Attached files
file | filename |
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EX-32.1 - UNION CARBIDE CORP /NEW/ | ex32_1.htm |
EX-23 - UNION CARBIDE CORP /NEW/ | ex23.htm |
EX-31.2 - UNION CARBIDE CORP /NEW/ | ex31_2.htm |
EX-32.2 - UNION CARBIDE CORP /NEW/ | ex32_2.htm |
EX-31.1 - UNION CARBIDE CORP /NEW/ | ex31_1.htm |
EX-10.5 - UNION CARBIDE CORP /NEW/ | ex10_5.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year
ended DECEMBER 31,
2009
Commission
file number: 1-1463
UNION
CARBIDE CORPORATION
(Exact
name of registrant as specified in its charter)
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New
York
(State
or other jurisdiction of
incorporation
or organization)
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13-1421730
(I.R.S.
Employer Identification No.)
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1254
Enclave Parkway, Houston, Texas 77077
(Address
of principal executive
offices) (Zip
Code)
Registrant's
telephone number, including area
code: 281-966-2727
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Securities
registered pursuant to Section 12(b) of the
Act: None
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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o Yes þ
No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
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o Yes þ
No
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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.
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þ
Yes o
No
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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).
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o Yes oNo
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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 the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.:
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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o Yes þ
No
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At
February 18, 2010, 1,000 shares of common stock were outstanding, all of
which were held by the registrant’s parent, The Dow Chemical
Company.
The
registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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Documents
Incorporated by Reference
None
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ANNUAL
REPORT ON FORM 10-K
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For
the Fiscal Year Ended December 31, 2009
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PART
I
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PAGE
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Business.
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3
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Risk
Factors.
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5
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Unresolved
Staff Comments.
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7
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Properties.
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7
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Legal
Proceedings.
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8
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Submission
of Matters to a Vote of Security Holders.
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11
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PART
II
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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11
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Selected
Financial Data.
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11
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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12
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Quantitative
and Qualitative Disclosures About Market Risk.
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24
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Financial
Statements and Supplementary Data.
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25
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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57
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Controls
and Procedures.
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57
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Other
Information.
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58
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PART
III
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Directors,
Executive Officers and Corporate Governance.
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58
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Executive
Compensation.
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58
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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58
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Certain
Relationships and Related Transactions, and Director
Independence.
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58
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Principal
Accounting Fees and Services.
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58
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PART
IV
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Exhibits,
Financial Statement Schedules.
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59
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88
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ITEM 1. BUSINESS.
Union
Carbide Corporation (the “Corporation” or “UCC”) is a chemicals and polymers
company. In addition to its consolidated operations, the Corporation
participates in partnerships and joint ventures (together, “nonconsolidated
affiliates”). The Corporation is a wholly owned subsidiary of The Dow Chemical
Company (“Dow”). Except as otherwise indicated by the context, the terms
“Corporation” or “UCC” as used herein mean Union Carbide Corporation and its
consolidated subsidiaries.
Dow conducts its worldwide operations
through global businesses. The Corporation’s business activities comprise
components of Dow’s global businesses rather than stand-alone operations.
Because there are no separable reportable business segments for UCC and no
detailed business information is provided to a chief operating decision maker
regarding the Corporation’s stand-alone operations, the Corporation’s results
are reported as a single operating segment. In order to simplify the customer
interface process, the Corporation sells its products to Dow. Products are sold
to Dow at market-based prices, in accordance with the terms of Dow’s
long-standing intercompany pricing policies.
The
following is a description of the Corporation’s principal products.
Ethylene Oxide/Ethylene Glycol
(“EO/EG”)—ethylene oxide (“EO”), a chemical intermediate primarily used
in the manufacture of monoethylene glycol (“MEG”), polyethylene glycol, glycol
ethers, ethanolamines, surfactants and other performance chemicals and polymers;
di- and triethylene glycol, used in a variety of applications, including boat
construction, shoe manufacturing, natural gas-drying and other moisture-removing
applications, and plasticizers for safety glasses; and tetraethylene glycol,
used predominantly in the production of plasticizers for automotive windows. MEG
is used extensively in the production of polyester fiber, resin and film,
automotive antifreeze and engine coolants, and aircraft anti-icing and deicing
fluids.
Industrial Chemicals and
Polymers—broad range of products for specialty applications, including
pharmaceutical, animal food supplements, personal care, industrial and household
cleaning, coatings for beverage and food cans, industrial coatings and many
other industrial uses. Product lines include acrolein and derivatives, CARBOWAX™
and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols,
TERGITOL™ and TRITON™ surfactants, UCAR™ deicing fluids, UCARTHERM™ heat
transfer fluids and UCON™ fluids.
Latex—water-based emulsions,
including EVOCAR™ vinyl acetate ethylene, NEOCAR™ branched vinyl ester latexes,
UCAR™ POLYPHOBE™ rheology modifiers, and UCAR™ all-acrylic, styrene-acrylic and
vinyl-acrylic latexes used as key components in decorative and industrial
paints, adhesives, textile products, and construction products, such as caulks
and sealants. See Note S to the Consolidated Financial Statements for
information regarding a 2010 divestiture.
Polyethylene—includes
FLEXOMER™ very low density polyethylene resins used as impact modifiers in other
polymers and to produce flexible hose and tubing, frozen-food bags and stretch
wrap; TUFLIN™ linear low density and UNIVAL™ high density polyethylene resins
used in high-volume applications such as housewares; milk, water, bleach and
detergent bottles; grocery sacks; trash bags; packaging; water and gas
pipe.
Polypropylene—end-use
applications include upholstery; hygiene articles; packaging films; thin wall
food containers and serviceware; industrial containers; housewares and
appliances; heavy-duty tapes and ropes; and automobile interior panels and
trim.
Solvents and
Intermediates—includes oxo aldehydes, acids and alcohols used as chemical
intermediates and industrial solvents and in herbicides, plasticizers, paint
dryers, jet-turbine lubricants, lube oil additives, and food and feed
preservatives; and esters, which serve as solvents in industrial coatings and
printing inks and in the manufacturing processes for pharmaceuticals and
polymers.
Technology Licensing and
Catalysts—includes licensing and supply of related catalysts for the
UNIPOL™ polypropylene process, catalysts supply for the METEOR™ process for
EO/EG and the LP OXO™ process for oxo alcohols; licensing of the UNIPOL™
polyethylene process and sale of related catalysts (including metallocene
catalysts) through Univation Technologies, LLC, a 50:50 joint venture with
ExxonMobil; and licensing of the METEOR™ process for EO/EG and the LP OXO™
process for oxo alcohols through Dow Technology Investments LLC, a 50:50 joint
venture with Dow Global Technologies Inc., a Dow subsidiary.
Vinyl Acetate Monomer—a
building block for the manufacture of a variety of polymers used in water-based
emulsion paints, adhesives, paper coatings, textiles, safety glass and acrylic
fibers.
Water Soluble
Polymers—polymers used to enhance the physical and sensory properties of
end-use products in a wide range of applications including food, paints and
coatings, pharmaceuticals, oil and gas, personal care, building and
construction, and other specialty applications. Key product lines include
CELLOSIZE™ hydroxyethyl cellulose, POLYOX™ water-soluble resins, and products
for hair and skin manufactured by Amerchol Corporation, a wholly owned
subsidiary.
Wire and
Cable—polyolefin-based compounds for high-performance insulation,
semiconductives and jacketing systems for power distribution,
telecommunications, and flame-retardant wire and cable. Key product lines
include: REDI-LINK™ polyethylene-based wire and cable compounds, SI-LINK™
polyethylene-based low voltage insulation compounds, UNIGARD™ HP
high-performance flame-retardant compounds, UNIGARD™ RE reduced emissions
flame-retardant compounds, and UNIPURGE™ purging compounds.
Competition
The
chemical industry has been historically competitive and this competitive
environment is expected to continue. The chemical divisions of the major
international oil companies also provide substantial competition both in the
United States and abroad.
Research
and Development
The
Corporation is engaged in a continuous program of basic and applied research to
develop new products and processes, to improve and refine existing products and
processes and to develop new applications for existing products. Research and
development expenses were $48 million in 2009, $68 million in 2008 and
$70 million in 2007. In addition, certain of the Corporation's
nonconsolidated affiliates conduct research and development within their
business fields.
Patents,
Licenses and Trademarks
The
Corporation owns approximately 1,200 U.S. and foreign patents that relate to a
wide variety of products and processes, has a substantial number of pending
patent applications throughout the world and is licensed under a number of
patents. These patents expire at various times over the next 20 years. The
Corporation also has a large number of trademarks. Although the Corporation
considers that its patents, licenses and trademarks in the aggregate constitute
a valuable asset, it does not regard its business as being materially dependent
upon any single patent, license or trademark.
Principal
Partly Owned Companies
UCC's
principal nonconsolidated affiliates at December 31, 2009 and the Corporation's
ownership interest in each are listed below:
·
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Nippon
Unicar Company Limited – 50 percent – a Japan-based manufacturer of
polyethylene and specialty polyethylene
compounds.
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·
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Univation
Technologies, LLC – 50 percent – a U.S. company that develops, markets and
licenses polyethylene process technology and related
catalysts.
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Financial
Information about Foreign and Domestic Operations and Export Sales
In
2009, the Corporation derived 41 percent of its trade sales from customers
outside the United States and had 1 percent of its property investment
located outside the United States. See Note R to the Consolidated Financial
Statements for information on sales to external customers and long-lived assets
by geographic area.
Protection
of the Environment
Matters
pertaining to the environment are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Notes A and L to
the Consolidated Financial Statements.
ITEM 1A. RISK FACTORS.
The
factors described below represent the Corporation’s principal
risks.
Volatility in purchased feedstock and
energy costs impacts UCC’s operating costs and adds variability to
earnings.
Purchased
feedstock and energy costs account for a substantial portion of the
Corporation’s total production costs and operating expenses. When these costs
increase, the Corporation is not always able to immediately raise selling prices
and, ultimately, the ability to pass on underlying cost increases is greatly
dependent on market conditions. Conversely, when these costs decline,
selling prices decline as well. As a result, volatility in these
costs could negatively impact the Corporation’s results of
operations.
Issues
involving The Dow Chemical Company, the Corporation’s parent company, could have
a liquidity impact on the Corporation.
Because
Dow is a service provider, material debtor, and the major customer of the
Corporation, certain events and situations affecting Dow’s acquisition of Rohm
and Haas Company (“Rohm and Haas”), as noted below, could potentially impact
sources of liquidity for the Corporation.
Dow’s
integration of Rohm and Haas, which was acquired on April 1, 2009, could
present significant challenges to Dow. The integration is requiring the
attention of Dow management and employees, which could lessen time spent on
services and administrative functions provided to the Corporation pursuant to
negotiated agreements. In addition, Dow’s integration and implementation could
result in higher expenses, and/or the use of more cash and other financial
resources than Dow had expected. Moreover, if the integration is not completed
as planned, it could negatively impact Dow’s financial condition and results of
operations.
In
2009, Dow issued preferred equity securities, debt securities and common equity
securities to partially finance the $15.7 billion acquisition of Rohm and Haas
on April 1, 2009. This requires Dow to make additional interest and dividend
payments and thus may reduce Dow’s flexibility to respond to changing business
and economic conditions or fund capital expenditures or working capital
needs. This may also increase Dow’s vulnerability to adverse economic
conditions.
Dow’s
credit rating is currently investment grade. Dow’s long-term and
short-tem credit ratings were downgraded by Fitch, Standard and Poor’s, and
Moody’s in the first half of 2009. If Dow’s credit-ratings are
further downgraded, borrowing costs will increase on certain indebtedness and it
could have a negative impact on Dow’s ability to access credit markets and
therefore, the Corporation’s liquidity.
The
value of investments is influenced by economic and market
conditions.
The
economic environment impacts the fair value of pension assets, which could
trigger increased future funding requirements of the pension trust.
Adverse
conditions in the global economy and disruption of financial markets could
continue to negatively impact UCC’s results of operations.
The
continuing economic downturn in the United States and globally could further
reduce demand for the Corporation’s products, resulting in a continued decrease
in sales volume that could have a negative impact on UCC’s results of
operations.
Actual
or alleged violations of environmental laws or permit requirements could result
in restrictions or prohibitions on plant operations, substantial civil or
criminal sanctions, as well as the assessment of strict liability and/or joint
and several liability.
The
Corporation is subject to extensive federal, state, local and foreign laws,
regulations, rules and ordinances relating to pollution, protection of the
environment and the generation, storage, handling, transportation, treatment,
disposal and remediation of hazardous substances and waste materials. At
December 31, 2009, the Corporation had accrued obligations of $84 million
($67 million at December 31, 2008) for environmental remediation and restoration
costs, including $21 million ($18 million at December 31, 2008) for the
remediation of Superfund sites. This is management’s best estimate of the costs
for remediation and restoration with respect to environmental matters for which
the Corporation has accrued liabilities, although the ultimate cost with respect
to these particular matters could range up to approximately twice that amount.
Costs and capital expenditures relating to environmental, health or safety
matters are subject to evolving regulatory requirements
and
will depend on the timing of the promulgation and enforcement of specific
standards which impose the requirements. Moreover, changes in environmental
regulations could inhibit or interrupt the Corporation’s operations, or require
modifications to its facilities. Accordingly, environmental, health or safety
regulatory matters may result in significant unanticipated costs or
liabilities.
The Corporation is party to a number
of claims and lawsuits arising out of the normal course of business with respect
to commercial matters, including product liability, governmental regulation and
other actions.
The
Corporation is involved in a number of legal proceedings and claims with both
private and governmental parties. These cover a wide range of matters,
including, but not limited to: product liability; trade regulation; governmental
regulatory proceedings; health, safety and environmental matters; employment;
patents; contracts; taxes; and commercial disputes. With the exception of the
possible effect of the asbestos-related liability described below, it is the
opinion of the Corporation’s management that the possibility is remote that the
aggregate of all such claims and lawsuits will have a material adverse impact on
the Corporation’s consolidated financial statements.
The
Corporation is and has been involved in a large number of asbestos-related suits
filed primarily in state courts during the past three decades. At December 31,
2009, the Corporation’s asbestos-related liability for pending and future claims
was $839 million ($934 million at December 31, 2008) and the Corporation’s
receivable for insurance recoveries related to its asbestos liability was
$84 million ($403 million at December 31, 2008). At December 31, 2009, the
Corporation also had receivables of $448 million ($272 million at December
31, 2008) for insurance recoveries for defense and resolution costs. Management
believes that it is reasonably possible that the cost of disposing of the
Corporation’s asbestos-related claims, including future defense costs, could
have a material adverse impact on the Corporation’s consolidated financial
statements.
Local,
state and federal governments have begun a regulatory process that could lead to
new regulations impacting the security of chemical plant locations and the
transportation of hazardous chemicals.
Growing
public and political attention has been placed on protecting critical
infrastructure, including the chemical industry, from security threats.
Terrorist attacks and natural disasters have increased concern regarding the
security of chemical production and distribution. In addition, local, state and
federal governments have begun a regulatory process that could lead to new
regulations impacting the security of chemical plant locations and the
transportation of hazardous chemicals, which could result in higher operating
costs and interruptions in normal business operations.
Increased
concerns regarding the safety of chemicals in commerce and their potential
impact on the environment could lead to new regulations.
Concerns
regarding the safety of chemicals in commerce and the potential impact on the
environment reflect a growing trend in societal demands for increasing levels of
product safety and environmental protection. These concerns could manifest into
additional pressure for more stringent regulatory intervention. In addition,
these concerns could influence public perceptions, the viability of the
Corporation’s products, the Corporation’s reputation, the cost to comply with
regulations, and the ability to attract and retain employees, which could have a
negative impact on the Corporation’s results of operations.
Weather-related
matters could impact the Corporation’s results of operations.
In
2005 and again in the third quarter of 2008, major hurricanes caused significant
disruption in UCC’s operations on the U.S. Gulf Coast, logistics across the
region and in the supply of certain raw materials which had an adverse impact on
volume and cost for some of UCC’s products. If similar weather-related matters
occur in the future, it could negatively affect UCC’s results of operations, due
to the Corporation’s substantial presence on the U.S. Gulf Coast.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The
Corporation operates 12 manufacturing sites in four countries. The Corporation
considers that its properties are in good operating condition and that its
machinery and equipment have been well maintained. The following are the major
production sites:
United
States:
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Hahnville,
Louisiana; Texas City and Seadrift, Texas; South Charleston, West
Virginia
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All
of UCC’s plants are owned or leased, subject to certain easements of other
persons which, in the opinion of management, do not substantially interfere with
the continued use of such properties or materially affect their
value.
A
summary of properties, classified by type, is contained in Note F to the
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Asbestos-Related
Matters
Introduction
The
Corporation is and has been involved in a large number of asbestos-related suits
filed primarily in state courts during the past three decades. These suits
principally allege personal injury resulting from exposure to
asbestos-containing products and frequently seek both actual and punitive
damages. The alleged claims primarily relate to products that UCC sold in the
past, alleged exposure to asbestos-containing products located on UCC’s
premises, and UCC’s responsibility for asbestos suits filed against a former
subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are
unable to demonstrate that they have suffered any compensable loss as a result
of such exposure, or that injuries incurred in fact resulted from exposure to
the Corporation’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including the Corporation and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. The
Corporation expects more asbestos-related suits to be filed against it and
Amchem in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
The
table below provides information regarding asbestos-related claims filed against
the Corporation and Amchem:
2009
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2008
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2007
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Claims
unresolved at January 1
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75,706 | 90,322 | 111,887 | |||||||||
Claims
filed
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8,455 | 10,922 | 10,157 | |||||||||
Claims
settled, dismissed or otherwise resolved
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(9,131 | ) | (25,538 | ) | (31,722 | ) | ||||||
Claims
unresolved at December 31
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75,030 | 75,706 | 90,322 | |||||||||
Claimants
with claims against both UCC and Amchem
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24,146 | 24,213 | 28,937 | |||||||||
Individual
claimants at December 31
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50,884 | 51,493 | 61,385 |
Plaintiffs’
lawyers often sue dozens or even hundreds of defendants in individual lawsuits
on behalf of hundreds or even thousands of claimants. As a result, the damages
alleged are not expressly identified as to UCC, Amchem or any other particular
defendant, even when specific damages are alleged with respect to a specific
disease or injury. In fact, there are no personal injury cases in which only the
Corporation and/or Amchem are the sole named defendants. For these reasons and
based upon the Corporation’s litigation and settlement experience, the
Corporation does not consider the damages alleged against it and Amchem to be a
meaningful factor in its determination of any potential asbestos-related
liability.
Estimating
the Liability
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, the Corporation increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing costs.
Since then, the Corporation has compared current asbestos claim and resolution
activity to the results of the most recent ARPC study at each balance sheet date
to determine whether the accrual continues to be appropriate. In addition, the
Corporation has requested ARPC to review Union Carbide’s historical asbestos
claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2007, the Corporation requested ARPC to review the Corporation’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2007. In December 2007, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2007, the Corporation’s asbestos-related
liability for pending and future claims was $1.1 billion.
In
November 2008, the Corporation requested ARPC to review the Corporation’s
historical asbestos claim and resolution activity and determine the
appropriateness of updating its December 2006 study. In response to that
request, ARPC reviewed and analyzed data through October 31, 2008. The resulting
study, completed by ARPC in December 2008, stated that the undiscounted cost of
resolving pending and future asbestos-related claims against UCC and Amchem,
excluding future defense and processing costs, through 2023 was estimated to be
between $952 million and $1.2 billion. As in its earlier
studies,
ARPC provided estimates for a longer period of time in its December 2008 study,
but also reaffirmed its prior advice that forecasts for shorter periods of time
are more accurate than those for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and the Corporation’s own
review of the asbestos claim and resolution activity, the Corporation decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
In
November 2009, the Corporation requested ARPC to review the Corporation’s 2009
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2008 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2009. In December 2009, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2009, the Corporation’s asbestos-related
liability for pending and future claims was $839 million.
At
December 31, 2009, approximately 23 percent of the recorded liability
related to pending claims and approximately 77 percent related to future
claims. At December 31, 2008, approximately 21 percent of the recorded
liability related to pending claims and approximately 79 percent related to
future claims.
Defense
and Resolution Costs
The
following table provides information regarding defense and resolution costs
related to asbestos-related claims filed against the Corporation and
Amchem:
Defense
and Resolution Costs
|
Aggregate
Costs
|
|||||||||||||||
In
millions
|
2009
|
2008
|
2007
|
to
Date as of
Dec.
31, 2009
|
||||||||||||
Defense
costs
|
$ | 62 | $ | 60 | $ | 84 | $ | 687 | ||||||||
Resolution
costs
|
$ | 94 | $ | 116 | $ | 88 | $ | 1,480 |
The
average resolution payment per asbestos claimant and the rate of new claim
filings has fluctuated both up and down since the beginning of 2001. The
Corporation’s management expects such fluctuations to continue in the future
based upon a number of factors, including the number and type of claims settled
in a particular period, the jurisdictions in which such claims arose, and the
extent to which any proposed legislative reform related to asbestos litigation
is being considered.
The
Corporation expenses defense costs as incurred. The pretax impact for defense
and resolution costs, net of insurance, was $58 million in 2009,
$53 million in 2008 and $84 million in 2007, and was reflected in
“Cost of sales” in the consolidated statements of income.
Insurance
Receivables
At
December 31, 2002, the Corporation increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion, substantially
exhausting its asbestos product liability coverage. The insurance receivable
related to the asbestos liability was determined after a thorough review of
applicable insurance policies and the 1985 Wellington Agreement, to which the
Corporation and many of its liability insurers are signatory parties, as well as
other insurance settlements, with due consideration given to applicable
deductibles, retentions and policy limits, and taking into account the solvency
and historical payment experience of various insurance carriers. The Wellington
Agreement and other agreements with insurers are designed to facilitate an
orderly resolution and collection of the Corporation’s insurance policies and to
resolve issues that the insurance carriers may raise.
In
September 2003, the Corporation filed a comprehensive insurance coverage case,
now proceeding in the Supreme Court of the State of New York, County of New
York, seeking to confirm its rights to insurance for various asbestos claims and
to facilitate an orderly and timely collection of insurance proceeds (the
“Insurance Litigation”). The Insurance Litigation was filed against insurers
that are not signatories to the Wellington Agreement and/or do not otherwise
have agreements in place with the Corporation regarding their asbestos-related
insurance coverage, in order to facilitate an orderly resolution and collection
of such insurance policies and to resolve issues that the insurance carriers may
raise. Since the filing of the case, UCC has reached settlements with several of
the carriers involved in the Insurance Litigation, including settlements reached
with two significant carriers in the fourth quarter of 2009, resulting in a
shift between receivable balances further discussed below. The Insurance
Litigation is ongoing.
The
Corporation’s receivable for insurance recoveries related to its asbestos
liability was $84 million at December 31, 2009 and $403 million at
December 31, 2008. The decrease in the receivable was principally due to
settlements reached in the fourth quarter of 2009 with two significant carriers
involved in the Insurance Litigation. At December 31, 2009 and 2008, all of the
receivable for insurance recoveries was related to insurers that are not
signatories to the Wellington Agreement and/or do not otherwise have agreements
in place regarding their asbestos-related insurance coverage.
In
addition to the receivable for insurance recoveries related to the
asbestos-related liability, the Corporation had receivables for defense and
resolution costs submitted to insurance carriers that have settlement agreements
in place regarding their asbestos-related insurance coverage. The
balance of these receivables increased in 2009 principally as a result of
settlements reached in the fourth quarter of 2009 with two significant carriers
involved in the Insurance Litigation.
Receivables
for Costs Submitted to Insurance Carriers with Settlement
Agreements
|
||||||||
at
December 31
In
millions
|
2009
|
2008
|
||||||
Receivables
for defense costs
|
$ | 91 | $ | 28 | ||||
Receivables
for resolution costs
|
357 | 244 | ||||||
Total
|
$ | 448 | $ | 272 |
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, after taking into account the
solvency and historical payment experience of various insurance carriers;
existing insurance settlements; and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, the Corporation continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection
Summary
The
amounts recorded for the asbestos-related liability and related insurance
receivable described above were based upon current, known facts. However, future
events, such as the number of new claims to be filed and/or received each year,
the average cost of disposing of each such claim, coverage issues among
insurers, and the continuing solvency of various insurance companies, as well as
the numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs and insurance recoveries to be higher or lower than
those projected or those recorded.
Because
of the uncertainties described above, management cannot estimate the full range
of the cost of resolving pending and future asbestos-related claims facing the
Corporation and Amchem. Management believes that it is reasonably possible that
the cost of disposing of the Corporation’s asbestos-related claims, including
future defense costs, could have a material adverse impact on the Corporation’s
results of operations and cash flows for a particular period and on the
consolidated financial position of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
Omitted
pursuant to General Instruction I of Form 10-K.
PART
II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The
Corporation is a wholly owned subsidiary of Dow; therefore, there is no public
trading market for the Corporation’s common stock.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted
pursuant to General Instruction I of Form 10-K.
Union
Carbide Corporation and Subsidiaries
Pursuant
to General Instruction I of Form 10-K “Omission of Information by Certain
Wholly-Owned Subsidiaries,” this section includes only management's narrative
analysis of the results of operations for the year ended December 31, 2009, the
most recent fiscal year, compared with the year ended December 31, 2008,
the fiscal year immediately preceding it.
References below to “Dow” refer to The
Dow Chemical Company and its consolidated subsidiaries, except as otherwise
indicated by the context.
Dow conducts its worldwide operations
through global businesses. Union Carbide Corporation’s (the “Corporation” or
“UCC”) business activities comprise components of Dow’s global operations rather
than stand-alone operations. Because there are no separable reportable business
segments for UCC and no detailed business information is provided to a chief
operating decision maker regarding the Corporation’s stand-alone operations, the
Corporation’s results are reported as a single operating segment.
Forward-Looking
Information
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements made by or on behalf of UCC. This section covers the
current performance and outlook of the Corporation. The forward-looking
statements contained in this section and in other parts of this document involve
risks and uncertainties that may affect the Corporation’s operations, markets,
products, services, prices and other factors as more fully discussed elsewhere
and in filings with the U.S. Securities and Exchange Commission. These risks and
uncertainties include, but are not limited to, economic, competitive, legal,
governmental and technological factors. Accordingly, there is no assurance that
the Corporation’s expectations will be realized. The Corporation assumes no
obligation to provide revisions to any forward-looking statements should
circumstances change, except as otherwise required by securities and other
applicable laws.
Results
of Operations
Total
net sales of $5,064 million for 2009 were down compared with $7,326 million in
2008. Net sales to related companies were $4,899 million for 2009 compared
with $7,107 million for 2008, a decrease of 31 percent. Selling prices
to Dow, which are based on market prices for the related products, were lower in
2009 for all major products except ethyleneamines compared with 2008, as prices
reflected declines in feedstock, energy and raw material costs. Ethylene glycol
(“EG”) and vinyl acetate monomer experienced the most significant price
declines. In 2009, volume decreased from 2008 for several products, with the
largest declines in EG and wire and cable, reflecting the decline in the global
economy which began in 2008 and extended into 2009. These decreases were
partially offset by increased demand for vinyl acetate monomer, ethyleneamines
and oxo products as these markets began to recover in the second half of
2009.
Cost of sales decreased 38 percent from
$7,194 million in 2008 to $4,457 million in 2009 due principally to lower
feedstock, energy and raw material costs, lower sales volume and cost control
measures.
Research and development (“R&D”)
expense was $48 million in 2009 compared with $68 million in
2008. The decrease of $20 million or 29 percent was due to cost
savings initiatives.
In
2008, UCC recorded a $26 million goodwill impairment loss associated with
polypropylene assets. For additional information, see Note H to the Consolidated
Financial Statements.
On June 30, 2009, the Board of
Directors of UCC approved a restructuring plan to improve the cost effectiveness
of the Corporation’s global operations. As a result, the Corporation recorded
restructuring charges of $162 million in the second quarter of 2009, which
included the shutdown of certain facilities that produce ethylene as well as
ethylene oxide/ethylene glycol ($38 million) and certain related capital project
write-offs ($7 million). Also included in the restructuring charge
was severance of $3 million and an impairment charge of $114 million related to
the expected loss arising from the U.S. Federal Trade Commission (“FTC”)
required divestiture of certain specialty latex assets resulting from Dow’s
acquisition of Rohm and Haas Company. The Corporation recorded the following
adjustments to its restructuring plans during 2009: $4 million increase in
severance costs related to the 2008 restructuring plan and $5 million adjustment
to reduce severance costs related to the 2007 restructuring plan. See Note C to
the Consolidated Financial Statements for information on the Corporation’s
restructuring activities.
On December 5, 2008, the Board of
Directors of UCC approved a restructuring plan to improve the cost effectiveness
of the Corporation’s global operations. As a result, the Corporation recorded
restructuring charges of $105 million in the fourth
quarter
of 2008, which included the write-off of the net book value of certain assets in
Texas and Xiaolan, China, and a workforce reduction.
Following
the December 2008 completion of a study to review its asbestos claim and
resolution activity, the Corporation decreased its asbestos-related liability
for pending and future claims (excluding future defense and processing costs) by
$54 million in the fourth quarter of 2008. The reduction was shown as
“Asbestos-related credit” in the consolidated statements of income, (see Note L
to the Consolidated Financial Statements).
