UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDECEMBER 31, 2007
Commission file number: 1-1463
UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)
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Commission file number: 1-1463 UNION CARBIDE CORPORATION (Exact name of registrant as specified in its charter) | ||||||||||||
New York (State or other jurisdiction of incorporation or organization) | 13-1421730 (I.R.S. Employer Identification No.) | ||||||||||||
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77077 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 281-966-2727 | |||||||||||
Securities registered pursuant to Section 12(b) of the Act: None | |||||||||||
Securities registered pursuant to Section 12(g) of the Act: None | |||||||||||
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Registrant’s telephone number, including area code: 713-978-2016
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exhange Act. (Check one):
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | ||||||||||||||
o Yes þ No | ||||||||||||||
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | ||||||||||||||
o Yes þ No | ||||||||||||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ||||||||||||||
þ Yes o No | ||||||||||||||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.: | ||||||||||||||
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | ||||||||||||||
o Yes þ No | ||||||||||||||
At February 18, 2009, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company. The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) for Form 10-K and is therefore filing this form with a reduced disclosure format. | ||||||||||||||
Documents Incorporated by Reference None | ||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes x No
At February 19, 2008, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.
The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) for Form 10-K and is therefore filing this form with a reduced disclosure format.
Documents Incorporated by Reference
None
Union Carbide Corporation
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2007
TABLE OF CONTENTS
PART I
ANNUAL REPORT ON FORM 10-K | |||
| For the Fiscal Year Ended December 31, 2008 | |||
| PART I |
| PAGE | ||||
| Business. | 3 | |||
| 4 | ||||
| Properties. | 6 | |||
| 9 | ||||
PART III | ||||
| 49 | ||||
| 49 | ||||
Security Ownership of Certain Beneficial Owners and Management and | 49 | |||
Certain Relationships and Related Transactions, and Director Independence. | 49 | |||
| 49 | ||||
PART IV | ||||
| 50 | ||||
| 79 | |||||
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. Hahnville, Louisiana; Texas City and Seadrift, Texas; South Charleston, West Virginia 2007 2006 2005 Claims unresolved at January 1 111,887 146,325 203,416 Claims filed 10,157 16,386 34,394 Claims settled, dismissed or otherwise resolved (31,722 ) (50,824 ) (91,485 ) Claims unresolved at December 31 90,322 111,887 146,325 Claimants with claims against both UCC and Amchem 28,937 38,529 48,647 Individual claimants at December 31 61,385 73,358 97,678 historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study. Defense and Resolution Costs 2007 2006 2005 Aggregate Costs Defense costs $84 $62 $75 $565 Resolution costs $88 $117 $139 $1,270 sales” in the consolidated statements of income. The Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million at December 31, 2008 and $467 million at December 31, Receivables for Costs Submitted to Insurance Carriers at December 31 In millions 2007 2006 Receivables for defense costs $ 18 $ 34 Receivables for resolution costs 253 266 Total $271 $300 Since February 6, 2001, theThe Corporation has beenis a wholly owned subsidiary of The Dow Chemical Company (“Dow”) as a consequence of the Corporation merging with a wholly owned subsidiary of Dow effective that date.. Except as otherwise indicated by the context, the terms “Corporation” or “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries.price,prices, in accordance with the terms of Dow’s long-standing intercompany pricing policies.ethylenemonoethylene glycol (“EG”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. EGMEG is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids.SENTRY��SENTRY™ polyethylene glycols and methoxypolyethylene glycols, solution vinyl resins, TERGITOL™ and TRITON™ surfactants, UCAR™ deicing fluids, UCARTHERM™ heat transfer fluids UCAR™ deicing fluids and UCON™ fluids.ethylene-modified latexes,vinyl acetate ethylene, NEOCAR™ branched vinyl ester latexes, UCAR™ POLYPHOBE™ rheology modifiers, and UCAR™ all-acrylic, styrene acrylicstyrene-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.pipe; and 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.pipe.include: carpeting andinclude 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.alcohols, as well asalcohols; 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,ExxonMobil; and licensing of the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols through Dow Technology Investments LLC, a newly formed (in 2007), 50:50 joint venture with Dow Global Technologies Inc., a Dow subsidiary.Developmentdevelopment expenses were $68 million in 2008, $70 million in 2007 and $71 million in 2006 and $78 million in 2005.2006. In addition, certain of the Corporation’sCorporation's nonconsolidated affiliates conduct research and development within their business fields.1,7001,364 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.UCC’s20072008 and the Corporation’sCorporation's ownership interest in each are listed below:·Nippon Unicar Company Limited — 50 percent — a Japan-based manufacturer of polyethylene and specialty polyethylene compounds.·The OPTIMAL Group of Companies [consisting of OPTIMAL Olefins (Malaysia) Sdn Bhd — 23.75 percent; OPTIMAL Glycols (Malaysia) Sdn Bhd — 50 percent; OPTIMAL Chemicals (Malaysia) Sdn Bhd — 50 percent] — Malaysian companies that operate an ethane/propane cracker, an ethylene glycol facility and a production facility for ethylene and propylene derivatives within a world-scale, integrated chemical complex located in Kerteh, Terengganu, Malaysia.·Univation Technologies, LLC — 50 percent — a U.S. company that develops, markets and licenses polyethylene process technology and related catalysts.· · · Univation Technologies, LLC – 50 percent – a U.S. company that develops, markets and licenses polyethylene process technology and related catalysts. Aboutabout Foreign and Domestic Operations and Export Sales2007,2008, the Corporation derived 5257 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 OP to the Consolidated Financial Statements for information on sales to external customers and long-lived assets by geographic area.Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operation,Operations, and Notes A and IJ to the Consolidated Financial Statements.4impactimpacts UCC’s operating costs and addadds variability to earnings.During 2007,rise.rise until the fourth quarter when costs fell sharply. Purchased feedstock and energy costs have not lessened in early 2008, and these costs are expected to remain volatile throughout the year.2009. When these costs increase, the Corporation is not always able to immediately raise selling prices and, ultimately, its ability to pass on underlying cost increases is greatly dependent on market conditions. As a result, increases in these costs could negatively impact the Corporation’s results of operations.2007,2008, the Corporation had accrued obligations of $75$67 million for environmental remediation and restoration costs, including $23$18 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. 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.and its subsidiaries areis 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.TheAt December 31, 2008, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion at December 31, 2007$934 million and the Corporation’s receivable for insurance recoveries related to its asbestos liability was $467 million at$403 million. At December 31, 2007. In addition,2008, the Corporation also had receivables of $272 million for insurance recoveries of $271 million at December 31, 2007 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 results of operations and cash flows for a particular period and on the consolidated financial positionstatements.twoand 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.51B.1B. UNRESOLVED STAFF COMMENTS. 2008 2007 2006 Claims unresolved at January 1 90,322 111,887 146,325 Claims filed 10,922 10,157 16,386 Claims settled, dismissed or otherwise resolved (25,538 ) (31,722 ) (50,824 ) Claims unresolved at December 31 75,706 90,322 111,887 Claimants with claims against both UCC and Amchem 24,213 28,937 38,529 Individual claimants at December 31 51,493 61,385 73,358 asbestosasbestos-related liability.6 At December 31, 2006, approximately 25 percent
In millions
to Date as of
Dec. 31, 2007Defense and Resolution Costs Aggregate Costs In millions 2008 2007 2006 Defense costs $60 $84 $62 $625 Resolution costs $116 $88 $117 $1,386 and $75 million in 2005, and was reflected in “Cost of sales.”2007,2008, the Corporation hashad reached settlements with several of the carriers involved in this litigation.72007 and $495 million at December 31, 2006.2007. At December 31, 20072008 and December 31, 2006,2007, 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 millions 2008 2007 Receivables for defense costs $ 28 $ 18 Receivables for resolution costs 244 253 Total $ 272 $ 271
5.5. MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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. Operations 2008. sales of investments and assets. Sundry income related parties, including $204 million from DIHC and $82 million from Modeland International Holdings Inc. 2007. 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 6.6. SELECTED FINANCIAL DATA.8OperationOperations.management’smanagement's narrative analysis of the results of operationoperations for the year ended December 31, 2007,2008, the most recent fiscal year, compared with the year ended December 31, 2006,2007, the fiscal year immediately preceding it.SFASStatement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” 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.Operation20072008 were down slightly at $7,493$7,326 million compared with $7,528$7,493 million in 2006.2007. Sales to Dow in 20072008 were $7,282$7,107 million compared with $7,022$7,282 million in 2006.2007. Selling prices to Dow are based on market prices for the related products. Average selling prices for mostall major products were higher in 20072008 compared with 2006,2007 principally due to higher feedstock and energy costs, led by ethylene glycol (“EG”),polyglycols and surfactants, polyethylene, polypropylene, ethanolamines and vinyl acetate monomer (“VAM”).oxo products. Sales volume was mixed, with overall volume down for 20072008 compared with 2006. Solid volume growth for several products (led by polyethylene, oxo products and VAM) was more than offset by declines in a few of the Corporation’s other products, principally EG. In addition, total net sales for 2006 included significant lump sum technology licensing revenue which did not recur in 2007 as technology licensing revenue varies from period to periodacross most product lines due to softening demand in the naturesecond half of the business.20072008 increased $318$313 million compared with 20062007 due to continuing increases insignificantly higher feedstock and energy costs. Gross margin for 20072008 was $132 million, down from $612 million compared with $965 million for 20062007 as the increase in selling prices was more than offset by the increase in feedstock and energy costs and overall lower sales volume, includingvolume.lower levelConsolidated Financial Statements.licensing activity.RestructuringDirectors 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. 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, the Corporation recorded restructuring charges of $55 million in the fourth quarter of 2007 that included the write-off of the net book value of the polypropylene plant in St. Charles, Louisiana, which was shutdownshut down in the fourth quarter of 2007, and organizational changes in West Virginia. In 2006, the Corporation recorded restructuring charges of $14 million, which included for asset write-offs associated with three manufacturing facilities totaling $10 million and $4 million related to the dissolution of a consolidated joint venture in China. See Note B to the Consolidated Financial Statements.In 2006, following$177$54 million. The reduction iswas shown as “Asbestos-related credit” in the consolidated statements of income. See Note I to the Consolidated Financial Statements for additional information regarding asbestos-related matters. In the fourth quarter of 2007, following the completion of the December 2007 review, as well as the Corporation’s own review of the asbestos claim and resolution activity, the Corporation determined that no change to the related liability for pending and future claims was required. At December 31, 2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion.increasedin 2008 was $166 million, down from $395 million in 2006 to $500 million in 2007 primarily due primarily to an increase inthe absence of equity earnings from EQUATE Petrochemical Company K.S.C. (“EQUATE”) and The OPTIMAL Group of Companies (“OPTIMAL”). In late fourth quarter 2007, the Corporation, through a series of noncash transactions, contributed its share of EQUATE for an increased share in Dow International Holdings Company (“DIHC”). As a result, the Corporation had an 18.77 percent interest in DIHC at December 31, 2007 compared with 7.4 percent at December 31, 2006.—– 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 on9(expense) — net for 20072008 was net income of $49$243 million compared with net expense of $39$49 million in 2006.2007. Sundry income for 2007approximately $98$297 million from DIHC.20072008 was $173$110 million compared with $128$173 million in 2006,2007, reflecting a sizeable increasedecrease in the level of interest bearing assets, in addition to higher interest rates. Interest expense and amortization of debt discount for 20072008 was $52$48 million compared with $54$52 million for 2006.2007 compared with $420 million in 2006.2007. The Corporation’s overall effective tax rate was 26.5 percent for 2008 compared with 7.6 percent for 2007, compared with 28.6 percent for 2006.2007. UCC’s effective tax rate fluctuates based on, among other factors, the level of after-tax income from joint ventures and the level of income relative to available tax credits. The effective tax rate for 2007 was lower than 2006low principally due to a change in the Corporation’s legal ownership structure with respect to its investment in EQUATE, resulting in a favorable impact to the “Provisionprovision for income taxes”taxes of $195 million in the fourth quarter of 2007. Also impacting the 2007 rate was the net reversalsreversal of valuation allowances of $64 million and higher earnings from the Corporation’s joint ventures. Since most of the earnings from nonconsolidated affiliates are taxed at the joint venture level, the impact of higher equity earnings decreased the Corporation’s overall effective tax rate. The Corporation is included in Dow’s consolidated federal income tax group and consolidated income tax return. The underlying factors affecting UCC’s overall effective tax rates are summarized in Note NO to the Consolidated Financial Statements.2007, compared with $1,046 million for 2006.On December 13, 2007, Dow and Petrochemical Industries Company of the State of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 joint venture that will be a market-leading, global petrochemicals company. The joint venture, to be headquartered in the United States, will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate. The joint venture is expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide. It is anticipated that a significant part of UCC’s U.S.-based manufacturing assets will be included in the new joint venture. While the transaction is subject to the completion of definitive agreements, customary conditions and regulatory approvals, it is anticipated that the joint venture between Dow and PIC will close in late 2008. Management is currently evaluating the accounting treatment and the impact on the Corporation’s financial statements.2007.
IJ to the Consolidated Financial Statements.10itsthe Corporation’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.most recent study from January 2005.2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against UCC and Amchem, and could be used in place of previous assumptions to update the January 2005 study. The resulting study, completed byrelatedasbestos-related liability for pending and future claims was required. At December 31, 2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion.2007 and $495 million at December 31, 2006.2007. In addition, the Corporation had receivables of $272 million at December 31, 2008 and $271 million at December 31, 2007 and $300 million at December 31, 2006 for insurance recoveries for defense and resolution costs.Operation,Operations, and Note IJ to the Consolidated Financial Statements.evolvingemerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomebecomes 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, 2007,2008, the Corporation had accrued obligations of $75$67 million for environmental remediation and restoration costs, including $23$18 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, 2006,2007, the Corporation had accrued obligations of $77$75 million for environmental remediation and restoration costs, including $25$23 million for the remediation of Superfund sites. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations and Notes A and IJ to the Consolidated Financial Statements.2007,2008, 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 KL 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.11
The Corporation determined 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 and comparisons to expected returns of peer companies with similar fund assets were also considered. The expected return of each asset class is derived from a forecasted future return confirmed by historical experience. 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 20072008 was 8.48.0 percent. This assumption was changed to 8.0 percentremained unchanged for determining 20082009 net periodic pension expense.The actual rate of return in 2007 was 12.7 percent. 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.
Net Increase in Market-Related Asset Value due to |
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In millions |
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|
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2008 |
| $ 40 |
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2009 |
| 31 |
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2010 |
| 45 |
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2011 |
| 30 |
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Total |
| $146 |
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Net Decrease in Market-Related Asset Value due to Recognition of Prior Asset Gains and Losses In millions | ||||
| 2009 | $ | 172 | ||
| 2010 | 158 | |||
| 2011 | 174 | |||
| 2012 | 203 | |||
| Total | $ | 707 | ||
2007, to 6.85 percent at December 31, 2008.
For 2008, the Corporation maintained itsfor 2009.
2008.
12
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.
Dow’s
Growing public
13
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.
Environmental Sites |
| UCC-owned Sites(1) |
| Superfund Sites(2) |
| |||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| |
Number of sites at January 1 |
| 33 |
| 33 |
| 47 |
| 47 |
| |
Sites added during year |
| 1 |
| — |
| 15 |
| 5 |
| |
Sites closed during year |
| (2 | ) | — |
| — |
| (5 | ) | |
Number of sites at December 31 |
| 32 |
| 33 |
| 62 |
| 47 |
| |
| Environmental Sites | UCC-owned Sites(1) | Superfund Sites(2) | ||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Number of sites at January 1 | 32 | 33 | 62 | 47 | ||||||||||||
| Sites added during year | - | 1 | 3 | 15 | ||||||||||||
| Sites closed during year | (1 | ) | (2 | ) | (9 | ) | - | |||||||||
| Number of sites at December 31 | 31 | 32 | 56 | 62 | ||||||||||||
(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. | ||||||||||||||||
(2) Superfund sites are sites, including sites not owned by UCC, where remediation obligations areimposed by Superfund Law.
14
The amounts charged to income on a pretax basis related to environmental remediation totaled $29 million in 2008 and $33 million in 2007, $23 million in 2006 and $19 million in 2005.2007. Capital expenditures for environmental protection were $17 million in 2008 and $15 million in 2007, $25 million in 2006 and $26 million in 2005.
2007.
|
| 2007 |
| 2006 |
| 2005 |
|
Claims unresolved at January 1 |
| 111,887 |
| 146,325 |
| 203,416 |
|
Claims filed |
| 10,157 |
| 16,386 |
| 34,394 |
|
Claims settled, dismissed or otherwise resolved |
| (31,722 | ) | (50,824 | ) | (91,485 | ) |
Claims unresolved at December 31 |
| 90,322 |
| 111,887 |
| 146,325 |
|
Claimants with claims against both UCC and |
| 28,937 |
| 38,529 |
| 48,647 |
|
Individual claimants at December 31 |
| 61,385 |
| 73,358 |
| 97,678 |
|
| 2008 | 2007 | 2006 | ||||||||||
| Claims unresolved at January 1 | 90,322 | 111,887 | 146,325 | |||||||||
| Claims filed | 10,922 | 10,157 | 16,386 | |||||||||
| Claims settled, dismissed or otherwise resolved | (25,538 | ) | (31,722 | ) | (50,824 | ) | ||||||
| Claims unresolved at December 31 | 75,706 | 90,322 | 111,887 | |||||||||
| Claimants with claims against both UCC and Amchem | 24,213 | 28,937 | 38,529 | |||||||||
| Individual claimants at December 31 | 51,493 | 61,385 | 73,358 | |||||||||
15
which covered the 15-year period ending in 2021 (excluding future defense and processing costs). The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income.
Defense and Resolution Costs |
| 2007 |
| 2006 |
| 2005 |
| Aggregate Costs to Date as of |
|
Defense costs |
| $84 |
| $62 |
| $75 |
| $565 |
|
Resolution costs |
| $88 |
| $117 |
| $139 |
| $1,270 |
|
| Defense and Resolution Costs | Aggregate Costs | ||||
| In millions | 2008 | 2007 | 2006 | to Date as of Dec. 31, 2008 | |
| Defense costs | $60 | $84 | $62 | $625 | |
| Resolution costs | $116 | $88 | $117 | $1,386 | |
sales” in the consolidated statements of income.
16
Receivables for Costs Submitted to Insurance Carriers at December 31 | ||||||||
| In millions | 2008 | 2007 | ||||||
| Receivables for defense costs | $ | 28 | $ | 18 | ||||
| Receivables for resolution costs | 244 | 253 | ||||||
| Total | $ | 272 | $ | 271 | ||||
|
|
|
|
|
|
Receivables for Costs Submitted to Insurance Carriers |
|
|
| ||
In millions |
| 2007 |
| 2006 |
|
Receivables for defense costs |
| $ 18 |
| $ 34 |
|
Receivables for resolution costs |
| 253 |
| 266 |
|
Total |
| $271 |
| $300 |
|
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.
17
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 will seek to fully enforce its rights under the terms of the JVFA and various related agreements.
Item 7A.7A. Quantitative and Qualitative Disclosures about Market RiskRisk.
Total Daily VAR at December 31* |
| 2007 |
| 2006 | |||||
In millions |
| Year-end |
| Average |
| Year-end |
| Average |
|
Interest rate |
| $10 |
| $8 |
| $7 |
| $7 |
|
*Using a 95 percent confidence level |
|
|
|
|
|
|
|
|
|
below.
