Document Y99wbOe3wxnv342kpXvbvGY1E

Baa. 3 January 9 1948 fc'er Assets Administration Viaehington 25, D, C. Gentlemen: Att. Ur. Irving Gumbel, Chief Chemical and Light Metals Branch Industrial Division Office of Real Property Disposal By Agreement of Lease dated March 22, 1946, Southern Alkali Corporation leased from Reconstruction finance Corporation, acting by and through War Assets Corporation, a portion of the magnesium plsnt site and facilities near Lake Charles, Louisiana, knoira and designated as Plancor 264, for conversion into end operation as a plant for the production of chlorine and caustic soda and other chemicals. Pursuant to the provisions of the Lease Agreement, portions of the leesed premises have been cleared and Southern has erected thereon a chlorine-caustic plant having a rated daily production capacity of 240 tons of chlorine and 264 tons of caustic soda. Construction of this plant is substantially completed and it is now ready for operation. On November 26, 1947 I met with your Messrs. Gumbel end Talbot in A&shington, on the invitation of the former, to discuss the possibility of a present outright sale to Southern of the leesed premises on a negotiated basis. It was agreed thet Southern would give the matter further study and would shortly submit for your consideration a proposal to purchase at a price and under terms and conditions which it considered would reflect the present fair value of the leased oremises. Southern is presently disposed to offer to purchase in fee simple ell property both real and personal, including appurtenant rights and ease ments, embreced in the "leased premises" ee defined in the Lease Agreement, together with the Dower transmission line interconnecting the power plant on the leased premises end CitieB Service Refining Corporation's Tutwiler Refinery near Lake Charles and the transformer station adjoining said Refinery, for the sum of Seven Million Five Hundred Thousand Dollars ($7,500,000), The power transmission line end transformer station, though not a part of Plancor 264, were constructed and installed in conjunction therewith to provide stand-by power service to the Refinery end would be useful to bouthem,at least temporarily, for the same purpose. j BB 00033011 ^ o -2- The price above suggested represents, in ouy opinion, the present fair value of the property we are offering to purchase. V.'e know of no formula for precisely measuring the present fair value of industrial land and facilities of this character originally built for one purpose and subsequently converted and adapted to another use. However, in an effort to arrive at a figure that would be reasonably accurate as a measure of its value, we have explored two approaches. ?e first appraised its present value on the basis of construction and conversion costs, making appropriate comparisons with the cost of constructing the chlorine-caustic plant at Natrium, West Virginia, Plancor 394, built by Pittsburgh Plate Glass Company for Defense Plant Corporation in 1942 and leased to and subsequently purchased by Pittsburgh Plate Glass Company, te then endeavored to measure the present cash value of the aggregate rentals that might reasonably be expected under the Lease Agreement over its entire twenty-year term. The following analyses and tabular summaries will indicate the bases of the lump sum price above-mentioned. Valus B&sed on Comparison with Natrium Plant As you know, although Plencor 164 was originally designed and constructed as a magnesium plant, its operation as such was discontinued shortly after its completion because of excessively high production costs resulting from engineering errors end operating difficulties. The super abundance of economical and efficient magnesium productive capacity else where in the country made it imperative that the only hope of salvaging any substantial portion of the government's investment in this plant lay in its conversion End adaptation to the manufacture of some other product. Sine like magnesium metal the production of electrolytic caustic soda and chlorine requires a large amount of direct current electrical energy, as well as large floor space, this plant was obviously more suitable for conversion to such production than to any other use. The Lease was consummated in mutual recognition of this fact. Southern first cleared the cell buildings end surrounding areas of obsolete end useless magnesium producing machinery, equipment end installa tions, at a cost of approximately 3*0,000 of which your Administration paid under the Lease the sum of 116,000. Southern then proceeded at its own expense to construct and install in and about the buildings thus cleared a chlorine-caustic plant at a cost of approximately Eleven Million Collars (11,000,000). In marked contrast to the Lake Charles plant, Plancor 394 at Natrium was assigned ana built in the first instance as t chlorine-caustic plent, with a rated daily productive capacity of 100 tons of chlorine and 110 tons of caustic soda. Built during the war, its construction cost the government approximately 14,30.