i s c o v e r yTHE QUARTERLY NEWSLETTER OF KOCH COMPANIES

January 2008

this issue...

International growth Pg 3 Year in Review Pg 5

Koch Fertilizer Pg 9 Wilton’s 50th Pg 11

On Nov. 5, 2007, Flint HillsResources completed its$440 million acquisi-

tion of Huntsman Corp.’s olefinsplant in Port Arthur, Texas.

Included in the purchase wasa 600-mile pipeline distributionnetwork that will be operatedby Koch Pipeline for FHR.

The plant processes naturalgas liquids into crucial buildingblocks used to make a varietyof plastics.

In an average year, the plant produces about 1.4 billion pounds of ethylene and more than 700 millionpounds of propylene. It alsoproduces cyclohexane.

The acquisition completed a two-part transaction withHuntsman that began with the purchase of four polymerplants last August.

New beginningHuntsman’s Port Arthur

facility was forced to shutdown for more than a year following an April 2006 explosion and fire.

FHR’s purchase of the plantwas contingent on repairs, asafe restart and a full month of operation at specified performance levels.

“Because of this plant’s pasthistory, the level of teamworkrequired to close the deal wasenormous,” said Brad Razook,FHR’s president.

“It began with KII’s businessdevelopment group coordinatingwith our FHR business leaders.

“Then our operations, legal and commercial teamsbecame deeply involved, especially during Huntsman’sreconstruction phase.

“With 185 employees at thePort Arthur plant and severalmore on the pipeline system, ourHR team also had plenty to do.

“Together, our teams did anoutstanding job of tackling a difficult challenge.

“They’re a great example of how we apply our corecapabilities,” said Razook,

“especially operations andtransaction excellence.”

Big and biggerOver the past five years,

FHR, Koch Industries’ largestcompany in terms of revenue,has made more than $1.5 billionin acquisitions.

“We’ve invested even morethan that on expansions andupgrades,” said Tony Sementelli,FHR’s chief financial officer,“such as the recent work at ourPine Bend refinery.”

In analyzing the numbers,Sementelli believes Port Arthurwas an exceptional buy.

“This involved more than greatassets operated by an excellentworkforce,” Sementelli said.

“It was also a very good pur-chase price. You couldn’t comeclose to building a new plantlike it for what we paid.

“It’s true that olefin marginsare under some pressure rightnow,” Sementelli said, “butthat’s less of an issue for us thanit is for public companiesfocused on quarterly results.

“We can afford to take a long-term view. In fact, we believethat’s the only point of viewworth taking.”

Plans for Port Arthur

“They’re a great example of how we apply our corecapabilities, especially operations and transactionexcellence.”

– Brad Razook

The board of directors of the British-AmericanFoundation of Texas wouldlike to thank Koch Industriesfor its generous sponsorship of our “Bond with the BABC” gala.

The event, hosted by theBritish-American BusinessCouncil Houston, benefitsBAFT’s scholarship programme.

We realize that the continued success of bi-lateraltrade between the US and theUK hinges on the students oftoday, including many giftedstudents.

Your underwriting of thisevent will go far in helpingthese deserving young peopleachieve academic excellence,the key to our global future.

Becci Himes, BAFT – Exec. Dir. Houston, Texas

I want to formally thankKoch Industries for its verygenerous commitment to ourPhase 4 Capital Campaign.This commitment helped usexceed our goal of $1,050,000and will be instrumental inhelping us reach our totalcampaign goal of $1,750,000.

We greatly appreciate Koch’scommitment to our missionand support of our communityYMCA.

Ken Rapp Denny Price Family YMCA Enid, Okla.

Editorial BoardPhilip Ellender Mary Beth JarvisRich Fink Charles KochJeff Gentry Jim MahoneyDale Gibbens Dave Robertson

Questions? Comments? Reprints?Contact: Rod Learned

(316) 828-6136learnedr@kochind.com

Publication design: Tammy Cox

Koch Creative Group

©2008 Koch Industries, Inc.http://www.kochind.comhttp://www.kochehs.comKoch is an EOE. M/F/D/V

I am a squad leader withAlpha Battery 1/161 FieldArtillery serving with theKansas National Guard. I amcurrently in Ft. Bliss, Texas,training to go to Iraq.

