Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2012

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

For the transition period from to

LOGO

TPC Group Inc.

TPC Group LLC

(Exact name of registrant as specified in its charter)


Entity	Commission File Number	State of Incorporation	I.R.S. Employer Identification No.
TPC Group Inc.	001-34727	Delaware	20-0863618
TPC Group LLC	333-173804	Texas	74-1778313

5151 San Felipe, Suite 800

Houston, Texas 77056

(Address of principal executive offices, including zip code)

(713) 627-7474

(Registrant’s telephone number, including area code)

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.


TPC Group Inc.		Yes x No ¨

TPC Group LLC		Yes x No ¨

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).


TPC Group Inc.		Yes x No ¨

TPC Group LLC		Yes x No ¨

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.


Entity	Large accelerated filer	Accelerated filer	Non-accelerated filer (Do not check if a smaller reporting company)	Smaller reporting company
TPC Group Inc.	¨	x	¨	¨
TPC Group LLC	¨	¨	x	¨

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


TPC Group Inc.		Yes ¨ No x

TPC Group LLC		Yes ¨ No x

The number of shares outstanding of TPC Group Inc.’s sole class of common stock, as of October 25, 2012 was 15,677,158. TPC Group LLC is a wholly owned subsidiary of TPC Group Inc.

This combined Form 10-Q is separately filed by TPC Group Inc. and TPC Group LLC. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself.

TPC Group LLC, a wholly owned subsidiary of TPC Group Inc., meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format contemplated by paragraphs (b) and (c) of General Instruction H(2) of Form 10-Q.

TPC GROUP INC. AND TPC GROUP LLC

TABLE OF CONTENTS


Item			Page

PART I. FINANCIAL INFORMATION

	Item 1 –	Financial Statements

		TPC Group Inc. and TPC Group LLC – unaudited Condensed Consolidated Financial Statements		4

		Notes to the unaudited Condensed Consolidated Financial Statements		9

	Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

	Item 3 –	Quantitative and Qualitative Disclosures about Market Risk		46

	Item 4 –	Controls and Procedures		46

PART II. OTHER INFORMATION

	Item 1 –	Legal Proceedings		47

	Item 1A –	Risk Factors		47

	Item 2 –	Unregistered Sales of Equity Securities and Use of Proceeds		48

	Item 6 –	Exhibits		48

	Signatures			50

EXPLANATORY NOTE

This report includes the combined filing of TPC Group Inc. (“TPCGI”) and TPC Group LLC (“TPCGLLC”), which is the principal subsidiary of TPCGI. TPCGLLC provided 100% of TPCGI’s total consolidated revenue for all periods presented and nearly 100% of TPCGI’s total consolidated noncash asset base as of September 30, 2012 and December 31, 2011. Unless the context indicates otherwise, throughout this report, the terms “the Company”, “we”, “us”, “our” and “ours” are used to refer to both TPCGI and TPCGLLC and their direct and indirect subsidiaries. Discussions or areas of this report that apply specifically to TPCGI or TPCGLLC are clearly noted in such section.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements include assumptions, expectations, predictions, intentions or beliefs about future events, particularly statements that may relate to the proposed merger between TPCGI and investment funds sponsored by First Reserve Corporation and SK Capital Partners or any alternative acquisition proposals related to TPCGI, future operating results, existing and expected competition, financing sources and availability, potential returns of capital to stockholders, the effects of seasonality and plans related to strategic alternatives or future expansion activities and capital expenditures. Although we believe that such statements are based on reasonable assumptions, no assurance can be given that such statements will prove to have been correct. A number of factors, many of which are outside our control, could cause actual results to vary materially from those expressed or implied in any forward-looking statements, including risks and uncertainties such as volatility in the petrochemicals industry, limitations on the Company’s access to capital, the effects of competition, leverage and debt service, general economic conditions, litigation and governmental investigations, and extensive environmental, health and safety laws and regulations. In addition, factors related to the proposed merger that could cause actual results to differ materially include, but are not limited to (1) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; (2) the outcome of any legal proceedings that may be instituted against TPCGI and others following announcement of the merger agreement; (3) the inability to complete the proposed merger due to the failure to satisfy the conditions to the merger, including obtaining the approval of TPCGI’s stockholders, antitrust clearances and other closing conditions; (4) risks that the proposed merger disrupts current plans and operations of the Company; (5) potential difficulties in employee retention as a result of the proposed merger; (6) the ability to recognize the benefits of the proposed merger; (7) legislative, regulatory and economic developments; and (8) other factors described in our filings with the SEC. More information about the risks and uncertainties relating to the Company and the forward-looking statements are found in “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in TPCGI’s and TPCGLLC’s combined Annual Report on Form 10-K for the year ended December 31, 2011, which is available free of charge on the SEC’s website at http://www.sec.gov. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements herein. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements - TPC Group Inc. (“TPCGI”) and TPC Group LLC (“TPCGLLC”)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	TPCGI						TPCGLLC
	September 30, 2012			December 31, 2011			September 30, 2012		December 31, 2011
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	165,408		$	107,572		$	81,125	$	23,862
Trade accounts receivable		156,019			210,810			156,019		210,810
Due from parent		—			—			948		849
Inventories		94,391			79,334			94,391		79,334
Other current assets		23,268			32,157			23,268		32,157

Total current assets		439,086			429,873			355,751		347,012

Property, plant and equipment, net		503,272			495,780			503,272		495,780
Investment in limited partnership		2,767			2,571			2,767		2,571
Intangible assets, net		5,877			5,909			5,877		5,909
Other assets		34,911			35,567			34,911		35,567

Total assets	$	985,913		$	969,700		$	902,578	$	886,839

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	154,618		$	170,084		$	154,581	$	170,047
Accrued liabilities		33,621			33,824			33,595		33,789

Total current liabilities		188,239			203,908			188,176		203,836
Long-term debt		348,248			348,042			348,248		348,042
Deferred income taxes		129,420			129,381			129,420		129,381

Total liabilities		665,907			681,331			665,844		681,259

Commitments and contingencies

Stockholders’ and members’ equity:		.
Common stock, $0.01 par value, 25,000,000 authorized and 15,854,503 and 15,815,070 issued and 15,677,158 and 15,637,725 shares outstanding at September 30, 2012 and December 31, 2011, respectively		158			158
Additional paid-in capital		174,673			171,679
Accumulated earnings		149,217			120,574
Accumulated other comprehensive income		(723	)		(723	)
Treasury stock, at cost, 177,345 shares		(3,319	)		(3,319	)

Stockholders’ equity		320,006			288,369

Members’ equity								236,734		205,580

Total liabilities and equity	$	985,913		$	969,700		$	902,578	$	886,839

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except per share amounts)


	TPCGI						TPCGLLC
	Three Months Ended September 30,						Three Months Ended September 30,
	2012			2011			2012			2011
Revenue	$	510,602		$	835,280		$	510,602		$	835,280
Cost of sales (excludes items listed below)		432,081			758,150			432,081			758,150
Operating expenses		38,404			35,595			38,404			35,595
General and administrative expenses		11,436			7,562			11,436			7,562
Depreciation and amortization		10,059			9,973			10,059			9,973

Income from operations		18,622			24,000			18,622			24,000

Other (income) expense:
Interest expense		8,580			8,698			8,580			8,698
Interest income		(57	)		(50	)		(18	)		(12	)
Other, net		(258	)		(438	)		(303	)		(473	)

Income before income taxes		10,357			15,790			10,363			15,787
Income tax expense		3,032			6,409			3,032			6,409

Net income	$	7,325		$	9,381		$	7,331		$	9,378

Comprehensive income	$	7,325		$	9,381		$	7,331		$	9,378

Earnings per share:
Basic	$	0.47		$	0.59

Diluted	$	0.46		$	0.58

Weighted average shares outstanding:
Basic		15,677			15,951
Diluted		15,841			16,047

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except per share amounts)


	TPCGI						TPCGLLC
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue	$	1,806,781		$	2,183,763		$	1,806,781		$	2,183,763
Cost of sales (excludes items listed below)		1,570,839			1,911,323			1,570,839			1,911,323
Operating expenses		111,153			109,843			111,153			109,843
General and administrative expenses		27,072			22,982			27,072			22,982
Depreciation and amortization		30,403			30,338			30,403			30,338

Income from operations		67,314			109,277			67,314			109,277

Other (income) expense:
Interest expense		25,410			25,791			25,410			25,791
Interest income		(170	)		(134	)		(46	)		(49	)
Other, net		(736	)		(1,294	)		(872	)		(1,422	)

Income before income taxes		42,810			84,914			42,822			84,957
Income tax expense		14,167			29,827			14,167			29,827

Net income	$	28,643		$	55,087		$	28,655		$	55,130

Comprehensive income	$	28,643		$	55,087		$	28,655		$	55,130

Earnings per share:
Basic	$	1.83		$	3.43

Diluted	$	1.81		$	3.41

Weighted average shares outstanding:
Basic		15,663			16,039
Diluted		15,802			16,166

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited, in thousands)


	TPCGI																		TPCGLLC
	Common Stock				Additional Paid-in Capital			Accumulated Earnings		Accumulated Other Comprehensive Income			Treasury Stock at Cost			Total Stockholders’ Equity			Members’ Equity
	Shares		Amount		Additional Paid-in Capital			Accumulated Earnings		Accumulated Other Comprehensive Income			Treasury Stock at Cost			Total Stockholders’ Equity			Members’ Equity
Balances - December 31, 2011		15,638	$	158	$	171,679		$	120,574	$	(723	)	$	(3,319	)	$	288,369		$	205,580

Net income		—		—		—			28,643		—			—			28,643			28,655
Exercise of stock options		20		—		509			—		—			—			509			—
Vesting of restricted stock		19		—		—			—		—			—			—			—
Shares withheld from vested restricted shares		—		—		(14	)		—		—			—			(14	)		—
Stock compensation expense		—		—		2,499			—		—			—			2,499			2,499

Balances - September 30, 2012		15,677	$	158	$	174,673		$	149,217	$	(723	)	$	(3,319	)	$	320,006		$	236,734

The accompanying notes are an integral part of this condensed consolidated financial statement.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	TPCGI						TPCGLLC
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Cash provided by operating activities	$	95,194		$	44,509		$	95,130		$	44,757

Cash used in investing activities		(37,867	)		(32,587	)		(37,867	)		(32,587	)

Cash flows from financing activities:
Exercise of stock options		509			974			—			—
Purchase of common stock		—			(16,097	)		—			—
Capital distributions to parent		—			—			—			(83,605	)

Cash provided by (used in) financing activities		509			(15,123	)		—			(83,605	)

Increase (decrease) in cash and cash equivalents		57,836			(3,201	)		57,263			(71,435	)
Cash and cash equivalents, beginning of period		107,572			85,594			23,862			83,858

Cash and cash equivalents, end of period	$	165,408		$	82,393		$	81,125		$	12,423

The accompanying notes are an integral part of these condensed consolidated financial statements.

TPC Group Inc. and TPC Group LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – BASIS OF PRESENTATION

1. Organization

The accompanying unaudited condensed consolidated financial statements of TPCGI include the accounts of TPCGI (“Parent”), a Delaware corporation, and its direct and indirect subsidiaries, including its direct wholly owned subsidiaries, Texas Petrochemicals Netherlands B.V. and TPCGLLC, a Texas limited liability company. The accompanying unaudited condensed consolidated financial statements of TPCGLLC include the accounts of TPCGLLC and its direct wholly owned subsidiaries, Texas Butylene Chemical Corporation, Texas Olefins Domestic International Sales Corporation, Port Neches Fuels LLC, and TP Capital Corp. Unless the context indicates otherwise, throughout this report, the terms “the Company”, “we”, “us”, “our” and “ours” are used to refer to both TPCGI and TPCGLLC and their direct and indirect subsidiaries. Discussions or areas of this report that apply specifically to TPCGI or TPCGLLC are clearly noted in such section.

2. Principles of Consolidation

The unaudited condensed consolidated financial statements of TPCGI include the accounts of TPCGI and its direct and indirect subsidiaries, after the elimination of all significant intercompany accounts and transactions. The unaudited condensed consolidated financial statements of TPCGLLC include the accounts of TPCGLLC and its subsidiaries, after the elimination of all significant intercompany accounts and transactions. Our investment in Hollywood/Texas Petrochemicals LP is accounted for under the equity method. The unaudited condensed consolidated financial statements presented have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

3 . Interim Financial Statements

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions prescribed by the Securities and Exchange Commission (“SEC”) for interim financial reporting and do not include all disclosures required by GAAP. Our December 31, 2011 Condensed Consolidated Balance Sheet data was derived from audited financial statements.

The unaudited condensed consolidated financial statements contained in this report include all material adjustments of a normal and recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods. The results of operations for the interim periods presented in this Form 10-Q are not necessarily indicative of the results to be expected for a full year or any other interim period.

The interim condensed consolidated financial statements should be read together with the audited consolidated financial statements and related notes thereto included in TPCGI’s and TPCGLLC’s combined Annual Report on Form 10-K for the year ended December 31, 2011.

NOTE B – DESCRIPTION OF BUSINESS

We have three principal processing facilities, all of which we own, located in Houston, Texas, Port Neches, Texas and Baytown, Texas. The Houston and Port Neches facilities, which process crude C4 into butadiene and related products, are strategically located near most of the significant petrochemicals consumers in Texas and Louisiana. Our Baytown facility primarily produces nonene and tetramer. All three locations provide convenient access to other Gulf Coast petrochemicals producers and are connected to several of our customers and raw materials suppliers through an extensive pipeline network. In addition, our Houston and Port Neches facilities are serviced by rail, tank truck, barge and ocean-going vessel.

The products in our C4 Processing segment include butadiene, primarily used to produce synthetic rubber that is mainly used in tires and other automotive products; butene-1, primarily used in the manufacture of plastic resins and synthetic alcohols; raffinates, primarily used in the manufacturing of alkylate, a component of premium unleaded gasoline; and methyl tertiary butyl ether (“MTBE”), primarily used as a gasoline blending stock. The products in our Performance Products segment include high purity isobutylene (“HPIB”), primarily used in the production of synthetic rubber, lubricant additives, surfactants and coatings; conventional polyisobutylene (“PIB”) and highly reactive polyisobutylene (“HR-PIB”), primarily used in the production of fuel and lubricant additives, caulks, adhesives, sealants and packaging; diisobutylene (“DIB”), primarily used in the manufacture of surfactants, plasticizers and resins; and nonene and tetramer, primarily used in the production of plasticizers, surfactants and lubricant additives. We sell our products primarily to chemical and petroleum based companies in North America.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our principal raw material feedstocks are crude C4, crude isobutylene and propylene. The pricing under our supply contracts and sales contracts is usually linked to a commodity price index, such as indices based on the price of unleaded regular gasoline, butane, isobutane or propylene, or to the price at which we sell the finished product. Our supply and sales contracts, which link pricing to commodity price indices, are considered normal purchase and sales contracts under applicable accounting guidance and are therefore not considered to be derivative instruments. This determination has been made based on the following criteria: (a) the supply and sales contracts conform to normal industry pricing and quantity terms; (b) the underlying price indices are considered clearly and closely related to the product being purchased or sold since they are directly relevant to the market value of the product being purchased or sold; (c) the contracts are settled via physical delivery; (d) the magnitude of the price adjustments based on the changes in the underlying commodity price indices are proportionate to the impact on the fair value of the asset being purchased or sold; and (e) these contracts have been documented as normal supply and sales contracts.

NOTE C – DETAIL AND DISCUSSION OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

Consolidated cash and cash equivalents at September 30, 2012 was $165.4 million, consisting of TPCGI cash of $84.3 million and TPCGLLC cash of $81.1 million. At September 30, 2012, our only depository account subject to Federal Deposit Insurance Corporation’s (“FDIC”) insurance limit of $250,000 on interest bearing accounts had a cash balance of $0.5 million. As of September 30, 2012 we had $149.0 million of our cash and cash equivalents invested in short term money market investments (subject to $250,000 FDIC insurance coverage limit) in a major U.S. bank and $15.9 million in non-interest-bearing depository accounts in banks. We believe that the likelihood of any loss of cash and cash equivalents is remote and that we are not exposed to any significant credit risk on cash and cash equivalents.

