

Commitments and contingencies (Notes 14 and 15)

             

Equity

             

Huntsman Corporation stockholders' equity:

             
 

Common stock $0.01 par value, 1,200,000,000 shares authorized, 239,215,142 and 237,225,258 issued and 236,448,794 and 234,081,490 outstanding in 2010 and 2009, respectively

    2     2  
 

Additional paid-in capital

    3,185     3,155  
 

Unearned stock-based compensation

    (13 )   (11 )
 

Accumulated deficit

    (1,096 )   (1,015 )
 

Accumulated other comprehensive loss

    (249 )   (287 )
           
   

Total Huntsman Corporation stockholders' equity

    1,829     1,844  

Noncontrolling interests in subsidiaries

    59     21  
           
   

Total equity

    1,888     1,865  
           
   

Total liabilities and equity

  $ 8,866   $ 8,626  
           

(a)
At September 30, 2010 and December 31, 2009, respectively, $6 and nil of cash and cash equivalents, $3 and nil of restricted cash, $12 and $9 of accounts and notes receivable (net), $48 and $33 of inventories, $1 each of prepaid expenses, $2 each of other current assets, $267 and $16 of property, plant and equipment (net), $7 and nil of intangible assets (net), $38 each of deferred income taxes, $52 and $32 of other noncurrent assets, $72 and $42 of accounts payable, $16 and $9 of accrued liabilities, $18 and $2 of current portion of debt, $181 and nil of long-term debt, and $100 and $93 of other noncurrent liabilities from consolidated variable interest entities are included in their respective Balance Sheet captions above. See "Note 6. Variable Interest Entities."

See accompanying notes to condensed consolidated financial statements (unaudited).

3


Table of Contents


HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In Millions, Except Per Share Amounts)

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2010   2009   2010   2009  

Revenues:

                         
 

Trade sales, services and fees, net

  $ 2,360   $ 2,038   $ 6,689   $ 5,533  
 

Related party sales

    41     37     149     68  
                   
   

Total revenues

    2,401     2,075     6,838     5,601  

Cost of goods sold

    1,986     1,733     5,757     4,877  
                   

Gross profit

    415     342     1,081     724  

Operating expenses:

                         
 

Selling, general and administrative

    202     214     628     606  
 

Research and development

    39     36     111     108  
 

Other operating expense (income)

    3         2     (9 )
 

Restructuring, impairment and plant closing costs

    4     7     24     83  
                   
   

Total expenses

    248     257     765     788  
                   

Operating income (loss)

    167     85     316     (64 )

Interest expense, net

    (64 )   (65 )   (168 )   (178 )

Loss on accounts receivable securitization program

        (3 )       (13 )

Equity in income (loss) of investment in unconsolidated affiliates

    3     (1 )   20     1  

Loss on early extinguishment of debt

    (7 )   (21 )   (169 )   (21 )

(Expenses) income associated with the Terminated Merger and related litigation

    (3 )   (2 )   (4 )   835  

Other income

    2     1     3     1  
                   

Income (loss) from continuing operations before income taxes

    98     (6 )   (2 )   561  

Income tax expense

    (41 )   (68 )   (46 )   (517 )
                   

Income (loss) from continuing operations

    57     (74 )   (48 )   44  

(Loss) income from discontinued operations, net of tax

    (1 )   6     48      
                   

Net income (loss)

    56     (68 )       44  

Net (income) loss attributable to noncontrolling interests

    (1 )       (3 )   4  
                   

Net income (loss) attributable to Huntsman Corporation

  $ 55   $ (68 ) $ (3 ) $ 48  
                   

Net income (loss)

  $ 56   $ (68 ) $   $ 44  

Other comprehensive income

    146     38     38     86  
                   

Comprehensive income (loss)

    202     (30 )   38     130  

Comprehensive (income) loss attributable to noncontrolling interests

    (1 )   (1 )   (3 )   3  
                   

Comprehensive income (loss) attributable to Huntsman Corporation

  $ 201   $ (31 ) $ 35   $ 133  
                   

(continued)

4


Table of Contents


HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (Continued)

(In Millions, Except Per Share Amounts)

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2010   2009   2010   2009  

Basic income (loss) per share:

                         

Income (loss) from continuing operations attributable to Huntsman Corporation common stockholders

  $ 0.24   $ (0.32 ) $ (0.22 ) $ 0.21  

(Loss) income from discontinued operations attributable to Huntsman Corporation common stockholders, net of tax

    (0.01 )   0.03     0.21      
                   

Net income (loss) attributable to Huntsman Corporation common stockholders

  $ 0.23   $ (0.29 ) $ (0.01 ) $ 0.21  
                   

Weighted average shares

    236.4     234.0     235.9     233.9  
                   

Diluted income (loss) per share:

                         

Income (loss) from continuing operations attributable to Huntsman Corporation common stockholders

  $ 0.23   $ (0.32 ) $ (0.22 ) $ 0.20  

(Loss) income from discontinued operations attributable to Huntsman Corporation common stockholders, net of tax

        0.03     0.21      
                   

Net income (loss) attributable to Huntsman Corporation common stockholders

  $ 0.23   $ (0.29 ) $ (0.01 ) $ 0.20  
                   

Weighted average shares

    241.0     234.0     235.9     238.1  
                   

Amounts attributable to Huntsman Corporation common stockholders:

                         

Income (loss) from continuing operations

  $ 56   $ (74 ) $ (51 ) $ 48  

(Loss) income from discontinued operations, net of tax

    (1 )   6     48      
                   

Net income (loss)

  $ 55   $ (68 ) $ (3 ) $ 48  
                   

Dividends per share

  $ 0.10   $ 0.10   $ 0.30   $ 0.30  
                   

See accompanying notes to condensed consolidated financial statements (unaudited).

5


Table of Contents


HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 
  Nine months ended
September 30,
 
 
  2010   2009  

Operating Activities:

             

Net income

  $   $ 44  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

             

Equity in income of investment in unconsolidated affiliates

    (20 )   (1 )

Depreciation and amortization

    295     338  

Provision for losses on accounts receivable

    5     7  

Loss (gain) on disposal of businesses/assets, net

    8     (2 )

Loss on early extinguishment of debt

    169     21  

Noncash interest expense

    12     14  

Noncash restructuring, impairment and plant closing costs

        5  

Deferred income taxes

    72     311  

Net unrealized loss (gain) on foreign currency transactions

    8     (8 )

Stock-based compensation

    19     14  

Portion of insurance settlement representing investing activities

    (34 )    

Other, net

    4     2  

Changes in operating assets and liabilities:

             
 

Accounts and notes receivable

    (318 )   (225 )
 

Accounts receivable from A/R Programs

    (254 )    
 

Inventories

    (184 )   424  
 

Prepaid expenses

    (15 )   (13 )
 

Other current assets

    (36 )   (4 )
 

Other noncurrent assets

    (69 )   (23 )
 

Accounts payable

    61     25  
 

Accrued liabilities

    (15 )   (13 )
 

Other noncurrent liabilities

    (58 )   (9 )
           

Net cash (used in) provided by operating activities

    (350 )   907  
           

Investing Activities:

             

Capital expenditures

    (132 )   (140 )

Proceeds from insurance settlement as reimbursement of capital expenditures

    34      

Proceeds from sale of businesses/assets, net of adjustments

        5  

Acquisition of business

        (31 )

Cash assumed in connection with the initial consolidation of a variable interest entity

    11      

Investment in unconsolidated affiliates

    (4 )    

Change in restricted cash

    1      

Other, net

    5     2  
           

Net cash used in investing activities

    (85 )   (164 )
           

(continued)

6


Table of Contents


HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

(Dollars in Millions)

 
  Nine months ended
September 30,
 
 
  2010   2009  

Financing Activities:

             

Net repayments under revolving loan facilities

  $ (7 ) $ (10 )

Revolving loan facility from A/R Programs

    254      

Net borrowings (repayments) on overdraft facilities

    6     (14 )

Repayments of short-term debt

    (153 )   (120 )

Borrowings on short-term debt

    188     95  

Repayments of long-term debt

    (1,073 )   (528 )

Proceeds from issuance of long-term debt

    725     874  

Repayments of notes payable

    (36 )   (55 )

Borrowings on notes payable

    38     63  

Debt issuance costs paid

    (25 )   (5 )

Call premiums related to early extinguishment of debt

    (159 )   (14 )

Dividends paid to common stockholders

    (72 )   (71 )

Repurchase and cancellation of stock awards

    (6 )    

Proceeds from issuance of common stock

    2      

Excess tax benefit related to stock-based compensation

    4      

Other, net

        (1 )
           

Net cash (used in) provided by financing activities

    (314 )   214  
           

Effect of exchange rate changes on cash

    7     5  
           

(Decrease) increase in cash and cash equivalents

    (742 )   962  

Cash and cash equivalents at beginning of period

    1,745     657  
           

Cash and cash equivalents at end of period

  $ 1,003   $ 1,619  
           

Supplemental cash flow information:

             
 

Cash paid for interest

  $ 142   $ 160  
 

Cash paid for income taxes

    19     145  

        During the nine months ended September 30, 2010 and 2009, the amount of capital expenditures in accounts payable decreased by $6 million and $29 million, respectively. The value of share awards that vested during the nine months ended September 30, 2010 and 2009 was $18 million and $11 million, respectively. In connection with our June 23, 2009 acquisition of the Baroda Division of Metrochem Industries Limited, $5 million of payables from us to Metrochem Industries Limited were forgiven. Beginning July 1, 2010, we began consolidating Arabian Amines Company, our ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia. For more information, see "Note 6. Variable Interest Entities."

        During the nine months ended September 30, 2010 and 2009, capital expenditures of $132 million and $140 million, respectively, were reimbursed in part by $34 million and nil, respectively, from insurance settlement proceeds. During the nine months ended September 30, 2010 we received $110 million from the settlement of our insurance claims related to the 2006 fire at our Port Arthur Texas plant, $34 million of which was considered as a reimbursement of capital expenditures.

See accompanying notes to condensed consolidated financial statements (unaudited).

7


Table of Contents

HUNTSMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(Dollars in Millions)

 
  Huntsman Corporation Stockholders    
   
 
 
  Common Stock    
   
   
  Accumulated
other
comprehensive
loss
   
   
 
 
  Additional
paid-in
capital
  Unearned
stock-based
compensation
  Accumulated
deficit
  Noncontrolling
interests in
subsidiaries
  Total
equity
 
 
  Shares   Amount  

Balance, January 1, 2010

    234,081,490   $ 2   $ 3,155   $ (11 ) $ (1,015 ) $ (287 ) $ 21   $ 1,865  

Net loss

                    (3 )       3      

Other comprehensive income

                        38         38  

Consolidation of a VIE

                            35     35  

Issuance of nonvested stock awards

            12     (12 )                

Vesting of stock awards

    1,933,030         9                     9  

Recognition of stock-based compensation

            3     10                 13  

Repurchase and cancellation of stock awards

    (428,944 )               (6 )           (6 )

Stock options exercised

    863,218         2                     2  

Excess tax benefit related to stock- based compensation

            4                     4  

Dividends declared on common stock

                    (72 )           (72 )
                                   

Balance, September 30, 2010

    236,448,794   $ 2   $ 3,185   $ (13 ) $ (1,096 ) $ (249 ) $ 59   $ 1,888  
                                   

 
  Huntsman Corporation Stockholders    
   
 
 
  Common Stock    
   
   
  Accumulated
other
comprehensive
loss
   
   
 
 
  Additional
paid-in
capital
  Unearned
stock-based
compensation
  Accumulated
deficit
  Noncontrolling
interests in
subsidiaries
  Total
equity
 
 
  Shares   Amount  

Balance, January 1, 2009

    233,553,515   $ 2   $ 3,141   $ (13 ) $ (1,031 ) $ (489 ) $ 22   $ 1,632  

Net income

                    48         (4 )   44  

Other comprehensive income

                        85     1     86  

Issuance of nonvested stock awards

            7     (7 )                

Vesting of stock awards

    550,052                              

Recognition of stock-based compensation

            4     8                 12  

Repurchase and cancellation of stock awards

    (134,791 )                            

Dividends declared on common stock

                    (71 )           (71 )
                                   

Balance, September 30, 2009

    233,968,776   $ 2   $ 3,152   $ (12 ) $ (1,054 ) $ (404 ) $ 19   $ 1,703  
                                   

See accompanying notes to condensed consolidated financial statements (unaudited).

8


Table of Contents


HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in Millions)

 
  September 30,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents(a)

  $ 603   $ 919  
 

Restricted cash(a)

    8     5  
 

Accounts and notes receivable (net of allowance for doubtful accounts of $56 each), ($647 and nil pledged as collateral, respectively)(a)

    1,611     1,018  
 

Accounts receivable from affiliates

    74     32  
 

Inventories(a)

    1,375     1,184  
 

Prepaid expenses(a)

    57     42  
 

Deferred income taxes

    34     33  
 

Other current assets(a)

    136     109  
           
   

Total current assets

    3,898     3,342  

Property, plant and equipment, net(a)

    3,452     3,357  

Investment in unconsolidated affiliates

    234     250  

Intangible assets, net(a)

    114     129  

Goodwill

    94     94  

Deferred income taxes(a)

    128     158  

Notes receivable from affiliates

    7     8  

Other noncurrent assets(a)

    472     355  
           
   

Total assets

  $ 8,399   $ 7,693  
           

LIABILITIES AND EQUITY

             

Current liabilities:

             
 

Accounts payable(a)

  $ 816   $ 715  
 

Accounts payable to affiliates

    36     41  
 

Accrued liabilities(a)

    633     613  
 

Deferred income taxes

    2     2  
 

Note payable to affiliate

    100     25  
 

Current portion of debt(a)

    384     195  
           
   

Total current liabilities

    1,971     1,591  

Long-term debt(a)

    3,953     3,781  

Notes payable to affiliates

    439     530  

Deferred income taxes

    120     79  

Other noncurrent liabilities(a)

    819     865  
           
   

Total liabilities

    7,302     6,846  

Commitments and contingencies (Notes 14 and 15)

             

Equity

             

Huntsman International LLC members' equity:

             
 

Members' equity, 2,728 units issued and outstanding

    3,042     3,021  
 

Accumulated deficit

    (1,698 )   (1,847 )
 

Accumulated other comprehensive loss

    (306 )   (348 )
           
   

Total Huntsman International LLC members' equity

    1,038     826  

Noncontrolling interests in subsidiaries

    59     21  
           
   

Total equity

    1,097     847  
           
   

Total liabilities and equity

  $ 8,399   $ 7,693  
           

(a)
At September 30, 2010 and December 31, 2009, respectively, $6 and nil of cash and cash equivalents, $3 and nil of restricted cash, $12 and $9 of accounts and notes receivable (net), $48 and $33 of inventories, $1 each of prepaid expenses, $2 each of other current assets, $267 and $16 of property, plant and equipment (net), $7 and nil of intangible assets (net), $38 each of deferred income taxes, $52 and $32 of other noncurrent assets, $72 and $42 of accounts payable, $16 and $9 of accrued liabilities, $18 and $2 of current portion of debt, $181 and nil of long-term debt, and $100 and $93 of other noncurrent liabilities from consolidated variable interest entities are included in their respective Balance Sheet captions above. See "Note 6. Variable Interest Entities."