Total Daily VAR at December 31(1) | 2008 | 2007 | ||
| In millions | Year-end | Average | Year-end | Average |
| Interest rate | $21 | $15 | $10 | $8 |
| (1) Using a 95 percent confidence level | ||||
18
(In millions) For the years ended December 31 2007 2006 2005 Net trade sales $ 211 $ 506 $ 300 Net sales to related companies 7,282 7,022 6,088 Total Net Sales 7,493 7,528 6,388 Cost of sales 6,881 6,563 5,690 Research and development expenses 70 71 78 Selling, general and administrative expenses 19 21 17 Amortization of intangibles — — 1 Restructuring charges 55 14 11 Asbestos-related credit — 177 — Equity in earnings of nonconsolidated affiliates 500 395 476 Gain on sale of nonconsolidated affiliate — — 637 Sundry income (expense) - net 49 (39 ) 145 Interest income 173 128 29 Interest expense and amortization of debt discount 52 54 71 Income before Income Taxes 1,138 1,466 1,807 Provision for income taxes 86 420 496 Income before Cumulative Effect of Change in Accounting Principle 1,052 1,046 1,311 Cumulative effect of change in accounting principle — — (8 ) Net Income Available for Common Stockholder $ 1,052 $ 1,046 $ 1,303 (In millions) At December 31 2007 2006 Assets Current Assets Cash and cash equivalents $ 22 $ 71 Accounts receivable: Trade (net of allowance for doubtful receivables - 2007: $2; 2006: $2) 26 33 Related companies 487 449 Other 129 145 Notes receivable from related companies 3,227 2,547 Inventories 178 199 Deferred income tax assets - current 60 41 Total current assets 4,129 3,485 Investments Investments in related companies 972 297 Investments in nonconsolidated affiliates 385 896 Other investments 22 23 Noncurrent receivables 46 58 Noncurrent receivables from related companies 306 187 Total investments 1,731 1,461 Property Property 7,509 7,459 Less accumulated depreciation 5,547 5,489 Net property 1,962 1,970 Other Assets Goodwill 26 26 Other intangible assets (net of accumulated amortization - 2007: $128; 2006: $122) 22 25 Deferred income tax assets - noncurrent 112 115 Asbestos-related insurance receivables - noncurrent 696 725 Pension assets 699 310 Deferred charges and other assets 88 73 Total other assets 1,643 1,274 Total Assets $ 9,465 $ 8,190 (In millions, except for share amounts) At December 31 2007 2006 Liabilities and Stockholder’s Equity Current Liabilities Notes payable: Related companies $ 5 $ 8 Other — 1 Accounts payable: Trade 239 292 Related companies 391 252 Other 29 40 Income taxes payable 185 49 Asbestos-related liabilities - current 141 129 Accrued and other current liabilities 180 172 Total current liabilities 1,170 943 Long-Term Debt 820 820 Other Noncurrent Liabilities Pension and other postretirement benefits - noncurent 461 518 Asbestos-related liabilities - noncurrent 1,001 1,079 Other noncurrent obligations 356 407 Total other noncurrent liabilities 1,818 2,004 Minority Interest in Subsidiaries 2 3 Stockholder’s Equity Common stock (authorized and issued: 1,000 shares of $0.01 par value each) — — Additional paid-in capital 121 121 Retained earnings (includes cumulative effect of adopting FIN No. 48 of $(67)) 5,767 4,782 Accumulated other comprehensive loss (233 ) (483 ) Net stockholder’s equity 5,655 4,420 Total Liabilities and Stockholder’s Equity $ 9,465 $ 8,190 (In millions) For the years ended December 31 2007 2006 2005 Operating Activities Net Income Available for Common Stockholder $ 1,052 $ 1,046 $ 1,303 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle — — 8 Depreciation and amortization 311 301 308 Provision (Credit) for deferred income tax (238 ) 58 455 Earnings of nonconsolidated affiliates in excess of dividends received (169 ) (24 ) (110 ) Net gain on sales of property (10 ) — — Pension contributions (2 ) (2 ) (54 ) Gain on sales of ownership interests in nonconsolidated affiliates, net — — (707 ) Other (gain) loss, net (1 ) 1 (14 ) Restructuring charges 55 14 — Asbestos-related credit — (177 ) — Changes in assets and liabilities: Accounts and notes receivable (6 ) 42 12 Related company receivables (825 ) (857 ) (1,582 ) Inventories 21 (18 ) 5 Accounts payable (64 ) 12 28 Related company payables 135 (62 ) (88 ) Other assets and liabilities (51 ) (112 ) (82 ) Cash provided by (used in) operating activities 208 222 (518 ) Investing Activities Capital expenditures (272 ) (228 ) (230 ) Proceeds from sales of property 22 5 9 Distributions from nonconsolidated affiliates 7 4 41 Changes in noncurrent receivable from related company (12 ) 10 25 Proceeds from sales of ownership interests in nonconsolidated affiliates — — 867 Proceeds from exchange of ownership interest in related company — — 296 Purchases of investments (7 ) (14 ) (2 ) Proceeds from sales of investments 6 3 12 Cash provided by (used in) investing activities (256 ) (220 ) 1,018 Financing Activities Changes in short-term notes payable (1 ) (2 ) — Payments on long-term debt — (2 ) (449 ) Cash used in financing activities (1 ) (4 ) (449 ) Summary Increase (Decrease) in cash and cash equivalents (49 ) (2 ) 51 Cash and cash equivalents at beginning of year 71 73 22 Cash and cash equivalents at end of year $ 22 $ 71 $ 73 (In millions) For the years ended December 31 2007 2006 2005 Common stock Balance at beginning and end of year — — — Additional paid-in capital Balance at beginning of year $ 121 $ 121 — Deemed capital contribution — — $ 121 Balance at end of year 121 121 121 Retained earnings Balance at beginning of year 4,782 3,736 2,433 Cumulative effect of adopting FIN No. 48 (67 ) — — Net income 1,052 1,046 1,303 Balance at end of year 5,767 4,782 3,736 Accumulated other comprehensive loss, net of tax Cumulative translation adjustments at beginning of year (72 ) (72 ) (56 ) Translation adjustments 3 — (16 ) Balance at end of year (69 ) (72 ) (72 ) Minimum pension liability at beginning of year — (12 ) (55 ) Adjustment for sale of nonconsolidated affiliate — — 43 Adjustments — 1 — Balance at end of year, 2006 prior to adoption of SFAS No. 158 — (11 ) (12 ) Reversal of Minimum Pension Liability under SFAS No. 158 — 11 — Recognition of prior service cost and net gain (loss) under SFAS No. 158 — (411 ) — Pension and Other Postretirement Benefit Plans at beginning of year (411 ) — — Net prior service cost (41 ) — — Net gain 288 — — Pension and Other Postretirement Benefit Plans at end of year (164 ) (411 ) — Accumulated derivative gain at beginning of year — 1 — Net hedging results — (1 ) 1 Balance at end of year — — 1 Total accumulated other comprehensive loss (233 ) (483 ) (83 ) Net Stockholder's Equity $ 5,655 $ 4,420 $ 3,774 (In millions) For the years ended December 31 2007 2006 2005 Net Income Available for Common Stockholder $ 1,052 $ 1,046 $ 1,303 Other Comprehensive Income (Loss), Net of Tax (tax amounts shown below for 2007, 2006, 2005) Cumulative translation adjustments 3 — (16 ) Defined benefit pension plans: Prior service cost arising during period (net of tax of $(24)) (41 ) — — Net gain arising during period (net of tax of $160) 270 — — Less: Amortization of net loss included in net periodic pension costs (net of tax of $11) 18 — — Minimum pension liability adjustment, including effect of sale of nonconsolidated affiliate in 2005 (net of tax $1 in 2006) — 1 43 Net gain (loss) on cash flow hedging derivative instruments — (1 ) 1 Total other comprehensive income 250 — 28 Comprehensive Income $ 1,302 $ 1,046 $ 1,331 Notes to the Consolidated Financial Statements“Corporation”"Corporation") as of December 31, 20072008 and 2006,2007, and the related consolidated statements of income, stockholder’s equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007.2008. 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’sCorporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.Corporation’sCorporation'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.20072008 and 2006,2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007,2008, 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.NotesNote A and K to the consolidated financial statements, effective December 31, 2006, Union Carbide Corporation changed its method of accounting for defined benefit pension and other postretirement plans to conform to Statement of Financial Accounting Standards No. 158.DELOITTETOUCHE Touche LLPMidland, MichiganFebruary 14, 200819Union Carbide Corporation and Subsidiaries Consolidated Statements of Income (In millions) For the years ended December 31 2008 2007 2006 Net trade sales $ 219 $ 211 $ 506 Net sales to related companies 7,107 7,282 7,022 Total Net Sales 7,326 7,493 7,528 Cost of sales 7,194 6,881 6,563 Research and development expenses 68 70 71 Selling, general and administrative expenses 13 19 21 Goodwill impairment loss 26 - - Restructuring charges 105 55 14 Asbestos-related credit 54 - 177 Equity in earnings of nonconsolidated affiliates 166 500 395 Sundry income (expense) - net 243 49 (39 ) Interest income 110 173 128 Interest expense and amortization of debt discount 48 52 54 Income before Income Taxes 445 1,138 1,466 Provision for income taxes 118 86 420 Net Income Available for Common Stockholder $ 327 $ 1,052 $ 1,046 See Notes to the Consolidated Financial Statements. Union Carbide Corporation and Subsidiaries Consolidated Balance Sheets (In millions) At December 31 2008 2007 Assets Current Assets Cash and cash equivalents $ 24 $ 22 Accounts receivable: Trade (net of allowance for doubtful receivables - 2008: $1; 2007: $2) 21 26 Related companies 128 487 Other 90 129 Notes receivable from related companies 3,934 3,227 Inventories 187 178 Deferred income taxes and other current assets 64 60 Total current assets 4,448 4,129 Investments Investments in related companies 972 972 Investments in nonconsolidated affiliates 427 385 Other investments 19 22 Noncurrent receivables 46 46 Noncurrent receivables from related companies 187 306 Total investments 1,651 1,731 Property Property 7,630 7,509 Less accumulated depreciation 5,744 5,547 Net property 1,886 1,962 Other Assets Goodwill - 26 Other intangible assets (net of accumulated amortization - 2008: $135; 2007: $128) 17 22 Deferred income tax assets - noncurrent 439 112 Asbestos-related insurance receivables - noncurrent 658 696 Pension assets - 699 Deferred charges and other assets 79 88 Total other assets 1,193 1,643 Total Assets $ 9,178 $ 9,465 Liabilities and Stockholder's Equity Current Liabilities Notes payable - related companies $ 12 $ 5 Long-term debt due within one year 249 - Accounts payable: Trade 170 239 Related companies 299 391 Other 35 29 Income taxes payable 176 185 Asbestos-related liabilities - current 120 141 Accrued and other current liabilities 198 180 Total current liabilities 1,259 1,170 Long-Term Debt 571 820 Other Noncurrent Liabilities Pension and other postretirement benefits - noncurent 662 461 Asbestos-related liabilities - noncurrent 824 1,001 Other noncurrent obligations 298 356 Total other noncurrent liabilities 1,784 1,818 Minority Interest in Subsidiaries 2 2 Stockholder's Equity Common stock (authorized and issued: 1,000 shares of $0.01 par value each) - - Additional paid-in capital 312 121 Retained earnings 6,094 5,767 Accumulated other comprehensive loss (844 ) (233 ) Net stockholder's equity 5,562 5,655 Total Liabilities and Stockholder's Equity $ 9,178 $ 9,465 See Notes to the Consolidated Financial Statements. Union Carbide Corporation and Subsidiaries Consolidated Statements of Cash Flows (In millions) For the years ended December 31 2008 2007 2006 Operating Activities Net Income Available for Common Stockholder $ 327 $ 1,052 $ 1,046 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 273 311 301 Provision (Credit) for deferred income tax 60 (238 ) 58 Earnings of nonconsolidated affiliates in excess of dividends received (34 ) (169 ) (24 ) Net gain on sales of property (14 ) (10 ) - Restructuring charges 105 55 14 Other (gain) loss, net - (1 ) 1 Asbestos-related credit (54 ) - (177 ) Goodwill impairment loss 26 - - Pension contributions (2 ) (2 ) (2 ) Changes in assets and liabilities: Accounts and notes receivable 19 (6 ) 42 Related company receivables (348 ) (825 ) (857 ) Inventories (9 ) 21 (18 ) Accounts payable (63 ) (64 ) 12 Related company payables (85 ) 135 (62 ) Other assets and liabilities (81 ) (51 ) (112 ) Cash provided by operating activities 120 208 222 Investing Activities Capital expenditures (252 ) (272 ) (228 ) Proceeds from sales of property 14 22 5 Distributions from nonconsolidated affiliates - 7 4 Changes in noncurrent receivable from related company 119 (12 ) 10 Purchases of investments (19 ) (7 ) (14 ) Proceeds from sales of investments 20 6 3 Cash used in investing activities (118 ) (256 ) (220 ) Financing Activities Changes in short-term notes payable - (1 ) (2 ) Payments on long-term debt - - (2 ) Cash used in financing activities - (1 ) (4 ) Summary Increase (Decrease) in cash and cash equivalents 2 (49 ) (2 ) Cash and cash equivalents at beginning of year 22 71 73 Cash and cash equivalents at end of year $ 24 $ 22 $ 71 See Notes to the Consolidated Financial Statements. Union Carbide Corporation and Subsidiaries Consolidated Statements of Stockholder's Equity (In millions) For the years ended December 31 2008 2007 2006 Common stock Balance at beginning and end of year - - - Additional paid-in capital Balance at beginning of year $ 121 $ 121 $ 121 Capital contribution 191 - - Balance at end of year 312 121 121 Retained earnings Balance at beginning of year 5,767 4,782 3,736 Cumulative effect of adopting FIN No. 48 - (67 ) - Net income 327 1,052 1,046 Balance at end of year 6,094 5,767 4,782 Accumulated other comprehensive loss, net of tax Cumulative translation adjustments at beginning of year (69 ) (72 ) (72 ) Translation adjustments 8 3 - Balance at end of year (61 ) (69 ) (72 ) Minimum pension liability at beginning of year - - (12 ) Adjustments - - 1 Balance at end of year, 2006 prior to adoption of SFAS No. 158 - - (11 ) Reversal of Minimum Pension Liability under SFAS No. 158 - - 11 Recognition of prior service cost and net gain (loss) under SFAS No. 158 - - (411 ) Pension and Other Postretirement Benefit Plans at beginning of year (164 ) (411 ) - Net prior service cost (credit) 7 (41 ) - Net gain (loss) (626 ) 288 - Pension and Other Postretirement Benefit Plans at end of year (783 ) (164 ) (411 ) Accumulated investment gain at beginning of year - - - Net investment results 1 - - Balance at end of year 1 - - Accumulated derivative gain at beginning of year - - 1 Net hedging results (1 ) - (1 ) Balance at end of year (1 ) - - Total accumulated other comprehensive loss (844 ) (233 ) (483 ) Net Stockholder's Equity $ 5,562 $ 5,655 $ 4,420 See Notes to the Consolidated Financial Statements. Consolidated Statements of Comprehensive Income (In millions) For the years ended December 31 2008 2007 2006 Net Income Available for Common Stockholder $ 327 $ 1,052 $ 1,046 Other Comprehensive Income (Loss), Net of Tax (tax amounts shown below for 2008, 2007, 2006) Cumulative translation adjustments 8 3 - Cumulative unrealized gains on investments 1 - - Defined benefit pension plans: Prior service cost (credit) arising during period (net of tax of $2, $(24), $-) 4 (41 ) - Net gain (loss) arising during period (net of tax of $(331), $160, $-) (627 ) 270 - Less: Amortization of prior service cost included in net periodic pension costs (net of tax of $2, $-, $-) 3 - - Less: Amortization of net loss included in net periodic pension costs (net of tax of $1, $11, $-) 1 18 - Minimum pension liability adjustment (net of tax of $-, $-, $1) - - 1 Net loss on cash flow hedging derivative instruments (1 ) - (1 ) Total other comprehensive income (loss) (611 ) 250 - Comprehensive Income (Loss) $ (284 ) $ 1,302 $ 1,046 See Notes to the Consolidated Financial Statements. Consolidated Statements of IncomeSee Notes to the Consolidated Financial Statements.20Union Carbide Corporation and SubsidiariesConsolidated Balance SheetsSee Notes to the Consolidated Financial Statements.21Union Carbide Corporation and SubsidiariesConsolidated Balance SheetsSee Notes to the Consolidated Financial Statements.22Union Carbide Corporation and SubsidiariesConsolidated Statements of Cash FlowsSee Notes to the Consolidated Financial Statements.23Union Carbide Corporation and SubsidiariesConsolidated Statements of Stockholder's EquitySee Notes to the Consolidated Financial Statements.Union Carbide Corporation and SubsidiariesConsolidated Statements of Comprehensive IncomeSee Notes to the Consolidated Financial Statements.24Union Carbide Corporation and Subsidiaries
basis, except as noted. See Note N for further discussion.
Reclassification of prior year amount for pension assets has been made to conform to the presentation adopted for 2007 in the consolidated balance sheets.
25
Cash and Cash Equivalents
The Corporation routinely reviews available-for-sale 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.
26
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 F.O.B.FOB (free on board) 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.
Accounting for Uncertainty in Income Taxes
On January 1, 2007, the Corporation adopted the provisions of FIN No. 48. The cumulative effect of adoption was a $67 million reduction of retained earnings. See Note NO for disclosures related to FIN No. 48.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” as
27
a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditionalfurther information on a future event that may or may not be within the control of the Corporation. FIN No. 47 was effective no later than the end of fiscal years ending after December 15, 2005.
The Corporation has 12 manufacturing sites in four countries. Most of these sites contain numerous individual manufacturing operations, particularly at the Corporation’s larger sites. Asset retirement obligations are recorded in the period in which they are incurred and reasonably estimable, including those 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. Retirement of assets may involve such efforts as remediation and treatment of asbestos, contractually required demolition, and other related activities, depending on the nature and location of the assets, and are typically realized only upon demolition of those facilities. In identifying asset retirement obligations, the Corporation considers identification of legally enforceable obligations, changes in existing law, estimates of potential settlement dates and the calculation of an appropriate discount rate to be used in calculating the fair value of the obligations. The Corporation has a well-established global process to identify, approve and track the demolition of retired or to-be-retired facilities; no assets are retired from service until this process has been followed. The Corporation typically forecasts demolition projects based on the usefulness of the assets; environmental, health and safety concerns; and other similar considerations. Under this process, as demolition projects are identified and approved, reasonable estimates may then be determined for the time frames during which any related asset retirement obligations are expected to be settled. For those assets where a range of potential settlement dates may be reasonably estimated, obligations are recorded.
Assets that have not been submitted/reviewed for potential demolition activities are considered to have continued usefulness and are generally still operating “normally.” Therefore, without a plan to demolish the assets or the expectation of a plan, such as shortening the useful life of assets for depreciation purposes under the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Corporation is unable to reasonably forecast a time frame to use for present value calculations. As such, the Corporation has not recognized obligations for individual plants/buildings at its 12 manufacturing sites where estimates of potential settlement dates cannot be reasonably made. The Corporation routinely reviews all changes to the list of items under consideration for demolition to determine if an adjustment to the value of the asset retirement obligation is required.
Adoption of FIN No. 47 on December 31, 2005 resulted in the recognition of an asset retirement obligation of $12 million and a charge of $8 million (net of tax of $4 million), which was included in “Cumulative effect of change in accounting principle” in the fourth quarter of 2005. The discount rate used to calculate the Corporation’s asset retirement obligations was 4.6 percent.
If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of FIN No. 47 had been in effect during 2005, the impact on “Net Income Available to Common Stockholder” would have been immaterial.
See Note I for the Corporation’s discussion related to asset retirement obligations.
Other Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Because the Corporation previously used nameplate capacity to calculate product costs, the adoption of SFAS No. 151 on January 1, 2006 had an immaterial favorable impact on the Corporation’s consolidated financial statements.
In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” which provides a practical exception to the SFAS No. 109 requirement to reflect the effect of a new tax law in the period of enactment by allowing additional time beyond the financial reporting period to evaluate the effects on plans for reinvestment or repatriation of unremitted foreign earnings. The American Jobs Creation Act of 2004 (the “AJCA”) introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. In May 2005, tax authorities released the clarifying language necessary to enable Dow to finalize its plan for the repatriation and reinvestment of foreign earnings subject to the requirements of the AJCA. Since the Corporation is included in Dow’s consolidated federal income tax group and consolidated tax return, the Corporation recognized an immaterial impact of the repatriation provision of the AJCA, in accordance with the terms of the Dow-UCC Tax Sharing Agreement.
On January 1, 2006, Dow adopted revised SFAS No. 123R, “Share-Based Payment.” The Corporation will continue to be allocated the portion of expense relating to its employees who receive stock-based compensation, which was $10 million in 2007, $7 million in 2006 and $8 million in 2005.
taxes.