-,000. In terms of production units this represents approximately 71,500 per ton per day of chlorine production capacity. (Actual cost is used notwithstanding the fact that a subsequent !_J^0003302~7 -3- ftfC appraieal developed a normal reproduction cost for Plsncor 394 of slightly less than $12,475>Q0Q which would result in a<unit cost of approximately $62,350 per ton of daily chlorine production capacity.) On this basis the present 240 ton plant at Lake Charles consist ing of the usable portions of the magnesium plant together with the chlorinecaustic facilities installed by Southern would represent a comparative aggregate value of approximately $17,100,000. The value of the leased premises, for chlorine-caustic production purposes, thus would be $17,100,000 less $11,000,000 or approximately $6,100,000. It is recognized that the leased power plant has greater generat ing capacity than is required for the present 240 ton chlorine-caustic plant. However, this factor is taken into account in our suggested price which is approximately 1254 of the value of the leased premises so calculated, on the basis of comparison with the cost of the most recently constructed independent chlorine-caustic plant in the United States. Value on Basis of Present Value of Probable Twenty-!ear Rentals In an effort to arrive at a dollar figure that would represent the present cash value of the future rents which could reasonably be expected under the Lease during the full term thereof, we have necessarily made certain assumptions of conditions that would obtain with reference to plant capacity, production volume, unit price, etc. he first assume that the plant will remain at its present capacity of 240 tons per day of chlorine throu^iout the lease term. True, the leased premises are of a size that would permit expansion to a 360 ton plant, but we have no present assurance that future business conditions in the area serviced by the plant will warrant such an expansion. lou will recall our original plans celled for en initial plant of 120 tons capacity. It may develop that our initial installation of a 240 ton plant at Lake Charles was unduly optimistic in the long run. Our next assumption relates to production volume. V.hile we are reasonably certain that the plant should operate at or near its rated capacity for the next year, possibly two years, it is reasonable to assume that the twenty-year lease term will embrace substantial periods of business recession or depression. At the outset. Southern predicated its decision to expand its initial plant to a capacity of 240 tone on the hope that the level of production over the twenty-year lease term would average 704 of capacity. V.e are willing to indulge that hope for the purpose of this analysis. Our third assumption relates to price. As you know, chlorine and caustic soda are co-products of the electrolytic process, approximately one and one-tenth tons of caustic soda being produced with each ton of t BB 0003303^1 -4- chlorine. This fact necessarily complicates the problem of forecasting production costs end price with respect to either or both products. This is true because the industrial demends for chlorine and for caustic soda are independent of one another and bear no fixed ratio one to another that would correspond to the technological ratio of their production. Is a consequence, it is reasonable to expect that at intervals during the Lease term the demand for chlorine will far exceed the demand for caustic soda, or vice versa, during which intervals it will be necessary to waste or dump substantial quantities of one of these co-products if the industrial demand for the other is to be met. In an effort to allow for these unavoidable uncertainties incident to the technology of our operations, we have assumed that over the entire period of the Lease term our average net realization from chlorine-caustic sales would approximate $60 per production unit of one ton of. chlorine and one and one-tenth tons of caustic soda. On this assumption, production rentals under the terms of the Lease would aver age $9 per chlorine-caustic production unit. It may be argued that our last assumption of average net sales realization appears unrealistic in the light of the current market prices of $45 per ton of chlorine and $43 per ton of 501 liquid caustic soda. However,- it must be borne in mind that these market prices reflect the present inflationary peak in the general economy. Obviously, long-range price forecasts must reflect long-range expectations as to future business conditions. These must in turn be predicated largely on production and price experience and trends during previous years. Y<1thin the past twenty years, the annual U.. production of chlorine has increased in