Attached files
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| EX-23 - ANALYSIS, RESEARCH & PLANNING CORPORATION'S CONSENT - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex23.htm |
| EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex312.htm |
| EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex311.htm |
| EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex321.htm |
| EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex322.htm |
| EX-10.5.12 - EXHIBIT 10.5.12 - UNION CARBIDE CORP /NEW/ | ucc2014-10kxex10512.htm |
| EXCEL - IDEA: XBRL DOCUMENT - UNION CARBIDE CORP /NEW/ | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
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.) | |
1254 Enclave Parkway, Houston, Texas 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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes R 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 R 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. R Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
R 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 R | Small reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes R No
At February 13, 2015, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.
The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
Union Carbide Corporation
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2014
TABLE OF CONTENTS
PAGE | ||
Business. | ||
Risk Factors. | ||
Unresolved Staff Comments. | ||
Properties. | ||
Legal Proceedings. | ||
Mine Safety Disclosures. | ||
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | ||
Selected Financial Data. | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations. | ||
Quantitative and Qualitative Disclosures About Market Risk. | ||
Financial Statements and Supplementary Data. | ||
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. | ||
Controls and Procedures. | ||
Other Information. | ||
Directors, Executive Officers and Corporate Governance. | ||
Executive Compensation. | ||
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | ||
Certain Relationships and Related Transactions, and Director Independence. | ||
Principal Accounting Fees and Services. | ||
Exhibits, Financial Statement Schedules. | ||
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Union Carbide Corporation and Subsidiaries |
FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Item 1. Business,” “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words "anticipate," “believe,” “estimate,” “expect,” “future,” “intend,” “may,” “opportunity,” "outlook," “plan,” “project,” “should,” “strategy,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this Form 10-K). Union Carbide Corporation undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 1. Business. |
THE CORPORATION
Union Carbide Corporation (the “Corporation” or “UCC”) is a chemicals and polymers company that has been a wholly owned subsidiary of The Dow Chemical Company (“Dow”) since 2001. Except as otherwise indicated by the context, the terms “Corporation” or “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries.
Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global businesses rather than stand-alone operations. Because there are no separable reportable business segments for UCC and no detailed business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment. In addition, in order to simplify the customer interface process, the Corporation sells substantially all its products to Dow. Products are sold to Dow at market-based prices, in accordance with the terms of Dow's intercompany pricing policies.
Available Information
The Corporation's annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge through the Financial Reports-SEC Filings section of the Corporation's website (www.unioncarbide.com), as soon as reasonably practicable after the reports are electronically filed or furnished with the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains these reports as well as proxy statements and other information regarding issuers that file electronically. The SEC's website is at www.sec.gov. The Corporation's website and its content are not deemed incorporated by reference into this report.
PRODUCTS
The following is a description of the Corporation's principal products.
Electrical and Telecommunications - polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications, and flame-retardant wire and cable. Key product lines include: REDI-LINK™ Polyethylene-Based Wire and Cable Compounds, SI-LINK™ Polyethylene-Based Low Voltage Insulation Compounds, UNIGARD™ HP High-Performance Flame-Retardant Compounds, UNIGARD™ RE Reduced Emissions Flame-Retardant Compounds, and UNIPURGE™ Purging Compounds.
Ethylene Oxide/Ethylene Glycol (“EO/EG”) - ethylene oxide, a chemical intermediate primarily used in the manufacture of monoethylene glycol (“MEG”), polyethylene glycol, glycol ethers, ethanolamines, surfactants and other performance chemicals and polymers; di- and triethylene glycol, used in a variety of applications, including boat construction, shoe manufacturing, natural gas-drying and other moisture-removing applications, and plasticizers for safety glasses; and tetraethylene glycol, used predominantly in the production of plasticizers for automotive windows. MEG is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids.
Hydrocarbons - ethylene and propylene; internal feedstocks that are primarily consumed by downstream businesses to optimize integration benefits and drive low costs.
Industrial Chemicals and Polymers - broad range of products for specialty applications, including pharmaceutical, animal food supplements, personal care, industrial and household cleaning, coatings for beverage and food cans, industrial coatings and many other industrial uses. Product lines include acrolein and derivatives, glutaraldehydes, CARBOWAX™ and CARBOWAX™ SENTRY™ Polyethylene Glycols and Methoxypolyethylene Glycols, TERGITOL™ and TRITON™ Surfactants, UCAR™ Deicing Fluids, UCARTHERM™ Heat Transfer Fluids and UCON™ Fluids.