Equity in earnings of nonconsolidated
affiliates was $45 million in 2009, down from $166 million in 2008 as the
Corporation’s joint ventures were also impacted by the global economic
downturn. In addition, equity earnings in 2009 were reduced as a
result of the sale of the Corporation’s ownership interest in the OPTIMAL Group
of Companies (“OPTIMAL”) in the third quarter of 2009, (see Note D to the
Consolidated Financial Statements).
Sundry
income – net includes a variety of income and expense items such as dividend
income, the gain or loss on foreign currency exchange, commissions, charges for
management services provided by Dow and gains and losses on sales of investments
and assets. Sundry income – net for 2009 was $479 million compared with
$243 million in 2008. Sundry income – net for 2009 was favorably impacted
by a pretax gain of $339 million on the sale of the Corporation’s ownership
interest in OPTIMAL. Sundry income – net for 2008 was favorably
impacted by dividend income of $297 million from related parties, including
$204 million from Dow International Holding Company (“DIHC”) and
$82 million from Modeland International Holdings Inc.
Interest
income for 2009 was $65 million compared with $110 million in 2008,
reflecting a decrease in interest rates. Interest expense and amortization of
debt discount for 2009 was $42 million compared with $48 million for
2008.
The
provision for income taxes was $239 million in 2009 compared with $118 million
in 2008. The Corporation’s overall effective tax rate was 25.6
percent for 2009 compared with 26.5 percent for 2008. The
Corporation’s effective tax rate fluctuates based on, among other factors, where
income is earned, the level of after-tax income from joint ventures, dividends
received from investments in related companies and the level of income relative
to tax credits available. The underlying factors affecting UCC’s overall
effective tax rates are summarized in Note Q to the Consolidated Financial
Statements.
The
Corporation reported net income of $696 million in 2009 compared with
$327 million for 2008. In addition to the pretax gain from the
Corporation’s sale of its ownership interest in OPTIMAL, the results for 2009
reflected the impact of lower raw material costs significantly offset by lower
demand, which continued to put downward pressure on prices reflecting the
economic downturn.
SUBSEQUENT
EVENT
On
July 31, 2009, Dow entered into a definitive agreement that included the sale of
certain specialty latex assets of the Corporation, located in the United States,
Canada, Puerto Rico and Mexico, as required by the U.S. Federal Trade Commission
(“FTC”) for the approval of Dow’s acquisition of Rohm and Haas. An
impairment charge of $114 million for these assets was recognized in the second
quarter of 2009 restructuring charge (see Note C to the Consolidated Financial
Statements). The divestiture of these assets was completed on January 25, 2010.
The impact of this sale on the Corporation’s consolidated financial statements
is not expected to be material.
OTHER
MATTERS
Recent
Accounting Guidance
See
Note B to the Consolidated Financial Statements for a summary of recent
accounting guidance.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”) requires management to make judgments, assumptions and estimates that
affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Note A to the Consolidated Financial Statements describes
the significant accounting policies and methods used in preparation of the
Consolidated Financial Statements. Following are the Corporation’s critical
accounting policies impacted by judgments, assumptions and
estimates:
Litigation
The
Corporation is subject to legal proceedings and claims arising out of the normal
course of business. The Corporation routinely assesses the likelihood of any
adverse judgments or outcomes to these matters, as well as ranges of probable
losses. A determination of the amount of the reserves required, if any, for
these contingencies is made after thoughtful analysis of each known issue and an
actuarial analysis of historical claims experience for incurred but not reported
matters. The Corporation has an active risk management program consisting of
numerous insurance policies secured from many carriers. These policies provide
coverage that is utilized to minimize the impact, if any, of the legal
proceedings. The required reserves may change in the future due to new
developments in each matter. For further discussion, see Note L to the
Consolidated Financial Statements.
Asbestos-Related
Matters
The
Corporation and a former subsidiary, Amchem Products, Inc. (“Amchem”), are and
have been involved in a large number of asbestos-related suits filed primarily
in state courts during the past three decades. Based on a study completed by
Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the
Corporation increased its December 31, 2002 asbestos-related liability for
pending and future claims for the 15-year period ending in 2017 to
$2.2 billion, excluding future defense and processing costs. The
Corporation also increased the receivable for insurance recoveries related to
its asbestos liability to $1.35 billion at December 31, 2002. Since
then, the Corporation has compared current asbestos claim and resolution
activity to the results of the most recent ARPC study at each balance sheet date
to determine whether the accrual continues to be appropriate. In addition, the
Corporation has requested ARPC to review the Corporation’s historical asbestos
claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2007, the Corporation requested ARPC to review the Corporation’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2007. In December 2007, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2007, the Corporation’s asbestos-related
liability for pending and future claims was $1.1 billion.
In
November 2008, the Corporation requested ARPC to review the Corporation’s
historical asbestos claim and resolution activity and determine the
appropriateness of updating its December 2006 study. In response to that
request, ARPC reviewed and analyzed data through October 31, 2008. The
resulting study, completed by ARPC in December 2008, stated that the
undiscounted cost of resolving pending and future asbestos-related claims
against UCC and Amchem, excluding future defense and processing costs, through
2023 was estimated to be between $952 million and $1.2 billion. As in
its earlier studies, ARPC provided estimates for a longer period of time in its
December 2008 study, but also reaffirmed its prior advice that forecasts for
shorter periods of time are more accurate than those for longer periods of
time.
In
December 2008, based on ARPC’s December 2008 study and the Corporation’s own
review of the asbestos claim and resolution activity, the Corporation decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
In
November 2009, the Corporation requested ARPC to review the Corporation’s 2009
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2008 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2009. In December 2009, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2009, the Corporation’s asbestos-related
liability for pending and future claims was $839 million.
The
Corporation’s receivable for insurance recoveries related to its asbestos
liability was $84 million at December 31, 2009 and $403 million at
December 31, 2008. The decrease in the receivable was principally due to
settlements reached in the fourth quarter of 2009 with two significant carriers.
In addition, the Corporation had receivables of $448 million at December
31, 2009 and $272 million at December 31, 2008 for defense and resolution costs
submitted to insurance carriers that have settlement agreements in place
regarding their asbestos related insurance coverage. The balance of these
receivables increased in 2009 principally as a result of settlements reached in
the fourth quarter of 2009 with two significant carriers.
The
amounts recorded by the Corporation for the asbestos-related liability and
related insurance receivable were based upon current, known facts. However,
future events, such as the number of new claims to be filed and/or received each
year, the average cost of disposing of each such claim, coverage issues among
insurers, and the continuing solvency of various insurance companies, as well as
the numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs and insurance recoveries for the Corporation to be
higher or lower than those projected or those recorded.
For
additional information, see Legal Proceedings and Note L to the
Consolidated Financial Statements.
Environmental
Matters
The
Corporation determines the costs of environmental remediation of its facilities
and formerly owned facilities based on evaluations of current law and existing
technologies. Inherent uncertainties exist in such evaluations primarily due to
unknown environmental conditions, changing governmental regulations and legal
standards regarding liability and emerging remediation technologies. The
recorded liabilities are adjusted periodically as remediation efforts progress
or as additional technical or legal information becomes available. In the case
of landfills and other active waste management facilities, UCC recognizes the
costs over the useful life of the facility. At December 31, 2009, the
Corporation had accrued obligations of $84 million for environmental
remediation and restoration costs, including $21 million for the
remediation of Superfund sites. This is management’s best estimate of the costs
for remediation and restoration with respect to environmental matters for which
the Corporation has accrued liabilities, although the ultimate cost with respect
to these particular matters could range up to approximately twice that amount.
At December 31, 2008, the Corporation had accrued obligations of
$67 million for environmental remediation and restoration costs, including
$18 million for the remediation of Superfund sites. For further discussion,
see Environmental Matters in Notes A and L to the Consolidated
Financial Statements.
Pension
and Other Postretirement Benefits
The
amounts recognized in the consolidated financial statements related to pension
and other postretirement benefits are determined from actuarial valuations.
Inherent in these valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could be settled at December
31, 2009, rate of increase in future compensation levels, mortality rates
and health care cost trend rates. These assumptions are updated annually and are
disclosed in Note N to the Consolidated Financial Statements. In accordance
with U.S. GAAP, actual results that differ from the assumptions are accumulated
and amortized over future periods and therefore affect expense recognized and
obligations recorded in future periods.
The
Corporation determines the expected long-term rate of return on plan assets by
performing a detailed analysis of key economic and market factors driving
historical returns for each asset class and formulating a projected return based
on factors in the current environment. Factors considered include,
but are not limited to, inflation, real economic growth, interest rate yield,
interest rate spreads and other valuation measures and market metrics. The
expected long-term rate for each asset class is then weighted based on the
strategic asset allocation approved by the governing body for each plan. The
Corporation’s historical experience with the pension fund asset performance is
also considered. A similar process is followed in determining the
expected long-term rate of return for assets held by the Corporation’s other
post retirement benefit plan trust. The expected long-term rate of return is an
assumption and not what is expected to be earned in any one particular year. The
weighted-average long-term rate of return assumption used for determining net
periodic pension expense for 2009 was 8 percent. This assumption was
lowered to 7.4 percent for determining 2010 net periodic pension expense. Future
actual pension income/expense will depend on future investment performance,
changes in future discount rates and various other factors related to the
population of participants in the Corporation’s pension plans.
The
discount rates utilized to measure the pension and other postretirement benefit
obligations are based on the yield on high-quality fixed income investments at
the measurement date. Future expected actuarially determined cash
flows of the plan are matched against the Citigroup Pension Discount Curve
(Above Median) to arrive at a single discount rate by plan. The resulting
discount rate decreased from 6.85 percent at December 31, 2008 to 5.85 percent
at December 31, 2009.
The
value of the qualified plan assets totaled $3.2 billion at December 31, 2009,
which is unchanged compared with December 31, 2008. The funded status
of the qualified plan, net of benefit obligations decreased by approximately
$200 million at December 31, 2009 compared with December 31,
2008. The decrease was due to the lower discount rates partially
offset by favorable impact of asset returns. For 2010, the
Corporation does not expect to make cash contributions to its pension and other
post retirement benefit plans.
The
assumption for the long-term rate of increase in compensation levels is 4.25
percent for 2010 and 4.5 percent thereafter. Since 2002, the Corporation has
used a generational mortality table to determine the duration of its pension and
other postretirement obligations.
The
Corporation bases the determination of pension expense or income on a
market-related valuation of plan assets, which reduces year-to-year volatility.
This market-related valuation recognizes investment gains or losses over a
five-year period from the year in which they occur. Investment gains or losses
for this purpose represent the difference between the expected return calculated
using the market-related value of plan assets and the actual return based on the
market value of plan assets. Since the market-related value of plan assets
recognizes gains or losses over a five-year period, the future value of plan
assets will be impacted when previously deferred gains or losses are recorded.
Over the life of the plan, both gains and losses have been recognized and
amortized. At December 31, 2009, $488 million of net losses remain to
be recognized in the calculation of the market-related value of plan assets.
These net losses will result in increases in future pension expense as they are
recognized in the market-related value of assets and are a component of the
total net loss of $1,416 million shown under “Pretax amounts recognized in
AOCI at December 31” in the table entitled “Change in Projected Benefit
Obligations, Plan Assets and Funded Status of all Significant Plans” included in
Note N to the Consolidated Financial Statements. The remaining
$928 million of net losses represents cumulative changes in plan experience
and actuarial assumptions. The net decrease in the market-related value of
assets due to the recognition of prior gains and losses is presented in the
following table:
Net
Decrease (Increase) in Market-Related Asset Value due to Recognition of
Prior Gains and Losses
In
millions
|
||||
2010
|
$ | 147 | ||
2011
|
162 | |||
2012
|
191 | |||
2013
|
(12 | ) | ||
Total
|
$ | 488 |
Based
on the 2010 pension assumptions, a reduction in curtailment costs, and changes
in the market-related value of assets due to the recognition of prior asset
gains, the Corporation expects net periodic benefit costs to increase
approximately $65 million for pension and other postretirement benefits in 2010
compared with 2009.
A
25 basis point adjustment in the long-term return on assets assumption
would change total pension expense for 2010 by approximately $9 million. A
25 basis point adjustment in the discount rate assumption would change the
total pension expense for 2010 by approximately $7 million.
Income
Taxes
Deferred
tax assets and liabilities are determined based on temporary differences between
the financial reporting and tax bases of assets and liabilities, applying
enacted tax rates expected to be in effect for the year in which the differences
are expected to reverse. Based on the evaluation of available evidence, both
positive and negative, the Corporation recognizes future tax benefits, such as
net operating loss carryforwards and tax credit carryforwards, to the extent
that realizing these benefits is considered more likely than not.
At
December 31, 2009, the Corporation had a net deferred tax asset
balance of $584 million, including deferred tax assets for tax loss and tax
credit carryforwards of $160 million, of which $14 million is subject
to expiration in the years 2010-2014. In order to realize these deferred tax
assets for tax loss and tax credit carryforwards, the Corporation needs taxable
income of approximately $616 million across multiple jurisdictions. The
taxable income needed to realize the deferred tax assets for tax loss and tax
credit carryforwards that are subject to expiration between 2010-2014 is
$167 million. In evaluating the ability to realize its deferred tax assets,
the Corporation relied principally on the reversal of existing temporary
differences, the availability of tax planning strategies and on forecasted
taxable income using historical and projected future operating
results.
The
Corporation recognizes the financial statement effects of an uncertain tax
position when it is more likely than not, based on the technical merits, that
the position will be sustained. At December 31, 2009, the Corporation
had uncertain tax positions of $208 million.
The
Corporation accrues for non-income tax contingencies when it is probable that a
liability to a taxing authority has been incurred and the amount of the
contingency can be reasonably estimated. At December 31, 2009, the
Corporation had a non-income tax contingency reserve of $25 million. For
additional information, see Note Q to the Consolidated Financial
Statements.
Environmental
Matters
Environmental
Policies
The
Corporation is committed to world-class environmental, health and safety
(“EH&S”) performance, as demonstrated by a long-standing commitment to
Responsible Care®, as well as a strong commitment to achieve the Corporation’s
2015 Sustainability Goals – goals that set the standard for sustainability in
the chemical industry by focusing on improvements in UCC’s local corporate
citizenship and product stewardship, and by actively pursuing methods to reduce
the Corporation’s environmental impact.
The
EH&S management system (“EMS”) defines the “who, what, when and how” needed
for the businesses to achieve the policies, requirements, performance
objectives, leadership expectations and public commitments. EMS is also designed
to minimize the long-term cost of environmental protection and to comply with
applicable laws and regulations. To ensure effective utilization, EMS is
integrated into a company-wide management system for EH&S, Operations,
Quality and Human Resources, including implementation of the global EH&S
Work Process to improve EH&S performance and to ensure ongoing compliance
worldwide.
UCC
first works to eliminate or minimize the generation of waste and emissions at
the source through research, process design, plant operations and maintenance.
Next, UCC finds ways to reuse and recycle materials. Finally, unusable or
non-recyclable hazardous waste is treated before disposal to eliminate or reduce
the hazardous nature and volume of the waste. Treatment may include destruction
by chemical, physical, biological or thermal means. Disposal of waste materials
in landfills is considered only after all other options have been thoroughly
evaluated. UCC has specific requirements for waste that is transferred to
non-UCC facilities, including the periodic auditing of these
facilities.
Chemical
Security
Public
and political attention continues to be placed on the protection of U.S.
critical infrastructure, including the chemical industry, from security threats.
Terrorist attacks and natural disasters have increased concern about the
security of chemical production and distribution. The focus on security is not
new to UCC. UCC continues to improve its security plans, placing emphasis on the
safety of UCC communities and people by being prepared to meet risks at any
level and to address both internal and external identifiable risks. UCC’s
security plans are also developed to avert interruptions of normal business work
operations which could have a material adverse impact on the Corporation's
results of operations, liquidity and financial condition.
UCC
is a Responsible Care® company and adheres to the Responsible Care® Security
Code that requires all aspects of security – including facility, transportation,
and cyberspace – be assessed and gaps addressed. Through global
implementation of the Security Code, including voluntary security enhancements
and upgrades made since 2002, UCC has permanently heightened the level of
security – not just in the United States, but worldwide. In addition, UCC uses a
risk-based approach employing the U.S. Government’s Sandia National Labs
methodology to repeatedly assess the risks to sites, systems and processes. UCC
has expanded its comprehensive Distribution Risk Review process that had been in
place for decades to address potential threats in all modes of transportation
across its supply chain. To reduce vulnerabilities, UCC maintains security
measures that meet or exceed regulatory and industry security standards in all
areas in which UCC operates. Assessment and improvement costs are not considered
material to the Corporation's consolidated financial statements.
UCC
continually works to strengthen partnerships with local responders, law
enforcement, and security agencies, and to enhance confidence in the integrity
of its security and risk management program as well as strengthen its
preparedness and response capabilities. UCC also works closely with its supply
chain partners and strives to educate lawmakers, regulators and communities
about its resolve and actions to date which are mitigating security and crisis
threats.
Climate
Change
There
is growing political and scientific consensus that emissions of greenhouse gases
(“GHG”) due to human activities continue to alter the composition of the global
atmosphere in ways that are affecting the climate. UCC takes global climate
change very seriously and is committed to reducing its GHG intensity (pounds of
GHG per pound of product), developing climate-friendly products and processes
and, over the longer term, implementing technology solutions to achieve even
greater climate change improvements.
Environmental
Remediation
UCC
accrues the costs of remediation of its facilities and formerly owned facilities
based on current law and existing technologies. The nature of such remediation
includes, for example, the management of soil and groundwater contamination and
the closure of contaminated landfills and other waste management facilities. In
the case of landfills and other active waste management facilities, UCC
recognizes the costs over the useful life of the facility. The policies adopted
to properly reflect the monetary impacts of environmental matters are discussed
in Note A to the Consolidated Financial Statements. To assess the impact on
the consolidated financial statements, environmental experts review currently
available facts to evaluate the probability and scope of potential liabilities.
Inherent uncertainties exist in such evaluations primarily due to unknown
environmental conditions, changing governmental regulations and legal standards
regarding liability, and emerging remediation technologies. These liabilities
are adjusted periodically as remediation efforts progress or as additional
technical or legal information becomes available. The Corporation had an accrued
liability of $63 million at December 31, 2009 and $49 million at
December 31, 2008 related to the remediation of current or former UCC-owned
sites.
In
addition to current and former UCC-owned sites, under the Federal Comprehensive
Environmental Response, Compensation and Liability Act and equivalent state laws
(hereafter referred to collectively as “Superfund Law”), UCC is liable for
remediation of other hazardous waste sites where UCC allegedly disposed of, or
arranged for the treatment or disposal of, hazardous substances. Because
Superfund Law imposes joint and several liability upon each party at a site, UCC
has evaluated its potential liability in light of the number of other companies
that also have been named potentially responsible parties (“PRPs”) at each site,
the estimated apportionment of costs among all PRPs, and the financial ability
and commitment of each to pay its expected share. Management’s estimate of the
Corporation’s remaining liability for the remediation of Superfund sites was
$21 million at December 31, 2009 and $18 million at
December 31, 2008, which has been accrued, although the ultimate cost with
respect to these sites could exceed that amount. The Corporation has not
recorded any third-party recovery related to these sites as a
receivable.
Information
regarding environmental sites is provided below:
Environmental
Sites
|
UCC-owned Sites (1)
|
Superfund Sites (2)
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Number
of sites at January 1
|
31 | 32 | 56 | 62 | ||||||||||||
Sites
added during year
|
- | - | 2 | 3 | ||||||||||||
Sites
closed during year
|
- | (1 | ) | - | (9 | ) | ||||||||||
Number
of sites at December 31
|
31 | 31 | 58 | 56 |
(1)
|
UCC-owned sites are sites
currently or formerly owned by UCC, where remediation obligations are
imposed (in the United States) by the Resource Conservation Recovery Act
or analogous state law.
|
(2)
|
Superfund
sites are sites, including sites not owned by UCC, where remediation
obligations are imposed by Superfund
Law.
|
In
total, the Corporation’s accrued liability for probable environmental
remediation and restoration costs was $84 million at December 31,
2009, compared with $67 million at December 31, 2008. This is
management’s best estimate of the costs for remediation and restoration with
respect to environmental matters for which the Corporation has accrued
liabilities, although the ultimate cost with respect to these particular matters
could range up to approximately twice that amount. It is the opinion of
management that the possibility is remote that costs in excess of those
disclosed will have a material adverse impact on the Corporation’s consolidated
financial statements.
The
amounts charged to income on a pretax basis related to environmental remediation
totaled $49 million in 2009 and $29 million in 2008. Capital
expenditures for environmental protection were $2 million in 2009 and
$17 million in 2008.
Asbestos-Related
Matters
Introduction
The
Corporation is and has been involved in a large number of asbestos-related suits
filed primarily in state courts during the past three decades. These suits
principally allege personal injury resulting from exposure to
asbestos-containing products and frequently seek both actual and punitive
damages. The alleged claims primarily relate to products that UCC sold in the
past, alleged exposure to asbestos-containing products located on UCC’s
premises, and UCC’s responsibility for asbestos suits filed against a former UCC
subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are
unable to demonstrate that they have suffered any compensable loss as a result
of such exposure, or that injuries incurred in fact resulted from exposure to
the Corporation’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including the Corporation and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. The
Corporation expects more asbestos-related suits to be filed against it and
Amchem in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
The
table below provides information regarding asbestos-related claims filed against
the Corporation and Amchem:
2009
|
2008
|
2007
|
||||||||||
Claims
unresolved at January 1
|
75,706 | 90,322 | 111,887 | |||||||||
Claims
filed
|
8,455 | 10,922 | 10,157 | |||||||||
Claims
settled, dismissed or otherwise resolved
|
(9,131 | ) | (25,538 | ) | (31,722 | ) | ||||||
Claims
unresolved at December 31
|
75,030 | 75,706 | 90,322 | |||||||||
Claimants
with claims against both UCC and Amchem
|
24,146 | 24,213 | 28,937 | |||||||||
Individual
claimants at December 31
|
50,884 | 51,493 | 61,385 |
Plaintiffs’
lawyers often sue dozens or even hundreds of defendants in individual lawsuits
on behalf of hundreds or even thousands of claimants. As a result, the damages
alleged are not expressly identified as to UCC, Amchem or any other particular
defendant, even when specific damages are alleged with respect to a specific
disease or injury. In fact, there are no personal injury cases in which only the
Corporation and/or Amchem are the sole named defendants. For these reasons and
based upon the Corporation’s litigation and settlement experience, the
Corporation does not consider the damages alleged against it and Amchem to be a
meaningful factor in its determination of any potential asbestos-related
liability.
Estimating
the Liability
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, the Corporation increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing costs.
Since then, the Corporation has compared current asbestos claim and resolution
activity to the results of the most recent ARPC study at each balance sheet date
to determine whether the accrual continues to be appropriate. In addition, the
Corporation has requested ARPC to review Union Carbide’s historical asbestos
claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2007, the Corporation requested ARPC to review the Corporation’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2007. In December 2007, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2007, the Corporation’s asbestos-related
liability for pending and future claims was $1.1 billion.
In
November 2008, the Corporation requested ARPC to review the Corporation’s
historical asbestos claim and resolution activity and determine the
appropriateness of updating its December 2006 study. In response to that
request, ARPC reviewed and analyzed data through October 31, 2008. The resulting
study, completed by ARPC in December 2008, stated that the undiscounted cost of
resolving pending and future asbestos-related claims against UCC and Amchem,
excluding future defense and processing costs, through 2023 was estimated to be
between $952 million and $1.2 billion. As in its earlier
studies,
ARPC provided estimates for a longer period of time in its December 2008 study,
but also reaffirmed its prior advice that forecasts for shorter periods of time
are more accurate than those for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and the Corporation’s own
review of the asbestos claim and resolution activity, the Corporation decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
In
November 2009, the Corporation requested ARPC to review the Corporation’s 2009
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2008 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2009. In December 2009, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2009, the Corporation’s asbestos-related
liability for pending and future claims was $839 million.
At
December 31, 2009, approximately 23 percent of the recorded liability
related to pending claims and approximately 77 percent related to future
claims. At December 31, 2008, approximately 21 percent of the recorded
liability related to pending claims and approximately 79 percent related to
future claims.
Defense
and Resolution Costs
The
following table provides information regarding defense and resolution costs
related to asbestos-related claims filed against the Corporation and
Amchem:
Defense
and Resolution Costs
|
Aggregate
Costs
|
|||||||||||||||
In
millions
|
2009
|
2008
|
2007
|
to
Date as of
Dec.
31, 2009
|
||||||||||||
Defense
costs
|
$ | 62 | $ | 60 | $ | 84 | $ | 687 | ||||||||
Resolution
costs
|
$ | 94 | $ | 116 | $ | 88 | $ | 1,480 |
The
average resolution payment per asbestos claimant and the rate of new claim
filings has fluctuated both up and down since the beginning of 2001. The
Corporation’s management expects such fluctuations to continue in the future
based upon a number of factors, including the number and type of claims settled
in a particular period, the jurisdictions in which such claims arose, and the
extent to which any proposed legislative reform related to asbestos litigation
is being considered.
The
Corporation expenses defense costs as incurred. The pretax impact for defense
and resolution costs, net of insurance, was $58 million in 2009,
$53 million in 2008 and $84 million in 2007, and was reflected in
“Cost of sales” in the consolidated statements of income.
Insurance
Receivables
At
December 31, 2002, the Corporation increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion, substantially
exhausting its asbestos product liability coverage. The insurance receivable
related to the asbestos liability was determined after a thorough review of
applicable insurance policies and the 1985 Wellington Agreement, to which the
Corporation and many of its liability insurers are signatory parties, as well as
other insurance settlements, with due consideration given to applicable
deductibles, retentions and policy limits, and taking into account the solvency
and historical payment experience of various insurance carriers. The Wellington
Agreement and other agreements with insurers are designed to facilitate an
orderly resolution and collection of the Corporation’s insurance policies and to
resolve issues that the insurance carriers may raise.
In September 2003, the Corporation
filed a comprehensive insurance coverage case, now proceeding in the Supreme
Court of the State of New York, County of New York, seeking to confirm its
rights to insurance for various asbestos claims and to facilitate an orderly and
timely collection of insurance proceeds (the “Insurance Litigation”). The
Insurance Litigation was filed against insurers that are not signatories to the
Wellington Agreement and/or do not otherwise have agreements in place with the
Corporation regarding their asbestos-related insurance coverage, in order to
facilitate an orderly resolution and collection of such insurance policies and
to resolve issues that the insurance carriers may raise. Since the filing of the
case,
UCC
has reached settlements with several of the carriers involved in the Insurance
Litigation, including settlements reached with two significant carriers in the
fourth quarter of 2009, resulting in a shift between receivable balances further
discussed below. The Insurance Litigation is ongoing.
The Corporation’s receivable for
insurance recoveries related to its asbestos liability was $84 million at
December 31, 2009 and $403 million at December 31, 2008. The decrease in
the receivable was principally due to settlements reached in the fourth quarter
of 2009 with two significant carriers involved in the Insurance Litigation. At
December 31, 2009 and 2008, all of the receivable for insurance recoveries was
related to insurers that are not signatories to the Wellington Agreement and/or
do not otherwise have agreements in place regarding their asbestos-related
insurance coverage.
In addition to the receivable for
insurance recoveries related to the asbestos-related liability, the Corporation
had receivables for defense and resolution costs submitted to insurance carriers
that have settlement agreements in place regarding their asbestos-related
insurance coverage. The balance of these receivables increased in
2009 principally as a result of settlements reached in the fourth quarter of
2009 with two significant carriers involved in the Insurance
Litigation.
Receivables
for Costs Submitted to Insurance Carriers with Settlement
Agreements
|
||||||||
at
December 31
In
millions
|
2009
|
2008
|
||||||
Receivables
for defense costs
|
$ | 91 | $ | 28 | ||||
Receivables
for resolution costs
|
357 | 244 | ||||||
Total
|
$ | 448 | $ | 272 |
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, after taking into account the
solvency and historical payment experience of various insurance carriers;
existing insurance settlements; and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, the Corporation continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection.
Summary
The
amounts recorded for the asbestos-related liability and related insurance
receivable described above were based upon current, known facts. However, future
events, such as the number of new claims to be filed and/or received each year,
the average cost of disposing of each such claim, coverage issues among
insurers, and the continuing solvency of various insurance companies, as well as
the numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs and insurance recoveries to be higher or lower than
those projected or those recorded.
Because
of the uncertainties described above, management cannot estimate the full range
of the cost of resolving pending and future asbestos-related claims facing the
Corporation and Amchem. Management believes that it is reasonably possible that
the cost of disposing of the Corporation’s asbestos-related claims, including
future defense costs, could have a material adverse impact on the Corporation’s
results of operations and cash flows for a particular period and on the
consolidated financial position of the Corporation.
Matters
Involving the Formation of K-Dow Petrochemicals
On
December 13, 2007, Dow and Petrochemical Industries Company (K.S.C.)
(“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation,
announced plans to form a 50:50 global petrochemicals joint venture. The
proposed joint venture, K-Dow Petrochemicals (“K-Dow”), was expected to have
revenues of more than $11 billion and employ more than 5,000 people
worldwide.