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in Millions)

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2010   2009   2010   2009  

Revenues:

                         
 

Trade sales, services and fees, net

  $ 2,360   $ 2,038   $ 6,689   $ 5,533  
 

Related party sales

    41     37     149     68  
                   
   

Total revenues

    2,401     2,075     6,838     5,601  

Cost of goods sold

    1,981     1,728     5,744     4,864  
                   

Gross profit

    420     347     1,094     737  

Operating expenses:

                         
 

Selling, general and administrative

    202     214     625     598  
 

Research and development

    39     36     111     108  
 

Other operating expense (income)

    3         (8 )   (9 )
 

Restructuring, impairment and plant closing costs

    4     7     24     83  
                   
   

Total expenses

    248     257     752     780  
                   

Operating income (loss)

    172     90     342     (43 )

Interest expense, net

    (69 )   (64 )   (182 )   (177 )

Loss on accounts receivable securitization program

        (3 )       (13 )

Equity in (loss) income of investment in unconsolidated affiliates

    3     (1 )   20     1  

Loss on early extinguishment of debt

    (7 )   (21 )   (23 )   (21 )

Other income

    1     1     3     1  
                   

Income (loss) from continuing operations before income taxes

    100     2     160     (252 )

Income tax expense

    (40 )   (49 )   (56 )   (203 )
                   

Income (loss) from continuing operations

    60     (47 )   104     (455 )

(Loss) income from discontinued operations, net of tax

    (1 )   6     48      
                   

Net income (loss)

    59     (41 )   152     (455 )

Net (income) loss attributable to noncontrolling interests

    (1 )       (3 )   4  
                   

Net income (loss) attributable to Huntsman International LLC

  $ 58   $ (41 ) $ 149   $ (451 )
                   

Net income (loss)

  $ 59   $ (41 ) $ 152   $ (455 )

Other comprehensive income

    148     39     42     90  
                   

Comprehensive income (loss)

    207     (2 )   194     (365 )

Comprehensive (income) loss attributable to noncontrolling interests

        (1 )   (2 )   3  
                   

Comprehensive income (loss) attributable to Huntsman International LLC

  $ 207   $ (3 ) $ 192   $ (362 )
                   

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 
  Nine months
ended
September 30,
 
 
  2010   2009  

Operating Activities:

             

Net income (loss)

  $ 152   $ (455 )

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

             

Equity in income of investment in unconsolidated affiliates

    (20 )   (1 )

Depreciation and amortization

    279     321  

Provision for losses on accounts receivable

    5     7  

Loss (gain) on disposal of businesses/assets, net

    8     (2 )

Loss on early extinguishment of debt

    23     21  

Noncash interest expense

    26     24  

Noncash restructuring, impairment and plant closing costs

        5  

Deferred income taxes

    66     125  

Net unrealized loss (gain) on foreign currency transactions

    8     (8 )

Noncash compensation

    17     10  

Portion of insurance settlement representing investing activities

    (34 )    

Other, net

    2     1  

Changes in operating assets and liabilities:

             
 

Accounts and notes receivable

    (318 )   (225 )
 

Accounts receivable from A/R Programs

    (254 )    
 

Inventories

    (184 )   424  
 

Prepaid expenses

    (14 )   (12 )
 

Other current assets

    (26 )   (19 )
 

Other noncurrent assets

    (69 )   (23 )
 

Accounts payable

    60     2  
 

Accrued liabilities

    2     37  
 

Other noncurrent liabilities

    (54 )   (5 )
           

Net cash (used in) provided by operating activities

    (325 )   227  
           

Investing Activities:

             

Capital expenditures

    (132 )   (140 )

Proceeds from insurance settlement as reimbursement of capital expenditures

    34      

Proceeds from sale of businesses/assets, net of adjustments

        5  

Acquisition of business

        (31 )

Cash assumed in connection with the initial consolidation of a variable interest entity

    11      

Investment in unconsolidated affiliates

    (4 )    

Change in restricted cash

    1      

(Increase) decrease in receivable from affiliate

    (42 )   8  

Other, net

    5     2  
           

Net cash used in investing activities

    (127 )   (156 )
           

(continued)

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

(Dollars in Millions)

 
  Nine months
ended
September 30,
 
 
  2010   2009  

Financing Activities:

             

Net repayments under revolving loan facilities

  $ (7 ) $ (10 )

Revolving loan facility from A/R Programs

    254      

Net borrowings (repayments) on overdraft facilities

    6     (14 )

Repayments of short-term debt

    (153 )   (120 )

Borrowings on short-term debt

    188     95  

Repayments of long-term debt

    (837 )   (528 )

Proceeds from issuance of long-term debt

    725     874  

Repayments of notes payable to affiliate

    (125 )   (403 )

Proceeds from notes payable to affiliate

    110     529  

Repayments of notes payable

    (36 )   (52 )

Borrowings on notes payable

    38     60  

Debt issuance costs paid

    (25 )   (5 )

Call premiums related to early extinguishment of debt

    (13 )   (14 )

Dividends paid to parent

        (23 )

Excess tax benefit related to stock-based compensation

    4      

Contribution from parent

        236  

Other, net

        (1 )
           

Net cash provided by financing activities

    129     624  
           

Effect of exchange rate changes on cash

    7     6  
           

(Decrease) increase in cash and cash equivalents

    (316 )   701  

Cash and cash equivalents at beginning of period

    919     87  
           

Cash and cash equivalents at end of period

  $ 603   $ 788  
           

Supplemental cash flow information:

             
 

Cash paid for interest

  $ 133   $ 153  
 

Cash paid for income taxes

    17     18  

        During the nine months ended September 30, 2010 and 2009, the amount of capital expenditures in accounts payable decreased by $6 million and $29 million, respectively. During the nine months ended September 30, 2010 and 2009, Huntsman Corporation contributed $17 million and $10 million, respectively, related to stock-based compensation. In connection with our June 23, 2009 acquisition of the Baroda Division of Metrochem Industries Limited, $5 million of payables from us to Metrochem Industries Limited were forgiven. Beginning July 1, 2010, we began consolidating Arabian Amines Company, our ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia. For more information, see "Note 6. Variable Interest Entities."

        During the nine months ended September 30, 2010 and 2009, capital expenditures of $132 million and $140 million, respectively, were reimbursed in part by $34 million and nil, respectively, from insurance settlement proceeds. During the nine months ended September 30, 2010 we received $110 million from the settlement of our insurance claims related to the 2006 fire at our Port Arthur Texas plant, $34 million of which was considered as a reimbursement of capital expenditures.

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(Dollars in Millions)

 
  Huntsman International LLC Members    
   
 
 
  Members' equity    
  Accumulated
other
comprehensive
loss
   
   
 
 
  Accumulated
deficit
  Noncontrolling
interests in
subsidiaries
  Total
equity
 
 
  Units   Amount  

Balance, January 1, 2010

    2,728   $ 3,021   $ (1,847 ) $ (348 ) $ 21   $ 847  

Net income

            149         3     152  

Other comprehensive income

                42         42  

Consolidation of a VIE

                    35     35  

Contribution from parent, net of distributions

        17                 17  

Excess tax benefit related to stock-based compensation

        4                 4  
                           

Balance, September 30, 2010

    2,728   $ 3,042   $ (1,698 ) $ (306 ) $ 59   $ 1,097  
                           

 

 
  Huntsman International LLC Members    
   
 
 
  Members' equity    
  Accumulated
other
comprehensive
loss
   
   
 
 
  Accumulated
deficit
  Noncontrolling
interests in
subsidiaries
  Total
equity
 
 
  Units   Amount  

Balance, January 1, 2009

    2,728   $ 2,865   $ (1,414 ) $ (554 ) $ 22   $ 919  

Net loss

            (451 )       (4 )   (455 )

Other comprehensive income

                89     1     90  

Contribution from parent, net of distributions

        246                 246  

Dividends paid to parent

            (23 )           (23 )
                           

Balance, September 30, 2009

    2,728   $ 3,111   $ (1,888 ) $ (465 ) $ 19   $ 777  
                           

See accompanying notes to condensed consolidated financial statements (unaudited).

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

CERTAIN DEFINITIONS

        For convenience in this report, the terms "Company," "our," "us" or "we" may be used to refer to Huntsman Corporation and, unless the context otherwise requires, its subsidiaries and predecessors. Any references to our "Company," "we," "us" or "our" as of a date prior to October 19, 2004 (the date of our Company's formation) are to Huntsman Holdings, LLC and its subsidiaries (including their respective predecessors). In this report, "Huntsman International" refers to Huntsman International LLC (our 100% owned subsidiary) and, unless the context otherwise requires, its subsidiaries; "HPS" refers to Huntsman Polyurethanes Shanghai Ltd. (our consolidated splitting joint venture with Shanghai Chlor-Alkali Chemical Company, Ltd); and "SLIC" refers to Shanghai Liengheng Isocyanate Company (our unconsolidated manufacturing joint venture with BASF AG and three Chinese chemical companies).

        In this report, we may use, without definition, the common names of competitors or other industry participants. We may also use the common names or abbreviations for certain chemicals or products.

INTERIM FINANCIAL STATEMENTS

        Our interim condensed consolidated financial statements (unaudited) and Huntsman International's interim condensed consolidated financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP" or "U.S. GAAP") and in management's opinion, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. Results for interim periods are not necessarily indicative of those to be expected for the full year. These condensed consolidated financial statements (unaudited) should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in our Form 8-K filed on June 8, 2010.

DESCRIPTION OF BUSINESS

        We are a global manufacturer of differentiated organic chemical products and of inorganic chemical products. Our products comprise a broad range of chemicals and formulations, which we market globally to a diversified group of consumer and industrial customers. Our products are used in a wide range of applications, including those in the adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. We are a leading global producer in many of our key product lines, including MDI, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals, dyes and titanium dioxide.

        We operate in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments. Our Polyurethanes, Performance Products, Advanced Materials and Textile Effects segments produce differentiated organic chemical products and our Pigments segment produces inorganic chemical products. We ceased operation of our Australian styrenics business during the first quarter of 2010 and report the results of that business as discontinued operations. See "Note 20. Discontinued Operations."

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. GENERAL (Continued)

COMPANY

        Our Company, a Delaware corporation, was formed in 2004 to hold the Huntsman businesses. Jon M. Huntsman founded the predecessor to our Company in the early 1970s as a small packaging company. Since then, we have grown through a series of acquisitions and now own a global portfolio of businesses.

        Currently, we operate all of our businesses through Huntsman International, our 100% owned subsidiary. Huntsman International is a Delaware limited liability company and was formed in 1999.

HUNTSMAN CORPORATION AND HUNTSMAN INTERNATIONAL FINANCIAL STATEMENTS

        Except where otherwise indicated, these notes relate to the condensed consolidated financial statements (unaudited) for both our Company and Huntsman International. The differences between our financial statements and Huntsman International's financial statements relate primarily to the following:

PRINCIPLES OF CONSOLIDATION

        Our condensed consolidated financial statements (unaudited) and Huntsman International's condensed consolidated financial statements (unaudited) include the accounts of our wholly-owned and majority-owned and controlled subsidiaries and any variable interest entities for which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated.

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. GENERAL (Continued)

USE OF ESTIMATES

        The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS

        Certain amounts in the condensed consolidated financial statements (unaudited) for prior periods have been reclassified to conform with the current presentation. In connection with the closure and abandonment of our Australian styrenics operations in the first quarter of 2010, we have treated this business as discontinued operations beginning in the first quarter of 2010. All relevant information for prior periods has been restated to reflect this change.

        During the first quarter of 2010, we began reporting our last-in, first-out ("LIFO") inventory valuation reserve charges as part of Corporate and other. These charges were previously reported in our Performance Products segment. All segment information for prior periods has been restated to reflect this change.

        During the third quarter of 2010, we began reporting the amounts outstanding under our accounts receivable securitization programs as part of our Polyurethanes, Performance Products, Advanced Materials, Textile Effects and Pigments segments. These amounts were previously reported in our Corporate and other segment. In addition, we eliminated intercompany balances from the assets of each reportable segment. All segment information for prior periods has been restated to reflect these changes.

RECENT DEVELOPMENTS

2021 Subordinated Notes

        On September 24, 2010, Huntsman International completed a $350 million offering of 8.625% subordinated notes due March 15, 2021 (the "2021 Subordinated Notes"). We used the net proceeds of $343 million to redeem a portion of our euro-denominated senior subordinated notes due 2013 (€132 million (approximately $177 million)) and a portion of U.S. dollar senior subordinated notes due 2014 ($159 million of which settled on October 12, 2010). See "Note 8. Debt—Transactions Affecting our Debt—Redemption of Notes." As of September 30, 2010, $159 million of these notes were classified as Current portion of long term debt on the accompanying condensed consolidated balance sheets (unaudited).

        On October 28, 2010, the Company announced that it had priced an issuance of an additional $180 million principal amount of 2021 Subordinated Notes through Huntsman International. The closing of the offering is expected to occur on November 12, 2010, subject to satisfaction of customary closing conditions. The Company intends to use all of the net proceeds to redeem the remaining $188 million aggregate principal amount of its outstanding 7.875% senior subordinated notes due 2014, including the payment of accrued interest.

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

1. GENERAL (Continued)

Note Redemptions

        On October 12, 2010, Huntsman International repaid $159 million of its 7.875% senior subordinated notes due 2014. The amount paid to redeem the notes, excluding accrued interest, was $165 million, which included principal of $159 million and premium of $6 million. During the fourth quarter of 2010, we expect to recognize a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of these notes.

        On September 27, 2010, Huntsman International repaid €132 million (approximately $177 million) of its 6.875% senior subordinated notes due 2013. The amount paid to redeem the notes, excluding accrued interest, was €137 million (approximately $183 million), which included principal of €132 million (approximately $177 million) and premium of €5 million (approximately $6 million). As of September 30, 2010, the 6.875% senior subordinated notes due 2013 have a remaining balance of €84 million (approximately $113 million).

        For more information, see "Note 8. Debt—Transactions Affecting Our Debt—Redemption of Notes."

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Adopted During 2010

        In February 2010, the Financial Accounting Standards Board ("FASB") issued and we adopted ASU No. 2010-09, Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements. This ASU provides a definition of the term "SEC filer" and removes the requirement for entities that are SEC filers to disclose the date through which subsequent events have been evaluated. We evaluate subsequent events through the date the financial statements are issued.

        In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. This ASU clarifies existing disclosure requirements to provide a greater level of disaggregated information and to provide more information regarding valuation techniques and inputs to fair value measurements. It requires additional disclosure related to transfers between the three levels of fair value measurement, as well as information about purchases, sales, issuances, and settlements in the roll forward of activity for Level 3 measurements. The enhanced disclosures required by this ASU are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity for Level 3 measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010. See "Note 10. Fair Value."