Polyethylene - includes FLEXOMER™ Polyethylene, very low density polyethylene resins used as impact modifiers in other polymers and to produce flexible hose and tubing, frozen-food bags and stretch wrap; TUFLIN™ Linear Low Density and UNIVAL™ High Density Polyethylene resins used in high-volume applications such as housewares; milk, water, bleach and detergent bottles; grocery sacks; trash bags; packaging; and water and gas pipe.
Solvents and Intermediates - includes oxo aldehydes, acids and alcohols used as chemical intermediates and industrial solvents and in herbicides, plasticizers, paint dryers, jet-turbine lubricants, lube oil additives, and food and feed preservatives;
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and esters, which serve as solvents in industrial coatings and printing inks and in the manufacturing processes for pharmaceuticals and polymers.
Technology Licensing and Catalysts - includes catalysts for supply and licensing of the METEOR™ Process for EO/EG and the LP OXO process for oxo alcohols; and licensing of the METEOR™ Process for EO/EG and the LP OXO process for oxo alcohols through Dow Technology Investments LLC, a 50:50 joint venture with Dow Global Technologies LLC, a Dow subsidiary.
Vinyl Acetate Monomer - a building block for the manufacture of a variety of polymers used in water-based emulsion paints, adhesives, paper coatings, textiles, safety glass and acrylic fibers.
Water Soluble Polymers - polymers used to enhance the physical and sensory properties of end-use products in a wide range of applications including food, paints and coatings, pharmaceuticals, oil and gas, home and 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.
COMPETITION
The chemical industry has been historically competitive and this competitive environment is expected to continue. Large, multinational chemical firms, as well as the chemical divisions of the major national and international oil companies, provide substantial competition both in the United States and abroad.
RESEARCH AND DEVELOPMENT
The Corporation is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes, and to develop new applications for existing products. Research and development expenses were $20 million in 2014, $25 million in 2013 and $35 million in 2012.
PATENTS, LICENSES AND TRADEMARKS
The Corporation continually applies for and obtains 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. At December 31, 2014, the Corporation owned 146 active U.S. patents and 539 active foreign patents related to a wide variety of products and processes. These patents expire as follows:
Remaining Life of Patents Owned at December 31, 2014 | ||||||
United States | Foreign | |||||
Within 5 years | 76 | 174 | ||||
6 to 10 years | 28 | 201 | ||||
11 to 15 years | 20 | 124 | ||||
16 to 20 years | 22 | 40 | ||||
Total | 146 | 539 | ||||
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 on any single or group of related patents, licenses or trademarks.
PRINCIPAL PARTLY OWNED COMPANIES
UCC had no principal nonconsolidated affiliates at December 31, 2014 and the Corporation's ownership interest changed in 2013 for the following:
• | Nippon Unicar Company Limited ("NUC") - previously owned 50 percent - a Japan-based manufacturer of polyethylene and specialty polyethylene compounds was sold to TonenGeneral Sekiyu K. K. on July 1, 2013. |
• | Univation Technologies, LLC ("Univation") - previously owned 50 percent - a United States-based company that develops, markets and licenses the UNIPOL™ Polyethylene Process Technology and sells related catalysts, including metallocene catalysts. On September 26, 2013, UCC declared a stock dividend to Dow of its 100 percent ownership in Union Carbide Subsidiary C, Inc., which included UCC's full ownership interest in Univation. |
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
In 2014, the Corporation derived 24 percent of its trade sales to external customers from customers outside the United States and had 3 percent of its property investment located outside the United States. See Note 20 to the Consolidated Financial Statements for information on sales to external customers and long-lived assets by geographic area.
PROTECTION OF THE ENVIRONMENT
Matters pertaining to the environment are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Notes 1 and 13 to the Consolidated Financial Statements.