TPCGLLC’s due from parent amounts were eliminated in the condensed consolidated financial statements of TPCGI.

Inventories, as of the dates presented, were as follows (in thousands):


	September 30, 2012		December 31, 2011
Finished goods	$	55,506	$	48,757
Raw materials and chemical supplies		38,885		30,577

	$	94,391	$	79,334

Other current assets, as of the dates presented, were as follows (in thousands):


	September 30, 2012		December 31, 2011
Prepaid expense and other	$	7,912	$	4,592
Federal income tax receivable (1)		—		12,387
Repair parts inventory		9,694		9,607
Deferred taxes, net		5,662		5,571

	$	23,268	$	32,157

(1)	Reduction reflects offset of 2012 federal tax provision.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Property, plant and equipment, as of the dates presented, were as follows (in thousands):


	September 30, 2012		December 31, 2011
Land and land improvements	$	41,803	$	41,803
Plant and equipment		630,689		600,918
Construction in progress		63,731		56,668
Other		21,226		20,261

		757,449		719,650
Less accumulated depreciation		254,177		223,870

	$	503,272	$	495,780

Amounts attributable to our investment in Hollywood/Texas Petrochemicals LP for the nine months ended September 30, 2012 were as follows (in thousands):


Balance December 31, 2011	$	2,571
Equity in Earnings		871
Distribution		(675	)

Balance September 30, 2012	$	2,767

Intangible Assets

Changes in the carrying amount of our intangible assets for the nine months ended September 30, 2012 were as follows (in thousands):


	Intangible Assets		Accumulated Amortization			Carrying Value
Balance at December 31, 2011	$	6,220	$	(311	)	$	5,909
Amortization		—		(32	)		(32	)

September 30, 2012	$	6,220	$	(343	)	$	5,877

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The gross carrying amounts and accumulated amortization of intangible assets, as of the dates presented, were as follows (in thousands):


	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
December 31, 2011
Technology license	$	5,499	$	—		$	5,499
Patents		721		(311	)		410

	$	6,220	$	(311	)	$	5,909


	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
September 30, 2012
Technology license	$	5,499	$	—		$	5,499
Patents		721		(343	)		378

	$	6,220	$	(343	)	$	5,877

Other assets, as of the dates presented, were as follows (in thousands):


	September 30, 2012		December 31, 2011
Debt issuance cost	$	7,230	$	9,556
Deferred turnaround cost		14,723		11,376
Other deferred costs		12,958		14,635

	$	34,911	$	35,567

Accrued liabilities, as of the dates presented, were as follows (in thousands):


	TPCGI				TPCGLLC
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Accrued payroll and benefits	$	7,675	$	9,824	$	7,675	$	9,824
Accrued freight		2,679		3,942		2,679		3,942
Accrued interest		14,638		7,869		14,638		7,869
Federal and state income tax		80		953		80		953
Property and sales tax		6,470		7,458		6,470		7,458
Deferred revenue		—		2,973		—		2,973
Other		2,079		805		2,053		770

	$	33,621	$	33,824	$	33,595	$	33,789

The difference at September 30, 2012 and December 31, 2011 between TPCGI’s and TPCGLLC’s accrued liabilities consisted of Delaware franchise taxes payable.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE D – DISCUSSION OF CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME CAPTIONS

Cost of sales for the three and nine months ended September 30, 2011 includes a lower-of-cost-or-market adjustment of $9.8 million to recognize the loss in value of certain inventories as of September 30, 2011 based on estimated recoverable amounts. Of the total charge, $9.4 million related to butadiene and $0.3 million related to fuel products in the C-4 Processing segment and $0.1 million related to isobutylene derivative products in the Performance Products segment. The $9.4 million charge related to butadiene reflected the decline in the butadiene benchmark price from $1.71 per pound in September 2011 to $1.40 per pound in October 2011.

General and administrative expenses include transaction expenses associated with the proposed merger between TPCGI and investment funds sponsored by First Reserve Corporation and SK Capital Partners of $0.4 million, $0.6 million and $4.5 million for the three months ended March 31, June 30 and September 30, 2012, respectively, for a total of $5.5 million for the nine months ended September 30, 2012.

NOTE E – ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

No accounting pronouncements were adopted during the nine months ended September 30, 2012.

NOTE F – DEBT

Outstanding debt, as of the dates presented, was as follows (in thousands):


	September 30, 2012			December 31, 2011
8 1/4% Senior Secured Notes	$	350,000		$	350,000
Unamortized discount on Notes		(1,752	)		(1,958	)

Total long-term debt	$	348,248		$	348,042

Our financing arrangements consist of the 8 ¹ / ₄ % Senior Secured Notes (the “Notes”) and the $175 million revolving credit facility (the “Revolving Credit Facility”).

At September 30, 2012, we had total long-term debt of $348.2 million and the ability to access $173.2 million of availability under the Revolving Credit Facility while still maintaining compliance with the covenants contained therein and in the indenture governing the Notes. Debt outstanding consisted entirely of the non-current amount due on the Notes. As of September 30, 2012, we were in compliance with all covenants set forth in the agreement governing the Revolving Credit Facility and in the indenture governing the Notes.

1. 8 ¹ / ₄ % Senior Secured Notes

The Notes are due October 1, 2017 and interest is paid semi-annually in arrears on April 1 and October 1 of each year. At September 30, 2012, the Notes had a carrying value of $348.2 million and a fair value of approximately $384.1 million.

2. Revolving Credit Facility

The $175 million Revolving Credit Facility matures on April 29, 2014. Availability under the Revolving Credit Facility is limited to the borrowing base, comprised of 85% of eligible accounts receivable and 65% of eligible inventory, as redetermined monthly.

NOTE G – FAIR VALUE

Within the framework for measuring fair value, Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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The standard defines the three levels of inputs used to measure fair value as follows:

•

Level 1: Inputs are unadjusted quoted prices for identical assets or liabilities in active markets, which primarily consist of financial instruments traded on exchange or futures markets.

•

Level 2: Inputs are other than quoted prices in active markets (included in Level 1), which are directly or indirectly observable as of the financial reporting date, including derivative instruments transacted primarily in over-the-counter markets.

•

Level 3: Unobservable inputs, which include inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

As of September 30, 2012 and December 31, 2011, we had no outstanding assets or liabilities measured at fair value on a recurring basis.

NOTE H – DISTRIBUTIONS TO PARENT - TPCGLLC


Distribution Date	Amount
December 30, 2010	$	61.4
March 4, 2011		5.0
March 14, 2011		63.6

	$	130.0

On September 30, 2011, in accordance with conditions set forth in our Revolving Credit Facility agreement and the indenture governing the Notes, an additional $15.0 million was distributed to TPCGI for a total of distributions to TPCGI for the nine months ended September 30, 2011 of $83.6 million. No distributions were made by TPCGLLC to TPCGI in the nine months ended September 30, 2012.

NOTE I – PURCHASE OF SHARES - TPCGI

On March 3, 2011, TPCGI announced that its Board of Directors approved a stock repurchase program for up to $30.0 million of its common stock. Purchases of common stock under the program have been and will be executed periodically in the open market or in privately negotiated transactions in accordance with applicable securities laws. The stock repurchase program does not obligate TPCGI to repurchase any dollar amount or number of shares of common stock, does not have an expiration date and may be limited or terminated at any time by the Board of Directors without prior notice. During the nine months ended September 30, 2011, TPCGI purchased 634,791 shares under the program in the open market at an average of $25.33 per share, for a total of $16.1 million. There were no purchases under the program during the nine months ended September 30, 2012. Total shares purchased as of September 30, 2012 under the $30.0 million program were 634,791 shares at an average of $25.33 per share for a total cost of $16.1 million. As of September 30, 2012, the remaining amount available for stock purchases under the program was $13.9 million. Subsequent to September 30, 2012 and through the filing date of this Form 10-Q, there have been no additional shares purchased. The shares purchased were immediately retired and any additional shares to be purchased under the program will be retired immediately. Any future purchases will depend on many factors, including the market price of the shares, our business and financial position and general economic and market conditions.

NOTE J – EARNINGS PER SHARE - TPCGI

Basic income per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted income per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company, subject to anti-dilution limitations.

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Basic and diluted earnings per share were computed for the periods presented as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Basic earnings per share:
Net income available to common shareholders	$	7,325	$	9,381	$	28,643	$	55,087

Average common shares outstanding		15,677		15,951		15,663		16,039

Basic earnings per share	$	0.47	$	0.59	$	1.83	$	3.43

Diluted earnings per share:
Net income available to common shareholders	$	7,325	$	9,381	$	28,643	$	55,087

Average common shares outstanding		15,677		15,951		15,663		16,039
Add common stock equivalents:
Stock options and restricted stock		164		96		139		127

Diluted average common shares outstanding		15,841		16,047		15,802		16,166

Diluted earnings per share	$	0.46	$	0.58	$	1.81	$	3.41

Anti-dilutive stock options not included in the treasury stock method		—		—		—		—

Average grant price of stock options not included in the treasury stock method	$	—	$	—	$	—	$	—

NOTE K – INCOME TAXES

Given the same operating results, effective tax rates for TPCGI and TPCGLLC are essentially the same. The effective tax rates for both the current and prior year periods were based on the projected effective rates for the respective full years ending December 31. The effective rates for all periods reflected the federal statutory rate of 35%, adjusted for the impact of projected permanent differences, the Section 199 domestic production deduction, state income taxes and adjustments for prior year permanent differences that were identified upon completion of the 2011 tax return in the third quarter of 2012.

During the second quarter of 2012, the Texas Comptroller of Public Accounts completed franchise tax audits for the fiscal years ended June 30, 2007, 2008 and 2009. Based on the results of those audits, the Texas Comptroller of Public Accounts and the Company reached a settlement pursuant to which the Company paid a total of $0.3 million in additional taxes and interest related to the three years covered by the audit. There were no penalties assessed. The settlement amount was included as a discrete item in the income tax provision for the second quarter of 2012.

In early 2012 the IRS initiated an audit of tax years ended June 30, 2008 and 2009. All requested information has been provided to the IRS agent and the audit is in final paperwork stage.

NOTE L – COMMITMENTS AND CONTINGENCIES

1 . Legal Matters

From time to time, we are party to routine litigation incidental to the normal course of our business, consisting primarily of claims for personal injury or exposure to our chemical products or feedstocks, and environmental matters. We intend to defend these actions vigorously and believe, based on currently available information, that adverse results or judgments from such actions, if any, will not be material to our financial condition, results of operations or cash flows. We record reserves for contingencies when information available indicates that a loss is probable and the amount of the loss is reasonably estimable. Management’s judgment may prove materially inaccurate, and such judgment is subject to the uncertainty of litigation. Many of the personal injury or product exposure lawsuits to which we are a party are covered by insurance and are being defended by our insurance carriers. To the extent that we are named in any legal proceedings relating to the assets acquired from Huntsman Petrochemical Corporation and Huntsman Fuels, LP (collectively, “Huntsman”) on June 27, 2006 where the alleged events giving rise to the proceeding occurred prior to our ownership of the assets, we should be indemnified in such proceedings by Huntsman, subject to specified terms and limitations contained in the Purchase and Sales Agreement with Huntsman.

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Our contractual arrangements with our customers and suppliers are typically very complicated and can include, for example, complex index based pricing formulas that determine the price for our feedstocks or finished products. Due to the complicated nature of our contractual arrangements, we can, from time to time, be involved in disputes with our customers and suppliers regarding the interpretation of these contracts, including the index-based pricing formulas. These disputes occur in the normal course of our business, seldom result in actual formal litigation, and are typically resolved in the context of the broader commercial relationship that we have with the customer or supplier. As described above, we record reserves for contingencies when information available indicates that a loss is probable and the amount of the loss is reasonably estimable. Management’s judgment may prove materially inaccurate, and such judgment is subject to the uncertainty of the dispute resolution or litigation process. As of September 30, 2012, we had not recognized any reserves related to unresolved disputes with customers and suppliers as there were no outstanding disputes.

On August 24, 2012, TPC Group entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sawgrass Holdings Inc. (“Sawgrass”) and Sawgrass Merger Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Sawgrass. On September 4, 2012, following the announcement of the Merger Agreement, Alvin Smilow, Trustee for Herman Smilow 2011 Irrevocable Trust, a purported TPC Group stockholder, filed a class action lawsuit in the Court of Chancery of the State of Delaware styled Alvin Smilow, Trustee for the Herman Smilow 2011 Irrevocable Trust v. TPC Group Inc., et al., C.A. No. 7829-VCN. He amended his complaint on September 14, 2012. On September 14, 2012, Greater Pennsylvania Carpenters’ Pension Fund, another purported stockholder of TPC Group, filed a substantially similar class action lawsuit in the Delaware Court of Chancery styled Greater Pennsylvania Carpenters’ Pension Fund v. Michael T. McDonnell, et al., C.A. No. 7865-VCN. On September 21, 2012, West Palm Beach Police Pension Fund, a third purported TPC Group stockholder, filed a substantially similar class action lawsuit in the Delaware Court of Chancery styled West Palm Beach Police Pension Fund v. Michael E. Ducey, et al., C.A. No. 7884-VCN. The lawsuits generally allege that TPC Group’s board of directors breached their fiduciary duties in entering into the Merger Agreement by agreeing to inadequate consideration for TPC Group’s stockholders, by improperly putting their personal interests ahead of the interests of the stockholders, by approving a Merger Agreement that includes deal protection devices allegedly designed to ensure that TPC Group will not receive a superior offer, and by failing to disclose material information in TPC Group’s preliminary proxy statement filed with the SEC on September 10, 2012. The lawsuits also allege that TPC Group, Sawgrass, and Merger Sub aided and abetted the directors in the alleged breaches of their fiduciary duties. In addition, one of the lawsuits alleges that First Reserve and SK Capital aided and abetted the directors in the alleged breaches of their fiduciary duties. The lawsuits seek injunctive relief, unspecified actual and punitive damages, and other relief.

On September 28, 2012, the Delaware Court of Chancery entered an order consolidating the three Delaware lawsuits, and re-captioned the action In re TPC Group, Inc. Shareholders Litigation, Consolidated C.A. No. 7865-VCN. On October 4, 2012, plaintiffs filed a consolidated amended class action complaint, with substantially the same allegations and claims as in the previously filed lawsuits. On October 9, 2012, the Delaware Court of Chancery granted the parties’ scheduling stipulation, which provides a calendar for discovery, depositions and briefing leading to a preliminary injunction hearing currently set for November 14, 2012.

We believe that the lawsuits are without merit and intend to vigorously defend against all claims asserted.

2. Environmental and Safety Matters

We are subject to extensive federal, state, local and foreign environmental laws, regulations, rules and ordinances. These include, for example:

•

the federal Resource Conservation and Recovery Act (“RCRA”) and comparable state laws that impose requirements for the generation, handling, transportation, treatment, storage, disposal and cleanup of waste from our facilities;

•

the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) also known as “Superfund,” and comparable state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent waste for disposal;

•

the federal Clean Water Act (“CWA”) and analogous state laws and regulations that impose detailed permit requirements and strict controls on discharges of waste water from our facilities; and

•

the federal Clean Air Act (“CAA”) and comparable state laws and regulations that impose obligations related to air emissions, including federal and state laws and regulations that recently took effect or are currently under development to address greenhouse gas (“GHG”) emissions.

In the ordinary course of business, we undertake frequent environmental inspections and monitoring and are subject to investigations by governmental enforcement authorities. In addition, our production facilities require a number of environmental permits and authorizations that are subject to renewal, modification and, in certain circumstances, revocation. Actual or alleged

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violations of environmental laws or permit requirements or the discovery of releases of hazardous substances at or from our facilities could result in restrictions or prohibitions on plant operations, significant remedial expenditures, substantial civil or criminal sanctions, as well as, under some environmental laws, the assessment of strict and/or joint and several liabilities. Moreover, changes in environmental regulations or the terms of our environmental permits 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.

We are committed to maintaining compliance with applicable environmental, health, safety (including process safety) and security (“EHS&S”) legal requirements, and we have developed policies and management systems intended to identify the various EHS&S legal requirements applicable to our operations and facilities. We endeavor to enhance and assure compliance with applicable requirements, ensure the safety of our employees, contractors, community neighbors and customers, and minimize the generation of wastes, the emission of air contaminants and the discharge of pollutants. These EHS&S management systems also serve to foster efficiency and improvement and to reduce operating risks.

