Hexion Specialty Chemicals Reports Fourth Quarter 2006 Results

COLUMBUS, Ohio - Hexion Specialty Chemicals has reported its results for the fourth quarter and fiscal year ended December 31, 2006.

Revenues of $1.31 billion in 2006 compared to $1.14 billion during the prior year period, an increase of approximately 15 percent.

Operating income improved 34 percent to $59 million versus $44 million in the prior year period. Income for the fourth quarter 2006 was negatively impacted by the delayed timing of contractual pass through of certain raw material price increases and integration costs of $12 million compared to integration costs of $5 million in fourth quarter 2005.

Net loss of $55 million for the 2006 quarter versus a net loss of $14 million in the prior year period. The net loss in the fourth quarter 2006 included a $69 million loss on extinguishment of debt.

Quarterly Segment EBITDA increased 11 percent to $124 million in 2006 compared to $112 million during the prior year period.

Adjusted EBITDA of $664 million for the year ended December 31, 2006.

“Hexion posted improved revenues and Segment EBITDA in the fourth quarter 2006 compared to the fourth quarter 2005, despite key raw materials at historically high levels,” said Craig O. Morrison, Chairman and CEO. “Rapidly escalating raw material costs continued to create a negative lead-lag effect in the fourth quarter 2006. Despite this volatility and some softening volumes for our products, primarily for the North American residential construction and automotive markets, we improved our fourth quarter 2006 Segment EBITDA and operating income by $12 million and $15 million, respectively, when compared to the fourth quarter 2005.”

“During the fourth quarter 2006, we continued to aggressively pursue pricing actions for both contract and non-contract customers to recapture raw material price increases,” Morrison said. “We were generally pleased with our progress to restore margins, although our efforts were hampered by the persistent rise in raw material costs that continued longer than we had previously anticipated. For the full-year, we estimate the lead-lag impact for both contractual and non-contractual customers totaled $60 million.”

In addition, Hexion’s Phase I synergy targets continued to be achieved as planned, with $25 million in synergies realized this quarter. “We remain confident in our ability to achieve the full balance of our $125 million Phase I synergies,” Morrison said. “We have also identified $50 million in Phase II synergies.”

During the quarter, Hexion also announced that it received Australian regulatory approval to purchase the adhesives and resins business of Orica Limited and subsequently completed the transaction in February 2007. The Orica adhesives and resins business manufactures formaldehyde and formaldehyde-based binding resins used primarily in the forest products industry. The business had 2006 sales of $85 million and employs 100 people. The acquisition included three manufacturing facilities, with one site in Australia and two in New Zealand.

As previously announced, Hexion amended its senior secured credit facility in November 2006. The amended and restated credit agreement increased the Company’s current seven-year $1.625 billion term loan facility to $2 billion. The amended and restated credit agreement also provides that the Company’s current seven-year $50 million synthetic letter of credit facility remained outstanding. The Company continues to have access to the $225 million revolving credit facility. In addition, during the fourth quarter 2006, the Company retired $625 million of outstanding senior second secured notes. The Company also sold through its wholly owned finance subsidiaries, Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, $200 million of Second-Priority Senior Secured Floating Rate Notes due 2014 and $625 million of 9¾% Second-Priority Senior Secured Notes due 2014.