28
December 31, 2006 for the Corporation, requiredrequires employers to recognize the funded status of defined benefit postretirement plans as an asset or liability on the balance sheet and to recognize changes in that funded status through comprehensive income. See Note KL for the impact of adopting the statement.
further information on pension plans and other postretirement benefits.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, in U.S. GAAP, and expands disclosures about fair value measurements. The statementStatement applies under other accounting pronouncements that require or permit fair value measurements and was effective for fiscal years beginning after November 15, 2007. TheIn February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Corporation adopted the portion of SFAS No. 157 that was not delayed, and since the Corporation’s existing fair value measurements are consistent with the guidance of the statement. Therefore,Statement, the partial adoption of the statementStatement did not have a material impact on the Corporation’s consolidated financial statements. Since the Corporation’s existing fair value measurements for pension assets are also consistent with the guidance of the Statement, the adoption of the Statement for pension and postretirement plans at the December 31, 2008 measurement date did not have a material impact on the Corporation’s consolidated financial statements. In accordance with FSP FAS No. 157-2, the provisions of SFAS No. 157 were not applied to the long-lived asset impairments described in Note B or to the goodwill impairments described in Note F. The Corporation does not expect the adoption of the Statement for nonfinancial assets and nonfinancial liabilities on January 1, 2008, in not expected2009 to have a material impact on the Corporation’s consolidated financial statements in the first quarter of 2008. Since the Corporation uses a December 31 measurement datestatements. See Note H for its pension and other postretirement plans, the Corporation is still evaluating the impact of adopting the statement for its plan assets.
expanded disclosures about fair value measurements.
See Note H for further information on fair value measurements.
useful life of such assets. The Corporation will apply the guidance of the Issue to defensive intangible assets acquired on or after January 1, 2009.
InOn December 5, 2008, the fourth quarterBoard of 2007,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 totalingof $105 million (shown as “Restructuring charges” in the consolidated statements of income) 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 plans (see Note L). At December 31, 2008, a liability of $48 million remained for severance and curtailment costs.
2008 Restructuring Activities In millions | Impairment of Long-Lived Assets | Costs associated with Exit or Disposal Activities | Severance Costs | Total | ||||||||||||
| Restructuring charges recognized in the fourth quarter of 2008 | $ | 57 | $ | 24 | $ | 24 | $ | 105 | ||||||||
| Charges against reserve | (57 | ) | - | - | (57 | ) | ||||||||||
| Reserve balance at December 31, 2008 | - | $ | 24 | $ | 24 | $ | 48 | |||||||||
2008 activities related to the Corporation’s 2007 restructuring reserve:
2007 Restructuring Activities In millions | Impairment of Long-Lived Assets | Costs associated with Exit or Disposal Activities | Severance Costs | Total | ||||||||||||
| Restructuring charges recognized in the fourth quarter of 2007 | $ | 26 | $ | 12 | $ | 17 | $ | 55 | ||||||||
| Charges against reserve | (26 | ) | - | - | (26 | ) | ||||||||||
| Reserve balance at December 31, 2007 | - | $ | 12 | $ | 17 | $ | 29 | |||||||||
| Cash payments | - | - | (2 | ) | (2 | ) | ||||||||||
| Reserve balance at December 31, 2008 | - | $ | 12 | $ | 15 | $ | 27 | |||||||||
2005 Restructuring
In the fourth quarter of 2005, the Corporation made certain decisions regarding non-strategic assets. These decisions resulted in the write-off of the net book value of three research and development pilot plants in the South Charleston, West Virginia facility totaling $11 million (shown as “Restructuring charges” in the consolidated statements of income).
29
NOTE C INVENTORIES
Inventories at December 31 |
| 2007 |
| 2006 |
|
Finished goods |
| $ 17 |
| $ 35 |
|
Work in process |
| 40 |
| 40 |
|
Raw materials |
| 47 |
| 37 |
|
Supplies |
| 74 |
| 87 |
|
Total inventories |
| $178 |
| $199 |
|
Inventories at December 31 In millions | 2008 | 2007 | ||||||
| Finished goods | $ | 48 | $ | 17 | ||||
| Work in process | 10 | 40 | ||||||
| Raw materials | 55 | 47 | ||||||
| Supplies | 74 | 74 | ||||||
| Total inventories | $ | 187 | $ | 178 | ||||
2007.
| Property at December 31 | Estimated | |||||||||||
| In millions | Useful Lives (Years) | 2008 | 2007 | |||||||||
| Land | - | $ | 51 | $ | 52 | |||||||
| Land and waterway improvements | 15-25 | 225 | 215 | |||||||||
| Buildings | 5-55 | 505 | 498 | |||||||||
| Machinery and equipment | 3-20 | 6,071 | 6,060 | |||||||||
| Utility and supply lines | 5-20 | 85 | 82 | |||||||||
| Other property | 3-30 | 379 | 377 | |||||||||
| Construction in progress | - | 314 | 225 | |||||||||
| Total property | $ | 7,630 | $ | 7,509 | ||||||||
Property at December 31 |
| Estimated |
|
|
|
|
|
|
| Useful Lives |
| 2007 |
| 2006 |
|
Land |
| — |
| $ 52 |
| $ 57 |
|
Land and waterway improvements |
| 15-25 |
| 215 |
| 211 |
|
Buildings |
| 5-55 |
| 498 |
| 534 |
|
Machinery and equipment |
| 3-20 |
| 6,060 |
| 5,962 |
|
Utility and supply lines |
| 5-20 |
| 82 |
| 74 |
|
Other property |
| 3-30 |
| 377 |
| 386 |
|
Construction in progress |
| — |
| 225 |
| 235 |
|
Total property |
|
|
| $7,509 |
| $7,459 |
|
In millions |
| 2007 |
| 2006 |
| 2005 |
|
Depreciation expense |
| $270 |
| $275 |
| $282 |
|
Manufacturing maintenance and repair costs |
| $223 |
| $199 |
| $234 |
|
Capitalized interest |
| $13 |
| $10 |
| $9 |
|
| In millions | 2008 | 2007 | 2006 | |
| Depreciation expense | $271 | $270 | $275 | |
| Manufacturing maintenance and repair costs | $211 | $223 | $199 | |
| Capitalized interest | $15 | $13 | $10 |
2007. Dividends received from nonconsolidated affiliates were approximately$132 million in 2008, $331 million in 2007 and $371 million in 2006 and $3662006.
DIHC (18.77 percent at December 31, 2007). For additional information, see Note N.
2007.
In November 2004, the Corporation sold a 2.5 percent interest in EQUATE Petrochemical Company K.S.C. (“EQUATE”) to National Bank of Kuwait for $104 million. In March 2005, these shares were sold to private Kuwaiti investors thereby completing the restricted transfer and reducing the Corporation’s ownership interest from 45 percent to 42.5 percent. A pretax gain of $70 million was recorded in the first quarter of 2005 related to the sale of these shares.
30
At December 31, 2006, the Corporation’s investment in EQUATE was $17 million less than its proportionate share of the underlying net assets. This amount represented the difference between EQUATE’s value of certain assets and the Corporation’s related valuation on a U.S. GAAP basis and was fully amortized in 2007. On December 21, 2007, the Corporation, through a series of noncash transactions, contributed its 42.5 percent interest in EQUATE to Dow International Holdings LLC (“DIHC”), an indirect wholly owned subsidiary of Dow. As a result of the contribution, the Corporation’s interest in DIHC increased to 18.77 percent. For additional information, see Note M.
On November 30, 2005, the Corporation completed the sale of its indirect 50 percent interest in UOP LLC (“UOP”) to a wholly owned subsidiary of Honeywell International, Inc. for a purchase price of $867 million, resulting in a pretax gain of $637 million in the fourth quarter of 2005.
Principal Nonconsolidated Affiliates
Principal Nonconsolidated Affiliates at December 31 |
| Ownership Interest | |||||
|
| 2007 |
| 2006 |
| 2005 |
|
EQUATE Petrochemical Company K.S.C. |
| — |
| 42.5 | % | 42.5 | % |
Nippon Unicar Company Limited |
| 50 | % | 50 | % | 50 | % |
The OPTIMAL Group of Companies: |
|
|
|
|
|
|
|
OPTIMAL Chemicals (Malaysia) Sdn Bhd |
| 50 | % | 50 | % | 50 | % |
OPTIMAL Glycols (Malaysia) Sdn Bhd |
| 50 | % | 50 | % | 50 | % |
OPTIMAL Olefins (Malaysia) Sdn Bhd |
| 23.75 | % | 23.75 | % | 23.75 | % |
Univation Technologies, LLC |
| 50 | % | 50 | % | 50 | % |
| Principal Nonconsolidated Affiliates at December 31 | Ownership Interest | ||||||||||||
| 2008 | 2007 | 2006 | |||||||||||
| EQUATE Petrochemical Company K.S.C. | - | - | 42.5 | % | |||||||||
| Nippon Unicar Company Limited | 50 | % | 50 | % | 50 | % | |||||||
| The OPTIMAL Group of Companies: | |||||||||||||
| OPTIMAL Chemicals (Malaysia) Sdn. Bhd. | 50 | % | 50 | % | 50 | % | |||||||
| OPTIMAL Glycols (Malaysia) Sdn. Bhd. | 50 | % | 50 | % | 50 | % | |||||||
| OPTIMAL Olefins (Malaysia) Sdn. Bhd. | 23.75 | % | 23.75 | % | 23.75 | % | |||||||
| Univation Technologies, LLC | 50 | % | 50 | % | 50 | % | |||||||
Summarized Balance Sheet Information at December 31 |
|
|
| ||
In millions |
| 2007 |
| 2006 |
|
Current assets |
| $ 828 |
| $1,326 |
|
Noncurrent assets |
| 1,086 |
| 3,184 |
|
Total assets |
| $1,914 |
| $4,510 |
|
Current liabilities |
| $ 463 |
| $ 588 |
|
Noncurrent liabilities |
| 477 |
| 1,685 |
|
Total liabilities |
| $ 940 |
| $2,273 |
|
Summarized Income Statement Information |
|
|
|
|
| ||||
In millions |
| 2007(1) |
| 2006 |
| 2005(2) |
| ||
Sales |
| $3,278 |
| $2,885 |
| $3,898 |
| ||
Gross profit |
| $1,478 |
| $1,177 |
| $1,695 |
| ||
Net income |
| $1,223 |
| $911 |
| $1,117 |
| ||
(1) |
| The summarized income statement information for 2007 includes the results | |||||||
(2) |
| The summarized income statement information for 2005 includes the results | |||||||
| Summarized Balance Sheet Information at December 31 | ||||||||
| In millions | 2008 | 2007 | ||||||
| Current assets | $ | 840 | $ | 828 | ||||
| Noncurrent assets | 1,038 | 1,086 | ||||||
| Total assets | $ | 1,878 | $ | 1,914 | ||||
| Current liabilities | $ | 416 | $ | 463 | ||||
| Noncurrent liabilities | 399 | 477 | ||||||
| Total liabilities | $ | 815 | $ | 940 | ||||
| Summarized Income Statement Information | ||||
| In millions | 2008 | 2007(1) | 2006(1) | |
| Sales | $2,410 | $3,278 | $2,885 | |
| Gross profit | $798 | $1,478 | $1,177 | |
| Net income | $515 | $1,223 | $911 | |
| (1) The summarized income statement information for 2007 and 2006 includes the results for EQUATE. | ||||
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 which came on stream in 2008 and additional industry capacity which is expected to come on stream in 2009. As a result, the Corporation recognized an impairment loss of $26 million in the fourth quarter of 2008.
31
Other Intangible Assets at December 31 | 2008 | 2007 | ||||||||||||||||||||||
| In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
| Intangible assets with finite lives: | ||||||||||||||||||||||||
| Licenses and intellectual property | $ | 33 | $ | (33 | ) | - | $ | 33 | $ | (32 | ) | $ | 1 | |||||||||||
| Patents | 2 | (1 | ) | $ | 1 | 3 | (2 | ) | 1 | |||||||||||||||
| Software | 117 | (101 | ) | 16 | 114 | (94 | ) | 20 | ||||||||||||||||
| Total other intangible assets | $ | 152 | $ | (135 | ) | $ | 17 | $ | 150 | $ | (128 | ) | $ | 22 | ||||||||||
|
|
|
|
|
| ||||||||
Other Intangible Assets |
| 2007 |
| 2006 |
| ||||||||
|
| Gross Carrying Amount |
| Accumulated Amortization |
| Net |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net |
|
Intangible assets with finite lives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses and intellectual property |
| $ 33 |
| $ (32 | ) | $ 1 |
| $ 33 |
| $ (32 | ) | $ 1 |
|
Patents |
| 3 |
| (2 | ) | 1 |
| 3 |
| (2 | ) | 1 |
|
Software |
| 114 |
| (94 | ) | 20 |
| 111 |
| (88 | ) | 23 |
|
Total other intangible assets |
| $150 |
| $(128 | ) | $22 |
| $147 |
| $(122 | ) | $25 |
|
The following table provides information regarding amortization expense:
Amortization Expense |
| 2007 |
| 2006 |
| 2005 |
|
Other intangible assets, excluding software |
| — |
| — |
| $1 |
|
Software, included in “Cost of sales” |
| $6 |
| $4 |
| $3 |
|
Amortization Expense In millions | 2008 | 2007 | 2006 | |
| Software, included in “Cost of sales” | $7 | $6 | $4 |
Estimated Amortization Expense |
|
|
|
2008 |
| $6 |
|
2009 |
| $6 |
|
2010 |
| $6 |
|
2011 |
| $4 |
|
2012 |
| — |
|
Estimated Amortization Expense for Next Five Years In millions | ||
| 2009 | $6 | |
| 2010 | $5 | |
| 2011 | $4 | |
| 2012 | $2 | |
| 2013 | - | |
Investing Results |
|
|
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
| 2005 |
|
Proceeds from sales of available-for-sale securities |
| $2 |
| $2 |
| — |
|
Fair Value of Financial Instruments at December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| 2007 |
| 2006 |
| ||||||||||||||
|
| Cost |
| Gain |
| Loss |
| Fair Value |
| Cost |
| Gain |
| Loss |
| Fair Value |
| ||
Marketable securities(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Debt securities |
| $19 |
| $1 |
| — |
| $20 |
| $20 |
| — |
| — |
| $20 |
| ||
Equity securities |
| 2 |
| — |
| — |
| 2 |
| 1 |
| — |
| — |
| 1 |
| ||
Total marketable securities |
| $21 |
| $1 |
| — |
| $22 |
| $21 |
| — |
| — |
| $21 |
| ||
Long-term debt including debt due within one year |
| $(820 | ) | $5 |
| $(9 | ) | $(824 | ) | $(820 | ) | $1 |
| $(30 | ) | $(849 | ) | ||
(1) Included in “Other investments” in the consolidated balance sheet.
2008.
| Investing Results | ||||
| In millions | 2008 | 2007 | 2006 | |
| Proceeds from sales of available-for-sale securities | $13 | $2 | $2 |
| Fair Value of Financial Instruments at December 31 | ||||||||||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||||||||||
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | ||||||||||||||||||||||||
Marketable securities(1): | ||||||||||||||||||||||||||||||||
| Debt securities | $ | 13 | $ | 1 | - | $ | 14 | $ | 19 | $ | 1 | - | $ | 20 | ||||||||||||||||||
| Long-term debt including debt due within one year | $ | (820 | ) | $ | 145 | - | $ | (675 | ) | $ | (820 | ) | $ | 5 | $ | (9 | ) | $ | (824 | ) | ||||||||||||
| (1) | Included in “Other investments” in the consolidated balance sheets. |
32
are netted, and only the net exposure is hedged. At December 31, 2007,2008, the Corporation had forward contracts to buy, sell or exchange foreign currencies, with expiration dates in the secondfirst quarter of 2008,2009, which were immaterial. The Corporation did not designate any derivatives as hedges at December 31, 2007 and 2006.
2008 or December 31, 2007.
Basis of Fair Value Measurements at December 31, 2008 | Significant Other Observable Inputs (Level 2) | |
| In millions | ||
| Assets at fair value: | ||
Debt securities(1) | $14 | |
| (1) | Included in “Other investments” in the consolidated balance sheets. |
Sundry Income (Expense) — Net |
|
|
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
| 2005 |
|
Net gain (loss) on sales of assets and securities |
| $ 10 |
| $ (3 | ) | $ 17 |
|
Net gain on sale of ownership interest in EQUATE |
| — |
| — |
| 70 |
|
Foreign exchange gain |
| 1 |
| — |
| 1 |
|
Related company commissions, net |
| (37 | ) | (40 | ) | (47 | ) |
Dividend income — related companies |
| 109 |
| 37 |
| 118 |
|
Other - net |
| (34 | ) | (33 | ) | (14 | ) |
Total sundry income (expense) - net |
| $ 49 |
| $(39 | ) | $145 |
|
Other Supplementary Information |
|
|
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
| 2005 |
|
Cash payments for interest |
| $66 |
| $62 |
| $88 |
|
Cash payments for income taxes |
| $233 |
| $276 |
| $89 |
|
Provision for doubtful receivables (1) |
| $4 |
| $(1 | ) | — |
|
(1) Included in “Selling, general and administrative expenses” in the consolidated statements of income.
| Sundry Income (Expense) – Net | ||||||||||||
| In millions | 2008 | 2007 | 2006 | |||||||||
| Net gain (loss) on sales of assets and securities | $ | 14 | $ | 10 | $ | (3 | ) | |||||
| Foreign exchange gain | - | 1 | - | |||||||||
| Related company commissions - net | (33 | ) | (37 | ) | (40 | ) | ||||||
| Dividend income - related companies | 297 | 109 | 37 | |||||||||
| Other - net | (35 | ) | (34 | ) | (33 | ) | ||||||
| Total sundry income (expense) - net | $ | 243 | $ | 49 | $ | (39 | ) | |||||
| Other Supplementary Information | ||||||||||||
| In millions | 2008 | 2007 | 2006 | |||||||||
| Cash payments for interest | $ | 59 | $ | 66 | $ | 62 | ||||||
| Cash payments for income taxes | $ | 40 | $ | 233 | $ | 276 | ||||||
Provision for (recovery of) doubtful receivables (1) | - | $ | 4 | $ | (1 | ) | ||||||
| (1) Included in “Selling, general and administrative expenses” in the consolidated statements of income. | ||||||||||||
33
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.
Accrued Liability for Environmental Matters |
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
|
Balance at beginning of year |
| $ 77 |
| $ 87 |
|
Additional accruals |
| 33 |
| 23 |
|
Charges against reserve |
| (35 | ) | (33 | ) |
Balance at end of year |
| $ 75 |
| $ 77 |
|
2007:
| Accrued Liability for Environmental Matters | ||||||||
| In millions | 2008 | 2007 | ||||||
| Balance at January 1 | $ | 75 | $ | 77 | ||||
| Additional accruals | 30 | 33 | ||||||
| Charges against reserve | (38 | ) | (35 | ) | ||||
| Balance at December 31 | $ | 67 | $ | 75 | ||||
2006.
income for 2006.
34
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.
Receivables for Costs Submitted to Insurance Carriers |
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
|
Receivables for defense costs |
| $ 18 |
| $ 34 |
|
Receivables for resolution costs |
| 253 |
| 266 |
|
Total |
| $271 |
| $300 |
|
Receivables for Costs Submitted to Insurance Carriers at December 31 | ||||||||
| In millions | 2008 | 2007 | ||||||
| Receivables for defense costs | $ | 28 | $ | 18 | ||||
| Receivables for resolution costs | 244 | 253 | ||||||
| Total | $ | 272 | $ | 271 | ||||
35
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 andCorporation’s consolidated financial position of the Corporation.statements. 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.
Fixed and Determinable Portion of Take or Pay Obligations |
|
|
|
2008 |
| $ 7 |
|
2009 |
| 7 |
|
2010 |
| 8 |
|
2011 |
| 2 |
|
2012 |
| 2 |
|
2013 and beyond |
| 11 |
|
Total |
| $37 |
|
Fixed and Determinable Portion of Take-or-Pay Obligations at December 31, 2008 In millions | |||
| 2009 | $ | 13 | |
| 2010 | 14 | ||
| 2011 | 6 | ||
| 2012 | 4 | ||
| 2013 | 4 | ||
| 2014 and beyond | 14 | ||
| Total | $ | 55 | |
Guarantees |
| Final |
| Maximum Future |
| Recorded Liability |
|
Guarantees at December 31, 2007 |
| 2014 |
| $77 |
| $1 |
|
Guarantees at December 31, 2006 |
| 2014 |
| $84 |
| $1 |
|
The guarantee related to a former subsidiary of the Corporation expired during 2007.