The following is a summary of some of the existing laws, rules and regulations to which our business operations are subject.

Waste Management. The federal RCRA and comparable state statutes, laws and regulations regulate the generation, handling, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous solid wastes. In the course of our operations, we generate industrial wastes that are regulated as hazardous wastes.

Comprehensive Environmental Response, Compensation, and Liability Act. The federal CERCLA and comparable state statutes, laws and regulations impose joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the current and past owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. Under CERCLA and comparable statutes, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certain environmental studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

Although we believe that we have utilized operating and waste disposal practices that were standard in the industry at the time, hazardous substances, wastes or hydrocarbons may have been released on or under the properties owned or operated by us, or on or under other locations, including off-site locations, where such substances have been taken for disposal. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, we could be liable for damages and could be required to remove previously disposed substances and wastes, or remediate contaminated property to prevent future contamination.

To the extent that liabilities arise from operations or events relating to our Port Neches facility that occurred prior to our ownership of the facility, we will generally be entitled to be indemnified by Huntsman for eight years after the June 2006 closing, subject to the terms and limitations of the indemnity provisions contained in the Purchase and Sale Agreement with Huntsman. We can provide no assurance, however, that all of such matters will be covered by the indemnity, that the indemnifying party will honor its obligations, or that the existing indemnities will be sufficient to cover the liabilities for such matters.

Water Discharges. The federal CWA and comparable state statutes, laws, and regulations impose restrictions and strict controls with respect to the discharge of pollutants in waste water and storm water, including spills and leaks of oil and other substances, into regulated waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the United States Environmental Protection Agency (the “EPA”) or an analogous state agency. Spill prevention, control and countermeasure requirements may require appropriate containment berms and similar structures to help prevent the contamination of regulated waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. Regulatory agencies can also impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.

Air Emissions. The federal CAA and comparable state statutes, laws and regulations regulate emissions of various air pollutants or contaminants through air emissions permitting programs and the imposition of other requirements. Such laws and regulations may require a facility to obtain pre-approval for the construction or modification of projects or facilities expected to emit air contaminants or result in the increase of existing emissions of air contaminants, and to obtain and strictly comply with air permits containing various emissions limitations and operational requirements, including the utilization of specific emission control technologies to limit emissions of particular pollutants. In addition, the EPA and state regulatory agencies have developed, and continue to develop, stringent

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regulations governing emissions of air contaminants at specified sources. Regulatory agencies can also impose administrative, civil and criminal penalties for non-compliance with air permits or other legal requirements regarding air emissions. Depending on the state-specific statutory authority, individual states may be able to impose air emissions limitations that are more stringent than the federal standards imposed by the EPA.

Permits and related compliance obligations under the CAA, as well as changes to state implementation plans for controlling air emissions in regional non-attainment areas, including the Houston-Galveston-Brazoria ozone non-attainment area, may require our operations to incur future capital expenditures in connection with the addition or modification of existing air emission control equipment and strategies. For example, as part of our efforts to comply with rule changes related to the emissions of nitrogen oxides (“NOx”) from our facilities, we installed two new, low-NOx boilers at each of our Houston and Port Neches facilities in fiscal 2006 through 2008, for a total capital investment of approximately $40 million. Failure to comply with these emission control requirements could subject us to monetary penalties, injunctions, conditions or restrictions on operations and enforcement actions. Our facilities may also be required to incur certain material capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions.

In 2011, the EPA adopted new rules establishing new Maximum Achievable Control Technology (MACT) requirements for industrial boilers that are major sources of air pollutants, as well as new rules regulating emissions of air pollutants from commercial and industrial solid waste incineration (CISWI) units. The EPA also adopted new rules regarding how it defines “solid waste” for purposes of determining whether the combustion of certain materials, such as a waste gas stream at an industrial plant, is regulated under the MACT standard or as a CISWI unit. While the EPA has announced that it is reconsidering certain portions of these 2011 rules, the new rules could establish new control requirements for our operations and affect our operating costs. For the time being, the EPA is exercising its enforcement discretion to not pursue enforcement actions for violations of notification deadlines under the Major Source Boiler MACT Rule or the CISWI Rule, as evidenced by its release of a “no action assurance” letter on February 7, 2012.

Air quality standards intended to protect the environment, including the National Ambient Air Quality Standards (“NAAQS”) promulgated by the EPA to address ambient air quality concerns, continue to evolve. The federal CAA requires that the EPA periodically review the science upon which the NAAQS are based and the standards themselves. As a result of this review, the EPA has in recent years lowered certain NAAQS, including the standards for sulfur dioxide, ozone and particulate matter, and may do so again in the future, for these or other pollutants. Changes to the NAAQS may increase the cost of our operations, require the installation of emissions controls, or reduce or delay available business opportunities.

Legislative and regulatory measures to address concerns that emissions of carbon dioxide, methane and other certain gases (commonly referred to as GHG), may be contributing to warming of the Earth’s atmosphere are in various phases of discussions or implementation at the international, national, regional and state levels. The petrochemical industry is a direct source of certain GHG emissions, namely carbon dioxide, and future restrictions on such emissions could impact our future operations. In the United States, federal legislation imposing restrictions on GHG is under consideration. In addition, the EPA has promulgated a series of rulemakings and other actions intended to result in the regulation of GHGs as pollutants under the federal CAA. In April 2010, the EPA promulgated final motor vehicle GHG emission standards, which apply to vehicle model years 2012-2016. The EPA has taken the position that the motor vehicle GHG emission standards triggered CAA permitting requirements for certain affected stationary sources of GHG emissions beginning on January 2, 2011. In May 2010, the EPA finalized the Prevention of Significant Deterioration (“PSD”) and Title V GHG Tailoring Rule, which phased in federal new source review and Title V permitting requirements for certain affected stationary sources of GHG emissions, beginning on January 2, 2011. For sources located in Texas, EPA has taken over the role of PSD permitting authority for GHGs under the terms of a Federal Implementation Plan (FIP). The addition of a separate, federal permitting authority for Texas sources alters the customary process for acquiring PSD permits in Texas and adds uncertainty to the permitting process. These EPA rulemakings could affect our operations and ability to obtain air permits for new or modified facilities.

Furthermore, in 2010, EPA regulations became effective that require monitoring and reporting of GHG emissions on an annual basis, including extensive GHG monitoring and reporting requirements. Following a six-month extension issued by the EPA, the first emissions reports required under the new rule were due on or before September 30, 2011 and we timely submitted such reports accordingly. Although this new rule does not control GHG emission levels from any facilities, it will cause us to incur monitoring and reporting costs.

Lastly, third party lawsuits have been filed against the EPA seeking to require individual companies to reduce GHG emissions from their operations or to recover damages allegedly resulting from those emissions. These and other lawsuits relating to GHG emissions may result in decisions by state and federal courts or regulatory agencies that could impact our operations and ability to obtain certifications and permits to construct future projects.

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Passage of climate change legislation or other federal or state legislative or regulatory initiatives that regulate or restrict GHG emissions in areas in which we conduct business could adversely affect the demand for our products, and depending on the particular program adopted, could increase the costs of our operations, including costs to operate and maintain our facilities, to install new emission controls on our facilities, to acquire allowances to authorize our GHG emissions, to pay any taxes related to our GHG emissions and/or to administer and manage a GHG emissions program. At this time, it is not possible to accurately estimate how laws or regulations addressing GHG emissions would impact our business, but we do not believe that the impact on us will be any more burdensome to us than to any other similarly situated companies.

Our business also could be negatively affected by physical changes in weather patterns. A loss of coastline in the vicinity of our facilities, which are located near the Gulf of Mexico, or an increase in severe weather patterns, could result in damages to or loss of our physical assets and/or a disruption of our supply and distribution channels. Changes of this nature could have a material adverse impact on our business. At this time, it is not possible to accurately project the effects of any such indirect impacts.

In addition to potential direct impacts on us, climate change legislation or regulation and/or physical changes or changes in weather patterns could affect entities that provide goods and services to us and indirectly have an adverse effect on our business as a result of increases in costs or availability of such goods and services. At this time it is not possible to accurately project the effects of any such indirect impacts.

In addition to the requirements imposed upon us by law, we also enter into other agreements from time to time with state and local environmental agencies either to avoid the risks of potential regulatory action against us or to implement improvements that exceed current legal requirements. To that end, in January 2009, we signed an Agreed Corrective Action Order (“ACAO”) with the Texas Commission on Environmental Quality (“TCEQ”) that will require us to reduce our emissions of butadiene and other volatile organic compounds at our Houston facility:

•

The ACAO was approved by the TCEQ Commissioners in April 2009 following a public agenda hearing. The ACAO obligates us to undertake a five-year, $20 million incremental spending program on projects designed to enhance environmental performance that would not normally have been done as part of routine maintenance at our Houston facility. We expect to implement the required measures and incur the incremental spending through a combination of (a) increases in our annual maintenance and capital expenditures throughout the five-year period and (b) additional expenditures in connection with our regularly scheduled turnarounds (typically occurring every three to four years). We expect to fund the incremental expenditures from our operations and/or from borrowings under the Revolving Credit Facility and do not expect the expenditures to have a material impact on our operations or liquidity. As of September 6, 2012, our expenditures on enhanced environmental performance projects in satisfaction of our obligation under the ACAO totaled approximately $9.8 million. We are currently in negotiation with the TCEQ for inclusion of additional project spending towards the obligation. In the ACAO, we also commit to reduce emissions of volatile organic compounds from discrete emissions events at our Houston facility on a rolling twelve-month basis by more than thirty-five percent of annual pre-ACAO levels. We believe we are currently in compliance with all requirements in the ACAO; however, we are currently in discussions with TCEQ regarding the impact, if any, on the ACAO of emissions from a June 2012 upset event caused by a lightning strike at our Houston facility. We do not believe, based on currently available information, that the results of such discussions will be material to our financial condition, results of operations or cash flows.

Chemical Product Safety Regulation. The products we make are subject to laws and regulations governing chemical product safety, including the federal Toxic Substances Control Act (“TSCA”) and chemical product safety laws in jurisdictions outside the United States where our products are distributed. The goal of TSCA is to prevent unreasonable risks of injury to health or the environment associated with the manufacture, processing, distribution in commerce, use or disposal of chemical substances. Under TSCA, the EPA has established reporting, record-keeping, testing and control-related requirements for new and existing chemicals with which we must comply. In September 2009, the EPA initiated a comprehensive approach to enhance the management of chemicals under TSCA and announced principles for strengthening U.S. chemical management laws. Changes in chemicals management regulations or laws could impose additional regulatory burdens and costs on us and others in the industry. In December 2006, the European Union adopted a new regulatory framework concerning the Registration, Evaluation and Authorization of Chemicals (known as REACH), which became effective on June 1, 2007. One of its main objectives is the protection of human health and the environment. REACH requires manufacturers and importers to gather information on the properties of their substances that meet certain volume or toxicological criteria and register the information in a central database to be maintained by the European Chemical Agency in Finland. REACH also contains a mechanism for the progressive substitution of the most dangerous chemicals when suitable alternatives have been identified. We met the deadline of December 1, 2008 for the pre-registration of those chemicals manufactured in, or imported into, the European Economic Area in quantities of one metric ton or more that were not otherwise exempted. Complete registrations containing extensive data on the characteristics of the chemicals will be required in three phases, depending on production

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usage or tonnage imported per year, and the toxicological criteria of the chemicals. The first registrations were required in 2010; subsequent registrations are due in 2013 and 2018. We registered five chemicals in 2010 to meet our initial obligations under REACH. The toxicological criteria considered for registration determinations are carcinogenicity, mutagenicity, reproductive toxicity (category 1 and 2), and aquatic toxicity. Beginning June 1, 2011, companies were required to notify the European Chemicals Agency of products containing above 0.1 percent of substances of very high concern on the candidate list for authorization. None of our products contain substances of very high concern on the candidate list for authorization, and therefore we were not required to report for this deadline. By June 1, 2013, the European Commission will review whether substances with endocrine disruptive properties should be authorized if safer alternatives exist. By June 1, 2019, the European Commission will determine whether to extend the duty to warn from substances of very high concern to those that could be dangerous or unpleasant. We do not expect that the costs to comply with current chemical product safety requirements or REACH will be material to our financial condition, results of operations or cash flows. It is possible that other regions in which we operate could follow the European Union approach and adopt more stringent chemical product safety requirements.

Health and Safety Regulation. We are subject to the requirements of the federal Occupational Safety and Health Act and comparable state statutes, laws and regulations. These laws and the implementing regulations strictly govern the protection of the health and safety of employees. Failure to comply with these requirements could subject us to monetary penalties, injunction and enforcement actions. The Occupational Safety and Health Administration’s (“OSHA”) hazard communication standard, the EPA’s community right-to-know regulations under Title III of CERCLA and similar state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations.

Our operations are also subject to standards designed to ensure the safety of our processes, including OSHA’s Process Safety Management standard. The Process Safety Management standard imposes requirements on regulated entities relating to the management of hazards associated with highly hazardous chemicals. Such requirements include conducting process hazard analyses for processes involving highly hazardous chemicals, developing detailed written operating procedures, including procedures for managing change, and evaluating the mechanical integrity of critical equipment. As a result of a process safety audit of our Houston plant conducted by OSHA’s local office under its process safety Regional Emphasis Program, we entered into a compliance agreement on October 6, 2007 with OSHA, which agreement required us to implement certain corrective actions on a three-year timetable through June 2010. We met all of the abatement and corrective action requirements in compliance with the deadlines in the compliance agreement. In addition, we expect to incur capital expenditures in the future as part of our ongoing baseline capital expenditure program to address the findings of the ongoing process hazard assessments, including expenditures to upgrade equipment and instrumentation at our Houston and Port Neches plants.

Security Regulation. We are subject to the requirements of the United States Department of Homeland Security’s Chemical Facility Anti-Terrorism Standard (CFATS) at our Baytown facility and the Marine Transportation Security Act (“MTSA”) at our Houston, Port Neches, and Lake Charles facilities. These requirements establish minimum standards for security at chemical facilities and marine-based chemical facilities, respectively. For our facilities at Houston and Lake Charles that were subject to the requirements of the MTSA, we are implementing modifications through Federal Emergency Management Agency (FEMA) federal grant programs that cover various percentages of the upgrades ranging from 50 to 100 percent. The Port Neches facility has applied for funding for similar facility improvements and approval is pending. For the Baytown facility, the site security plan is under review by the Department of Homeland Security.

NOTE M – DEFINED BENEFIT PENSION PLAN

For the periods presented, periodic pension expense consisted of the following components (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Components of net periodic pension cost:
Service cost	$	248		$	270		$	744		$	810
Interest cost		74			67			222			201
Expected return on assets		(95	)		(79	)		(285	)		(238	)
Amortization of actuarial loss		11			—			33			—

	$	238		$	258		$	714		$	773

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NOTE N – SEGMENT INFORMATION

We manage our business as two operating segments based on the products we offer and the markets we serve. Our organizational structure is designed to most effectively manage our business segments and service the needs of our customers. Our operating segments are the C4 Processing business and the Performance Products business.

In the C4 Processing segment, we process the crude C4 stream into several higher value components, namely butadiene, butene-1, raffinates and MTBE. In our Performance Products segment, we produce high purity isobutylene and process isobutylene to produce higher value derivative products, such as polyisobutylene and diisobutylene. We also process propylene into nonene, tetramer, and other associated by-products.

We produce steam and electricity for our own use at our Houston facility and we sell a portion of our steam production as well as excess electricity. The revenues and expenses related to sale of steam and electricity are not significant and are included in the C4 Processing segment.

The primary products produced in our C4 Processing segment and their primary uses are as follows:

Butadiene—primarily used to produce synthetic rubber that is mainly used in tires and other automotive products;

Butene-1—primarily used in the manufacture of plastic resins and synthetic alcohols;

Raffinates—primarily used in the manufacturing of alkylate, a component of premium unleaded gasoline; and

Methyl Tertiary Butyl Ether (“MTBE”)—primarily used as a gasoline blending stock.