        Effective January 1, 2010, we adopted ASU No. 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which codified Statement of Financial Accounting Standards ("SFAS") No. 167, Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities, to replace the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity ("VIE") with a qualitative approach. This new approach focuses on identifying which enterprise has the power to direct the activities of a VIE that

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, and amends the types of events that trigger a reassessment of whether an entity is a VIE. Further, it requires additional disclosures about an enterprise's involvement in variable interest entities. The initial adoption of this statement did not have a significant impact on our condensed consolidated financial statements (unaudited). See "Note 6. Variable Interest Entities."

        Effective January 1, 2010, we adopted ASU No. 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets, which codified SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. This statement removes the concept of a qualifying special-purpose entity ("QSPE") from SFAS No. 140 and removes the exception from applying FIN 46(R) to QSPEs. SFAS No. 166 modifies the derecognition provisions in SFAS No. 140 and requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor's beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. It also requires additional disclosures regarding the transferor's continuing involvement with transferred financial assets and the related risks retained. Upon adoption of this statement, transfers of accounts receivable under our accounts receivable securitization programs no longer qualified for derecognition and were accounted for as secured borrowings beginning in January 2010. See "Note 8. Debt—Transactions Affecting Our Debt—Accounts Receivable Securitization." Prior to the adoption of this statement, receivables transferred under our U.S. and European accounts receivable securitization programs (the "U.S. A/R Program," the "EU A/R Program" and collectively the "A/R Programs") qualified as sales.

Accounting Pronouncements Pending Adoption in Future Periods

        In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force. This ASU provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. The amendments in this ASU replace the term "fair value" in the revenue allocation guidance with "selling price" to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant, and they establish a selling price hierarchy for determining the selling price of a deliverable. The amendments in this ASU will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, and they significantly expand the required disclosures related to multiple-deliverable revenue arrangements. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. We are evaluating this ASU to determine its impact on our condensed consolidated financial statements (unaudited).

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HUNTSMAN CORPORATION AND SUBSIDIARIES

HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3. BUSINESS COMBINATIONS

LAFFANS ACQUISITION

        On July 31, 2010, we announced that we entered into a definitive agreement to acquire the chemicals business of Laffans Petrochemicals Ltd ("Laffans"). Located in Ankleshwar, India, Laffans manufactures amines and surfactants, had annual 2009 sales of approximately $45 million and has 130 employees. The acquisition, with a cost of approximately $21 million, including debt, a non-compete agreement and other obligations, is subject to certain terms and conditions and is expected to occur in the first half of 2011. The acquired business will be integrated into our Performance Products segment.

BARODA ACQUISITION

        On June 23, 2009, we announced the acquisition of the Baroda Division ("Baroda") of Metrochem Industries Limited ("MCIL"), a manufacturing facility for the production of intermediates and specialty dyes for textiles, located in Baroda, India. Baroda had been a significant supplier to our Textile Effects division and this acquisition strengthens the Textile Effects division's competitiveness and supports its development in Asia. We initially entered into an agreement to acquire Baroda on June 29, 2007. The initial agreement provided either party with the right to terminate the agreement if a transaction was not consummated by April 30, 2008. On February 6, 2009, we entered into a non-binding agreement in principle with MCIL under which the purchase price was revised to be approximately $35 million (U.S. dollar equivalents), which included receivables existing on the closing date due to MCIL from our affiliates, which were also settled at acquisition. Payment of the acquisition cost was phased in various tranches. The first tranche of $7 million was paid during 2008; additional tranches were paid during 2009; and a final payment of $2 million was made upon completion of the audit of net working capital acquired in the first quarter of 2010. In addition, $5 million of accounts payable by us to MCIL were forgiven in connection with this acquisition.

        We have accounted for the Baroda acquisition using the acquisition method. As such, we analyzed the fair value of tangible and intangible assets acquired and liabilities assumed. The allocation of

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HUNTSMAN INTERNATIONAL LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

3. BUSINESS COMBINATIONS (Continued)


acquisition cost to the assets acquired and liabilities assumed is summarized as follows (dollars in millions):

Acquisition cost:

       
 

Cash payments made in 2008

  $ 7  
 

Cash payments made in 2009

    31  
 

Cash payments made in 2010

    2  
 

Forgiveness of amounts payable from us to MCIL

    (5 )
       

Total acquisition cost

  $ 35  
       

Fair value of assets acquired and liabilities assumed:

       
 

Accounts receivable

  $ 2  
 

Inventories

    3  
 

Other current assets

    2  
 

Property, plant and equipment

    31  
 

Intangible assets

    3  
 

Deferred tax asset

    2  
 

Accounts payable

    (3 )
 

Short-term debt

    (3 )
 

Deferred tax liability

    (2 )
       

Total fair value of net assets acquired

  $ 35  
       

4. INVENTORIES

        Inventories are stated at the lower of cost or market, with cost determined using LIFO, first-in first-out, and average costs methods for different components of inventory. Inventories consisted of the following (dollars in millions):

 
  September 30,
2010
  December 31,
2009
 

Raw materials and supplies

  $ 307   $ 240  

Work in progress

    101     77  

Finished goods

    1,026     917  
           

Total

    1,434     1,234  

LIFO reserves

    (59 )   (50 )
           

Net

  $ 1,375   $ 1,184  
           

        For both September 30, 2010 and December 31, 2009, approximately 10% of inventories were recorded using the LIFO cost method.

        In the normal course of operations, we at times exchange raw materials and finished goods with other companies for the purpose of reducing transportation costs. The net non-monetary open exchange positions are valued at cost. The amounts included in inventory under non-monetary open

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

4. INVENTORIES (Continued)


exchange agreements payable by us as of September 30, 2010 were $3 million. The amounts included in inventory under non-monetary open exchange agreements receivable by us as of December 31, 2009 were $2 million. Other open exchanges are settled in cash and result in a net deferred profit margin. The amounts under these open exchange agreements receivable or payable by us at both September 30, 2010 and December 31, 2009 were nil.

5. INVESTMENT IN UNCONSOLIDATED AFFILIATES

        In 2008, we and our joint venture partner, the Zamil Group, formed Arabian Amines Company ("AAC"), our ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia. AAC's funding requirements have been satisfied through a combination of debt and equity, with the equity already provided on a 50/50 basis by us and the Zamil Group. Trial production commenced in the second quarter of 2010 and from July 2010, AAC generated significant revenues from the sale of product. Final plant testing and certification is expected to be complete in the fourth quarter of 2010. The plant has an approximate annual capacity of 60 million pounds. We will purchase and sell all of the production from this joint venture. We have provided certain guarantees of approximately $14 million for these obligations, which will terminate upon completion of the project and satisfaction of certain conditions. A $1 million guarantee will be provided after project completion. We have estimated that the fair value of these guarantees was nil as of the closing date of this transaction and, accordingly, no amounts have been recorded. While AAC was accounted for under the equity method during its development stage, we began consolidating this joint venture beginning July 1, 2010. For more information, see "Note 6. Variable Interest Entities."

        During the nine months ended September 30, 2010, we recorded a non-recurring $18 million credit to equity income of investment in unconsolidated affiliates to appropriately reflect our investment in the Sasol-Huntsman GmbH and Co. KG ("Sasol-Huntsman") joint venture. This credit represented a cumulative correction of an error that was individually immaterial in each year since our initial investment in the joint venture in 1997. In connection with the current expansion of the maleic anhydride capacity at our Sasol-Huntsman joint venture we believe that the joint venture is a VIE and that we may be the primary beneficiary. Accordingly, we may consolidate this joint venture beginning in the first quarter of 2011 when the plant expansion starts production.

6. VARIABLE INTEREST ENTITIES

        We evaluate our investments and transactions to identify VIEs for which we are the primary beneficiary. We hold a variable interest in the following three joint ventures for which we are the primary beneficiary:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6. VARIABLE INTEREST ENTITIES (Continued)

        Creditors of these entities have no recourse to our general credit, except in the event that we offer guarantees of specified indebtedness. As the primary beneficiary of three variable interest entities at September 30, 2010, the joint ventures' assets, liabilities and results of operations are included in our condensed consolidated financial statements (unaudited).

        The following table summarizes the carrying amount of Rubicon and Pacific Iron Products' assets and liabilities included in our condensed consolidated balance sheet (unaudited), before intercompany eliminations, as of September 30, 2010 (dollars in millions):

Current assets

  $ 85  

Property, plant and equipment, net

    17  

Other noncurrent assets

    46  

Deferred income taxes

    38  
       

Total assets

  $ 186  
       

Current liabilities

 
$

94
 

Long-term debt

    3  

Other noncurrent liabilities

    93  
       

Total liabilities

  $ 190  
       

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

6. VARIABLE INTEREST ENTITIES (Continued)

        The following table summarizes the carrying amount of AACs assets and liabilities included in our condensed consolidated balance sheet (unaudited), before intercompany eliminations, as of September 30, 2010 and July 1, 2010 (dollars in millions):

 
  September 30,
2010
  July 1,
2010
 

Current assets

  $ 26   $ 28  

Property, plant and equipment, net

    250     260  

Other noncurrent assets

    10     1  

Intangible assets

    7     7  
           

Total assets

  $ 293   $ 296  
           

Current liabilities

  $ 38   $ 39  

Long-term debt

    181     181  

Other noncurrent liabilities

    7     6  
           

Total liabilities

  $ 226   $ 226  
           

        AAC's assets and liabilities were recorded at estimated fair value as of July 1, 2010, and are preliminary pending final valuation of certain assets and liabilities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7. RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS

        As of September 30, 2010 and December 31, 2009, accrued restructuring, impairment and plant closing costs by type of cost and initiative consisted of the following (dollars in millions):

 
  Workforce
reductions(1)
  Demolition and
decommissioning
  Non-cancelable
lease costs
  Other
restructuring
costs
  Total(2)  

Accrued liabilities as of January 1, 2010

  $ 50   $ 1   $ 3   $ 21   $ 75  

2010 charges for 2005 initiatives

    1                 1  

2010 charges for 2009 initiatives

    4             3     7  

2010 charges for 2010 initiatives

    22                 22  

Reversal of reserves no longer required

    (5 )       (1 )       (6 )

2010 payments for 2005 initiatives

        (1 )           (1 )

2010 payments for 2006 initiatives

    (2 )               (2 )

2010 payments for 2008 initiatives

    (7 )               (7 )

2010 payments for 2009 initiatives

    (11 )           (3 )   (14 )

Net activity of discontinued operations

    (24 )           3     (21 )

Foreign currency effect on liability balance

    2                 2  
                       

Accrued liabilities as of September 30, 2010

  $ 30   $   $ 2   $ 24   $ 56  
                       

(1)
The total workforce reduction reserves of $30 million relate to the termination of 310 positions, of which 273 positions had not been terminated as of September 30, 2010.

(2)
Accrued liabilities by initiatives were as follows (dollars in millions):

 
  September 30,
2010
  December 31,
2009
 

2005 initiatives and prior

  $ 3   $ 3  

2006 initiatives

    3     5  

2008 initiatives

        7  

2009 initiatives

    26     60  

2010 initiatives

    24      
           

Total

  $ 56   $ 75  
           

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7. RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS (Continued)

        Details with respect to our reserves for restructuring, impairment and plant closing costs are provided below by segment and initiative (dollars in millions):

 
  Polyurethanes   Performance
Products
  Advanced
Materials
  Textile
Effects
  Pigments   Discontinued
Operations
  Corporate & Other   Total  

Accrued liabilities as of January 1, 2010

  $ 2   $   $ 7   $ 17   $ 11   $ 34   $ 4   $ 75  

2010 charges for 2005 initiatives

                    1             1  

2010 charges for 2009 initiatives

            1         6             7  

2010 charges for 2010 initiatives

                16             6     22  

Reversal of reserves no longer required

            (3 )       (2 )       (1 )   (6 )

2010 payments for 2005 initiatives

                    (1 )           (1 )

2010 payments for 2006 initiatives

                (2 )               (2 )

2010 payments for 2008 initiatives

    (1 )           (5 )   (1 )           (7 )

2010 payments for 2009 initiatives

            (3 )   (2 )   (6 )       (3 )   (14 )

Net activity of discontinued operations

                        (21 )       (21 )

Foreign currency effect on liability balance

                2                 2  
                                   

Accrued liabilities as of September 30, 2010

  $ 1   $   $ 2   $ 26   $ 8   $ 13   $ 6   $ 56  
                                   

Current portion of restructuring reserves

  $ 1   $   $ 1   $ 26   $ 7   $ 13   $ 6   $ 54  

Long-term portion of restructuring reserve

            1         1             2  

Estimated additional future charges for current restructuring projects

                                                 

Estimated additional charges within one year

                    4         1     5  

Estimated additional charges beyond one year

                                 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

7. RESTRUCTURING, IMPAIRMENT AND PLANT CLOSING COSTS (Continued)

        Details with respect to cash and non-cash restructuring charges for the periods ended September 30, 2010 and 2009 by initiative are provided below (dollars in millions):

 
  Three months ended
Septemeber 30, 2010
  Nine months ended
September 30, 2010
 

Cash charges:

             
 

2010 charges for 2005 & prior initiatives

  $   $ 1  
 

2010 charges for 2009 initiatives

    2     7  
 

2010 charges for 2010 initiatives

    2     22  

Reversal of reserves no longer required

        (6 )
           

Total 2010 Restructuring, Impairment and Plant Closing Costs

  $ 4   $ 24  
           

 

 
  Three months ended
September 30, 2009
  Nine months ended
September 30, 2009
 

Cash charges:

             
 

2009 charges for 2006 initiatives

  $   $ 1  
 

2009 charges for 2008 initiatives

    2     4  
 

2009 charges for 2009 initiatives

    7     78  

Reversal of reserves no longer required

    (1 )   (4 )

Non-cash charges

    (1 )   4  
           

Total 2009 Restructuring, Impairment and Plant Closing Costs

  $ 7   $ 83  
           

        During the nine months ended September 30, 2010, our Textile Effects segment recorded net charges of $16 million primarily related to the consolidation of our Swiss manufacturing facilities.

        During the nine months ended September 30, 2010, our Pigments segment recorded net charges of $5 million primarily related to the closure of the Grimsby, U.K. plant. We expect to incur additional charges of $4 million through December 31, 2012, primarily related to the closure of the Grimsby, U.K. plant.