On
November 28, 2008, Dow entered into a Joint Venture Formation Agreement
(“JVFA”) with PIC that provided for the establishment of K-Dow. To form the
joint venture, Dow would transfer by way of contribution and sale to K-Dow,
assets used in the research, development, manufacture, distribution, marketing
and sale of polyethylene, polypropylene, polycarbonate, polycarbonate compounds
and blends, ethyleneamines, ethanolamines, and related licensing and catalyst
technologies; and K-Dow would assume certain related liabilities. It was
anticipated that a significant part (but not substantially all) of UCC’s
U.S.-based manufacturing assets would be included in the new joint
venture.
Failure
to Close
On
December 31, 2008, Dow received a written notice from PIC with respect to
the JVFA advising Dow of PIC’s position that certain conditions to closing were
not satisfied and, therefore, PIC was not obligated to close the transaction. On
January 2, 2009, PIC refused to close the K-Dow transaction in accordance
with the JVFA. Dow disagrees with the characterizations and conclusions
expressed by PIC in the written notice and Dow has informed PIC that it breached
the JVFA. On January 6, 2009, Dow announced that it would seek to fully
enforce its rights under the terms of the JVFA and various related agreements.
Currently, Dow continues in a process to consider alternatives for these
businesses.
Arbitration
Dow’s
claims against PIC are subject to an arbitration agreement between the parties,
which provides for arbitration under the Rules of Arbitration of the
International Chamber of Commerce. On February 18, 2009, Dow initiated
arbitration proceedings against PIC alleging that PIC breached the JVFA by
failing to close the transaction on January 2, 2009. Dow is seeking damages
in excess of $2.5 billion in the arbitration proceeding.
Union
Carbide Corporation and Subsidiaries
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
UCC’s
business operations give rise to market risk exposure due to changes in foreign
exchange rates and interest rates. To manage such risks effectively, the
Corporation can enter into hedging transactions, pursuant to established
guidelines and policies, which enable it to mitigate the adverse effects of
financial market risk. The Corporation does not hold derivative financial
instruments for trading purposes.
As
a result of investments, production facilities and other operations on a global
basis, the Corporation has assets, liabilities and cash flows in currencies
other than the U.S. dollar. The primary objective of the Corporation’s foreign
exchange risk management is to optimize the U.S. dollar value of net assets and
cash flows, keeping the adverse impact of currency movements to a minimum. To
achieve this objective, the Corporation will hedge, when appropriate, on a net
exposure basis using foreign currency forward contracts, over-the-counter option
contracts, cross-currency swaps and nonderivative instruments in foreign
currencies. Main exposures are related to assets, liabilities and cash flows
denominated in the currencies of Europe, Asia Pacific and Canada.
The
main objective of interest rate risk management is to reduce the total funding
cost to the Corporation and to alter the interest rate exposure to the desired
risk profile. The Corporation’s primary exposure is to the U.S. dollar yield
curve. UCC will use interest rate swaps and “swaptions,” when appropriate, to
accomplish this objective.
UCC
uses value at risk (“VAR”), stress testing and scenario analysis for risk
measurement and control purposes. VAR estimates the maximum potential gain or
loss in fair market values given a certain move in prices over a certain period
of time, using specified confidence levels. The VAR methodology used by the
Corporation is a historical simulation model which captures the co-movements in
market rates across different instruments and market risk exposure categories.
The historical simulation model uses a 97.5 percent confidence level and the
historical scenario period includes at least six months of historical
data. The 2009 and 2008 year-end and average daily VAR for the
aggregate of all positions are shown below:
Total
Daily VAR at December 31
|
2009
|
2008
|
||||||||||||||
In
millions
|
Year-end
|
Average
|
Year-end
|
Average
|
||||||||||||
Interest
rate
|
$ | 20 | $ | 30 | $ | 46 | $ | 28 |
The
decline in year-end VAR was due to a decrease in total debt in
2009.
See
Notes I and M to the Consolidated Financial Statements for further
disclosure regarding market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholder of
Union
Carbide Corporation
We
have audited the accompanying consolidated balance sheets of Union Carbide
Corporation and subsidiaries (the "Corporation") as of December 31, 2009 and
2008, and the related consolidated statements of income, equity, comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2009. Our audits also included the financial statement schedule listed
in the Index at Item 15 (a) 2. These financial statements and financial
statement schedule are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Corporation's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Union Carbide Corporation and subsidiaries at
December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/
DELOITTE & TOUCHE LLP
|
||
Deloitte
& Touche LLP
Midland,
Michigan
February
19, 2010
|
||
Union
Carbide Corporation and Subsidiaries
|
||||||||||||
Consolidated
Statements of Income
|
||||||||||||
(In
millions) For the years ended December 31
|
2009
|
2008
|
2007
|
|||||||||
Net
trade sales
|
$ | 165 | $ | 219 | $ | 211 | ||||||
Net
sales to related companies
|
4,899 | 7,107 | 7,282 | |||||||||
Total
Net Sales
|
5,064 | 7,326 | 7,493 | |||||||||
Cost
of sales
|
4,457 | 7,194 | 6,881 | |||||||||
Research
and development expenses
|
48 | 68 | 70 | |||||||||
Selling,
general and administrative expenses
|
10 | 13 | 19 | |||||||||
Goodwill
impairment loss
|
- | 26 | - | |||||||||
Restructuring
charges
|
161 | 105 | 55 | |||||||||
Asbestos-related
credit
|
- | 54 | - | |||||||||
Equity
in earnings of nonconsolidated affiliates
|
45 | 166 | 500 | |||||||||
Sundry
income - net
|
479 | 243 | 49 | |||||||||
Interest
income
|
65 | 110 | 173 | |||||||||
Interest
expense and amortization of debt discount
|
42 | 48 | 52 | |||||||||
Income
Before Income Taxes
|
935 | 445 | 1,138 | |||||||||
Provision
for income taxes
|
239 | 118 | 86 | |||||||||
Net
Income Attributable to Union Carbide Corporation
|
$ | 696 | $ | 327 | $ | 1,052 | ||||||
See
Notes to the Consolidated Financial Statements.
|
Union
Carbide Corporation and Subsidiaries
|
|||||||||
Consolidated
Balance Sheets
|
|||||||||
(In
millions) At December 31
|
2009
|
2008
|
|||||||
Assets
|
|||||||||
Current
Assets
|
|||||||||
Cash
and cash equivalents
|
$ | 22 | $ | 24 | |||||
Accounts
receivable:
|
|||||||||
Trade
(net of allowance for doubtful receivables - 2009: $1; 2008:
$1)
|
20 | 21 | |||||||
Related
companies
|
371 | 128 | |||||||
Other
|
254 | 90 | |||||||
Notes
receivable from related companies
|
4,150 | 3,934 | |||||||
Inventories
|
207 | 187 | |||||||
Deferred
income taxes and other current assets
|
109 | 64 | |||||||
Total
current assets
|
5,133 | 4,448 | |||||||
Investments
|
|||||||||
Investments
in related companies
|
972 | 972 | |||||||
Investments
in nonconsolidated affiliates
|
116 | 427 | |||||||
Other
investments
|
21 | 19 | |||||||
Noncurrent
receivables
|
47 | 46 | |||||||
Noncurrent
receivables from related companies
|
101 | 187 | |||||||
Total
investments
|
1,257 | 1,651 | |||||||
Property
|
|||||||||
Property
|
7,533 | 7,630 | |||||||
Less
accumulated depreciation
|
5,986 | 5,744 | |||||||
Net
property
|
1,547 | 1,886 | |||||||
Other
Assets
|
|||||||||
Other
intangible assets (net of accumulated amortization - 2009: $140; 2008:
$135)
|
10 | 17 | |||||||
Deferred
income tax assets - noncurrent
|
498 | 439 | |||||||
Asbestos-related
insurance receivables - noncurrent
|
330 | 658 | |||||||
Deferred
charges and other assets
|
73 | 79 | |||||||
Total
other assets
|
911 | 1,193 | |||||||
Total
Assets
|
$ | 8,848 | $ | 9,178 | |||||
Liabilities
and Equity
|
|||||||||
Current
Liabilities
|
|||||||||
Notes
payable - related companies
|
$ | 3 | $ | 12 | |||||
Long-term
debt due within one year
|
- | 249 | |||||||
Accounts
payable:
|
|||||||||
Trade
|
225 | 170 | |||||||
Related
companies
|
329 | 299 | |||||||
Other
|
28 | 35 | |||||||
Income
taxes payable
|
119 | 176 | |||||||
Asbestos-related
liabilities - current
|
115 | 120 | |||||||
Accrued
and other current liabilities
|
195 | 198 | |||||||
Total
current liabilities
|
1,014 | 1,259 | |||||||
Long-Term
Debt
|
571 | 571 | |||||||
Other
Noncurrent Liabilities
|
|||||||||
Pension
and other postretirement benefits - noncurrent
|
855 | 662 | |||||||
Asbestos-related
liabilities - noncurrent
|
734 | 824 | |||||||
Other
noncurrent obligations
|
240 | 298 | |||||||
Total
other noncurrent liabilities
|
1,829 | 1,784 | |||||||
Stockholder's
Equity
|
|||||||||
Common
stock (authorized and issued: 1,000 shares of $0.01 par value
each)
|
- | - | |||||||
Additional
paid-in capital
|
312 | 312 | |||||||
Retained
earnings
|
6,131 | 6,094 | |||||||
Accumulated
other comprehensive loss
|
(1,010 | ) | (844 | ) | |||||
Union
Carbide Corporation's stockholder's equity
|
5,433 | 5,562 | |||||||
Noncontrolling
Interests
|
|
1 | 2 | ||||||
Total
Equity
|
5,434 | 5,564 | |||||||
Total
Liabilities and Equity
|
$ | 8,848 | $ | 9,178 | |||||
See
Notes to the Consolidated Financial Statements.
|
Union
Carbide Corporation and Subsidiaries
|
||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
(In
millions) For the years ended December 31
|
2009
|
2008
|
2007
|
|||||||||
Operating
Activities
|
||||||||||||
Net
Income Available for Common Stockholder
|
$ | 696 | $ | 327 | $ | 1,052 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
297 | 273 | 311 | |||||||||
Provision
(Credit) for deferred income tax
|
(69 | ) | 60 | (238 | ) | |||||||
Earnings
of nonconsolidated affiliates in excess of dividends
received
|
(9 | ) | (34 | ) | (169 | ) | ||||||
Net
gain on sales of property
|
(3 | ) | (14 | ) | (10 | ) | ||||||
Restructuring
charges
|
159 | 105 | 55 | |||||||||
Gain
on sale of ownership interest in nonconsolidated
affiliates
|
(339 | ) | - | (1 | ) | |||||||
Other
(gain) loss, net
|
- | - | (1 | ) | ||||||||
Asbestos-related
credit
|
- | (54 | ) | - | ||||||||
Goodwill
impairment loss
|
- | 26 | - | |||||||||
Pension
contributions
|
(2 | ) | (2 | ) | (2 | ) | ||||||
Changes
in assets and liabilities:
|
||||||||||||
Accounts
and notes receivable
|
20 | 19 | (6 | ) | ||||||||
Related
company receivables
|
(459 | ) | (348 | ) | (825 | ) | ||||||
Inventories
|
(20 | ) | (9 | ) | 21 | |||||||
Accounts
payable
|
48 | (63 | ) | (64 | ) | |||||||
Related
company payables
|
21 | (85 | ) | 135 | ||||||||
Other
assets and liabilities
|
(94 | ) | (81 | ) | (50 | ) | ||||||
Cash
provided by operating activities
|
246 | 120 | 208 | |||||||||
Investing
Activities
|
||||||||||||
Capital
expenditures
|
(101 | ) | (252 | ) | (272 | ) | ||||||
Proceeds
from sale of ownership interest in nonconsolidated
affiliates
|
671 | - | - | |||||||||
Proceeds
from sales of property
|
6 | 14 | 22 | |||||||||
Distributions
from nonconsolidated affiliates
|
- | - | 7 | |||||||||
Changes
in noncurrent receivable from related company
|
85 | 119 | (12 | ) | ||||||||
Purchases
of investments
|
(30 | ) | (19 | ) | (7 | ) | ||||||
Proceeds
from sales of investments
|
30 | 20 | 6 | |||||||||
Cash
provided by (used in) investing activities
|
661 | (118 | ) | (256 | ) | |||||||
Financing
Activities
|
||||||||||||
Changes
in short-term notes payable
|
- | - | (1 | ) | ||||||||
Dividends
paid to stockholder
|
(660 | ) | - | - | ||||||||
Payments
on long-term debt
|
(249 | ) | - | - | ||||||||
Cash
used in financing activities
|
(909 | ) | - | (1 | ) | |||||||
Summary
|
||||||||||||
Increase
(Decrease) in cash and cash equivalents
|
(2 | ) | 2 | (49 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
24 | 22 | 71 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 22 | $ | 24 | $ | 22 | ||||||
See
Notes to the Consolidated Financial Statements.
|
Union
Carbide Corporation and Subsidiaries
|
||||||||||||
Consolidated
Statements of Equity
|
||||||||||||
(In
millions) For the years ended December 31
|
2009
|
2008
|
2007
|
|||||||||
Common
stock
|
||||||||||||
Balance
at beginning and end of year
|
- | - | - | |||||||||
Additional
paid-in capital
|
||||||||||||
Balance
at beginning of year
|
$ | 312 | $ | 121 | $ | 121 | ||||||
Capital
contribution
|
- | 191 | - | |||||||||
Balance
at end of year
|
312 | 312 | 121 | |||||||||
Retained
earnings
|
||||||||||||
Balance
at beginning of year
|
6,094 | 5,767 | 4,782 | |||||||||
Cumulative
effect of adopting FIN No. 48
|
- | - | (67 | ) | ||||||||
Dividends
Declared
|
(660 | ) | - | - | ||||||||
Net
income
|
696 | 327 | 1,052 | |||||||||
Other
|
1 | - | - | |||||||||
Balance
at end of year
|
6,131 | 6,094 | 5,767 | |||||||||
Accumulated
other comprehensive loss, net of tax
|
||||||||||||
Cumulative
translation adjustments at beginning of year
|
(61 | ) | (69 | ) | (72 | ) | ||||||
Translation
adjustments
|
- | 8 | 3 | |||||||||
Balance
at end of year
|
(61 | ) | (61 | ) | (69 | ) | ||||||
Pension
and Other Postretirement Benefit Plans at beginning of
year
|
(783 | ) | (164 | ) | (411 | ) | ||||||
Net
prior service cost (credit)
|
3 | 7 | (41 | ) | ||||||||
Net
gain (loss)
|
(170 | ) | (626 | ) | 288 | |||||||
Pension
and Other Postretirement Benefit Plans at end of year
|
(950 | ) | (783 | ) | (164 | ) | ||||||
Accumulated
investment gain at beginning of year
|
1 | - | - | |||||||||
Net
investment results
|
- | 1 | - | |||||||||
Balance
at end of year
|
1 | 1 | - | |||||||||
Accumulated
derivative loss at beginning of year
|
(1 | ) | - | - | ||||||||
Net
hedging results
|
1 | (1 | ) | - | ||||||||
Balance
at end of year
|
- | (1 | ) | - | ||||||||
Total
accumulated other comprehensive loss
|
(1,010 | ) | (844 | ) | (233 | ) | ||||||
Union
Carbide Corporation's Stockholder's Equity
|
5,433 | 5,562 | 5,655 | |||||||||
Noncontolling
Interests
|
1 | 2 | 2 | |||||||||
Total
Equity
|
$ | 5,434 | $ | 5,564 | $ | 5,657 | ||||||
See
Notes to the Consolidated Financial Statements.
|
||||||||||||
Consolidated
Statements of Comprehensive Income
|
||||||||||||
(In
millions) For the years ended December 31
|
2009 | 2008 | 2007 | |||||||||
Net
Income Attributable to Union Carbide Corporation
|
$ | 696 | $ | 327 | $ | 1,052 | ||||||
Other
Comprehensive Income (Loss), Net of Tax (tax amounts shown below
for
2009, 2008, 2007)
|
||||||||||||
Cumulative
translation adjustments
|
- | 8 | 3 | |||||||||
Cumulative
unrealized gains on investments
|
- | 1 | - | |||||||||
Defined
benefit pension plans:
|
||||||||||||
Prior
service cost (credit) arising during period (net of tax of $-, $2,
$(24))
|
- | 4 | (41 | ) | ||||||||
Net
gain (loss) arising during period (net of tax of $(87), $(331),
$160)
|
(172 | ) | (627 | ) | 270 | |||||||
Less: Amortization
of prior service cost included in net periodic pension
costs (net of tax of $2, $2, $-)
|
3 | 3 | - | |||||||||
Less: Amortization
of net loss included in net periodic pension costs (net
of tax of $-, $1, $11)
|
2 | 1 | 18 | |||||||||
Net
gain (loss) on cash flow hedging derivative instruments
|
1 | (1 | ) | - | ||||||||
Total
other comprehensive income (loss)
|
(166 | ) | (611 | ) | 250 | |||||||
Comprehensive
Income (Loss)
|
$ | 530 | $ | (284 | ) | $ | 1,302 | |||||
See
Notes to the Consolidated Financial Statements.
|
Union
Carbide Corporation and Subsidiaries
Notes
to the Consolidated Financial Statements
Table
of Contents
Note |
Page
|
||
A
|
Summary
of Significant Accounting Policies
|
30
|
|
B
|
Recent
Accounting Guidance
|
33
|
|
C
|
Restructuring
|
35
|
|
D
|
Divestiture
of Nonconsolidated Affiliate
|
37
|
|
E
|
Inventories
|
37
|
|
F
|
Property
|
38
|
|
G
|
Nonconsolidated
Affiliates
|
38
|
|
H
|
Goodwill
and Other Intangible Assets
|
39
|
|
I
|
Financial
Instruments
|
40
|
|
J
|
Fair
Value Measurements
|
41
|
|
K
|
Supplementary
Information
|
42
|
|
L
|
Commitments
and Contingent Liabilities
|
42
|
|
M
|
Notes
Payable and Long-Term Debt
|
46
|
|
N
|
Pension
and Other Postretirement Benefits
|
47
|
|
O
|
Leased
Property
|
52
|
|
P
|
Related
Party Transactions
|
52
|
|
Q
|
Income
Taxes
|
54
|
|
R
|
Business
and Geographic Areas
|
56
|
|
S
|
Subsequent
Event
|
56
|
NOTE
A SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles
of Consolidation and Basis of Presentation
Except
as otherwise indicated by the context, the terms “Corporation” and “UCC” as used
herein mean Union Carbide Corporation and its consolidated subsidiaries. The
accompanying consolidated financial statements of the Corporation were prepared
in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) and include the assets, liabilities, revenues and
expenses of all majority-owned subsidiaries over which the Corporation exercises
control and, when applicable, entities for which the Corporation has a
controlling financial interest. Intercompany transactions and balances are
eliminated in consolidation. Investments in nonconsolidated affiliates (20–50
percent owned companies, joint ventures and partnerships) are accounted for on
the equity basis, except as noted.
The
Corporation is a wholly owned subsidiary of The Dow Chemical Company
(“Dow”). In accordance with the accounting requirements for wholly
owned subsidiaries the presentation of earnings per share is not required in
financial statements of wholly owned subsidiaries and it therefore is not
provided.
Dow
conducts its worldwide operations through global businesses. The Corporation’s
business activities comprise components of Dow’s global operations rather than
stand-alone operations. The Corporation sells its products to Dow at
market-based prices, in accordance with Dow’s longstanding intercompany pricing
policy, in order to simplify the customer interface process. Because there are
no separable reportable business segments for UCC and no detailed business
information is provided to a chief operating decision maker regarding the
Corporation’s stand-alone operations, the Corporation’s results are reported as
a single operating segment.
Related
Companies
Transactions
with the Corporation’s parent company, Dow, or other Dow subsidiaries have been
reflected as related company transactions in the consolidated financial
statements.
Use
of Estimates in Financial Statement Preparation
The
preparation of financial statements in accordance with U.S. GAAP requires the
use of estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The Corporation’s consolidated financial statements
include amounts that are based on management’s best estimates and judgments.
Actual results could differ from those estimates.
Foreign
Currency Translation
While
the Corporation’s consolidated subsidiaries are primarily based in the United
States, the Corporation has small subsidiaries in Asia Pacific. For those
subsidiaries, the local currency has been primarily used as the functional
currency. Translation gains and losses of those operations that use local
currency as the functional currency are included in the consolidated balance
sheets in “Accumulated other comprehensive income (loss)” (“AOCI”). Where the
U.S. dollar is used as the functional currency, foreign currency gains and
losses are reflected in income.
Environmental
Matters
Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based
on current law and existing technologies. These accruals are adjusted
periodically as assessment and remediation efforts progress or as additional
technical or legal information becomes available. Accruals for environmental
liabilities are included in the consolidated balance sheets in both “Accrued and
other current liabilities” and “Other noncurrent obligations” at undiscounted
amounts. Accruals for related insurance or other third-party recoveries for
environmental liabilities are recorded when it is probable that a recovery will
be realized and are included in the consolidated balance sheets as “Accounts
receivable – Other.”
Environmental
costs are capitalized if the costs extend the life of the property, increase its
capacity, and/or mitigate or prevent contamination from future operations. Costs
related to environmental contamination treatment and cleanup are charged to
expense. Estimated future incremental operations, maintenance and management
costs directly related to remediation are accrued when such costs are probable
and reasonably estimable.
Cash
and Cash Equivalents
Cash
and cash equivalents include time deposits and readily marketable securities
with original maturities of three months or less.
Financial
Instruments
The
Corporation calculates the fair value of financial instruments using quoted
market prices whenever available. When quoted market prices are not available
for various types of financial instruments (such as forwards, options and
swaps), the Corporation uses standard pricing models with market-based inputs
that take into account the present value of estimated future cash
flows.
The
Corporation utilizes derivatives to manage exposures to currency exchange rates,
commodity prices and interest rate risk. The fair values of all derivatives are
recognized as assets or liabilities at the balance sheet date. Changes in the
fair value of these instruments are reported in income or AOCI, depending on the
use of the derivative and whether it qualifies for hedge accounting
treatment.
Gains
and losses on derivatives that are designated and qualify as cash flow hedging
instruments are recorded in AOCI, to the extent the hedges are effective, until
the underlying transactions are recognized in income. To the extent effective,
gains and losses on derivative and nonderivative instruments used as hedges of
the Corporation’s net investment in foreign operations are recorded in AOCI as
part of the cumulative translation adjustment. The ineffective portions of cash
flow hedges and hedges of net investment in foreign operations, if any, are
recognized in income immediately.
Gains
and losses on derivatives designated and qualifying as fair value hedging
instruments, as well as the offsetting losses and gains on the hedged items, are
reported in income in the same accounting period. Derivatives not designated as
hedging instruments are marked-to-market at the end of each accounting period
with the results included in income.
Inventories
Inventories
are stated at the lower of cost or market. The method of determining cost for
each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out
(“FIFO”); and average cost, and is used consistently from year to
year.
Property
Land,
buildings and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated service lives of depreciable assets and
is calculated using the straight-line method. Fully depreciated assets are
retained in property and accumulated depreciation accounts until they are
removed from service. In the case of disposals, assets and related accumulated
depreciation are removed from the accounts, and the net amounts, less proceeds
from disposal, are included in income.
Impairment
and Disposal of Long-Lived Assets
The
Corporation evaluates long-lived assets and certain identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. When undiscounted future
cash flows are not expected to be sufficient to recover an asset’s carrying
amount, the asset is written down to its fair value.
Long-lived assets to be disposed of
other than by sale are classified as held and used until they are disposed of.
Long-lived assets to be disposed of by sale are classified as held for sale and
are reported at the lower of carrying amount or fair value less cost to sell,
and depreciation is ceased.
Asset
Retirement Obligations
The
Corporation records asset retirement obligations as incurred and reasonably
estimable, including obligations for which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the Corporation. The fair values of obligations are recorded as
liabilities on a discounted basis and are accreted over time for the change in
present value. Costs associated with the liabilities are capitalized and
amortized over the estimated remaining useful life of the asset, generally for
periods of 10 years or less.
Investments
in Related Companies
Investments
in related companies consist of the Corporation’s ownership interests in Dow
subsidiaries located in North America, Europe and Latin America. Investments in
the Dow subsidiaries have been accounted for using the cost method.
Investments
Investments
in debt and marketable equity securities are classified as trading,
available-for-sale or held-to-maturity. Investments classified as trading are
reported at fair value with unrealized gains and losses included in income.
Those classified as available-for-sale are reported at fair value with
unrealized gains and losses recorded in AOCI. Those classified as
held-to-maturity are recorded at amortized cost. The cost of investments sold is
determined by specific identification. The Corporation routinely reviews
available-for-sale and held-to-maturity securities for other-than-temporary
declines in fair value below the cost basis, and when events or changes in
circumstances indicate the carrying value of an asset may not be recoverable,
the security is written down to fair value establishing a new cost
basis.
Revenue
Substantially
all of the Corporation’s revenues are from transactions with Dow. Approximately
96 percent of the Corporation’s sales are related to sales of product. The
remaining 4 percent are related to the licensing of patents and
technology.
Revenue
for product sales to related companies is recognized as risk and title to the
product transfer to the related company, which occurs either at the time
production is complete or free on board (“FOB”) UCC’s manufacturing facility, in
accordance with the sales agreement between the Corporation and Dow. Revenue
related to the initial licensing of patents and technology is recognized when
earned; revenue related to running royalties is recognized according to licensee
production levels.
Revenue
for product sales is recognized as risk and title to the product transfer to the
customer, which for trade sales, usually occurs at the time shipment is made.
Substantially all of the Corporation’s trade sales are sold FOB shipping point
or, with respect to countries other than the United States, an equivalent basis.
As such, title to the product passes when the product is delivered to the
freight carrier. UCC’s standard terms of delivery are included in its contracts
of sale, order confirmation documents, and invoices. Freight costs and any
directly related costs of transporting finished product to customers are
recorded as “Cost of sales.”
Legal
Costs
The
Corporation expenses legal costs, including those legal costs expected to be
incurred in connection with a loss contingency, as incurred.
Severance
Costs
Management
routinely reviews its operations around the world in an effort to ensure
competitiveness across its businesses and geographic areas. When the reviews
result in a workforce reduction related to the shutdown of facilities or other
optimization activities, severance benefits are provided to employees primarily
under ongoing benefit arrangements. These severance costs are accrued once
management commits to a plan of termination including the number of employees to
be terminated, their job classifications or functions, their locations and the
expected completion date.
Income
Taxes
The
Corporation accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities using enacted rates. The effect of a
change in tax rates on deferred tax assets is recognized in income in the period
that includes the enactment date. The Corporation is included in Dow’s
consolidated federal income tax group and consolidated income tax return. The
Corporation uses the separate return method to account for its income taxes;
accordingly, there is no difference between the method used to account for
income taxes at the UCC level and the formula in the Dow-UCC Tax Sharing
Agreement used to compute the amount due to Dow or UCC for UCC’s share of
taxable income and tax attributes on Dow’s consolidated income tax
return.
Annual
tax provisions include amounts considered sufficient to pay assessments that may
result from examinations of prior year tax returns; however, the amount
ultimately paid upon resolution of issues raised may differ from the amounts
accrued.
The
Corporation recognizes the financial statement effects of an uncertain income
tax position when it is more likely than not, based on the technical merits,
that the position will be sustained upon examination. The Corporation accrues
for non-income tax contingencies when it is probable that a liability to a
taxing authority has been incurred and the amount of the contingency can be
reasonably estimated. The current portion of uncertain income tax positions is
included in “Income taxes payable” and the long-term portion is included in
“Other noncurrent obligations” in the consolidated balance sheets.
Provision
is made for taxes on undistributed earnings of foreign subsidiaries and related
companies to the extent that such earnings are not deemed to be permanently
invested.
NOTE
B RECENT ACCOUNTING GUIDANCE
Accounting
Standards Codification
On
July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification™ (“Codification” or “ASC”) became the single source of
authoritative U.S. GAAP (other than rules and interpretive releases of the U.S.
Securities and Exchange Commission). The Codification is topically based with
topics organized by ASC number and updated with Accounting Standards Updates
(“ASUs”). ASUs replace accounting guidance that was historically issued as
Statements of Financial Accounting Standards (“SFAS”), FASB Interpretations
(“FIN”), FASB Staff Positions (“FSP”), Emerging Issue Task Force (“EITF”)
Abstracts and other types of accounting standards. The Codification became
effective September 30, 2009 for the Corporation, and disclosures within
this Annual Report on Form 10-K have been updated to reflect the
change.
Accounting
for Noncontrolling Interests
SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements – an amendment of
ARB No. 51” (codified in ASC Topic 810, “Consolidation”), was effective
January 1, 2009 for the Corporation and established accounting and
reporting standards for noncontrolling interests in a subsidiary and for
deconsolidation of a subsidiary. The retrospective presentation and disclosure
requirements outlined by the consolidation guidance have been incorporated into
this Annual Report on Form 10-K.
On December 31, 2009,
the Corporation adopted ASU 2010-02, “Consolidation (Topic 810): Accounting and
Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification,” which clarifies the decrease-in-ownership provisions of ASC
Topic 810-10 and guidance applicability. In addition, the ASU expands
the required disclosures upon deconsolidation of a subsidiary. The Corporation
will apply this ASU, as applicable, to transactions in the future.