Your company’s $20,000donation to help bring KansasNational Guard familiestogether for the holidays wasfantastic.

Your company made it possible for our troops tomake it home, at no expenseto us, to see our families andloved ones one last time.

We are preparing to leavefor Iraq in January, so this willbe our farewell to our lovedones until we return.

I would like to thank youand the Koch family for yoursupport.

Sgt. Michael Yandel Ft. Bliss, Texas

I just wanted to send a noteto say thank you very much forKII’s donation to the KansasNational Guard Foundation.

It helped to bring my brotherhome for Christmas to be withhis wife and newborn daughter.

My brother and our entirefamily are all very apprecia-tive. I am proud to work forsuch a giving company.Thanks again.

Christine Looney KII - Tax Services Wichita, Kan.

i s c o v e ryJANUARY 2008 VOLUME 14 NUMBER 1

Letters may be edited for length or clarityP

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TaiPei - Rick Dobzelecki, (far right) Asia-Pacific vice president forINVISTA Intermediates, fills in for Santa at a Nov. 30 Christmas

tree lighting. The event was sponsored by The Far Eastern Group,Taiwan’s premier petrochemical company and INVISTA’s venture

partner in a nylon and PTA plant.

On the Cover:

Workers for the MinnCan

project, a 300-mile pipeline

expansion, arebusy this winter.Construction in

Minnesota’swetland areas isactually easierduring freezing

weather.

INTERNATIONAL NEWS

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Global Growth:Highlights of recent international acquisitions, expansionsand investments (above and beyond the acquisition of INVISTA in 2004 and Georgia-Pacific in 2005).

4

A Growing Business

9

the rest of the industry wascertainly surprised,” saidPackebush.

“That’s because there was a perception that U.S. assetscould not compete withimports when world naturalgas prices were far lower thandomestic prices.

“We bought those assets, atleast in part, because we wereconvinced the market couldn’tget any worse.”

Koch Fertilizer also purchasedFarmland’s 50 percent interestin Point Lisas NitrogenLimited, which owns anammonia plant in Trinidad and Tobago.

About the same time, KochFertilizer acquired minorityinterests and marketing rightsfor two other companies withammonia plants in that sameCaribbean nation.

Why buy distressed domesticassets and make majorinvestments outside the U.S.?

According to Packebush:“We had a different point ofview and a much differentshareholder base than mostothers in our industry.”

Vision and POVAs Charles Koch wrote in his

book, The Science of Success:“Point of view developmentinvolves intensive, systematic,global study.”

That study leads to “thedevelopment of a vision thatexplicitly states how we planto create superior value.”

Prior to its Farmland acquisitions, the KochFertilizer team spent monthsstudying the drivers of globalgrain and nitrogen markets.

When they looked at globaltrade flows, the team realizeddemand would inevitably goup, led by growing markets inChina, India, Latin Americaand the former Soviet Union.

“All across the world,”Packebush said, “populationand incomes are increasing.That leads to increased proteinconsumption and higherdemand for grain. Higher grain

Wichita - Marketers and traders keep a sharp eye on fertilizer markets around the globe. Koch Fertilizer also has traders in Europe and Asia.

Gulf Central Pipeline in 1988.The following year, the

business began marketingammonia, a nitrogen-richingredient used in many fertilizers, from the pipeline.

Most ammonia is processedfrom natural gas, which accountsfor about 90 percent of the cost ofmaking ammonia. Consequently,changes in natural gas priceshave a significant effect onammonia producers.

Skyrocketing U.S. naturalgas prices in the 1990s spelleddisaster for many domesticfertilizer companies.

Koch Fertilizer’s Sterlington,La., facility was among themany Gulf Coast fertilizerplants that couldn’t competewith offshore producers usingless expensive feedstock.

“From 1998 to 2002 the U.S.nitrogen production businesswas very difficult,” recalledSteve Packebush, president of Koch Nitrogen Co.