OTHER ACTIVITIES
Divestitures
On October 11, 2013, Dow entered into a definitive agreement under which its global Polypropylene Licensing and Catalysts business would be divested to W.R. Grace & Co. On December 2, 2013, the sale was completed and proceeds allocated to the Corporation were $398 million, net of working capital adjustments and cost to sell, with proceeds subject to customary post closing adjustments, which were finalized in the fourth quarter of 2014. Included in the divestiture was the Corporation's polypropylene catalysts manufacturing facility in Norco, Louisiana, as well as customer contracts, accounts receivable, licenses, intellectual property and inventory. See Note 4 to the Consolidated Financial Statements for additional information.
On January 31, 2013, UCC entered into a definitive agreement to sell its 50 percent ownership interest in NUC to TonenGeneral Sekiyu K. K. On July 1, 2013, the sale was completed for $13 million. As a result of this share sale, the Corporation reclassified a $20 million gain, primarily attributable to cumulative translation adjustments, from "Accumulated other comprehensive loss" into earnings in the third quarter of 2013 and is included in "Sundry income (expense) - net" in the consolidated statements of operations. Including this reclassification, the sale resulted in no pretax gain or loss. See Note 7 to the Consolidated Financial Statements for additional information.
Stock Dividend
On September 26, 2013, UCC declared a stock dividend to Dow of its 100 percent ownership interest in Union Carbide Subsidiary C, Inc., which included UCC's full ownership interest in Univation. This stock dividend was effective on September 29, 2013, and totaled $70 million.
Dividends
On a quarterly basis, the Corporation's Board of Directors reviews and approves a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution.
The Corporation declared and paid cash dividends of $1.3 billion to Dow in 2014; dividends paid to Dow were $661 million in 2013.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 1A. Risk Factors. |
RISK FACTORS
The factors described below represent the Corporation's principal risks.
Global Economic Conditions: The Corporation operates in a global, competitive environment, which gives rise to operating and market risk exposure.
The Corporation sells substantially all of its products to Dow, which operates in a competitive, global environment, and competes worldwide for sales. Increased levels of competition could result in lower prices or lower sales volume, which could have a negative impact on the Corporation's results of operations.
Economic conditions around the world and in certain industries in which the Corporation does business also impact sales price and volume. As a result, market uncertainty or an economic downturn in the geographic areas or industries in which UCC sells its products could reduce demand for these products and result in decreased sales volume, which could have a negative impact on UCC's results of operations.
Raw Materials: Availability of purchased feedstocks and energy and the volatility of these costs impact the Corporation's operating costs and add variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of the Corporation's total production costs and operating expenses. The Corporation purchases hydrocarbon raw materials including ethane, propane, butane and naphtha as feedstocks. The Corporation also purchases certain monomers, primarily ethylene and propylene, to supplement internal production, as well as other raw materials. The Corporation purchases natural gas, primarily to generate electricity, and purchases electric power.
Feedstock and energy costs generally follow price trends in crude oil and natural gas, which are sometimes volatile. Ultimately, the ability to pass on underlying cost increases is dependent on market conditions. Conversely, when feedstock and energy costs decline, selling prices generally decline as well. As a result, volatility in these costs could impact the Corporation's results of operations.
The Corporation restarted an ethylene facility in St. Charles, Louisiana, in 2012 to take advantage of increasing supplies of low-cost natural gas and natural gas liquids ("NGLs") from shale gas. As a result of this action, the Corporation's exposure to purchased ethylene and propylene has declined, offset by increased exposure to ethane and propane feedstocks.
While the Corporation expects abundant and cost-advantaged supplies of NGLs in the United States to persist for the foreseeable future, if NGLs were to become significantly less advantaged than crude oil-based feedstocks, it could have a negative impact on the Corporation's results of operations and future investments.
Also, if the Corporation's key suppliers of feedstocks and energy are unable to provide the raw materials required for production, it could have a negative impact on the Corporation's results of operations.
Supply/Demand Balance: Earnings generated by the Corporation vary based in part on the balance of supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity, especially for basic commodities where capacity is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to the increase in supply, which could negatively impact the Corporation's results of operations.
Financial Flexibility: Market conditions could reduce Dow's financial flexibility, which could impact the financial flexibility of the Corporation.
Adverse economic conditions could reduce Dow's flexibility to respond to changing business and economic conditions or to fund capital expenditures or working capital needs. The economic environment could result in a contraction in the availability of credit in the marketplace and reduce sources of liquidity for Dow and could result in higher borrowing costs. Since Dow is a service provider, material debtor, and the major customer of the Corporation, reduced financial flexibility for Dow could potentially impact the financial flexibility of the Corporation.