        During the nine months ended September 30, 2010, we recorded net charges of $5 million in Corporate and other related to workforce reductions in connection with a reorganization and regional consolidation of our transactional accounting activities. We expect to incur additional charges of $1 million through December 31, 2011, related to these activities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT

        Outstanding debt consisted of the following (dollars in millions):

 
  September 30,
2010
  December 31,
2009
 

Senior Credit Facilities:

             
 

Term loans

  $ 1,686   $ 1,968  

Amounts outstanding under A/R programs

    243      

Senior notes

    447     434  

Subordinated notes

    1,442     1,294  

Australian credit facilities

    30     34  

HPS (China) debt

    201     163  

Variable interest entities—AAC

    199      

Convertible notes

        236  

Other

    89     83  
           

Total debt—excluding debt to affiliates

  $ 4,337   $ 4,212  
           

Total Current portion of debt

 
$

384
 
$

431
 

Long-term portion

    3,953     3,781  
           

Total debt—excluding debt to affiliates

  $ 4,337   $ 4,212  
           

Total debt—excluding debt to affiliates

 
$

4,337
 
$

4,212
 

Notes payable to affiliates—noncurrent

    4     5  
           

Total debt

  $ 4,341   $ 4,217  
           

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)

 
  September 30,
2010
  December 31,
2009
 

Senior Credit Facilities:

             
 

Term loans

  $ 1,686   $ 1,968  

Amounts outstanding under A/R programs

    243      

Senior notes

    447     434  

Subordinated notes

    1,442     1,294  

Australian credit facilities

    30     34  

HPS (China) debt

    201     163  

Variable interest entities—AAC

    199      

Other

    89     83  
           

Total debt—excluding debt to affiliates

  $ 4,337   $ 3,976  
           

Total Current portion of debt

 
$

384
 
$

195
 

Long-term portion

    3,953     3,781  
           

Total debt—excluding debt to affiliates

  $ 4,337   $ 3,976  
           

Total debt—excluding debt to affiliates

 
$

4,337
   
3,976
 

Notes payable to affiliates—current

    100     25  

Notes payable to affiliates—noncurrent

    439     530  
           

Total debt

  $ 4,876   $ 4,531  
           

DIRECT AND SUBSIDIARY DEBT

        Huntsman Corporation's direct debt and guarantee obligations consist of the following: guarantees of certain debt of HPS (our Chinese MDI joint venture); a guarantee of certain obligations of AAC (our consolidated ethyleneamines manufacturing joint venture in Jubail, Saudi Arabia); a guarantee of certain debt of Huntsman Corporation Australia Pty Limited; certain indebtedness incurred from time to time to finance certain insurance premiums; and a guarantee of certain obligations of Huntsman International in its capacity as a contributor and servicer guarantor under the U.S. A/R Program. Substantially all of our other debt, including the facilities described below, has been incurred by our subsidiaries (primarily Huntsman International); such subsidiary debt is nonrecourse to us and we have no contractual obligation to fund our subsidiaries' respective operations.

TRANSACTIONS AFFECTING OUR DEBT

Senior Credit Facilities

        As of September 30, 2010, our senior credit facilities ("Senior Credit Facilities") consisted of (i) our $290 million revolving credit facility ("Revolving Facility"); (ii) our $1,302 million term loan B facility ("Term Loan B"); and (iii) our $427 million ($384 million carrying value) term loan C facility

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)


("Term Loan C" and, collectively with Term Loan B, the "Dollar Term Loans"). As of September 30, 2010, we had no borrowings outstanding under our Revolving Facility, and we had approximately $34 million (U.S. dollar equivalents) of letters of credit and bank guarantees issued and outstanding under our Revolving Facility. All of our Senior Credit Facilities are obligations of Huntsman International and are not direct obligations of Huntsman Corporation.

        On September 30, 2010, Huntsman International increased the aggregate amount of revolving commitments available under the Revolving Facility from $225 million to $290 million, as provided for in the Fifth Amendment to Credit Agreement, dated March 9, 2010 (discussed below). There are currently no borrowings outstanding under the Revolving Facility.

        On March 9, 2010, Huntsman International entered into the Fifth Amendment to Credit Agreement with JPMorgan Chase Bank, N.A., as successor administrative agent and collateral agent, and the other financial institutions party thereto, which amended certain terms of our Senior Credit Facilities (the "2010 Amendment"). Among other things, the 2010 Amendment:

        At the present time, borrowings under the Revolving Facility, Term Loan B and Term Loan C bear interest at LIBOR plus 3.25%, LIBOR plus 1.50% and LIBOR plus 2.25%, respectively. The applicable interest rate of the Revolving Facility and Term Loan B are subject to certain secured leverage ratio thresholds. The Revolving Facility matures on March 9, 2014 (subject to optional extensions from time to time with the consent of the lenders and subject to certain specified conditions and exceptions), Term Loan B matures in 2014 and Term Loan C matures in 2016. Notwithstanding the stated maturity

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)


dates, the maturities of the Revolving Facility and the Dollar Term Loans will accelerate if we do not repay or refinance all but $100 million of Huntsman International's outstanding debt securities on or before three months prior to the maturity dates of such debt securities.

        During the nine months ended September 30, 2010, we paid the annual scheduled repayment of $16 million on Term Loan B and $5 million on Term Loan C. In addition, we made the following prepayments on our Senior Credit Facilities:

Accounts Receivable Securitization

        Under our A/R Programs, we grant an undivided interest in certain of our trade receivables to bankruptcy-remote special purpose entities (the "U.S. SPE" and the "EU SPE"). This undivided interest serves as security for the issuance of debt. The A/R Programs provide for financing through a conduit program (in both U.S. dollars and euros). Receivables transferred under the A/R Programs qualified as sales through December 31, 2009. Upon adoption of new accounting guidance in 2010, transfers of accounts receivable under our A/R Programs no longer met the criteria for derecognition. Accordingly, the amounts outstanding under our A/R Programs are accounted for as secured borrowings as of January 1, 2010. See "Note 2. Recently Issued Accounting Pronouncements." Our A/R Programs are obligations of Huntsman International and are not direct obligations of Huntsman Corporation.

        As of September 30, 2010, under our A/R Programs, we had $243 million in U.S. dollar equivalents in loans outstanding (consisting of $55 million and €139 million (approximately $188 million)). As of September 30, 2010, $614 million of accounts receivable were pledged as collateral under the A/R Programs. As of December 31, 2009, the A/R Programs had $254 million in U.S. dollar equivalents in loans outstanding (consisting of $55 million and €139 million (approximately $199 million)).

2021 Subordinated Notes

        On September 24, 2010, Huntsman International completed a $350 million offering of 2021 Subordinated Notes. We used the net proceeds of $343 million to redeem a portion of our euro-denominated senior subordinated notes due 2013 (€132 million (approximately $177 million)) and a portion of U.S. dollar senior subordinated notes due 2014 ($159 million of which settled on October 12, 2010). See "—Redemption of Notes" below. As of September 30, 2010, $159 million of these notes were classified as Current portion of long term debt on the accompanying condensed consolidated balance sheets (unaudited).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)

        The 2021 Subordinated Notes bear interest at the rate of 8.625% per annum payable semi-annually on March 15 and September 15 beginning on March 15, 2011. The 2021 Subordinated Notes will mature on March 15, 2021. At any time prior to September 15, 2013, Huntsman International may redeem up to 40% of the aggregate principal amount of the 2021 Subordinated Notes with the net cash proceeds of certain equity offerings. Huntsman International may redeem the 2021 Subordinated Notes in whole or in part prior to September 15, 2015 at a price equal to 100% of the principal amount thereof plus a "make-whole" premium. The 2021 Subordinated Notes are redeemable on or after September 15, 2015 at 104.3125%, declining ratably to par on or after September 15, 2018.

        The 2021 Subordinated Notes are general unsecured senior subordinated obligations of Huntsman International and are guaranteed on a general unsecured senior subordinated basis by substantially all of Huntsman International's domestic subsidiaries and certain foreign subsidiaries (collectively, "Subsidiary Guarantors"). The indenture governing the 2021 Subordinated Notes imposes certain limitations on the ability of Huntsman International and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, enter into transactions with affiliates, create dividend or other payment restrictions affecting restricted subsidiaries and merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation.

        Upon the occurrence of certain change of control events, holders of the 2021 Subordinated Notes will have the right to require that Huntsman International purchase all or a portion of such holder's 2021 Subordinated Notes in cash at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.

2020 Subordinated Notes

        On March 17, 2010, Huntsman International completed a $350 million offering of 8.625% subordinated notes due March 15, 2020 (the "2020 Subordinated Notes"). We used the net proceeds of $343 million to redeem a portion of our euro-denominated senior subordinated notes due 2013 (€184 million (approximately $253 million)) and a portion of our euro-denominated senior subordinated notes due 2015 (€59 million (approximately $81 million)). See "—Redemption of Notes" below.

        At any time prior to March 15, 2013, Huntsman International may redeem up to 40% of the aggregate principal amount of the 2020 Subordinated Notes with the net cash proceeds of certain equity offerings. Huntsman International may redeem the 2020 Subordinated Notes in whole or in part prior to March 15, 2015 at a price equal to 100% of the principal amount thereof plus a "make-whole" premium. The 2020 Subordinated Notes are redeemable on or after March 15, 2015 at 104.3125%, declining ratably to par on or after March 15, 2018.

        Interest is payable on the 2020 Subordinated Notes semiannually on March 15 and September 15 of each year. The 2020 Subordinated Notes are general unsecured senior subordinated obligations of Huntsman International and are guaranteed on a general unsecured senior subordinated basis by our Subsidiary Guarantors. The indenture governing the 2020 Subordinated Notes contains covenants relating to, among other things, the following: the incurrence of additional indebtedness; the payment

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)

of dividends and the payment of certain other restricted payments; transactions with affiliates; creating dividend or other payment restrictions affecting restricted subsidiaries; the merger or consolidation with any other person or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of its assets; or the adoption of a plan of liquidation.

Redemption of Notes

        On October 12, 2010, Huntsman International repaid $159 million of its 7.875% senior subordinated notes due 2014. The amount paid to redeem the notes, excluding accrued interest, was $165 million, which included principal of $159 million and premium of $6 million. As of September 30, 2010 and prior to this redemption, the 7.875% senior subordinated notes due 2014 had a remaining balance of $347 million ($351 million carrying value). After the redemption, the 7.875% senior subordinated notes due 2014 have a remaining balance of $188 million (carrying value of $190). During the fourth quarter of 2010, we expect to recognize a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of these notes.

        On September 27, 2010, Huntsman International repaid €132 million (approximately $177 million) of its 6.875% senior subordinated notes due 2013. The amount paid to redeem the notes, excluding accrued interest, was €137 million (approximately $183 million), which included principal of €132 million (approximately $177 million) and premium of €5 million (approximately $6 million). As of September 30, 2010, the 6.875% senior subordinated notes due 2013 have a remaining balance of €84 million (approximately $113 million).

        On March 17, 2010, Huntsman International repaid €184 million (approximately $253 million) of its 6.875% senior subordinated notes due 2013. The amount paid to redeem the notes, excluding accrued interest, was €189 million (approximately $259 million), which included principal of €184 million (approximately $253 million) and premium of €5 million (approximately $7 million).

        On March 17, 2010, Huntsman International repaid €59 million (approximately $81 million) of its 7.5% senior subordinated notes due 2015. The amount paid to redeem the notes, excluding accrued interest, was €59 million (approximately $81 million). As of September 30, 2010, the 7.5% senior subordinated notes due 2015 have a remaining balance of €76 million (approximately $103 million).

        On January 11, 2010, we repurchased the entire $250 million principal amount of our outstanding Convertible Notes for approximately $382 million from Apollo and its affiliates. The Convertible Notes were issued to Apollo in December 2008. The Convertible Notes, which would have matured on December 23, 2018, bore interest at 7% per annum and were convertible into approximately 31.8 million shares of our common stock. As a result of the repurchase of the Convertible Notes, we recorded a loss on early extinguishment of debt in the first quarter of 2010 of $146 million.

        On July 23, 2009, Huntsman International redeemed in full all of its $296 million 11.625% senior secured notes due October 2010. The total redemption payment, excluding accrued interest was $305 million, which included principal of $296 million and a call premium of approximately $9 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)

        On August 3, 2009, Huntsman International redeemed in full all of its $198 million 11.5% senior notes due July 2012. The total redemption payment, excluding accrued interest, was $204 million, which included principal of $198 million and a call premium of $6 million.

        In connection with these redemptions, we recorded a loss on early extinguishment of debt for the three and nine months ended September 30, 2010 of $7 million and $162 million, respectively and for the three and nine months ended September 30, 2009 of $21 million each. Huntsman International recorded a loss on early extinguishment of debt for the three and nine months ended September 30, 2010 of $7 million and $16 million, respectively, and for the three and nine months ended September 30, 2009 of $21 million each.

Variable Interest Entity Debt

        AAC has the following loan commitments and debt financing:

Other Debt

        On April 1, 2010, our $25 million European overdraft facility was terminated. This facility was a demand facility used for the working capital needs of our European subsidiaries. In September 2010, we replaced this facility with a new $25 million European overdraft facility that is a demand facility we will use for the working capital needs of our European subsidiaries. In addition, we continue to maintain certain other foreign overdraft facilities used for working capital needs.

        HPS obtained secured loans for the construction of its MDI production facility. This debt consists of various committed loans, including both U.S. dollar and RMB term loans and RMB working capital loans. During the nine months ended September 30, 2010, HPS refinanced RMB 130 million (approximately $19 million) in working capital loans that were scheduled to be repaid during the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)


quarter. The loans were refinanced for three years at the same interest rate of 90% of the Peoples Bank of China rate, which was 4.9% as of September 30, 2010.

        HPS has a loan facility for the purpose of discounting commercial drafts with recourse. The facility has a stated capacity for discounting up to CNY700 million (approximately $105 million) and drafts are discounted using a discount rate of the three-month SHIBOR plus 2.2%. The facility agreement is for one year and is renewed annually. During the three months ended September 30, 2010, the facility was extended from July 2010 to June 2011. As of September 30, 2010, HPS has discounted with recourse CNY647 million (approximately $97 million) of commercial drafts, all of which is classified as Current portion of debt on the accompanying condensed consolidated balance sheets (unaudited). While the facility has a maturity of June 2011, the lender has the right to accept or reject drafts presented for discounting.

        On June 30, 2010, we amended certain credit facilities used by certain of our Australian subsidiaries (the "Australian Credit Facilities"). The amendment, among other things, extended the maturity of the facility to June 2015 and amended the interest rate to the Australian index rate plus a margin of 3.75% for borrowings under the revolving facility and 3.5% for borrowings under the term facility, so long as a guarantee remains in place from Huntsman Corporation. In addition, the amendment provides that the revolving facility collateral includes the secured interest in certain receivables. As of September 30, 2010, the aggregate balance outstanding under the Australian Credit Facilities was A$30 million (approximately $30 million, of which $16 million is classified as Current portion of long term debt on the accompanying condensed consolidated balance sheets).

        During the third quarter of 2010, we incurred other debt related to the financing of our insurance premiums in connection with our annual renewal in July 2010. As of September 30, 2010, the outstanding amount of financed insurance premiums was $23 million, all of which was classified as Current portion of debt on the accompanying condensed consolidated balance sheets (unaudited). The insurance premium financing is secured by the prepaid insurance premiums.