Guarantees In millions | Final Expiration | Maximum Future Payments | Recorded Liability | |
| Guarantees at December 31, 2008 | 2014 | $72 | $1 | |
| Guarantees at December 31, 2007 | 2014 | $77 | $1 |
36
NOTE JK NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable at December 31 |
|
|
|
|
|
In millions |
| 2007 |
| 2006 |
|
Notes payable — related companies |
| $5 |
| $8 |
|
Notes payable — other |
| — |
| 1 |
|
Total notes payable |
| $5 |
| $9 |
|
Year-end average interest rates |
| 5.67 | % | 5.28 | % |
Long-Term Debt at December 31 |
| 2007 |
|
|
| 2006 |
|
|
|
|
| Average |
|
|
| Average |
|
|
|
In millions |
| Rate |
| 2007 |
| Rate |
| 2006 |
|
Promissory notes and debentures: |
|
|
|
|
|
|
|
|
|
6.70% Notes due 2009 |
| 6.70% |
| $249 |
| 6.70% |
| $249 |
|
7.875% Debentures due 2023 |
| 7.875% |
| 175 |
| 7.875% |
| 175 |
|
6.79% Debentures due 2025 |
| 6.79% |
| 12 |
| 6.79% |
| 12 |
|
7.50% Debentures due 2025 |
| 7.50% |
| 150 |
| 7.50% |
| 150 |
|
7.75% Debentures due 2096 |
| 7.75% |
| 200 |
| 7.75% |
| 200 |
|
Other facilities — various rates and maturities: |
|
|
|
|
|
|
|
|
|
Pollution control/industrial revenue bonds, maturity 2012 |
| 5.09% |
| 37 |
| 5.09% |
| 37 |
|
Unamortized debt discount |
| — |
| (3 | ) | — |
| (3 | ) |
Total long-term debt |
| — |
| $820 |
| — |
| $820 |
|
Annual Installments on Long-Term Debt |
| ||
2008 |
| — |
|
2009 |
| $249 |
|
2010 |
| — |
|
2011 |
| — |
|
2012 |
| $37 |
|
Notes Payable at December 31 In millions | ||
| 2008 | 2007 | |
| Notes payable – related companies | $12 | $5 |
| Year-end average interest rates | 2.70% | 5.67% |
| Long-Term Debt at December 31 | 2008 | 2007 | ||||||||||||||
| Average | Average | |||||||||||||||
| In millions | Rate | 2008 | Rate | 2007 | ||||||||||||
| Promissory notes and debentures: | ||||||||||||||||
| 6.70% Notes due 2009 | 6.70 | % | $ | 249 | 6.70 | % | $ | 249 | ||||||||
| 7.875% Debentures due 2023 | 7.88 | % | 175 | 7.88 | % | 175 | ||||||||||
| 6.79% Debentures due 2025 | 6.79 | % | 12 | 6.79 | % | 12 | ||||||||||
| 7.50% Debentures due 2025 | 7.50 | % | 150 | 7.50 | % | 150 | ||||||||||
| 7.75% Debentures due 2096 | 7.75 | % | 200 | 7.75 | % | 200 | ||||||||||
| Other facilities: | ||||||||||||||||
| Pollution control/industrial revenue bonds, maturity 2012 | 5.09 | % | 37 | 5.09 | % | 37 | ||||||||||
| Unamortized debt discount | - | (3 | ) | - | (3 | ) | ||||||||||
| Long-term debt due within a year | - | (249 | ) | - | - | |||||||||||
| Total long-term debt | - | $ | 571 | - | $ | 820 | ||||||||||
Annual Installments on Long-Term Debt for the Next Five Years In millions | ||
| 2009 | $249 | |
| 2010 | - | |
| 2011 | - | |
| 2012 | $37 | |
| 2013 | - | |
2009.
37
| Pension Plan Assumptions | Benefit Obligations at December 31 | Net Periodic Costs for the Year | ||||
| 2008 | 2007 | 2008 | 2007 | |||
| Discount rate | 6.85% | 6.65% | 6.65% | 5.95% | ||
| Rate of increase in future compensation levels | 4.50% | 4.50% | 4.50% | 4.50% | ||
| Long-term rate of return on assets | - | - | 8.00% | 8.40% | ||
Pension Plan Assumptions |
| Benefit Obligations |
| Net Periodic Costs | ||
|
| 2007 | 2006 |
| 2007 | 2006 |
Discount rate |
| 6.65% | 5.95% | 5.95% | 5.65% | |
Rate of increase in future compensation levels |
| 4.50% | 4.50% | 4.50% | 4.50% | |
Long-term rate of return on assets |
| — | — | 8.40% | 8.75% | |
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.
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets |
| ||||
In millions |
| 2007 |
| 2006 |
|
Projected benefit obligation |
| $18 |
| $19 |
|
Accumulated benefit obligation |
| $18 |
| $18 |
|
2007.
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31 | ||
| In millions | 2008 | 2007 |
| Projected benefit obligation | $3,419 | $18 |
| Accumulated benefit obligation | $3,392 | $18 |
| Fair value of plan assets | $3,181 | - |
2009.
Plan Assumptions for Other Postretirement Benefits |
|
|
|
|
|
|
| |||||
|
| Benefit Obligations |
| Net Periodic Costs | ||||||||
|
| 2007 | 2006 |
| 2007 | 2006 | ||||||
Discount rate |
| 6.50% | 5.85% | 5.85% | 5.60% | |||||||
Initial health care cost trend rate |
| 10.43% | 8.84% | 8.84% | 9.54% | |||||||
Ultimate health care cost trend rate |
| 6.00% | 6.00% | 6.00% | 6.00% | |||||||
Year ultimate trend rate to be reached |
| 2014 | 2011 | 2011 | 2011 | |||||||
| Plan Assumptions for Other Postretirement Benefits | Benefit Obligations at December 31 | Net Periodic Costs for the Year | |||
| 2008 | 2007 | 2008 | 2007 | ||
| Discount rate | 6.95% | 6.50% | 6.50% | 5.85% | |
| Initial health care cost trend rate | 9.79% | 10.43% | 10.43% | 8.84% | |
| Ultimate health care cost trend rate | 6.00% | 6.00% | 6.00% | 6.00% | |
| Year ultimate trend rate to be reached | 2018 | 2014 | 2014 | 2011 | |
Adoption of SFAS No. 158
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” As required, the Corporation adopted this statement effective December 31, 2006. The following table provides a breakdown of the incremental effect of applying this statement on individual line items in the consolidated balance sheet at December 31, 2006:
38
| Net Periodic Benefit Cost (Credit) for all Significant Plans | ||||||||||||||||||||||||
| Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||||||||||
| In millions | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||||||
| Service cost | $ | 18 | $ | 22 | $ | 23 | $ | 2 | $ | 3 | $ | 4 | ||||||||||||
| Interest cost | 225 | 214 | 211 | 30 | 30 | 31 | ||||||||||||||||||
| Expected return on plan assets | (310 | ) | (317 | ) | (332 | ) | - | - | - | |||||||||||||||
| Amortization of prior service cost (credit) | 7 | 2 | 2 | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||
| Amortization of net loss | 2 | 27 | 31 | - | 2 | 3 | ||||||||||||||||||
Termination/curtailment cost(1) | 16 | 5 | - | 8 | 6 | - | ||||||||||||||||||
| Net periodic benefit cost (credit) | $ | (42 | ) | $ | (47 | ) | $ | (65 | ) | $ | 38 | $ | 39 | $ | 36 | |||||||||
| (1) | See Note B for information regarding curtailment costs recorded in 2008 and 2007. |
Incremental Effect of Applying SFAS No. 158 |
|
|
|
|
|
|
|
|
| Before |
| Incremental |
| After |
|
Deferred income tax assets - current |
| $43 |
| $(2 | ) | $41 |
|
Deferred income tax assets - noncurrent |
| $(122 | ) | 237 |
| $115 |
|
Pension assets |
| $873 |
| (563 | ) | $310 |
|
Total Assets |
| $8,518 |
| $(328 | ) | $8,190 |
|
Accrued and other current liabilities |
| $179 |
| $(7 | ) | $172 |
|
Pension and other postretirement benefits - noncurrent |
| $439 |
| 79 |
| $518 |
|
Accumulated other comprehensive loss (“AOCI”) |
| $(83 | ) | (400 | ) | $(483 | ) |
Total Liabilities and Stockholder’s Equity |
| $8,518 |
| $(328 | ) | $8,190 |
|
Net Periodic Benefit Cost (Credit) for all Significant Plans |
|
|
|
|
|
|
| ||||||||||||
|
| Defined Benefit Pension Plans |
| Other Postretirement Benefits |
| ||||||||||||||
In millions |
| 2007 |
| 2006 |
| 2005 |
| 2007 |
| 2006 |
| 2005 |
| ||||||
Service cost |
| $ 22 |
| $ 23 |
| $ 26 |
| $ 3 |
| $ 4 |
| $ 4 |
| ||||||
Interest cost |
| 214 |
| 211 |
| 217 |
| 30 |
| 31 |
| 35 |
| ||||||
Expected return on plan assets |
| (317 | ) | (332 | ) | (341 | ) | — |
| — |
| — |
| ||||||
Amortization of prior service cost (credit) |
| 2 |
| 2 |
| 2 |
| (2 | ) | (2 | ) | (2 | ) | ||||||
Amortization of net loss |
| 27 |
| 31 |
| 3 |
| 2 |
| 3 |
| 5 |
| ||||||
Termination/curtailment cost |
| 5 |
| — |
| — |
| 6 |
| — |
| — |
| ||||||
Net periodic benefit cost (credit) |
| $(47 | ) | $(65 | ) | $(93 | ) | $39 |
| $36 |
| $42 |
| ||||||
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income |
| |||||||
|
| Defined Benefit Pension Plans |
| Other Postretirement Benefits |
| |||
In millions |
| 2007 |
| 2007 |
| |||
Net gain |
| $(375 | ) | $(55 | ) | |||
Prior service cost |
| 64 |
| 1 |
| |||
Amortization of prior service cost (credit) |
| (2 | ) | 2 |
| |||
Amortization of net loss |
| (27 | ) | (2 | ) | |||
Total recognized in other comprehensive income |
| $(340 | ) | $(54 | ) | |||
Total recognized in net periodic benefit cost and other comprehensive income |
| $(387 | ) | $(15 | ) | |||
39
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | ||||||||||||||||
| Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||
| In millions | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Net (gain) loss | $ | 978 | $ | (375 | ) | $ | (20 | ) | $ | (55 | ) | |||||
| Prior service (credit) cost | (6 | ) | 64 | - | 1 | |||||||||||
| Amortization of prior service (cost) credit | (7 | ) | (2 | ) | 2 | 2 | ||||||||||
| Amortization of net loss | (2 | ) | (27 | ) | - | (2 | ) | |||||||||
| Total recognized in other comprehensive (income) loss | $ | 963 | $ | (340 | ) | $ | (18 | ) | $ | (54 | ) | |||||
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 921 | $ | (387 | ) | $ | 20 | $ | (15 | ) | ||||||
| Change in Projected Benefit Obligations, Plan Assets and Funded Status of all Significant Plans | ||||||||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||
| In millions | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Change in projected benefit obligation: | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 3,500 | $ | 3,712 | $ | 490 | $ | 548 | ||||||||
| Service cost | 18 | 22 | 2 | 3 | ||||||||||||
| Interest cost | 225 | 214 | 30 | 30 | ||||||||||||
| Amendments | - | 64 | - | - | ||||||||||||
| Actuarial changes in assumptions and experience | (39 | ) | (238 | ) | (21 | ) | (55 | ) | ||||||||
| Benefits paid | (285 | ) | (279 | ) | (41 | ) | (43 | ) | ||||||||
| Termination/curtailment cost | 9 | 5 | 9 | 7 | ||||||||||||
| Other | (9 | ) | - | - | - | |||||||||||
| Benefit obligation at end of year | $ | 3,419 | $ | 3,500 | $ | 469 | $ | 490 | ||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 4,180 | $ | 4,003 | - | - | ||||||||||
| Actual return (loss) on plan assets | (709 | ) | 466 | - | - | |||||||||||
| Employer contributions | 2 | 2 | - | - | ||||||||||||
| Asset transfer | (7 | ) | (12 | ) | - | - | ||||||||||
| Benefits paid | (285 | ) | (279 | ) | - | - | ||||||||||
| Fair value of plan assets at end of year | $ | 3,181 | $ | 4,180 | - | - | ||||||||||
| Funded status at end of year | $ | (238 | ) | $ | 680 | $ | (469 | ) | $ | (490 | ) | |||||
| Net amounts recognized in the consolidated balance sheets at December 31: | ||||||||||||||||
| Noncurrent assets | - | $ | 699 | - | - | |||||||||||
| Current liabilities | $ | (2 | ) | (2 | ) | $ | (50 | ) | $ | (52 | ) | |||||
| Noncurrent liabilities | (236 | ) | (17 | ) | (419 | ) | (438 | ) | ||||||||
| Net amounts recognized in the consolidated balance sheets | $ | (238 | ) | $ | 680 | $ | (469 | ) | $ | (490 | ) | |||||
| Pretax amounts recognized in AOCI at December 31: | ||||||||||||||||
| Net loss | $ | 1,143 | $ | 167 | $ | 10 | $ | 30 | ||||||||
| Prior service cost (credit) | 61 | 74 | (10 | ) | (12 | ) | ||||||||||
| Pretax balance in AOCI at end of year | $ | 1,204 | $ | 241 | - | $ | 18 | |||||||||
Estimated Future Benefit Payments |
|
|
| ||
In millions |
| Defined Benefit |
| Other |
|
2008 |
| $ 285 |
| $ 54 |
|
2009 |
| 279 |
| 51 |
|
2010 |
| 275 |
| 48 |
|
2011 |
| 271 |
| 46 |
|
2012 |
| 270 |
| 43 |
|
2013 through 2017 |
| 1,328 |
| 188 |
|
Total |
| $2,708 |
| $430 |
|
40
| Estimated Future Benefit Payments at December 31, 2008 | ||||||||
| In millions | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||
| 2009 | $ | 286 | $ | 52 | ||||
| 2010 | 283 | 50 | ||||||
| 2011 | 278 | 48 | ||||||
| 2012 | 275 | 45 | ||||||
| 2013 | 271 | 42 | ||||||
| 2014 through 2018 | 1,316 | 200 | ||||||
| Total | $ | 2,709 | $ | 437 | ||||
Plan Assets
Weighted-Average Allocation of Plan Assets |
|
|
| ||
|
| 2007 |
| 2006 |
|
Equity securities |
| 43% |
| 47% |
|
Debt securities |
| 36% |
| 34% |
|
Alternative Investments |
| 21% |
| 19% |
|
Total |
| 100% |
| 100% |
|
Weighted-Average Allocation of Plan Assets at December 31 | ||||||||
| 2008 | 2007 | |||||||
| Equity securities | 16 | % | 43 | % | ||||
| Debt securities | 60 | % | 36 | % | ||||
| Alternative Investments | 24 | % | 21 | % | ||||
| Total | 100 | % | 100 | % | ||||
plan.
Strategic Target Allocation of Plan Assets | |||||
Asset Category | Target Allocation | Range | |||
Equity securities | 40% |
|
| 50% | |
Debt securities | 43% |
|
| 68% | |
Alternative Investments | 17% |
|
| 25% | |
Total | 100% |
| |||
Minimum Operating Lease Commitments |
|
| |
2008 |
| $11 |
|
2009 |
| 3 |
|
2010 |
| 1 |
|
2011 |
| 1 |
|
2012 |
| 1 |
|
2013 and thereafter |
| — |
|
Total |
| $17 |
|
Minimum Operating Lease Commitments at December 31, 2008 In millions | ||||
| 2009 | $ | 6 | ||
| 2010 | 3 | |||
| 2011 | 2 | |||
| 2012 | 2 | |||
| 2013 | 1 | |||
| 2014 and thereafter | - | |||
| Total | $ | 14 | ||
41
Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in “Sundry income (expense) —– net” in the consolidated statements of income. Purchases from that Dow subsidiary were approximately $3.9 billion in 2008, $3.3 billion in 2007 and $3.1 billion in 2006 and $2.5 billion in 2005.
2006.
The losses and additional costs incurred by the Corporation in 2005 due to hurricane Katrina were covered by the Corporation’s insurance program. sheets.
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 2005, the ownership of Dow Canada was restructured whereby31, 2008, the Corporation received an 11.2had a 19.13 percent ownership interest in Dow Canada Holding LP (“DCHLP”) and a cash distribution of approximately $296 million in exchange forDIHC (18.77 percent at December 31, 2007) which the Corporation’s 11.2 percent ownership interest in Dow Canada. The cash distribution reduced the carryover basis of the investment in DCHLP to zero and the remaining $121 million was treated as a deemed capital contribution in “Additional paid-in capital” in the consolidated balance sheet. The Corporation accounted for its 11.2 percent partnership interest in DCHLP using the equity method.
The Corporation recorded equity earnings of approximately $10 million from DCHLP for the first two months of 2006, which increased the investment balance to $10 million. On March 1, 2006, the Corporation transferred its 11.2 percent partnership interest in DCHLP to a newly formed corporation, GWN Holding, Inc. (“GWN”), in exchange for 11.2 percent of GWN’s common stock. The Corporation accounts for its 11.2 percent ownership interest in GWN using the cost method.
42
In accordance with the Amended and Restated Tax Sharing Agreement between the Corporation and Dow, the Corporation made payments of $287$33 million to Dow in 20072008 to cover the Corporation’s estimated federal tax liability for 2007 compared to $2682008; payments were $287 million in 2006.
2007.
2013.
During 2007,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 positive financial performance, adherence to fiscal discipline and improvedlower forecasted earnings which resultedand deteriorating market conditions, offsetting the positive impacts, resulting in net reversals ofincreases to the Corporation’s valuation allowances of $64$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.
These events, combined with improvedlower 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, compared with 28.6 percentpercent.
The American Jobs Creation Actwas lower than the U.S. statutory rate due to an excess of 2004 (the “AJCA”) introducedearnings by a special one-timenumber of joint ventures over dividends received deduction onfrom those companies and the repatriationbenefit of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. In May 2005,dividend income from related companies. UCC’s reported effective tax authorities released the clarifying language necessary to enable Dow to complete its determination regarding the repatriation and reinvestment of foreign earnings. In December 2005, Dow repatriated funds from a foreign entity that is partially owned by the Corporation. Since the Corporation is included in Dow’s consolidated federal income tax group and consolidated tax return, the Corporation recognized an immaterial impact of the repatriation provision of the AJCA, in accordance with the terms of the Dow-UCC Tax Sharing Agreement.