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Environmental Compliance: The costs of complying with evolving regulatory requirements could negatively impact the Corporation's financial results. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
The Corporation is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment, greenhouse gas emissions and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. At December 31, 2014, the Corporation had accrued obligations of $132 million ($126 million at December 31, 2013) for probable environmental remediation and restoration costs, including $22 million ($23 million at December 31, 2013) 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and 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 could result in significant unanticipated costs or liabilities.
Litigation: The Corporation is party to a number of claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions.
The Corporation is involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. With the exception of the possible effect of the asbestos-related liability described below, it is the opinion of the Corporation's management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on the Corporation's consolidated financial statements.
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. At December 31, 2014, the Corporation's asbestos-related liability for pending and future claims was $513 million ($501 million at December 31, 2013) and the Corporation's receivable for insurance recoveries related to its asbestos liability was $10 million ($25 million at December 31, 2013). At December 31, 2014, the Corporation also had receivables of $69 million ($66 million at December 31, 2013) for insurance recoveries for defense and resolution costs. Management believes that it is reasonably possible that the cost of disposing of the Corporation's asbestos-related claims, including future defense costs, could have a material impact on the Corporation's consolidated financial statements.
Chemical Safety: Increased concerns regarding the safety of chemicals in commerce and their potential impact on the environment have resulted in more restrictive regulations from local, state and federal governments and could lead to new regulations.
Concerns regarding the safe use of chemicals in commerce and their potential impact on health and the environment reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest themselves in stockholder proposals, preferred purchasing and continued pressure for more stringent regulatory intervention. These concerns could also influence public perceptions, the viability of the Corporation's products, the Corporation's reputation and the cost to comply with regulations. In addition, terrorist attacks and natural disasters have increased concerns about the security and safety of chemical production and distribution. These concerns could have a negative impact on the Corporation's results of operations.
Local, state and federal governments continue to propose new regulations related to the security of chemical plant locations and the transportation of hazardous chemicals, which would result in higher operating costs.
Operational Event: A significant operational event could negatively impact the Corporation's results of operations.
As a diversified chemical manufacturing company, the Corporation's operations, the transportation of products, cyber attacks or severe weather conditions and other natural phenomena (such as drought, hurricanes, earthquakes, tsunamis, floods, etc.) could result in an unplanned event that could be significant in scale and could negatively impact operations, neighbors or the public at large, which could have a negative impact on the Corporation's results of operations.
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Major hurricanes have caused significant disruption in UCC's operations on the U.S. Gulf Coast, logistics across the region, and the supply of certain raw materials, which had an adverse impact on volume and cost for some of UCC's products. Due to the Corporation's substantial presence on the U.S. Gulf Coast, similar severe weather conditions or other natural phenomena in the future could negatively affect UCC's results of operations.
Pension and Other Postretirement Benefits: Increased obligations and expenses related to the Corporation's defined benefit pension plans and other postretirement benefit plan could negatively affect UCC's financial condition and results of operations.
The Corporation has defined benefit pension plans and an other postretirement benefit plan (the “plans”) in the United States. The assets of the Corporation's funded plans are primarily invested in fixed income and equity securities of U.S. and foreign issuers. Changes in the market value of plan assets, investment returns, discount rates, mortality rates, the rate of increase in compensation levels, regulations and health care cost trends may affect the funded status of the Corporation's plans and could cause volatility in the net periodic benefit cost, future funding requirements of the plans and the funded status of the plans. A significant increase in the Corporation's obligations or future funding requirements could have a negative impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
Cyber Vulnerability: The risk of loss of the Corporation's intellectual property, trade secrets or other sensitive business information or disruption of operations could negatively impact the Corporation's financial results.
Cyber attacks or security breaches could compromise confidential, business critical information, cause a disruption in the Corporation's operations or harm the Corporation's reputation. The Corporation has attractive information assets, including intellectual property, trade secrets and other sensitive, business critical information. While the Corporation has a comprehensive cyber security program that is continuously reviewed, maintained and upgraded, a significant cyber attack could result in the loss of critical business information and/or could negatively impact operations, which could have a negative impact on the Corporation's financial results.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 1B. Unresolved Staff Comments. |
UNRESOLVED STAFF COMMENTS
None.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 2. Properties. |
PROPERTIES
The Corporation operates eight manufacturing sites in three countries. The Corporation considers its properties to be in good operating condition and that its machinery and equipment have been well maintained. The following are the major production sites:
United States: | Hahnville (St. Charles), Louisiana; Seadrift and Texas City, Texas. |
All of UCC's plants are owned or leased, subject to certain easements of other persons that, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value.