The primary products produced in our Performance Products segment and their primary uses are as follows:

High purity isobutylene (“HPIB”)—primarily used in the production of synthetic rubber, lubricant additives, surfactants and coatings;

Conventional polyisobutylenes (“PIB”) and highly reactive polyisobutylenes (“HR-PIB”)—primarily used in the production of fuel and lubricant additives, caulks, adhesives, sealants and packaging;

Diisobutylene—primarily used in the manufacture of surfactants, plasticizers and resins; and

Nonene and tetramer—primarily used in the production of plasticizers, surfactants, and lubricant additives.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Reportable Segments

The following table provides unaudited revenues, cost of sales, operating expenses and depreciation and amortization by reportable segment for the periods presented (amounts in thousands). The amount of revenues, cost of sales, operating expenses and depreciation and amortization are the same for both TPCGI and TPCGLLC.

Financial results by operating segment for the periods presented were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Revenue:
C4 Processing	$	406,529	$	713,492	$	1,483,195	$	1,806,890
Performance Products		104,073		121,788		323,586		376,873

	$	510,602	$	835,280	$	1,806,781	$	2,183,763

Cost of sales (1):
C4 Processing	$	352,664	$	654,834	$	1,312,569	$	1,597,414
Performance Products		79,417		103,316		258,270		313,909

	$	432,081	$	758,150	$	1,570,839	$	1,911,323

Operating expenses:
C4 Processing	$	27,453	$	25,179	$	79,527	$	78,542
Performance Products		10,951		10,416		31,626		31,301

	$	38,404	$	35,595	$	111,153	$	109,843

Depreciation and amortization:
C4 Processing	$	4,296	$	4,426	$	13,260	$	13,401
Performance Products		2,580		2,585		7,744		7,932
Corporate		356		309		1,057		1,077
Unallocated		2,827		2,653		8,342		7,928

	$	10,059	$	9,973	$	30,403	$	30,338

Operating segment earnings
C4 Processing	$	22,116	$	29,053	$	77,839	$	117,533
Performance Products		11,125		5,471		25,946		23,731

	$	33,241	$	34,524	$	103,785	$	141,264

(1)	Cost of sales does not include operating expenses or depreciation and amortization expense.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Reconciliation of operating segment earnings to net income

We define operating segment earnings as revenues less cost of sales, operating expenses and segment depreciation and amortization. Depreciation and amortization on certain assets cannot be reasonably allocated among the segments and are shown separately. The following table provides a reconciliation of operating segment earnings to net income for the periods presented (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating segment earnings	$	33,241		$	34,524		$	103,785		$	141,264
Unallocated and corporate depreciation and amortization		(3,183	)		(2,962	)		(9,399	)		(9,005	)
General and administrative expenses		(11,436	)		(7,562	)		(27,072	)		(22,982	)
Unallocated interest and other, net		(8,265	)		(8,210	)		(24,504	)		(24,363	)
Unallocated income tax expense		(3,032	)		(6,409	)		(14,167	)		(29,827	)

Net income	$	7,325		$	9,381		$	28,643		$	55,087

3. Segment Assets

Assets by segment are shown below (in thousands). Assets allocated to the operating segments consist primarily of trade accounts receivable, inventories, property, plant and equipment, and intangible assets. Corporate assets primarily include cash, investment in limited partnership and other assets. Unallocated assets consist of plant assets at our Houston facility that benefit both operating segments, but are not part of a specific production unit or process.


	TPCGI				TPCGLLC
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
C4 Processing	$	430,038	$	477,515	$	430,038	$	477,515
Performance Products		219,097		204,060		219,097		204,060
Corporate		201,231		152,402		117,896		69,541
Unallocated		135,547		135,723		135,547		135,723

	$	985,913	$	969,700	$	902,578	$	886,839

The difference in the corporate assets of TPCGI and TPCGLLC consists nearly 100% of cash.

4. Intersegment Sales

Inter-segment product transfers from the C4 Processing segment to the Performance Products segment are not significant and, as such, are not reported as inter-segment revenues.

5. Geographic Areas

We do not conduct operations or have long-lived assets in countries other than the United States.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE O – SUBSEQUENT EVENTS

We evaluated subsequent events through the date the financial statements were issued and determined that there were no events which should be disclosed or recognized in the financial statements.

NOTE P – SUPPLEMENTAL GUARANTOR INFORMATION

Under the indenture governing the Notes, the Notes are fully and unconditionally and jointly and severally guaranteed (the “Guarantees”) initially by all of TPCGLLC’s material domestic subsidiaries. Each of the subsidiary guarantors is 100% owned by TPCGLLC, and there are no subsidiaries of TPCGLLC other than the subsidiary guarantors. TPCGLLC is a wholly owned subsidiary of TPCGI. TPCGLLC provided 100% of TPCGI’s total consolidated revenue for all periods presented and nearly 100% of TPCGI’s total consolidated noncash asset base as of September 30, 2012 and December 31, 2011. TPCGI and its only other direct wholly owned subsidiary, Texas Petrochemicals Netherlands B.V., are neither issuers nor guarantors of the Notes. Condensed consolidating financial information with respect to the guarantors is presented below. There are no significant restrictions on the ability of TPCGLLC or any subsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

The following tables set forth condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011, condensed consolidating statements of operations for the three and nine months ended September 30, 2012 and 2011 and condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2011. The accompanying consolidating financial information includes the accounts of TPCGI and TPCGLLC (the “Issuer”), and the combined accounts of all guarantor subsidiaries. In the opinion of management, separate complete financial statements of guarantor subsidiaries would not provide additional information that would be material for investors to evaluate the sufficiency of the Guarantees.

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS

September 30, 2012

(In thousands)


	TPCGLLC		Guarantor Subsidiaries			Eliminations			TPCGLLC Consolidated		TPCGI			Eliminations			TPCGI Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	81,124	$	1		$	—		$	81,125	$	84,283		$	—		$	165,408
Trade accounts receivable		156,019		—			—			156,019		—			—			156,019
Due from parent		1,327		(379	)		—			948		(948	)		—			—
Inventories		94,391		—			—			94,391		—			—			94,391
Other current assets		23,268		—			—			23,268		—			—			23,268

Total current assets		356,129		(378	)		—			355,751		83,335			—			439,086

Property, plant and equipment, net		501,891		1,381			—			503,272		—			—			503,272
Investment in limited partnership		2,767		—			—			2,767		—			—			2,767
Intangible assets, net		5,877		—			—			5,877		—			—			5,877
Investment in subsidiaries		927		—			(927	)		—		236,734			(236,734	)		—
Other assets		34,911		—			—			34,911		—			—			34,911

Total assets	$	902,502	$	1,003		$	(927	)	$	902,578	$	320,069		$	(236,734	)	$	985,913

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	154,581	$	—		$	—		$	154,581	$	37		$	—		$	154,618
Accrued liabilities		33,519		76			—			33,595		26			—			33,621

Total current liabilities		188,100		76			—			188,176		63			—			188,239

Long-term debt		348,248		—			—			348,248		—			—			348,248
Deferred income taxes		129,420		—			—			129,420		—			—			129,420

Total liabilities		665,768		76			—			665,844		63			—			665,907

Commitments and contingencies

Equity		236,734		927			(927	)		236,734		320,006			(236,734	)		320,006

Total liabilities and equity	$	902,502	$	1,003		$	(927	)	$	902,578	$	320,069		$	(236,734	)	$	985,913

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2011

(In thousands)


	TPCGLLC		Guarantor Subsidiaries		Eliminations			TPCGLLC Consolidated		TPCGI			Eliminations			TPCGI Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	23,861	$	1	$	—		$	23,862	$	83,710		$	—		$	107,572
Trade accounts receivable		210,810		—		—			210,810		—			—			210,810
Due from parent		792		57		—			849		(849	)		—			—
Inventories		79,334		—		—			79,334		—			—			79,334
Other current assets		32,157		—		—			32,157		—			—			32,157

Total current assets		346,954		58		—			347,012		82,861			—			429,873

Property, plant and equipment, net		494,878		902		—			495,780		—			—			495,780
Investment in limited partnership		2,571		—		—			2,571		—			—			2,571
Intangible assets, net		5,909		—		—			5,909		—			—			5,909
Investment in subsidiaries		960		—		(960	)		—		205,580			(205,580	)		—
Other assets		35,567		—		—			35,567		—			—			35,567

Total assets	$	886,839	$	960	$	(960	)	$	886,839	$	288,441		$	(205,580	)	$	969,700

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	170,047	$	—	$	—		$	170,047	$	37		$	—		$	170,084
Accrued liabilities		33,789		—		—			33,789		35			—			33,824

Total current liabilities		203,836		—		—			203,836		72			—			203,908

Long-term debt		348,042		—		—			348,042		—			—			348,042
Deferred income taxes		129,381		—		—			129,381		—			—			129,381

Total liabilities		681,259		—		—			681,259		72			—			681,331

Commitments and contingencies

Equity		205,580		960		(960	)		205,580		288,369			(205,580	)		288,369

Total liabilities and equity	$	886,839	$	960	$	(960	)	$	886,839	$	288,441		$	(205,580	)	$	969,700

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2012

(In thousands)


	TPCGLLC			Guarantor Subsidiaries			Eliminations			TPCGLLC Consolidated			TPCGI			Eliminations			TPCGI Consolidated
Revenue	$	510,558		$	44		$	—		$	510,602		$	—		$	—		$	510,602
Cost of sales (excludes items listed below)		432,081			—			—			432,081			—			—			432,081
Operating expenses		38,379			25			—			38,404			—			—			38,404
General and administrative expenses		11,436			—			—			11,436			—			—			11,436
Depreciation and amortization		10,028			31			—			10,059			—			—			10,059

Income (loss) from operations		18,634			(12	)		—			18,622			—			—			18,622

Other (income) expense:
Interest expense		8,580			—			—			8,580			—			—			8,580
Interest income		(18	)		—			—			(18	)		(39	)		—			(57	)
Net loss (income) in consolidated subsidiaries		12			—			(12	)		—			(7,331	)		7,331			—
Other, net		(303	)		—			—			(303	)		45			—			(258	)

Income (loss) before income taxes		10,363			(12	)		12			10,363			7,325			(7,331	)		10,357
Income tax expense		3,032			—			—			3,032			—			—			3,032

Net income (loss)	$	7,331		$	(12	)	$	12		$	7,331		$	7,325		$	(7,331	)	$	7,325

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended September 30, 2011

(In thousands)


	TPCGLLC			Guarantor Subsidiaries			Eliminations			TPCGLLC Consolidated			TPCGI			Eliminations			TPCGI Consolidated
Revenue	$	835,264		$	16		$	—		$	835,280		$	—		$	—		$	835,280
Cost of sales (excludes items listed below)		758,150			—			—			758,150			—			—			758,150
Operating expenses		35,588			7			—			35,595			—			—			35,595
General and administrative expenses		7,562			—			—			7,562			—			—			7,562
Depreciation and amortization		9,952			21			—			9,973			—			—			9,973

Income (loss) from operations		24,012			(12	)		—			24,000			—			—			24,000

Other (income) expense:
Interest expense		8,698			—			—			8,698			—			—			8,698
Interest income		(12	)		—			—			(12	)		(38	)		—			(50	)
Net loss (income) in consolidated subsidiaries		12			—			(12	)		—			(9,378	)		9,378			—
Other, net		(473	)		—			—			(473	)		35			—			(438	)

Income (loss) before income taxes		15,787			(12	)		12			15,787			9,381			(9,378	)		15,790

Income tax expense		6,409			—			—			6,409			—			—			6,409

Net income (loss)	$	9,378		$	(12	)	$	12		$	9,378		$	9,381		$	(9,378	)	$	9,381

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2012

(In thousands)


				Guarantor						TPCGLLC									TPCGI
	TPCGLLC			Subsidiaries			Eliminations			Consolidated			TPCGI			Eliminations			Consolidated
Revenue	$	1,806,650		$	131		$	—		$	1,806,781		$	—		$	—		$	1,806,781
Cost of sales (excludes items listed below)		1,570,839			—			—			1,570,839			—			—			1,570,839
Operating expenses		111,078			75			—			111,153			—			—			111,153
General and administrative expenses		27,072			—			—			27,072			—			—			27,072
Depreciation and amortization		30,314			89			—			30,403			—			—			30,403

Income (loss) from operations		67,347			(33	)		—			67,314			—			—			67,314

Other (income) expense:
Interest expense		25,410			—			—			25,410			—			—			25,410
Interest income		(46	)		—			—			(46	)		(124	)		—			(170	)
Net loss (income) in consolidated subsidiaries		33			—			(33	)		—			(28,655	)		28,655			—
Other, net		(872	)		—			—			(872	)		136			—			(736	)

Income (loss) before income taxes		42,822			(33	)		33			42,822			28,643			(28,655	)		42,810

Income tax expense		14,167			—			—			14,167			—			—			14,167

Net income (loss)	$	28,655		$	(33	)	$	33		$	28,655		$	28,643		$	(28,655	)	$	28,643

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2011

(In thousands)


				Guarantor						TPCGLLC									TPCGI
	TPCGLLC			Subsidiaries			Eliminations			Consolidated			TPCGI			Eliminations			Consolidated
Revenue	$	2,183,718		$	45		$	—		$	2,183,763		$	—		$	—		$	2,183,763
Cost of sales (excludes items listed below)		1,911,323			—			—			1,911,323			—			—			1,911,323
Operating expenses		109,821			22			—			109,843			—			—			109,843
General and administrative expenses		22,982			—			—			22,982			—			—			22,982
Depreciation and amortization		30,278			60			—			30,338			—			—			30,338

Income (loss) from operations		109,314			(37	)		—			109,277			—			—			109,277

Other (income) expense:
Interest expense		25,791			—			—			25,791			—			—			25,791
Interest income		(49	)		—			—			(49	)		(85	)		—			(134	)
Net loss (income) in consolidated subsidiaries		37			—			(37	)		—			(55,130	)		55,130			—
Other, net		(1,422	)		—			—			(1,422	)		128			—			(1,294	)

Income (loss) before income taxes		84,957			(37	)		37			84,957			55,087			(55,130	)		84,914

Income tax expense		29,827			—			—			29,827			—			—			29,827

Net income (loss)	$	55,130		$	(37	)	$	37		$	55,130		$	55,087		$	(55,130	)	$	55,087

TPC Group Inc. and TPC Group LLC – (Continued)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2012

(In thousands)


	TPCGLLC			Guarantor Subsidiaries		Eliminations		TPCGLLC Consolidated			TPCGI		Eliminations		TPCGI Consolidated
Cash provided by operating activities	$	95,130		$	—	$	—	$	95,130		$	64	$	—	$	95,194

Cash used in investing activities		(37,867	)		—		—		(37,867	)		—		—		(37,867	)

Cash flows from financing activities:
Exercise of stock options		—			—		—		—			509		—		509

Cash provided by financing activities		—			—		—		—			509		—		509

Increase in cash and cash equivalents		57,263			—		—		57,263			573		—		57,836
Cash and cash equivalents, beginning of period		23,861			1		—		23,862			83,710		—		107,572

Cash and cash equivalents, end of period	$	81,124		$	1	$	—	$	81,125		$	84,283	$	—	$	165,408

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2011

(In thousands)


	TPCGLLC			Guarantor Subsidiaries		Eliminations		TPCGLLC Consolidated			TPCGI			Eliminations		TPCGI Consolidated
Cash provided by (used in) operating activities	$	44,757		$	—	$	—	$	44,757		$	(248	)	$	—	$	44,509

Cash used in investing activities		(32,587	)		—		—		(32,587	)		—			—		(32,587	)

Cash flows from financing activities:
Exercise of stock options		—			—		—		—			974			—		974
Repurchase of common stock		—			—		—		—			(16,097	)		—		(16,097	)
Capital distributions of parent		(83,605	)		—		—		(83,605	)		83,605			—		—

Cash (used in) provided by financing activities		(83,605	)		—		—		(83,605	)		68,482			—		(15,123	)

(Decrease) increase in cash and cash equivalents		(71,435	)		—		—		(71,435	)		68,234			—		(3,201	)
Cash and cash equivalents, beginning of period		83,857			1		—		83,858			1,736			—		85,594

Cash and cash equivalents, end of period	$	12,422		$	1	$	—	$	12,423		$	69,970		$	—	$	82,393

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes of TPC Group Inc. (“TPCGI”) and TPC Group LLC (“TPCGLLC”) included in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and related notes included in TPCGI and TPCGLLC’s combined Annual Report on Form 10-K for the year ended December 31, 2011.

