THE QUARTERLY NEWSLETTER OF KOCH COMPANIES DiscoveryOCTOBER 2018

Koch Industries’ Vision emphasizes virtuous cycles of mutual benefit. This is the opposite of the “I win, you lose” mentality that seems to be driving many global trade policies these days.

At Koch, we believe everyone is better off when they are free to associate and contract with others, unhindered by tariffs, needless regulations or other barriers. This allows people to improve their lives by meeting their needs in the most cost-effective way possible. Tariffs, which are just taxes on mutually-beneficial trade — raise costs for consumers, businesses and farmers.

Throughout history, the most prosperous societies have been those that are open, not just to trade, but to the free flow of ideas, too. Those that have eliminated trade barriers — even when they did so unilaterally — have always fared the best.

Examples include the citizens of England and the Netherlands, who led the world in prosperity as their countries opened up. Conversely, medieval China went

Tariff-ically troublingfrom being the most advanced country on earth to one of the poorest when it shut down internal and external exchanges. GOOD OR BAD One of the things that makes Koch Industries unique is its opposition to tariffs and subsidies even when they benefit Koch companies. There are several recent examples of this.

Koch lobbied for the expiration of the federal tax credit for ethanol, a $20 billion giveaway, even though FHR, a Koch company, is one of the nation’s leading ethanol producers. Koch also opposes the federal ethanol mandate, which dictates that U.S. consumers must use billions of gallons of corn-based ethanol and biofuels annually.

After the 2016 elections, Republicans in the U.S. Congress proposed a so-called Border Adjustment Tax — a new 20 percent tax on all imports. Koch and its allies lobbied against this tax, even though it would have increased Koch’s profits significantly.

Koch is also opposed to the hundreds of tariff increases levied so far this year. “These tariffs further rig the system by creating winners and losers,” explains Charles Koch. “They promote cronyism because companies and even entire countries are not treated equally.

“Our Vision is to create value for others. Tariffs can only hurt others, and the people U.S. tariffs hurt the most are our own citizens.” STEEL YOURSELF

By one estimate, at least 140,000 American jobs are involved in steel production. Another six million jobs — especially those in construction and manufacturing — depend on steel.

THIS ISSUE...

2 The Scoop

4 Transformation underway at FHR

7 Charles Koch goes nuclear

8 Perspective: Dave Robertson

Story continues on page 6.

Simply put, it’s a flexible platform where employees will find a variety of news from around Koch, all in one place. You can subscribe to the topics you want to follow and access the news from any device, 24/7.

The Scoop also makes it easy to share our stories with your professional and personal social media channels, helping connect your followers to what Koch companies are all about. The Scoop is open to all Koch company employees globally and participation is voluntary.

Visit koch.link/scoop then click on “Sign In with SSO,” complete a few profile questions and select subscription categories.

EMAIL USDiscovery@kochind.com

DISCOVERY ONLINE KOCHnews.com/media-

resources

www.KOCHind.com

DiscoveryOctober 2018Volume 24 | Number 4

© 2018 Koch Industries, Inc. Koch is an EOE. M/F/D/V.

EDITORIAL BOARD Susan Armitage

Philip Ellender

Jeff Gentry

Greg Guest

Jim Hannan

Amy Hennes

Charles Koch

Steve Lombardo

Walt Malone

Brad Razook

Dave Robertson

Peter Ventimiglia

Letters and other submissions become the property of Koch Industries, Inc., and may be reproduced in whole or in part, including the author’s name, for any purpose and in any manner. Letters may be edited for length or clarity.Postal Pipeline

FOUNDER’S DAY

More than 120,000 Koch

company employees around the

world celebrated Founder’s Day

on September 21.

The following pictures were taken

in Llíria, Spain; Bangalore, India;

Canéjan, France; Lisle, Illinois;

Auburn Hills, Michigan; and

Wichita, Kansas.

We may have 120,000 employees around the world, but we make sure every one of our interns has the opportunity to interact with each other, learn and grow through a variety of networking activities including community service, athletic competitions, group projects and face-to-face time with leadership.