Naturally, the questionarose: should Koch get out of the fertilizer business?

That’s what many assumedwas happening in 2002 whenKoch sold the largest ammoniapipeline in the U.S.

But then, within a matter ofmonths, Koch Fertilizer boughtthe Midwest fertilizer assets ofbankrupt Farmland Industries.

“Surprised”“When we bid on the

Farmland assets in 2003,

Charles Koch, chairmanand CEO of KochIndustries, Inc., is often

asked to give specific examplesof how to apply Market-BasedManagement®, KII’s distinctivebusiness and managementphilosophy.

His examples usually involveKII’s biggest or oldest businesses,such as Flint Hills Resources,Georgia-Pacific and KochChemical Technology Group.

But these days he alsoshines the MBM® spotlight on a once small and oftenoverlooked business: KochFertilizer.

(In this article, KochFertilizer is the name used for the entire group of fertilizerassets and marketing businessesowned by Koch NitrogenCompany and its affiliates.)

Koch Fertilizer used to be an ammonia pipeline and distribution business with asingle ammonia productionfacility. It is now one of theworld’s largest producers andmarketers of nitrogen fertilizer.

In terms of value creation,the Koch Fertilizer businessenjoyed its best-ever performancelast year.

That’s quite an accomplish-ment for a business that manyonce wrote off as hopeless.

RootsKoch first got into the fertil-

izer business by acquiring anammonia pipeline system from

increaseddemand for fertilizer.

GlobalIn addition

to its 3.2 milliontons of annualproductioncapacity in NorthAmerica, KochFertilizer is ashareholder in several Caribbean projects.It owns interests in plants inVenezuela and Trinidad andTobago, and markets much oftheir production.

The cost of natural gas inthose countries is much lessthan in the U.S., giving them asubstantial advantage when itcomes to ammonia production.“The plants in the Caribbeanhave some of the lowest production costs in the world,”said Packebush.

Koch Fertilizer also hasinternational employees atoffices in Paris, Beijing, theCayman Islands, Geneva andBrandon. These offices focuson the marketing and tradingof fertilizer products.

“Our employees worldwideare doing a great job developingnew markets and relationshipsto grow our business insideand outside the U.S. We realizeda long time ago that there’s noway we can do everythingfrom Wichita, so having aninternational presence isessential.”

Challenge cultureThe leadership team works

hard at maintaining a robustchallenge process, encouragingany and every employee to speakout, regardless of the businessor capability in which they work.

That’s especially challengingin an organization where asignificant number of theemployees are either new tothe company or their rolewithin the last two years.

“Having a real challenge cultureis essential for applying MBM,”said Packebush, “because it’s

demand means more demandfor fertilizer.”

In developing its vision andpoint of view, Koch Fertilizeralso saw the need to build diver-sification in its production base.

“The future prices of naturalgas are unknown andunknowable, so it was impor-tant for us to build flexibilityinto our production base.

“We did this by investingoutside the U.S. in regionswith abundant natural gasresources. Then we developedimport distribution channels to ensure our customers consistent long-term supply,regardless of gas prices.

“What was critically impor-tant for us was the support ofthe KII board in pursuing thistwo-tiered vision of domesticand international assets.

“They not only supportedour contrarian point of view,they agreed to help fund ourgrowth.”

GrowthIn September 2006, Koch

Fertilizer successfully acquiredSimplot’s nitrogen plant inBrandon, Manitoba.

In Enid, Okla., a majorexpansion is underway thatwill increase that plant’s ureaproduction capacity by morethan 35 percent.

Since 2005, Koch Fertilizerhas invested more than $100million in plants that were onceconsidered marginal productionassets. About half of that amounthas been invested in natural gasefficiency improvements.

U.S. energy policy has alsocontributed to Koch Fertilizer’sgrowth. The energy bill passedby Congress last Novembermandates a substantial increasein the use of renewable fuels.

Most of that 3.6 billion-gallon increase will involvecorn-based ethanol. Theincreased demand for corn to make ethanol will mean

Brandon, Manitoba - Koch Fertilizer Canada, Ltd. employsabout 180 people at its facilities, acquired in 2006.