Explanatory Note – TPCGI and TPCGLLC

TPCGLLC is the principal wholly owned subsidiary of TPCGI. TPCGLLC provided 100% of TPCGI’s total consolidated revenue for all periods presented and nearly 100% of TPCGI’s total consolidated noncash asset base as of September 30, 2012 and December 31, 2011. Unless the context indicates otherwise, throughout the following discussion and analysis of our financial condition and results of operations, the terms “the Company”, “we”, “us”, “our” and “ours” are used to refer to both TPCGI and TPCGLLC and their direct and indirect subsidiaries. Any discussions or areas in this report that apply specifically to TPCGI or TPCGLLC are clearly noted as such.

2012 Developments

On August 24, 2012, TPCGI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sawgrass Holdings Inc. (“Sawgrass”) and Sawgrass Merger Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Sawgrass. Sawgrass and Merger Sub are entities formed by investment funds affiliated with First Reserve Corporation and SK Capital Partners. Upon the terms and subject to the conditions of the Merger Agreement, Merger Sub will merge with and into TPCGI, with TPCGI continuing as the surviving corporation as a wholly owned subsidiary of Sawgrass. As a result of the merger, TPCGI will cease to be a publicly traded company.

In the merger, each outstanding share of TPCGI common stock (other than (i) any shares owned by Sawgrass, Merger Sub or any other subsidiary of Sawgrass, (ii) shares owned by stockholders who are entitled to and who properly exercise appraisal rights under Delaware law and (iii) shares owned by TPCGI in treasury or by direct or indirect wholly owned subsidiaries of TPCGI) will be converted into the right to receive $40.00 in cash, without interest, less any applicable withholding taxes.

Consummation of the merger is subject to customary conditions, including without limitation: (i) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of TPCGI’s common stock entitled to vote on the merger; (ii) the expiration or early termination of the waiting period applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), and the approval of the European Commission under Council Regulation (EC) No 139/2004 of the European Union, as amended; and (iii) the absence of any order enjoining or prohibiting the merger. Moreover, each party’s obligation to consummate the merger is subject to certain other conditions, including without limitation: (x) the accuracy of the other party’s representations and warranties contained in the Merger Agreement (subject to certain materiality qualifiers) and (y) the other party’s compliance with its obligations under the Merger Agreement in all material respects. Availability of financing for the Merger is not a condition to Sawgrass’s and Merger Sub’s obligations to consummate the merger. TPCGI and Sawgrass and its affiliates filed their HSR notifications on September 10, 2012 and received notice of early termination of the applicable waiting period on September 21, 2012. A Short Form CO notification was filed with the European Commission on October 8, 2012 and a decision from the European Commission is expected by November 14, 2012.

On October 5, 2012, TPCGI received an unsolicited non-binding proposal to be acquired by Innospec Inc. (“Innospec”). In its proposal letter, Innospec expressed its interest in pursuing an acquisition of all of TPCGI’s common stock for an all-cash purchase price in the range of $44-46 per share. The proposal is subject to certain conditions, including, among others, securing requisite equity and debt financing, completion of due diligence, receipt of internal approvals and negotiation and execution of a definitive agreement. Innospec stated that equity financing for the proposed acquisition is expected to be provided by a fund, Blackstone Capital Partners VI, L.P., managed by a subsidiary of The Blackstone Group L.P. (“Blackstone”) on behalf of its private equity investors. Included with Innospec’s letter was a letter from Barclays Capital Inc. (“Barclays”) stating that Barclays was highly confident of its ability to arrange the required debt financing in connection with the proposed transaction. Consummation of the proposal would be subject to regulatory approvals and other conditions. TPCGI’s board of directors determined that the Innospec proposal would reasonably be expected to lead to a superior proposal (as that term is defined in the Merger Agreement). Consistent with its fiduciary duties, TPCGI’s board of directors has authorized discussions and negotiations with Innospec and is facilitating the due diligence review by it and its financing sources, and, in consultation with its independent legal and financial advisors, will carefully consider and evaluate any definitive proposal that may be received from Innospec. There are no guarantees that these negotiations will result in Innospec making a definitive proposal or, if a definitive proposal is made, that the board of directors will determine it to be a superior proposal to the merger.

On September 13, 2012 we announced that TPCGI’s Board of Directors approved our strategic project to produce on-purpose isobutylene. The project includes refurbishment and restart of certain of our dehydrogenation assets at our Houston operating facility. These dehydrogenation assets will serve to provide isobutylene feedstock for our Performance Products and fuels businesses, including MTBE, polyisobutylene, high purity isobutylene and diisobutylene. The construction is scheduled to be complete allowing start-up late in the second half of 2014, and will produce up to 650 million pounds per year of isobutylene from isobutane, a natural gas liquids feedstock whose production volumes continue to increase as a result of U.S. shale gas development. Total capital expenditure for the project is estimated at $265 million, with $25 million of that amount already spent to date.

Overview

We manage our business and conduct our activities in two operating segments, our C4 Processing segment and our Performance Products segment. These two operating segments are our reporting segments. In the C4 Processing segment, we process the crude C4 stream into several higher value components, namely butadiene, butene-1, raffinates and MTBE. In our Performance Products segment, we produce high purity isobutylene and we process isobutylene to produce higher value derivative products, such as polyisobutylene and diisobutylene. We also process propylene into nonene, tetramer and associated by-products as a part of our Performance Products segment. We produce steam and electricity for our own use at our Houston facility, and we sell a portion of our steam production as well as excess electricity, which are reported as part of our C4 Processing segment.

The primary drivers of our businesses are general economic and industrial growth. Our results are impacted by the effects of economic upturns or downturns on our customers and our suppliers, as well as on our own costs to produce, sell and deliver our products. Our customers generally use our products in their own production processes; therefore, if our customers curtail production of their products, our results could be materially affected. In particular, our feedstock costs and product prices are susceptible to volatility in pricing and availability of crude oil, natural gas and oil-related products such as unleaded regular gasoline. Prices for these products tend to be volatile as well as cyclical, as a result of global and local economic factors, worldwide political events, weather patterns and the economics of oil and natural gas exploration and production, among other things.

Material Industry Trends

We receive most of our crude C4 feedstock from steam crackers, which are designed to process naphtha and natural gas liquids (NGLs) as feedstocks for ethylene production. Crude C4 is a byproduct of the ethylene production process, and the volume of crude C4 produced by the process is driven by both the volume of ethylene produced and the composition of the steam cracker feedstock. Some major ethylene producers have the flexibility to shift from light feedstocks, such as NGLs, to heavier feedstocks, such as naphtha, or vice versa depending on the economics of the feedstock. When ethylene producers process heavier feedstock, greater volumes of crude C4 are produced. However, when light feedstocks are inexpensive relative to heavy feedstocks, the producers may choose to process those light feedstocks instead, a process referred to as “light cracking,” which results in lower volumes of crude C4 production. Throughout 2011 and the first nine months of 2012, NGL prices remained attractive relative to naphtha; consequently, light cracking was prevalent and crude C4 supply was reduced over the same period, which had a negative impact on our C4 Processing segment production and sales volumes. We anticipate that the relatively high cost of crude oil compared to the cost of natural gas that we have seen over the past four to five years will continue, especially in light of the abundance of shale natural gas being discovered and developed in the U.S., and will drive continuation of light cracking well into the future. In addition to the impact of light cracking, crude C4 supply in 2012 has also been negatively impacted by an abnormally high concentration of planned steam cracker maintenance outages.

The favorable market conditions for our products that existed throughout 2010 and through the first nine months of 2011 weakened significantly during the fourth quarter of 2011 as a result of weakening global economic conditions. The deterioration in market conditions for our products during the fourth quarter of 2011 was driven by global economic uncertainty, related in part to the European debt crisis, and a substantial reduction in customer orders as customers reduced their inventory levels in response to a more curtailed short-term economic outlook and lower end-use demand for their products.

In early 2012, based on an anticipated recovery in global economic conditions relative to the fourth quarter of 2011, we experienced a sequential strengthening in demand for our products that was bolstered by customers restocking their low 2011 year-end inventory levels in anticipation of an upturn in end-use demand. Regarding butadiene, the upturn in demand in the first quarter of 2012 coincided with the abnormally high concentration of planned ethylene plant maintenance outages, which significantly curtailed the availability of crude C4 feedstock, and in turn resulted in a tight supply of finished butadiene. This tight supply condition, in conjunction with the upturn in demand, drove the contract price of butadiene from 0.98/lb in December 2011 to $1.46/lb. in March 2012, an increase of 49%.

In the early part of the second quarter of 2012, the favorable economic trend of the first quarter began to wane in light of mixed signals regarding the global economic outlook for the remainder of 2012. The reversal of what appeared to be a positive trend in the first quarter was driven by renewed concern over the instability of the European economy and its potential impact on the U.S. economy, as well as indications of a slowing economic growth rate in the emerging market economies. Consequently, in the early part of the second quarter of 2012 we began to experience a general softening in demand for our products, especially for butadiene, which was exacerbated by customers’ concerns regarding their inventory levels, which had been replenished during the first quarter. As a result, after increasing to $1.55/lb. in April 2012, the price of butadiene declined to $1.48/lb in May 2012 and to $1.09/lb. in June 2012, a 30% decline over the last two months of the quarter. As a result of further weakening in selling prices in July 2012, we recorded a lower-of-cost-or-market adjustment of $2.8 million to write down the carrying value of our inventories, primarily butadiene, at June 30, 2012. The soft demand and downward trend in butadiene pricing that we experienced during the second quarter of 2012 continued through the third quarter. The price of butadiene declined 22% during the third quarter of 2012, from $1.09/lb. in June to $0.84/lb. in September; however, there are recent indications that pricing may be stabilizing as the October contract price was unchanged from the September price. As anticipated, we experienced seasonal strength in demand and margins for fuel products during the third quarter of 2012.

Outlook

We continue to see a business environment characterized by general economic weakness, continued destocking in the synthetic rubber chain and a relative balance between supply and demand at the present time. We are also beginning to experience the normal seasonal decline in margins in our fuels-related products.

TPCGI and TPCGLLC Results of Operations

The following table provides unaudited sales volumes, revenue, cost of sales, gross profit contribution (“GPC”) (defined below), operating expenses and TPCGI Adjusted EBITDA (defined below) by reportable segment (amounts in thousands) for the three and nine months ended September 30, 2012 and 2011. Please refer to this information, as well as our unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, when reading our discussion and analysis of results of operations below. All information provided in the table below, except sales volumes, is derived from our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income. All information provided in the table is the same for both TPCGI and TPCGLLC, except for minor differences in Corporate expenses, which are discussed in note 6 to the table.

GPC, as used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, is defined as revenue less cost of sales as reported in our Condensed Consolidated Statements of Operations and Comprehensive Income, and is presented by operating segment in the table below. GPC is the residual amount that is available to cover all other expenses after deducting the variable costs to produce and distribute our products from revenue.

Adjusted EBITDA is not a measure computed in accordance with generally accepted accounting principles in the United States (“GAAP”). A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets, or statements of cash flows (or equivalent statements); or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. The table below provides a reconciliation of TPCGI Adjusted EBITDA to TPCGI Net Income, the GAAP measure most directly comparable to Adjusted EBITDA.

Adjusted EBITDA is presented and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations because management believes it enhances understanding by investors and lenders of the Company’s financial performance. As a complement to financial measures provided in accordance with GAAP, management believes that Adjusted EBITDA assists investors and lenders who follow the practice of some investment analysts who adjust GAAP financial measures to exclude items that may obscure underlying performance outlook and trends and distort comparability. In addition, management believes a presentation of Adjusted EBITDA on a segment and consolidated basis enhances overall understanding of our performance by providing a higher degree of transparency for such items and providing a level of disclosure that helps investors understand how management plans, measures and evaluates our financial performance and allocates capital. Since Adjusted EBITDA is not a measure computed in accordance with GAAP, it is not intended to be presented herein as a substitute to operating income or net income as indicators of the Company’s financial performance. Adjusted EBITDA is the primary performance measurement used by our senior management and TPCGI’s Board of Directors to evaluate financial results and to allocate capital resources between our business segments.

We calculate Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization (EBITDA), which is then adjusted in certain periods to remove or add back items that, in the opinion of management, distort comparability between periods. As shown below in the reconciliation of TPCGI Adjusted EBITDA to TPCGI Net Income, the GAAP measure most directly comparable to

Adjusted EBITDA, there was one adjustment to EBITDA for the three and nine months ended September 30, 2012, but there were no adjustments for the comparable prior year periods.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Sales volumes (lbs) (1):
C4 Processing		544,739			669,067			1,651,238			1,941,515
Performance Products		148,142			149,063			419,175			487,145

		692,881			818,130			2,070,413			2,428,660

Revenue:
C4 Processing	$	406,529		$	713,492		$	1,483,195		$	1,806,890
Performance Products		104,073			121,788			323,586			376,873

	$	510,602		$	835,280		$	1,806,781		$	2,183,763

Cost of sales (2)(3):
C4 Processing	$	352,664		$	654,834		$	1,312,569		$	1,597,414
Performance Products		79,417			103,316			258,270			313,909

	$	432,081		$	758,150		$	1,570,839		$	1,911,323

Gross profit contribution (4):
C4 Processing	$	53,865		$	58,658		$	170,626		$	209,476
Performance Products		24,656			18,472			65,316			62,964

	$	78,521		$	77,130		$	235,942		$	272,440

Operating expenses:
C4 Processing	$	27,453		$	25,179		$	79,527		$	78,542
Performance Products		10,951			10,416			31,626			31,301

	$	38,404		$	35,595		$	111,153		$	109,843

TPCGI Adjusted EBITDA (5)(6):
C4 Processing	$	26,412		$	33,479		$	91,099		$	130,933
Performance Products		13,705			8,056			33,690			31,663
Corporate (7)		(6,690	)		(7,124	)		(20,831	)		(21,687	)

	$	33,427		$	34,411		$	103,958		$	140,909

(1)	Sales volumes represent product sales volumes only and do not include volumes of products delivered under tolling or similar arrangements, in which we do not purchase the raw materials, but process raw materials for another party for a specified fee.

(2)	Cost of sales does not include operating expenses or depreciation and amortization expense.

(3)	Cost of sales for the three and nine months ended September 30, 2011 includes a lower-of-cost-or-market charge of $9.8 million, of which $9.7 million relates to the C4 Processing segment and $0.1 million relates to the Performance Products segment.

(4)	Gross profit contribution is defined herein as revenue less cost of sales.

(5)	See above for a discussion of TPCGI Adjusted EBITDA and see below for reconciliations of TPCGI Adjusted EBITDA to TPCGI Net Income for the periods presented

(6)	TPCGI Adjusted EBITDA for the C4 Processing and Performance Products operating segments was the same for TPCGI and TPCGLLC for all periods presented. Total TPCGI Adjusted EBITDA differs slightly from total TPCGLLC Adjusted EBITDA due to minor differences in miscellaneous corporate expenses.

(7)	Corporate expenses exclude transaction expenses associated with the proposed merger between TPCGI and investment funds sponsored by First Reserve Corporation and SK Capital Partners of $4.5 million and $5.5 million for the three and nine months ended September 30, 2012, respectively.

The following table provides a reconciliation of TPCGI Adjusted EBITDA to TPCGI Net Income (in thousands) for the three and nine months ended September 30, 2012 and 2011. Net Income is the most directly comparable GAAP measure reported in the Condensed Consolidated Statements of Operations and Comprehensive Income.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
TPCGI Net Income	$	7,325	$	9,381	$	28,643	$	55,087

Income tax expense		3,032		6,409		14,167		29,827
Interest expense, net		8,523		8,648		25,240		25,657
Depreciation and amortization		10,059		9,973		30,403		30,338

TPCGI EBITDA		28,939		34,411		98,453		140,909
Transaction expenses (1)		4,488		—		5,505		—

TPCGI Adjusted EBITDA	$	33,427	$	34,411	$	103,958	$	140,909

(1)	These expenses are the non-recurring expenses incurred and recognized in our 2012 third quarter and year-to-date results associated with the proposed merger between TPCGI and investment funds sponsored by First Reserve Corporation and SK Capital Partners.