Fair
Value Measurements
On
January 1, 2009, the Corporation adopted FSP No. FAS 157-2,
“Effective Date of FASB Statement No. 157” (codified in ASC Topic 820,
“Fair Value Measurements and Disclosures”), related to nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value on
the financial statements on a recurring basis. Since the Corporation’s fair
value measurements for nonfinancial assets and nonfinancial liabilities were
consistent with the guidance of the FSP, the adoption of the guidance did not
have a material impact on the Corporation’s consolidated financial statements.
The Corporation’s required disclosures are included in Note J.
On June 30, 2009, the
Corporation adopted FSP No. FAS 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (codified in ASC
Topic 820). This FSP provided additional guidance for estimating the fair
value when the market activity for an asset or liability has declined
significantly. The adoption of this guidance did not have a material impact on
the Corporation’s consolidated financial statements.
On
October 1, 2009, the Corporation adopted ASU 2009-05, “Fair Value Measurements
and Disclosure (Topic 820): Measuring Liabilities at Fair Value.” This ASU
clarified the fair value measurements for a liability in an active market and
the valuation techniques in the absence of a Level 1
measurement. The adoption of
this ASU did not have a material impact on the Corporation’s consolidated
financial statements.
On
December 31, 2009, the Corporation adopted ASU 2009-12, “Fair Value
Measurements and Disclosures (Topic 820): Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent),” which provided
guidance within ASC Topic 820 on measuring the fair value of certain
alternative investments in entities that calculate net asset values. The adoption of
this ASU did not have a material impact on the Corporation’s consolidated
financial statements.
Other
Recently Adopted Accounting Guidance
On
December 31, 2008, the Corporation early adopted SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133” (codified in ASC Topic 815, “Derivatives and
Hedging”). This guidance required enhanced disclosures about an entity’s
derivative and hedging activities. The Corporation’s required disclosures are
included in Note I.
On
January 1, 2009, the Corporation adopted FSP No. FAS 141(R)-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (codified in ASC Topic 805, “Business
Combinations” and ASC Topic 820). This guidance states that assets acquired and
liabilities assumed in a business combination that arise from contingencies
should be recognized at fair value if the acquisition date fair value can be
reasonably determined. If the acquisition date fair value cannot be reasonably
determined, then the asset or liability should be recognized in accordance with
ASC Topic 450, “Contingencies” (formerly SFAS No. 5, “Accounting for
Contingencies,” and FIN No. 14, “Reasonable Estimation of the Amount
of a Loss - an interpretation of FASB Statement No. 5”). The FSP also requires
new disclosures for the assets and liabilities within the scope of this Topic.
The Corporation will apply this guidance to future business
combinations.
On
June 30, 2009, the Corporation adopted FSP No. FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (codified in ASC Topic 320, “Investments - Debt and
Equity Securities”). This guidance amends the other-than-temporary impairment
guidance for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities. The adoption of this guidance did not have a
material impact on the Corporation’s consolidated financial
statements.
On
June 30, 2009, the Corporation adopted SFAS No. 165, “Subsequent Events”
(codified in ASC Topic 855, “Subsequent Events”). This guidance establishes the
principles and requirements for evaluating and reporting subsequent events,
including the period subject to evaluation for subsequent events, the
circumstances requiring recognition of subsequent events in the financial
statements, and the required disclosures. The Corporation has evaluated
subsequent events in accordance with this guidance through the filing of this
Annual Report on Form 10-K on February 19, 2010.
On
December 31, 2009, the Corporation adopted FSP No. FAS 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets” (codified in
ASC Topic 715, “Compensation - Retirement Benefits”). The FSP requires
new disclosures on investment policies and strategies, categories of plan
assets, fair value measurements of plan assets, and significant concentrations
of risk. The required disclosures are included in Note N.
Accounting
Guidance Issued But Not Adopted as of December 31, 2009
In December 2009, the
FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860): Accounting
for Transfers of Financial Assets.” This ASU is intended to improve the
information provided in financial statements concerning transfers of financial
assets, including the effects of transfers on financial position, financial
performance and cash flows, and any continuing involvement of the transferor
with the transferred financial assets. This ASU is effective for the
first annual reporting period beginning after November 15, 2009, which is
January 1, 2010 for the Corporation. The adoption of this ASU is not expected to
have a material impact on the Corporation’s consolidated financial
statements.
In
December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,” which amended the consolidation guidance applicable to
variable interest entities and required additional disclosures concerning an
enterprise’s continuing involvement with variable interest entities. This ASU is
effective for the first annual reporting period beginning after November 15,
2009, which is January 1, 2010 for the Corporation. The adoption of this ASU is
not expected to have a material impact on the Corporation’s consolidated
financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements - consensus of the FASB Emerging
Issues Task Force,” which amends the criteria for when to evaluate individual
delivered items in a multiple deliverable arrangement and how to allocate
consideration received. This ASU is effective for fiscal periods beginning on or
after June 15, 2010, which is January 1, 2011 for the Corporation. The
Corporation is currently evaluating the impact of adopting the
guidance.
In
January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements,”
which adds disclosure requirements about transfers in and out of Levels 1 and 2
and separate disclosures about activity relating to Level 3 measurements, and
clarifies input and valuation techniques. This ASU is effective for
the first reporting period beginning after December 15, 2009. The Corporation is
currently evaluating the impact of adopting the guidance and will include any
required new disclosure in its report for the interim period ended March 31,
2010, as appropriate.
NOTE
C RESTRUCTURING
2009
Restructuring
On
June 30, 2009, the Board of Directors of UCC approved a restructuring plan to
improve the cost effectiveness of the Corporation’s global operations. As a
result, the Corporation recorded restructuring charges of $162 million in
the second quarter of 2009, which included the shutdown of certain facilities
that produced ethylene as well as ethylene oxide/ethylene glycol in Hahnville,
Louisiana ($38 million) and certain related capital project write-offs
($7 million). In addition, due to the expected loss arising from the United
States Federal Trade Commission (“FTC”) required divestiture of certain
specialty latex assets resulting from Dow’s acquisition of Rohm and Haas
Company, the Corporation recognized an impairment charge in the second quarter
of 2009 ($114 million). Also, included in the second quarter restructuring
charge was severance of approximately $3 million for 41 people related
to the plant shutdowns and corporate workforce reductions. During 2009,
severance of $2 million was paid, leaving a liability at December 31, 2009 of $1
million for approximately 16 employees. The workforce reduction is
expected to be completed by the end of 2010.
The
following table summarizes the activities related to the Corporation’s 2009
restructuring reserve:
2009
Restructuring Activities
In
millions
|
Impairment
of
Long-Lived
Assets
and
Other Assets
|
Severance
Costs
|
Total
|
|||||||||
Restructuring
charges recognized in
the second quarter of 2009
|
$ | 159 | $ | 3 | $ | 162 | ||||||
Charges
against the reserve
|
(159 | ) | - | (159 | ) | |||||||
Cash
payments
|
- | (2 | ) | (2 | ) | |||||||
Reserve
balance at December 31, 2009
|
- | $ | 1 | $ | 1 |
2008
Restructuring
On
December 5, 2008, the Board of Directors of UCC approved a restructuring
plan to improve the cost effectiveness of the Corporation’s global operations.
As a result, the Corporation recorded restructuring charges of $105 million
in the fourth quarter of 2008, which included the write-off of the net book
value of certain assets in Texas and Xiaolan, China, and a workforce reduction
to improve the cost effectiveness and to enhance the efficiency of the
Corporation’s operations. The charges included a $57 million write-off of
the net book value associated with the shutdown of a facility that manufactures
NORDELTM
hydrocarbon rubber in Seadrift, Texas, the solution vinyl resins facility in
Texas City, Texas and the emulsion systems facility in Xiaolan, China; severance
of $24 million for a workforce reduction of 399 people; and
curtailment costs of $24 million associated with the Corporation’s defined
benefit pension plans. During the first quarter of 2009, the Corporation
identified an additional 50 employees to be separated under the 2008
restructuring plan, resulting in the recognition of an additional
$4 million of severance cost. During 2009, severance of $23 million
was paid, leaving a liability at December 31, 2009 of $5 million for
approximately 59 employees. The workforce reduction is expected to be
completed by the end of 2010.
The
following table summarizes the activities related to the Corporation’s 2008
restructuring reserve:
2008
Restructuring Activities
In
millions
|
Impairment
of Long-Lived Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
Restructuring
charges recognized in
the fourth quarter of 2008
|
$ | 57 | $ | 24 | $ | 24 | $ | 105 | ||||||||
Charges
against the reserve
|
(57 | ) | - | - | (57 | ) | ||||||||||
Reserve
balance at December 31, 2008
|
- | $ | 24 | $ | 24 | $ | 48 | |||||||||
Adjustment
to the reserve
|
- | - | 4 | 4 | ||||||||||||
Cash
payments
|
- | - | (23 | ) | (23 | ) | ||||||||||
Reserve
balance at December 31, 2009
|
- | $ | 24 | $ | 5 | $ | 29 |
2007
Restructuring
On
November 30, 2007, the Board of Directors of UCC approved a plan to shut
down certain assets and make organizational changes to enhance the efficiency
and cost effectiveness of the Corporation's operations. As a result, based on
decisions made by management, the Corporation recorded restructuring charges of
$55 million in the fourth quarter of 2007. The charges included a
$26 million write-off of the net book value of the polypropylene
manufacturing facility at St. Charles Operations in Hahnville, Louisiana,
which was shut down at the end of 2007; severance of $17 million for a
workforce reduction of 231 people; and curtailment costs of
$12 million associated with the Corporation’s defined benefit pension
plans. At December 31, 2008, severance of $2 million had been paid and
a liability of $15 million remained for approximately 187 employees.
In the fourth quarter of 2009, the Corporation reduced the reserve by $5 million
related to severance costs, as redeployment opportunities for affected employees
were identified. During 2009, severance of $7 million was paid, leaving a
liability at December 31, 2009 of $3 million for approximately
35 employees. The remaining workforce reduction is expected to be completed
in 2010.
The
following table summarizes the activities related to the Corporation’s 2007
restructuring reserve:
2007
Restructuring Activities
In
millions
|
Impairment
of Long-Lived Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
Restructuring
charges recognized in the
fourth quarter of 2007
|
$ | 26 | $ | 12 | $ | 17 | $ | 55 | ||||||||
Charges
against the reserve
|
(26 | ) | - | - | (26 | ) | ||||||||||
Reserve
balance at December 31, 2007
|
- | $ | 12 | $ | 17 | $ | 29 | |||||||||
Cash
payments
|
- | - | (2 | ) | (2 | ) | ||||||||||
Reserve
balance at December 31, 2008
|
- | $ | 12 | $ | 15 | $ | 27 | |||||||||
Adjustment
to the reserve
|
- | - | (5 | ) | (5 | ) | ||||||||||
Cash
payments
|
- | - | (7 | ) | (7 | ) | ||||||||||
Reserve
balance at December 31, 2009
|
- | $ | 12 | $ | 3 | $ | 15 |
NOTE
D DIVESTITURE OF NONCONSOLIDATED
AFFILIATE
On
September 30, 2009, the Corporation completed the sale of its ownership
interest in the OPTIMAL Group of Companies (“OPTIMAL”), nonconsolidated
affiliates, for net proceeds of $660 million to Petroliam Nasional Berhad.
This sale resulted in a pretax gain of $339 million included in “Sundry
income - net.”
NOTE
E INVENTORIES
The
following table provides a breakdown of inventories:
Inventories
at December 31
In
millions
|
2009
|
2008
|
||||||
Finished
goods
|
$ | 70 | $ | 48 | ||||
Work
in process
|
10 | 10 | ||||||
Raw
materials
|
49 | 55 | ||||||
Supplies
|
78 | 74 | ||||||
Total
inventories
|
$ | 207 | $ | 187 |
The
reserves reducing inventories from a FIFO basis to a LIFO basis amounted to
$126 million at December 31, 2009 and $115 million at
December 31, 2008. The inventories that were valued on a LIFO basis,
principally U.S. chemicals and plastics product inventories, represented
54 percent of the total inventories at December 31, 2009 and
51 percent of the total inventories at December 31, 2008.
A
reduction of certain inventories resulted in the liquidation of some of the
Corporation’s LIFO inventory layers, which had an immaterial impact on pretax
income in 2009, 2008 and 2007.
NOTE
F PROPERTY
Property
at December 31
|
Estimated
|
|||||||||||
In
millions
|
Useful
Lives (Years)
|
2009
|
2008
|
|||||||||
Land
|
- | $ | 50 | $ | 51 | |||||||
Land
and waterway improvements
|
15-25 | 226 | 225 | |||||||||
Buildings
|
5-55 | 481 | 505 | |||||||||
Machinery
and equipment
|
3-20 | 6,174 | 6,071 | |||||||||
Utility
and supply lines
|
5-20 | 135 | 85 | |||||||||
Other
property
|
3-30 | 381 | 379 | |||||||||
Construction
in progress
|
- | 86 | 314 | |||||||||
Total
property
|
$ | 7,533 | $ | 7,630 |
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Depreciation
expense
|
$ | 272 | $ | 271 | $ | 270 | ||||||
Manufacturing
maintenance and repair costs
|
$ | 218 | $ | 211 | $ | 223 | ||||||
Capitalized
interest
|
$ | 4 | $ | 15 | $ | 13 |
NOTE
G NONCONSOLIDATED AFFILIATES
The
Corporation’s investments in related companies accounted for by the equity
method (“nonconsolidated affiliates”) were $116 million at December 31,
2009 and $427 million at December 31, 2008. Dividends received from
nonconsolidated affiliates were $36 million in 2009, $132 million in 2008
and $331 million in 2007. Undistributed earnings of nonconsolidated
affiliates included in retained earnings were $26 million at
December 31, 2009 and $245 million at December 31,
2008.
In
late fourth quarter 2007, the Corporation, through a series of noncash
transactions, contributed its share of EQUATE Petrochemical Company K.S.C.
(“EQUATE”) for an increased share in Dow International Holdings Company
(“DIHC”). As a result, the Corporation has an ownership interest in DIHC which
is accounted for using the cost method. In accordance with the terms of the
contribution agreement, Dow made a capital contribution to UCC in the amount of
$191 million in the first quarter of 2008. The Corporation had a 19.13
percent ownership interest in DIHC at December 31, 2009 and 2008. See Note P for
additional information.
All
of the nonconsolidated affiliates in which the Corporation has investments are
privately held companies; therefore, quoted market prices are not
available.
Principal
Nonconsolidated Affiliates
The
Corporation’s principal nonconsolidated affiliates and the Corporation’s
ownership interest for each at December 31, 2009, 2008 and 2007 are shown
below:
Principal
Nonconsolidated Affiliates at December 31
|
Ownership
Interest
|
||
2009
|
2008
|
2007
|
|
Nippon
Unicar Company Limited
|
50%
|
50%
|
50%
|
The
OPTIMAL Group of Companies (1) :
|
|||
OPTIMAL
Chemicals (Malaysia) Sdn. Bhd.
|
-
|
50%
|
50%
|
OPTIMAL
Glycols (Malaysia) Sdn. Bhd.
|
-
|
50%
|
50%
|
OPTIMAL
Olefins (Malaysia) Sdn. Bhd.
|
-
|
23.75%
|
23.75%
|
Univation
Technologies, LLC
|
50%
|
50%
|
50%
|
(1)
|
On
September 30, 2009, the Corporation completed the sale of its ownership
interest in OPTIMAL. See Note
D.
|
The
Corporation’s investment in the principal nonconsolidated affiliates was
$108 million at December 31, 2009 and $420 million at
December 31, 2008, and its equity in earnings was $45 million in 2009,
$167 million in 2008 and $495 million in 2007. The summarized
financial information presented below represents the combined accounts (at
100 percent) of the principal nonconsolidated affiliates.
Summarized
Balance Sheet Information at December 31
|
||||||||
In
millions
|
2009
|
2008
|
||||||
Current
assets
|
$ | 292 | $ | 840 | ||||
Noncurrent
assets
|
136 | 1,038 | ||||||
Total
assets
|
$ | 428 | $ | 1,878 | ||||
Current
liabilities
|
$ | 149 | $ | 416 | ||||
Noncurrent
liabilities
|
72 | 399 | ||||||
Total
liabilities
|
$ | 221 | $ | 815 |
Summarized
Income Statement Information
|
||||||||||||
In
millions
|
2009
(1)
|
2008
(1)
|
2007 (1)
|
|||||||||
Sales
|
$ | 1,239 | $ | 2,410 | $ | 3,278 | ||||||
Gross
profit
|
$ | 181 | $ | 798 | $ | 1,478 | ||||||
Net
income
|
$ | 83 | $ | 515 | $ | 1,223 |
(1)
|
The summarized income statement
information for 2007 includes the results for EQUATE. The
summarized income statement information includes the results for OPTIMAL
for 2008 and 2007 and for the first nine months of
2009.
|
NOTE
H GOODWILL AND OTHER INTANGIBLE ASSETS
During
the fourth quarter of 2008, the Corporation performed its annual impairment
tests for goodwill. As a result of this review, it was determined that the
goodwill associated with polypropylene assets was impaired. Management’s
impairment review determined that discounted cash flows did not support the
carrying value of the goodwill. This was due to the demand decline in North
America and Western Europe, significant new industry capacity that came on
stream in 2008 and additional industry capacity that came on stream in 2009. As
a result, the Corporation recognized an impairment loss of $26 million in
the fourth quarter of 2008 which reduced the Corporation’s goodwill balance to
zero at December 31, 2008.
The
following table provides information regarding the Corporation’s other
intangible assets:
Other Intangible Assets at December 31 | ||||||||||||||||||||||||
2009 |
2008
|
|||||||||||||||||||||||
In
millions
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||
Intangible
assets with finite lives:
|
||||||||||||||||||||||||
Licenses
and intellectual property
|
$ | 33 | $ | (33 | ) | - | $ | 33 | $ | (33 | ) | - | ||||||||||||
Patents
|
2 | (1 | ) | $ | 1 | 2 | (1 | ) | $ | 1 | ||||||||||||||
Software
|
115 | (106 | ) | 9 | 117 | (101 | ) | 16 | ||||||||||||||||
Total
other intangible assets
|
$ | 150 | $ | (140 | ) | $ | 10 | $ | 152 | $ | (135 | ) | $ | 17 |
The
following table provides information regarding amortization
expense:
Amortization
Expense
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Software,
included in “Cost of sales”
|
$ | 5 | $ | 7 | $ | 6 |
Total
estimated amortization expense for the next five fiscal years is as
follows:
Estimated
Amortization Expense for Next Five Years
In
millions
|
||||
2010
|
$ | 4 | ||
2011
|
$ | 4 | ||
2012
|
$ | 2 | ||
2013
|
- | |||
2014
|
- |
NOTE
I FINANCIAL INSTRUMENTS
Investments
The
Corporation’s investments in marketable securities are classified as
available-for-sale.
Investing
Results
|
||||||||||||
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Proceeds
from sales of available-for-sale securities
|
$ | 10 | $ | 13 | $ | 2 |
Portfolio
managers regularly review all of the Corporation’s holdings to determine if any
investments are other-than-temporarily impaired. The analysis
includes reviewing the amount of temporary impairment, as well as the length of
time it has been impaired. In addition, specific guidelines for each
instrument type are followed to determine if an other-than-temporary impairment
has occurred. At December 31, 2009 and December 31, 2008 there were
no impairment indicators or circumstances that would result in a material
adjustment of these investments.
The
Corporation’s investments in debt securities had contractual maturities of less
than 10 years at December 31, 2009.
Fair
Value of Financial Instruments:
|
||||||||||||||||||||||||||||||||
At
December 31, 2009
|
At
December 31, 2008
|
|||||||||||||||||||||||||||||||
In
millions
|
Cost
|
Gain
|
Loss
|
Fair
Value
|
Cost
|
Gain
|
Loss
|
Fair
Value
|
||||||||||||||||||||||||
Marketable
securities (1):
|
||||||||||||||||||||||||||||||||
Debt
securities
|
$ | 16 | $ | 1 | - | $ | 17 | $ | 13 | $ | 1 | - | $ | 14 | ||||||||||||||||||
Equity
securities
|
1 | - | - | 1 | - | - | - | - | ||||||||||||||||||||||||
Total
marketable securities
|
$ | 17 | $ | 1 | - | $ | 18 | $ | 13 | $ | 1 | - | $ | 14 | ||||||||||||||||||
Long-term
debt including debt due within one year
|
$ | (571 | ) | $ | 73 | - | $ | (498 | ) | $ | (820 | ) | $ | 145 | - | $ | (675 | ) |
(1)
|
Included
in “Other investments” in the consolidated balance
sheets.
|
Cost
approximates fair value for all other financial instruments.
The
Corporation enters into foreign exchange forward contracts to hedge various
currency exposures, primarily related to assets and liabilities denominated in
foreign currencies. The primary business objective of the activity is to
optimize the U.S. dollar value of the Corporation’s assets and liabilities.
Assets and liabilities denominated in the same foreign currency are netted, and
only the net exposure is hedged. The Corporation had forward contracts to buy,
sell or exchange foreign currencies that expired in the fourth quarter of 2009
and were immaterial. The Corporation did not designate any derivatives as hedges
at December 31, 2009.
During
2009, 2008 and 2007, nonconsolidated affiliates of the Corporation had hedging
activities that were accounted for as cash flow hedges in accordance with the
accounting guidance for derivatives and hedging. The Corporation’s proportionate
share of the hedging results recorded in accumulated other comprehensive income
by the nonconsolidated affiliates is reported as net hedging results in the
Corporation’s consolidated statements of equity in accordance with the
accounting guidance for reporting comprehensive income.
NOTE
J FAIR VALUE MEASUREMENTS
The
following table summarizes the basis used to measure certain assets at fair
value on a recurring basis in the consolidated balance sheets:
Basis
of Fair Value Measurements
on
a Recurring Basis at
December
31
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Other Observable Inputs
(Level
2)
|
||||||
In
millions
|
2009
|
2008
|
||||||
Assets
at fair value:
|
||||||||
Debt
securities (1)
|
$ | 17 | $ | 14 |
(1)
|
Included
in “Other investments” in the consolidated balance
sheets.
|
Assets
that are measured using significant other observable inputs are primarily valued
by reference to quoted prices of similar assets in active markets, adjusted for
any terms specific to that asset. For all other assets for which observable
inputs are used, fair value is derived through the use of fair value models,
such as a discounted cash flow model or other standard pricing
models.
For
assets and liabilities classified as Level 2, the fair value is based on the
price a dealer would pay for the security or similar securities. Market inputs
are obtained from well-established and recognized vendors of market data and
placed through tolerance/quality checks.
The
following table summarizes the basis used to measure certain assets at fair
value on a nonrecurring basis in the consolidated balance sheets:
Basis
of Fair Value Measurements on a Nonrecurring Basis in 2009
In
millions
|
Significant
Other Unobservable Inputs
(Level
3)
|
Total
Losses 2009
|
||||||
Assets
at fair value:
|
||||||||
Long-lived
assets
|
- | $ | (159 | ) |
As
part of the restructuring plan that was approved on June 30, 2009, the
Corporation shut down certain manufacturing facilities and will divest certain
specialty latex assets resulting from Dow’s acquisition of Rohm and Haas Company
as required by the FTC. As a result, long-lived assets with a carrying value of
$159 million were written down to estimated fair value, less cost to sell,
resulting in an impairment charge of $159 million, which was included in
the second quarter of 2009 restructuring charge. The long-lived assets were
valued based on bids received from third parties and using discounted cash flow
analysis based on assumptions that market participants would use. Key inputs
included anticipated revenues, associated manufacturing costs, capital
expenditures and discount, growth and tax rates. The divestiture of the FTC
required assets was completed on January 25, 2010 (see Notes C and
S).
NOTE
K SUPPLEMENTARY INFORMATION
Sundry
Income – Net
|
||||||||||||
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Net
gain on sales of assets and securities
|
$ | 3 | $ | 14 | $ | 10 | ||||||
Net
gain on sale of ownership interest in OPTIMAL
|
339 | - | - | |||||||||
Foreign
exchange gain
|
1 | - | 1 | |||||||||
Related
company commissions - net
|
(32 | ) | (33 | ) | (37 | ) | ||||||
Dividend
income - related companies
|
193 | 297 | 109 | |||||||||
Other
- net
|
(25 | ) | (35 | ) | (34 | ) | ||||||
Total
sundry income - net
|
$ | 479 | $ | 243 | $ | 49 |
Other
Supplementary Information
|
||||||||||||
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Cash
payments for interest
|
$ | 53 | $ | 59 | $ | 66 | ||||||
Cash
payments for income taxes
|
$ | 373 | $ | 40 | $ | 233 | ||||||
Provision
for doubtful receivables (1)
|
- | - | $ | 4 | ||||||||
(1)
Included in “Selling, general and administrative expenses” in the
consolidated statements of income.
|
NOTE
L COMMITMENTS AND CONTINGENT LIABILITIES
Environmental
Matters
Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based
on current law and existing technologies.
At December 31, 2009, the Corporation
had accrued obligations of $84 million for environmental remediation and
restoration costs, including $21 million for the remediation of Superfund sites.
This is management’s best estimate of the costs for remediation and restoration
with respect to environmental matters for which the Corporation has accrued
liabilities, although the ultimate cost with respect to these particular matters
could range up to approximately twice that amount. Inherent uncertainties exist
in these estimates primarily due to unknown environmental conditions, changing
governmental regulations and legal standards regarding liability, and emerging
remediation technologies for handling site remediation and
restoration.
At December 31, 2008, the
Corporation had accrued obligations of $67 million for environmental
remediation and restoration costs, including $18 million for the
remediation of Superfund sites. It is the opinion of the Corporation’s
management that the possibility is remote that costs in excess of those
disclosed will have a material adverse impact on the Corporation’s consolidated
financial statements.
The
following table summarizes the activity in the Corporation’s accrued obligations
for environmental matters for the years ended December 31, 2009 and
2008:
Accrued
Liability for Environmental Matters
|
||||||||
In
millions
|
2009
|
2008
|
||||||
Balance
at January 1
|
$ | 67 | $ | 75 | ||||
Additional
accruals
|
49 | 30 | ||||||
Charges
against reserve
|
(32 | ) | (38 | ) | ||||
Balance
at December 31
|
$ | 84 | $ | 67 |
The
amounts charged to income on a pretax basis related to environmental remediation
totaled $49 million in 2009, $29 million in 2008 and $33 million in
2007. Capital expenditures for environmental protection were $2 million in 2009,
$17 million in 2008 and $15 million in 2007.
Litigation
The
Corporation is involved in a number of legal proceedings and claims with both
private and governmental parties. These cover a wide range of matters,
including, but not limited to: product liability; trade regulation; governmental
regulatory proceedings; health, safety and environmental matters; employment;
patents; contracts; taxes; and commercial disputes.
Separately,
the Corporation is and has been involved in a large number of asbestos-related
suits filed primarily in state courts during the past three decades. These suits
principally allege personal injury resulting from exposure to
asbestos-containing products and frequently seek both actual and punitive
damages. The alleged claims primarily relate to products that UCC sold in the
past, alleged exposure to asbestos-containing products located on UCC’s
premises, and UCC’s responsibility for asbestos suits filed against a former UCC
subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are
unable to demonstrate that they have suffered any compensable loss as a result
of such exposure, or that injuries incurred in fact resulted from exposure to
the Corporation’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including the Corporation and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. The
Corporation expects more asbestos-related suits to be filed against it and
Amchem in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
Estimating
the Liability
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, the Corporation increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing
costs. Since then, the Corporation has compared current asbestos claim and
resolution activity to the results of the most recent ARPC study at each balance
sheet date to determine whether the accrual continues to be appropriate. In
addition, the Corporation has requested ARPC to review the Corporation’s
historical asbestos claim and resolution activity each November since 2004 to
determine the appropriateness of updating the most recent ARPC
study.
In
November 2007, the Corporation requested ARPC to review the Corporation’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2007. In December 2007, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2007, the Corporation’s asbestos-related
liability for pending and future claims was $1.1 billion.
In
November 2008, the Corporation requested ARPC to review the Corporation’s
historical asbestos claim and resolution activity and determine the
appropriateness of updating ARPC’s December 2006 study. In response to that
request, ARPC reviewed and analyzed data through October 31, 2008. The
resulting study, completed by ARPC in December 2008, stated that the
undiscounted cost of resolving pending and future asbestos-related claims
against UCC and Amchem, excluding future defense and processing costs, through
2023 was estimated to be between $952 million and $1.2 billion. As in
its earlier studies, ARPC provided estimates for a longer period of time in its
December 2008 study, but also reaffirmed its prior advice that forecasts for
shorter periods of time are more accurate than those for longer periods of
time.
In
December 2008, based on ARPC’s December 2008 study and the Corporation’s own
review of the asbestos claim and resolution activity, the Corporation decreased
the asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending in 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statement of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
In
November 2009, the Corporation requested ARPC to review the Corporation’s 2009
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2008 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2009. In December 2009, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on the
Corporation’s own review of the asbestos claim and resolution activity and
ARPC’s response, the Corporation determined that no change to the accrual was
required. At December 31, 2009, the Corporation’s asbestos-related
liability for pending and future claims was $839 million.
