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:
·
Nippon Unicar Company Limited - 50 percent - a Japan-based manufacturer of polyethylene and specialty polyethylene compounds.
·
Univation Technologies, LLC - 50 percent - a U.S. company that develops, markets and licenses polyethylene process technology and related catalysts.
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
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:
Hahnville, Louisiana; Texas City and Seadrift, Texas; South Charleston, West Virginia
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.
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:
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:
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.
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.
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.
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.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I of Form 10-K.
Union Carbide Corporation and Subsidiaries
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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:
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:
(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:
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:
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.
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.
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:
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.
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
Notes to the Consolidated Financial Statements
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
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:
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:
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:
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:
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
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:
(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.
(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:
The following table provides information regarding amortization expense:
Total estimated amortization expense for the next five fiscal years is as follows:
NOTE I FINANCIAL INSTRUMENTS
Investments
The Corporation’s investments in marketable securities are classified as available-for-sale.
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.
(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:
(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:
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
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:
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.
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:
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.
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
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:
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.
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:
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.
(1)
See Note C for information regarding curtailment costs recorded in 2008 and 2007.
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:
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.
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:
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:
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:
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.
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.
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:
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:
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
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.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 14.
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:
(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.
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
Statements of changes in equity for the years ended December 31, 2007, 2006 and
Statements of cash flows for the years ended December 31, 2007, 2006 and
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
10.5
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.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
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
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
EQUATE Petrochemical Company KSC (Closed)
Balance Sheets
The accompanying notes form an integral part of these financial statements.
EQUATE Petrochemical Company KSC (Closed)
Statements of Income
The accompanying notes form an integral part of these financial statements.
EQUATE Petrochemical Company KSC (Closed)
Statements of Changes in Equity
The accompanying notes form an integral part of these financial statements.
EQUATE Petrochemical Company KSC (Closed)
Statements of Cash flows
The accompanying notes form an integral part of these financial statements.
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
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.
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,
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
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.
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.
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.
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).
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).
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.
LONG-TERM DEBT
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:
The total charge for the year is US$ 5.63 million which has been included in the statement of income as follows:
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:
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:
(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
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$.
The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
Foreign currency sensitivity analysis
As at December 31, 2007, if the US$ 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.
The table below shows the credit limit and balance of 5 major counterparties at the balance sheet date:
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.
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.
Union Carbide Corporation and Subsidiaries
Signatures
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.
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
Duncan A. Stuart, Director
Chief Financial Officer
/s/ RONALD C. EDMONDS
Ronald C. Edmonds, Vice President and Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation
Union Carbide Corporation and Subsidiaries
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.
DESCRIPTION
2.1
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).
2.2
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).
3.1
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).
3.2
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).
4.1
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).
4.2
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.
10.1
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).
10.1.1
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).
10.1.2
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).
10.1.3
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).
10.2
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).
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).
10.4
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).
10.5
Amended and Restated Revolving Credit Agreement dated as of May 28, 2004, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors.
10.5.1
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).
10.5.2
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).
10.5.3
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).
10.5.4
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).
10.5.5
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).
10.5.6
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).
10.5.7
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).
10.6
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).
10.7
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).
10.7.1
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).
10.7.2
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).
10.8
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).
10.9
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).
Omitted pursuant to General Instruction I of Form 10-K.
Analysis, Research & Planning Corporation’s Consent.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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