Contractual linkages of raw material costs and selling prices of finished products to commodity indices

The cost of our raw material feedstock purchases is usually determined by application of index-based formulas contained in many of our raw material supply contracts. Through these index-based formulas, our raw material costs are linked to commodity market indices (such as the published contract price for butadiene and indices based on the price of unleaded regular gasoline, butane, isobutane or propylene) or to the selling price of the related finished product. The selling prices for our finished products are also typically determined from index-based formulas contained in many of our sales contracts and, in most cases, the indices used to determine finished product selling prices are the same indices used to determine the cost of the corresponding raw material feedstock. The linkage between the costs of our raw material feedstocks and the selling prices of our finished products to the same indices mitigates, to varying degrees, our exposure to volatility in our average material margin per pound (which we define as the difference between average revenue per pound and average raw material cost per pound). Since these index-based pricing formulas provide relative stability in our average material margin per pound over time, the material margin percentage (which we define as the difference between average revenue per pound and average raw material cost per pound as a percentage of average revenue per pound) tends to decline during periods in which selling prices and raw material costs trend upward and tends to increase during periods when selling prices and raw material costs trend downward. Although the index-based pricing formulas provide relative stability in our average material margin per pound over time, it is not perfectly constant due to various factors, including those listed below.

•

We may purchase raw material feedstocks in one period based on market indices for that period, and then sell the related finished products in a later period based on market indices for the later period. Changes in selling prices of finished products, based on changes in the underlying market indices between the period the raw material feedstocks are purchased and the related finished products are sold, lessens the effect of the matching indices and causes variation in our average material margin per pound. For example, we may purchase crude C4 at pricing based on the January butadiene index but sell the finished butadiene at pricing based on the February butadiene index. If the butadiene index for January and February are the same, we would expect to realize substantially the same unit margins regardless of the absolute value of the index. However, if the index increases between January and February, we would realize a temporary margin expansion until pricing stabilizes; and conversely, if the index decreases, we would realize a temporary margin contraction. The magnitude of the effect on the average material margin per pound and the material margin percentage depends on the magnitude of the change in the underlying indices between the period the raw material is purchased and the period the finished product is sold and the quantity of inventory impacted by the change.

•

Although most of our supply and sales contracts contain index-based formulas, varying proportions of our raw material purchases and finished product sales are done on a spot basis or otherwise negotiated terms. In addition, while many of the index-based formulas in our contracts are simply based on a percentage of the relevant index, others apply adjustment factors to the market indices that do not fluctuate with changes in the underlying index. Although non-fluctuating adjustment factors would not impact the material margin per pound, they can impact the material margin percentage. During periods when market indices are high, the use of non-fluctuating adjustment factors tends to reduce the material margin percentage; and conversely, during periods when market indices are low the non-fluctuating adjustment factors tend to increase the material margin percentage.

•

Under some of our raw material purchase contracts the cost of the raw materials are based on a percentage of the relevant market index and under some of our sales contracts the selling price of the related finished product is based on a higher percentage of the same market index. As a result, the average material margin per pound tends to increase during periods in which the market indices are trending upward and tends to decrease during periods in which the market indices are trending downward, although the material margin percentage tends to be relatively constant.

•

Finished product selling price formulas under some of our sales contracts, primarily in the Performance Products segment, are based on commodity indices not for the period in which the sale occurs but for either a prior or subsequent period. The effect on profit margins of these selling price formulas is diminished during times of relatively stable market indices, but can have a substantial effect on both the average material margin per pound and the material margin percentage during times of rapidly increasing or decreasing market indices.

Average Material margin per pound and material margin percentage

The table below provides the average material margin per pound and the material margin percentage (both as defined above) for each period presented.

The overall average revenue and average raw material cost per pound for the third quarter of 2012 decreased $0.28 and $0.30, respectively, compared to the third quarter of 2011, which resulted in an increase in the average material margin per pound from $0.14 in the third quarter of 2011 to $0.16 in the third quarter of 2012. As a result of the combined impact of the higher unit margin and the significantly lower selling prices and raw material costs, the material margin percentage increased from 14% to 22%. The average material cost per pound in the third quarter of 2011 included the effect of a lower-of-cost-or-market charge of $9.8 million, which increased the unit cost by $0.01 and reduced the material margin percentage by 1%.

The overall average revenue per pound for the first nine months of 2012 of $0.87 was down $0.03, while the overall average raw material cost per pound of $0.72 was down $0.02. As a result, both the material margin per pound and the material margin percentage for the first nine months of 2012 were slightly lower versus the comparable prior year period.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Average revenue per pound ($)	$	0.74		$	1.02		$	0.87		$	0.90
Average raw material cost per pound ($)		0.58			0.88			0.72			0.74
Average material margin per pound ($)		0.16			0.14			0.15			0.16
Material margin percentage		22	%		14	%		17	%		18	%

Butadiene Price Impact

As discussed above, a substantial portion of our product selling prices and raw material costs are linked to the same commodity indices and this linkage mitigates, to varying degrees, our exposure to volatility in our profit margins. However, the stabilizing effect of using matching indices is lessened when we do not purchase the feedstock and sell the finished product in the same period. Regarding butadiene (our largest individual product line based on both sales volume and earnings), the linkage between our raw material cost and finished product selling price is the published contract price for butadiene. As a result of the timing between the purchase of crude C4 in one period and sale of finished butadiene in a later period, unit margins will expand as butadiene pricing trends upward and will contract as butadiene pricing trends downward. When pricing is stable, our unit margins are stable and represent the value of the processing and aggregation services we provide to our customers.

The table below provides the percentage change in the butadiene contract price and corresponding impact on our GPC (in millions) for each period presented:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
% increase (decrease) in butadiene contract price		(22	)%		12	%		(14	)%		98	%
Positive (negative) impact on gross profit contribution (1)	$	(5	)	$	6		$	(1	)	$	40

(1)

The $6 million and $40 million impacts of the change in butadiene price for the three and nine month periods ended September 30, 2011, respectively, include positive impacts of $15 million and $50 million, respectively, from the increase in butadiene pricing, partially offset by a $9.4 million lower-of-cost-or-market charge related to the write-down of butadiene inventory at September 30, 2011 due to the decline in the butadiene benchmark price from $1.71/lb. in September 2011 to $1.40/lb. in October 2011.

As shown in the table above, the fluctuations in the contract price of butadiene during the periods presented had significant impacts on our GPC. The impact over the first nine months of 2012 was a negative $1 million compared to a positive $40 million over the first nine months of 2011. The cumulative impact on the first nine months of 2012 consisted of a first quarter positive impact of $17 million and second and third quarter negative impacts of $13 million and $5 million, respectively. The cumulative impact on the first nine months of 2011 consisted of positive impacts during the first three quarters of $8 million, $26 million and $6 million, respectively.

The $17 million positive impact in the first quarter of 2012 resulted from a steady upward trend in contract pricing, from $0.98/lb. in December 2011 to $1.46/lb. in March 2012. The $18 million negative impact over the course of the second and third quarters of 2012 reflected a downward trend in contract pricing from $1.46/lb. in March 2012 to $0.84/lb. in September 2012. The $40 million positive impact over the first nine months of 2011 reflected a steady upward trend in contract pricing from $0.86/lb. in December 2010 to $1.71/lb. in September 2011, which was then reduced by a lower-of-cost-or-market charge in September, which resulted from a decline in contract pricing from $1.71 in September 2011 to $1.40 in October 2011.

The following table summarizes the primary indices which impact our revenues and raw material costs by segment.


Segment / Finished Product	Revenues	Raw Material Costs
C4 Processing Segment
Butadiene	Butadiene	Butadiene
Butene – 1	Unleaded regular gasoline	Unleaded regular gasoline
Raffinates	Unleaded regular gasoline	Unleaded regular gasoline
MTBE	Unleaded regular gasoline	Unleaded regular gasoline

Performance Products Segment
High purity isobutylene	Butane	Unleaded regular gasoline
Diisobutylene	Butane	Butane
Polyisobutylene	Butane	Butane
Nonene	Propylene	Propylene
Tetramer	Propylene	Propylene

The following table summarizes the average index prices for each period presented.


	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		% Chg.			2012		2011		% Chg.
Average commodity prices:
Butadiene (cents/lb)(1)		88.8		172.6		-49	%		116.5		136.4		-15	%
Unleaded regular gasoline (cents/gal)(2)		297.7		288.9		3	%		297.6		285.7		4	%
Butane (cents/gal)(3)		143.5		188.4		-24	%		165.9		183.5		-10	%
Propylene (cents/lb)(1)		49.8		76.5		-35	%		60.4		78.5		-23	%

(1)	Industry pricing was obtained through IHS, formerly CMAI.

(2)	Industry pricing was obtained through Platts.

(3)	Industry pricing was obtained through OPIS.

Three months ended September 30, 2012 versus three months ended September 30, 2011

Revenue, cost of sales, operating expenses, general and administrative expenses, depreciation and amortization expense and interest expense were the same for TPCGI and TPCGLLC for each period discussed below.

Revenue

Total revenue for the quarter ended September 30, 2012 was $510.6 million compared to $835.3 million for the prior year quarter. The decrease of $324.7 million, or 39%, reflected a 15% decrease in overall sales volume and a 28% decrease in overall average unit selling price.

C4 Processing segment revenue of $406.5 million for the third quarter of 2012 was down $307.0 million, or 43%, compared to third quarter 2011 revenue of $713.5 million. The decrease reflected the combined effect of 19% lower sales volume, which had a negative impact of $127 million, and a 30% decrease in overall average unit selling price, which had a negative impact of $180 million. The lower sales volume and lower average selling price for the segment compared to the third quarter of 2011 were driven primarily by the continuation of the relatively weaker market conditions and demand for butadiene that we have seen throughout 2012, as well as crude C4 feedstock restrictions related to the abnormally high concentration of planned ethylene cracker maintenance outages and unplanned supplier outages. The 30% decrease in overall average unit selling price was primarily the result of a 45% decrease in the average unit selling price for butadiene, partially offset by slightly higher average selling prices for butene-1 and fuel products. The lower selling price for butadiene was primarily the result of a 49% decrease in the average benchmark price for butadiene and the slightly higher selling prices for butene-1 and fuel products was primarily the result of a 3% increase in the average price of unleaded regular gasoline.

Performance Products segment revenue for the three months ended September 30, 2012 was $104.1 million compared to $121.8 million for the third quarter of 2011, a decrease of $17.7 million, or 15%. The lower revenue was driven primarily by lower selling prices as well as a slight decline in sales volume. The lower overall average unit selling price was primarily the result of a 24% decrease in the average price of butane, which is a major pricing component of our isobutylene derivative products, and a 35% decrease in the average price of propylene, which is a major pricing component of our propylene derivative products. The impact of the substantial decline in pricing for butane and propylene was somewhat mitigated by a more favorable customer mix due to restricted product availability, better negotiated pricing for products not linked to commodity indices and reduced volume of low value by-products as a result of a successful yield improvement project.

Cost of sales

Total cost of sales was $432.1 million for the third quarter of 2012 compared to $758.2 million for the third quarter of 2011. The overall $326.1 million, or 43%, decrease reflected the 15% decrease in sales volume and a 33% decrease in overall average unit raw material cost. Consistent with the decrease in the overall average unit selling price discussed above, the lower overall average unit raw material cost reflected the commodity market indices to which a substantial portion of our raw material costs (and selling prices) are linked.

Cost of sales for the third quarter of 2011 included a lower-of-cost-or-market charge of $9.8 million to recognize the loss in value of certain inventories as of September 30, 2011. Of the total charge, $9.4 million related to butadiene and $0.3 million related to fuel

products in the C4 Processing segment and $0.1 million related to isobutylene derivative products in the Performance Products segment. The $9.4 million charge related to butadiene inventory reflected the decline in the butadiene benchmark price from $1.71/lb. in September 2011 to $1.40/lb. in October 2011.

C4 Processing segment cost of sales was $352.7 million in the third quarter of 2012 compared to $654.8 million in the third quarter of 2011. The $302.1 million, or 46%, decrease reflected the impact of the 19% decline in sales volume discussed above and a 35% decrease in overall average unit raw material cost. The 35% decrease in overall average unit raw material cost was driven primarily by a 46% decrease in the average raw material cost for butadiene, which reflected the 49% decrease in the average benchmark price for butadiene. As discussed above, in spite of the linkage between the cost of crude C4 we purchase and the price at which we sell finished butadiene, our raw material costs and profit margins in a given period are impacted by purchasing crude C4 in one period and selling finished butadiene in a subsequent period during times of butadiene price volatility. Cost of sales for the third quarter of 2012 included a negative butadiene pricing impact of $5 million, while the third quarter of 2011 included a positive butadiene pricing impact of $6 million, which resulted in relatively higher cost of sales of $11 million in the third quarter of 2012 when compared to the third quarter of 2011. The $6 million impact of the change in butadiene price in the third quarter of 2011 included a positive impact of $15 million from the increase in butadiene pricing during the quarter, partially offset by a $9.4 million lower-of-cost-or-market charge related to the write-down of butadiene inventory at September 30, 2011 due to the decline in the butadiene benchmark price from $1.71/lb. in September 2011 to $1.40/lb. in October 2011. C4 Processing segment cost of sales as a percentage of segment revenue was 87% for the third quarter of 2012 compared to 92% for the third quarter of 2011, which included the lower-of-cost-or-market charge of $9.7 discussed above.

Performance Products segment cost of sales was $79.4 million in the third quarter of 2012 compared to $103.3 million in the third quarter of 2011, which represents a decrease of $23.9 million, or 23%. The lower cost of sales was driven primarily by a 23% decline in overall average unit raw material cost as well as a slight decline in sales volume. The lower overall average unit raw material cost reflected a 24% decrease in the average price of butane, which is a major raw material pricing component for our isobutylene derivative products, and a 35% decrease in the average price of propylene, which is a major raw material pricing component for our propylene derivative products. Performance Products segment cost of sales as a percentage of segment revenue was 76% for the third quarter of 2012 compared to 85% for the third quarter of 2011. The percentage of cost of sales to revenue in the prior year quarter reflected an unfavorable sales mix for the polyisobutylene product line and higher sales volumes of by-product streams which carry near breakeven margins.

Operating expenses

Operating expenses incurred in the third quarter of 2012 were $38.4 million compared to $35.6 million for the third quarter of 2011. The $2.8 million increase was due primarily to higher outside service fees of $1.7 million and higher property taxes of $2.1 million, partially offset by lower personnel costs. The comparatively higher property tax expense in the 2012 quarter reflected a reduction in expense in the third quarter of 2011 as a result of an arbitration settlement with the local taxing authority, which resulted in a reduction of 2011 property taxes as well as partial refunds of previously paid property taxes for 2008, 2009 and 2010.

General and administrative expenses

General and administrative expenses of $11.4 million for the third quarter of 2012 were up $3.9 million compared to $7.6 million in the third quarter of 2011 due primarily to the transaction expenses of $4.5 million discussed above, partially offset by lower legal and other professional fees.

Depreciation and amortization expense

Depreciation and amortization expense was $10.1 million for the third quarter of 2012 compared to $10.0 million for the prior year quarter. The increase in depreciation related to projects completed over the past year was offset by the decrease in depreciation related to assets that became fully depreciated over the same period.

Interest expense

Interest expense, which consists of interest on the 8 ¹ / ₄ % Senior Secured Notes (the Notes) and amortization of deferred financing costs, was $8.6 million and $8.7 million in the third quarters of 2012 and 2011, respectively. There were no borrowings on the Revolving Credit Facility in either period.

Interest income

Interest income represents interest on short-term deposits. TPCGI interest income is higher than TPCGLLC interest income in both the current and prior year quarters due to TPCGI’s larger cash balance during each period.

Other, net

Other, net for both TPCGI and TPCGLLC for the third quarters of both 2012 and 2011 consisted primarily of income from our investment in Hollywood/Texas Petrochemicals LP, a joint venture with Kirby Inland Marine to operate four barges capable of transporting chemicals, which is accounted for under the equity method. The lower amount for the third quarter of 2012 was due to minor differences in miscellaneous items. The minor differences in other, net between TPCGI and TPCGLLC in both the current and prior year quarters were due to TPCGI Delaware franchise taxes.