Domestic and Foreign Components of Income |
|
|
|
|
|
| |
In millions |
| 2007 |
| 2006 |
| 2005 |
|
Domestic |
| $1,141 |
| $1,465 |
| $1,805 |
|
Foreign |
| (3 | ) | 1 |
| 2 |
|
Total |
| $1,138 |
| $1,466 |
| $1,807 |
|
43
| Domestic and Foreign Components of Income Before Income Taxes | ||||||||||||
| In millions | 2008 | 2007 | 2006 | |||||||||
| Domestic | $ | 447 | $ | 1,141 | $ | 1,465 | ||||||
| Foreign | (2 | ) | (3 | ) | 1 | |||||||
| Total | $ | 445 | $ | 1,138 | $ | 1,466 | ||||||
Reconciliation to U.S. Statutory Rate |
|
|
|
|
|
|
| |||
In millions |
| 2007 |
| 2006 |
| 2005 |
| |||
Taxes at U.S. statutory rate |
| $ | 399 |
| $ | 513 |
| $ | 632 |
|
Equity earnings effect |
| (121 | ) | (142 | ) | (160 | ) | |||
Change in EQUATE legal ownership structure |
| (195 | ) | — |
| — |
| |||
Foreign rates other than 35% |
| 1 |
| 1 |
| 1 |
| |||
U.S. tax effect of foreign earnings and dividends |
| 86 |
| 94 |
| 99 |
| |||
U.S. business credits |
| (9 | ) | (28 | ) | (11 | ) | |||
Benefit of dividend income from related companies |
| (34 | ) | — |
| (43 | ) | |||
Unrecognized Tax Benefits |
| 34 |
| — |
| — |
| |||
Tax contingency reserve adjustments |
| — |
| 66 |
| (21 | ) | |||
State and local tax impact |
| (24 | ) | (59 | ) | 11 |
| |||
Other — net |
| (51 | ) | (25 | ) | (12 | ) | |||
Total tax provision |
| $ | 86 |
| $ | 420 |
| $ | 496 |
|
Effective tax rate |
| 7.6 | % | 28.6 | % | 27.4 | % | |||
Provision for Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| 2007 |
| 2006 |
| 2005 |
| ||||||||||||||
In millions |
| Current |
| Deferred |
| Total |
| Current |
| Deferred |
| Total |
| Current |
| Deferred |
| Total |
| ||
Federal |
| $300 |
| $(239 | ) | $61 |
| $351 |
| $117 |
| $468 |
| $24 |
| $453 |
| $477 |
| ||
State and local |
| 17 |
| 1 |
| 18 |
| — |
| (59 | ) | (59 | ) | 16 |
| 1 |
| 17 |
| ||
Foreign |
| 7 |
| — |
| 7 |
| 11 |
| — |
| 11 |
| 1 |
| 1 |
| 2 |
| ||
Total |
| $324 |
| $(238 | ) | $86 |
| $362 |
| $58 |
| $420 |
| $41 |
| $455 |
| $496 |
| ||
Deferred Tax Balances at December 31 |
| 2007 |
| 2006 |
| ||||
In millions |
| Deferred |
| Deferred Tax |
| Deferred |
| Deferred |
|
Property |
| — |
| $(344 | ) | $ 4 |
| $(384 | ) |
Tax loss and credit carryforwards |
| $151 |
| — |
| 215 |
| — |
|
Postretirement benefit obligations |
| 342 |
| (343 | ) | 493 |
| (323 | ) |
Other accruals and reserves |
| 400 |
| (51 | ) | 432 |
| (192 | ) |
Inventory |
| 8 |
| — |
| 7 |
| — |
|
Long-term debt |
| — |
| (1 | ) | — |
| — |
|
Investments |
| 2 |
| — |
| — |
| (1 | ) |
Other — net |
| 66 |
| (9 | ) | 28 |
| (11 | ) |
Subtotal |
| $969 |
| $(748 | ) | $1,179 |
| $(911 | ) |
Valuation allowance |
| (49 | ) | — |
| (112 | ) | — |
|
Total |
| $920 |
| $(748 | ) | $1,067 |
| $(911 | ) |
| Reconciliation to U.S. Statutory Rate | ||||||||||||
| In millions | 2008 | 2007 | 2006 | |||||||||
| Taxes at U.S. statutory rate | $ | 156 | $ | 399 | $ | 513 | ||||||
| Equity earnings effect | (70 | ) | (121 | ) | (142 | ) | ||||||
| Change in EQUATE legal ownership structure | - | (195 | ) | - | ||||||||
| Foreign income taxed at rates other than 35% | 1 | 1 | 1 | |||||||||
| U.S. tax effect of foreign earnings and dividends | 14 | 86 | 94 | |||||||||
| U.S. business credits | (4 | ) | (9 | ) | (28 | ) | ||||||
| Benefit of dividend income from related companies | (58 | ) | (34 | ) | - | |||||||
| Unrecognized tax benefits | 16 | 34 | - | |||||||||
| Tax contingency reserve adjustments | - | - | 66 | |||||||||
| State and local tax impact | 56 | (24 | ) | (59 | ) | |||||||
| Other – net | 7 | (51 | ) | (25 | ) | |||||||
| Total tax provision | $ | 118 | $ | 86 | $ | 420 | ||||||
| Effective tax rate | 26.5 | % | 7.6 | % | 28.6 | % | ||||||
| Provision for Income Taxes | ||||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
| In millions | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | |||||||||||||||||||||||||||
| Federal | $ | 63 | $ | 62 | $ | 125 | $ | 300 | $ | (239 | ) | $ | 61 | $ | 351 | $ | 117 | $ | 468 | |||||||||||||||||
| State and local | (13 | ) | (2 | ) | (15 | ) | 17 | 1 | 18 | - | (59 | ) | (59 | ) | ||||||||||||||||||||||
| Foreign | 9 | (1 | ) | 8 | 7 | - | 7 | 11 | - | 11 | ||||||||||||||||||||||||||
| Total | $ | 59 | $ | 59 | $ | 118 | $ | 324 | $ | (238 | ) | $ | 86 | $ | 362 | $ | 58 | $ | 420 | |||||||||||||||||
| Deferred Tax Balances at December 31 | 2008 | 2007 | ||||||||||||||
| In millions | Deferred Tax Assets | Deferred Tax Liabilities | Deferred Tax Assets | Deferred Tax Liabilities | ||||||||||||
| Property | $ | 1 | $ | 292 | - | $ | 344 | |||||||||
| Tax loss and credit carryforwards | 161 | - | $ | 151 | - | |||||||||||
| Postretirement benefit obligations | 662 | 360 | 342 | 343 | ||||||||||||
| Other accruals and reserves | 470 | 41 | 400 | 51 | ||||||||||||
| Inventory | 8 | - | 8 | - | ||||||||||||
| Long-term debt | - | 1 | - | 1 | ||||||||||||
| Investments | - | 1 | 2 | - | ||||||||||||
| Other – net | 56 | 75 | 66 | 9 | ||||||||||||
| Subtotal | $ | 1,358 | $ | 770 | $ | 969 | $ | 748 | ||||||||
| Valuation allowance | (111 | ) | - | (49 | ) | - | ||||||||||
| Total | $ | 1,247 | $ | 770 | $ | 920 | $ | 748 | ||||||||
recognized.
44
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The Corporation is included in Dow’s consolidated federal income tax group and consolidated tax return. DowCurrent 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, for 1998-2006.including the U.S. federal, varous 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 will be reduced by approximately $80$70 million ($80 million at December 31, 2007). 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 $10 million.
The impact on the Corporation’s results of operations is expected to be immaterial.
Tax Years Subject to Examination by Major Tax Jurisdiction at December 31 | ||
| Jurisdiction | Earliest Open Year | |
| 2008 | 2007 | |
| United States: | ||
| Federal income tax | 2001 | 2001 |
| State and local income tax | 1996 | 1989 |
|
| United |
| Asia |
| Rest of |
| Total |
|
2007 |
|
|
|
|
|
|
|
|
|
Sales to external customers (1) |
| $101 |
| $71 |
| $39 |
| $211 |
|
Long-lived assets |
| $1,945 |
| $12 |
| $5 |
| $1,962 |
|
2006 |
|
|
|
|
|
|
|
|
|
Sales to external customers (1) |
| $352 |
| $118 |
| $36 |
| $506 |
|
Long-lived assets |
| $1,950 |
| $15 |
| $5 |
| $1,970 |
|
2005 |
|
|
|
|
|
|
|
|
|
Sales to external customers (1) |
| $155 |
| $88 |
| $57 |
| $300 |
|
Long-lived assets |
| $2,012 |
| $20 |
| $5 |
| $2,037 |
|
| In millions | United States | Asia Pacific | Rest of World | Total |
| 2008 | ||||
Sales to external customers (1) | $94 | $58 | $67 | $219 |
| Long-lived assets | $1,872 | $9 | $5 | $1,886 |
| 2007 | ||||
Sales to external customers (1) | $101 | $71 | $39 | $211 |
| Long-lived assets | $1,945 | $12 | $5 | $1,962 |
| 2006 | ||||
Sales to external customers (1) | $352 | $118 | $36 | $506 |
| Long-lived assets | $1,950 | $15 | $5 | $1,970 |
45
February 9.9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.·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.· · · · provide reasonable assurance as to the detection of fraud. 2007,2008, 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., 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.EDWARD W. RICHEUDIO GIL Edward E. Rich/s/ WILLIAM H. WIEDEMAN19, 200846
9B.9B. OTHER INFORMATION.
12.12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
For the years ended December 31, In thousands 2007 2006 Audit fees (a) $1,669 $1,587 Audit-related fees (b) 252 359 Tax fees 5 13 All other fees — — Total $1,926 $1,959 (a) 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. (b) Primarily for agreed-upon procedures engagements and audits of employee benefit plans’ financial statements.14.14. PRINCIPAL ACCOUNTING FEES AND SERVICES.20072008 and 2006,2007, 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”).47In thousands 2008 2007 $ 1,747 $ 1,669 434 252 Tax fees 4 5 Total $ 2,185 $ 1,926 (2) Primarily for agreed-upon procedures, engagements and audits of employee benefit plans’ financial statements.
Schedule II Valuation and Qualifying Accounts 3. The following financial statements of the Corporation’s former nonconsolidated affiliate (see Note N), EQUATE Petrochemical Company K.S.C., are presented pursuant to Rule 3-09 of Regulation S-X: Notes to financial statements The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K: Exhibit No. Description of Exhibit Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (In millions) For the Years Ended December 31 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Balance Deductions Balance at Beginning Additions to from at End Description of Year Reserves Reserves of Year 2007 RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: For doubtful receivables $2 — — $2 2006 RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: For doubtful receivables $3 — 1 (a) $2 2005 RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY: For doubtful receivables $4 — 1 (a) $3 2007 2006 2005 (a) Deductions represent: Notes and accounts receivable written off — $1 $115.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.1. The Corporation’s 2007 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Item 8 of Part II.2. Financial Statement Schedules.1. The Corporation’s 2008 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Item 8 of Part II. 2. Financial Statement Schedules. 3. The following financial statements of the Corporation’s former nonconsolidated affiliate (see Note M), EQUATE Petrochemical Company K.S.C., are presented pursuant to Rule 3-09 of Regulation S-X:4. Exhibits — See the Exhibit Index on pages 79-81 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.10.7.1First Amendment to Second Amended and Restated Revolving Loan Agreement, effectiveas of December 31, 2007, between the Corporation and The Dow Chemical Company.10.9Contribution Agreement dated as of December 21, 2007, among the Corporation, DowInternational Holdings Company and The Dow Chemical Company.2331.131.232.132.248SCHEDULE IIUnion Carbide Corporation and SubsidiariesValuation and Qualifying Accounts49Union Carbide Corporation Schedule II Valuation and Qualifying Accounts In millions For the Years Ended December 31 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E 2008 For doubtful receivables $2 - $1 (1) $1 2007 For doubtful receivables $2 - - $2 2006 For doubtful receivables $3 - $1 (1) $2 2008 2007 2006 (1) Deductions represent: Notes and accounts receivable written off $1 - $1
50
|
|
|
| As at December 31, |
| ||
|
|
|
| 2007 |
| 2006 |
|
|
| Notes |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and bank balances |
| 5 |
| 416,706 |
| 151,465 |
|
Trade receivables, net |
| 6 |
| 145,458 |
| 122,773 |
|
Prepayments and other assets |
|
|
| 25,904 |
| 16,593 |
|
Due from related parties |
| 14 |
| 159,684 |
| 149,052 |
|
Inventories, net |
| 7 |
| 43,016 |
| 42,080 |
|
|
|
|
| 790,768 |
| 481,963 |
|
Non-current assets |
|
|
|
|
|
|
|
Property, plant and equipment, net |
| 8 |
| 1,660,689 |
| 1,413,782 |
|
Intangible assets, net |
| 9 |
| 121,651 |
| 132,507 |
|
Long-term loans to related parties |
| 14 |
| 1,469,770 |
| 719,770 |
|
|
|
|
| 3,252,110 |
| 2,266,059 |
|
|
|
|
| 4,042,878 |
| 2,748,022 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
|
|
| 26,920 |
| 26,804 |
|
Accruals and other liabilities |
| 10 |
| 104,434 |
| 68,284 |
|
Due to related parties |
| 14 |
| 28,421 |
| 18,158 |
|
|
|
|
| 159,775 |
| 113,246 |
|
Non-current liabilities |
|
|
|
|
|
|
|
Long-term debt |
| 15 |
| 1,639,820 |
| 879,568 |
|
Retirement benefit obligation |
| 16 |
| 31,192 |
| 26,342 |
|
Long term incentives |
|
|
| 3,102 |
| 1,417 |
|
Deferred income |
| 11 |
| 510,521 |
| 288,303 |
|
|
|
|
| 2,184,635 |
| 1,195,630 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
| 21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital and reserves |
|
|
|
|
|
|
|
Share capital |
| 12 |
| 700,000 |
| 700,000 |
|
Retained earnings |
|
|
| 998,468 |
| 739,146 |
|
|
|
|
| 1,698,468 |
| 1,439,146 |
|
|
|
|
| 4,042,878 |
| 2,748,022 |
|
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Notes | |||||||||
| ASSETS | |||||||||
| Current assets | |||||||||
| Cash and bank balances | 5 | 416,706 | 151,465 | ||||||
| Trade receivables, net | 6 | 145,458 | 122,773 | ||||||
| Prepayments and other assets | 25,904 | 16,593 | |||||||
| Due from related parties | 14 | 159,684 | 149,052 | ||||||
| Inventories, net | 7 | 43,016 | 42,080 | ||||||
| 790,768 | 481,963 | ||||||||
| Non-current assets | |||||||||
| Property, plant and equipment, net | 8 | 1,660,689 | 1,413,782 | ||||||
| Intangible assets, net | 9 | 121,651 | 132,507 | ||||||
| Long-term loans to related parties | 14 | 1,469,770 | 719,770 | ||||||
| 3,252,110 | 2,266,059 | ||||||||
| 4,042,878 | 2,748,022 | ||||||||
| LIABILITIES AND EQUITY | |||||||||
| Current liabilities | |||||||||
| Accounts payable | 26,920 | 26,804 | |||||||
| Accruals and other liabilities | 10 | 104,434 | 68,284 | ||||||
| Due to related parties | 14 | 28,421 | 18,158 | ||||||
| 159,775 | 113,246 | ||||||||
| Non-current liabilities | |||||||||
| Long-term debt | 15 | 1,639,820 | 879,568 | ||||||
| Retirement benefit obligation | 16 | 31,192 | 26,342 | ||||||
| Long term incentives | 3,102 | 1,417 | |||||||
| Deferred income | 11 | 510,521 | 288,303 | ||||||
| 2,184,635 | 1,195,630 | ||||||||
| Commitments and contingencies | 21 | ||||||||
| Capital and reserves | |||||||||
| Share capital | 12 | 700,000 | 700,000 | ||||||
| Retained earnings | 998,468 | 739,146 | |||||||
| 1,698,468 | 1,439,146 | ||||||||
| 4,042,878 | 2,748,022 | ||||||||
51
|
|
|
| For the years ended December 31, | |||||||
|
|
|
| 2007 |
| 2006 |
| 2005 |
| ||
|
| Notes |
|
|
|
|
|
|
| ||
Sales |
| 14 |
| 1,205,713 |
|
| 986,213 |
|
| 961,453 |
|
Cost of sales |
| 17 |
| (388,075 | ) |
| (367,977 | ) |
| (313,545 | ) |
Gross profit |
|
|
| 817,638 |
|
| 618,236 |
|
| 647,908 |
|
Polypropylene plant management fee |
| 14 |
| 1,000 |
|
| 1,000 |
|
| 1,000 |
|
General, administrative and selling expenses |
| 17 |
| (51,895 | ) |
| (52,434 | ) |
| (51,351 | ) |
Operating income |
|
|
| 766,743 |
|
| 566,802 |
|
| 597,557 |
|
Interest income |
| 14 |
| 71,819 |
|
| 29,282 |
|
| 5,754 |
|
Foreign exchange loss |
|
|
| (1,363 | ) |
| (521 | ) |
| (341 | ) |
Other income |
|
|
| 1,817 |
|
| 229 |
|
| 1,199 |
|
Finance costs |
| 18 |
| (62,276 | ) |
| (24,199 | ) |
| (10,472 | ) |
Net income before contribution to Kuwait |
|
|
| 776,740 |
|
| 571,593 |
|
| 593,697 |
|
Contribution to KFAS |
|
|
| (7,270 | ) |
| (5,143 | ) |
| (5,336 | ) |
Directors’ fees |
|
|
| (148 | ) |
| (136 | ) |
| (302 | ) |
Net income for the year |
|
|
| 769,322 |
|
| 566,314 |
|
| 588,059 |
|
| For the years ended December 31, | ||||||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | ||||||||||||||
| Notes | ||||||||||||||||
| Sales | 14 | 1,205,713 | 986,213 | 961,453 | ||||||||||||
| Cost of sales | 17 | (388,075 | ) | (367,977 | ) | (313,545 | ) | |||||||||
| Gross profit | 817,638 | 618,236 | 647,908 | |||||||||||||
| Polypropylene plant management fee | 14 | 1,000 | 1,000 | 1,000 | ||||||||||||
| General, administrative and selling expenses | 17 | (51,895 | ) | (52,434 | ) | (51,351 | ) | |||||||||
| Operating income | 766,743 | 566,802 | 597,557 | |||||||||||||
| Interest income | 14 | 71,819 | 29,282 | 5,754 | ||||||||||||
| Foreign exchange loss | (1,363 | ) | (521 | ) | (341 | ) | ||||||||||
| Other income | 1,817 | 229 | 1,199 | |||||||||||||
| Finance costs | 18 | (62,276 | ) | (24,199 | ) | (10,472 | ) | |||||||||
| Net income before contribution to Kuwait Foundation for Advancement of Sciences (“KFAS”) and Directors’ fees | 776,740 | 571,593 | 593,697 | |||||||||||||
| Contribution to KFAS | (7,270 | ) | (5,143 | ) | (5,336 | ) | ||||||||||
| Directors’ fees | (148 | ) | (136 | ) | (302 | ) | ||||||||||
| Net income for the year | 769,322 | 566,314 | 588,059 | |||||||||||||
52
|
|
|
| Share |
| Retained |
| Total |
| ||
|
| Note |
|
|
|
|
|
|
| ||
Balance as at January 1, 2005 |
|
|
| 700,000 |
| 672,773 |
|
| 1,372,773 |
|
|
Dividends paid |
|
|
| - |
| (558,000 | ) |
| (558,000 | ) |
|
Net income for the year |
|
|
| - |
| 588,059 |
|
| 588,059 |
|
|
Balance as at December 31, 2005 |
|
|
| 700,000 |
| 702,832 |
|
| 1,402,832 |
|
|
Dividends paid |
|
|
| - |
| (530,000 | ) |
| (530,000 | ) |
|
Net income for the year |
|
|
| - |
| 566,314 |
|
| 566,314 |
|
|
Balance as at December 31, 2006 |
|
|
| 700,000 |
| 739,146 |
|
| 1,439,146 |
|
|
Dividends paid |
| 13 |
| - |
| (510,000 | ) |
| (510,000 | ) |
|
Net income for the year |
|
|
| - |
| 769,322 |
|
| 769,322 |
|
|
Balance as at December 31, 2007 |
|
|
| 700,000 |
| 998,468 |
|
| 1,698,468 |
|
|
Share capital US$’000 | Retained earnings US$’000 | Total US$’000 | ||||||||||||||
| Note | ||||||||||||||||
| Balance as at January 1, 2005 | 700,000 | 672,773 | 1,372,773 | |||||||||||||
| Dividends paid | - | (558,000 | ) | (558,000 | ) | |||||||||||
| Net income for the year | - | 588,059 | 588,059 | |||||||||||||
| Balance as at December 31, 2005 | 700,000 | 702,832 | 1,402,832 | |||||||||||||
| Dividends paid | - | (530,000 | ) | (530,000 | ) | |||||||||||
| Net income for the year | - | 566,314 | 566,314 | |||||||||||||
| Balance as at December 31, 2006 | 700,000 | 739,146 | 1,439,146 | |||||||||||||
| Dividends paid | 13 | - | (510,000 | ) | (510,000 | ) | ||||||||||
| Net income for the year | - | 769,322 | 769,322 | |||||||||||||
| Balance as at December 31, 2007 | 700,000 | 998,468 | 1,698,468 | |||||||||||||
53
|
| For the years ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
|
|
|
|
|
|
|
| |||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
| ||
Net income for the year |
| 769,322 |
|
| 566,314 |
|
| 588,059 |
|
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortisation |
| 111,248 |
|
| 105,478 |
|
| 101,551 |
|
|
Finance costs |
| 62,276 |
|
| 24,199 |
|
| 10,472 |
|
|
Interest income |
| (71,819 | ) |
| (29,282 | ) |
| (5,754 | ) |
|
Allowance for obsolete and slow moving spare parts |
| 300 |
|
| 13,641 |
|
| 500 |
|
|
Loss on disposal of property, plant and equipment |
| - |
|
| 3,732 |
|
| - |
|
|
Provision for retirement benefit obligation and long term |
| 6,535 |
|
| 6,955 |
|
| 4,567 |
|
|
|
| 877,862 |
|
| 691,037 |
|
| 699,395 |
|
|
Trade receivables |
| (22,685 | ) |
| (6,418 | ) |
| 59,064 |
|
|
Prepayments and other assets |
| (9,307 | ) |
| 4,390 |
|
| (12,709 | ) |
|
Due from related parties |
| 213,917 |
|
| 130,678 |
|
| 20,942 |
|
|
Inventories |
| (1,236 | ) |
| (2,880 | ) |
| (5,514 | ) |
|
Accounts payable |
| 116 |
|
| 13,694 |
|
| 2,434 |
|
|
Accruals and other liabilities |
| (1,090 | ) |
| 10,011 |
|
| (15,024 | ) |
|
Due to related parties |
| 10,263 |
|
| (27,194 | ) |