In July, our interns got the chance to ask their best questions of our CEO, Charles Koch. He shared a few jokes, his best advice and explained why the hands-on experience they gained over the summer is as valuable to the company as it is to them.

Koch Industries

What a great opportunity

Koch offers to their summer

interns. The interns learn

from the best. They learn and

understand the workings of

a corporate company. Also,

Koch makes it fun for them

with some outside activities

while they are there for the

summer. A big thank you to

Koch for this program!

— Marilyn K. Jacot-Powers

What’s The Scoop?

2

International News

Düsseldorf, Germany – Guardian Glass made quite a splash at glasstec 2018, the world’s leading trade fair for the glass industry.

“Our attendance at glasstec fit perfectly with Guiding Principle 5 – Knowledge,” said Kevin Baird, president and CEO of Guardian Glass. “We want to acquire knowledge from the best sources, regardless of who or where they are, so we can improve our performance.”

Baird says this global trade fair, which is held every two years, is the best in the business — especially for new technology.

“More than two-thirds of the exhibits are new products and some of them are developed by students.”

Universities from Australia, France, Germany, the Netherlands

Beijing, China – It has been nearly a year since China banned imports of mixed recyclable paper, which is used to make the boxes and containers for Chinese-made products sold around the world.

“The actions taken by the Chinese government have changed the worldwide trade flows of recycled fiber,” said Marc Forman, president of GP’s recycling business. “And every month, it seems like a new barrier has been added that makes it harder to ship product to our Chinese customers.”

Forman says the drop in the company’s shipments to China has been dramatic — falling from about 1 million tons in 2017 to less than 400,000 tons in 2018.

“The Chinese ban disrupted the market in two ways: it hurt the suppliers who provide us with product for recycling, and it challenged the customers we sell to who rely on that fiber to produce their products.”

Fortunately, says Forman, the company had the foresight to develop a diversified portfolio of customers in several countries.

Left: Guardian Clarity™ – This “invisible glass” creates some memorable interactions in the Land of Lions at the London Zoo. The product was also on display in July at the International Council of Museums exhibition in Milan, Italy.

© Romag

This provided some optionality when the ban hit. That strategy has paid off in a big way.

The vision for GP’s recycling business — which was established in the 1960s and is one of the largest recycling entities in the

U.S. — is to bring buyers and sellers of recycled commodities together in ways that create value.

“We take material that would’ve ended up in a landfill and get it in the hands of people who can use it to make new products we use every day.

“Ban or no ban,” said Forman, “that’s what we’re committed to doing.”

and the U.K. were participants at glasstec 2018, along with several multinational corporations.

One of the innovations Guardian Glass unveiled at the trade fair was a bit like something out of a James Bond or sci-fi movie.

It’s sheet glass that, with the flick of a switch, goes from transparent to utterly black. Once it becomes commercially available in 2019, the company expects to see enormous demand for this innovative product.

EMAIL USDiscovery@kochind.com

DISCOVERY ONLINE KOCHnews.com/media-

resources

The design for the Guardian Glass booth at glasstec 2018. The biennial international trade fair was held Oct. 22-26 in Düsseldorf.

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In last October’s Discovery, Brad Razook and Jeff Ramsey explained how Flint Hills Resources was beginning to transform itself in order to compete in a marketplace that was becoming increasingly unpredictable.

By then, it was already obvious that FHR’s traditional kind of

long-term thinking was no longer reliable. New technologies and competitive threats were poised to disrupt — and in some cases completely redefine — the very nature of its industry, especially the transportation fuel sector.

Advancements in batteries and autonomous vehicle technologies, together with policies that ignore market economics by subsidizing electric vehicles, have the potential to completely reshape FHR’s competitive landscape.

Refiners and petrochemical manufacturers are no strangers to the disruptive effects of new technologies and the realities of competing in a sometimes volatile and unforgiving marketplace.

For decades, FHR and its predecessor companies have endured economic recessions, oil embargoes, price controls and the promise of hydrogen cars. Over the years, countless government policies have manipulated energy markets in unproductive ways.