Income tax expense

Given the same operating results, effective tax rates for TPCGI and TPCGLLC are essentially the same. The effective tax rates for both the current and prior year quarters were based on the projected effective rates for the respective full years ending December 31. The effective rates for both periods reflected the federal statutory rate of 35%, adjusted for the impact of projected permanent differences, the Section 199 domestic production deduction, state income taxes and adjustments for prior year permanent differences that were identified upon completion of the 2011 tax return in the third quarter of 2012.

Net income

Net income for TPCGI in the third quarter of 2012 was $7.3 million compared to $9.4 million in the third quarter of 2011. The primary components of the $2.1 million decrease were higher operating expenses of $2.8 million and higher general and administrative expenses of $3.9 million, partially offset by lower income tax expense of $3.3 million and higher GPC of $1.4 million. TPCGLLC’s net income for the current and prior year quarters was slightly different from the TPCGI amounts due to minor differences in interest income and Delaware franchise taxes.

Adjusted EBITDA

Adjusted EBITDA for the C4 Processing and Performance Products operating segments were the same for TPCGI and TPCGLLC for each period discussed below. Total TPCGI Adjusted EBITDA differs slightly from total TPCGLLC Adjusted EBITDA due to minor differences in miscellaneous corporate expenses. Due to the insignificance of the differences, the discussion of total Adjusted EBITDA and corporate expenses below will be from the TPCGI perspective only.

Adjusted EBITDA for the third quarter of 2012 was $33.4 million compared to $34.4 million for the third quarter of 2011. The decrease of $1.0 million, or 3%, reflected lower Adjusted EBITDA for the C4 Processing segment of $7.1 million, partially offset by higher Adjusted EBITDA for the Performance Products segment of $5.7 million and lower corporate expenses of $0.4 million.

C4 Processing segment Adjusted EBITDA was $26.4 million in the third quarter of 2012 versus $33.5 million in the third quarter of 2011. The decrease of $7.1 million, or 21%, reflected lower GPC of $4.8 million and higher operating expenses of $2.3 million. The decrease in GPC reflected the impact of 19% lower sales volume, partially offset by the impact of a 13% improvement in overall average unit margin. The lower sales volume negatively impacted GPC by $11 million and the higher average unit margin positively impacted GPC by $6 million. The higher average unit margin for the segment reflected the effect of stronger values and margins for fuel products, partially offset lower butadiene margins. The decrease in average unit margin for butadiene reflected the negative impact of a 22% decline in butadiene pricing during the third quarter of 2012, which was in contrast to the positive impact of a 12% increase in butadiene pricing during the third quarter of 2011. The price decline in the third quarter of 2012 had a negative impact on GPC of $5 million, while the price increase in the third quarter of 2011 had a net positive impact on GPC of $6 million ($15 million impact of price increase, partially offset by lower-of-cost-or-market charge of $9.4 million). Excluding the butadiene price impact from both the current and prior year third quarters, the average unit margin for butadiene for the two periods were consistent, which reflects the inherent value of the butadiene logistics and aggregation services we provide for both our suppliers and our customers.

Performance Products segment Adjusted EBITDA for the third quarter of 2012 was $13.7 million compared to $8.1 million for the third quarter of 2011. The $5.6 million, or 70%, improvement reflected higher GPC of $6.2 million, partially offset by higher operating expenses of $0.6 million. The increase in GPC was due almost entirely to the impact of a 34% improvement in overall average unit margin, as slightly lower sales volume has a negligible impact. The higher average unit margin reflected a favorable product mix that included reduced volume of low margin by-products as a result of a successful yield improvement project and better negotiated pricing margins on products whose selling prices are not tied to commodity indices.

Corporate and other expenses consist of general and administrative expenses and other, net discussed above.

Nine months ended September 30, 2012 versus Nine months ended September 30, 2011

Revenue, cost of sales, operating expenses, general and administrative expenses, depreciation and amortization expense, and interest expense were the same for TPCGI and TPCGLLC for each period discussed below.

Revenue

Total revenue for the nine months ended September 30, 2012 was $1,806.8 million compared to $2,183.8 million for the nine months ended September 30, 2011. The decrease of $377.0 million, or 17%, reflected 15% lower sales volume and a 3% decrease in the overall average unit selling price.

C4 Processing segment revenue of $1,483.2 million for the first nine months of 2012 was down $323.7 million, or 18%, compared to the first nine months of 2011. The decrease reflected 15% lower sales volume and a 4% decrease in the overall average unit selling price. The negative effects on revenue of the lower volume and lower average unit selling price were $238 million and $86 million, respectively. The lower sales volume in the 2012 period reflected curtailed production as a result of limited availability of crude C4 feedstock due to the abnormally high concentration of ethylene cracker maintenance outages during the first half of the year, especially during the first quarter, and weaker market conditions, especially for butadiene, in the second and third quarters than in the comparable prior year periods. Aside from the soft demand for butadiene in the second and third quarters quarter of 2012, sales volume was also negatively impacted by high customer inventory levels that had been replenished during the first quarter and the tendency of some butadiene customers to defer their purchases in light of declining prices. The lower average unit selling price was driven by lower butadiene pricing, which was primarily the result of the 15% decline in the average benchmark price for butadiene, partially offset by higher pricing for butene-1 and fuel products, which was primarily the result of the 4% higher pricing for unleaded regular gasoline.

Performance Products segment revenue for the nine months ended September 30, 2012 was $323.6 million compared to $376.9 million for the first nine months of 2011, a decrease of $53.3 million, or 14%. The lower revenue was driven primarily by the impact of a 14% decrease in sales volume as the overall average unit selling price for the segment was down less than 1%. The negative impact of the lower sales volume was $46 million and the negative impact of the slightly lower average unit selling price was $7 million. The lower sales volume reflected feedstock constraints in the first half of 2012 from the abnormally high level of planned crude C4 supplier outages, extended and unplanned outages regarding major suppliers for the isobutylene and propylene derivatives product lines, relatively stronger demand in 2011 due to customers building their inventory levels in light of a positive economic outlook and lower sales volume of low value by-products as a result of a successful yield improvement project. The overall average unit selling price for the Performance Products segment was relatively consistent with the prior year, in spite of lower average commodity prices, as a result of more favorable customer mix due to in part to restricted product availability, better negotiated pricing for products not linked to commodity indices and the reduced volume of low value by-products.

Cost of sales

Total cost of sales was $1,570.8 million for the nine months ended September 30, 2012 compared to $1,911.3 million for the nine months ended September 30, 2011. The overall $340.5 million, or 18%, decrease was primarily the result of the 15% decrease in sales volume and a 3% decrease in overall average unit raw material cost. Consistent with the decrease in the overall average unit selling price discussed above, the lower overall average unit raw material cost reflected the commodity market indices to which a substantial portion of our raw material costs (and selling prices) are linked.

Cost of sales for nine months ended September 30, 2011 included a lower-of-cost-or-market charge of $9.8 million to recognize the loss in value of certain inventories as of September 30, 2011. Of the total charge, $9.4 million related to butadiene and $0.3 million related to fuel products in the C4 Processing segment and $0.1 million related to isobutylene derivative products in the Performance Products segment. The $9.4 million charge related to butadiene inventory was primarily the result of the decline in the butadiene benchmark price from $1.71/lb. in September 2011 to $1.40/lb. in October 2011.

C4 Processing segment cost of sales was $1,312.6 million for the nine months ended September 30, 2012, which was down $284.8 million, or 18%, compared to $1,597.4 million for the nine months ended September 30, 2011. The decrease reflected the combined impact of the 15% decrease in sales volume discussed above and a 3% decline in average unit raw material cost. The decrease in overall average unit raw material cost was driven by lower raw material cost for butadiene, which reflected the 15% decrease in the average

benchmark price for butadiene. As discussed above, in spite of the linkage between the cost of crude C4 we purchase and the price at which we sell finished butadiene, our raw material costs and profit margins in a given period are impacted by purchasing crude C4 in one period and selling finished butadiene in a subsequent period during times of butadiene price volatility. Cost of sales for the first nine months of 2012 included a negative butadiene pricing impact of $1 million, while cost of sales for the first nine months of 2011 included a positive butadiene pricing impact of $40 million, which resulted in relatively higher cost of sales of $41 million in the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. The $40 million impact of the change in butadiene price in the first nine months of 2011 reflected a substantial positive impact from the increase in butadiene pricing during the first nine months of 2011, partially offset by a $9.4 million lower-of-cost-or-market charge related to the write-down of butadiene inventory at September 30, 2011 due to the decline in the butadiene benchmark price from $1.71/lb. in September 2011 to $1.40/lb. in October 2011. C4 Processing segment cost of sales as a percentage of segment revenue was 88% for both nine month periods ended September 30, 2012 and 2011.

Performance Products segment cost of sales was $258.3 million for the nine months ended September 30, 2012 compared to $313.9 million for the nine months ended September 30, 2011, which represented a decrease of $55.6 million, or 18%. The decrease in cost of sales reflected both the 14% decline in sales volume discussed above, and a 4% decrease in the average unit raw material cost. The lower overall average unit raw material cost reflected a 10% decrease in the average price of butane, which is a major raw material pricing component for our isobutylene derivative products, and a 23% decrease in the average price of propylene, which is a major raw material pricing component for our propylene derivative products. Performance Products segment cost of sales as a percentage of segment revenues was 80% for the first nine months of 2012 compared to 83% for the first nine months of 2011.

Operating expenses

Operating expenses for the nine months ended September 30, 2012 were $111.2 million compared to $109.8 million for the comparable prior year period. The $1.4 million increase was due primarily to higher outside service fees of $1.2 million and higher property taxes of $2.3 million, partially offset by lower maintenance and personnel costs. The comparatively higher property tax expense in the 2012 period reflected a reduction in expense in the prior year period as a result of an arbitration settlement with the local taxing authority, which resulted in a reduction of 2011 property taxes as well as partial refunds of previously paid property taxes for 2008, 2009 and 2010.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2012 were $27.1 million compared to $23.0 million for the nine months ended September 30, 2011. The $4.1 million increase was due primarily to the transaction expenses of $5.5 million discussed above, partially offset by lower legal and other professional fees.

Depreciation and amortization expense

Depreciation and amortization expense was $30.4 million for the first nine months of 2012 compared to $30.3 million for the first nine months of 2011. The increase in depreciation related to projects completed over the past year was offset by the decrease in depreciation related to assets that became fully depreciated over the same period.

Interest expense

Interest expense, which consists of interest on the 8 ¹ / ₄ % Senior Secured Notes (the Notes) and amortization of deferred financing costs, was $25.4 million and $25.8 million in the current and prior year periods, respectively. There were no borrowings on the Revolving Credit Facility in either period.

Interest income

Other, net

Other, net for both TPCGI and TPCGLLC for the first nine months of both 2012 and 2011 consisted primarily of income from our investment in Hollywood/Texas Petrochemicals LP, a joint venture with Kirby Inland Marine to operate four barges capable of transporting chemicals, which is accounted for under the equity method. The lower amount for the first half of 2012 reflected lower income from the joint venture of $0.1 million and lower amounts of miscellaneous items. The minor differences in other, net between TPCGI and TPCGLLC in both the current and prior year periods were due to TPCGI Delaware franchise taxes.

Income tax expense

Given the same operating results, effective tax rates for TPCGI and TPCGLLC are essentially the same. The effective tax rates for both the current and prior year periods were based on the projected effective rates for the respective full years ending December 31. The effective rates for both periods reflected the federal statutory rate of 35%, adjusted for the impact of projected permanent differences, the Section 199 domestic production deduction, state income taxes and adjustments for prior year permanent differences that were identified upon completion of the 2011 tax return in the third quarter of 2012.

Net income

Net income for TPCGI for the nine months ended September 30, 2012 was $28.6 million compared to $55.1 million in the nine months ended September 30, 2011. The primary components of the $26.5 million decrease were lower GPC of $36.5 million, higher operating expenses of $1.3 million and higher general and administrative expenses of $4.1 million, partially offset by lower income tax expense of $15.7 million. TPCGLLC’s net income for the current and prior year periods was slightly different from the TPCGI amounts due to minor differences in miscellaneous corporate expenses and Delaware franchise taxes.

Adjusted EBITDA

Adjusted EBITDA for the C4 Processing and Performance Products operating segments were the same for TPCGI and TPCGLLC for each period discussed below. Total TPCGI Adjusted EBITDA differs slightly from total TPCGLLC Adjusted EBITDA due to minor differences in miscellaneous corporate expenses. Due to the insignificance of the differences the discussion of total Adjusted EBITDA and corporate expenses below will be from the TPCGI perspective only.

Adjusted EBITDA for the nine months ended September 30, 2012 was $104.0 million compared to $140.9 million for the nine months ended September 30, 2011. The decrease of $36.9 million, or 26%, reflected lower Adjusted EBITDA for the C4 Processing segment of $39.8 million, partially offset by higher Adjusted EBITDA for the Performance Products segment of $2.0 million and lower corporate expenses of $0.9 million.

C4 Processing segment Adjusted EBITDA was $91.1 million for the nine months ended September 30, 2012 compared to $130.9 million for the nine months ended September 30, 2011. The decrease of $39.8 million, or 30%, reflected lower GPC of $38.8 and higher operating expenses of $1.0 million. The decrease in GPC reflected the impact of 15% lower sales volume and a 4% decrease in average unit margin. The lower sales volume accounted for $27 million of the decrease and the lower average unit margin accounted for remainder of the decrease. The lower average unit margin for the segment reflected lower butadiene margins, partially offset by stronger values and margins for fuel products. The decrease in average unit margin for butadiene reflected the negative impact of a 14% decline in butadiene pricing during the first nine months of 2012, which was in contrast to the positive impact of a 98% increase in butadiene pricing during the first nine months of 2011. The price decline in the current year period had a negative impact on GPC of $1 million, while the price increase in the prior year quarter had a net positive impact on GPC of $40 million (including the lower-of-cost-or-market charge of $9.4 million). Excluding the butadiene price impact from both the current and prior year periods, the average unit margin for butadiene for the two periods were consistent, which reflects the inherent value of the butadiene logistics and aggregation services we provide for both our suppliers and our customers.

Performance Products segment Adjusted EBITDA for the first nine months of 2012 was $33.7 million versus $31.7 million for the first nine months of 2011. The $2.0 million, or 6%, increase reflected higher GPC of $2.3 million, partially offset by higher operating expenses of $0.3 million. The increase in GPC reflected a 21% improvement in average unit margin, partially offset by 14% lower sales volume. The higher average unit margin had a positive impact on GPC of $7 million and the lower sales volume negatively impacted GPC by $5 million. The higher average unit margin reflected a favorable product mix that included reduced volume of low margin by-products as a result of a successful yield improvement project and better negotiated pricing margins on products whose selling prices are not tied to commodity indices.

Corporate and other expenses consist of general and administrative expenses and other, net discussed above.

Liquidity and Capital Resources

Our financing arrangements consist of the Notes and the $175 million asset based revolving credit facility (the “Revolving Credit Facility”).

The Notes are fully and unconditionally and jointly and severally guaranteed initially by all of TPCGLLC’s material domestic subsidiaries. Each of the subsidiary guarantors is 100% owned by TPCGLLC, and there are no subsidiaries of TPCGLLC other than the subsidiary guarantors. TPCGLLC is a direct wholly owned subsidiary of TPCGI. TPCGI and its only other wholly owned subsidiary, Texas Petrochemicals Netherlands B.V., are neither issuers nor guarantors of the Notes.

At September 30, 2012, we had total debt of $348.2 million and cash on hand of $165.4 million. Debt outstanding consisted entirely of the Notes, as there were no borrowings under our Revolving Credit Facility. As of September 30, 2012, we were in compliance with all covenants set forth in the indenture governing the Notes and the credit agreement governing the Revolving Credit Facility.