Intercompany Note

        Under an existing promissory note (the "Intercompany Note"), we have provided financing to Huntsman International. As of September 30, 2010, the outstanding total balance of the Intercompany Note was $535 million. Under the agreements governing the Senior Credit Facilities, Huntsman International cannot repay amounts under the Intercompany Note if there are any outstanding revolving loans, swing line loans or outstanding letters of credit that are not cash collateralized, unless, before and after giving effect to such payment on a pro forma basis, Huntsman International is currently in compliance with the leverage covenant in the Senior Credit Facilities (the "Leverage Covenant"). During the nine months ended September 30, 2010, Huntsman International repaid a net $15 million under the Intercompany Note. As of September 30, 2010, and in accordance with the limitation contained in the agreements governing our Senior Credit Facilities as described above, Huntsman International would be permitted to repay the entire $535 million balance on the Intercompany Note.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

8. DEBT (Continued)

        The Intercompany Note is unsecured and $100 million of the outstanding amount is classified as current as of September 30, 2010 on the accompanying condensed consolidated balance sheets (unaudited). As of September 30, 2010, under the terms of the Intercompany Note, Huntsman International promises to pay us interest on the unpaid principal amount at a rate per annum based on the previous monthly average borrowing rate obtained under our U.S. A/R Program, less 10 basis points (provided that the rate shall not exceed an amount that is 25 basis points less than the monthly average borrowing rate obtained for the U.S. LIBOR-based borrowings under our Revolving Facility). Subject to the conditions of the Senior Credit Facilities, with our consent, the principal and accrued interest outstanding under the Intercompany Note may also be forgiven, capitalized or satisfied with any alternate form of consideration.

COMPLIANCE WITH COVENANTS

        Our management believes that we are in compliance with the covenants contained in the agreements governing our material debt instruments, including our Senior Credit Facilities, our A/R Programs and our notes.

        Our Senior Credit Facilities are subject to a single financial covenant, the Leverage Covenant, which applies only to the Revolving Facility and is tested at the Huntsman International level. The Leverage Covenant is applicable only if borrowings, letters of credit or guarantees are outstanding under the Revolving Facility (cash collateralized letters of credit or guarantees are not deemed outstanding). The Leverage Covenant is a net senior secured leverage ratio covenant which requires that Huntsman International's ratio of senior secured debt to EBITDA (as defined in the applicable agreement) is no more than 3.75 to 1.

        If in the future Huntsman International failed to comply with the Leverage Covenant, then we would not have access to liquidity under our Revolving Facility. If Huntsman International failed to comply with the Leverage Covenant at a time when we had loans or letters of credit outstanding under the Revolving Facility, Huntsman International would be in default under the Senior Credit Facilities, and, unless Huntsman International obtained a waiver or forbearance with respect to such default (as to which we can provide no assurance), Huntsman International could be required to pay off the balance of the Senior Credit Facilities in full, and we would not have further access to such facilities.

        The agreements governing our A/R Programs also contain certain financial covenants. Any material failure to meet the applicable A/R Program's covenants in the future could lead to an event of default under the A/R Programs, which could require us to cease our use of such facilities. Under these circumstances, unless any default was remedied or waived, we would likely lose the ability to obtain financing with respect to our trade receivables. A material default under the A/R Programs would also constitute an event of default under our Senior Credit Facilities, which could require us to pay off the balance of the Senior Credit Facilities in full and could result in the loss of our Senior Credit Facilities.

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

        We are exposed to market risks, such as changes in interest rates, foreign exchange rates and commodity pricing risks. From time to time, we enter into transactions, including transactions involving derivative instruments, to manage certain of these exposures.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

        All derivatives, whether designated in hedging relationships or not, are recorded on our balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in accumulated other comprehensive income (loss), to the extent effective, and will be recognized in the income statement when the hedged item affects earnings. To the extent applicable, we perform effectiveness assessments in order to use hedge accounting at each reporting period. For a derivative that does not qualify as a hedge or to the extent that the hedge is ineffective, changes in fair value are recognized in earnings.

        We also hedge our net investment in certain European operations. Changes in the fair value of the hedge in the net investment of certain European operations are recorded in accumulated other comprehensive (loss) income.

        Our cash flows and earnings are subject to fluctuations due to exchange rate variation. Our revenues and expenses are denominated in various currencies. From time to time, we may enter into foreign currency derivative instruments to minimize the short-term impact of movements in foreign currency rates. Where practicable, we generally net multicurrency cash balances among our subsidiaries to help reduce exposure to foreign currency exchange rates. Certain other exposures may be managed from time to time through financial market transactions, principally through the purchase of spot or forward foreign exchange contracts (generally with maturities of one year or less). We do not hedge our currency exposures in a manner that would eliminate the effect of changes in exchange rates on our cash flows and earnings. As of September 30, 2010, we had approximately $168 million notional amount (in U.S. dollar equivalents) outstanding in forward foreign currency contracts.

        On December 9, 2009, we entered into a five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50 million and was designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded in other comprehensive loss. We will pay a fixed 2.6% on the hedge and receive the one-month LIBOR rate. As of September 30, 2010, the fair value of the hedge was $3 million and is recorded in other noncurrent liabilities.

        On January 19, 2010, we entered into an additional five-year interest rate contract to hedge the variability caused by monthly changes in cash flow due to associated changes in LIBOR under our Senior Credit Facilities. The notional value of the contract is $50 million and was designated as a cash flow hedge. The effective portion of the changes in the fair value of the swap was recorded in other comprehensive loss. We will pay a fixed 2.8% on the hedge and receive the one-month LIBOR rate. As of September 30, 2010, the fair value of the hedge was $3 million and is recorded in other noncurrent liabilities.

        Beginning in 2009, AAC entered into a 12 year floating to fixed interest rate contract providing to us LIBOR interest payments for a fixed payment of 5.02%. In connection with the consolidation of AAC as of July 1, 2010, the interest rate contract is now consolidated by Huntsman International. See Note 6. "Variable Interest Entities." The notional amount of the hedge as of September 30, 2010 is $63 million and the interest rate contract is not designated as a cash flow hedge. As of September 30,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)


2010, the fair value of the hedge was $7 million and was recorded in Other noncurrent liabilities on the accompanying condensed consolidated balance sheets (unaudited). For the quarter ended September 30, 2010 we recorded interest expense of $1 million.

        In conjunction with the issuance of our 2020 Subordinated Notes, we entered into cross-currency interest rate contracts with three counterparties. On March 17, 2010, we made payments of $350 million to these counterparties and received €255 million from these counterparties, and on maturity, March 15, 2015, we are required to pay €255 million to these counterparties and will receive $350 million from these counterparties. On March 15 and September 15 of each year, we will receive U.S. dollar interest payments of approximately $15 million (equivalent to an annual rate of 8.625%) and make interest payments of approximately €11 million (equivalent to an annual rate of approximately 8.41%). This swap is designated as a hedge of net investment for financial reporting purposes. As of September 30, 2010, the fair value of this swap was $15 million and was recorded as noncurrent assets in our condensed consolidated balance sheet (unaudited). For the three and nine months ended September 30, 2010, the effective portion of the changes in the fair value of $(34) million and $3 million, respectively, was recorded in other comprehensive income, with the ineffective portion of $(2) million and $12 million, respectively, recorded as an (addition) reduction to interest expense. On July 15, 2010, we changed the method of assessing the effectiveness of this hedge from the spot method to the forward method, which we believe will reduce the ineffective portion and lower volatility in interest expense in future periods.

        For the three and nine months ended September 30, 2010, the changes in fair value of the realized gains (losses) recorded in the accompanying condensed consolidated statements of operations (unaudited) of our other outstanding foreign currency rate hedging contracts and derivatives were not considered significant.

        A significant portion of our intercompany debt is denominated in euros. We also finance certain of our non-U.S. subsidiaries with intercompany loans that are, in many cases, denominated in currencies other than the entities' functional currency. We manage the net foreign currency exposure created by this debt through various means, including cross-currency swaps, the designation of certain intercompany loans as permanent loans because they are not expected to be repaid in the foreseeable future ("permanent loans") and the designation of certain debt and swaps as net investment hedges.

        Foreign currency transaction gains and losses on intercompany loans that are not designated as permanent loans are recorded in earnings. Foreign currency transaction gains and losses on intercompany loans that are designated as permanent loans are recorded in other comprehensive loss. From time to time, we review such designation of intercompany loans.

        From time to time, we review our non-U.S. dollar denominated debt and swaps to determine the appropriate amounts designated as hedges. As of September 30, 2010, we have designated approximately €338 million ($459 million) of euro-denominated debt and the cross-currency interest rate swap as a hedge of our net investments. For the three and nine months ended September 30, 2010, the amount of (loss) gain recognized on the hedge of our net investments was $(60) million and $28 million, respectively and was recorded in other comprehensive loss. As of September 30, 2010, we had €1,174 million (approximately $1,594 million) in net euro assets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10. FAIR VALUE

        The fair values of our financial instruments were as follows (dollars in millions):

Huntsman Corporation

 
  September 30, 2010   December 31, 2009  
 
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
 

Non-qualified employee benefit plan investments

  $ 9   $ 9   $ 10   $ 10  

Cross-currency interest rate contracts

    15     15          

Interest rate contracts

    (13 )   (13 )   1     1  

Long-term debt (including current portion)

    (4,337 )   (4,457 )   (4,212 )   (4,390 )

Huntsman International

 
  September 30, 2010   December 31, 2009  
 
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
 

Non-qualified employee benefit plan investments

  $ 9   $ 9   $ 10   $ 10  

Cross-currency interest rate contracts

    15     15          

Interest rate contracts

    (13 )   (13 )   1     1  

Long-term debt (including current portion)

    (4,337 )   (4,457 )   (3,976 )   (3,951 )

        The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of non-qualified employee benefit plan investments is estimated using prevailing market prices. The estimated fair values of our long-term debt other than the Convertible Notes are based on quoted market prices for the identical liability when traded as an asset in an active market. The estimated fair value of our Convertible Notes at December 31, 2009 was based on the present value of estimated future cash flows, calculated using management's best estimates of key assumptions including relevant interest rates, expected share volatility, dividend yields and the probabilities associated with certain features of the Convertible Notes.

        The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 2010, and current estimates of fair value may differ significantly from the amounts presented herein.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10. FAIR VALUE (Continued)

        The following assets and liabilities are measured at fair value on a recurring basis (dollars in millions):

 
   
  Fair Value Amounts Using  
Description
  September 30,
2010
  Quoted prices in
active
markets for
identical
assets (Level 1)
  Significant
other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 

Assets:

                         
 

Available-for-sale equity securities:

                         
   

Equity mutual funds

  $ 9   $ 9   $   $  
 

Derivatives:

                         
   

Cross-currency interest rate contract(1)

    15             15  
                   

Total assets

  $ 24   $ 9   $   $ 15  
                   

Liabilities:

                         
 

Derivatives:

                         
   

Interest rate contracts(2)

  $ 13   $   $ 13   $  
                   

(1)
The income approach is used to calculate the fair value of these instruments. Fair value represents the present value of estimated future cash flows, calculated using relevant interest rates, exchange rates, and yield curves at stated intervals.

(2)
The income approach is used to calculate the fair value of these instruments. Fair value represents the present value of estimated future cash flows, calculated using relevant interest rates and yield curves at stated intervals.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

10. FAIR VALUE (Continued)

        The following table shows a reconciliation of beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (dollars in millions):

 
  Three months ended
September 30, 2010
  Nine months ended
September 30, 2010
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
  Cross-Currency
Interest Rate
Contract
  Total   Retained Interest
in Securitized
Receivables
  Cross-Currency
Interest Rate
Contract
  Total  

Beginning balance

  $ 51   $ 51   $ 262   $   $ 262  

Total gains or losses

                               
 

Included in earnings (or changes in net assets)

    (2 )   (2 )       12     12  
 

Included in other comprehensive income (loss)

    (34 )   (34 )       3     3  

Purchases, issuances, sales and settlements(1)

            (262 )       (262 )
                       

Ending balance

  $ 15   $ 15   $   $ 15   $ 15  
                       

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at September 30, 2010

  $ (2 ) $ (2 ) $   $ 12   $ 12  
                       

(1)
Upon adoption of ASU 2009-16, transfers of our accounts receivable under our A/R Programs no longer met the criteria for derecognition. Accordingly, beginning January 1, 2010, the amounts outstanding under the A/R Programs were accounted for as secured borrowings and the retained interest in securitized receivables was no longer relevant.

        Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the three months and nine months ended September 30, 2010 are reported in interest expense and other comprehensive loss as follows (dollars in millions):

 
  Three months ended
September 30, 2010
  Nine months ended
September 30, 2010
 
 
  Interest
Expense
  Other comprehensive
income (loss)
  Interest
Expense
  Other comprehensive
income (loss)
 

Total net (losses) gains included in earnings

  $ (2 ) $   $ 12   $  

Changes in unrealized gains (losses) relating to assets still held at June 30, 2010

    (2 )   (34 )   12     3  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11. EMPLOYEE BENEFIT PLANS

        Components of the net periodic benefit costs for the three and nine months ended September 30, 2010 and 2009 were as follows (dollars in millions):

 
  Defined Benefit
Plans
  Other
Postretirement
Benefit Plans
 
 
  Three Months
Ended
September 30,
  Three Months
Ended
September 30,
 
 
  2010   2009   2010   2009  

Service cost

  $ 15   $ 13   $   $ 3  

Interest cost

    35     36     1     3  

Expected return on assets

    (39 )   (37 )        

Amortization of prior service cost

    (1 )   (1 )   (1 )   (1 )

Amortization of actuarial loss

    6     8     1     (3 )

Special termination benefits

        1          
                   

Net periodic benefit cost

  $ 16   $ 20   $ 1   $ 2  
                   

 

 
  Defined Benefit
Plans
  Other
Postretirement
Benefit Plans
 
 
  Nine Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  

Service cost

  $ 48   $ 46   $ 2   $ 5  

Interest cost

    106     106     5     7  

Expected return on assets

    (121 )   (107 )        

Amortization of prior service cost

    (4 )   (4 )   (2 )   (2 )

Amortization of actuarial loss

    18     25     1     (2 )

Special termination benefits

        2          

Curtailment gain

        (1 )        
                   

Net periodic benefit cost

  $ 47   $ 67   $ 6   $ 8  
                   

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

11. EMPLOYEE BENEFIT PLANS (Continued)

 
  Defined Benefit
Plans
  Other
Postretirement
Benefit Plans
 
 
  Three Months
Ended
September 30,
  Three Months
Ended
September 30,
 
 
  2010   2009   2010   2009  

Service cost

  $ 15   $ 13   $   $ 3  

Interest cost

    35     36     1     3  

Expected return on assets

    (39 )   (37 )        

Amortization of prior service cost

    (1 )   (1 )   (1 )   (1 )

Amortization of actuarial loss

    7     10     1     (3 )

Special termination benefits

        1          
                   

Net periodic benefit cost

  $ 17   $ 22   $ 1   $ 2  
                   

 

 
  Defined Benefit
Plans
  Other
Postretirement
Benefit Plans
 
 
  Nine Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  

Service cost

  $ 48   $ 46   $ 2   $ 5  

Interest cost

    106     106     5     7  

Expected return on assets

    (121 )   (107 )        

Amortization of prior service cost

    (4 )   (4 )   (2 )   (2 )

Amortization of actuarial loss

    22     30     1     (2 )

Special termination benefits

        2          

Curtailment gain

        (1 )        
                   

Net periodic benefit cost

  $ 51   $ 72   $ 6   $ 8  
                   

        During the nine months ended September 30, 2010 and 2009, we made contributions to our pension and other postretirement benefit plans of $100 million and $115 million, respectively. During the remainder of 2010, we expect to contribute an additional amount of $21 million to these plans.