Despite these challenges, the delivery of safe, reliable and affordable fuels and other products — all derived from a 42-gallon barrel of oil — has helped transform civilization and led to a marked improvement in the quality of life all around the world.

Along the way, FHR has played a key role in finding ways to improve the delivery of these products in a safe, energy-efficient manner. Market-driven innovations in biofuel technologies have only contributed to the value proposition of these products.

“We have done a good job of adapting in the past,” said Brad Razook, CEO of Koch Resources, “but the challenges we face today are more existential and require an even more determined response. They are the fundamental drivers of our need to transform.” TRANSFORMATION IN PROGRESS The type of transformation the company is pursuing doesn’t happen overnight. It also must be continual. So even though FHR has already made significant progress, there is still much work left to do.

A NEW CALL TO ACTION

“We began by fundamentally changing our mindset,” explained Jeff Ramsey, CEO of Flint Hills Resources. “We had to change our organizational focus and create entirely new capabilities, otherwise we wouldn’t have been able to change fast enough. In this kind of marketplace, which is much more dynamic, we have to be very nimble and opportunistic if we want to remain competitive.”

The changes FHR has already made span the organization. The wider use of automation, data analytics and other technological advancements are just the beginning. These have already helped improve FHR’s competitiveness and are preparing the company for whatever opportunities and challenges lie ahead.

Some changes have been small but meaningful, such as incorporating smart-bot technologies into the company’s accounting practices. This has eliminated boring and repetitious work such as scanning invoices.

Other changes have been more foundational. FHR has created new shared-service capabilities for legal, EH&S and large capital projects. It has also consolidated FHR and Koch Pipeline Company, creating new synergies that have helped both companies reduce costs. PEOPLE POWER

Perhaps most significantly, FHR has dramatically restructured its site operations to more aggressively leverage automation technologies and eliminate inefficient hierarchies.

More than 500 operational roles have been realigned to focus on using new technologies to run process units and provide services. The benefits of this have already become obvious across the organization.

To help accelerate transformation efforts, FHR’s Operations Excellence group has reorganized and changed its name. It now focuses on new capabilities, including data analytics and automation. Today’s Ops Services group serves as a knowledge network for driving site-by-site adoption of new technologies.

So far, the results of these changes have been promising.

Transformation initiatives, including the wider use of Advanced Process Control technologies, have contributed to all-time monthly production records at the company’s Shell Rock ethanol plant and an industry-best, 90+ percent utilization rate at its Pine Bend refinery. New deep-learning Advanced Analytics Process Controls currently being tested at FHR’s Port Arthur chemical site show even greater potential.

4

PEOPLE FIRST

As Koch’s new Vision plainly puts it, creative destruction has always been with us. But today’s rate of change is unprecedented, and it will touch every aspect of our business, including our greatest resource — our people.

Koch’s Guiding Principles — which were recently updated to help us confront the challenges all Koch companies face today — are essential for the creation of virtuous cycles of mutual benefit.

“More than anything else, our future success depends on the ability of our employees to embrace transformation and internalize our company’s Guiding Principles,” said Ramsey. “The technological changes we are experiencing are an opportunity for all of us to find new ways to create value in our roles and find fulfillment in the work we do.

“As Charles Koch recently said at an employee meeting in Wichita, ‘We want you to be fulfilled rather than just earn a living.’” COMPETITION IS GOOD

The marketplace is littered with the wreckage of companies that failed to anticipate and respond to the disruptive effects of new technologies and new sources of competition.

Even more so today, the rapid pace of technological change threatens to leave laggards behind permanently.

“Make no mistake, competition is good, and we should all welcome the challenge that’s in front of us,” said Razook.

“The truth is, the best way to remain viable and to compete successfully in this world of new and emerging technologies is to produce a superior product and do it better than the competition.

“We have to recommit ourselves to the core

concepts that are the foundation of Koch’s success, especially the idea of creating virtuous cycles of mutual benefit.”