Sources and uses of cash

Our primary source of liquidity is cash flow generated from our operating activities and borrowing capacity under the Revolving Credit Facility. Our primary uses of cash are working capital, capital expenditures, contractual obligations, debt service and stock repurchases or dividends by TPCGI. We expect to have adequate liquidity to fund our liquidity requirements over the foreseeable future. This expectation is based, however, on estimates and assumptions regarding, among other things, our sales volumes, our feedstock purchase volumes, market prices for petrochemicals, capital and credit market conditions, and general industry and economic conditions. If one or more of these factors materially differs from our estimates, we may need to obtain additional financing to conduct our operations, which may not be available on acceptable terms or at all.

Availability under the Revolving Credit Facility is limited to the borrowing base, comprised of 85% of eligible accounts receivable and 65% of eligible inventory, as redetermined monthly. Up to $30 million of the facility may be used for the issuance of letters of credit. The Revolving Credit Facility also includes an accordion feature under which the lenders may agree, upon our request, to increase their commitments to an aggregate amount not to exceed $200 million. The Revolving Credit Facility matures on April 29, 2014. At September 30, 2012, we had the ability to access $173.2 million of availability under the Revolving Credit Facility, while still maintaining compliance with the covenants contained therein and in the indenture governing the Notes.

Amounts borrowed under the Revolving Credit Facility bear interest, at our option, at a rate equal to either (a) the Eurodollar Rate (as defined in the credit agreement governing the Revolving Credit Facility) plus 3.00% to 3.75%, or (b) the base rate (as described below) plus 2.00% to 2.75%, in each case depending on the ratio of TPCGLLC’s consolidated debt to consolidated Adjusted EBITDA (as defined in the credit agreement governing the Revolving Credit Facility), with a lower leverage ratio resulting in lower rates. The base rate equals the highest of (i) the administrative agent’s prime lending rate, (ii) the Federal Funds Rate plus 1/2 of 1%, or (iii) the one-month Eurodollar Rate (as defined in the credit agreement governing the Revolving Credit Facility) plus 1%.

A commitment fee is payable on the unused portion of the Revolving Credit Facility in an amount equal to 0.50% per annum if average availability is less than 50% of the total commitments, or 0.75% per annum if average availability is 50% or more of the total commitments, in each case based on average availability during the previous fiscal quarter.

The Revolving Credit Facility is secured with a first priority lien on TPCGLLC’s cash, accounts receivable, inventory and certain intangibles, and through cross-collateralization with the Notes, a second priority lien on all other assets, including fixed assets. The Revolving Credit Facility is guaranteed by all of the material domestic subsidiaries of TPCGLLC and provides for customary events of default.

The Revolving Credit Facility includes covenants that restrict, subject to specified exceptions, our ability to:

•

create or permit liens on assets;

•

incur additional indebtedness or issue redeemable equity securities;

•

guarantee indebtedness;

•

merge or consolidate with a third party;

•

sell or otherwise dispose of assets;

•

pay dividends or effect stock buy-backs;

•

issue or sell stock of subsidiaries;

•

make loans, investments and acquisitions;

•

enter into transactions with affiliates;

•

change the lines of business in which we are engaged;

•

change our fiscal year;

•

make voluntary prepayments or redemptions of subordinated indebtedness;

•

enter into agreements that limit our subsidiaries’ ability to pay distributions to or enter into transactions with us;

•

maintain cash balances in excess of $15 million without using such excess cash to prepay loans under the Revolving Credit Facility; and

•

enter into receivables financings or securitization programs.

Although the Revolving Credit Facility restricts acquisitions, investments and the payment of dividends, respectively, acquisitions, investments and dividends are permitted, subject to restrictions under other indebtedness, if (a) pro forma current and average 90-day historical availability each exceed the greater of $50 million or 50% of the total commitments, or (b) pro forma projected, current and average 90-day historical availability each exceed the greater of $25 million or 25% of the total commitments and we meet a minimum consolidated fixed charge coverage ratio. Finally, the Revolving Credit Facility requires a minimum consolidated fixed charge coverage ratio should availability be less than the greater of $15 million or 15% of the total commitments.

Distributions to TPCGI from TPCGLLC

A portion of the proceeds of the October 5, 2010 issuance and sale of the Notes, along with cash on hand, was used to fund a $130.0 million distribution by TPCGLLC to TPCGI to be used by TPCGI for dividends, stock repurchases or other returns of capital to its stockholders. The $130.0 million distribution was made in installments of $61.4 million on December 30, 2010, $5.0 million on March 4, 2011 and $63.6 million on March 14, 2011. On September 30, 2011, in accordance with conditions set forth in the credit agreement governing our Revolving Credit Facility and the indenture governing the Notes an additional $15.0 million was distributed by TPCGLLC to TPCGI. No distributions occurred in the nine months ended September 30, 2012.

Purchase of Shares under Stock Repurchase Program

Cash Flow Summary

The following table summarizes changes in cash and cash equivalents for TPCGI and TPCGLLC during the nine months ended September 30, 2012 and 2011 (in thousands):


	TPCGI						TPCGLLC
	2012			2011			2012			2011
Cash flows (used in) provided by :
Operating activities	$	95,194		$	44,509		$	95,130		$	44,757
Investing activities		(37,867	)		(32,587	)		(37,867	)		(32,587	)
Financing activities		509			(15,123	)		—			(83,605	)

Change in cash and cash equivalents	$	57,836		$	(3,201	)	$	57,263		$	(71,435	)

Operating activities

For the nine months ended September 30, 2012, TPCGI had positive net cash flows from operations of $95.2 million. The primary components of the operating cash flows were net income of $28.6 million, depreciation and other net non-cash expenses of $41.3 million and reduced investment in working capital of $32.3 million, partially offset by deferred plant turnaround costs of $6.7 million. The reduced investment in working capital during the first nine months of 2012 reflected lower trade receivables (discussed below) partially offset by higher inventories (discussed below). Days outstanding for trade receivables and trade payables and days of inventory on hand at September 30, 2012 were each in line with historical trends. The deferred turnaround costs, which related to turnaround projects at both our Houston and Port Neches plants, will be amortized until the next scheduled turnaround.

The minor difference between TPCGI and TPCGLLC operating cash flows for the first nine months of 2012 reflected a minor difference in net income and a minor effect of intercompany cash transactions.

Our inventory at September 30, 2012 of $94.4 million was $15.1 million higher than the $79.3 million at December 31, 2011. The increase in inventory value reflected a 24% increase in physical inventory volumes, partially offset by a 4% decrease in overall average cost per pound. Although inventory quantities at September 30, 2012 were lower than normal levels, they were higher than the quantities on hand at the end of 2011, which were abnormally low as a result of our efforts to tightly manage inventory levels during the fourth quarter of 2011 in light of the significant curtailment in business activity, as well as a turnaround at one of our major storage facilities. The impact of the higher inventory levels was to increase inventory carrying value by $19 million at September 30, 2012, while the lower average cost per pound resulted in a $4 million reduction in carrying value.

Trade accounts receivable were $156.0 million at September 30, 2012 compared to $210.8 million at December 31, 2011. The decrease primarily reflected lower sales in September 2012 compared to December 2011, on lower sales volumes. Days of sales outstanding at September 30, 2012 was 29 days, which is slightly lower than the 31 day average over the past year and the 34 days at December 31, 2011. Trade accounts receivable were more than 98% current at both September 30, 2012 and December 31, 2011.

For the nine months ended September 30, 2011, TPCGI had positive net cash flows from operations of $44.5 million. The primary components of the operating cash flows were net income of $55.1 million plus depreciation and other net non-cash expenses of $39.4 million, partially offset by an increased investment in working capital of $47.0 million and deferred plant turnaround costs of $5.8 million. The increased investment in working capital during the nine months ended September 30, 2011 reflected the upward trend in selling prices of our products and the costs of our raw material over the course of the period. Increased investment in trade accounts receivable and inventory were partially offset by increased levels of trade accounts payable, which also reflected the impact of higher raw material costs. The deferred turnaround costs, related primarily to a major turnaround project at our Houston facility during the first quarter of 2011.

The minor difference between TPCGI and TPCGLLC operating cash flows for the first nine months of 2011 reflected a minor difference in net income and a the effect of intercompany cash transactions.

Investing activities

During the nine month periods ended September 30, 2012 and 2011, we invested $37.9 million and $ 32.6 million, respectively, in the form of capital expenditures. Capital spending during the first nine months of 2012, in addition to baseline spending, included $14.4 million for our strategic projects to produce isobutylene feedstock and on-purpose butadiene. Capital spending during the first nine months of 2011, in addition to baseline spending, included $7.7 million for the new lab at the Houston facility and $5.6 million for the primary phase of engineering related to our strategic projects.

Financing activities

Cash generated from financing activities of $0.5 million during the first nine months of 2012 was from exercise of stock options, which related to TPCGI. Net cash used in financing activities in the comparable prior year period of $15.1 million consisted of $16.1 million used for stock purchases under the Stock Repurchase Program, partially offset by $1.0 million provided from exercise of stock options. Cash used in financing activities by TPCGLLC during the first nine months of 2011 consisted of the distributions to TPCGI.

Off-balance sheet arrangements

We do not currently utilize any off-balance sheet arrangements to enhance our liquidity and capital resource positions, or for any other purpose.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

There have been no material developments during the nine months ended September 30, 2012 regarding the matters previously disclosed about quantitative and qualitative market risk in TPCGI’s and TPCGLLC’s combined Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of TPC Group Inc.’s and TPC Group LLC’s Disclosure Committee and management, including our President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, TPC Group Inc.’s and TPC Group LLC’s President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

Changes in Internal Controls

During the period covered by this report there were no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

See Note L to the condensed consolidated financial statements for a description of certain legal proceedings.

Item 1A.

Risk Factors

The risk factors discussed below update the risk factors previously discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. We refer you to the risk factors described in that filing for a more complete discussion of our material risks.

Failure to complete the merger could have a material adverse effect on us.

On August 24, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sawgrass Holdings Inc. (“Sawgrass”) and Sawgrass Merger Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Sawgrass. Consummation of the merger is subject to the terms and conditions of the Merger Agreement, including, but not limited to, the adoption of the Merger Agreement by the requisite affirmative vote of our stockholders. There can be no assurance that our stockholders will adopt the Merger Agreement or that the other conditions to the completion of the merger will be satisfied. If the merger is not completed for any reason, the price of our common stock will likely decline to the extent that the market price of our common stock reflects market assumptions that the merger will be completed. Additionally, we are subject to additional risks in connection with the merger, including: (i) the occurrence of any event, change or circumstance that could give rise to the termination of the merger agreement and the possibility that we would be required to pay a $19 million termination fee in connection therewith, (ii) the outcome of any legal proceedings that may be instituted against us and others related to the Merger Agreement, (iii) the failure of the merger to close for any reason or the failure by Sawgrass to obtain the necessary equity and debt financing set forth in the commitment letters received in connection with the merger, or alternative financing, or the failure of any such financing to be sufficient to complete the merger and the other transactions contemplated by the Merger Agreement, (iv) the restrictions imposed on our business, properties and operations pursuant to the affirmative and negative covenants set forth in the Merger Agreement and the potential impact of such covenants on our business, (v) the risk that the merger and any alternative acquisition proposals initiated by third parties disrupts our current plans and operations and (vi) the amount of the costs, fees, expenses and charges related to the Merger Agreement or the merger.

There may be substantial disruption to our business and distraction of our management and employees as a result of the merger.

There may be substantial disruption to our business and distraction of our management and employees from day-to-day operations because matters related to the merger may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to us.

Business uncertainties and contractual restrictions while the merger is pending may have an adverse effect on us.

Uncertainty about the effect of the merger on employees, suppliers, partners, regulators, and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain, and motivate key personnel and could cause suppliers, customers and others that deal with us to defer purchases or other decisions concerning us or seek to change existing business relationships with us. In addition, the merger agreement restricts us from making certain acquisitions and taking other specified actions without Sawgrass’s approval. These restrictions could prevent us from pursuing attractive business opportunities.

The Merger Agreement restricts our ability to pursue alternatives to the merger.

The Merger Agreement contains “no shop” provisions that, subject to limited fiduciary exceptions, restrict our ability to initiate, solicit or knowingly encourage any inquiries regarding any proposal or offer that constitutes or would reasonably be expected to lead to an acquisition proposal, engage or participate in any discussions or negotiations regarding, or provide any non-public information or data to, any person relating to, or that would reasonably be expected to lead to, any acquisition proposal or otherwise knowingly facilitate (including by providing information) any effort or attempt to make an acquisition proposal. Further, there are only a limited number of exceptions that would allow our board of directors to withdraw or change its recommendation to holders of our common stock that they vote in favor of the adoption of the Merger Agreement. If our board of directors were to take such actions as permitted by the Merger Agreement, doing so in specified situations could entitle Sawgrass to terminate the merger agreement and to be paid a $19 million termination fee. These restrictions could deter a potential acquiror from proposing an alternative transaction.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

As reflected in the following table, there were no purchases by us of shares of TPCGI’s common stock during the three months ended September 30, 2012:

Total Number
of Shares
Purchased

Average
Price
Paid Per
Share

Total Number of
Shares Purchased
As Part of
Publicly
Announced Plans
or Programs

Approximate
Dollar Value of Shares
that may yet be
Purchased Under the
Plans or Programs

July 2012

—

13.9 million

August 2012

—

13.9 million

September 2012

—

13.9 million

—

13.9 million

On March 3, 2011, TPCGI announced that its Board of Directors approved a stock repurchase program for up to $30.0 million of TPCGI’s common stock. Purchases of common stock under the program have been and will be executed periodically in the open market or in privately negotiated transactions in accordance with applicable securities laws. The stock repurchase program does not obligate TPCGI to repurchase any dollar amount or number of shares of common stock, does not have an expiration date and may be limited or terminated at any time by TPCGI’s Board of Directors without prior notice. During the first quarter of 2011, TPCGI purchased 282,532 shares under the program in the open market at an average of $27.59 per share, for a total of $7.8 million. During the third quarter of 2011, TPCGI purchased an additional 352,259 shares under the program in the open market at an average of $23.53 per share, for a total of $8.3 million. There were no purchases under the program during the second quarter of 2011 and the first nine months of 2012. Total shares purchased through September 30, 2012, under the $30.0 million program are 634,791 shares at an average of $25.33 per share, for a total of $16.1 million. As of September 30, 2012, the remaining amount available for stock purchases under the program was $13.9 million. Subsequent to September 30, 2012 and through the filing date of this Form 10-Q, there have been no additional shares purchased. The shares purchased were immediately retired and any additional shares to be purchased under the program will be retired immediately. Any future purchases will depend on many factors, including the market price of the shares, our business and financial position and general economic and market conditions.

Item 6.

Exhibits

The following exhibits are filed as part of this report:

INDEX TO EXHIBITS


Exhibit No.		Description

2.1		Agreement and Plan of Merger dated August 24, 2012 among TPC Group, Inc., Sawgrass Holdings Inc. and Sawgrass Merger Sub Inc. (incorporated by reference to the Current Report on Form 8-K filed August 27, 2012)

31.1 *		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for TPC Group Inc.

31.2 *		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for TPC Group LLC.

31.3 *		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for TPC Group Inc.

31.4 *		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for TPC Group LLC.



32.1 **		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for TPC Group Inc.

32.2 **		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for TPC Group LLC.

32.3 **		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for TPC Group Inc.

32.4 **		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for TPC Group LLC.

101.INS ***		XBRL Instance Document

101.SCH ***		XBRL Schema Document

101.CAL ***		XBRL Calculation Linkbase Document

101.LAB ***		XBRL Label Linkbase Document

101.PRE ***		XBRL Presentation Linkbase Document

101.DEF ***		XBRL Definition Linkbase Document

*	Filed herewith.

Pursuant to Securities and Exchange Commission Release No. 33-8238, this certification is treated as “accompanying” this report and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

***

Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TPC Group Inc.

Date: November 5, 2012	By:	/s/ Michael T. McDonnell
		Michael T. McDonnell
		President and Chief Executive Officer

Date: November 5, 2012	By:	/s/ Miguel A. Desdin
		Miguel A. Desdin
		Senior Vice President and Chief Financial Officer


		TPC Group LLC

Date: November 5, 2012	By:	/s/ Michael T. McDonnell
		Michael T. McDonnell
		President and Chief Executive Officer

Date: November 5, 2012	By:	/s/ Miguel A. Desdin
		Miguel A. Desdin
		Senior Vice President and Chief Financial Officer

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