| 19,150 |
|
|
Net cash generated by operating activities |
| 1,067,840 |
|
| 813,318 |
|
| 767,738 |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
| (296,084 | ) |
| (360,016 | ) |
| (128,112 | ) |
|
Purchases of intangible assets |
| - |
|
| - |
|
| (528 | ) |
|
Long-term loans advanced to related parties |
| (750,000 | ) |
| (719,770 | ) |
| - |
|
|
Short-term loan repaid by / (advanced to) related party |
| - |
|
| 100,000 |
|
| (100,000 | ) |
|
Interest received |
| 69,340 |
|
| 25,624 |
|
| 4,796 |
|
|
Net cash used in investing activities |
| (976,744 | ) |
| (954,162 | ) |
| (223,844 | ) |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Proceeds from term debt |
| 760,000 |
|
| 885,000 |
|
| - |
|
|
Loan origination fees paid |
| (159 | ) |
| (5,664 | ) |
| (211 | ) |
|
Finance costs paid |
| (75,696 | ) |
| (40,207 | ) |
| (11,589 | ) |
|
Dividends paid |
| (510,000 | ) |
| (530,000 | ) |
| (558,000 | ) |
|
Repayment of finance lease |
| - |
|
| (99,898 | ) |
| - |
|
|
Repayment of syndicated bank loan |
| - |
|
| (99,897 | ) |
| - |
|
|
Net cash generated by / (used in) financing activities |
| 174,145 |
|
| 109,334 |
|
| (569,800 | ) |
|
Net increase / (decrease) in cash and bank balances |
| 265,241 |
|
| (31,510 | ) |
| (25,906 | ) |
|
Cash and bank balances at beginning of the year |
| 151,465 |
|
| 182,975 |
|
| 208,881 |
|
|
Cash and bank balances at end of the year |
| 416,706 |
|
| 151,465 |
|
| 182,975 |
|
|
NON-CASH TRANSACTIONS |
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
| (37,788 | ) |
| (32,967 | ) |
| - |
|
|
| For the years ended December 31, | ||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income for the year | 769,322 | 566,314 | 588,059 | |||||||||
| Adjustments for: | ||||||||||||
| Depreciation and amortisation | 111,248 | 105,478 | 101,551 | |||||||||
| Finance costs | 62,276 | 24,199 | 10,472 | |||||||||
| Interest income | (71,819 | ) | (29,282 | ) | (5,754 | ) | ||||||
| Allowance for obsolete and slow moving spare parts | 300 | 13,641 | 500 | |||||||||
| Loss on disposal of property, plant and equipment | - | 3,732 | - | |||||||||
| Provision for retirement benefit obligation and long term incentives net of payments | 6,535 | 6,955 | 4,567 | |||||||||
| 877,862 | 691,037 | 699,395 | ||||||||||
| Trade receivables | (22,685 | ) | (6,418 | ) | 59,064 | |||||||
| Prepayments and other assets | (9,307 | ) | 4,390 | (12,709 | ) | |||||||
| Due from related parties | 213,917 | 130,678 | 20,942 | |||||||||
| Inventories | (1,236 | ) | (2,880 | ) | (5,514 | ) | ||||||
| Accounts payable | 116 | 13,694 | 2,434 | |||||||||
| Accruals and other liabilities | (1,090 | ) | 10,011 | (15,024 | ) | |||||||
| Due to related parties | 10,263 | (27,194 | ) | 19,150 | ||||||||
| Net cash generated by operating activities | 1,067,840 | 813,318 | 767,738 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Purchases of property, plant and equipment | (296,084 | ) | (360,016 | ) | (128,112 | ) | ||||||
| Purchases of intangible assets | - | - | (528 | ) | ||||||||
| Long-term loans advanced to related parties | (750,000 | ) | (719,770 | ) | - | |||||||
| Short-term loan repaid by / (advanced to) related party | - | 100,000 | (100,000 | ) | ||||||||
| Interest received | 69,340 | 25,624 | 4,796 | |||||||||
| Net cash used in investing activities | (976,744 | ) | (954,162 | ) | (223,844 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from term debt | 760,000 | 885,000 | - | |||||||||
| Loan origination fees paid | (159 | ) | (5,664 | ) | (211 | ) | ||||||
| Finance costs paid | (75,696 | ) | (40,207 | ) | (11,589 | ) | ||||||
| Dividends paid | (510,000 | ) | (530,000 | ) | (558,000 | ) | ||||||
| Repayment of finance lease | - | (99,898 | ) | - | ||||||||
| Repayment of syndicated bank loan | - | (99,897 | ) | - | ||||||||
| Net cash generated by / (used in) financing activities | 174,145 | 109,334 | (569,800 | ) | ||||||||
| Net increase / (decrease) in cash and bank balances | 265,241 | (31,510 | ) | (25,906 | ) | |||||||
| Cash and bank balances at beginning of the year | 151,465 | 182,975 | 208,881 | |||||||||
| Cash and bank balances at end of the year | 416,706 | 151,465 | 182,975 | |||||||||
| NON-CASH TRANSACTIONS | ||||||||||||
| Purchase of property, plant and equipment | (37,788 | ) | (32,967 | ) | - | |||||||
54
|
|
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. |
|
| |
| ||
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. | ||
| |||
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, | Effective for annual periods beginning on or after January 1, 2008 | |
55
|
|
| |
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 |
| 3 | |
| SIGNIFICANT ACCOUNTING POLICIES |
| |
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”). | |
| |
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 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 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 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. | |
| |
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. |
56
|
Trade payables |
| |
| |
Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. | |
| |
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 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 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. |
57
|
|
| |
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. | |
| |
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 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. | |
| |
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 |
58
|
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). | |
| |
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. | |
| |
The Company, a closed shareholding company incorporated in the State of Kuwait, is not subject to income taxes. | |
| |
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. | |
| |
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. |
59
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
|
|
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. | |
|
60
| 5 | CASH AND BANK BALANCES | ||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Cash and bank balances | 19,853 | 28,822 | |||||||
| Time deposits | 396,853 | 122,643 | |||||||
| 416,706 | 151,465 | ||||||||
All bank accounts of the Company are assigned as security for the Company’s obligations under the term debt facility agreement (see note 15). The effective interest rate on time deposits as at December 31, 2007 was 5.21% (2006: 4.93%) per annum. | |||||||||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
5. | CASH AND BANK BALANCES | |||||||
|
| |||||||
|
| As at December 31, |
| |||||
|
| 2007 |
| 2006 |
| |||
Cash and bank balances |
| 19,853 |
|
| 28,822 |
|
| |
Time deposits |
| 396,853 |
|
| 122,643 |
|
| |
|
| 416,706 |
|
| 151,465 |
|
| |
| All bank accounts of the Company are assigned as security for the Company’s obligations under the term debt facility agreement (see note 15). The effective interest rate on time deposits as at December 31, 2007 was 5.21% (2006: 4.93%) per annum. | |||||||
|
| |||||||
6. | TRADE RECEIVABLES, NET | |||||||
|
| |||||||
|
| As at December 31, |
| |||||
|
| 2007 |
| 2006 |
| |||
Trade receivables |
| 145,560 |
|
| 122,875 |
|
| |
Less: allowance for doubtful debts |
| (102 | ) |
| (102 | ) |
| |
|
| 145,458 |
|
| 122,733 |
|
| |
| 6 | TRADE RECEIVABLES, NET | |||||||||
| As at December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Trade receivables | 145,560 | 122,875 | ||||||||
| Less: allowance for doubtful debts | (102 | ) | (102 | ) | ||||||
| 145,458 | 122,733 | |||||||||
The average credit period on sales is 60 days. The average age of these receivables is 26 days (2006: 22 days).The Company has provided fully for all receivables over 120 days because historical experience is that, such receivables are past due beyond 120 days are generally not recoverable. Trade receivables between 60 days and 120 days are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience. As at December 31, 2007, trade receivables of US$ 143.3 million (2006: US$ 121.7 million) were fully performing. Included in the Company’s trade receivables balance are debtors with a carrying amount of US$ 2.28 million (2006: US$ 1.46 million) which are past due at the reporting date for which the Company has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Company may hold collateral over some of these balances. Ageing of past due but not impaired | ||||||||||
| As at December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| 60 – 90 days | 1,617 | - | ||||||||
| 90 – 120 days | 665 | 1,460 | ||||||||
| Total | 2,282 | 1,460 | ||||||||
| ||
|
| As at December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
60 – 90 days |
| 1,617 |
|
| - |
|
|
90 – 120 days |
| 665 |
|
| 1,460 |
|
|
Total |
| 2,282 |
|
| 1,460 |
|
|
There was no movement in the allowance for doubtful debts during 2007 and 2006. | ||
In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the management believe that there is no further credit provision required in excess of the allowance for doubtful debts. | ||
61
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
7. | INVENTORIES | ||||||||||||||||||||||
|
| ||||||||||||||||||||||
|
| As at December 31, |
| ||||||||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||||||||
Raw materials |
| 16,292 |
|
| 20,233 |
|
| ||||||||||||||||
Finished goods |
| 13,725 |
|
| 9,820 |
|
| ||||||||||||||||
Spare parts |
| 13,299 |
|
| 26,168 |
|
| ||||||||||||||||
|
| 43,316 |
|
| 56,221 |
|
| ||||||||||||||||
Allowance for obsolete and slow moving spare parts |
| (300 | ) |
| (14,141 | ) |
| ||||||||||||||||
|
| 43,016 |
|
| 42,080 |
|
| ||||||||||||||||
| Movement in the allowance for obsolete and slow moving spare parts: | ||||||||||||||||||||||
|
| For the years ended December 31, |
| ||||||||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||||||||
Balance at beginning of the year |
| 14,141 |
|
| 500 |
|
| ||||||||||||||||
Increase in allowance recognized in the statement of income |
| 300 |
|
| 13,641 |
|
| ||||||||||||||||
Amounts written off during the year |
| (14,141 | ) |
| - |
|
| ||||||||||||||||
|
| 300 |
|
| 14,141 |
|
| ||||||||||||||||
| During the year, the Company recognised inventories of US$ 196,045 thousand (2006:US$ 156,902 thousand) as expenses in the statement of income and is included in cost of sales. Amounts written off during the year relate to obsolete spare parts which were fully provided for in 2006. | ||||||||||||||||||||||
|
| ||||||||||||||||||||||
8. | PROPERTY, PLANT AND EQUIPMENT | ||||||||||||||||||||||
|
| ||||||||||||||||||||||
|
| Buildings |
| Plant |
| Office |
| Assets |
| Total |
| ||||||||||||
|
| US$’000 |
| US$’000 |
| US$’000 |
| US$’000 |
| US$’000 |
| ||||||||||||
Cost |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
As at January 1, 2006 |
| 35,535 |
|
| 1,559,823 |
|
| 88,984 |
|
| 141,841 |
|
| 1,826,183 |
|
| |||||||
Additions |
| - |
|
| 53,949 |
|
| - |
|
| 356,097 |
|
| 410,046 |
|
| |||||||
Disposals |
| - |
|
| (6,786 | ) |
| - |
|
| - |
|
| (6,786 | ) |
| |||||||
Transfers |
| 2,530 |
|
| 59,611 |
|
| 6,861 |
|
| (69,002 | ) |
| - |
|
| |||||||
As at January 1, 2007 |
| 38,065 |
|
| 1,666,597 |
|
| 95,845 |
|
| 428,936 |
|
| 2,229,443 |
|
| |||||||
Additions |
| - |
|
| - |
|
| - |
|
| 347,155 |
|
| 347,155 |
|
| |||||||
Disposals |
| (5,865 | ) |
| (28,055 | ) |
| (1,156 | ) |
| - |
|
| (35,076 | ) |
| |||||||
Transfers |
| 29,056 |
|
| 31,121 |
|
| (24,816 | ) |
| (35,361 | ) |
| - |
|
| |||||||
As at December 31, 2007 |
| 61,256 |
|
| 1,669,663 |
|
| 69,873 |
|
| 740,730 |
|
| 2,541,522 |
|
| |||||||
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
As at January 1, 2006 |
| 17,136 |
|
| 641,156 |
|
| 65,945 |
|
| - |
|
| 724,237 |
|
| |||||||
Charge for the year |
| 1,657 |
|
| 88,678 |
|
| 4,143 |
|
| - |
|
| 94,478 |
|
| |||||||
Disposals |
| - |
|
| (3,054 | ) |
| - |
|
| - |
|
| (3,054 | ) |
| |||||||
As at January 1, 2007 |
| 18,793 |
|
| 726,780 |
|
| 70,088 |
|
| - |
|
| 815,661 |
|
| |||||||
Charge for the year |
| 1,757 |
|
| 96,811 |
|
| 1,680 |
|
| - |
|
| 100,248 |
|
| |||||||
Disposals |
| (5,865 | ) |
| (28,055 | ) |
| (1,156 | ) |
| - |
|
| (35,076 | ) |
| |||||||
Transfers |
| 15,588 |
|
| - |
|
| (15,588 | ) |
| - |
|
| - |
|
| |||||||
As at December 31, 2007 |
| 30,273 |
|
| 795,536 |
|
| 55,024 |
|
| - |
|
| 880,833 |
|
| |||||||
Carrying amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
As at December 31, 2007 |
| 30,983 |
|
| 874,127 |
|
| 14,849 |
|
| 740,730 |
|
| 1,660,689 |
|
| |||||||
As at December 31, 2006 |
| 19,272 |
|
| 939,817 |
|
| 25,757 |
|
| 428,936 |
|
| 1,413,782 |
|
| |||||||
62
| 7 | INVENTORIES | |||||||||
| As at December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Raw materials | 16,292 | 20,233 | ||||||||
| Finished goods | 13,725 | 9,820 | ||||||||
| Spare parts | 13,299 | 26,168 | ||||||||
| 43,316 | 56,221 | |||||||||
| Allowance for obsolete and slow moving spare parts | (300 | ) | (14,141 | ) | ||||||
| 43,016 | 42,080 | |||||||||
| Movement in the allowance for obsolete and slow moving spare parts: | ||||||||||
| For the years ended December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Balance at beginning of the year | 14,141 | 500 | ||||||||
| Increase in allowance recognized in the statement of income | 300 | 13,641 | ||||||||
| Amounts written off during the year | (14,141 | ) | - | |||||||
| 300 | 14,141 | |||||||||
During the year, the Company recognised inventories of US$ 196,045 thousand (2006:US$ 156,902 thousand) as expenses in the statement of income and is included in cost of sales. Amounts written off during the year relate to obsolete spare parts which were fully provided for in 2006. | ||||||||||
| 8 | PROPERTY, PLANT AND EQUIPMENT | ||||||||||||||||||||
Buildings and roads | Plant and equipment | Office furniture and equipment | Assets under construction | Total | |||||||||||||||||
| US$’000 | US$’000 | US$’000 | US$’000 | US$’000 | |||||||||||||||||
| Cost | |||||||||||||||||||||
| As at January 1, 2006 | 35,535 | 1,559,823 | 88,984 | 141,841 | 1,826,183 | ||||||||||||||||
| Additions | - | 53,949 | - | 356,097 | 410,046 | ||||||||||||||||
| Disposals | - | (6,786 | ) | - | - | (6,786 | ) | ||||||||||||||
| Transfers | 2,530 | 59,611 | 6,861 | (69,002 | ) | - | |||||||||||||||
| As at January 1, 2007 | 38,065 | 1,666,597 | 95,845 | 428,936 | 2,229,443 | ||||||||||||||||
| Additions | - | - | - | 347,155 | 347,155 | ||||||||||||||||
| Disposals | (5,865 | ) | (28,055 | ) | (1,156 | ) | - | (35,076 | ) | ||||||||||||
| Transfers | 29,056 | 31,121 | (24,816 | ) | (35,361 | ) | - | ||||||||||||||
| As at December 31, 2007 | 61,256 | 1,669,663 | 69,873 | 740,730 | 2,541,522 | ||||||||||||||||
| Accumulated depreciation | |||||||||||||||||||||
| As at January 1, 2006 | 17,136 | 641,156 | 65,945 | - | 724,237 | ||||||||||||||||
| Charge for the year | 1,657 | 88,678 | 4,143 | - | 94,478 | ||||||||||||||||
| Disposals | - | (3,054 | ) | - | - | (3,054 | ) | ||||||||||||||
| As at January 1, 2007 | 18,793 | 726,780 | 70,088 | - | 815,661 | ||||||||||||||||
| Charge for the year | 1,757 | 96,811 | 1,680 | - | 100,248 | ||||||||||||||||
| Disposals | (5,865 | ) | (28,055 | ) | (1,156 | ) | - | (35,076 | ) | ||||||||||||
| Transfers | 15,588 | - | (15,588 | ) | - | - | |||||||||||||||
| As at December 31, 2007 | 30,273 | 795,536 | 55,024 | - | 880,833 | ||||||||||||||||
| Carrying amount | |||||||||||||||||||||
| As at December 31, 2007 | 30,983 | 874,127 | 14,849 | 740,730 | 1,660,689 | ||||||||||||||||
| As at December 31, 2006 | 19,272 | 939,817 | 25,757 | 428,936 | 1,413,782 | ||||||||||||||||
Assets under construction mainly consist of capital construction costs incurred on new utilities and infrastructure facilities and EQUATE expansion project under the Olefins II projects (see note 14). The related commitments are reported in note 21. In 2007, borrowing costs amounting to US$ 13 million (2006: US$ 17 million) on qualifying assets was added to the cost of those assets. The Company’s property, plant and equipment have been assigned as security for the term debt facility granted to the Company (see note 15). |
| 9 | INTANGIBLE ASSETS | ||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Cost | |||||||||
| Technology and licence contributed by UCC | 220,000 | 220,000 | |||||||
| Licence fee paid to Parsons E&C Europe Ltd | 216 | 72 | |||||||
| Licence fees paid to UCC | 11,706 | 11,706 | |||||||
| Olefin technology | 195 | 195 | |||||||
| As at December 31 | 232,117 | 231,973 | |||||||
| For the years ended December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Accumulated amortisation | |||||||||
| As at 1 January | 99,466 | 88,466 | |||||||
| Charge for the year | 11,000 | 11,000 | |||||||
| As at December 31 | 110,466 | 99,466 | |||||||
| Carrying amount | 121,651 | 132,507 | |||||||
In 1996, UCC contributed the technology and licences concerned in consideration for US$ 220 million. During 2004 and 2005, the Company paid licence fees of US$ 11.25 million and US$ 0.528 million respectively to UCC for PE expansion. | |||||||||
| 10 | ACCRUALS AND OTHER LIABILITIES | |||||||||
| As at December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Sales commission | 674 | 849 | ||||||||
| Ocean freight | 3,004 | 3,642 | ||||||||
| Staff incentive | 8,882 | 6,481 | ||||||||
| Staff saving schemes | 2,725 | - | ||||||||
| Staff leave and other employee benefits | 7,314 | 3,053 | ||||||||
| Interest on term debt | 336 | 884 | ||||||||
| Accrual for KFAS | 12,413 | 5,103 | ||||||||
| Accrual for new utilities and infrastructure facilities (see note 8) | 37,788 | 32,967 | ||||||||
| Other capital project accrual | 3,034 | 8,848 | ||||||||
| Feed gas supply | 22,187 | 2,687 | ||||||||
| Others | 6,077 | 3,770 | ||||||||
| 104,434 | 68,284 | |||||||||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
8. | PROPERTY, PLANT AND EQUIPMENT (CONTINUED) | |||||||
| Assets under construction mainly consist of capital construction costs incurred on new utilities and infrastructure facilities and EQUATE expansion project under the Olefins II projects (see note 14). The related commitments are reported in note 21. In 2007, borrowing costs amounting to US$ 13 million (2006: US$ 17 million) on qualifying assets was added to the cost of those assets. The Company’s property, plant and equipment have been assigned as security for the term debt facility granted to the Company (see note 15). | |||||||
|
| |||||||
9. | INTANGIBLE ASSETS | |||||||
|
| |||||||
|
| As at December 31, |
| |||||
|
| 2007 |
| 2006 |
| |||
Cost |
|
|
|
|
| |||
Technology and licence contributed by UCC |
| 220,000 |
|
| 220,000 |
|
| |
Licence fee paid to Parsons E&C Europe Ltd |