“In many ways, we need to harken back to our company’s origins,” added Ramsey.“Back then, the constant drive of competition, innovation and discovery paved the way to a better future.

“It’s true that our past success is no guarantee of future results. That’s why we’re working on new and better ways of building our business.”

Other transformation improvements include:

• All FHR sites are now equipped with Wi-Fi, which is lowering the cost and expanding the use of technologies that collect continuous, real-time operating data. (In one application, a wireless vibration monitor recently found a transient condition that was an indicator of a potential equipment failure. Not so long ago, the indicator would have never been found).

• Technicians are now using Wi-Fi connected mobile devices in the field to verify repairs, coordinate resources and communicate the status of operations in real time.

• FHR is partnering with John Zink Hamworthy Combustion to replace operating heater burners using visual judgement with analytics. The improved energy efficiency is resulting in higher yields and utilization.

• Safety has been improved by automating chemical deliveries. Electronic locks allow a chemical transfer to take place only if the delivery truck matches certain programed conditions.

• A new method of developing Advanced Process Control models using machine learning is proving more economic and faster than traditional APC systems.

• FHR is partnering with Molex to apply analytics to piping corrosion monitoring systems. This has already improved the quality and value of the data.

• Turnarounds (major scheduled maintenance projects) are being transformed by the use of smart cameras for virtual planning, remote confined space monitoring and remote rapid-execution centers.

• Automated equipment monitoring is being developed to find and flag anomalies that traditionally were too costly to investigate. (A recent use of this technology found a slight vibration increase that was easily and inexpensively resolved.)

5

So earlier this year, when the U.S. slapped a 25 percent tariff on imported steel (in some cases, it was 50 percent), the ripple effects were substantial. This particular tariff provides a good example of how a tariff can cut both ways — helping some but hurting others.

Koch is a minority shareholder in Big River Steel, the largest industrial project in the history of Arkansas. Big River, which began operating about two years ago, was the world’s first Flex Mill. It can produce a wide variety of advanced automotive and electrical steels made from melted scrap.

The new tariffs on imported steel — coupled with strong market demand for steel products — have pushed up steel prices anywhere from 20 to 30 percent this year, which is a big boost for results at Big River Steel. ON THE OTHER HAND But for American consumers, the tariff story isn’t so nice. They now face higher costs for goods and services and have fewer choices when foreign sources are unable to compete.

Examples of the harms created by trade barriers are, unfortunately, numerous.

TARIFF-ICALLY TROUBLING (CONTINUED FROM PAGE 1)

Consider the price of food. Due to trade barriers and subsidies, sugar costs Americans 52 percent more than the world price, adding up to about $4.4 billion per year. For decades, buyers of cured pork products in the U.S. were hurt by a ban on Italian imports.

The effect on car prices is even costlier. According to one report, recent tariffs could cause the popular Toyota Camry to cost “$1,800 more to build, while the Tundra truck built in San Antonio would cost $2,800 more. The Sienna minivan, built in Princeton, Indiana, would cost about an additional $3,000.”

Higher tariffs and “trade wars” also mean many hard-working Americans could lose their jobs. One estimate found that a 25 percent tariff on $50 billion worth of Chinese imports puts 76,000 U.S. jobs at risk. DOING THE MATH

Molex, which has manufacturing sites around the world, is another example of how tariffs are affecting global companies and customers.

Molex must now pay significant additional tariffs on U.S. imports from China, as well as any products it exports to China from the U.S. Those costs must be passed on to the consumers who buy new smart phones, vehicles, appliances or rely on advanced medical equipment.

“It’s frustrating,” said Joe Nelligan, Molex’s new CEO, “because as a Koch company, we strongly support free trade.

“Policymakers need to understand that trade barriers can have far-reaching

Koch opposes tariffs, even when

they benefit Koch companies.

6

Koch companies with a global manufacturing presence find tariffs to be especially troubling.