Ft. Dodge, Iowa - Most of Farmland’sMidwest fertilizer assets were purchased

at a 2003 bankruptcy auction. www.kochfertilizer.com

the only way to capture thebest knowledge across theorganization.

“That culture allowed us to effectively blend our asset capabilities with our supply and trading capabilities. It hasalso helped us leverage theunique skills and knowledge ofour new employees, especiallythose at the Brandon facility.

“It’s clear to us that ourrobust challenge culture hascontributed greatly to the success of our business.”

Moving forwardLike all Koch businesses,

Koch Fertilizer is challenged to find new and better ways of building on its success.

“We think the markets couldreally help us for the next twoor three years,” said Packebush.“Global grain markets arestrong and growing and otherfundamental drivers look goodas well, but the market willeventually become more challenging again.

“We have stressed to every-one the need to maintain ourhumility and intensity in thegood times. We will continuerethinking and innovating ourbusiness by identifying anddeveloping ‘bolt on’ opportuni-ties in our existing businessand developing other newindustry platforms that fit ourcapabilities.

“Innovation and creativedestruction are major focusesfor our business. They are certainly a major focus of our senior management andshareholders at Koch.”

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Celebration In 1987, Princess Margaret,

sister of Queen Elizabeth II,helped celebrate the thirtiethanniversary of the Wilton plant.

Last November, the plantcelebrated its fiftieth year ofoperation with an employeeparty and visits from INVISTAleaders.

While many UK chemicalproducers have struggled tomeet the challenges of globalcompetition, INVISTA hasworked hard to keep Wiltoncompetitive by investing in newtechnology, processes andtraining.

“When you consider howsmall it was when it started andthen look at what it’s capable of now,” said Doug Annan,INVISTA’s Wilton site manager,“you have to be impressed.

“That first load of nylon poly-mer produced in 1957 was thetrickle that became a flood.”

Perhaps half of all thechemicals made in theUK are produced in

Teesside, an area well-knownfor industrial production.

INVISTA’s chemical plant atWilton in Teesside is a four-hour drive north of London,but less than four miles fromBritain’s second-largest portfacility, where North Sea oiland gas arrive for processing.

For most of the 20th century,Imperial Chemical Industrieswas one of the two biggestemployers in Teesside.

ICI came up with the word“plastics” in 1927 and inventedan important new polymer, poly-thene, in 1933. The companyalso claims to have createdthe first polyester fiber.

Wilton After World War II, ICI began

building a massive chemicalcomplex in Wilton.

Several facilities were addedover the years, including aplant that began producingnylon intermediates and poly-mers in late 1957.

Since then, the Wilton planthas produced millions of tonsof products, including HMD,adipic acid, nylon salts andnylon polymers.

The plant has changedhands twice. It was acquiredby DuPont in 1993 and becamepart of the division DuPontlater renamed INVISTA.

In 2004, the year Koch sub-sidiaries acquired INVISTA,Wilton employees were hon-ored with a Diamond Awardfrom the UK’s ChemicalIndustry Association.

This award, which was alsogiven to INVISTA’s Maydownand Gloucester sites, requires10 consecutive years of supe-rior safety, health and environ-mental performance.

LOOKING BACK

From trickle to floodNoteworthy

“Knowing is notenough; we mustapply. Willing is notenough; we mustdo.”

—- Goethe

The first load of nylonpolymer from

the Wiltonplant wasproduced in 1957.

Today,INVISTA’s

Wilton plant has about

300 companyand 100

contractoremployees.

Common Sense Economics:What everyone should knowabout wealth and prosperityby James Gwartney, RichardStroup and Dwight Lee.

Do you like the idea of reduc-ing poverty and improving ourworld (two ideas that seem nearand dear to most presidentialcandidates)?

If you do, then Nobel Prize-winning economist VernonSmith has a suggestion: read this book.

The authors, notes Smith, provide a simple and straightfor-ward explanation of how economic freedom benefits us all.

Just in time for this year’s elections, Common SenseEconomics spends anentire chapter dis-cussing economicprogress and the roleof government.