| 216 |
|
| 72 |
|
| |
Licence fees paid to UCC |
| 11,706 |
|
| 11,706 |
|
| |
Olefin technology |
| 195 |
|
| 195 |
|
| |
As at December 31 |
| 232,117 |
|
| 231,973 |
|
| |
|
| For the years ended December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Accumulated amortisation |
|
|
|
|
| ||
As at 1 January |
| 99,466 |
|
| 88,466 |
|
|
Charge for the year |
| 11,000 |
|
| 11,000 |
|
|
As at December 31 |
| 110,466 |
|
| 99,466 |
|
|
Carrying amount |
| 121,651 |
|
| 132,507 |
|
|
| In 1996, UCC contributed the technology and licences concerned in consideration for US$ 220 million. During 2004 and 2005, the Company paid licence fees of US$ 11.25 million and US$ 0.528 million respectively to UCC for PE expansion. | |||||||
|
| |||||||
10. | ACCRUALS AND OTHER LIABILITIES | |||||||
|
|
|
| |||||
|
| As at December 31, |
| |||||
|
| 2007 |
| 2006 |
| |||
Sales commission |
| 674 |
|
| 849 |
|
| |
Ocean freight |
| 3,004 |
|
| 3,642 |
|
| |
Staff incentive |
| 8,882 |
|
| 6,481 |
|
| |
Staff saving schemes |
| 2,725 |
|
| - |
|
| |
Staff leave and other employee benefits |
| 7,314 |
|
| 3,053 |
|
| |
Interest on term debt |
| 336 |
|
| 884 |
|
| |
Accrual for KFAS |
| 12,413 |
|
| 5,103 |
|
| |
Accrual for new utilities and infrastructure facilities (see note 8) |
| 37,788 |
|
| 32,967 |
|
| |
Other capital project accrual |
| 3,034 |
|
| 8,848 |
|
| |
Feed gas supply |
| 22,187 |
|
| 2,687 |
|
| |
Others |
| 6,077 |
|
| 3,770 |
|
| |
|
| 104,434 |
|
| 68,284 |
|
| |
63
|
|
Deferred income represents reservation right fees accrued to the extent of construction cost incurred by the Company during 2006 and 2007. Such fees are receivable from the Olefins II project entities (see note 14). |
| 12 | SHARE CAPITAL | ||||||
|
| ||||||
The share capital of the Company comprises 2,160 million authorised, issued and fully paid up shares of Fils 100 each (December 31, 2006: 2,160 million authorised, issued and fully paid up shares of Fils 100 each) (1000 Fils equals 1 Kuwaiti Dinar). | |||||||
The ownership percentages of the shareholders at December 31, 2007 are as follows: | |||||||
|
| ||||||
Union Carbide Corporation (“UCC”) | 42.5% | ||||||
Petrochemical Industries Company (“PIC”) | 42.5% | ||||||
Boubyan Petrochemical Company (“BPC”) | 9% | ||||||
Al Qurain Petrochemical Industries Company (“QPIC”) | 6% | ||||||
On December 20, 2007, UCC contributed its 42.5% ownership interest in EQUATE to Union Carbide Investment B.V, a limited liability company incorporated in Netherlands and owned by Dow Europe Holding B.V. However, the regulatory procedures in Kuwait relating to the contribution of ownership were not completed before December 31, 2007. Therefore, Union Carbide Corporation will remain as a shareholder as at the balance sheet date from Kuwaiti regulatory aspects. | |||||||
| 13 | PROPOSED DIVIDEND | |||
|
| |||
The directors proposed a cash dividend of US$ 692 million for the year ended December 31, 2007 (2006: US$ 510 million) which is subject to the approval of shareholders at the annual General Assembly. This dividend has not been recorded in the accompanying financial statements, and will be recorded only once it has been approved by the shareholders. | ||||
64
|
| |
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 | |
f) | Provision of various services by the Company to TKOC, TKSC, KARO and PIC under Olefins II projects. | |
65
14. RELATED PARTY TRANSACTIONS (CONTINUED) Details of significant related party transactions are disclosed below: For the years ended December 31, 2007 2006 2005 a) Revenues Polypropylene plant management fees from PIC 1,000 1,000 1,000 Sales of EG to MEG International FZE 533,773 391,514 329,283 Interest income on short-term loan to TKOC - - 872 Interest income on long-term loans to TKOC and TKSC 63,973 23,950 - b) Purchases and expenses Feed gas and fuel gas purchased from PIC 143,981 103,666 73,150 Catalyst purchased from DOW 1,857 9,637 2,281 Catalyst purchased from UNIVATION 2,441 4,865 10,038 Operating cost reimbursed by PIC for running of polypropylene plant (26,890 ) (24,271 ) (22,732 ) Expenses reimbursed by PIC and DOW for Olefins II projects - - (6,535 ) Operating costs reimbursed to EMC 2,607 2,223 2,512 Staff secondment costs reimbursed to UCC 3,360 3,351 3,089 c) Key management compensation Salaries and other short term benefits 2,818 2,321 2,253 Terminal benefits 48 47 112 As at December 31, 2007 2006 d) Due from related parties Due from PIC 9,154 10,221 Due from DOW 55 133 Due from TKOC 36,880 24,402 Due from TKSC 13,411 25,659 Due from KARO - 44,890 Due from KPPC 20,822 426 Due from KPC 191 - Due from Kuwait National Petroleum Company (“KNPC”) 6,229 5,451 Due from MEG International FZE 72,942 26,521 Due from MEG Europe - 11,349 159,684 149,052 EQUATE Petrochemical Company KSC (Closed)Table of ContentsNotes to Financial Statements
US$’000
US$’000
US$’000
US$’000
US$’00066
| Details of significant related party transactions are disclosed below: | |||||||||||||
| For the years ended December 31, | |||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | |||||||||||
| a) Revenues | |||||||||||||
| Polypropylene plant management fees from PIC | 1,000 | 1,000 | 1,000 | ||||||||||
| Sales of EG to MEG International FZE | 533,773 | 391,514 | 329,283 | ||||||||||
| Interest income on short-term loan to TKOC | - | - | 872 | ||||||||||
Interest income on long-term loans to TKOC and TKSC | 63,973 | 23,950 | - | ||||||||||
| b) Purchases and expenses | |||||||||||||
| Feed gas and fuel gas purchased from PIC | 143,981 | 103,666 | 73,150 | ||||||||||
| Catalyst purchased from DOW | 1,857 | 9,637 | 2,281 | ||||||||||
Catalyst purchased from UNIVATION | 2,441 | 4,865 | 10,038 | ||||||||||
| Operating cost reimbursed by PIC for running of polypropylene plant | (26,890 | ) | (24,271 | ) | (22,732 | ) | |||||||
| Expenses reimbursed by PIC and DOW for Olefins II projects | - | - | (6,535 | ) | |||||||||
| Operating costs reimbursed to EMC | 2,607 | 2,223 | 2,512 | ||||||||||
| Staff secondment costs reimbursed to UCC | 3,360 | 3,351 | 3,089 | ||||||||||
| c) Key management compensation | |||||||||||||
| Salaries and other short term benefits | 2,818 | 2,321 | 2,253 | ||||||||||
| Terminal benefits | 48 | 47 | 112 | ||||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| d) Due from related parties | |||||||||
| Due from PIC | 9,154 | 10,221 | |||||||
| Due from DOW | 55 | 133 | |||||||
| Due from TKOC | 36,880 | 24,402 | |||||||
| Due from TKSC | 13,411 | 25,659 | |||||||
| Due from KARO | - | 44,890 | |||||||
| Due from KPPC | 20,822 | 426 | |||||||
| Due from KPC | 191 | - | |||||||
| Due from Kuwait National Petroleum Company (“KNPC”) | 6,229 | 5,451 | |||||||
| Due from MEG International FZE | 72,942 | 26,521 | |||||||
| Due from MEG Europe | - | 11,349 | |||||||
| 159,684 | 149,052 | ||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| e) Long-term loans to related parties | |||||||||
| TKOC | 1,142,570 | 597,570 | |||||||
| TKSC | 327,200 | 122,200 | |||||||
| 1,469,770 | 719,770 | ||||||||
| f) Due to related parties | |||||||||
| Due to PIC | 24,053 | 12,327 | |||||||
| Due to DOW | - | 700 | |||||||
| Due to UCC | 522 | 1,889 | |||||||
| Due to EMC | - | 172 | |||||||
| Due to TKOC | - | 2,409 | |||||||
| Due to TKSC | - | 661 | |||||||
| Advance from MEG International FZE | 3,846 | - | |||||||
| 28,421 | 18,158 | ||||||||
| g) Deferred income | |||||||||
| Reservation right fees accrued and receivable from TKOC, TKSC, KPPC and PIC (see note 11) | 510,521 | 288,303 | |||||||
|
|
|
| As at December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
e) Long-term loans to related parties |
| US$’000 |
| US$’000 |
| ||
TKOC |
| 1,142,570 |
|
| 597,570 |
|
|
TKSC |
| 327,200 |
|
| 122,200 |
|
|
|
| 1,469,770 |
|
| 719,770 |
|
|
|
|
|
|
|
|
|
|
f) Due to related parties |
|
|
|
|
|
|
|
Due to PIC |
| 24,053 |
|
| 12,327 |
|
|
Due to DOW |
| - |
|
| 700 |
|
|
Due to UCC |
| 522 |
|
| 1,889 |
|
|
Due to EMC |
| - |
|
| 172 |
|
|
Due to TKOC |
| - |
|
| 2,409 |
|
|
Due to TKSC |
| - |
|
| 661 |
|
|
Advance from MEG International FZE |
| 3,846 |
|
| - |
|
|
|
| 28,421 |
|
| 18,158 |
|
|
|
|
|
|
|
|
|
|
g) Deferred income |
|
|
|
|
|
|
|
Reservation right fees accrued and receivable from TKOC, TKSC, KPPC and PIC (see note 11) |
| 510,521 |
|
| 288,303 |
|
|
| As at December 31, | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Term debt | 1,639,820 | 879,568 | ||||||||
On May 19, 2006, the Company signed a US$ 2.5 billion term debt facility agreement with a consortium of banks which includes a term loan facility of US$ 2.2 billion and a revolving loan facility of US$ 300 million. The term loan is repayable over a period of 11 years in biannual instalments starting from December 15, 2009. The interest rate on this facility is LIBOR + 0.5%. The effective interest rate on the outstanding loan balance as at December 31, 2007 was 5.71% (2006: 5.82%) per annum. The facility is secured by a charge over the Company’s property, plant and equipment and bank balances. During 2007, the Company had obtained the revolving loan and was repaid during the year. The effective interest rate on the revolving loan was 5.82% (2006: 5.81%) per annum. As at December 31, 2007, the Company had available US$ 855 million (2006: US$ 1.6 billion) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. | ||||||||||
|
RETIREMENT BENEFIT OBLIGATION |
|
| As at December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| US$’000 |
| US$’000 |
| ||
|
|
|
|
|
| ||
Term debt |
| 1,639,820 |
|
| 879,568 |
|
|
The most recent actuarial valuation of the
The principal assumptions used for the
|
67
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
The most recent actuarial valuation of the present value of the defined benefit obligation was carried out at December 31, 2007. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the Projected Unit Credit Method.
The principal assumptions used for the purposes of the actuarial valuations were as follows:
| For the year ended December 31, 2007 | ||||
| Discount rate | 6.5% | |||
| Expected rate of increase in | ||||
| - Basic Salary & Variable allowances including overtime and incentives | 8.7% p.a in 2008 gradually reducing to 5.5% p.a over 5 years and level thereafter | |||
| - Average annual & quarterly incentives | 13.2% p.a | |||
| Long-term inflation | 2.5% p.a | |||
| Mid-term real GDP Growth | 4% p.a | |||
| Demographic assumptions | ||||
| Retirement age | ||||
| - Kuwaiti employees | Age 50 | |||
| - Non-Kuwaiti employees | Age 55 |
The total charge for the year is US$ 5.63 million which has been included in the statement of income as follows:
The total charge for the year is US$ 5.63 million which has been included in the statement of income as follows: |
For the year ended December 31, 2007 US$’000 | ||||||
| Cost of sales |
| 4,733 | ||||
| General, administrative and selling expenses |
| 901 | ||||
| 5,634 | |||||
Movements in the present value of the defined benefit obligation in the current year were as follows:
| Movements in the present value of the defined benefit obligation in the current year were as follows: | |||||
For the year ended December 31, 2007 US$’000 | ||||||
| Balance as at January 1 |
| 26,342 | ||||
| Current service cost |
| 5,634 | ||||
| Benefits paid |
| (784 | ) | |||
| Balance as at December 31 |
| 31,192 | ||||
68
For the years ended December 31, 2007 2006 2005 Staff costs: Cost of sales 78,056 63,125 54,148 General, administrative and selling expenses 24,416 26,375 21,843 102,472 89,500 75,991 Depreciation and amortisation: Cost of sales 97,054 87,621 84,095 General, administrative and selling expenses 14,194 17,857 17,456 111,248 105,478 101,551 For the years ended December 31, 2007 2006 2005 Interest on short-term and long-term debts 75,559 41,262 11,650 Less: Amounts included in cost of qualifying assets (see note 8) (13,283) (17,063) (1,178) 62,276 24,199 10,472 For the years ended December 31, 2007 2006 2005 Net income in accordance with IFRS 769,322 566,314 588,059 Items increasing / (decreasing) reported net income: Difference in retirement benefits related to IAS – 19 “Employee benefits” (5,163) - - Reversal of amortisation of intangibles 11,000 11,000 11,000 Net income in accordance with US GAAP 775,159 577,314 599,059 EQUATE Petrochemical Company KSC (Closed)Notes to Financial Statements17. STAFF COSTS, DEPRECIATION AND AMORTIZATIONStaff costs, depreciation and amortisation charges are included in the statementTable of income under the following categories:
US$’000
US$’000
US$’00018. FINANCE COSTSContents
US$’000
US$’000
US$’00019. RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATESThe 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:
US$’000
US$’000
US$’000The Company’s comprehensive income in accordance with US GAAP for the years ended December 31, 2007, 2006 and 2005 was $775,159, $577,314 and $599,059 respectively.69
| 17 | STAFF COSTS, DEPRECIATION AND AMORTIZATION | |||||||||||||
| Staff costs, depreciation and amortisation charges are included in the statement of income under the following categories: | ||||||||||||||
| For the years ended December 31, | ||||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | ||||||||||||
| Staff costs: | ||||||||||||||
| Cost of sales | 78,056 | 63,125 | 54,148 | |||||||||||
| General, administrative and selling expenses | 24,416 | 26,375 | 21,843 | |||||||||||
| 102,472 | 89,500 | 75,991 | ||||||||||||
| Depreciation and amortisation: | ||||||||||||||
| Cost of sales | 97,054 | 87,621 | 84,095 | |||||||||||
| General, administrative and selling expenses | 14,194 | 17,857 | 17,456 | |||||||||||
| 111,248 | 105,478 | 101,551 | ||||||||||||
| 18 | FINANCE COSTS | |||||||||||||
| For the years ended December 31, | ||||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | ||||||||||||
| Interest on short-term and long-term debts | 75,559 | 41,262 | 11,650 | |||||||||||
| Less: Amounts included in cost of qualifying assets (see note 8) | (13,283 | ) | (17,063 | ) | (1,178 | ) | ||||||||
| 62,276 | 24,199 | 10,472 | ||||||||||||
| 19 | RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES |
| The financial statements of the Company are prepared in accordance with IFRS which differ in certain respects from accounting principles generally accepted in the United States of America (“US GAAP”). The significant differences and their effect on the net income for the years ended December 31, and equity as at December 31, are set out below: |
| For the years ended December 31, | |||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | |||||||||||
| Net income in accordance with IFRS | 769,322 | 566,314 | 588,059 | ||||||||||
| Items increasing / (decreasing) reported net income: | |||||||||||||
| Difference in retirement benefits related to IAS – 19 “Employee benefits” | (5,163 | ) | - | - | |||||||||
| Reversal of amortisation of intangibles | 11,000 | 11,000 | 11,000 | ||||||||||
| Net income in accordance with US GAAP | 775,159 | 577,314 | 599,059 | ||||||||||
The Company’s comprehensive income in accordance with US GAAP for the years ended December 31, 2007, 2006 and 2005 was $ 775,159, $ 577,314 and $ 599,059 respectively. | |||||||||||||
As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Equity in accordance with IFRS: | 1,698,468 | 1,439,146 | |||||||
| Items increasing / (decreasing) reported equity: | |||||||||
| Difference in retirement benefits related to IAS – 19 “Employee benefits” | (5,163 | ) | - | ||||||
| Elimination of intangible assets for UCC technology and licences | (220,000 | ) | (220,000 | ) | |||||
| Reversal of accumulated amortisation of intangible assets of UCC technology and licences | 110,271 | 99,271 | |||||||
| Equity in accordance with US GAAP | 1,583,576 | 1,318,417 | |||||||
In 1996, UCC contributed technology and licences valued at US$ 220 million to the Company in exchange for subordinated debt. In June 1999, the Company converted this subordinated debt, as well as other subordinated debt due to PIC and BPC, as well as accrued interest on such notes, to equity. Under US GAAP, the intangible assets were recognized at UCC’s historical cost, which was zero. These US GAAP adjustments eliminate the intangible assets and accumulated amortisation on the intangible assets, from the Company’s balance sheet, and eliminate amortisation expense on the intangible assets from the Company’s statement of income. Under US GAAP, the end of service indemnity liability is calculated based on the Kuwaiti Labour Law which differs from the calculation under IAS – 19. The difference under both methods is considered as a reconciling item in computing the net income as per US GAAP. | |||||||||||||
Under US GAAP, the Company’s contribution to KFAS, and directors’ fees are considered part of operating income, as follows: | |||||||||||||
| For the years ended December 31, | |||||||||||||
2007 US$’000 | 2006 US$’000 | 2005 US$’000 | |||||||||||
| Operating income in accordance with IFRS | 766,743 | 566,802 | 597,557 | ||||||||||
| Items increasing / (decreasing) reported operating income: | |||||||||||||
U.S. GAAP adjustments to operating income related to amortisation | 11,000 | 11,000 | 11,000 | ||||||||||
| Difference in retirement benefits related to IAS – 19 “Employee benefits” | (5,163 | ) | - | - | |||||||||
| Contributions to KFAS | (7,270 | ) | (5,143 | ) | (5,336 | ) | |||||||
| Directors’ fees | (148 | ) | (136 | ) | (302 | ) | |||||||
| Operating income in accordance with US GAAP | 765,162 | 572,523 | 602,919 | ||||||||||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
|
| As at December 31, |
| ||
|
| 2007 |
| 2006 |
|
Equity in accordance with IFRS: |
| 1,698,468 |
| 1,439,146 |
|
Items increasing / (decreasing) reported equity: |
|
|
|
|
|
Difference in retirement benefits related to IAS – 19 “Employee benefits” |
| (5,163) |
| - |
|
Elimination of intangible assets for UCC technology and licences |
| (220,000) |
| (220,000) |
|
Reversal of accumulated amortisation of intangible assets of UCC technology and licences |
| 110,271 |
| 99,271 |
|
Equity in accordance with US GAAP |
| 1,583,576 |
| 1,318,417 |
|
In 1996, UCC contributed technology and licences valued at US$ 220 million to the Company in exchange for subordinated debt. In June 1999, the Company converted this subordinated debt, as well as other subordinated debt due to PIC and BPC, as well as accrued interest on such notes, to equity. Under US GAAP, the intangible assets were recognized at UCC’s historical cost, which was zero. These US GAAP adjustments eliminate the intangible assets and accumulated amortisation on the intangible assets, from the Company’s balance sheet, and eliminate amortisation expense on the intangible assets from the Company’s statement of income.