        On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. On March 30, 2010, President Obama signed into law a reconciliation measure, the Health Care and Education Reconciliation Act of 2010. The passage of this legislation has resulted in comprehensive reform of health care in the U.S. We are currently evaluating the impact of this legislation on our results of operations and financial condition.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

12. HUNTSMAN CORPORATION STOCKHOLDERS' EQUITY

COMMON STOCK DIVIDENDS

        On each of September 30, June 30 and March 31, 2010, we paid cash dividends of $24 million, or $0.10 per share, to common stockholders of record as of September 15, June 15 and March 15, 2010, respectively. On each of September 30, June 30 and March 31, 2009 we paid cash dividends of approximately $24 million, or $0.10 per share, to common stockholders of record as of September 15, June 15 and March 15, 2009, respectively.

13. OTHER COMPREHENSIVE INCOME (LOSS)

        The components of other comprehensive income (loss) were as follows (dollars in millions):

Huntsman Corporation

 
   
   
  Other comprehensive income (loss)  
 
  Accumulated other
comprehensive
income (loss)
  Three Months
Ended
  Nine Months
Ended
 
 
  September 30,
2010
  December 31,
2009
  September 30,
2010
  September 30,
2009
  September 30,
2010
  September 30,
2009
 

Foreign currency translation adjustments, net of tax of $20 and $15 as of September 30, 2010 and December 31, 2009, respectively

  $ 304   $ 274   $ 143   $ 28   $ 30   $ 68  

Pension and other postretirement benefit adjustments, net of tax of $98 and $102 as of September 30, 2010 and December 31, 2009, respectively

    (568 )   (580 )   2     9     12     20  

Other comprehensive income (loss) of unconsolidated affiliates

    7     7                 (3 )

Other, net

    2     6     1     1     (4 )   1  
                           
 

Total

    (255 )   (293 )   146     38     38     86  

Amounts attributable to noncontrolling interests

    6     6         (1 )       (1 )
                           

Amounts attributable to Huntsman Corporation

  $ (249 ) $ (287 ) $ 146   $ 37   $ 38   $ 85  
                           

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13. OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

Huntsman International

 
   
   
  Other comprehensive income (loss)  
 
  Accumulated other
comprehensive
income (loss)
  Three Months
Ended
  Nine Months
Ended
 
 
  September 30,
2010
  December 31,
2009
  September 30,
2010
  September 30,
2009
  September 30,
2010
  September 30,
2009
 

Foreign currency translation adjustments, net of tax of $7 and $2 as of September 30, 2010 and December 31, 2009, respectively

  $ 303   $ 273   $ 144   $ 27   $ 30   $ 68  

Pension and other postretirement benefit adjustments, net of tax of $130 and $134 as of September 30, 2010 and December 31, 2009, respectively

    (619 )   (635 )   3     11     16     24  

Other comprehensive income (loss) of unconsolidated affiliates

    7     7                 (3 )

Other, net

    (3 )   1     1     1     (4 )   1  
                           
 

Total

    (312 )   (354 )   148     39     42     90  

Amounts attributable to noncontrolling interests

    6     6         (1 )       (1 )
                           

Amounts attributable to Huntsman International LLC

  $ (306 ) $ (348 ) $ 148   $ 38   $ 42   $ 89  
                           

        Items of other comprehensive income (loss) of our Company and our consolidated affiliates have been recorded net of tax, with the exception of the foreign currency translation adjustments related to subsidiaries with earnings permanently reinvested. The tax effect is determined based upon the jurisdiction where the income or loss was recognized and is net of valuation allowances.

14. COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

Asbestos Litigation

        We have been named as a "premises defendant" in a number of asbestos exposure cases, typically claims by non-employees of exposure to asbestos while at a facility. In the past, these cases typically have involved multiple plaintiffs bringing actions against multiple defendants, and the complaints have not indicated which plaintiffs were making claims against which defendants, where or how the alleged

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injuries occurred or what injuries each plaintiff claimed. These facts, which would be central to any estimate of probable loss, generally have been learned only through discovery.

        Where a claimant's alleged exposure occurred prior to our ownership of the relevant "premises," the prior owners generally have contractually agreed to retain liability for, and to indemnify us against, asbestos exposure claims. This indemnification is not subject to any time or dollar amount limitations. Upon service of a complaint in one of these cases, we tender it to the prior owner. None of the complaints in these cases state the amount of damages being sought. The prior owner accepts responsibility for the conduct of the defense of the cases and payment of any amounts due to the claimants. In our sixteen-year experience with tendering these cases, we have not made any payment with respect to any tendered asbestos cases. We believe that the prior owners have the intention and ability to continue to honor their indemnity obligations, although we cannot assure you that they will continue to do so or that we will not be liable for these cases if they do not.

        The following table presents for the periods indicated certain information about cases for which service has been received that we have tendered to the prior owner, all of which have been accepted.

 
  Nine months
ended
September 30,
 
 
  2010   2009  

Unresolved at beginning of period

    1,138     1,140  

Tendered during period

    23     13  

Resolved during period(1)

    21     14  

Unresolved at end of period

    1,140     1,139  

(1)
Although the indemnifying party informs us when tendered cases have been resolved, it generally does not inform us of the settlement amounts relating to such cases, if any. The indemnifying party has informed us that it typically manages our defense together with the defense of other entities in such cases and resolves claims involving multiple defendants simultaneously, and that it considers the allocation of settlement amounts, if any, among defendants to be confidential and proprietary. Consequently, we are not able to provide the number of cases resolved with payment by the indemnifying party or the amount of such payments.

        We have never made any payments with respect to these cases. As of September 30, 2010, we had an accrued liability of $16 million relating to these cases and a corresponding receivable of $16 million relating to our indemnity protection with respect to these cases. We cannot assure you that our liability will not exceed our accruals or that our liability associated with these cases would not be material to our financial condition, results of operations or liquidity; however, we are not able to estimate the amount or range of loss in excess of our accruals. Additional asbestos exposure claims may be made against us in the future, and such claims could be material. However, because we are not able to estimate the amount or range of losses associated with such claims, we have made no accruals with respect to unasserted asbestos exposure claims as of September 30, 2010.

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        Certain cases in which we are a "premises defendant" are not subject to indemnification by prior owners or operators. The following table presents for the periods indicated certain information about these cases. Cases include all cases for which service has been received by us. Certain prior cases that were filed in error against us have been dismissed.

 
  Nine months
ended
September 30,
 
 
  2010   2009  

Unresolved at beginning of period

    39     43  

Filed during the period

    3     1  

Resolved during period

    2     3  

Unresolved at end of period

    40     41  

        We paid gross settlement costs for asbestos exposure cases that are not subject to indemnification of $200,000 and nil during the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, we had an accrual of $225,000 relating to these cases. We cannot assure you that our liability will not exceed our accruals or that our liability associated with these cases would not be material to our financial condition, results of operations or liquidity; however, we are not able to estimate the amount or range of loss in excess of our accruals. Additional asbestos exposure claims may be made against us in the future, and such claims could be material. However, because we are not able to estimate the amount or range of losses associated with such claims, we have made no accruals with respect to unasserted asbestos exposure claims as of September 30, 2010.

Antitrust Matters

        We have been named as a defendant in civil class action antitrust suits alleging that between 1999 and 2004 we conspired with Bayer, BASF, Dow and Lyondell to fix the prices of MDI, TDI, polyether polyols, and related systems ("polyether polyol products") sold in the U.S. in violation of the federal Sherman Act. These cases are consolidated as the "Polyether Polyols" cases in multidistrict litigation known as In re Urethane Antitrust Litigation, MDL No. 1616, Civil No. 2:04-md-01616-JWL-DJW, pending in the U.S. District Court for the District of Kansas.

        In addition, we and the other Polyether Polyol defendants have also been named as defendants in three civil antitrust suits brought by certain direct purchasers of polyether polyol products that opted out of the class certified in MDL No. 1616. While these opt out plaintiffs make similar claims as the class plaintiffs, the court denied defendants' motion to dismiss claims of improper activity outside the class period. Accordingly, the relevant time frame for these cases is 1994-2006. These cases are referred to as the "direct action cases" and are pending in the U.S. District Court for the District of New Jersey.

        Merits discovery was consolidated in MDL No. 1616 for both the class and direct action cases and is ongoing. The trial is currently scheduled for May 2012.

        Two purported class action cases filed May 5 and 17, 2006 pending in the Superior Court of Justice, Ontario Canada and Superior Court, Province of Quebec, District of Quebec, by direct

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purchasers of MDI, TDI and polyether polyols and by indirect purchasers of these products remain largely dormant although the plaintiffs have recently filed papers seeking class certification. A purported class action case filed February 15, 2002 by purchasers of products containing rubber and urethanes products and pending in Superior Court of California, County of San Francisco is stayed pending resolution of MDL No. 1616. Finally, we have been named in a proposed third amended complaint by indirect purchasers of MDI, TDI, polyether polyols and polyester polyols pending against Bayer and Chemtura in the U.S. District Court for the District of Massachusetts. The matter is currently stayed pending a settlement of previously asserted claims against Bayer and Chemtura. We opposed the motion for leave to file the proposed amended complaint adding us as a defendant in that action. The plaintiffs in each of these matters make similar claims against the defendants as the class plaintiffs in MDL No. 1616.

        We have been named as a defendant in two purported class action civil antitrust suits alleging that we and our co-defendants and other co-conspirators conspired to fix prices of titanium dioxide sold in the U.S. between at least March 1, 2002 and the present. The cases were filed on February 9 and 12, 2010 in the U.S. District Court for the District of Maryland and a consolidated complaint was filed on April 12, 2010. The other defendants named in this matter are E.I. du Pont de Nemours and Company, Kronos Worldwide Inc., Millennium Inorganic Chemicals, Inc. and the National Titanium Dioxide Company Limited (d/b/a Cristal). Together with our co-defendants we have filed a motion to dismiss this litigation.

        In all of the antitrust litigation currently pending against us, the plaintiffs generally are seeking injunctive relief, treble damages, costs of suit and attorneys fees.

        The plaintiffs' pleadings in these various antitrust suits provide few specifics about any alleged illegal conduct on our part, and we are not aware of any illegal conduct by us or any of our employees. For these reasons, we cannot estimate the possibility of loss or range of loss relating to these claims, and therefore we have not accrued a liability for these claims. Nevertheless, we could incur losses due to these claims in the future and those losses could be material.

Port Arthur Plant Fire Insurance Litigation

        On April 29, 2006, our former Port Arthur, Texas olefins manufacturing plant (which we sold to Flint Hills Resources in November 2007) experienced a major fire. The plant was covered by property damage and business interruption insurance through International Risk Insurance Company ("IRIC"), our captive insurer, and certain reinsurers (the "Reinsurers"). The property damage and business interruption insurance was subject to a combined deductible of $60 million. We, together with IRIC, asserted claims to the Reinsurers related to losses occurring as a result of this fire. On August 31, 2007, the Reinsurers brought an action against us in the U.S. District Court for the Southern District of Texas. The action sought to compel us to arbitrate with the Reinsurers to resolve disputes related to our claims or, in the alternative, to declare judgment in favor of the Reinsurers. Pursuant to a December 29, 2008 agreement, we participated with the Reinsurers in binding arbitration. We paid our deductible on the claim of $60 million and were paid $365 million by the Reinsurers prior to the commencement of binding arbitration. On May 14, 2010, we entered into a settlement agreement with the Reinsurers, including those Reinsurers that did not participate in the arbitration proceedings, that

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resolved the remainder of our insurance claim for a total amount of $110 million. The Reinsurers completed the payment of this amount on June 15, 2010. For more information, see "Note 17. Casualty Losses and Insurance Recoveries—Port Arthur, Texas Plant Fire."

Other Proceedings

        We are a party to various other proceedings instituted by private plaintiffs, governmental authorities and others arising under provisions of applicable laws, including various environmental, products liability and other laws. Except as otherwise disclosed in this report, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial condition, results of operations or liquidity.

Guarantees

        AAC obtained various loan commitments in the aggregate amount of approximately $195 million (U.S. dollar equivalents), of which $192 million was drawn and outstanding as of September 30, 2010. We have provided certain guarantees of approximately $14 million for these commitments and our guarantees will terminate upon completion of the project and satisfaction of certain other conditions. A $1 million guarantee will be provided after project completion. We have estimated that the fair value of such guarantees was nil as of the closing date of this transaction and, accordingly, no amounts have been recorded.

15. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

GENERAL

        We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to safety, pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In the ordinary course of business, we are subject to frequent environmental inspections and monitoring and occasional investigations by governmental enforcement authorities. In addition, our production facilities require operating permits that are subject to renewal, modification and, in certain circumstances, revocation. Actual or alleged violations of safety laws, environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as, under some environmental laws, the assessment of strict liability and/or joint and several liability. Moreover, changes in environmental regulations could inhibit or interrupt our operations, or require us to modify our facilities or operations. Accordingly, environmental or regulatory matters may cause us to incur significant unanticipated losses, costs or liabilities.

ENVIRONMENTAL, HEALTH AND SAFETY SYSTEMS

        We are committed to achieving and maintaining compliance with all applicable environmental, health and safety ("EHS") legal requirements, and we have developed policies and management systems that are intended to identify the multitude of EHS legal requirements applicable to our operations, enhance compliance with applicable legal requirements, ensure the safety of our employees,

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contractors, community neighbors and customers and minimize the production and emission of wastes and other pollutants. Although EHS legal requirements are constantly changing and are frequently difficult to comply with, these EHS management systems are designed to assist us in our compliance goals while also fostering efficiency and improvement and minimizing overall risk to us.

EHS CAPITAL EXPENDITURES

        We may incur future costs for capital improvements and general compliance under EHS laws, including costs to acquire, maintain and repair pollution control equipment. For the nine months ended September 30, 2010 and 2009, our capital expenditures for EHS matters totaled $47 million and $28 million, respectively. Because capital expenditures for these matters are subject to evolving regulatory requirements and depend, in part, on the timing, promulgation and enforcement of specific requirements, our capital expenditures for EHS matters have varied significantly from year to year and we cannot provide assurance that our recent expenditures will be indicative of future amounts required under EHS laws.

REMEDIATION LIABILITIES

        We have incurred, and we may in the future incur, liability to investigate and clean up waste or contamination at our current or former facilities or facilities operated by third parties at which we may have disposed of waste or other materials. Similarly, we may incur costs for the cleanup of waste that was disposed of prior to the purchase of our businesses. Under some circumstances, the scope of our liability may extend to damages to natural resources.

        Under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and similar state laws, a current or former owner or operator of real property may be liable for remediation costs regardless of whether the release or disposal of hazardous substances was in compliance with law at the time it occurred, and a current owner or operator may be liable regardless of whether it owned or operated the facility at the time of the release. We have been notified by third parties of claims against us for cleanup liabilities at approximately 10 former facilities or third party sites, including, but not limited to, sites listed under CERCLA. Based on current information and past experiences at other CERCLA sites, we do not expect any of these third party claims to result in material liability to us. Outside the U.S., analogous contaminated property laws, such as those in effect in France and Australia, can hold past owners and/or operators liable for remediation at former facilities.