A summary of property, classified by type, is contained in Note 6 to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 3. Legal Proceedings. |
LEGAL PROCEEDINGS
Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc.
It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
For additional information, see Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 13 to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries |
PART I, Item 4. Mine Safety Disclosures. |
MINE SAFETY DISCLOSURES
Not applicable.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation is a wholly owned subsidiary of Dow; therefore, there is no public trading market for the Corporation's common stock.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 6. Selected Financial Data. |
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I of Form 10‑K.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to General Instruction I of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” this section includes only management's narrative analysis of the results of operations for the year ended December 31, 2014, the most recent fiscal year, compared with the year ended December 31, 2013, the fiscal year immediately preceding it.
References below to “Dow” refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context.
Dow conducts its worldwide operations through global businesses, and Union Carbide Corporation's (the “Corporation” or “UCC”) business activities comprise components of Dow's global operations rather than stand-alone operations. Because there are no separable reportable business segments for UCC and no detailed business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment.
Results of Operations
Total net sales for 2014 were $6,917 million, substantially unchanged when compared with net sales of $6,948 million in 2013. Net sales to related companies, principally to Dow, were $6,835 million for 2014, compared with $6,787 million for 2013, an increase of 1 percent. Selling prices to Dow are based on market prices for the related products.
Total net sales were flat as price gains were offset by volume declines. Average selling prices increased 5 percent in 2014 compared with 2013. Prices were up across most businesses with the largest gains in polyethylene, solvents, acrylic monomers, amines and vinyl acetate monomers. Volume was down 5 percent in 2014 compared with 2013. Volume gains in electrical and telecommunications and polyethylene were partially offset by volume declines in solvents, ethylene, acrolein and derivatives and vinyl acetate monomer, as well as the impact on sales from the divestiture of Dow's Polypropylene Licensing and Catalysts business in 2013.
Cost of sales were $5,922 million in 2014, down 5 percent from $6,214 million in 2013 due to lower raw material costs, improved operating rates, cost reduction initiatives and the impact of the divestiture of Dow's Polypropylene Licensing and Catalysts business. These declines were offset by increased spending for planned maintenance turnarounds and unplanned plant outages due to weather conditions earlier in 2014.
Research and development (“R&D”) expenses were $20 million in 2014, compared with $25 million in 2013. This decrease is a result of cost reduction initiatives as well as Dow's divestiture of the Polypropylene Licensing and Catalysts business in the fourth quarter of 2013.
In 2014, the Corporation recorded a pretax charge of $78 million related to an increase in the asbestos-related liability for pending and future claims. This adjustment was required due to the increase in mesothelioma claim activity compared to the previous forecast. See Note 13 to the Consolidated Financial Statements for additional information on asbestos-related matters.
In the fourth quarter of 2012, the Board of Directors approved a restructuring plan to improve the cost effectiveness of the Corporation's global operations. As a result, the Corporation recorded pretax restructuring charges totaling $71 million in the fourth quarter of 2012, which included asset write-downs and write-offs of $48 million, severance costs of $10 million and costs associated with exit or disposal activities of $13 million. The restructuring affected approximately 100 positions and resulted in a shutdown of certain manufacturing facilities. In the fourth quarter of 2014, the Corporation recorded a favorable adjustment to the reserve for contract cancellation fees of $3 million. In the first quarter of 2012, the Corporation recorded restructuring charges totaling $3 million related to a workforce reduction of approximately 20 employees. See Note 3 to the Consolidated Financial Statements for additional information on the Corporation's restructuring activities.
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Equity in earnings of nonconsolidated affiliates was $7 million in 2014, down from $82 million in 2013 primarily due to the change in ownership of Univation Technologies, LLC ("Univation"). In the third quarter of 2013, UCC declared a stock dividend to Dow of its 100 percent ownership in Union Carbide Subsidiary C, Inc., which included UCC's full ownership interest in Univation. For additional information on nonconsolidated affiliates, see Note 7 to the Consolidated Financial Statements.