At
December 31, 2009, approximately 23 percent of the recorded liability
related to pending claims and approximately 77 percent related to future
claims. At December 31, 2008, approximately 21 percent of the recorded
liability related to pending claims and approximately 79 percent related to
future claims.
Insurance
Receivables
At
December 31, 2002, the Corporation increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion,
substantially exhausting its asbestos product liability coverage. The insurance
receivable related to the asbestos liability was determined by the Corporation
after a thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which the Corporation and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of the
Corporation’s insurance policies and to resolve issues that the insurance
carriers may raise.
In
September 2003, the Corporation filed a comprehensive insurance coverage case,
now proceeding in the Supreme Court of the State of New York, County of New
York, seeking to confirm its rights to insurance for various asbestos claims and
to facilitate an orderly and timely collection of insurance proceeds (the
“Insurance Litigation”). The Insurance Litigation was filed against insurers
that are not signatories to the Wellington Agreement and/or do not otherwise
have agreements in place with the Corporation regarding their asbestos-related
insurance coverage, in order to facilitate an orderly resolution and collection
of such insurance policies and to resolve issues that the insurance carriers may
raise. Since the filing of the case, UCC has reached settlements with several of
the carriers involved in the Insurance Litigation, including settlements reached
with two significant carriers in the fourth quarter of 2009, resulting in a
shift between receivable balances further discussed below. The
Insurance Litigation is ongoing.
The
Corporation’s receivable for insurance recoveries related to its asbestos
liability was $84 million at December 31, 2009 and $403 million at
December 31, 2008. The decrease in the receivable was principally due to
settlements reached in the fourth quarter of 2009 with two significant carriers
involved in the Insurance Litigation. At December 31, 2009 and 2008, all of the
receivable for insurance recoveries was related to insurers that are not
signatories to the Wellington Agreement and/or do not otherwise have agreements
in place regarding their asbestos-related insurance coverage.
In
addition to the receivable for insurance recoveries related to the
asbestos-related liability, the Corporation had receivables for defense and
resolution costs submitted to insurance carriers that have settlement agreements
in place regarding their asbestos-related insurance coverage. The
balance of these receivables increased in 2009 principally as a result of
settlements reached in the fourth quarter of 2009 with two significant carriers
involved in the Insurance Litigation.
Receivables
for Costs Submitted to Insurance Carriers with Settlement
Agreements
|
||||||||
December
31
In
millions
|
2009
|
2008
|
||||||
Receivables
for defense costs
|
$ | 91 | $ | 28 | ||||
Receivables
for resolution costs
|
357 | 244 | ||||||
Total
|
$ | 448 | $ | 272 |
The
Corporation expenses defense costs as incurred. The pretax impact for defense
and resolution costs, net of insurance, was $58 million in 2009, $53 million in
2008 and $84 million in 2007 and was reflected in “Cost of sales.”
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, and after taking into account the
solvency and historical payment experience of various insurance carriers,
existing insurance settlements, and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, the Corporation continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection.
Summary
The
amounts recorded for the asbestos-related liability and related insurance
receivable described above were based upon current, known facts. However, future
events, such as the number of new claims to be filed and/or received each year,
the average cost of disposing of each such claim, coverage issues among insurers
and the continuing solvency of various insurance companies, as well as the
numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs and insurance recoveries to be higher or lower than
those projected or those recorded.
Because
of the uncertainties described above, management cannot estimate the full range
of the cost of resolving pending and future asbestos-related claims facing the
Corporation and Amchem. Management believes that it is reasonably possible that
the cost of disposing of the Corporation’s asbestos-related claims, including
future defense costs, could have a material adverse impact on the results of
operations and cash flows for a particular period and on the consolidated
financial position of the Corporation.
While
it is not possible at this time to determine with certainty the ultimate outcome
of any of the legal proceedings and claims referred to in this filing,
management believes that adequate provisions have been made for probable losses
with respect to pending claims and proceedings, and that, except for the
asbestos-related matters described above, the ultimate outcome of all known and
future claims, after provisions for insurance, will not have a material adverse
impact on the results of operations, cash flows and financial position of the
Corporation. Should any losses be sustained in connection with any of such legal
proceedings and claims in excess of provisions provided and available insurance,
they will be charged to income when determinable.
Purchase
Commitments
At
December 31, 2009, the Corporation had various outstanding commitments for
take-or-pay agreements, with terms extending from one to fifteen years. Such
commitments were not in excess of current market prices. The fixed and
determinable portion of obligations under purchase commitments at
December 31, 2009 is presented in the following table:
Fixed
and Determinable Portion of Take-or-Pay Obligations
at
December 31, 2009
In
millions
|
||||
2010
|
$ | 14 | ||
2011
|
6 | |||
2012
|
4 | |||
2013
|
4 | |||
2014
|
4 | |||
2015
and beyond
|
10 | |||
Total
|
$ | 42 |
Guarantees
During
the third quarter of 2009, the nonperformance guarantees undertaken by the
Corporation for its nonconsolidated affiliate Nippon Unicar Company Limited
expired. In addition, during the third quarter of 2009, the
Corporation sold its ownership interest in OPTIMAL, thereby eliminating all
outstanding nonperformance guarantees (see Note D). The Corporation
had no outstanding guarantee obligations at December 31, 2009.
The
Corporation had undertaken obligations to guarantee the performance of certain
nonconsolidated affiliates (including OPTIMAL and Nippon Unicar Company Limited)
if specified triggering events occurred. Non-performance under a contract for
commercial and/or financial obligations by the guaranteed party would have
triggered the obligation of the Corporation to make payments to the beneficiary
of the guarantees. Financial obligations included debt and lease
arrangements.
The
following table provides a summary of the final expiration, maximum future
payments, and recorded liability reflected in the consolidated balance sheets
for these guarantees at December 31, 2008.
Guarantees
at December 31, 2008
In
millions
|
Final
Expiration
|
Maximum
Future Payments
|
Recorded
Liability
|
||||||
Guarantees
|
2014
|
$ | 72 | $ | 1 |
Conditional
Asset Retirement Obligations
The
Corporation has recognized conditional asset retirement obligations related to
asbestos encapsulation as a result of planned demolition and remediation
activities at manufacturing and administrative sites in the United States. The
aggregate carrying amount of conditional asset retirement obligations was
$9 million at December 31, 2009 and 2008. The discount rate used to
calculate the Corporation’s asset retirement obligations was 2.45 percent
(7.13 percent at December 31, 2008). These obligations are included in the
consolidated balance sheets as “Accrued and other current
liabilities.”
The
Corporation has not recognized conditional asset retirement obligations for
which a fair value cannot be reasonably estimated in its consolidated financial
statements. It is the opinion of management that the possibility is remote that
such conditional asset retirement obligations, when estimable, will have a
material adverse impact on the Corporation’s consolidated financial statements
based on current costs.
NOTE
M NOTES PAYABLE AND LONG-TERM DEBT
Notes
Payable at December 31
In
millions
|
2009
|
2008
|
||||||
Notes
payable – related companies
|
$ | 3 | $ | 12 | ||||
Year-end
average interest rates
|
0.05 | % | 2.70 | % |
Long-Term
Debt at December 31
|
2009
|
2008
|
||||||||||||||
Average
|
Average
|
|||||||||||||||
In
millions
|
Rate
|
2009
|
Rate
|
2008
|
||||||||||||
Promissory
notes and debentures:
|
||||||||||||||||
Notes
due 2009
|
- | - | 6.70 | % | $ | 249 | ||||||||||
Debentures
due 2023
|
7.875 | % | $ | 175 | 7.875 | % | 175 | |||||||||
Debentures
due 2025
|
6.79 | % | 12 | 6.79 | % | 12 | ||||||||||
Debentures
due 2025
|
7.50 | % | 150 | 7.50 | % | 150 | ||||||||||
Debentures
due 2096
|
7.75 | % | 200 | 7.75 | % | 200 | ||||||||||
Other
facilities:
|
||||||||||||||||
Pollution
control/industrial revenue bonds, maturity 2012
|
5.09 | % | 37 | 5.09 | % | 37 | ||||||||||
Unamortized
debt discount
|
- | (3 | ) | - | (3 | ) | ||||||||||
Long-term
debt due within one year
|
- | - | - | (249 | ) | |||||||||||
Total
long-term debt
|
- | $ | 571 | - | $ | 571 |
Annual
Installments on Long-Term Debt
for
the Next Five Years
In
millions
|
||||
2010
|
- | |||
2011
|
- | |||
2012
|
$ | 37 | ||
2013
|
- | |||
2014
|
- |
The
Corporation’s outstanding public debt has been issued under indentures which
contain, among other provisions, covenants that the Corporation must comply with
while the underlying notes are outstanding. Such covenants are typically based
on the Corporation’s size and financial position and include, subject to the
exceptions and qualifications contained in the indentures, obligations not to
(i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale
and lease-back transactions with respect to principal U.S. manufacturing
facilities, or (iii) merge into or consolidate with any other entity or sell or
convey all or substantially all of its assets. Failure of the Corporation to
comply with any of these covenants could, after the passage of any applicable
grace period, result in a default under the applicable indenture which would
allow the note holders to accelerate the due date of the outstanding principal
and accrued interest on the subject notes. Management believes the Corporation
was in compliance with the covenants referred to above at December 31,
2009.
NOTE
N PENSION AND OTHER POSTRETIREMENT
BENEFITS
Pension
Plans
The
Corporation currently has a defined benefit pension plan that covers
substantially all employees in the United States. Benefits are based on length
of service and the employee’s three highest consecutive years of compensation.
Employees hired on or after January 1, 2008 earn benefits that are based on a
set percentage of annual pay, plus interest. The Corporation also has a
nonqualified supplemental pension plan.
The
Corporation’s funding policy is to contribute to the plan when pension laws or
economics either require or encourage funding. In 2009, UCC did not make any
contributions to its qualified pension plan. UCC does not expect to contribute
assets to its qualified pension plan in 2010.
The
weighted-average assumptions used to determine pension plan obligations and net
periodic benefit costs are provided below:
Pension
Plan Assumptions
|
Benefit
Obligations
at
December 31
|
Net
Periodic Costs
for
the Year
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
5.85 | % | 6.85 | % | 6.85 | % | 6.65 | % | ||||||||
Rate
of increase in future compensation levels
|
4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | ||||||||
Long-term
rate of return on assets
|
- | - | 8.00 | % | 8.00 | % |
The
Corporation determines the expected long-term rate of return on assets by
performing a detailed analysis of historical and expected returns based on the
strategic asset allocation and the underlying return fundamentals of each asset
class. The Corporation’s historical experience with the pension fund asset
performance is also considered. The discount rates utilized to measure the
pension and other postretirement benefit obligations are based on the yield on
high quality fixed income investments at the measurement date. Future expected
actuarially determined cash flows of the plans are matched against the Citigroup
Pension Discount Curve (Above Median) to arrive at a single discount rate by
plan.
The
accumulated benefit obligation for all defined benefit pension plans was
$3.7 billion at December 31, 2009 and $3.4 billion at
December 31, 2008.
Pension
Plans with Accumulated Benefit Obligations
in Excess of Plan Assets at
December 31
|
||||||||
In
millions
|
2009
|
2008
|
||||||
Projected
benefit obligation
|
$ | 3,691 | $ | 3,419 | ||||
Accumulated
benefit obligation
|
$ | 3,656 | $ | 3,392 | ||||
Fair
value of plan assets
|
$ | 3,240 | $ | 3,181 |
Other
Postretirement Benefits
The
Corporation provides certain health care and life insurance benefits to retired
U.S. employees. The plan provides health care benefits, including hospital,
physicians’ services, drug and major medical expense coverage, and life
insurance benefits. The Corporation and the retiree share the cost of these
benefits, with the Corporation portion increasing as the retiree has increased
years of credited service, although there is a cap on the Corporation portion.
The Corporation has the ability to change these benefits at any time. Employees
hired after January 1, 2008 are not covered under this plan.
The
Corporation funds most of the cost of these health care and life insurance
benefits as incurred. No contributions were made to the plan trust in 2009 and
UCC does not expect to contribute assets to its other postretirement benefit
plan trust in 2010.
The
weighted-average assumptions used to determine other postretirement benefit
obligations and net periodic benefit costs for the plan are provided in the
following table:
Plan
Assumptions for Other Postretirement Benefits
|
Benefit
Obligations
at
December 31
|
Net
Periodic Costs
for
the Year
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
5.60 | % | 6.95 | % | 6.95 | % | 6.50 | % | ||||||||
Initial
health care cost trend rate
|
9.17 | % | 9.79 | % | 9.79 | % | 10.43 | % | ||||||||
Ultimate
health care cost trend rate
|
5.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | ||||||||
Year
ultimate trend rate to be reached
|
2019 | 2018 | 2018 | 2014 |
Increasing
or decreasing the assumed medical cost trend rate by one percentage point in
each year would have a $5 million impact on the accumulated postretirement
benefit obligation at December 31, 2009 and an immaterial impact on the net
periodic postretirement benefit cost for the year.
Net
Periodic Benefit Cost (Credit) for all Significant Plans
|
||||||||||||||||||||||||
Defined
Benefit Pension Plans
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||
In
millions
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
Service
cost
|
$ | 15 | $ | 18 | $ | 22 | $ | 2 | $ | 2 | $ | 3 | ||||||||||||
Interest
cost
|
223 | 225 | 214 | 31 | 30 | 30 | ||||||||||||||||||
Expected
return on plan assets
|
(299 | ) | (310 | ) | (317 | ) | - | - | - | |||||||||||||||
Amortization
of prior service cost (credit)
|
7 | 7 | 2 | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||
Amortization
of net loss
|
3 | 2 | 27 | - | - | 2 | ||||||||||||||||||
Termination/curtailment
cost (1)
|
- | 16 | 5 | - | 8 | 6 | ||||||||||||||||||
Net
periodic benefit cost (credit)
|
$ | (51 | ) | $ | (42 | ) | $ | (47 | ) | $ | 31 | $ | 38 | $ | 39 |
(1)
|
See
Note C for information regarding curtailment costs recorded in 2008 and
2007.
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income for
all Significant Plans
|
||||||||||||||||||||||||
Defined
Benefit Pension Plans
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||
In
millions
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
Net
(gain) loss
|
$ | 276 | $ | 978 | $ | (375 | ) | $ | (20 | ) | $ | (20 | ) | $ | (55 | ) | ||||||||
Prior
service (credit) cost
|
- | (6 | ) | 64 | - | - | 1 | |||||||||||||||||
Amortization
of prior service (cost) credit
|
(7 | ) | (7 | ) | (2 | ) | 2 | 2 | 2 | |||||||||||||||
Amortization
of net loss
|
(3 | ) | (2 | ) | (27 | ) | - | - | (2 | ) | ||||||||||||||
Total
recognized in other comprehensive (income) loss
|
$ | 266 | $ | 963 | $ | (340 | ) | $ | (18 | ) | $ | (18 | ) | $ | (54 | ) | ||||||||
Total
recognized in net periodic benefit cost and other comprehensive (income)
loss
|
$ | 215 | $ | 921 | $ | (387 | ) | $ | 13 | $ | 20 | $ | (15 | ) |
Change
in Projected Benefit Obligations, Plan Assets and Funded Status of all
Significant Plans
|
||||||||||||||||
Defined
Benefit
Pension
Plans
|
Other
Postretirement Benefits
|
|||||||||||||||
In
millions
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Change
in projected benefit obligation:
|
||||||||||||||||
Benefit
obligation at beginning of year
|
$ | 3,419 | $ | 3,500 | $ | 469 | $ | 490 | ||||||||
Service
cost
|
15 | 18 | 2 | 2 | ||||||||||||
Interest
cost
|
223 | 225 | 30 | 30 | ||||||||||||
Actuarial
changes in assumptions and experience
|
339 | (39 | ) | (20 | ) | (21 | ) | |||||||||
Benefits
paid
|
(294 | ) | (285 | ) | (37 | ) | (41 | ) | ||||||||
Termination/curtailment
cost
|
- | 9 | - | 9 | ||||||||||||
Other
|
(11 | ) | (9 | ) | - | - | ||||||||||
Benefit
obligation at end of year
|
$ | 3,691 | $ | 3,419 | $ | 444 | $ | 469 | ||||||||
Change
in plan assets:
|
||||||||||||||||
Fair
value of plan assets at beginning of year
|
$ | 3,181 | $ | 4,180 | - | - | ||||||||||
Actual
return (loss) on plan assets
|
359 | (709 | ) | - | - | |||||||||||
Employer
contributions
|
2 | 2 | - | - | ||||||||||||
Asset
transfer
|
(8 | ) | (7 | ) | - | - | ||||||||||
Benefits
paid
|
(294 | ) | (285 | ) | - | - | ||||||||||
Fair
value of plan assets at end of year
|
$ | 3,240 | $ | 3,181 | - | - |
Funded
status at end of year
|
$ | (451 | ) | $ | (238 | ) | $ | (444 | ) | $ | (469 | ) | ||||
Net
amounts recognized in the consolidated balance sheets at December
31:
|
||||||||||||||||
Current
liabilities
|
$ | (2 | ) | $ | (2 | ) | $ | (46 | ) | $ | (50 | ) | ||||
Noncurrent
liabilities
|
(449 | ) | (236 | ) | (398 | ) | (419 | ) | ||||||||
Net
amounts recognized in the consolidated balance sheets
|
$ | (451 | ) | $ | (238 | ) | $ | (444 | ) | $ | (469 | ) | ||||
Pretax
amounts recognized in AOCI at December 31:
|
||||||||||||||||
Net
loss
|
$ | 1,416 | $ | 1,143 | $ | (10 | ) | $ | 10 | |||||||
Prior
service cost (credit)
|
54 | 61 | (8 | ) | (10 | ) | ||||||||||
Pretax
balance in AOCI at end of year
|
$ | 1,470 | $ | 1,204 | $ | (18 | ) | - |
In
2010, an estimated net loss of $54 million and prior service cost of
$7 million for the defined benefit pension plans will be amortized from
AOCI to net periodic benefit cost. In 2010, an estimated prior service credit of
$2 million for the other postretirement benefit plan will be amortized from
AOCI to net periodic benefit cost.
Estimated
Future Benefit Payments
The
estimated future benefit payments, reflecting expected future service, as
appropriate, are presented in the following table:
Estimated
Future Benefit Payments at December 31, 2009
|
||||||||
In
millions
|
Defined
Benefit Pension Plans
|
Other
Postretirement Benefits
|
||||||
2010
|
$ | 281 | $ | 47 | ||||
2011
|
279 | 47 | ||||||
2012
|
275 | 46 | ||||||
2013
|
272 | 43 | ||||||
2014
|
269 | 40 | ||||||
2015
through 2019
|
1,311 | 176 | ||||||
Total
|
$ | 2,687 | $ | 399 |
Plan
Assets
Plan
assets consist mainly of equity and fixed income securities of U.S. and foreign
issuers, and may include alternative investments such as real estate, private
equity and other absolute return strategies. At December 31, 2009 and 2008,
plan assets totaled $3.2 billion and included no Dow common
stock.
Investment
Strategy and Risk Management for Plan Assets
The
Corporation’s investment strategy for the plan assets is to manage the assets in
order to pay retirement benefits to plan participants while minimizing cash
contributions from the Corporation over the life of the plans. This is
accomplished by diversifying investments in various asset classes and earning an
acceptable long-term rate of return consistent with an acceptable degree of
risk, while considering the liquidity needs of the plan.
The
plan is permitted to use derivative instruments for investment purposes, as well
as for hedging the underlying asset and liability exposure and rebalancing the
asset allocation. The plan uses value at risk, stress testing, scenario analysis
and Monte Carlo simulation to monitor and manage risk in the
portfolios.
Equity
securities include investments in companies located in the United States,
developed non-U.S. markets, and emerging markets. Fixed income
securities are primarily invested in investment grade corporate bonds of
companies from diversified industries, and U.S. treasuries. Alternative
investments primarily include investments in real estate, private equity funds
and absolute return strategies. Other significant investment types include
insurance contracts and interest rate, equity and foreign derivative investments
and hedges.
Strategic
Target Allocation of Plan Assets
|
||||
Asset
Category
|
Target
Allocation
|
|||
Equity
securities
|
40 | % | ||
Debt
securities
|
43 | % | ||
Alternative
investments
|
17 | % | ||
Total
|
100 | % |
Concentration
of Risk
The
Corporation mitigates the credit risk of investments by establishing guidelines
with the investment managers that limit investment in any single issue or issuer
to an amount that is not material to the portfolio being
managed. These guidelines are monitored for compliance both by the
Corporation and the external managers. Credit risk for hedging
activity is mitigated by utilizing multiple counterparties and through
collateral support agreements.
The
JP Morgan Federal Agency money market fund is utilized as the sweep vehicle for
the U.S. plan, which from time to time can represent a significant
investment. For this plan, approximately half of the plan is covered
by a participating group annuity issued by Prudential Insurance
Company.
The
following table summarizes the bases used to measure the Company’s pension plan
assets at fair value:
Basis
of Fair Value Measurements at December 31, 2009
In
millions
|
Quoted
Prices in Active Markets for Identical Items
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total
|
||||||||||||
Cash
and cash equivalents
|
$ | 11 | $ | 331 | - | $ | 342 | |||||||||
Equity
securities:
|
||||||||||||||||
U.S.
equity
|
$ | 160 | $ | 2 | - | $ | 162 | |||||||||
Non
- U.S. equity – developed countries
|
153 | 99 | - | 252 | ||||||||||||
Emerging
market
|
144 | 148 | - | 292 | ||||||||||||
Equity
derivatives
|
- | 9 | - | 9 | ||||||||||||
Total
equity securities
|
$ | 457 | $ | 258 | - | $ | 715 | |||||||||
Fixed
income securities:
|
||||||||||||||||
U.S.
government and municipalities
|
- | $ | 576 | - | $ | 576 | ||||||||||
U.S.
agency mortgage backed securities
|
- | 82 | - | 82 | ||||||||||||
Corporates
– investment grade
|
- | 720 | - | 720 | ||||||||||||
Non-U.S.
governments – developed countries
|
- | 24 | - | 24 | ||||||||||||
Non-U.S.
corporates – developed countries
|
- | 113 | - | 113 | ||||||||||||
Emerging
market debt
|
- | 3 | - | 3 | ||||||||||||
Other
asset-backed securities
|
- | 39 | - | 39 | ||||||||||||
Convertible
bonds
|
$ | 19 | 134 | - | 153 | |||||||||||
High
yield bonds
|
- | 5 | $ | 10 | 15 | |||||||||||
Total
fixed income securities
|
$ | 19 | $ | 1,696 | $ | 10 | $ | 1,725 | ||||||||
Alternative
investments:
|
||||||||||||||||
Real
estate
|
- | $ | 9 | $ | 98 | $ | 107 | |||||||||
Private
equity
|
- | - | 231 | 231 | ||||||||||||
Absolute
return
|
- | 100 | - | 100 | ||||||||||||
Total
alternative investments
|
- | $ | 109 | $ | 329 | $ | 438 | |||||||||
Other
securities:
|
||||||||||||||||
Foreign
exchange derivatives
|
- | $ | (1 | ) | - | $ | (1 | ) | ||||||||
Insurance
contracts
|
- | - | $ | 21 | 21 | |||||||||||
Total
other securities
|
- | $ | (1 | ) | $ | 21 | $ | 20 | ||||||||
Total
assets at fair value
|
$ | 487 | $ | 2,393 | $ | 360 | $ | 3,240 |
For
assets classified as Level 1 (measured using quoted prices in active
markets), the total fair value is either the price of the most recent trade at
the time of the market close or the official close price as defined by the
exchange in which the asset is most actively traded on the last trading day of
the period, multiplied by the number of units held without consideration of
transaction costs.
For
assets classified as Level 2, the fair value is based on the price a dealer
would pay for the security or similar securities, adjusted for any terms
specific to that asset or liability. Market inputs are obtained from well
established and recognized vendors of market data and placed through
tolerance/quality checks. For derivative assets and liabilities, the fair value
is calculated using standard industry models used to calculate the fair value of
the various financial instruments based on significant observable market inputs
such as foreign exchange rates, commodity prices, swap rates, interest rates,
and implied volatilities obtained from various market sources.
For
all other assets for which observable inputs are used, fair value is derived
through the use of fair value models, such as a discounted cash flow model or
other standard pricing models.
For
assets classified as Level 3, the total fair value is based on significant
unobservable inputs including assumptions where there is little, if any, market
activity for the investment. Investment managers or fund managers provide
valuations of the investment on a monthly or quarterly basis. These valuations
are reviewed for reasonableness based on applicable sector, benchmark and
company performance. Adjustments to valuations are made where appropriate. Where
available, audited financial statements are obtained and reviewed for the
investments as support for the manager’s investment valuation.
The
following table summarizes the changes in fair value of Level 3 pension
plan assets for the year ended December 31, 2009:
Fair
Value Measurement of Level 3
Pension
Plan Assets
In
millions
|
Equity
Securities
|
Fixed
Income Securities
|
Alternative
Investments
|
Other
Securities
|
Total
|
|||||||||||||||
Balance
at January 1, 2009
|
$ | 1 | $ | 7 | $ | 353 | $ | 20 | $ | 381 | ||||||||||
Actual
return on plan assets:
|
||||||||||||||||||||
Relating
to assets held at Dec. 31, 2009
|
4 | 3 | (18 | ) | - | (11 | ) | |||||||||||||
Relating
to assets sold during 2009
|
(4 | ) | - | (18 | ) | - | (22 | ) | ||||||||||||
Purchases,
sales and settlements
|
(1 | ) | - | 12 | 1 | 12 | ||||||||||||||
Balance
at December 31, 2009
|
- | $ | 10 | $ | 329 | $ | 21 | $ | 360 |
NOTE
O LEASED PROPERTY
The
Corporation has operating leases primarily for facilities and distribution
equipment. The future minimum rental payments under operating leases with
remaining noncancelable terms in excess of one year are as follows:
Minimum
Operating Lease Commitments
at
December 31, 2009
In
millions
|
||||
2010
|
$ | 4 | ||
2011
|
3 | |||
2012
|
2 | |||
2013
|
1 | |||
2014
|
- | |||
2015
and thereafter
|
- | |||
Total
|
$ | 10 |
Rental
expenses under operating leases were $23 million in 2009, $30 million in
2008 and $36 million in 2007.
NOTE
P RELATED PARTY TRANSACTIONS
The
Corporation sells products to Dow to simplify the customer interface process.
Products are sold to and purchased from Dow at market-based prices in accordance
with the terms of Dow’s long-standing intercompany pricing policies. The
Corporation also procures certain commodities and raw materials through a Dow
subsidiary and pays a commission to that Dow subsidiary based on the volume and
type of commodities and raw materials purchased. The commission expense is
included in “Sundry income – net” in the consolidated statements of income.
Purchases from that Dow subsidiary were approximately $1.9 billion in 2009,
$3.9 billion in 2008 and $3.3 billion in 2007.
The
Corporation has a master services agreement with Dow whereby Dow provides
services, including, but not limited to, accounting, legal, treasury
(investments, cash management, risk management, insurance), procurement, human
resources, environmental, health and safety, and business management for UCC.
Under the master services agreement with Dow, for general administrative and
overhead type services that Dow routinely allocates to various businesses, UCC
is charged the cost of those services based on the Corporation’s and Dow’s
relative manufacturing conversion costs. This arrangement resulted in an average
quarterly charge of approximately $5 million in 2009 ($6 million in 2008
and 2007) and is included in “Sundry income – net.”
For
services that Dow routinely charges based on effort, UCC is charged the cost of
such services on a fully absorbed basis, which includes direct and indirect
costs. Additionally, certain Dow employees are contracted to UCC and Dow is
reimbursed for all direct employment costs of such employees. Management
believes the method used for determining expenses charged by Dow is reasonable.
Dow provides these services by leveraging its centralized functional service
centers to provide services at a cost that management believes provides an
advantage to the Corporation.
The
monitoring and execution of risk management policies related to interest rate
and foreign currency risks, which are based on Dow’s risk management philosophy,
are provided as a service to UCC.
As
part of Dow’s cash management process, UCC is a party to revolving loans with
Dow that have interest rates based on LIBOR (London Interbank Offered Rate) with
varying maturities. At December 31, 2009, the Corporation had a note
receivable of $4.1 billion ($3.9 billion at December 31, 2008)
from Dow under a revolving loan agreement. The Corporation may draw from this
note receivable in support of its daily working capital requirements and, as
such, the net effect of cash inflows and outflows under this revolving loan
agreement is presented in the consolidated statements of cash flows as an
operating activity.
The
Corporation also has a separate revolving credit agreement with Dow that allows
the Corporation to borrow or obtain credit enhancements up to an aggregate of
$1 billion that matures December 30, 2010, pursuant to an amendment
effective as of September 30, 2009. Dow may demand repayment with a 30-day
written notice to the Corporation, subject to certain restrictions. A related
collateral agreement provides for the replacement of certain existing pledged
assets, primarily equity interests in various subsidiaries and joint ventures,
with cash collateral. At December 31, 2009, $891 million
($826 million at December 31, 2008) was available under the revolving
credit agreement. The cash collateral was reported as “Noncurrent receivables
from related companies” in the consolidated balance sheets.