Under US GAAP, the end of service indemnity liability is calculated based on the Kuwaiti Labour Law which differs from the calculation under IAS – 19. The difference under both methods is considered as a reconciling item in computing the net income as per US GAAP.
Under US GAAP, the Company’s contribution to KFAS, and directors’ fees are considered part of operating income, as follows:
|
| For the years ended December 31, |
| ||||
|
| 2007 |
| 2006 |
| 2005 |
|
Operating income in accordance with IFRS |
| 766,743 |
| 566,802 |
| 597,557 |
|
Items increasing / (decreasing) reported operating income: |
|
|
|
|
|
|
|
U.S. GAAP adjustments to operating income related to amortisation |
| 11,000 |
| 11,000 |
| 11,000 |
|
Difference in retirement benefits related to IAS – 19 “Employee benefits” |
| (5,163) |
| - |
| - |
|
Contributions to KFAS |
| (7,270) |
| (5,143) |
| (5,336) |
|
Directors’ fees |
| (148) |
| (136) |
| (302) |
|
Operating income in accordance with US GAAP |
| 765,162 |
| 572,523 |
| 602,919 |
|
70
| 20 | FINANCIAL INSTRUMENTS |
Capital risk management The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Company consists of debt, which includes the borrowings disclosed in note 15, cash and cash equivalents and equity, comprising issued capital as disclosed in note 12, and retained earnings. Gearing ratio The gearing ratio as at December 31, was as follows: |
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Debt (i) | 170,050 | 159,798 | |||||||
| Cash and bank balances | (416,706 | ) | (151,465 | ) | |||||
| Net debt | (246,656 | ) | 8,333 | ||||||
| Equity | 1,698,468 | 1,439,146 | |||||||
| Net debt to equity ratio | (15 | )% | 0.58 | % | |||||
(i) debt is defined as long-term debt, as detailed in note 15, less long term loans to related parties. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in note 3 to the financial statements. |
| Categories of financial instruments |
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Financial assets | |||||||||
| Cash and bank balances | 416,706 | 151,465 | |||||||
| Trade receivables, net | 145,458 | 122,773 | |||||||
| Due from related parties | 159,684 | 149,052 | |||||||
| Long-term loan to related parties | 1,469,770 | 719,770 | |||||||
| 2,191,618 | 1,143,060 | ||||||||
| Financial liabilities | |||||||||
| Trade payables | 26,920 | 26,804 | |||||||
| Due to related parties | 28,421 | 18,158 | |||||||
| Long-term debt | 1,639,820 | 879,568 | |||||||
| 1,695,161 | 924,530 | ||||||||
Financial risk management objectives The Company’s Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk and fair value interest rate risk), credit risk, liquidity risk and cash flow interest rate risk. |
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
Capital risk management
The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.
The capital structure of the Company consists of debt, which includes the borrowings disclosed in note 15, cash and cash equivalents and equity, comprising issued capital as disclosed in note 12, and retained earnings.
Gearing ratio
The gearing ratio as at December 31, was as follows:
|
| As at December 31, |
| ||
|
| 2007 |
| 2006 |
|
Debt (i) |
| 170,050 |
| 159,798 |
|
Cash and bank balances |
| (416,706) |
| (151,465) |
|
Net debt |
| (246,656) |
| 8,333 |
|
Equity |
| 1,698,468 |
| 1,439,146 |
|
Net debt to equity ratio |
| (15)% |
| 0.58% |
|
(i) debt is defined as long-term debt, as detailed in note 15, less long term loans to related parties.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in note 3 to the financial statements.
Categories of financial instruments
|
| As at December 31, |
| ||
|
| 2007 |
| 2006 |
|
Financial assets |
|
|
|
|
|
Cash and bank balances |
| 416,706 |
| 151,465 |
|
Trade receivables, net |
| 145,458 |
| 122,773 |
|
Due from related parties |
| 159,684 |
| 149,052 |
|
Long-term loan to related parties |
| 1,469,770 |
| 719,770 |
|
|
| 2,191,618 |
| 1,143,060 |
|
Financial liabilities |
|
|
|
|
|
Trade payables |
| 26,920 |
| 26,804 |
|
Due to related parties |
| 28,421 |
| 18,158 |
|
Long-term debt |
| 1,639,820 |
| 879,568 |
|
|
| 1,695,161 |
| 924,530 |
|
Financial risk management objectives
The Company’s Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Company through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk and fair value interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
71
Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. Foreign currency risk management The Company undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The Company’s exposure to balance sheet risk is insignificant since all significant assets and liabilities are denominated in US$. The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: |
| As at December 31, | As at December 31, | ||||||||||||||||
| Liabilities | Assets | ||||||||||||||||
2007 US$’000 | 2006 US$’000 | 2007 US$’000 | 2006 US$’000 | ||||||||||||||
| Euro | 8,326 | 11,265 | 52,940 | 48,137 | |||||||||||||
| Kuwaiti Dinar | 59,445 | 23,980 | 23,756 | 11,187 | |||||||||||||
| Other | - | - | 2,509 | 1,969 | |||||||||||||
Foreign currency sensitivity analysis As at December 31, 2007, if the US$ had weakened/strengthened by 5% against the Euro with all other variables held constant, profit for the year would have been US$ 2.27 million (2006: US$ 1.87 million, 2005: US$ $ 1.05 million) lower/higher, mainly as a result of foreign exchange gains/losses on translation of Euro denominated trade receivables, due from/to related parties and trade payable. Interest rate risk management The Company is exposed to interest rate risk as it borrows funds at floating interest rates. The risk is managed by the Company by maintaining at floating rate borrowings. Interest rate sensitivity analysis As at December 31, 2007, if interest rates on US$ denominated borrowings had been 0.1% higher/lower with all other variables held constant, profit for the year would have been US$ 0.173 million (2006: US$ 0.073 million, 2005: US$ 0.203 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings. The Company’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. |
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
Financial risk management objectives (continued)
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates.
Foreign currency risk management
The Company undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts.
The Company’s exposure to balance sheet risk is insignificant since all significant assets and liabilities are denominated in US$.
The carrying amounts of the Company’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
|
| As at December 31, |
| As at December 31, |
| ||||
|
| Liabilities |
| Assets |
| ||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
Euro |
| 8,326 |
| 11,265 |
| 52,940 |
| 48,137 |
|
Kuwaiti Dinar |
| 59,445 |
| 23,980 |
| 23,756 |
| 11,187 |
|
Other |
| - |
| - |
| 2,509 |
| 1,969 |
|
Foreign currency sensitivity analysis
As at December 31, 2007, if the US$ had weakened/strengthened by 5% against the Euro with all other variables held constant, profit for the year would have been US$ 2.27 million (2006: US$ 1.87 million, 2005: US$ $ 1.05 million) lower/higher, mainly as a result of foreign exchange gains/losses on translation of Euro denominated trade receivables, due from/to related parties and trade payable.
Interest rate risk management
The Company is exposed to interest rate risk as it borrows funds at floating interest rates. The risk is managed by the Company by maintaining at floating rate borrowings.
Interest rate sensitivity analysis
As at December 31, 2007, if interest rates on US$ denominated borrowings had been 0.1% higher/lower with all other variables held constant, profit for the year would have been US$ 0.173 million (2006: US$ 0.073 million, 2005: US$ 0.203 million) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings.
The Company’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.
72
Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available and, if not available, the Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the management annually. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Company has significant credit exposure to counterparties. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: | |||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Trade receivables, net | 145,458 | 122,773 | |||||||
| Due from related parties | 159,684 | 149,052 | |||||||
| Long-term loans to related parties | 1,469,770 | 719,770 | |||||||
| 1,774,912 | 991,595 | ||||||||
| The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: | |||||||||
| As at December 31, | |||||||||
2007 US$’000 | 2006 US$’000 | ||||||||
| Domestic & Gulf Cooperation Council countries (GCC) | 18,608 | 15,706 | |||||||
| Asia | 71,922 | 60,705 | |||||||
| Europe | 14,082 | 11,886 | |||||||
| Other regions | 40,846 | 34,476 | |||||||
| 145,458 | 122,773 | ||||||||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
Financial risk management objectives (continued)
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available and, if not available, the Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the management annually.
Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
The Company has significant credit exposure to counterparties. The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
|
| As at December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| US$’000 |
| US$’000 |
| ||
Trade receivables, net |
| 145,458 |
| 122,773 |
| ||
Due from related parties |
| 159,684 |
| 149,052 |
| ||
Long-term loans to related parties |
| 1,469,770 |
| 719,770 |
| ||
|
| 1,774,912 |
| 991,595 |
| ||
|
|
|
| ||||
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: |
| ||||||
|
|
|
| ||||
|
| As at December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| US$’000 |
| US$’000 |
| ||
Domestic & Gulf Cooperation Council countries (GCC) |
| 18,608 |
| 15,706 |
| ||
Asia |
| 71,922 |
| 60,705 |
| ||
Europe |
| 14,082 |
| 11,886 |
| ||
Other regions |
| 40,846 |
| 34,476 |
| ||
|
| 145,458 |
| 122,773 |
| ||
73
| The table below shows the credit limit and balance of 5 major counterparties at the balance sheet date: |
| As at December 31, 2007 | As at December 31, 2006 | |||||||||||||||||
Counterparty | Location | Credit limit | Carrying amount | Credit limit | Carrying amount | |||||||||||||
| US$’ 000 | US$’ 000 | US$’ 000 | US$’ 000 | |||||||||||||||
| MEGlobal International FZE | Dubai | 100,000 | 72,942 | 50,000 | 26,521 | |||||||||||||
| Bee Lian Plastic Industries | Malaysia | 11,230 | 10,106 | 6,680 | 6,186 | |||||||||||||
| Continental Industries Group Inc | Turkey | 10,000 | 8,217 | - | - | |||||||||||||
| Obegi Chemicals Sal | Lebanon | 9,250 | 1,947 | - | - | |||||||||||||
| Kassas & Al-Kurdi Company | Syria | 5,100 | 3,932 | - | - | |||||||||||||
Liquidity risk management Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. Ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in note 15 is a listing of additional undrawn facilities that the Company has at its disposal to further reduce liquidity risk. The table below analyses the Company’s non-derivative financial liabilities based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. |
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
Financial risk management objectives (continued)
Credit risk management (continued)
The table below shows the credit limit and balance of 5 major counterparties at the balance sheet date:
|
|
|
| As at December 31, 2007 |
| As at December 31, 2006 |
| ||||
Counterparty |
| Location |
| Credit limit |
| Carrying |
| Credit limit |
| Carrying |
|
|
|
|
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
|
MEGlobal International FZE |
| Dubai |
| 100,000 |
| 72,942 |
| 50,000 |
| 26,521 |
|
Bee Lian Plastic Industries |
| Malaysia |
| 11,230 |
| 10,106 |
| 6,680 |
| 6,186 |
|
Continental Industries Group Inc |
| Turkey |
| 10,000 |
| 8,217 |
| - |
| - |
|
Obegi Chemicals Sal |
| Lebanon |
| 9,250 |
| 1,947 |
| - |
| - |
|
Kassas & Al-Kurdi Company |
| Syria |
| 5,100 |
| 3,932 |
| - |
| - |
|
Liquidity risk management
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
Ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in note 15 is a listing of additional undrawn facilities that the Company has at its disposal to further reduce liquidity risk.
The table below analyses the Company’s non-derivative financial liabilities based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
74
As at December 31, 2007 | Less than 1 year | Between 1 and 2 years | Between 2 and 5 years | Over 5 years | |||||||||||||
| US$’ 000 | US$’ 000 | US$’ 000 | US$’ 000 | ||||||||||||||
| Trade payables | 26,920 | - | - | - | |||||||||||||
| Due to related parties | 28,421 | - | - | - | |||||||||||||
| Long-term debt | - | 55,426 | 365,844 | 1,218,550 | |||||||||||||
As at December 31, 2006 | Less than 1 year | Between 1 and 2 years | Between 2 and 5 years | Over 5 years | |||||||||||||
| US$’ 000 | US$’ 000 | US$’ 000 | US$’ 000 | ||||||||||||||
| Trade payables | 26,804 | - | - | - | |||||||||||||
| Due to related parties | 18,158 | - | - | - | |||||||||||||
| Long-term debt | - | - | 157,003 | 722,565 | |||||||||||||
Fair value of financial instruments The fair value of financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments. Set out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the financial statements: | |||||||||||||||||
| As at December 31, 2007 | As at December 31, 2006 | ||||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||
| US$’ 000 | US$’ 000 | US$’ 000 | US$’ 000 | ||||||||||||||
| Financial assets | |||||||||||||||||
| Cash and bank balances | 416,706 | 416,706 | 151,465 | 151,465 | |||||||||||||
| Trade receivables, net | 145,458 | 145,458 | 122,773 | 122,773 | |||||||||||||
| Due from related parties | 159,684 | 159,684 | 149,052 | 149,052 | |||||||||||||
| Long-term loans to related parties | 1,469,770 | 1,469,770 | 719,770 | 719,770 | |||||||||||||
| As at December 31, 2007 | As at December 31, 2006 | ||||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||
| US$’ 000 | US$’ 000 | US$’ 000 | US$’ 000 | ||||||||||||||
| Financial liabilities | |||||||||||||||||
| Trade payables | 26,920 | 26,920 | 26,804 | 26,804 | |||||||||||||
| Due to related parties | 28,421 | 28,421 | 18,158 | 18,158 | |||||||||||||
| Long-term debt | 1,639,820 | 1,639,820 | 879,568 | 879,568 | |||||||||||||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
Liquidity risk management (continued)
As at December 31, 2007 |
| Less than |
| Between 1 |
| Between 2 |
| Over 5 |
|
|
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
|
Trade payables |
| 26,920 |
| - |
| - |
| - |
|
Due to related parties |
| 28,421 |
| - |
| - |
| - |
|
Long-term debt |
| - |
| 55,426 |
| 365,844 |
| 1,218,550 |
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2006 |
| Less than |
| Between 1 |
| Between 2 |
| Over 5 |
|
|
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
|
Trade payables |
| 26,804 |
| - |
| - |
| - |
|
Due to related parties |
| 18,158 |
| - |
| - |
| - |
|
Long-term debt |
| - |
| - |
| 157,003 |
| 722,565 |
|
|
|
|
|
|
|
|
|
|
|
Fair value of financial instruments
The fair value of financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments.
Set out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial instruments that are carried in the financial statements:
|
| As at December 31, 2007 |
| As at December 31, 2006 | ||||
|
| Carrying |
| Fair value |
| Carrying |
| Fair value |
|
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
Financial assets |
|
|
|
|
|
|
|
|
Cash and bank balances |
| 416,706 |
| 416,706 |
| 151,465 |
| 151,465 |
Trade receivables, net |
| 145,458 |
| 145,458 |
| 122,773 |
| 122,773 |
Due from related parties |
| 159,684 |
| 159,684 |
| 149,052 |
| 149,052 |
Long-term loans to related parties |
| 1,469,770 |
| 1,469,770 |
| 719,770 |
| 719,770 |
|
| As at December 31, 2007 |
| As at December 31, 2006 | ||||
|
| Carrying |
| Fair value |
| Carrying |
| Fair value |
|
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
| US$’ 000 |
Financial liabilities |
|
|
|
|
|
|
|
|
Trade payables |
| 26,920 |
| 26,920 |
| 26,804 |
| 26,804 |
Due to related parties |
| 28,421 |
| 28,421 |
| 18,158 |
| 18,158 |
Long-term debt |
| 1,639,820 |
| 1,639,820 |
| 879,568 |
| 879,568 |
75
| 21 | COMMITMENTS AND CONTINGENT LIABILITIES | |||||||||
The Company has a fixed gas purchase commitment with KNPC of approximately US$ 361,000 per day until the agreement is cancelled in writing by both parties. | ||||||||||
| The Company had the following commitments and contingent liabilities outstanding as at December 31: | ||||||||||
2007 US$’000 | 2006 US$’000 | |||||||||
| Letters of credit and letters of guarantee | 4,176 | 3,677 | ||||||||
| Purchase of capital assets | 110,968 | 319,679 | ||||||||
| Loan commitments to related parties | 527,230 | 1,277,230 | ||||||||
| 22 | COMPARATIVE FIGURES Reclassification have been made to present the long term incentives separately in the balance sheet. In addition, certain immaterial comparative figures have been reclassified to conform to the current year’s presentation. | ||
EQUATE Petrochemical Company KSC (Closed)
Notes to Financial Statements
The Company has a fixed gas purchase commitment with KNPC of approximately US$ 361,000 per day until the agreement is cancelled in writing by both parties.
The Company had the following commitments and contingent liabilities outstanding as at December 31:
|
| 2007 |
| 2006 | |
Letters of credit and letters of guarantee |
| 4,176 |
| 3,677 |
|
Purchase of capital assets |
| 110,968 |
| 319,679 |
|
Loan commitments to related parties |
| 527,230 |
| 1,277,230 |
|
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.
76
UNION CARBIDE CORPORATION | ||||||||||
| By: | /s/ W. H. WEIDEMAN | |||||||||
|
| |||||||||
W. H. Weideman, Vice President and Controller | ||||||||||
The Dow Chemical Company | ||||||||||
Authorized Representative of | ||||||||||
Union Carbide Corporation | ||||||||||
/s/ PATRICK E. GOTTSCHALK | /s/ | |
Patrick E. Gottschalk, Director |
| |
President and Chief Executive Officer | ||
| /s/ EUDIO GIL | /s/ DUNCAN A. STUART | |
|
| |
|
| |
Chief Financial Officer | ||
/s/ W. H. WEIDEMAN | ||
| ||
W. H. Weideman, Vice President and Controller | ||
The Dow Chemical Company | ||
Authorized Representative of | ||
Union Carbide Corporation |
77
78
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. dated August 3, 1999). | |
| 3.1 | ||
| Restated Certificate of Incorporation of Union Carbide Corporation under Section 807 of the Business Corporation Law, as filed | |
| 3.2 | ||
|
| |
|
| |
| Amended and Restated Bylaws of Union Carbide Corporation, amended as of April 22, 2004 | |
| 4.1 | ||
| Indenture dated as of June 1, 1995, between the Corporation and the Chase Manhattan Bank (formerly Chemical Bank), Trustee | |
| 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 | |
| 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 | |
| 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 | |
| 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 | |
| 10.2 | ||
| Second Amended and Restated Sales Promotion Agreement, effective January 1, 2004, between the Corporation and The Dow Chemical Company | |
| 10.3 | ||
|
Third Amended and Restated Agreement (to Provide Materials and Services), dated as of | |
| 10.4 | ||
| Amended and Restated Tax Sharing Agreement, effective as of February 7, 2001, between the Corporation and The Dow Chemical Company |
79
Union Carbide Corporation and Subsidiaries
Exhibit Index
|
|
| 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 | |
| 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 |
| 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 | |
| 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 | |
| 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 | |
| 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). | |
10.6 | Amended and Restated Pledge and Security Agreement dated as of May 28, 2004, between the Corporation and The Dow Chemical Company | |
| 10.7 | ||
| Second Amended and Restated Revolving Loan Agreement, effective as of November 1, 2005, between the Corporation and The Dow Chemical Company | |
| 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 | |
| 10.8 | ||
| Purchase and Sale Agreement dated as of September 30, 2005, between Catalysts, Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials LLC | |
| 10.9 | ||
| Contribution Agreement dated as of December 21, 2007, among the Corporation, Dow International Holdings Company and The Dow Chemical | |
| 21 | ||
| Omitted pursuant to General Instruction I of Form 10-K. | |
| 23 | ||
| 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. |
80
Union Carbide Corporation and Subsidiaries
Exhibit Index
|
|
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
81