Sundry income (expense) - net includes a variety of income and expense items such as dividend income, the gain or loss on foreign currency exchange, commissions, charges for management services provided by Dow, and gains and losses on sales of investments and assets. Sundry income (expense) - net for 2014 was net income of $14 million compared with net income of $308 million in 2013. The decrease in income compared with 2013 was primarily due to a gain of $368 million related to Dow's divestiture of the Polypropylene Licensing and Catalysts business partially offset by an impairment charge of $25 million in a related company investment in 2013. In 2014, Sundry income (expense) - net includes a gain of $66 million on the sale of UCC's railcar fleet to Dow partially offset by reclassification of a cumulative translation adjustment of $16 million primarily related to the liquidation of a foreign entity. See Notes 4, 12 and 17 to the Consolidated Financial Statements for additional information.
Interest income for 2014 was $11 million, compared with $12 million in 2013. Interest expense and amortization of debt discount for 2014 was $32 million, flat with 2013. Long-term debt was up 2 percent in 2014 compared with 2013. See Note 14 to the Consolidated Financial Statements for additional information.
The provision for income taxes was $304 million in 2014, which resulted in an overall effective tax rate of 34.1 percent. The tax rate for 2014 was unfavorably impacted by changes in valuation allowances on state income tax attributes, partially offset by favorable manufacturing deductions in the United States. This compares with a tax provision of $319 million in 2013, which resulted in an overall effective tax rate of 29.9 percent. In 2013, the tax rate was favorably impacted by changes in the valuation allowances in the United States on state income tax attributes, audit settlements and remeasurement of tax positions. The 2013 tax rate was negatively impacted by the reversal of uncertain tax positions resulting from an unfavorable court ruling in the first quarter of 2013. The underlying factors affecting UCC's overall effective tax rates are summarized in Note 18 to the Consolidated Financial Statements.
The Corporation reported net income of $587 million in 2014, compared with net income of $748 million for 2013. Net income declined in 2014 due to an increase in the asbestos-related liability for pending and future claims and the decrease in equity earnings as a result of UCC declaring a stock dividend to Dow in 2013 for its ownership interest in Univation, which was partially offset by improved raw material costs and a gain on the sale of UCC's railcar fleet to Dow. Net income for 2013 included the gain on the sale of Dow's Polypropylene Licensing and Catalysts business in the fourth quarter of 2013. See Notes 4, 12, 13 and 17 to the Consolidated Financial Statements for additional information.
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OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting Policies
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Following are the Corporation's critical accounting policies impacted by judgments, assumptions and estimates:
Litigation
The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known claim. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note 13 to the Consolidated Financial Statements.
Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. ("Amchem"). Each year, Analysis, Research and Planning Corporation ("ARPC") performs a review for UCC based upon historical asbestos claims and resolution activity. UCC compares current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the asbestos-related liability continues to be appropriate.
It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
For additional information, see Part I, Item 3. Legal Proceedings; Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations; and Note 13 to the Consolidated Financial Statements.
Environmental Matters
The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability and emerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. At December 31, 2014, the Corporation had accrued obligations of $132 million for probable environmental remediation and restoration costs, including $22 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. For further discussion, see Environmental Matters in Notes 1 and 13 to the Consolidated Financial Statements.
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Pension Plans and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could have been settled at December 31, 2014, 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 15 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore affect expense recognized and obligations recorded in future periods.
The Corporation determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Corporation's historical experience with the pension fund asset performance is also considered. 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 2014 was 6.80 percent. This assumption was also used for determining 2015 net periodic pension expense. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Corporation's pension plans.
The discount rates utilized to measure the pension and other postretirement benefit obligations are based on the yield on high-quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plan are matched against the Towers Watson RATE:Link yield curve (based on 60th to 90th percentile bond yields) to arrive at a single discount rate by plan. The discount rate was 3.90 percent at December 31, 2014 and 4.75 percent at December 31, 2013.
The value of the qualified plan assets totaled $3.5 billion at December 31, 2014, a decrease from $3.6 billion at December 31, 2013. The underfunded status of the qualified plan increased by $387 million at December 31, 2014, compared with December 31, 2013. The increase was primarily due to lower discount rates and updated mortality tables. For 2015, the Corporation does not expect to make cash contributions to its pension and other postretirement benefit plans.