        One of these sites, the North Maybe Canyon Mine CERCLA site, includes an abandoned phosphorous mine near Soda Springs, Idaho believed to have been operated by one of our predecessor companies (El Paso Products Company). In 2004, the U.S. Forest Service notified us that we are a CERCLA Potentially Responsible Party (a "PRP") for the mine site involving selenium-contaminated surface water. Under a 2004 administrative order, the current mine lessee, Nu-West Industries, Inc., began undertaking the investigation required for a CERLA removal process. In 2008, the site was transitioned to the CERCLA remedial action process, which requires a Remedial Investigation/Feasibility Study (an "RI/FS"). In 2009, the Forest Service notified the three PRPs (our Company, Nu-West and Wells Cargo) that it would undertake the RI/FS itself. On February 19, 2010, in

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conjunction with Wells Cargo, we agreed to jointly comply with a unilateral administrative order (a "UAO") to conduct an RI/FS of the entire West Ridge of the site, although we are alleged to have had only a limited historical presence in the investigation area. In March 2010, following the initiation of litigation by Nu-West, the Forest Service assumed Nu-West's original investigation obligations. We continue to coordinate with our insurers regarding policy coverage in this matter. On June 15, 2010, we received the UAO which had been executed by the Forest Service. At this time, we are unable to estimate the cost of the RI/FS or our ultimate liability in this matter, but we do not believe it will be material to our financial condition.

        In addition, under the Resource Conservation and Recovery Act, or RCRA, and similar state laws, we may be required to remediate contamination originating from our properties as a condition to our hazardous waste permit. Some of our manufacturing sites have an extended history of industrial chemical manufacturing and use, including on-site waste disposal. We are aware of soil, groundwater or surface contamination from past operations at some of our sites, and we may find contamination at other sites in the future. For example, our Port Neches, Texas, and Geismar, Louisiana, facilities are the subject of ongoing remediation requirements under RCRA authority. Similar laws exist in a number of locations in which we currently operate manufacturing facilities, such as Australia, Switzerland and Italy.

        In June of 2006, an agreement was reached between the local regulatory authorities and our Advanced Materials site in Pamplona, Spain to relocate our manufacturing operations in order to facilitate new urban development desired by the city. Subsequently, as required by the authorities, soil and groundwater sampling was performed and followed by a quantitative risk assessment. Although unresolved at this time, some level of remediation of site contamination may be required in the future, but the estimated cost is unknown because the remediation approach and timing has not been determined.

        By letter dated March 7, 2006, our Base Chemicals and Polymers facility in West Footscray, Australia, was issued a clean-up notice by the Environmental Protection Authority, Victoria, Australia (the "EPA Victoria") due to concerns about soil and groundwater contamination emanating from the site. The agency revoked the original clean-up notice on September 4, 2007 and issued a revised clean-up notice due to "the complexity of contamination issues" at the site. On August 23, 2010, EPA Victoria revoked the second clean-up notice and issued a revised notice that included a requirement for financial assurance for the remediation. As a consequence, we have entered into negotiations regarding the form of the financial assurance with EPA Victoria. We can provide no assurance that the agency will agree with our proposal, will not seek to institute additional requirements for the site or that additional costs will not be associated with the clean up. This facility has been closed and demolition commenced in May 2010. In the third quarter of 2009, we recorded a $30 million liability related to estimated environmental remediation costs at this site.

        In many cases, our potential liability arising from historical contamination is based on operations and other events occurring prior to our ownership of a business or specific facility. In these situations, we frequently obtained an indemnity agreement from the prior owner addressing remediation liabilities arising from pre-closing conditions. We have successfully exercised our rights under these contractual covenants for a number of sites and, where applicable, mitigated our ultimate remediation liability. We

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cannot assure you, however, that all of such matters will be subject to indemnity, that the prior owner will honor its indemnity or that our existing indemnities will be sufficient to cover our liabilities for such matters.

        By letter of March 15, 2010, the U.S. Department of Justice (the "DOJ") notified us that the U.S. Environmental Protection Agency (the "EPA") has requested that the DOJ bring an action in federal court against us and other PRPs for recovery of costs incurred by the U.S. in connection with releases of hazardous substances from the State Marine Superfund Site in Port Arthur, Texas. As of August 31, 2007, the EPA had incurred and paid approximately $2.8 million in unreimbursed response costs related to the site. Prior to filing the complaint, the DOJ requested that PRPs sign and return a standard tolling agreement (from March 31, 2010 through September 30, 2010) and participate in settlement discussions. We originally responded to an information request regarding this site on March 7, 2005 and identified historical transactions associated with a predecessor of a company we acquired. The prior owners have contractually agreed to indemnify us in this matter. While the DOJ is aware of the indemnity, we may be required to participate in future settlement discussions; therefore, on March 29, 2010, we submitted the signed tolling agreement and offer to negotiate to the DOJ. The tolling agreement has since been extended until March 31, 2011.

        Based on available information and the indemnification rights we believe are likely to be available, we believe that the costs to investigate and remediate known contamination will not have a material adverse effect on our financial condition, results of operations or cash flows. However, if such indemnities are unavailable or do not fully cover the costs of investigation and remediation or we are required to contribute to such costs, and if such costs are material, then such expenditures may have a material adverse effect on our financial condition, results of operations or cash flows. At the current time, we are unable to estimate the total cost, exclusive of indemnification benefits, to remediate any of the known contamination sites.

ENVIRONMENTAL RESERVES

        We have accrued liabilities relating to anticipated environmental cleanup obligations, site reclamation and closure costs and known penalties. Liabilities are recorded when potential liabilities are either known or considered probable and can be reasonably estimated. Our liability estimates are calculated using present value techniques and are based upon requirements placed upon us by regulators, available facts, existing technology and past experience. The environmental liabilities do not include amounts recorded as asset retirement obligations. We had accrued $45 million and $41 million for environmental liabilities as of September 30, 2010 and December 31, 2009, respectively. Of these amounts, $8 million and $5 million were classified as accrued liabilities in our consolidated balance sheets as of September 30, 2010 and December 31, 2009, respectively, and $36 million were classified as other noncurrent liabilities in our consolidated balance sheets for both September 30, 2010 and December 31, 2009. In certain cases, our remediation liabilities may be payable over periods of up to 30 years. We may incur losses for environmental remediation in excess of the amounts accrued; however, we are not able to estimate the amount or range of such potential excess.

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REGULATORY DEVELOPMENTS

Reach Regulations

        In December 2006, the EU parliament and EU council approved a new EU regulatory framework for chemicals called "REACH" (Registration, Evaluation and Authorization of Chemicals). REACH took effect on June 1, 2007, and the program it establishes will be phased in over 11 years. Under the regulation, companies that manufacture in or import into the European Economic Area ("EEA") more than one metric tonne of a chemical substance per year will be required to register such chemical substances and isolated intermediates in a central database. Use authorizations will be granted for a specific chemical if the applicants can show that the risks in using the chemical are adequately controlled; and for chemicals where there are no suitable alternative substances or technologies available and the applicant can demonstrate that the social and economic benefits of using the chemical outweigh the risks. In addition, specified uses of some hazardous substances may be restricted. Furthermore, all applicants will have to study the availability of alternative chemicals. If an alternative is available, an applicant will have to submit a "substitution" plan to the regulatory agency. The regulatory agency will only authorize persistent bio-accumulative and toxic substances if an alternative chemical is not available. The registration, evaluation and authorization phases of the program will require expenditures and resource commitments in order to, for example, participate in mandatory data-sharing forums; acquire, generate and evaluate data; prepare and submit dossiers for substance registration; obtain legal advice and reformulate products, if necessary. We have established a cross-business European REACH team that is working closely with our businesses to identify and list all substances we purchase or manufacture in, or import into, the EEA. We met pre-registration REACH compliance requirements by the November 30, 2008 regulatory deadline, with the exception of pre-registrations for two substances, for a total of 1,850 pre-registrations for substances that we intend to register. We are currently proceeding with the registration of the two substances as provided for under REACH, as well as of the high-volume and high-priority chemicals under the program, which must be registered no later than November 30, 2010. Although the total long-term cost for REACH compliance is not estimable at this time, we spent approximately $3 million, $2 million and $3 million during the years ended December 31, 2009, 2008 and 2007, respectively, on REACH compliance. However, we cannot provide assurance that these recent expenditures will be indicative of future amounts required for REACH compliance.

Greenhouse Gas Regulation

        Although the existence of binding emissions limitations under the Kyoto Protocol after 2012 is in doubt, we expect our operations to be subject to increasing greenhouse gas ("GHG") regulations. Even in the absence of a new global agreement to limit GHGs, we may be subject to additional regulation under the European Union Emissions Trading System as well as new national and regional GHG trading programs. For example, our operations in Australia and selected U.S. states and Canadian provinces may be subject to future GHG regulations under contemplated national or regional emissions trading systems.

        Because the United States has yet to pass federal climate change legislation, domestic GHG efforts are likely to be guided by EPA regulations in the near future. While EPA's GHG programs are

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currently subject to judicial challenge, our domestic operations may become subject to EPA's regulatory requirements when implemented. In particular, expansions of our existing facilities or construction of new facilities may be subject to the Clean Air Act's Prevention of Significant Deterioration Requirements under EPA's Tailoring Rule. In addition, certain aspects of our operations may be subject to GHG monitoring and reporting requirements. If we are subject to EPA GHG regulations, we may face increased monitoring, reporting, and compliance costs.

        We are already managing and reporting GHG emissions, to varying degrees, as required by law for our sites in locations subject to Kyoto Protocol obligations and/or EU emissions trading scheme requirements. Although these sites are subject to existing GHG legislation, few have experienced or anticipate significant cost increases as a result, although it is likely that GHG emission restrictions will increase over time. Potential consequences of such restrictions include capital requirements to modify assets used to meet GHG restriction and/or increases in energy costs above the level of general inflation, as well as direct compliance costs. Currently, however, it is not possible to estimate the likely financial impact of potential future regulation on any of our sites.

        Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth's atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any of those effects were to occur, they could have an adverse effect on our assets and operations.

Chemical Facility Anti-Terrorism Rulemaking

        The U.S. Department of Homeland Security ("DHS") issued the final rule of their "Chemical Facility Anti-Terrorism Standard" in 2007. The initial phase of the rule required all chemical facilities in the U.S. to evaluate their facilities against the DHS Appendix A list of "Chemicals of Interest." Facilities which have specified chemicals in threshold quantities on the Appendix A list were required to submit a "Top Screen" questionnaire to DHS in 2008. In early 2008, we submitted Top Screens for all of our covered facilities. After reviewing the Top Screens, DHS determined that four of our sites were "High Risk" facilities. As a result, we were required to perform security vulnerability assessments at the High Risk sites. The security vulnerability assessments were completed and sent to DHS during the fourth quarter of 2008. Based on their assessment of the security vulnerability assessments, we received notice from DHS that one of our sites was elevated to a high security risk tier. The DHS determined the other three sites to be lower security risk tiers. The three lower-tiered sites have submitted Site Security Plans ("SSPs") to the DHS. The SSPs are based on a list of 18 risk-based performance standards, but security improvements recommended from the SSPs are not anticipated to be material. The high tiered site also submitted an SSP to the DHS, and security upgrades as a result of DHS requirements are estimated to cost $8 million to $10 million to be spent during 2011 and 2012.

MTBE Developments

        We produce MTBE, an oxygenate that is blended with gasoline to reduce vehicle air emissions and to enhance the octane rating of gasoline. Litigation or legislative initiatives restricting the use of MTBE in gasoline may subject us or our products to environmental liability or materially adversely affect our

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

15. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS (Continued)


sales and costs. Because MTBE has contaminated some water supplies, its use has become controversial in the U.S. and elsewhere, and its use has been effectively eliminated in the U.S. market. We currently market MTBE, either directly or through third parties, to gasoline additive customers located outside the U.S., although there are additional costs associated with such outside-U.S. sales which may result in decreased profitability compared to historical sales in the U.S. We may also elect to use all or a portion of our precursor tertiary butyl alcohol to produce saleable products other than MTBE. If we opt to produce products other than MTBE, necessary modifications to our facilities will require significant capital expenditures and the sale of such other products may produce a lower level of cash flow than that historically produced from the sale of MTBE.

        Numerous companies, including refiners, manufacturers and sellers of gasoline, as well as manufacturers of MTBE, have been named as defendants in numerous cases in U.S. courts that allege MTBE contamination in groundwater. The plaintiffs in the MTBE groundwater contamination cases generally seek compensatory damages, punitive damages, injunctive relief, such as monitoring and abatement, and attorney fees. Between 2007 and 2009, we were named as a defendant in 18 of these lawsuits in New York state and federal courts, which we settled in an amount immaterial to us.

        It is possible that we could be named as a defendant in existing or future MTBE contamination cases. We cannot provide assurances that adverse results against us in existing or future MTBE contamination cases will not have a material adverse effect on our business, results of operations and financial position.

INDIA INVESTIGATION

        During the third quarter of 2010, we completed an internal investigation of the operations of Petro Araldite Pvt. Ltd. ("PAPL"), our majority owned joint venture in India. PAPL manufactures base liquid resins, base solid resins and formulated products in India. The investigation initially focused on allegations of illegal disposal of hazardous waste and waste water discharge and related reporting irregularities. Based upon preliminary findings, the investigation was expanded to include a review of the production and off-book sales of certain products and waste products. The investigation included the legality under Indian law and U.S. law, including the U.S. Foreign Corrupt Practices Act, of certain payments made by employees of the joint venture to government officials in India. Records at the facility covering nine months in 2009 and early 2010 show that less than $11,000 in payments were made to officials for that period; in addition, payments in unknown amounts may have been made by individuals from the facility in previous years.

        In May and September 2010, PAPL fully disclosed the environmental noncompliance issues to the local Indian environmental agency, the Tamil Nadu Pollution Control Board. All environmental compliance and reporting issues have been addressed to the agency's satisfaction other than the use of freshwater for the dilution of wastewater effluent discharges and the remediation of several off-site solid waste disposal areas. Also in May 2010, we voluntarily contacted the SEC and the DOJ to advise them of our investigation and that we intend to cooperate fully with each of them. We met with the SEC and the DOJ in early October to discuss this matter. Steps have been taken to halt all known illegal or improper activity. These steps included the termination of employment of management employees as appropriate.

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15. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS (Continued)

        No conclusions can be drawn at this time as to whether any government agencies will open formal investigations of these matters or what remedies such agencies may seek. Governmental agencies could assess material civil and criminal penalties and fines against PAPL and potentially against us and could issue orders that adversely affect the operations of PAPL. We cannot, however, determine at this time the magnitude of the penalties and fines that could be assessed, the total costs to remediate the prior noncompliance or the effects of implementing any necessary corrective measures on the PAPL's operations.

16. STOCK-BASED COMPENSATION PLANS

        Under the Huntsman Stock Incentive Plan (the "Stock Incentive Plan"), a plan approved by stockholders, we may grant non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, phantom stock, performance awards and other stock-based awards to our employees, directors and consultants and to employees and consultants of our subsidiaries, provided that incentive stock options may be granted solely to employees. The terms of the grants are fixed at the grant date. We were authorized to grant up to 32.6 million shares under the Stock Incentive Plan. As of September 30, 2010, we had 12 million shares remaining under the Stock Incentive Plan available for grant. Option awards have a maximum contractual term of 10 years and generally must have an exercise price at least equal to the market price of our common stock on the date the option award is granted. Stock-based awards generally vest over a three-year period.