In
December 2009, the Corporation declared and paid a dividend of $660 million to
Dow.
At
December 31, 2008, the Corporation had an insurance receivable of $47 million
from its insurer (an affiliate of Dow) for losses incurred from Hurricane
Katrina in 2005 and Hurricanes Gustav and Ike in 2008. The insurance receivable
was reported in “Accounts receivable – Related companies” in the consolidated
balance sheets. During 2009, the Corporation received $2 million in insurance
payments and settled and collected the remaining balance of $45 million with its
insurers for $43 million with the balance charged to “Cost of sales” in the
consolidated statements of income.
The
Corporation received cash dividends from its investments in related companies of
$193 million in 2009, including $158 million from Dow International
Holding Company (“DIHC”) and $32 million from Dow Technology Investment
LLC. In 2008, dividends from its investments in related companies
were $297 million (including $204 million from DIHC and
$82 million from Modeland). These dividends were included in “Sundry income
– net.”
In
December 2007, under the terms of a contribution agreement among UCC, Dow and
DIHC, the Corporation contributed its 42.5 percent ownership interest in
EQUATE Petrochemical Company K.S.C. (“EQUATE”) to UC Investment B.V. (“UCIBV”),
a newly formed Dutch limited liability company in which the Corporation was the
sole shareholder. The Corporation then contributed its ownership interest in
UCIBV to DIHC in exchange for an increased ownership interest in DIHC. The
Corporation has the right to sell its shares in DIHC to Dow anytime during the
period January 1, 2009 through December 31, 2011 for an amount calculated
using a formula in the agreement which intends to approximate fair value. In
accordance with the terms of the contribution agreement, Dow made a capital
contribution to UCC in the amount of $191 million in the first quarter of
2008. At December 31, 2009 and 2008, the Corporation had a 19.13 percent
ownership interest in DIHC, which the Corporation accounts for using the cost
method.
In
accordance with the Amended and Restated Tax Sharing Agreement between the
Corporation and Dow, the Corporation made payments of $289 million to Dow in
2009 to cover the Corporation’s estimated federal tax liability for 2009;
payments were $33 million in 2008 and $287 million in 2007.
NOTE
Q INCOME TAXES
Operating
loss carryforwards at December 31, 2009 amounted to $511 million
compared with $607 million at the end of 2008. Such amounts included U.S.
state and local operating loss carryforwards determined more likely than not to
be utilized. At December 31, 2009, $167 million of the operating loss
carryforwards was subject to expiration in the years 2010 through 2014. The
remaining balances expire in years beyond 2014 or have an indefinite
carryforward period. Tax credit carryforwards amounted to $39 million at
December 31, 2009 and 2008, all of which expire in years beyond
2014.
Undistributed
earnings of foreign subsidiaries and related companies that are deemed to be
permanently invested amounted to $58 million at December 31, 2009,
$60 million at December 31, 2008 and $72 million at December 31,
2007. It is not practicable to calculate the unrecognized deferred tax liability
on those earnings.
The
Corporation had valuation allowances, which were primarily related to the
realization of recorded tax benefits on tax loss carryforwards from operations
in the United States of $122 million at December 31, 2009 and
$111 million at December 31, 2008.
The
tax rate for 2009 was positively impacted by dividends received from investments
in related companies accounted for using the cost method. This positive impact
was partially offset by the tax effect of the Corporation’s sale of its
ownership interest in OPTIMAL. These events resulted in an effective tax rate
for 2009 that was lower than the U.S. statutory rate. UCC’s reported effective
tax rate for 2009 was 25.6 percent.
The
tax rate for 2008 was positively impacted by after-tax income from joint
ventures and dividends received from investments in related companies accounted
for using the cost method. The Corporation determined during 2008 that it was
more likely than not that certain tax loss carryforwards in the United States
would not be utilized due to lower forecasted earnings and deteriorating market
conditions, offsetting the positive impacts, resulting in net increases to the
Corporation’s valuation allowances of $46 million. These events resulted in
an effective tax rate for 2008 that was lower than the U.S. statutory rate.
UCC’s reported effective tax rate for 2008 was 26.5 percent.
In
2007, the Corporation, through a series of noncash transactions, contributed its
investment in EQUATE to DIHC, resulting in a favorable impact to the “Provision
for income taxes” of $195 million in the fourth quarter of 2007. See Notes
G and P for further information. These events, combined with lower earnings from
certain of the Corporation’s joint ventures, resulted in an effective tax rate
for 2007 that was lower than the U.S. statutory rate. UCC’s reported effective
tax rate for 2007 was 7.6 percent.
Domestic
and Foreign Components of Income Before Income Taxes
|
||||||||||||
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Domestic
|
$ | 933 | $ | 447 | $ | 1,141 | ||||||
Foreign
|
2 | (2 | ) | (3 | ) | |||||||
Total
|
$ | 935 | $ | 445 | $ | 1,138 |
Reconciliation
to U.S. Statutory Rate
|
||||||||||||
In
millions
|
2009
|
2008
|
2007
|
|||||||||
Taxes
at U.S. statutory rate
|
$ | 327 | $ | 156 | $ | 399 | ||||||
Equity
earnings effect
|
26 | (70 | ) | (121 | ) | |||||||
Change
in EQUATE legal ownership structure
|
- | - | (195 | ) | ||||||||
Foreign
income taxed at rates other than 35%
|
- | 1 | 1 | |||||||||
U.S.
tax effect of foreign earnings and dividends
|
- | 14 | 86 | |||||||||
U.S.
business credits
|
- | (4 | ) | (9 | ) | |||||||
Benefit
of dividend income from investments in related companies
|
(67 | ) | (58 | ) | (34 | ) | ||||||
Unrecognized
tax benefits
|
(5 | ) | 16 | 34 | ||||||||
U.S.
Federal Audit Settlement
|
(28 | ) | - | - | ||||||||
Federal
tax accrual adjustments
|
(18 | ) | - | - | ||||||||
State
and local tax impact
|
7 | 56 | (24 | ) | ||||||||
Other
– net
|
(3 | ) | 7 | (51 | ) | |||||||
Total
tax provision
|
$ | 239 | $ | 118 | $ | 86 | ||||||
Effective
tax rate
|
25.6 | % | 26.5 | % | 7.6 | % |
Provision
for Income Taxes
|
||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
In
millions
|
Current
|
Deferred
|
Total
|
Current
|
Deferred
|
Total
|
Current
|
Deferred
|
Total
|
|||||||||||||||||||||||||||
Federal
|
$ | 293 | $ | (68 | ) | $ | 225 | $ | 63 | $ | 62 | $ | 125 | $ | 300 | $ | (239 | ) | $ | 61 | ||||||||||||||||
State
and local
|
10 | (2 | ) | 8 | (13 | ) | (2 | ) | (15 | ) | 17 | 1 | 18 | |||||||||||||||||||||||
Foreign
|
5 | 1 | 6 | 9 | (1 | ) | 8 | 7 | - | 7 | ||||||||||||||||||||||||||
Total
|
$ | 308 | $ | (69 | ) | $ | 239 | $ | 59 | $ | 59 | $ | 118 | $ | 324 | $ | (238 | ) | $ | 86 |
Deferred Tax Balances at December 31 |
2009
|
2008
|
||||||||||||||
In
millions
|
Deferred
Tax Assets
|
Deferred
Tax Liabilities
|
Deferred
Tax Assets
|
Deferred
Tax Liabilities
|
||||||||||||
Property
|
- | $ | 285 | $ | 1 | $ | 292 | |||||||||
Tax
loss and credit carryforwards
|
$ | 160 | - | 161 | - | |||||||||||
Postretirement
benefit obligations
|
712 | 380 | 662 | 360 | ||||||||||||
Other
accruals and reserves
|
526 | - | 470 | 41 | ||||||||||||
Inventory
|
7 | - | 8 | - | ||||||||||||
Long-term
debt
|
- | 1 | - | 1 | ||||||||||||
Investments
|
- | 1 | - | 1 | ||||||||||||
Other
– net
|
45 | 77 | 56 | 75 | ||||||||||||
Subtotal
|
$ | 1,450 | $ | 744 | $ | 1,358 | $ | 770 | ||||||||
Valuation
allowance
|
(122 | ) | - | (111 | ) | - | ||||||||||
Total
|
$ | 1,328 | $ | 744 | $ | 1,247 | $ | 770 |
Uncertain
Tax Positions
On
January 1, 2007, the Corporation adopted the provisions of FIN No. 48,
“Accounting for Uncertainty in Income Taxes.” The cumulative effect of adoption
was a $67 million reduction of retained earnings. At December 31, 2009, the
total amount of unrecognized tax benefits was $208 million
($265 million at December 31, 2008), of which $190 million
($247 million at December 31, 2008) would impact the effective tax rate, if
recognized.
Interest
income and penalties associated with unrecognized tax benefits are recognized as
components of the “Provision for income taxes” and were $13 million in 2009 and
$20 million in 2008. Interest expense and penalties associated with unrecognized
tax benefits are recognized as components of the “Provision for income taxes”
and were $22 million in 2007. The Corporation’s accrual for interest and
penalties was $18 million at December 31, 2009 and $35 million at
December 31, 2008.
Total
Gross Unrecognized Tax Benefits
|
||||||||
In
millions
|
2009
|
2008
|
||||||
Balance
at January 1
|
$ | 265 | $ | 269 | ||||
Increases
related to positions taken on items from prior years
|
6 | 15 | ||||||
Decreases
related to positions taken on items from prior years
|
(5 | ) | (8 | ) | ||||
Increases
related to positions taken in current year
|
- | 11 | ||||||
Settlement
of uncertain tax positions with tax authorities
|
(58 | ) | (22 | ) | ||||
Balance
at December 31
|
$ | 208 | $ | 265 |
The Corporation is
included in Dow’s consolidated federal income tax group and consolidated tax
return. Current and deferred tax expenses are calculated for the Corporation as
a stand-alone group and are allocated to the group from the consolidated totals.
UCC is currently under examination in a number of tax jurisdictions,
including the U.S. federal, various state and foreign jurisdictions. It is
reasonably possible that these examinations may be resolved within twelve
months. As a result, it is reasonably possible that the total gross unrecognized
tax benefits of the Corporation at December 31, 2009, will be reduced by
approximately $5 million ($70 million at December 31, 2008). The
amount of the settlement remains uncertain and it is reasonably possible that
before settlement, the amount of gross unrecognized tax benefits may increase or
decrease by approximately $1 million. The impact on the Corporation’s
results of operations is expected to be immaterial.
Tax
years that remain subject to examination for the Corporation’s tax jurisdictions
are shown below:
Tax
Years Subject to Examination by Major Tax Jurisdiction at December
31
|
||
Jurisdiction
|
Earliest
Open Year
|
|
2009
|
2008
|
|
United
States:
|
||
Federal
income tax
|
2004
|
2001
|
State
and local income tax
|
1996
|
1996
|
The
reserve for non-income tax contingencies related to issues in the United States
was $25 million at December 31, 2009 and $29 million at December
31, 2008. This is management’s best estimate of the potential liability for
non-income tax contingencies. Inherent uncertainties exist in estimates of tax
contingencies due to changes in tax law, both legislated and concluded through
the various jurisdictions’ tax court systems. It is the opinion of the
Corporation’s management that the possibility is remote that costs in excess of
those accrued will have a material adverse impact on the Corporation’s
consolidated financial statements.
NOTE
R BUSINESS AND GEOGRAPHIC AREAS
Dow
conducts its worldwide operations through global businesses. The Corporation’s
business activities comprise components of Dow’s global businesses rather than
stand-alone operations. The Corporation sells its products to Dow in order to
simplify the customer interface process. The products are sold to Dow at
market-based prices in accordance with Dow’s long-standing intercompany pricing
policy. Because there are no separable reportable business segments for the
Corporation and no detailed business information is provided to a chief
operating decision maker regarding the Corporation's stand-alone operations, the
Corporation’s results are reported as a single operating segment.
Sales
are attributed to geographic areas based on customer location; long-lived assets
are attributed to geographic areas based on asset location. Sales to external
customers and long-lived assets by geographic area were as follows:
In
millions
|
United
States
|
Asia
Pacific
|
Rest
of World
|
Total
|
||||||||||||
2009
|
||||||||||||||||
Sales
to external customers (1)
|
$ | 98 | $ | 29 | $ | 38 | $ | 165 | ||||||||
Long-lived
assets
|
$ | 1,534 | $ | 8 | $ | 5 | $ | 1,547 | ||||||||
2008
|
||||||||||||||||
Sales
to external customers (1)
|
$ | 94 | $ | 58 | $ | 67 | $ | 219 | ||||||||
Long-lived
assets
|
$ | 1,872 | $ | 9 | $ | 5 | $ | 1,886 | ||||||||
2007
|
||||||||||||||||
Sales
to external customers (1)
|
$ | 101 | $ | 71 | $ | 39 | $ | 211 | ||||||||
Long-lived
assets
|
$ | 1,945 | $ | 12 | $ | 5 | $ | 1,962 |
(1)
|
Of the total sales to external
customers, China represented approximately 5 percent in 2009,
14 percent in 2008 and 19 percent in 2007, and is included in
Asia Pacific.
|
NOTE
S SUBSEQUENT EVENT
On
July 31, 2009, Dow entered into a definitive agreement that included the sale of
certain specialty latex assets of the Corporation, located in the United States,
Canada, Puerto Rico and Mexico, as required by the FTC for the approval of Dow’s
acquisition of Rohm and Haas. An impairment charge of
$114
million for these assets was recognized in the second quarter of 2009
restructuring charge (see Note C). The divestiture of these assets was completed
on January 25, 2010. The impact of this sale on the Corporation’s consolidated
financial statements is not expected to be material.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, the
Corporation carried out an evaluation, under the supervision and with the
participation of the Corporation’s Disclosure Committee and the Corporation’s
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Corporation’s
disclosure controls and procedures pursuant to Exchange Act Rule 15d-15(b).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Corporation’s disclosure controls and procedures are
effective.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Corporation’s internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Corporation’s internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Corporation’s internal control framework and processes
are designed to provide reasonable assurance to management and the Board of
Directors regarding the reliability of financial reporting and the preparation
of the Corporation’s consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America.
The
Corporation’s internal control over financial reporting includes those policies
and procedures that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Corporation;
|
|
·
|
provide
reasonable assurance that transactions are recorded properly to allow for
the preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Corporation are being made only in accordance with authorizations of
management and Directors of the
Corporation;
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Corporation’s assets
that could have a material effect on the consolidated financial
statements; and
|
|
·
|
provide
reasonable assurance as to the detection of
fraud.
|
Because
of its inherent limitations, any system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements.
Management
assessed the effectiveness of the Corporation’s internal control over financial
reporting and concluded that, as of December 31, 2009, such internal
control is effective. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control—Integrated
Framework.
Management’s
internal control report was not subject to attestation by the Corporation’s
independent registered public accounting firm, Deloitte & Touche LLP, pursuant to temporary rules
of the Securities and Exchange Commission that permit the Corporation to provide
only management’s report. Therefore, this annual report does not include an
attestation report regarding internal control over financial reporting from
Deloitte & Touche LLP.
/s/
PATRICK E. GOTTSCHALK
|
/s/
EUDIO GIL
|
|
Patrick
E. Gottschalk
President
and Chief Executive Officer
|
Eudio
Gil
Vice
President, Treasurer and
Chief
Financial Officer
|
|
/s/
RONALD C. EDMONDS
|
||
Ronald
C. Edmonds, Vice President and Controller
The
Dow Chemical Company
Authorized
Representative of
Union
Carbide Corporation
|
||
February
19, 2010
|
ITEM 9B. OTHER INFORMATION.
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Omitted
pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted
pursuant to General Instruction I of Form 10-K.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Omitted
pursuant to General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Omitted
pursuant to General Instruction I of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.
Dow’s
Audit Committee pre-approves all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed for Dow and its
subsidiaries (including the Corporation) by its independent auditor, subject to
the de minimus
exception for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act which are approved by Dow’s Audit Committee prior to the completion
of the audit. The Corporation’s management and its Board of Directors subscribe
to these policies and procedures. For the years ended December 31, 2009 and
2008, professional services were performed for the Corporation by Deloitte &
Touche LLP, the member
firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, the “Deloitte Entities”).
Total
fees paid to the Deloitte Entities were:
In
thousands
|
2009
|
2008
|
||||||
Audit
fees (1)
|
$ | 1,751 | $ | 1,747 | ||||
Audit-related
fees (2)
|
239 | 434 | ||||||
Tax
fees
|
- | 4 | ||||||
Total
|
$ | 1,990 | $ | 2,185 |
(1)
|
The
aggregate fees billed for the audit of the Corporation’s annual financial
statements, the reviews of the financial statements in Quarterly Reports
on Form 10-Q, statutory audits and other regulatory
filings.
|
|
(2)
|
Primarily
for agreed-upon procedure engagements and audits of employee benefit plan
financial statements.
|
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.
(a) The
following documents are filed as part of this report:
1.
|
The
Corporation’s 2009 Consolidated Financial Statements and the Report of
Independent Registered Public Accounting Firm are included in Item 8 of
this Annual Report on Form 10-K.
|
2.
|
Financial
Statement Schedules.
|
The
following Financial Statement Schedule should be read in conjunction with the
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K:
Schedule
II
|
Valuation
and Qualifying Accounts
|
Schedules
other than the one listed above are omitted because of the absence of the
conditions under which they are required or because the information called for
is included in the Consolidated Financial Statements or Notes
thereto.
3.
|
The
following financial statements of the Corporation’s former nonconsolidated
affiliate (see Note P to the Consolidated Financial Statements),
EQUATE Petrochemical Company K.S.C., are presented pursuant to Rule 3-09
of Regulation S-X:
|
Independent
Auditor’s report
|
Balance
sheets at December 31, 2007 and 2006
|
Statements
of income for the years ended December 31, 2007, 2006 and
2005
|
Statements
of changes in equity for the years ended December 31, 2007, 2006 and
2005
|
Statements
of cash flows for the years ended December 31, 2007, 2006 and
2005
|
Notes
to financial statements
|
4.
|
Exhibits
– See the Exhibit Index on pages 90-91 of this Annual Report on Form 10-K
for exhibits filed with this Annual Report on Form 10-K (see below) and
for exhibits incorporated by
reference.
|
The
Corporation will provide a copy of any exhibit upon receipt of a written request
for the particular exhibit or exhibits desired. All requests should be addressed
to the Corporation’s principal executive offices (address provided at the end of
the Exhibit Index).
|
The
following exhibits listed on the Exhibit Index are filed with this Annual
Report on Form 10-K:
|
Exhibit
No.
|
Description
of Exhibit
|
Amended
and Restated Revolving Credit Agreement dated as of May 28, 2004, among
the Corporation, The Dow Chemical Company and certain Subsidiary
Guarantors.
|
|
Analysis,
Research & Planning Corporation’s Consent.
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
TRADEMARKS
The
following trademarks of Union Carbide Corporation or its subsidiaries appear in
this report:
CARBOWAX,
CELLOSIZE, EVOCAR, FLEXOMER, LP OXO, METEOR, NEOCAR, NORDEL, POLYOX, POLYPHOBE,
REDI-LINK, SI-LINK, SENTRY, TERGITOL, TRITON, TUFLIN, UCAR, UCARTHERM, UCON,
UNIGARD, UNIPOL, UNIPURGE, UNIVAL
The
following registered service mark of American Chemistry Council appears in this
report: Responsible Care
The
following trademark on the Financial Accounting Standards Board appears in this
report: FASB Accounting Standards Codification
Union
Carbide Corporation
|
Schedule
II
|
|
Valuation
and Qualifying Accounts
|
||
In
millions
|
For
the Years Ended December 31
|
COLUMN
A
|
COLUMN
B
|
COLUMN
C
|
COLUMN
D
|
COLUMN
E
|
|||||||||||||||
Description
|
Balance
at
Beginning
of
Year
|
Additions
to Reserves
|
Deductions
from
Reserves
|
Balance
at
End
of
Year
|
|||||||||||||||
2009 | |||||||||||||||||||
RESERVES
DEDUCTED FROM ASSETS TO WHICH
THEY
APPLY:
|
|||||||||||||||||||
For
doubtful receivables
|
$ | 1 | - | - | $ | 1 | |||||||||||||
2008 | |||||||||||||||||||
RESERVES
DEDUCTED FROM ASSETS TO WHICH
THEY
APPLY:
|
|||||||||||||||||||
For
doubtful receivables
|
$ | 2 | - | $ | 1 | (1) | $ | 1 | |||||||||||
2007 | |||||||||||||||||||
RESERVES
DEDUCTED FROM ASSETS TO WHICH
THEY
APPLY:
|
|||||||||||||||||||
For
doubtful receivables
|
$ | 2 | - | - | $ | 2 | |||||||||||||
2009
|
2008
|
2007
|
||||||||||
(1)
Deductions represent:
|
||||||||||||
Notes
and accounts receivable written off
|
- | $ | 1 | - |
INDEPENDENT
AUDITOR’S REPORT
To
the Board of Directors and Shareholders of
EQUATE
Petrochemical Company KSC (Closed)
We
have audited the accompanying balance sheet of EQUATE Petrochemical Company KSC
(Closed) (“the Company”), a venture between Union Carbide Corporation,
Petrochemical Industries Company, Boubyan Petrochemical Company and Al Qurain
Petrochemical Industries Company as at December 31, 2007 and 2006, and the
related statements of income, changes in equity and cash flows for each of the
three years ended December 31, 2007, 2006 and 2005. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2007 and
2006, and the results of its operations and its cash flows for each of the three
years ended December 31, 2007, 2006 and 2005 in conformity with International
Financial Reporting Standards (“IFRS”) as issued by International Accounting
Standards Board (“IASB”).
The
accounting principles reflected in the above mentioned financial statements
prepared in conformity with IFRS as issued by IASB vary in certain significant
respects from accounting principles generally accepted in the United States of
America (“US GAAP”). The application of US GAAP would have affected
the determination of net income for each of the three years ended December 31,
2007, 2006 and 2005 and the determination of equity as of December 31, 2007 and
2006 to the extent summarized in Note 19 to the financial
statements.
Jassim
Ahmad Al-Fahad
Al-Fahad
& Co., Deloitte & Touche
License
No. 53 - A
February
14, 2008
Kuwait
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Notes
|
|||||||||
ASSETS
|
|||||||||
Current
assets
|
|||||||||
Cash
and bank balances
|
5 | 416,706 | 151,465 | ||||||
Trade
receivables, net
|
6 | 145,458 | 122,773 | ||||||
Prepayments
and other assets
|
25,904 | 16,593 | |||||||
Due
from related parties
|
14 | 159,684 | 149,052 | ||||||
Inventories,
net
|
7 | 43,016 | 42,080 | ||||||
790,768 | 481,963 | ||||||||
Non-current
assets
|
|||||||||
Property,
plant and equipment, net
|
8 | 1,660,689 | 1,413,782 | ||||||
Intangible
assets, net
|
9 | 121,651 | 132,507 | ||||||
Long-term
loans to related parties
|
14 | 1,469,770 | 719,770 | ||||||
3,252,110 | 2,266,059 | ||||||||
4,042,878 | 2,748,022 | ||||||||
LIABILITIES
AND EQUITY
|
|||||||||
Current
liabilities
|
|||||||||
Accounts
payable
|
26,920 | 26,804 | |||||||
Accruals
and other liabilities
|
10 | 104,434 | 68,284 | ||||||
Due
to related parties
|
14 | 28,421 | 18,158 | ||||||
159,775 | 113,246 | ||||||||
Non-current
liabilities
|
|||||||||
Long-term
debt
|
15 | 1,639,820 | 879,568 | ||||||
Retirement
benefit obligation
|
16 | 31,192 | 26,342 | ||||||
Long
term incentives
|
3,102 | 1,417 | |||||||
Deferred
income
|
11 | 510,521 | 288,303 | ||||||
2,184,635 | 1,195,630 | ||||||||
Commitments
and contingencies
|
21 | ||||||||
Capital
and reserves
|
|||||||||
Share
capital
|
12 | 700,000 | 700,000 | ||||||
Retained
earnings
|
998,468 | 739,146 | |||||||
1,698,468 | 1,439,146 | ||||||||
4,042,878 | 2,748,022 |
The
accompanying notes form an integral part of these financial
statements.
For
the years ended December 31,
|
||||||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
||||||||||||||
Notes
|
||||||||||||||||
Sales
|
14 | 1,205,713 | 986,213 | 961,453 | ||||||||||||
Cost
of sales
|
17 | (388,075 | ) | (367,977 | ) | (313,545 | ) | |||||||||
Gross
profit
|
817,638 | 618,236 | 647,908 | |||||||||||||
Polypropylene
plant management fee
|
14 | 1,000 | 1,000 | 1,000 | ||||||||||||
General,
administrative and selling expenses
|
17 | (51,895 | ) | (52,434 | ) | (51,351 | ) | |||||||||
Operating
income
|
766,743 | 566,802 | 597,557 | |||||||||||||
Interest
income
|
14 | 71,819 | 29,282 | 5,754 | ||||||||||||
Foreign
exchange loss
|
(1,363 | ) | (521 | ) | (341 | ) | ||||||||||
Other
income
|
1,817 | 229 | 1,199 | |||||||||||||
Finance
costs
|
18 | (62,276 | ) | (24,199 | ) | (10,472 | ) | |||||||||
Net
income before contribution to Kuwait Foundation for Advancement of
Sciences (“KFAS”) and Directors’ fees
|
776,740 | 571,593 | 593,697 | |||||||||||||
Contribution
to KFAS
|
(7,270 | ) | (5,143 | ) | (5,336 | ) | ||||||||||
Directors’
fees
|
(148 | ) | (136 | ) | (302 | ) | ||||||||||
Net
income for the year
|
769,322 | 566,314 | 588,059 |
The
accompanying notes form an integral part of these financial
statements.
Share
capital
US$’000
|
Retained
earnings
US$’000
|
Total
US$’000
|
||||||||||||||
Note
|
||||||||||||||||
Balance
as at January 1, 2005
|
700,000 | 672,773 | 1,372,773 | |||||||||||||
Dividends
paid
|
- | (558,000 | ) | (558,000 | ) | |||||||||||
Net
income for the year
|
- | 588,059 | 588,059 | |||||||||||||
Balance
as at December 31, 2005
|
700,000 | 702,832 | 1,402,832 | |||||||||||||
Dividends
paid
|
- | (530,000 | ) | (530,000 | ) | |||||||||||
Net
income for the year
|
- | 566,314 | 566,314 | |||||||||||||
Balance
as at December 31, 2006
|
700,000 | 739,146 | 1,439,146 | |||||||||||||
Dividends
paid
|
13 | - | (510,000 | ) | (510,000 | ) | ||||||||||
Net
income for the year
|
- | 769,322 | 769,322 | |||||||||||||
Balance
as at December 31, 2007
|
700,000 | 998,468 | 1,698,468 |
The
accompanying notes form an integral part of these financial
statements.
For
the years ended December 31,
|
||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
||||||||||
OPERATING
ACTIVITIES
|
||||||||||||
Net
income for the year
|
769,322 | 566,314 | 588,059 | |||||||||
Adjustments
for:
|
||||||||||||
Depreciation
and amortisation
|
111,248 | 105,478 | 101,551 | |||||||||
Finance
costs
|
62,276 | 24,199 | 10,472 | |||||||||
Interest
income
|
(71,819 | ) | (29,282 | ) | (5,754 | ) | ||||||
Allowance
for obsolete and slow moving spare parts
|
300 | 13,641 | 500 | |||||||||
Loss
on disposal of property, plant and equipment
|
- | 3,732 | - | |||||||||
Provision
for retirement benefit obligation and long term incentives net of
payments
|
6,535 | 6,955 | 4,567 | |||||||||
877,862 | 691,037 | 699,395 | ||||||||||
Trade
receivables
|
(22,685 | ) | (6,418 | ) | 59,064 | |||||||
Prepayments
and other assets
|
(9,307 | ) | 4,390 | (12,709 | ) | |||||||
Due
from related parties
|
213,917 | 130,678 | 20,942 | |||||||||
Inventories
|
(1,236 | ) | (2,880 | ) | (5,514 | ) | ||||||
Accounts
payable
|
116 | 13,694 | 2,434 | |||||||||
Accruals
and other liabilities
|
(1,090 | ) | 10,011 | (15,024 | ) | |||||||
Due
to related parties
|
10,263 | (27,194 | ) | 19,150 | ||||||||
Net
cash generated by operating activities
|
1,067,840 | 813,318 | 767,738 | |||||||||
INVESTING
ACTIVITIES
|
||||||||||||
Purchases
of property, plant and equipment
|
(296,084 | ) | (360,016 | ) | (128,112 | ) | ||||||
Purchases
of intangible assets
|
- | - | (528 | ) | ||||||||
Long-term
loans advanced to related parties
|
(750,000 | ) | (719,770 | ) | - | |||||||
Short-term
loan repaid by / (advanced to) related party
|
- | 100,000 | (100,000 | ) | ||||||||
Interest
received
|
69,340 | 25,624 | 4,796 | |||||||||
Net
cash used in investing activities
|
(976,744 | ) | (954,162 | ) | (223,844 | ) | ||||||
FINANCING
ACTIVITIES
|
||||||||||||
Proceeds
from term debt
|
760,000 | 885,000 | - | |||||||||
Loan
origination fees paid
|
(159 | ) | (5,664 | ) | (211 | ) | ||||||
Finance
costs paid
|
(75,696 | ) | (40,207 | ) | (11,589 | ) | ||||||
Dividends
paid
|
(510,000 | ) | (530,000 | ) | (558,000 | ) | ||||||
Repayment
of finance lease
|
- | (99,898 | ) | - | ||||||||
Repayment
of syndicated bank loan
|
- | (99,897 | ) | - | ||||||||
Net
cash generated by / (used in) financing activities
|
174,145 | 109,334 | (569,800 | ) | ||||||||
Net
increase / (decrease) in cash and bank balances
|
265,241 | (31,510 | ) | (25,906 | ) | |||||||
Cash
and bank balances at beginning of the year
|
151,465 | 182,975 | 208,881 | |||||||||
Cash
and bank balances at end of the year
|
416,706 | 151,465 | 182,975 | |||||||||
NON-CASH
TRANSACTIONS
|
||||||||||||
Purchase
of property, plant and equipment
|
(37,788 | ) | (32,967 | ) | - |
The
accompanying notes form an integral part of these financial
statements.