The assumption for the long-term rate of increase in compensation levels was 4.50 percent, consistent with 2013. Since 2002, the Corporation has used a generational mortality table to determine the duration of its pension and other postretirement obligations. On October 27, 2014, the Society of Actuaries ("SOA") published updated mortality tables and mortality improvement scales (generational mortality tables), which reflect increased life expectancy. Based on an evaluation of the mortality experience of the Corporation's U.S. pension plans and the SOA's tables, the Corporation adopted updated generational mortality tables for purposes of measuring U.S. pension and other postretirement obligations at year-end.
The Corporation bases the determination of pension expense on a market-related valuation of plan assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. At December 31, 2014, $64 million of net gains remain to be recognized in the calculation of the market-related value of plan assets. These net gains will result in decreases in future pension expense as they are recognized in the market-related value of assets.
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The net increase in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:
Net Increase in Market-Related Asset Value due to Recognition of Prior Gains In millions | |||
2015 | $ | 20 | |
2016 | 24 | ||
2017 | 4 | ||
2018 | 16 | ||
Total | $ | 64 | |
Based on the 2015 pension assumptions and changes in the market-related value of assets due to the recognition of prior asset gains, the Corporation expects net periodic benefit costs to increase approximately $10 million for pension and other postretirement benefits in 2015 compared with 2014. The increase in net periodic benefit cost is primarily due to lower discount rates, which were partially offset by the Corporation's implementation of an Employee Group Waiver Plan ("EGWP"). For additional information on the EGWP, see Note 15 to the Consolidated Financial Statements.
A 25 basis point adjustment in the long-term return on assets assumption would change total pension expense for 2015 by $8 million. A 25 basis point adjustment in the discount rate assumption would change the total pension expense for 2015 by $1 million.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Corporation recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered more likely than not.
At December 31, 2014, the Corporation had a net deferred tax asset balance of $544 million, after valuation allowances of $53 million. In evaluating the ability to realize the deferred tax assets, the Corporation relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
At December 31, 2014, the Corporation had deferred tax assets for tax loss and tax credit carryforwards of $82 million, of which $41 million is subject to expiration in the years 2015 through 2019. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Corporation needs taxable income of approximately $1,035 million across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2015 through 2019 is $530 million.
The Corporation recognizes the financial statement effects of an uncertain tax position when it is more likely than not, based on technical merits, that the position will be sustained. At December 31, 2014, the Corporation had a liability for uncertain tax positions of $1 million.
The Corporation accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. At December 31, 2014, the Corporation had no non-income tax contingency reserve. For additional information, see Note 18 to the Consolidated Financial Statements.
Environmental Matters
Environmental Policies
The Corporation is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by a long-standing commitment to Responsible Care®, as well as a strong commitment to achieve the Corporation's 2015 Sustainability Goals - goals that set the standard for sustainability in the chemical industry by focusing on improvements in UCC's local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the Corporation's environmental impact.
The EH&S management system (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve the policies, requirements, performance objectives, leadership expectations and public commitments. EMS is also designed to
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minimize the long-term cost of environmental protection and to comply with applicable laws and regulations. To ensure effective utilization, EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources, including implementation of the global EH&S Work Process to improve EH&S performance and to ensure ongoing compliance worldwide.
UCC first works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Next, UCC finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. UCC has specific requirements for waste that is transferred to non-UCC facilities, including the periodic auditing of these facilities.
Chemical Security
Public and political attention continues to be placed on the protection of U.S. critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern about the security and safety of chemical production and distribution. The focus on security is not new to UCC. UCC continues to improve its security plans, placing emphasis on the safety of UCC communities and people by being prepared to meet risks at any level and to address both internal and external identifiable risks. UCC's security plans are also developed to avert interruptions of normal business operations, which could have a material impact on the Corporation's results of operations, liquidity and financial condition.