Other chapters aredevoted to the sevenmajor sources ofeconomic progress,a dozen specificsuggestions for improv-ing your own economic situationand “the ten key elements” ofeconomics.

The authors also show how economic concepts at both the personal and societallevel are not as far apart assome might think.

“The same principles that explainhow nations become wealthy canalso make you wealthy,” they write.“And…increasing your wealth helpsothers become wealthy as well.”

Too

True

even the simplest business tooperate without enormous risk.

We believe the long-termsuccess of any business isdetermined by how much it is contributing to improvingpeople’s lives and prosperitythrough value creation.

Many political leaders, on the other hand, seemdetermined to destroy value.

Government spending continues to increase at a ratefaster than the growth of theU.S. economy (which manyeconomists believe is alreadyin recession).

To support that spending,taxes will escalate. The growthof government regulations has been even greater, furtherundermining economic freedomand prosperity.

By spending far more than it takes in and piling up unfunded liabilities, thegovernment is not only undermining prosperity todaybut also for future generations.

Even worse, by limiting the personal liberties and market-based policies that createprosperity, the government ismaking it more difficult toreverse that crippling trend.

Our best hope in the battle forpersonal and economic freedomand continued prosperity isawareness and advocacy.

You must know your political candidates and payattention to proposals by your regulators.

Don't just consider theirintentions or their rhetoric;think about their results.

Always make it a point tosupport those people and policies that advance thecause of freedom and prosperity – two benefits that are forever linked.

And take to heart Goethe'sadvice: "Knowing is notenough; we must apply.Willing is not enough; we must do."

PERSPECTIVE

Ihave some goodnews and some bad news.

The good news is KochIndustries did very well in2007. It was not a recordyear overall, but mostKoch companies turned invery strong results.

We continued toimprove our environmen-tal, health and safety performance.

We continued to investin expansions and improve-ments that are essential to the well-being of our companies,customers and society.

We also made several important acquisitions, creatingmore and better opportunitiesfor many employees.

We are entering 2008 thestrongest we’ve ever been inkey dimensions: finance, culture, compliance, talent,capabilities and competitiveposition.

The bad news involves whatwe face politically in the U.S.

This is ironic, because theU.S. has long been regarded as one of the most free andprosperous nations on earth.

Unfortunately, as PresidentJefferson observed, a growinggovernment is often the worstenemy of liberty.

Judging from what we'veheard from the presidentialcampaigns so far, we could be facing the greatest loss ofliberty and prosperity since the 1930s.

History lessonOne of the most chilling

examples of how governmentcan create and perpetuate misery is the Great Depression.

Its most notable causes were

By Charles KochChairmanand CEO

Koch Industries, Inc.

the manipulation of the moneysupply, large increases in taxesand import tariffs, and the prevention of needed priceadjustments by the federalgovernment.

These actions led to economic collapse and disaster for most U.S. citizens.But then, to make mattersworse, the government pro-longed the misery with a hostof other harmful interventions.

Massive new federal agenciesand regulations were created.Taxes and spending skyrocketedwhile the number of federalemployees more than doubled.

Wage and price controlswere imposed and the policyof paying farmers not to pro-duce was introduced. Therewere also repeated violationsof the U.S. Constitution,including a serious loss of civil liberties.

These policies prolongedthe depression until WWII. In fact, as late as 1938, U.S.unemployment exceeded 17 percent and the stock market was less than a thirdof what it had been in 1929.

All of this was done in thename of making things betteror more fair.

Grim realityUnfortunately, we are facing

many similar initiatives today. The U.S. Congress has already

passed – or is considering –massive new regulations andsubsidies, many of them relatedto carbon reduction schemes.

We are seeing increased pro-tectionism, further socializationof health care and over-crimi-nalization of commerce.

U.S. politicians plan to continue to tilt the table bypassing more contributionrules that favor candidateswho support big government.

Many of these policymakerssupport price controls, includingcriminal price-gouging laws, thatwould make it impossible for

www.scienceofsuccess.com

“The natural progress ofthings is for liberty to yieldand government to gainground.”

- Thomas Jefferson