PCB cases could force Solutia into bankruptcy
Rachel Melcer Post-Dispatch

Solutia Inc. said that its pockets may not be deep enough to pay out the hundreds of millions of dollars being asked of it in one liability lawsuit and that it certainly can't accommodate the $3 billion attorneys said they expect in another.

In its second-quarter earnings report, filed Thursday with the Securities and Exchange Commission, the chemical company said it might have to turn those pockets inside-out and head into Chapter 11 bankruptcy restructuring.

And that could land the liability in the lap of another local company once connected to Solutia, Creve Coeur-based Monsanto Co.

"I don't think, by putting (the possibility of bankruptcy) in written words, it's any different than what people have been thinking and talking about," said spokesman Glenn Ruskin on Friday at Solutia's headquarters in Town and Country. "It is what it is. It's just a very factual presentation of what's happening to us."

What's happening can be summed up in two words: polychlorinated biphenyls, or PCBs.

Solutia is defending against two lawsuits - one at the state level, the other federal - that claim the homes, health and mental state of thousands of Anniston, Ala., residents were harmed by PCBs produced in their community more than 30 years ago.

The PCBs were made by the former Monsanto Co., a pharmaceutical, chemical and agrochemical company that, over time, became three separate companies: Pharmacia Corp. (now part of Pfizer Inc.), Solutia and the "new" Monsanto.

Through a series of complex legal deals, Solutia agreed to take on liability for PCB litigation, some retiree benefits and environmental cleanups that had belonged to the parent. Since its 1997 spinoff into an independent company, Solutia has spent an average of about $100 million a year on these liabilities, according to Thursday's filing.

The most damning of these, clearly, is the litigation. After settling two PCB liability cases for approximately $40 million each, the company ran into the ongoing state-level Abernathy v. Monsanto case, which has dragged on for more than 20 months and cost Solutia dearly. Its stock price and credit ratings have plunged because of uncertainty over the outcome.

"At the time of our spinoff, and with the economy being fine, these were viewed as manageable cases," spokeswoman Liesel Livingston said.

The Abernathy case "almost defies logic in the manner in which it has been proceeding," Ruskin said. "I don't think anyone predicted it would go the route it's going."

As of Aug. 11, the jury had ruled that Solutia should pay $101 million in compensatory damages to the first 509 of 907 plaintiffs who claim property damage. Jurors have yet to hear arguments over personal injury claims.

Based on the returns so far - which Solutia vows to appeal - attorneys in the separate, federal-level case, Tolbert v. Monsanto, have told Solutia they expect to receive $3 billion for their approximately 15,300 plaintiffs, the filing said.

Add that to Solutia's run-of-the-mill business woes - rising raw material and energy costs, a floundering joint venture, competition from overseas and the down economy - and the company is in dire straits.

Solutia executives made that clear in a July 30 conference call with analysts, saying they would consider "all available alternatives" to meet an impending cash crunch. In the SEC filing, they added more ominous language, saying the alternatives are "including, but not limited to, a potential reorganization under Chapter 11 of the Bankruptcy Code."

Donald Stewart, plaintiff's attorney in the Abernathy case, apparently took Solutia at its word. He did not return calls seeking comment.

But according to Solutia's filing, Stewart filed a motion asking Calhoun County Circuit Court Judge Joel Laird to sever Solutia from the case, if it should file for Chapter 11 protection. A bankruptcy filing would put an immediate stop to the trial and add plaintiffs to a list of Solutia's unsecured creditors, unlikely to receive the full value of their claims.

Laird granted the motion Aug. 6 and also ordered that Pharmacia - and anyone acting in concert with Pharmacia - should not be allowed to seek an extension of the bankruptcy protection for themselves.

And that's where Monsanto comes in.

As the components of the old Monsanto separated, the new Monsanto wound up second in line, after Solutia, in responsibility for the PCB litigation. According to Monsanto's SEC filings, it is "required to indemnify Pharmacia for liabilities that Solutia assumed (in its spinoff) to the extent that Solutia fails to pay, perform or discharge those liabilities."

Last week, Standard & Poor's Ratings Service dropped Monsanto's credit ratings slightly and gave it a "negative" outlook, based on concern over the PCB cases. Moody's Investors Service also reassessed Monsanto but decided not to make any changes in its ratings.

Monsanto said in filings that it might "take action" to reduce the likelihood that it will be called upon to provide that indemnification but did not specify what that might mean.

On Aug. 4, Monsanto agreed to release Solutia from a $39.9 million letter of credit that Solutia had been required to provide it in dealing with a separate litigation.

After the cancellation of that note, Solutia was left with $78 million outstanding on a $180 million credit facility. So it can borrow up to $102 million and has $84 million in cash and cash equivalents on hand.

"That pays bills and that pays people," Livingston said.

The company will have to pay tens of millions of dollars in the second half to meet obligations to Astaris, a joint venture, and to perform certain environmental remediations. And it is trying to refinance debt that will come due in late 2004 and early 2005 - a task made harder with its repeatedly lowered credit ratings.

Still, Solutia is proceeding as a going concern. It is not marching straight toward bankruptcy, Livingston said.

"As a corporation, we're doing the right things," she said. "We're going down a number of paths, bankruptcy obviously being one of those."

Solutia also agreed to settle a class-action lawsuit being brought by owners of properties around Lay Lake, Ala., again over PCB contamination. On Aug. 8, the company agreed to pay $5 million and said a "significant percentage" of that would be covered by its insurance.

"If you look at the details, there are some really great things going on," said Livingston, noting that sales rose to $1.2 billion in the first half, though there was a $40 million net loss. The company's glass innerlayers, for cars and buildings, are doing well. And other product lines remain strong.

"It's just so frustrating, working in an organization with great people, great product lines ... and we've got this cloud hanging over us," she said.

If the company is to recover, it will need to hang on to as many of those people as possible. And, when it comes to its top executives, Solutia's board of directors are willing to pay extra to ensure that will happen.

The company reached retention agreements with John Hunter, chairman, president and chief executive, and Bob Clausen, vice chairman, chief financial officer and chief accounting officer.

Over the next 30 months, each man will be paid cash incentives in installments. On the first and second anniversaries of the agreements, each will receive payments equal to his base pay - $800,000 in Hunter's case, $500,000 in Clausen's. At the 30-month anniversary, each will receive an additional payment equal to half his base pay.

"The board felt very strongly ... that it needed them," Ruskin said. While Solutia's earnings have fallen, the board felt that was due to conditions beyond the executives' control.

All of that was explained to Solutia's employees in an e-mail from the board, Ruskin said. Another e-mail warned them of the SEC filing and its mention of a possible bankruptcy filing.

All in all, Livingston said, they've taken it in stride.

"Openness really tends to calm things," she said. "And these are some resilient people. We've been through a lot and people are willing to work through it, as long as they feel they aren't being kept in the dark."

Reporter Rachel Melcer:
E-mail: rmelcer@post-dispatch.com
Phone: 314-340-8394