Molex is dealing with pricing, supply chain and administrative issues because of new tariffs.

consequences. They further divide people rather than bringing them together in a mutually beneficial way.” BAD POLICY

The international response to U.S. tariff increases has been outrage, appeals to the World Trade Organization and a wave of retaliatory tariffs on popular American

exports. This creates tremendous uncertainty for many businesses.

Uncertainty is a serious problem, because when businesses have no confidence in what a government is likely to do tomorrow — let alone a year from now — it hinders investments and limits opportunities.

“What we need is a paradigm shift,” said Charles Koch. “Leaders need to start thinking in terms of win-win rather than a zero-sum game. It’s just not true that every gain of one country comes at another country’s expense.”

Noteworthy

Mad About Trade: Why Main Street America Should Embrace Globalization by Daniel Griswold

Although Griswold’s book is focused on the U.S. and its trade policies, he makes a strong case for global free trade, noting that competition from imports lowers prices, improves

quality and results in greater variety — benefits that are especially important for poor and middle-class families worldwide.

Griswold is also convinced freer trade results in more peaceable times.

“Thanks in part to expanding trade, our world is more democratized and peaceful,” he writes. “Trade has promoted peace among nations, making it less likely that America’s sons and daughters will fight in future wars.”

In analyzing the world’s overheated trade debate, Griswold makes some very specific recommendations for changes in U.S. policy. Among them is a repeal of all tariffs and other trade restrictions that raise the cost of production for U.S.-based companies.

Griswold also suggests consolidating all unemployment, job retraining and wage insurance programs in ways that benefit all American workers, not just those who have been displaced by trade.

For those who argue the U.S. should just focus on shrinking its foreign trade “deficit,” Griswold is quick to point out that whenever America’s trade deficit has gone down, the U.S. unemployment rate invariably goes up.

“Free trade,” concludes Griswold, “enhances our liberty, promotes prosperity, and advances peace.”

A nation that would enrich itself

by foreign trade is certainly most

likely to do so when its neighbors

are all rich, industrious, and

commercial nations.

– Adam Smith

Looking Back

The nuclear optionSixty years ago, Charles Koch earned his first post-graduate degree from MIT — a master’s in nuclear engineering.

“Back then, nuclear power was fairly new, and I thought it had the potential to create some entrepreneurial opportunities,” Koch recalled. “So I signed up.”

Koch’s coursework began his senior year. As part of the curriculum, he took advanced courses in calculus, thermodynamics and nuclear physics.

“A lot of the calculus was unintelligible for me. It was integral calculus with continuities, which is impenetrable compared to differential calculus.

“I struggled with other aspects of the material, especially nuclear engineering, where the theory didn’t fit the data, so they used bugger factors to make the equations work.” WELCOME TO OAK RIDGE

Koch’s spring semester was spent at MIT’s engineering practice school at the Atomic Energy Commission’s nuclear production and research facility in Oak Ridge, Tennessee, a 60,000-acre campus built during World War II.

“I am now on my second problem out of the six we do during the term,” wrote Koch to his parents in March 1958.

“Much of the work is classified so I can only discuss it in generalities.

“My first problem was the design and testing of a certain sort of hot wire and probe. The second has to do with some calculations on one of the research reactors down here.”

Charles Koch doing lab work at MIT.

Koch was excited to work with an IBM 704 computer at Oak Ridge. The 704, which relied on vacuum tube circuitry, was the first mass-produced computer capable of large-scale, high-speed mathematic calculations. NOT SO HOT

Charles Koch learned at least two important things during his time studying nuclear engineering.

First, because of strict government involvement and oversight, he realized that nuclear power was unlikely to present as many opportunities as he had hoped.

Second, and much more important for him personally, was the realization that he was better at dealing with some concepts and kinds of math than others.

“After I left MIT, I got a job at a consulting firm. During that time, I read a textbook on accounting and took an MIT course in finance. Those concepts were much more obvious and natural to me.

“I now know that I’m a lousy engineer — even though I have three engineering degrees.” (Whenever anything breaks at the Koch’s house, it’s usually Charles’ wife, Liz, who fixes it.)

But Koch insists that his difficult year at MIT was important, “because it really taught me best how to develop my aptitudes.