volume from approximately 83,000 tons in 1925 to a peak of more then l,260,0o0 tons in 1944* Thus, in 1944 the nation's chlorine production wes more than 15 times greeter than in 1925. The years 1945 and 1946 showed a slight reduction in volume. Luring this period the market price of chlorine declined from $60 per ton in 1926 to $35 per ton during the period 1940-1946, a decline of more than 56. Lven the present market price, increased as a result of higher labor and material costs during the past fifteen months is 6till only 43.8^ lees than the 1926 market price despite the general level of wholesale prices which is approximately 160 of the 1926 normal. The growth of production volume and the corresponding decline in market price of caustic soda during the oast twenty years, though less spectacular than in the case of chlorine is nonetheless indicative of definite long-term trends. The attached charts show in tabular form the price and production trends and relationships above described. At the present time the productive capacity of the nation is still being expended, tor example, Diamond Alkali is nearing completion of its 200 ton plant at Houston, Texas which will directly compete with I BB 00 0330TM t 0 n -5- the Lake Charles plant in the southwest market. 'rtyahdotte Chemicals is adding approximately 100 tons to its plant capacity at Yyanaotte, Michigan, and Monsanto at t. Louis, DuPont at Niagara falls and Pittsburgh Plate Glass at Natrium are all making substantial increases in their respective plant capacities. The obvious conclusion to be drawn from the past end present growth of the industry is that the present period of abnormally short supply will be relatively short lived end that soon there will be productive capacity ample to supply the normal demend for chlorine and caustic soda. In fact it is not improbable that there will soon be en excess of productive capacity over demand for these products. Thus, looking ahead over the next tvent# years, we feel reasonably certain that the downward price trend of the past twenty years will resume and continue at a more' gradual pace efter the present inflation has ended. IVe know of no factor that would indicate a reversal of this price trend in the chlorine-caustic industry. Based on the assumptions with respect to capacity, average annual production and net sales realisation, as explained above, we expect that, over the full twenty-year period of the Lease term, Southern should be eble to produce in the leased plant aporoximately 61,000 chlorine-caustic production units, as above described, per year. Computing rentals payable on this production volume at the rate of 9 per production unit (15^ of 60) your Administration or its successor as Lessor should receive during such period an average annual rental of approximately 550,000 or a total rental over the twenty-year period of approximately 11,000,000. Such an annual rental over the twenty-year period of the Lease, figured on a per annum interest basis, would represent a present cash value of $7,474,500, Of the two approaches to the estimated present value of the 1 aeed premises hereinabove discussed, we feel that the second approach involving expected annual and aggregate rentals based on estimated average production and sales realisation, is the more accurate and realistic. Our suggested purchase price more closely approximates the value determined according to this latter epproach, rounded out to a figure that will include the value of the power transmission line and transformer sub-station connecting the leased power plent with Cities Service's power plant at its Tutwiler Refinery nearby. The 7,500,000 purchase price would be payable by Southern over a period of four years, 1,500,000 in cesh upon the execution of a formal purchase agreement ana a like amount at the expiration of each of four twelve mouth periods thereafter. Southern would agree to execute a purchase money mortgage covering the entire plant, including its own installations therein, to secure payment of the unpaid portion of the purchase nrice and would agree to pay interest at a mutually agreedannual rate on all un paid purchase money irom the date of the purchase agreement until payment is made. BB~0003305_2 -6- The foregoing is a summary outline and analysis of the principal features of a proposal for the purchase of the subject property which we of Southern Alkali Corporation consider fair and reasonable. It is submitted at this time in this tentative form for the purpose of opening negotiations with your Administration. Ye are ready end willing to discuss any phase of this proposal with you in detail and to give attention to any suggestions or comments you may wish to make at this time. Vie would appreciate receiving your reaction to this proposal at your eerliest convenience. lours very truly, SOUmRH ALKALI CORPORATION ETAidjg Att. ty 77 Asplunc/h Vice President LTM_00330TJ