1
|
INCORPORATION
AND ACTIVITIES
|
EQUATE
Petrochemical Company K.S.C. (Closed) (“the Company”) is a closed
shareholding company incorporated in the State of Kuwait on
November 20, 1995 as a joint venture between Union Carbide
Corporation (“UCC”), Petrochemical Industries Company (“PIC”) and Boubyan
Petrochemical Company (“BPC”).
The
Company is engaged in the manufacture and sale of ethylene glycol (“EG”)
and polyethylene (“PE”). The Company also operates and maintains a
polypropylene plant on behalf of PIC.
UCC
is a wholly owned subsidiary of The Dow Chemical Company
(“DOW”).
The
address of the Company’s registered office is at National Bank of Kuwait
building, Block 8, Plot 4A/5A/6A, Jleeb Al-Shuwaikh, P. O. Box 4733 Safat
13048, Kuwait.
The
financial statements were approved by the board of directors and
authorised for issue on
February 14, 2008.
|
2
|
ADOPTION
OF NEW AND REVISED STANDARDS
|
|
Standards
and Interpretations effective in the current period
|
||
In
the current year, the Company has adopted IFRS 7 “Financial Instruments:
Disclosures”
which is effective for annual reporting periods beginning on or after
January 1, 2007, and the consequential amendments to IAS 1 “Presentation
of Financial Statements”.
The
impact of the adoption of IFRS 7 and the changes to IAS 1 has been to
expand the disclosures provided in these financial statements regarding
the Company’s financial instruments and management of capital (see note
20).
Four
Interpretations issued by the International Financial Reporting
Interpretations Committee are effective for the current period. These are:
IFRIC 7 Applying the
Restatement Approach under IAS 29, Financial Reporting in
Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC
9 Reassessment of
Embedded Derivatives; and IFRIC 10 Interim Financial Reporting
and Impairment. The adoption of these Interpretations has not led
to any changes in the Company’s accounting policies.
|
||
Standards
and Interpretations in issue not yet adopted
At
the date of authorisation of these financial statements, the following
Standards and Interpretations were issued but not yet
effective:
|
||
· IAS
1(Revised) Presentation of Financial
Statements
|
Effective
for annual periods beginning on or after 1 January 2009
|
|
· IAS 23
(Revised) Borrowing
Costs
|
Effective
for annual periods beginning on or after January 1, 2009
|
|
· IFRS 8 Operating
Segments
|
Effective
for annual periods beginning on or after January 1, 2009
|
|
· IFRIC 11 IFRS 2: Group and Treasury
Share Transactions
|
Effective
for annual periods beginning on or after March 1, 2007
|
|
· IFRIC 12 Service Concession
Arrangements
|
Effective
for annual periods beginning on or after January 1, 2008
|
|
· IFRIC 13 Customer Loyalty
Programmes
|
Effective
for annual periods beginning on or after July 1, 2008
|
|
· IFRIC 14 IAS 19 – The Limit on a
Defined Benefit Asset,
Minimum Funding Requirements and
their Interaction
|
Effective
for annual periods beginning on or after January 1,
2008
|
Standards
and Interpretations in issue not yet adopted
The
revisions to IAS 23 will have no impact on the Company’s accounting
policies. The principal change to the Standard, which was to eliminate the
previously available option to expense all borrowing costs when incurred,
will have no impact on the financial statements because it has always been
the Company’s accounting policy to capitalise borrowing costs incurred on
qualifying assets.
The
directors anticipate that the adoption of these Standards and
Interpretations in future periods will have no material financial impact
on the financial statements of the Company in the period of initial
application
|
3
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Statement
of compliance
|
|
The
financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by International
Accounting Standards Board (“IASB”).
|
|
Basis
of preparation
|
|
The
financial statements have been prepared on the historical cost basis
except for the revaluation of certain financial instruments. The principal
accounting policies are set out below.
|
|
Financial
instruments
|
|
Financial
assets and financial liabilities are recognized on the Company’s balance
sheet when the Company becomes a party to the contractual provisions of
the instrument.
|
|
Cash
and bank balances
|
|
Cash
and bank balances consist of cash on hand, bank current accounts and short
term deposits with an original maturity of three months or less when
purchased.
|
|
Trade
receivables
|
|
Trade
receivables are measured at initial recognition at fair value, and are
subsequently measured at amortised cost using the effective interest rate
method, less any impairment. Interest income is recognised by applying the
effective interest rate, except for short-term receivables when the
recognition of interest would be immaterial. Appropriate allowances for
estimated irrecoverable amounts are recognised in the statement of income
when there is objective evidence that the asset is impaired. Significant
financial difficulties of the debtor, probability that the debtor will
enter bankruptcy or financial reorganisation, and default or delinquency
in payments (more than 60 days overdue) are considered indicators that the
trade receivable is impaired. The allowance recognised is measured as the
difference between the asset’s carrying amount and the present value of
estimated future cash flows discounted at the effective interest rate
computed at initial recognition.
|
|
Effective
interest rate method
|
|
The
effective interest method is a method of calculating the amortised cost of
a financial asset and of allocating interest income over the relevant
period. The effective interest rate is the rate that exactly discounts
estimated future cash receipts through the expected life of the financial
asset, or, where appropriate, a shorter
period.
|
Trade
payables
|
|
Trade
payables are initially measured at fair value, and are subsequently
measured at amortised cost, using the effective interest rate
method.
|
|
Inventories
|
|
Raw
materials and finished goods are stated at the lower of weighted average
cost or net realisable value. The cost of finished products includes
direct materials, direct labour and fixed and variable manufacturing
overhead and other costs incurred in bringing inventories to their present
location and condition.
Spare
parts are not intended for resale and are valued at the lower of purchased
cost or net realisable value using the weighted average method after
making allowance for any obsolete and slow moving and obsolete items.
Purchase cost includes the purchase price, import duties, transportation,
handling and other direct costs.
Net
realisable value represents the estimated selling price for inventories
less all estimated costs of completion and costs necessary to make the
sale.
|
|
Property,
plant and equipment
|
|
Property,
plant and equipment are carried at cost less accumulated depreciation and
any accumulated impairment losses.
Depreciation
is calculated based on the estimated useful lives of the applicable assets
on a straight-line basis commencing when the assets are ready for their
intended use, at the following annual rates:
Buildings
and
roads 5%
Plant
and
equipment 5%
- 20%
Office
furniture and
equipment 20%
The
estimated useful lives, residual values and depreciation methods are
reviewed at each year end, with the effect of any changes in estimate
accounted for on prospective basis.
Expenditure
incurred to replace a component of an item of property, plant and
equipment that is accounted for separately, is capitalised with the
carrying amount of the property, plant and equipment being
replaced. Other subsequent expenditure is capitalised only when
it increases the future economic benefits embodied in the item of fixed
asset. All other expenditure is recognised in the statement of income when
the expense is incurred. Maintenance and repairs, replacements and
improvements of minor importance are expensed as incurred. Significant
improvements and replacements of assets are capitalised.
Properties
in the course of construction for production, rental or administrative
purposes, or for purposes not yet determined, are carried at cost, less
any recognised impairment loss. Cost includes professional fees and, for
qualifying assets, borrowing costs capitalised in accordance with the
Company’s accounting policy (see below). Depreciation of these assets, on
the same basis as other property, plant and equipment, commences when the
assets are ready for their intended use.
The
gain or loss arising on the disposal or retirement of an item of property,
plant and equipment is determined as the difference between the sales
proceeds and the carrying amount of the asset and is recognised in the
statement of income.
|
|
Intangible
assets
|
|
Intangible
assets consist of technology and licences for the manufacture of ethylene,
EG and PE.
Intangibles
are carried at cost less accumulated amortisation and any accumulated
impairment losses. The intangible assets are amortised from the date of
commencement of commercial production on a straight-line basis over twenty
years, except for the olefin technology, which is amortised over five
years. The estimated useful life and amortisation method are reviewed at
the end of each annual reporting period, with the effect of any changes in
estimate being accounted for on a prospective
basis.
|
Retirement
benefit cost
|
|
The
Company accounts for retirement benefits under IAS 19 “Employee Benefits”
and, is payable to employees on completion of employment in accordance
with the Kuwaiti Labour Law.
The
cost of providing retirement benefits is determined using the Projected
Unit Credit Method, with actuarial valuations being carried out at each
balance sheet date. Actuarial gains and losses that exceed 10 per cent of
the present value of the Company’s defined benefit obligation at the end
of the prior year are amortised over the expected average remaining
working lives of the employees. Past service cost is recognised
immediately to the extent that the benefits are already vested, and
otherwise is amortised on a straight-line basis over the average period
until the benefits become vested. The liability is not externally
funded.
The
retirement benefit obligation recognised in the balance sheet represents
the present value of the defined benefit obligation as adjusted for
unrecognised actuarial gains and losses and unrecognised past service
costs.
|
|
Revenue
recognition
|
|
Sales
net of applicable discounts, are recognised when the revenue is realized
or realizable, has been earned, and collectibility is reasonably assured.
Revenue is recognised as risk and title transfer to the customer, which
usually occurs at the time shipment is made. PE production is sold with
freight paid by the Company and EG production is sold FOB (“free on
board”) shipping point. Title to the product passes when the product is
delivered to the freight carrier. The Company’s terms of sale are included
in its contracts of sale, order confirmation documents, and invoices.
Freight costs are recorded as “Cost of Sales”.
Interest
income is accrued on a time basis with reference to the principal
outstanding and at the effective interest rate applicable, which is the
rate that exactly discounts estimated future cash receipts through the
expected life of the financial asset to that asset’s net carrying
amount.
|
|
Borrowing
costs
|
|
Borrowing
costs directly attributable to the construction of qualifying assets,
which are assets that necessarily take a substantial period of time to get
ready for their intended use are added to the cost of those assets by
applying a capitalisation rate on the expenditure on such assets, until
such time as the assets are substantially ready for their intended use.
The capitalisation rate used by the Company is the weighted average of the
borrowing costs applicable to the outstanding borrowings during the
period. The remaining borrowing costs are recognised in the statement of
income in the period in which they are incurred.
|
|
Translation
of foreign currencies
|
|
The
functional currency of the Company is United States Dollars (“US$”) and
accordingly, the financial statements are presented in US$, rounded to the
nearest thousand. The functional currency is different from the currency
of the country in which the Company is domiciled since the majority of the
Company’s revenue and expenses, and all of the Company’s borrowings, are
denominated in US$.
Transactions
denominated in foreign currencies are translated into US$ at rates of
exchange prevailing at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies are retranslated into US$ at
rates of exchange prevailing at the balance sheet date. The resultant
exchange differences are recorded in the statement of
income
|
Term
debt
|
|
Interest
bearing debts are measured initially at fair value and are subsequently
measured at amortised cost, using the effective interest rate method. Any
difference between the proceeds (net of transaction costs) and the
settlement or redemption of borrowings is recognised over the term of
borrowings in accordance with the Company’s accounting policy for
borrowing costs (see above).
|
|
Impairment
of tangible and intangible assets
|
|
At
each balance sheet date, the Company reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any
indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is estimated in
order to determine the extent of the impairment loss (if any). Where it is
not possible to estimate the recoverable amount of an individual asset,
the Company estimates the recoverable amount of the cash-generating unit
to which the asset belongs.
The
recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a discount rate that reflects
current market assessments of the time value of money and the risks
specific to the asset.
If
the recoverable amount of an asset (or cash-generating unit) is estimated
to be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment
loss is recognised immediately in the statement of income.
Where
an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not
exceed the carrying amount that would have been determined had no
impairment loss been recognised for the asset (cash-generating unit) in
prior years. A reversal of an impairment loss is recognised immediately in
the statement of income.
|
|
Income
Taxes
|
|
The
Company, a closed shareholding company incorporated in the State of
Kuwait, is not subject to income taxes.
|
|
Derivatives
|
|
Derivatives
are initially recognised at fair value at the date a derivative contract
is entered into and are subsequently remeasured to their fair value at
each balance sheet date. The resulting gain or loss is recognised in the
statement of income immediately. Foreign exchange forward contracts are
treated as trading instruments and are stated at fair market value with
gains or losses included in the statement of income in foreign exchange
gain / (loss) in the period they occur.
|
|
Contribution
to Kuwait Foundation for the Advancement of Sciences
|
|
The
Company is legally required to contribute to the Kuwait Foundation for the
Advancement of Sciences (“KFAS”). The Company’s contributions to KFAS are
recognized as an expense in the period during which the Company’s
contribution is legally
required.
|
70
4
|
CRITICAL
JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
|
In
the application of the Company’s accounting policies, which are described
in note 3, management is required to make judgements, estimates and
assumptions about the carrying amounts of assets and liabilities that are
not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are
considered to be relevant. Actual results may differ from these
estimates.
The
estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which
the estimate is revised if the revision affects only that period or in the
period of the revision and future periods if the revision affects both
current and future periods.
|
|
Critical
judgements in applying accounting policies
The
following are the critical judgements, apart from those involving
estimations (see below), that management has made in the process of
applying the entity’s accounting policies and that have the most
significant effect on the amounts recognised in financial
statements.
Borrowing
costs
As
described in notes 3 and 8, the Company’s management has considered it
appropriate to capitalise borrowing costs directly attributable to the
qualifying assets under construction.
Impairment
of loans and receivables
The
Company’s management reviews periodically items classified as loans and
receivables to assess whether an allowance for impairment should be
recorded in the statement of income. Management estimates the amount and
timing of future cash flows when determining the level of allowance
required. Such estimates are necessarily based on assumptions about
several factors involving varying degrees of judgement and
uncertainty.
Retirement
Benefit Obligation
The
cost of providing retirement benefits is determined using the Projected
Unit Credit Method, with actuarial valuations being carried out at each
balance sheet date. Actuarial valuations are based on a number of
assumptions and require significant judgements made by the management. The
management believes that the assumptions used in determining the
retirement benefit obligation using actuarial valuation method are
reasonable.
Key
sources of estimation uncertainty
The
key assumptions concerning the future and other key sources of estimation
uncertainty at the balance sheet date are discussed below:
Impairment
of tangible and intangible assets and useful lives
The
Company’s management tests annually whether tangible and intangible assets
have suffered impairment in accordance with accounting policies stated in
note 3, the recoverable amount of an asset is determined based on
value-in-use method. This method uses estimated cash flow projections over
the estimated useful life of the asset discounted using market
rates.
During
the year the Company reviewed the estimated useful life over which its
tangible assets are depreciated and intangible assets are amortised. The
Company’s management is satisfied that the estimates of useful life are
appropriate. The depreciation and amortisation charged for the year will
change significantly if actual life is different than the estimated useful
life.
|
5
|
CASH
AND BANK BALANCES
|
||||||||
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Cash
and bank balances
|
19,853 | 28,822 | |||||||
Time
deposits
|
396,853 | 122,643 | |||||||
416,706 | 151,465 | ||||||||
All
bank accounts of the Company are assigned as security for the Company’s
obligations under the term debt facility agreement (see note 15). The
effective interest rate on time deposits as at December 31, 2007 was 5.21%
(2006: 4.93%) per
annum.
|
6
|
TRADE
RECEIVABLES, NET
|
|||||||||
As
at December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Trade
receivables
|
145,560 | 122,875 | ||||||||
Less:
allowance for doubtful debts
|
(102 | ) | (102 | ) | ||||||
145,458 | 122,733 | |||||||||
The
average credit period on sales is 60 days. The average age of these
receivables is 26 days (2006: 22 days).The Company has provided fully for
all receivables over 120 days because historical experience is that, such
receivables are past due beyond 120 days are generally not recoverable.
Trade receivables between 60 days and 120 days are provided for based on
estimated irrecoverable amounts from the sale of goods, determined by
reference to past default experience.
As
at December 31, 2007, trade receivables of US$ 143.3 million (2006: US$
121.7 million) were fully performing.
Included
in the Company’s trade receivables balance are debtors with a carrying
amount of US$ 2.28 million (2006: US$ 1.46 million) which are past due at
the reporting date for which the Company has not provided as there has not
been a significant change in credit quality and the amounts are still
considered recoverable. The Company may hold collateral over some of these
balances.
Ageing of past due but not
impaired
|
||||||||||
As
at December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
60
– 90 days
|
1,617 | - | ||||||||
90
– 120 days
|
665 | 1,460 | ||||||||
Total
|
2,282 | 1,460 |
There
was no movement in the allowance for doubtful debts during 2007 and
2006.
|
||
In
determining the recoverability of a trade receivable, the Company
considers any change in the credit quality of the trade receivable from
the date credit was initially granted up to the reporting date. The
concentration of credit risk is limited due to the customer base being
large and unrelated. Accordingly, the management believe that there is no
further credit provision required in excess of the allowance for doubtful
debts.
|
7
|
INVENTORIES
|
|||||||||
As
at December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Raw
materials
|
16,292 | 20,233 | ||||||||
Finished
goods
|
13,725 | 9,820 | ||||||||
Spare
parts
|
13,299 | 26,168 | ||||||||
43,316 | 56,221 | |||||||||
Allowance
for obsolete and slow moving spare parts
|
(300 | ) | (14,141 | ) | ||||||
43,016 | 42,080 | |||||||||
Movement in the allowance for obsolete and slow moving spare
parts:
|
||||||||||
For
the years ended December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Balance
at beginning of the year
|
14,141 | 500 | ||||||||
Increase
in allowance recognized in the statement of income
|
300 | 13,641 | ||||||||
Amounts
written off during the year
|
(14,141 | ) | - | |||||||
300 | 14,141 | |||||||||
During
the year, the Company recognised inventories of US$ 196,045 thousand
(2006:US$ 156,902 thousand) as expenses in the statement of income and is
included in cost of sales.
Amounts
written off during the year relate to obsolete spare parts which were
fully provided for in
2006.
|
8
|
PROPERTY,
PLANT AND EQUIPMENT
|
||||||||||||||||||||
Buildings
and
roads
|
Plant
and
equipment
|
Office
furniture
and
equipment
|
Assets
under
construction
|
Total
|
|||||||||||||||||
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
|||||||||||||||||
Cost
|
|||||||||||||||||||||
As
at January 1, 2006
|
35,535 | 1,559,823 | 88,984 | 141,841 | 1,826,183 | ||||||||||||||||
Additions
|
- | 53,949 | - | 356,097 | 410,046 | ||||||||||||||||
Disposals
|
- | (6,786 | ) | - | - | (6,786 | ) | ||||||||||||||
Transfers
|
2,530 | 59,611 | 6,861 | (69,002 | ) | - | |||||||||||||||
As
at January 1, 2007
|
38,065 | 1,666,597 | 95,845 | 428,936 | 2,229,443 | ||||||||||||||||
Additions
|
- | - | - | 347,155 | 347,155 | ||||||||||||||||
Disposals
|
(5,865 | ) | (28,055 | ) | (1,156 | ) | - | (35,076 | ) | ||||||||||||
Transfers
|
29,056 | 31,121 | (24,816 | ) | (35,361 | ) | - | ||||||||||||||
As
at December 31, 2007
|
61,256 | 1,669,663 | 69,873 | 740,730 | 2,541,522 | ||||||||||||||||
Accumulated
depreciation
|
|||||||||||||||||||||
As
at January 1, 2006
|
17,136 | 641,156 | 65,945 | - | 724,237 | ||||||||||||||||
Charge
for the year
|
1,657 | 88,678 | 4,143 | - | 94,478 | ||||||||||||||||
Disposals
|
- | (3,054 | ) | - | - | (3,054 | ) | ||||||||||||||
As
at January 1, 2007
|
18,793 | 726,780 | 70,088 | - | 815,661 | ||||||||||||||||
Charge
for the year
|
1,757 | 96,811 | 1,680 | - | 100,248 | ||||||||||||||||
Disposals
|
(5,865 | ) | (28,055 | ) | (1,156 | ) | - | (35,076 | ) | ||||||||||||
Transfers
|
15,588 | - | (15,588 | ) | - | - | |||||||||||||||
As
at December 31, 2007
|
30,273 | 795,536 | 55,024 | - | 880,833 | ||||||||||||||||
Carrying
amount
|
|||||||||||||||||||||
As
at December 31, 2007
|
30,983 | 874,127 | 14,849 | 740,730 | 1,660,689 | ||||||||||||||||
As
at December 31, 2006
|
19,272 | 939,817 | 25,757 | 428,936 | 1,413,782 |
Assets
under construction mainly consist of capital construction costs incurred
on new utilities and infrastructure facilities and EQUATE expansion
project under the Olefins II projects (see note 14). The related
commitments are reported in note 21.
In
2007, borrowing costs amounting to US$ 13 million (2006: US$
17 million) on qualifying assets was added to the cost of those
assets.
The
Company’s property, plant and equipment have been assigned as security for
the term debt facility granted to the Company (see note
15).
|
9
|
INTANGIBLE
ASSETS
|
||||||||
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Cost
|
|||||||||
Technology
and licence contributed by UCC
|
220,000 | 220,000 | |||||||
Licence
fee paid to Parsons E&C Europe Ltd
|
216 | 72 | |||||||
Licence
fees paid to UCC
|
11,706 | 11,706 | |||||||
Olefin
technology
|
195 | 195 | |||||||
As
at December 31
|
232,117 | 231,973 |
For
the years ended December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Accumulated
amortisation
|
|||||||||
As
at 1 January
|
99,466 | 88,466 | |||||||
Charge
for the year
|
11,000 | 11,000 | |||||||
As
at December 31
|
110,466 | 99,466 | |||||||
Carrying
amount
|
121,651 | 132,507 | |||||||
In
1996, UCC contributed the technology and licences concerned in
consideration for US$ 220 million. During 2004 and 2005, the Company
paid licence fees of US$ 11.25 million and US$ 0.528 million respectively
to UCC for PE expansion.
|
10
|
ACCRUALS
AND OTHER LIABILITIES
|
|||||||||
As
at December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Sales
commission
|
674 | 849 | ||||||||
Ocean
freight
|
3,004 | 3,642 | ||||||||
Staff
incentive
|
8,882 | 6,481 | ||||||||
Staff
saving schemes
|
2,725 | - | ||||||||
Staff
leave and other employee benefits
|
7,314 | 3,053 | ||||||||
Interest
on term debt
|
336 | 884 | ||||||||
Accrual
for KFAS
|
12,413 | 5,103 | ||||||||
Accrual
for new utilities and infrastructure facilities (see note
8)
|
37,788 | 32,967 | ||||||||
Other
capital project accrual
|
3,034 | 8,848 | ||||||||
Feed
gas supply
|
22,187 | 2,687 | ||||||||
Others
|
6,077 | 3,770 | ||||||||
104,434 | 68,284 |
11
|
DEFERRED
INCOME
|
Deferred
income represents reservation right fees accrued to the extent of
construction cost incurred by the Company during 2006 and 2007. Such fees
are receivable from the Olefins II project entities (see note
14).
|
12
|
SHARE
CAPITAL
|
||||||
The
share capital of the Company comprises 2,160 million authorised, issued
and fully paid up shares of Fils 100 each (December 31, 2006: 2,160
million authorised, issued and fully paid up shares of Fils 100 each)
(1000 Fils equals 1 Kuwaiti Dinar).
|
|||||||
The
ownership percentages of the shareholders at December 31, 2007 are as
follows:
|
|||||||
Shareholder’s name
|
% of
ownership
|
||||||
Union
Carbide Corporation (“UCC”)
|
42.5%
|
||||||
Petrochemical
Industries Company (“PIC”)
|
42.5%
|
||||||
Boubyan
Petrochemical Company (“BPC”)
|
9%
|
||||||
Al
Qurain Petrochemical Industries Company (“QPIC”)
|
6%
|
||||||
On
December 20, 2007, UCC contributed its 42.5% ownership interest in EQUATE
to Union Carbide Investment B.V, a limited liability company incorporated
in Netherlands and owned by Dow Europe Holding B.V. However, the
regulatory procedures in Kuwait relating to the contribution of ownership
were not completed before December 31, 2007. Therefore, Union Carbide
Corporation will remain as a shareholder as at the balance sheet date from
Kuwaiti regulatory
aspects.
|
13
|
PROPOSED
DIVIDEND
|
|
The
directors proposed a cash dividend of US$ 692 million for the year ended
December 31, 2007 (2006: US$ 510
million) which is subject to the approval of shareholders at the annual
General Assembly. This dividend has not been recorded in the accompanying
financial statements, and will be recorded only once it has been approved
by the
shareholders.
|
14
|
RELATED
PARTY TRANSACTIONS
|
|
In
the normal course of business the Company enters into transactions with
its shareholders PIC, UCC, BPC, QPIC and UCC’s parent company DOW and its
affiliates.
EQUATE
Marketing Company EC, Bahrain (“EMC”), which is owned by PIC and UCC, is
the exclusive sales agent in certain territories for the marketing of PE
produced by the Company.
On
February 1, 2005, the Company signed a distribution agreement with
MEGlobal International FZE Dubai (“MEG International FZE”) as distributor
for EG produced by the Company. MEG International FZE is 50:50
joint ventures of PIC and DOW.
During
2004, DOW and PIC initiated a number of joint venture petrochemical
projects (“Olefins II projects”) in Kuwait to manufacture polyethylene,
ethylene glycol and styrene monomer. The Olefins II projects consist of
the Equate expansion project, and the incorporation and development of The
Kuwait Olefins Company (“TKOC”), The Kuwait Styrene Company (“TKSC”), and
Kuwait Aromatics Company (“KARO”). TKOC is a joint venture of DOW Europe
Holding B.V (“DEH”) (42.5%), PIC (42.5%), BPC (9%) and QPIC (6%). TKSC is
joint venture of DEH (42.5%) and KARO (57.5%). KARO is owned by PIC (40%),
KNPC (40%) and QPIC (20%). The Olefins II projects are expected to be
operational by the third quarter of 2008.
On
December 2, 2004, the Company signed a Materials and Utility Supply
Agreement (“MUSA”) with TKOC, TKSC, KARO and PIC. Under the terms of the
MUSA the Company will receive a reservation right fee from the above
entities that will equal the total capital construction costs that would
be incurred by the Company on the new utilities and infrastructure
facilities under the Olefins II projects (see note 11).
During
2006, services agreements were signed between DOW, PIC and the Company
with TKOC, TKSC, KARO and PIC for the provision of various services to the
Olefins II projects.
An
agreement to amend the MUSA and Service Agreements (“primary agreements”)
was signed between the parties to the primary agreements on
February 8, 2006 releasing KARO from its obligations and liabilities
under the primary agreements and appointing Kuwait Paraxylene Production
Company K.S.C. (“KPPC”) in place of KARO to assume and perform all
obligations of KARO as if KPPC were and had been a party to the primary
agreements. KPPC is a 100% owned subsidiary of KARO.
On
May 31, 2006, the Company signed term loan agreements with TKOC and TKSC,
under which the Company will provide a US$ 1.5 billion term loan to TKOC
and US$ 497 million term loan to TKSC respectively. The term loans are
repayable over a period of 11 years in biannual instalments starting from
December 15, 2009 and carry annual interest rates ranging from 0.625% to
0.825% over LIBOR.
All
transactions with related parties are carried out on a negotiated contract
basis.