“To become self-actualized and eventually fulfilled, we all need work that stretches us and continually challenges us — but not so difficult that it’s impossible to accomplish and demoralizes us.”

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Perspective

Five years ago, which was the last time Koch Industries updated its Vision, our world looked a little different.

There were no Apple watches, no Siri or Alexa, and no Bluetooth movies in the SUV so the kids could watch “Zootopia” (again).

Most of us would agree that those technological advancements — and countless others like them — have made our lives better. We like being able to see who’s ringing our doorbell when we’re not at home, driving cars that help keep us out of accidents, and getting accurate answers to questions in an instant.

What’s even more amazing is to think that the changes we’ve seen in the last five years will probably be eclipsed by what we’ll see in the next two. That’s how rapidly the pace of change is accelerating.

But now that our new Vision emphasizes accelerated change and the need for constant transformation — both personally and professionally — some people are worried. They wonder why we can’t just keep things the way they are. After all, this will likely be a record year for Koch Industries. If it’s not broken, why fix it?

I think we’ll all be in a better position if we look at change in a more positive and proactive way. THREE KEY CONCEPTS

I believe there are three key concepts that will make or break our implementation of KII’s new Vision: mutual benefit, continual transformation and self-actualization.

To begin with, everything we do needs to be based on a win-win proposition, not a winner-take-all or zero-sum mentality. As simple as it sounds, this point of view is something that makes us fundamentally different as a company.

If you think about it, this is not a radically new concept for us. We’ve been operating this way for a very long time. That’s why Customer Focus was one of our Guiding Principles for so many years. Mutual

Dave Robertson President and COO, Koch Industries

benefit is what we want to accomplish because we always do better when we help our customers and other constituents do better.

Continual transformation is a more challenging proposition. We’ve all seen jobs, markets and even entire industries upended as new technologies take hold. To pretend that we can ignore those changes, or to think that creative destruction won’t ever affect us, is not reality-based.

We used to talk about the need for continuous improvement, which is still important, but transformation goes far beyond that. It doesn’t mean doing what you’ve been doing a little better or a little faster. It means doing things in entirely new ways, or maybe not doing what we used to do at all.

Technology can be a great tool for helping us transform ourselves and our businesses. Do you really want to settle for folded paper road maps or a new fax machine? I don’t. That’s why each of us should want to transform — both personally and professionally.

It’s exciting to think about the new roles that transformation could bring to Koch. Five years ago, we didn’t know we’d be recruiting and hiring cloud architects, data analytics specialists, digital marketing strategists or drone pilots. Five years from now, who knows?

The third key concept to implementing our Vision is also the most personal: self-actualization. This is now our culminating Guiding Principle — the one principle that the other seven rely on. Self-actualization is what will drive the success (or failure) of our company.

Charles described self-actualization in detail in the last issue of Discovery.

But I think his daughter, Elizabeth, also did a great job of summing up the concept when she spoke at Charles’ 80th birthday party with Koch employees.

“Find the thing that brings you alive inside,” Elizabeth said, “and use it to bring others alive.”

The more you self-actualize, the more you will create a better life for yourself and your loved ones, and the more you help the company succeed by benefiting others. It’s a virtuous cycle that you set in motion. WHAT’S YOUR POINT OF VIEW?

If you view the pace of change and the use of technology-driven improvements as a threat, things are likely to not go well for you. Whether we like it or not, change is happening. And it’s happening at an ever-faster pace.

On the other hand, if you realize that technology-driven changes can make your job safer, more productive and less boring — or, even better, transform your role into something far more exciting and rewarding — what’s not to like?

Embracing new technology does not mean you have to lose your job. Accountants did not disappear when spreadsheets took the pencil-pushing out of tracking numbers. We still need cowboys on our ranches even though we can track the location and health of our cattle by using drones.

It’s up to us to have a positive, can-do attitude toward change and embrace our opportunities to improve. Only then can we contribute at a higher level, making each of us, our families, our businesses, our customers and our communities, better off.

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