        The compensation cost under the Stock Incentive Plan for our Company and Huntsman International was as follows (dollars in millions):

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2010   2009   2010   2009  

Huntsman Corporation

  $ 8   $ 5   $ 20   $ 14  

Huntsman International

  $ 6   $ 5   $ 17   $ 10  

        The total income tax benefit recognized in the statements of operations for us and Huntsman International for stock-based compensation arrangements was $5 million and $4 million for each of the nine months ended September 30, 2010 and 2009, respectively.

STOCK OPTIONS

        The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our common stock through the grant date. The expected term of options granted was estimated based on the contractual term of the instruments and employees' expected exercise and post-vesting employment termination behavior. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time

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16. STOCK-BASED COMPENSATION PLANS (Continued)


of grant. The assumptions noted below represent the weighted average of the assumptions utilized for stock options granted during the period.

 
  Three Months
ended September 30,
  Nine Months
ended September 30,
 
 
  2010   2009   2010   2009  

Dividend yield

  NA     5.2 %   3.0 %   15.4 %

Expected volatility

  NA     70.8 %   69.0 %   70.4 %

Risk-free interest rate

  NA     2.9 %   3.1 %   2.5 %

Expected life of stock options granted during the period

  NA     6.6 years     6.6 years     6.6 years  

        During the three months ended September 30, 2010, no stock options were granted.

        A summary of stock option activity under the Stock Incentive Plan as of September 30, 2010 and changes during the nine months then ended is presented below:

Option Awards
  Shares   Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  (in thousands)
   
  (years)
  (in millions)
 

Outstanding at January 1, 2010

    11,677   $ 11.30              

Granted

    654     13.50              

Exercised

    (863 )   2.59              

Forfeited

    (75 )   21.27              
                         

Outstanding at September 30, 2010

    11,393     12.02     7.1   $ 48  
                         

Exercisable at September 30, 2010

    6,800     17.30     6.0     13  
                         

        The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2010 was $6.97 per option. As of September 30, 2010, there was $5 million of total unrecognized compensation cost related to nonvested stock option arrangements granted under the Stock Incentive Plan. That cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

        The total intrinsic value of stock options exercised during the nine months ended September 30, 2010 was $9 million. During the nine months ended September 30, 2009, no stock options were exercised.

NONVESTED SHARES

        Nonvested shares granted under the Stock Incentive Plan consist of restricted stock, which is accounted for as an equity award, and phantom stock, which is accounted for as a liability award

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16. STOCK-BASED COMPENSATION PLANS (Continued)


because it can be settled in either stock or cash. A summary of the status of our nonvested shares as of September 30, 2010 and changes during the nine months then ended is presented below:

 
  Equity Awards   Liability Awards  
 
  Shares   Weighted
Average
Grant-Date
Fair Value
  Shares   Weighted
Average
Grant-Date
Fair Value
 
 
  (in thousands)
   
  (in thousands)
   
 

Nonvested at January 1, 2010

    3,428   $ 5.20     1,880   $ 3.61  

Granted

    1,015     12.96     472     13.50  

Vested

    (1,278 )(1)   7.10     (656 )   4.44  

Forfeited

    (23 )   2.59     (22 )   5.88  
                       

Nonvested at September 30, 2010

    3,142     6.95     1,674     6.04  
                       

(1)
As of September 30, 2010, a total of 329,132 restricted stock units were vested, of which 65,733 vested during the nine months ended September 30, 2010. These shares have not been reflected as vested shares in this table because, in accordance with the restricted stock unit agreements, shares of common stock are not issued for vested restricted stock units until termination of employment.

        As of September 30, 2010, there was $27 million of total unrecognized compensation cost related to nonvested share compensation arrangements granted under the Stock Incentive Plan. That cost is expected to be recognized over a weighted-average period of approximately 1.6 years. The value of share awards that vested during the nine months ended September 30, 2010 and 2009 was $18 million and $11 million, respectively.

17. CASUALTY LOSSES AND INSURANCE RECOVERIES

PORT ARTHUR, TEXAS PLANT FIRE

        On April 29, 2006, our former Port Arthur, Texas olefins manufacturing plant (which we sold to Flint Hills Resources in November 2007) experienced a major fire. The plant was covered by property damage and business interruption insurance through IRIC, and the Reinsurers. The property damage and business interruption insurance was subject to a combined deductible of $60 million. We, together with IRIC, asserted claims to the Reinsurers related to losses occurring as a result of this fire. Our claims were the subject of litigation and an arbitration proceeding with certain of the Reinsurers.

        Prior to December 31, 2009, we received payments on insurance claims with respect to the fire totaling $365 million. On May 14, 2010, we entered into a settlement agreement with the Reinsurers (including those Reinsurers that did not participate in the arbitration proceeding). Pursuant to the settlement agreement, we received a final payment totaling $110 million. Upon receipt of this payment, we agreed to the dismissal with prejudice of the legal and arbitration proceedings relating to our insurance claims.

        As a result of this settlement, we recognized a pretax gain of $110 million in discontinued operations during the second quarter of 2010, the proceeds of which were used to repay secured debt

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17. CASUALTY LOSSES AND INSURANCE RECOVERIES (Continued)


in accordance with relevant provisions of the agreements governing our Senior Credit Facilities. Of the $110 million payment, $34 million was reflected within the statement of cash flows as cash flows from investing activities and the remaining $76 million was reflected as cash flows from operating activities.

2005 U.S. GULF COAST STORMS

        On September 22, 2005, we sustained property damage at our Port Neches and Port Arthur, Texas facilities as a result of a hurricane. We maintain customary insurance coverage for property damage and business interruption. With respect to coverage of these losses, the deductible for property damage was $10 million, while business interruption coverage did not apply for the first 60 days.

        Through December 31, 2009 we received $41 million in payments in connection with our insurance claim for property damage and business interruption losses from the 2005 Gulf Coast storms. On July 29, 2009, the reinsurers filed a declaratory judgment action seeking to compel arbitration between the parties or to declare that the Reinsurers owed nothing further from the storm damage. We filed a counterclaim seeking to declare that the reinsurers owed us the remaining amount of our claim. Subsequently, the parties participated in mediation on February 8-9, 2010 and resolved the remainder of our insurance claim for a total of $7 million. The reinsurers paid that amount within 30 days following the execution of the proof of loss and settlement agreement and represents income from discontinued operations.

18. (EXPENSES) INCOME ASSOCIATED WITH THE TERMINATED MERGER AND RELATED LITIGATION

        On July 12, 2007, we entered into an agreement and plan of merger with Hexion (the "Hexion Merger Agreement"). On June 18, 2008, Hexion, Apollo and certain of their affiliates filed an action in Delaware Chancery Court seeking to terminate the Hexion Merger. We countersued Hexion and Apollo in the Delaware Chancery Court and filed a separate action against Apollo and certain of its affiliates in the District Court of Montgomery County, Texas. On December 13, 2008, we terminated the Hexion Merger Agreement and, on December 14, 2008, we entered into the Apollo Settlement Agreement to settle the Terminated Merger-related litigation and certain other related matters. Pursuant to the Apollo Settlement Agreement, Hexion and certain Apollo affiliates have paid us an aggregate of $1 billion.

        On September 30, 2008, we filed suit in the 9th Judicial District Court in Montgomery County, Texas against the Banks that had entered into a commitment letter to provide funding for the Hexion Merger. On June 22, 2009, we entered into the Texas Bank Litigation Settlement Agreement with the Banks. The Texas Bank Litigation was dismissed with prejudice on June 23, 2009. In accordance with the Texas Bank Litigation Settlement Agreement, the Banks paid us a cash payment of $632 million, purchased the $600 million aggregate principal amount 51/2% senior notes due 2016 (the "2016 Senior Notes") from Huntsman International, and provided Huntsman International with Term Loan C in the principal amount of $500 million. The 2016 Senior Notes and Term Loan C borrowings were at favorable rates to us and were recorded at a combined fair value of $864 million. Accordingly, we recognized a gain of $868 million in connection with the Texas Bank Litigation Settlement Agreement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

18. (EXPENSES) INCOME ASSOCIATED WITH THE TERMINATED MERGER AND RELATED LITIGATION (Continued)

        Expenses associated with the Terminated Merger and related litigation for the three and nine months ended September 30, 2010 were $3 million and $4 million, respectively, and were primarily comprised of $3 million of bonuses paid to certain members of the Board of Directors, upon the recommendation of an independent committee of the Board of Directors, for their efforts in connection with the litigation with Hexion and Apollo following the Terminated Merger. During the three months ended September 30, 2009, we recorded $2 million of legal fees related to the Texas Bank Litigation and, during the nine months ended September 30, 2009, we reported income of $835 million related principally to the gain recognized in connection with the Texas Bank Litigation Settlement Agreement, offset in part by legal fees and employee retention bonuses.

19. INCOME TAXES

        For the three months and nine months ended September 30, 2010 we have computed our provision for income taxes based on the actual effective tax rate for the year-to-date by applying the discrete method. The discrete method was used to calculate the income tax provision as the annual effective tax rate was not considered a reliable estimate of year-to-date income tax expense.

        We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. We evaluate deferred tax assets to determine whether it is more likely than not that they will be realized. Valuation allowances are reviewed on a tax jurisdictional basis to analyze whether there is sufficient positive or negative evidence to support a change in judgment about the realizability of the related deferred tax assets for each jurisdiction. During the nine months ended September 30, 2010, we released a valuation allowance of $14 million on our Australia net deferred tax assets, primarily as a result of discontinuing the operations of the styrenics business.

        During the nine months ended September 30, 2010, we recorded a net decrease in unrecognized tax benefits with a corresponding income tax benefit of approximately $6 million, resulting from the settlement of tax audits, the effective settlement of certain tax positions and the expiration of statutes of limitations net of current year additions.

HUNTSMAN CORPORATION

        In addition to the tax benefits resulting from the valuation allowance release and the unrecognized tax benefit items discussed above, during the nine months ended September 30, 2010, we recognized $17 million of tax benefit on the $169 million of loss on early extinguishment of debt (the majority of the loss is not tax deductible for tax purposes). During the nine months ended September 30, 2009, we recorded discrete tax expense of $309 million related to the $835 million of income related to the Terminated Merger and related litigation and we recorded a valuation allowance of $146 million against the net deferred tax assets in the U.K. Excluding these items, we recorded income tax expense of $83 million and $62 million for the nine months ended September 30, 2010 and 2009, respectively. Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

19. INCOME TAXES (Continued)

HUNTSMAN INTERNATIONAL

        In addition to the tax benefits resulting from the valuation allowance release and the unrecognized tax benefit items discussed above, during the nine months ended September 30, 2010, Huntsman International recognized $9 million of tax benefit on the $23 million of loss on early extinguishment of debt and during the nine months ended September 30, 2009, Huntsman International recorded a valuation allowance of $156 million against the net deferred tax assets in the U.K. Excluding these items, Huntsman International recorded income tax expense of $85 million and $47 million, for the nine months ended September 30, 2010 and 2009, respectively. Our tax obligations are affected by the mix of income and losses in the tax jurisdictions in which we operate.

20. DISCONTINUED OPERATIONS

        During the first quarter of 2010, we ceased operation of our former Australian styrenics business. The following results of operations of our former Australian styrenics business and other corporate assets held for sale have been presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited) (dollars in millions):

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2010   2009   2010   2009  

Revenues

  $ 8   $ 34   $ 43   $ 67  

Costs and expenses

    (10 )   (94 )   (72 )   (133 )
                   

Operating (loss) income

    (2 )   (60 )   (29 )   (66 )

Income tax benefit

    3     68     12     68  
                   

Income (loss) from discontinued

                         
 

operations, net of tax

  $ 1   $ 8   $ (17 ) $ 2  
                   

        Beginning in the first quarter of 2010, the EBITDA of our former Australian styrenics business was included in discontinued operations for all periods presented.

        In 2007, we completed the sale of our former U.S. base chemicals business (the "U.S. Base Chemicals Disposition") and our North American polymers business assets (the "North American Polymers Disposition"). The results of these former businesses are presented as discontinued operations in the accompanying condensed consolidated statements of operations (unaudited).

        During the three and nine months ended September 30, 2010, we recorded after tax (loss) income from discontinued operations related to our former U.S. base chemicals and North American polymers businesses of $(2) million and $65 million, respectively, which consisted primarily of a $110 million pretax gain recorded in connection with the final settlement of insurance claims related to the 2006 fire at our former Port Arthur, Texas plant and a pretax gain of $7 million from the settlement of insurance claims related to the 2005 gulf coast storms, offset in part by income taxes and legal fees related to the arbitration of the fire insurance claim. See "Note 17. Casualty Losses and Insurance Recoveries." During the three and nine months ended September 30, 2009, we recorded an after tax loss from

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20. DISCONTINUED OPERATIONS (Continued)


discontinued operations of $2 million each, related primarily to the revaluation of outstanding product exchange liabilities related to our former U.S. base chemicals business and legal fees related to the arbitration of the insurance claims on the 2006 fire at our former Port Arthur, Texas olefins manufacturing plant.

        U.S. tax law provides for a tax return deduction on investments that are deemed "worthless" for U.S. tax purposes. In connection with the September 2009 announcement of the closure of our former Australian styrenics operations, we concluded that our investment in our Australian styrenics business was worthless for U.S. tax purposes. As a result, we recorded a net tax benefit of $68 million related to the cumulative investments in our Australian styrenics business during the third quarter of 2009.

21. NET INCOME (LOSS) PER SHARE

        Basic (loss) income per share excludes dilution and is computed by dividing net income (loss) attributable to Huntsman Corporation common stockholders by the weighted average number of shares outstanding during the period. Diluted income per share reflects potential dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period, increased by the number of additional shares that would have been outstanding if the potential dilutive units had been exercised or converted.

        On December 23, 2008, we issued the Convertible Notes in an aggregate principal amount of $250 million. Prior to their repurchase, the Convertible Notes were convertible into common stock at a conversion price of $7.857 per share, subject to certain anti-dilution adjustments. On January 11, 2010, we repurchased the entire $250 million principal amount of the Convertible Notes.

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21. NET INCOME (LOSS) PER SHARE (Continued)

        Basic and diluted income (loss) per share is determined using the following information:

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2010   2009   2010   2009  

Numerator:

                         

Basic and diluted income (loss) from continuing operations:

                         

Income (loss) from continuing operations attributable to Huntsman Corporation

  $ 56   $ (74 ) $ (51 ) $ 48  

Convertible notes interest expense, net of tax

                 
                   

Income (loss) from continuing operations attributable to Huntsman Corporation—diluted

    56     (74 )   (51 )   48  
                   

Basic and diluted net income (loss):

                         

Net income (loss) attributable to Huntsman Corporation—basic

    55     (68 )   (3 )   48  

Convertible notes interest expense, net of tax