The
following is a description of significant related party agreements and
transactions:
a)
Supply by UCC of technology and licences relating to manufacture of
polyethylene and ethylene glycol;
b)
Supply by PIC to the Company of certain minimum quantities of feed gas and
fuel gas on a priority basis;
c)
Supply by UCC, DOW and UNIVATION of certain catalysts to the
Company;
d)
Secondment of certain staff to the Company by UCC;
e)
Supply by the Company of certain materials and services required by PIC to
operate and maintain polypropylene
plant;
f)
Provision of various services by the Company to TKOC, TKSC, KARO and PIC
under Olefins II projects.
|
Details
of significant related party transactions are disclosed
below:
|
|||||||||||||
For
the years ended December 31,
|
|||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
|||||||||||
a)
Revenues
|
|||||||||||||
Polypropylene
plant management fees from PIC
|
1,000 | 1,000 | 1,000 | ||||||||||
Sales
of EG to MEG International FZE
|
533,773 | 391,514 | 329,283 | ||||||||||
Interest
income on short-term loan to TKOC
|
- | - | 872 | ||||||||||
Interest
income on long-term loans to TKOC and TKSC
|
63,973 | 23,950 | - | ||||||||||
b)
Purchases and expenses
|
|||||||||||||
Feed
gas and fuel gas purchased from PIC
|
143,981 | 103,666 | 73,150 | ||||||||||
Catalyst
purchased from DOW
|
1,857 | 9,637 | 2,281 | ||||||||||
Catalyst purchased from
UNIVATION
|
2,441 | 4,865 | 10,038 | ||||||||||
Operating
cost reimbursed by PIC for running of polypropylene
plant
|
(26,890 | ) | (24,271 | ) | (22,732 | ) | |||||||
Expenses
reimbursed by PIC and DOW for Olefins II projects
|
- | - | (6,535 | ) | |||||||||
Operating
costs reimbursed to EMC
|
2,607 | 2,223 | 2,512 | ||||||||||
Staff
secondment costs reimbursed to UCC
|
3,360 | 3,351 | 3,089 | ||||||||||
c) Key
management compensation
|
|||||||||||||
Salaries
and other short term benefits
|
2,818 | 2,321 | 2,253 | ||||||||||
Terminal
benefits
|
48 | 47 | 112 | ||||||||||
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
d)
Due from related parties
|
|||||||||
Due
from PIC
|
9,154 | 10,221 | |||||||
Due from DOW
|
55 | 133 | |||||||
Due from TKOC
|
36,880 | 24,402 | |||||||
Due from TKSC
|
13,411 | 25,659 | |||||||
Due from KARO
|
- | 44,890 | |||||||
Due from KPPC
|
20,822 | 426 | |||||||
Due from KPC
|
191 | - | |||||||
Due from Kuwait National Petroleum Company (“KNPC”)
|
6,229 | 5,451 | |||||||
Due from MEG International FZE
|
72,942 | 26,521 | |||||||
Due
from MEG Europe
|
- | 11,349 | |||||||
159,684 | 149,052 |
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
e)
Long-term loans to related parties
|
|||||||||
TKOC
|
1,142,570 | 597,570 | |||||||
TKSC
|
327,200 | 122,200 | |||||||
1,469,770 | 719,770 |
f)
Due to related parties
|
|||||||||
Due to PIC
|
24,053 | 12,327 | |||||||
Due to DOW
|
- | 700 | |||||||
Due to UCC
|
522 | 1,889 | |||||||
Due to EMC
|
- | 172 | |||||||
Due to TKOC
|
- | 2,409 | |||||||
Due to TKSC
|
- | 661 | |||||||
Advance from MEG International FZE
|
3,846 | - | |||||||
28,421 | 18,158 | ||||||||
g)
Deferred income
|
|||||||||
Reservation
right fees accrued and receivable from TKOC, TKSC, KPPC
and PIC (see note 11)
|
510,521 | 288,303 |
15
|
LONG-TERM
DEBT
|
As
at December 31,
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Term
debt
|
1,639,820 | 879,568 | ||||||||
On
May 19, 2006, the Company signed a US$ 2.5 billion term debt facility
agreement with a consortium of banks which includes a term loan facility
of US$ 2.2 billion and a revolving loan facility of US$ 300 million. The
term loan is repayable over a period of 11 years in biannual instalments
starting from December
15, 2009. The interest rate on this facility is LIBOR + 0.5%. The
effective interest rate on the outstanding loan balance as at December 31,
2007 was 5.71% (2006: 5.82%) per annum. The facility is secured by a
charge over the Company’s property, plant and equipment and bank
balances.
During
2007, the Company had obtained the revolving loan and was repaid during
the year. The effective interest rate on the revolving loan was 5.82%
(2006: 5.81%) per annum.
As
at December 31, 2007, the Company had available US$ 855 million (2006: US$
1.6 billion) of undrawn committed borrowing facilities in respect of which
all conditions precedent had been met.
|
16
|
RETIREMENT
BENEFIT OBLIGATION
|
The
most recent actuarial valuation of the present value of the defined
benefit obligation was carried out at December 31, 2007. The present value
of the defined benefit obligation, and the related current service cost
and past service cost, were measured using the Projected Unit Credit
Method.
The
principal assumptions used for the purposes of the actuarial valuations
were as follows:
|
For
the year ended December 31, 2007
|
||||
Discount
rate
|
6.5%
|
|||
Expected
rate of increase in
|
||||
-
Basic Salary & Variable allowances including overtime and incentives
|
8.7%
p.a in 2008 gradually reducing to 5.5% p.a over 5 years and level
thereafter
|
|||
-
Average annual & quarterly incentives
|
13.2%
p.a
|
|||
Long-term
inflation
|
2.5%
p.a
|
|||
Mid-term
real GDP Growth
|
4%
p.a
|
|||
Demographic
assumptions
|
||||
Retirement
age
|
||||
-
Kuwaiti
employees
|
Age
50
|
|||
-
Non-Kuwaiti
employees
|
Age
55
|
The
total charge for the year is US$ 5.63 million which has been included in
the statement of income as follows:
|
For
the year ended
December
31, 2007
US$’000
|
||||||
Cost
of sales
|
4,733 | |||||
General,
administrative and selling expenses
|
901 | |||||
5,634 | ||||||
Movements
in the present value of the defined benefit obligation in the current year
were as follows:
|
||||||
For
the year ended
December
31, 2007
US$’000
|
||||||
Balance
as at January 1
|
26,342 | |||||
Current
service cost
|
5,634 | |||||
Benefits
paid
|
(784 | ) | ||||
Balance
as at December 31
|
31,192 |
17
|
STAFF
COSTS, DEPRECIATION AND AMORTIZATION
|
|||||||||||||
Staff
costs, depreciation and amortisation charges are included in the statement
of income under the following categories:
|
||||||||||||||
For
the years ended December 31,
|
||||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
||||||||||||
Staff
costs:
|
||||||||||||||
Cost
of sales
|
78,056 | 63,125 | 54,148 | |||||||||||
General,
administrative and selling expenses
|
24,416 | 26,375 | 21,843 | |||||||||||
102,472 | 89,500 | 75,991 |
Depreciation
and amortisation:
|
||||||||||||||
Cost
of sales
|
97,054 | 87,621 | 84,095 | |||||||||||
General,
administrative and selling expenses
|
14,194 | 17,857 | 17,456 | |||||||||||
111,248 | 105,478 | 101,551 |
18
|
FINANCE
COSTS
|
|||||||||||||
For
the years ended December 31,
|
||||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
||||||||||||
Interest
on short-term and long-term debts
|
75,559 | 41,262 | 11,650 | |||||||||||
Less:
Amounts included in cost of qualifying assets (see note
8)
|
(13,283 | ) | (17,063 | ) | (1,178 | ) | ||||||||
62,276 | 24,199 | 10,472 |
19
|
RECONCILIATION
TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES
|
The
financial statements of the Company are prepared in accordance with IFRS
which differ in certain respects from accounting principles generally
accepted in the United States of America (“US GAAP”). The significant
differences and their effect on the net income for the years ended
December 31, and equity as at December 31, are set out
below:
|
For
the years ended December 31,
|
|||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
|||||||||||
Net
income in accordance with IFRS
|
769,322 | 566,314 | 588,059 | ||||||||||
Items
increasing / (decreasing) reported net income:
|
|||||||||||||
Difference
in retirement benefits related to IAS – 19 “Employee
benefits”
|
(5,163 | ) | - | - | |||||||||
Reversal
of amortisation of intangibles
|
11,000 | 11,000 | 11,000 | ||||||||||
Net
income in accordance with US GAAP
|
775,159 | 577,314 | 599,059 | ||||||||||
The
Company’s comprehensive income in accordance with US GAAP for the years
ended December 31, 2007, 2006 and 2005 was $ 775,159, $ 577,314 and $
599,059 respectively.
|
80
As at December
31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Equity
in accordance with IFRS:
|
1,698,468 | 1,439,146 | |||||||
Items
increasing / (decreasing) reported equity:
|
|||||||||
Difference
in retirement benefits related to IAS – 19 “Employee
benefits”
|
(5,163 | ) | - | ||||||
Elimination
of intangible assets for UCC
technology and licences
|
(220,000 | ) | (220,000 | ) | |||||
Reversal
of accumulated amortisation of intangible assets
of UCC technology and licences
|
110,271 | 99,271 | |||||||
Equity
in accordance with US GAAP
|
1,583,576 | 1,318,417 |
In
1996, UCC contributed technology and licences valued at US$ 220 million to
the Company in exchange for subordinated debt. In June 1999, the
Company converted this subordinated debt, as well as other subordinated
debt due to PIC and BPC, as well as accrued interest on such notes, to
equity. Under US GAAP, the intangible assets were recognized at UCC’s
historical cost, which was zero. These US GAAP adjustments eliminate the
intangible assets and accumulated amortisation on the intangible assets,
from the Company’s balance sheet, and eliminate amortisation expense on
the intangible assets from the Company’s statement of income.
Under
US GAAP, the end of service indemnity liability is calculated based on the
Kuwaiti Labour Law which differs from the calculation under IAS – 19. The
difference under both methods is considered as a reconciling item in
computing the net income as per US GAAP.
|
|||||||||||||
Under
US GAAP, the Company’s contribution to KFAS, and directors’ fees are
considered part of operating income, as follows:
|
|||||||||||||
For
the years ended December 31,
|
|||||||||||||
2007
US$’000
|
2006
US$’000
|
2005
US$’000
|
|||||||||||
Operating
income in accordance with IFRS
|
766,743 | 566,802 | 597,557 | ||||||||||
Items
increasing / (decreasing) reported operating income:
|
|||||||||||||
U.S.
GAAP adjustments to operating income related to
amortisation
|
11,000 | 11,000 | 11,000 | ||||||||||
Difference
in retirement benefits related to IAS – 19 “Employee
benefits”
|
(5,163 | ) | - | - | |||||||||
Contributions
to KFAS
|
(7,270 | ) | (5,143 | ) | (5,336 | ) | |||||||
Directors’
fees
|
(148 | ) | (136 | ) | (302 | ) | |||||||
Operating
income in accordance with US GAAP
|
765,162 | 572,523 | 602,919 |
20
|
FINANCIAL
INSTRUMENTS
|
Capital
risk management
The
Company manages its capital to ensure that it will be able to continue as
a going concern while maximising the return to stakeholders through the
optimisation of the debt and equity balance.
The
capital structure of the Company consists of debt, which includes the
borrowings disclosed in note 15, cash and cash equivalents and equity,
comprising issued capital as disclosed in note 12, and retained
earnings.
Gearing ratio
The
gearing ratio as at December 31, was as
follows:
|
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Debt
(i)
|
170,050 | 159,798 | |||||||
Cash
and bank balances
|
(416,706 | ) | (151,465 | ) | |||||
Net
debt
|
(246,656 | ) | 8,333 | ||||||
Equity
|
1,698,468 | 1,439,146 | |||||||
Net
debt to equity ratio
|
(15 | )% | 0.58 | % |
(i)
debt is defined as long-term debt, as detailed in note 15, less long term
loans to related parties.
Significant
accounting policies
Details
of the significant accounting policies and methods adopted, including the
criteria for recognition, the basis of measurement and the basis on which
income and expenses are recognised, in respect of each class of financial
asset and financial liability are disclosed in note 3 to the financial
statements.
|
Categories
of financial instruments
|
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Financial
assets
|
|||||||||
Cash
and bank balances
|
416,706 | 151,465 | |||||||
Trade
receivables, net
|
145,458 | 122,773 | |||||||
Due
from related parties
|
159,684 | 149,052 | |||||||
Long-term
loan to related parties
|
1,469,770 | 719,770 | |||||||
2,191,618 | 1,143,060 | ||||||||
Financial
liabilities
|
|||||||||
Trade
payables
|
26,920 | 26,804 | |||||||
Due
to related parties
|
28,421 | 18,158 | |||||||
Long-term
debt
|
1,639,820 | 879,568 | |||||||
1,695,161 | 924,530 |
Financial
risk management objectives
The
Company’s Corporate Treasury function provides services to the business,
co-ordinates access to domestic and international financial markets,
monitors and manages the financial risks relating to the operations of the
Company through internal risk reports which analyse exposures by degree
and magnitude of risks. These risks include market risk (including
currency risk and fair value interest rate risk), credit risk, liquidity
risk and cash flow interest rate risk.
|
Market
risk
Market
risk is the risk that changes in market prices, such as foreign exchange
rates, interest rates and equity prices will affect the Company’s income
or the value of its holdings of financial instruments. The objective of
market risk management is to manage and control market risk exposures
within acceptable parameters, while optimising the return.
The
Company’s activities expose it primarily to the financial risks of changes
in foreign currency exchange rates and interest rates.
Foreign
currency risk management
The
Company undertakes certain transactions denominated in foreign currencies.
Hence, exposures to exchange rate fluctuations arise. Exchange rate
exposures are managed within approved policy parameters utilising forward
foreign exchange contracts.
The
Company’s exposure to balance sheet risk is insignificant since all
significant assets and liabilities are denominated in US$.
The
carrying amounts of the Company’s foreign currency denominated monetary
assets and monetary liabilities at the reporting date are as
follows:
|
As
at December 31,
|
As
at December 31,
|
||||||||||||||||
Liabilities
|
Assets
|
||||||||||||||||
2007
US$’000
|
2006
US$’000
|
2007
US$’000
|
2006
US$’000
|
||||||||||||||
Euro
|
8,326 | 11,265 | 52,940 | 48,137 | |||||||||||||
Kuwaiti
Dinar
|
59,445 | 23,980 | 23,756 | 11,187 | |||||||||||||
Other
|
- | - | 2,509 | 1,969 |
Foreign
currency sensitivity analysis
As
at December 31, 2007, if the US$ had weakened/strengthened by 5% against
the Euro with all other variables held constant, profit for the year would
have been US$ 2.27 million (2006: US$ 1.87 million, 2005: US$ $ 1.05
million) lower/higher, mainly as a result of foreign exchange gains/losses
on translation of Euro denominated trade receivables, due from/to related
parties and trade payable.
Interest
rate risk management
The
Company is exposed to interest rate risk as it borrows funds at floating
interest rates. The risk is managed by the Company by maintaining at
floating rate borrowings.
Interest
rate sensitivity analysis
As
at December 31, 2007, if interest rates on US$ denominated borrowings had
been 0.1% higher/lower with all other variables held constant, profit for
the year would have been US$ 0.173 million (2006: US$ 0.073 million, 2005:
US$ 0.203 million) lower/higher, mainly as a result of higher/lower
interest expense on floating rate borrowings.
The
Company’s exposures to interest rates on financial assets and financial
liabilities are detailed in the liquidity risk management section of this
note.
|
Credit
risk management
Credit
risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Company. The
Company has adopted a policy of only dealing with creditworthy
counterparties and obtaining sufficient collateral, where appropriate, as
a means of mitigating the risk of financial loss from defaults. The
Company only transacts with entities that are rated the equivalent of
investment grade and above. This information is supplied by independent
rating agencies where available and, if not available, the Company uses
other publicly available financial information and its own trading records
to rate its major customers. The Company’s exposure and the credit ratings
of its counterparties are continuously monitored and the aggregate value
of transactions concluded is spread amongst approved counterparties.
Credit exposure is controlled by counterparty limits that are reviewed and
approved by the management annually.
Trade
receivables consist of a large number of customers, spread across diverse
industries and geographical areas. Ongoing credit evaluation is performed
on the financial condition of accounts receivable.
The
Company has significant credit exposure to counterparties. The credit risk
on liquid funds is limited because the counterparties are banks with high
credit-ratings assigned by international credit-rating
agencies.
Exposure
to credit risk
The
carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk at the reporting date
was:
|
|||||||||
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Trade
receivables, net
|
145,458 | 122,773 | |||||||
Due
from related parties
|
159,684 | 149,052 | |||||||
Long-term
loans to related parties
|
1,469,770 | 719,770 | |||||||
1,774,912 | 991,595 |
The
maximum exposure to credit risk for trade receivables at the reporting
date by geographic region was:
|
|||||||||
As
at December 31,
|
|||||||||
2007
US$’000
|
2006
US$’000
|
||||||||
Domestic
& Gulf Cooperation Council countries (GCC)
|
18,608 | 15,706 | |||||||
Asia
|
71,922 | 60,705 | |||||||
Europe
|
14,082 | 11,886 | |||||||
Other
regions
|
40,846 | 34,476 | |||||||
145,458 | 122,773 |
The
table below shows the credit limit and balance of 5 major counterparties
at the balance sheet date:
|
As
at December 31, 2007
|
As
at December 31, 2006
|
|||||||||||||||||
Counterparty
|
Location
|
Credit
limit
|
Carrying
amount
|
Credit
limit
|
Carrying
amount
|
|||||||||||||
US$’
000
|
US$’
000
|
US$’
000
|
US$’
000
|
|||||||||||||||
MEGlobal
International FZE
|
Dubai
|
100,000 | 72,942 | 50,000 | 26,521 | |||||||||||||
Bee
Lian Plastic Industries
|
Malaysia
|
11,230 | 10,106 | 6,680 | 6,186 | |||||||||||||
Continental Industries Group Inc |
Turkey
|
10,000 | 8,217 | - | - | |||||||||||||
Obegi
Chemicals Sal
|
Lebanon
|
9,250 | 1,947 | - | - | |||||||||||||
Kassas
& Al-Kurdi Company
|
Syria
|
5,100 | 3,932 | - | - |
Liquidity
risk management
Liquidity
risk is the risk that the Company will not be able to meet its financial
obligations as they fall due. The Company’s approach to managing liquidity
is to ensure, as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the
Company’s reputation.
Ultimate
responsibility for liquidity risk management rests with the board of
directors, which has built an appropriate liquidity risk management
framework for the management of the Company’s short, medium and long-term
funding and liquidity management requirements. The Company manages
liquidity risk by maintaining adequate reserves, banking facilities and
reserve borrowing facilities, by continuously monitoring forecast and
actual cash flows and matching the maturity profiles of financial assets
and liabilities. Included in note 15 is a listing of additional undrawn
facilities that the Company has at its disposal to further reduce
liquidity risk.
The
table below analyses the Company’s non-derivative financial liabilities
based on the remaining period at the balance sheet to the contractual
maturity date. The amounts disclosed in the table are the contractual
undiscounted cash flows. Balances due within 12 months equal their
carrying balances as the impact of discounting is not
significant.
|
As
at December 31, 2007
|
Less
than
1
year
|
Between
1
and
2 years
|
Between
2
and
5 years
|
Over
5
years
|
|||||||||||||
US$’
000
|
US$’
000
|
US$’
000
|
US$’
000
|
||||||||||||||
Trade
payables
|
26,920 | - | - | - | |||||||||||||
Due
to related parties
|
28,421 | - | - | - | |||||||||||||
Long-term
debt
|
- | 55,426 | 365,844 | 1,218,550 | |||||||||||||
As
at December 31, 2006
|
Less
than
1
year
|
Between
1
and
2 years
|
Between
2
and
5 years
|
Over
5
years
|
|||||||||||||
US$’
000
|
US$’
000
|
US$’
000
|
US$’
000
|
||||||||||||||
Trade
payables
|
26,804 | - | - | - | |||||||||||||
Due
to related parties
|
18,158 | - | - | - | |||||||||||||
Long-term
debt
|
- | - | 157,003 | 722,565 | |||||||||||||
Fair
value of financial instruments
The
fair value of financial assets and financial liabilities (excluding
derivative instruments) is determined in accordance with generally
accepted pricing models based on discounted cash flow analysis using
prices from observable current market transactions and dealer quotes for
similar instruments.
Set
out below is a comparison by category of carrying amounts and fair values
of all of the Company’s financial instruments that are carried in the
financial statements:
|
|||||||||||||||||
As
at December 31, 2007
|
As
at December 31, 2006
|
||||||||||||||||
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
||||||||||||||
US$’
000
|
US$’
000
|
US$’
000
|
US$’
000
|
||||||||||||||
Financial
assets
|
|||||||||||||||||
Cash
and bank balances
|
416,706 | 416,706 | 151,465 | 151,465 | |||||||||||||
Trade
receivables, net
|
145,458 | 145,458 | 122,773 | 122,773 | |||||||||||||
Due
from related parties
|
159,684 | 159,684 | 149,052 | 149,052 | |||||||||||||
Long-term
loans to related parties
|
1,469,770 | 1,469,770 | 719,770 | 719,770 |
As
at December 31, 2007
|
As
at December 31, 2006
|
||||||||||||||||
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
||||||||||||||
US$’
000
|
US$’
000
|
US$’
000
|
US$’
000
|
||||||||||||||
Financial
liabilities
|
|||||||||||||||||
Trade
payables
|
26,920 | 26,920 | 26,804 | 26,804 | |||||||||||||
Due
to related parties
|
28,421 | 28,421 | 18,158 | 18,158 | |||||||||||||
Long-term
debt
|
1,639,820 | 1,639,820 | 879,568 | 879,568 | |||||||||||||
21
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
|||||||||
The
Company has a fixed gas purchase commitment with KNPC of approximately US$
361,000 per day until the agreement is cancelled in writing by both
parties.
|
||||||||||
The
Company had the following commitments and contingent liabilities
outstanding as at December 31:
|
||||||||||
2007
US$’000
|
2006
US$’000
|
|||||||||
Letters
of credit and letters of guarantee
|
4,176 | 3,677 | ||||||||
Purchase
of capital assets
|
110,968 | 319,679 | ||||||||
Loan
commitments to related parties
|
527,230 | 1,277,230 |
22
|
COMPARATIVE
FIGURES
Reclassification
have been made to present the long term incentives separately in the
balance sheet. In addition, certain immaterial comparative figures have
been reclassified to conform to the current year’s
presentation.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 19th
day of February 2010.
UNION
CARBIDE CORPORATION
|
||
By:
|
/s/
RONALD C. EDMONDS
|
|
Ronald
C. Edmonds, Vice President and Controller
The
Dow Chemical Company
Authorized
Representative of
Union
Carbide Corporation
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed on the 19th day of February 2010 by the following
persons in the capacities indicated:
/s/
PATRICK E. GOTTSCHALK
|
/s/
GLENN J. MORAN
|
|
Patrick
E. Gottschalk, Director
|
Glenn
J. Moran, Director
|
|
President
and Chief Executive Officer
|
||
/s/
EUDIO GIL
|
/s/
DUNCAN A. STUART
|
|
Eudio
Gil, Vice President, Treasurer and
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Duncan
A. Stuart, Director
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Chief
Financial Officer
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/s/
RONALD C. EDMONDS
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Ronald
C. Edmonds, Vice President and Controller
The
Dow Chemical Company
Authorized
Representative of
Union
Carbide Corporation
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Supplemental
Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the
Act by Registrants Which Have Not Registered Securities Pursuant to Section 12
of the Act
The
Corporation, which is a wholly owned subsidiary of Dow, does not send an annual
report to security holders or proxy material with respect to any annual or other
meeting of security holders, to Dow or any other security holders.
Union
Carbide Corporation and Subsidiaries
Exhibit
Index
EXHIBIT
NO.
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DESCRIPTION
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2.1
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Agreement
and Plan of Merger dated as of August 3, 1999 among Union Carbide
Corporation, The Dow Chemical Company and Transition Sub Inc. (see Exhibit
2 of the Corporation’s Current Report on Form 8-K dated August 3,
1999).
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2.2
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Agreement
for the Sale & Purchase of Shares, dated as of August 17, 2009, among
Union Carbide Corporation, UCMG L.L.C. and Petroliam Nasional Berhad (see
Exhibit 2.1 of the Corporation’s Current Report on Form 8-K dated
September 30, 2009).
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3.1
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Restated
Certificate of Incorporation of Union Carbide Corporation under Section
807 of the Business Corporation Law, as filed on May 13, 2008 (see Exhibit
3.1.4 of the Corporation’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008).
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3.2
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Amended
and Restated Bylaws of Union Carbide Corporation, amended as of April 22,
2004 (see Exhibit 3.2 of the Corporation’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2004).
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4.1
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Indenture
dated as of June 1, 1995, between the Corporation and the Chase Manhattan
Bank (formerly Chemical Bank), Trustee (see Exhibit 4.1.2 to the
Corporation’s Form S-3 effective October 13, 1995, Reg. No.
33-60705).
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4.2
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The
Corporation will furnish to the Commission upon request any other debt
instrument referred to in Item 601(b)(4)(iii)(A) of Regulation
S-K.
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10.1
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Amended
and Restated Service Agreement, effective as of July 1, 2002, between the
Corporation and The Dow Chemical Company (see Exhibit 10.23 of the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
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10.1.1
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Service
Addendum No. 2 to the Service Agreement, effective as of August 1, 2001,
between the Corporation and The Dow Chemical Company (see Exhibit 10.23.2
of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
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10.1.2
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Restated
Service Addendum No. 1 to the Service Agreement, effective as of February
6, 2001, between the Corporation and The Dow Chemical Company (see Exhibit
10.23.3 of the Corporation’s 2002 Form 10-K).
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10.1.3
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Service
Addendum No. 3 to the Amended and Restated Service Agreement, effective as
of January 1, 2005, between the Corporation and The Dow Chemical
Company (see Exhibit 10.1.3 of the Corporation’s 2004 Form
10-K).
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10.2
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Second
Amended and Restated Sales Promotion Agreement, effective January 1, 2004,
between the Corporation and The Dow Chemical Company (see Exhibit 10.24 of
the Corporation’s 2003 Form 10-K).
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10.3
|
Third
Amended and Restated Agreement (to Provide Materials and Services), dated
as of March 1, 2008, between the Corporation and Dow Hydrocarbons and
Resources LLC (see Exhibit 10.3 of the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008).
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10.4
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Amended
and Restated Tax Sharing Agreement, effective as of February 7, 2001,
between the Corporation and The Dow Chemical Company (see Exhibit 10.27 of
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).
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10.5
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Amended
and Restated Revolving Credit Agreement dated as of May 28, 2004, among
the Corporation, The Dow Chemical Company and certain Subsidiary
Guarantors.
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10.5.1
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First
Amendment dated October 29, 2004 to the Amended and Restated Revolving
Credit Agreement, dated as of May 28, 2004, among the Corporation, The Dow
Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.1 of
the Corporation’s 2004 Form 10-K).
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10.5.2
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Second
Amendment to the Amended and Restated Revolving Credit Agreement,
effective as of December 30, 2004, among the Corporation, The Dow
Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.2 of
the Corporation’s 2004 Form 10-K).
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10.5.3
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Third
Amendment to the Amended and Restated Revolving Credit Agreement, dated as
of September 30, 2005, among the Corporation, The Dow Chemical
Company and certain Subsidiary Guarantors (see Exhibit 10.5.3 of the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005).
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10.5.4
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Fourth
Amendment to the Amended and Restated Revolving Credit Agreement, dated as
of September 30, 2006, among the Corporation, The Dow Chemical
Company and certain Subsidiary Guarantors (see Exhibit 10.5.4 of the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006).
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10.5.5
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Fifth
Amendment to the Amended and Restated Revolving Credit Agreement, dated as
of September 30, 2007, among the Corporation, The Dow Chemical
Company and certain Subsidiary Guarantors (see Exhibit 10.5.5 of the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007).
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10.5.6
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Sixth
Amendment to the Amended and Restated Revolving Credit Agreement,
effective as of September 30, 2008, among the Corporation, The
Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.6
of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008).
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10.5.7
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Seventh
Amendment to the Amended and Restated Revolving Credit Agreement,
effective as of September 30, 2009, among the Corporation, The Dow
Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.7 of
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009).
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10.6
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Amended
and Restated Pledge and Security Agreement dated as of May 28, 2004,
between the Corporation and The Dow Chemical Company (see Exhibit 10.29 of
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
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10.7
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Second
Amended and Restated Revolving Loan Agreement, effective as of November 1,
2005, between the Corporation and The Dow Chemical Company (see Exhibit
10.7 of the Corporation’s 2005 Annual Report on
Form 10-K).
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10.7.1
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First
Amendment to Second Amended and Restated Revolving Loan Agreement,
effective as of December 31, 2007, between the Corporation and The
Dow Chemical Company (see Exhibit 10.7.1 of the Corporation’s 2007 Annual
Report on Form 10-K).
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10.7.2
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Second
Amendment to Second Amended and Restated Revolving Loan Agreement,
effective as of August 1, 2009, between the Corporation and The Dow
Chemical Company (see Exhibit 10.7.2 of the Corporation’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2009).
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10.8
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Purchase
and Sale Agreement dated as of September 30, 2005, between Catalysts,
Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials LLC
(see Exhibit 10.8 of the Corporation’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005).
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10.9
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Contribution
Agreement dated as of December 21, 2007, among the Corporation, Dow
International Holdings Company and The Dow Chemical Company (see Exhibit
10.9 of the Corporation’s 2007 Annual Report on
Form 10-K).
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21
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Omitted
pursuant to General Instruction I of Form 10-K.
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23
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Analysis,
Research & Planning Corporation’s Consent.
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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Union
Carbide Corporation and Subsidiaries
Exhibit
Index
Wherever
an exhibit listed above refers to another exhibit or document (e.g., "see
Exhibit 6 of . . ."), that exhibit or document is incorporated herein by such
reference.
A
copy of any exhibit listed above may be obtained on written request to the
Secretary's Office, Union Carbide Corporation, 1254 Enclave Parkway, Houston,
Texas 77077
92