UCC is a Responsible Care® company and adheres to the Responsible Care® Security Code, which requires that all aspects of security - including facility, transportation, and cyberspace - be assessed and gaps addressed. Through global implementation of the Security Code, including voluntary security enhancements and upgrades made since 2002, UCC has permanently heightened the level of security - not just in the United States, but worldwide. UCC implemented the Community Awareness and Emergency Response ("CAER") initiative at its manufacturing sites around the world and the communities near those sites. The CAER initiative includes open communication, integrated planning and community drills between industry and the surrounding communities. The CAER initiative continues to be a critical part of UCC's global implementation of Responsible Care®. In addition, UCC uses a risk-based approach employing the U.S. Government's Sandia National Labs methodology to repeatedly assess the risks to sites, systems and processes. UCC has expanded its comprehensive Distribution Risk Review process that had been in place for decades to address potential threats in all modes of transportation across its supply chain. To reduce vulnerabilities, UCC maintains security measures that meet or exceed regulatory and industry security standards in all areas in which UCC operates. Assessment and improvement costs are not considered material to the Corporation's consolidated financial statements.
UCC continually works to strengthen partnerships with local responders, law enforcement and security agencies, and to enhance confidence in the integrity of its security and risk management program as well as strengthen its preparedness and response capabilities. UCC also works closely with its supply chain partners and strives to educate lawmakers, regulators and communities about its resolve and actions to date which are mitigating security and crisis threats.
Climate Change
Climate change matters for UCC are driven by changes in regulatory matters and physical climate parameters.
Regulatory Matters
Regulatory matters include cap and trade schemes, increased greenhouse gas ("GHG") limits, and taxes on GHG emissions, fuel and energy. The potential implications of each of these matters are all very similar, including increased cost of purchased energy, additional capital costs for installation or modification of GHG emitting equipment, and additional costs associated directly with GHG emissions (such as cap and trade systems or carbon taxes), which are primarily related to energy use. It is difficult to estimate the potential impact of these regulatory matters on energy prices.
Reducing UCC's overall energy usage and GHG emissions through new and unfolding projects will decrease the potential impact of these regulatory matters. The Corporation has not experienced any material impact related to regulated GHG emissions.
Physical Climate Parameters
Many scientific academies throughout the world have concluded that it is very likely that human activities are contributing to global warming. At this point, it is difficult to predict and assess the probability and opportunity of a global warming trend on UCC specifically. Preparedness plans are developed that detail actions needed in the event of severe weather. These measures have historically been in place and these activities and associated costs are driven
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by normal operational preparedness. UCC continues to study the long-term implications of changing climate parameters or water availability, plant siting issues, and impacts and opportunities for products.
The Corporation continues to elevate its internal focus and external positions to focus on the root cause of GHG emissions, including the sustainable use of energy. Through corporate energy efficiency programs and focused GHG management efforts, the Corporation has and is continuing to reduce its GHG emissions footprint.
Environmental Remediation
UCC accrues the costs of remediation of its facilities and formerly owned facilities based on current law and existing technologies. The nature of such remediation includes, for example, the management of soil and groundwater contamination and the closure of contaminated landfills and other waste management facilities. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. The policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note 1 to the Consolidated Financial Statements. To assess the impact on the consolidated financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had an accrued liability of $110 million at December 31, 2014 and $103 million at December 31, 2013, related to the remediation of current or former UCC-owned sites.
In addition to current and former UCC-owned sites, under the Federal Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as “Superfund Law”), UCC is liable for remediation of other hazardous waste sites where UCC allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Because Superfund Law imposes joint and several liability upon each party at a site, UCC has evaluated its potential liability in light of the number of other companies that also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. Management's estimate of the Corporation's remaining liability for the remediation of Superfund sites was $22 million at December 31, 2014 and $23 million at December 31, 2013, which has been accrued, although the ultimate cost with respect to these sites could exceed that amount. The Corporation has not recorded any third-party recovery related to these sites as a receivable.
Information regarding environmental sites is provided below:
Environmental Sites | UCC-owned Sites (1) | Superfund Sites (2) | |||||||
2014 | 2013 | 2014 | 2013 | ||||||
Number of sites at January 1 | 28 | 31 | 64 | 66 | |||||
Sites added during year | — | 1 | 1 | 1 | |||||
Sites closed during year | — | (4 | ) | (1 | ) | (3 | ) | ||
Number of sites at December 31 | 28 | 28 | 64 | 64 | |||||
(1) | UCC-owned sites are sites currently or formerly owned by UCC, where remediation obligations are imposed (in the United States) by the Resource Conservation Recovery Act or analogous state law. |
(2) | Superfund sites are sites, including sites not owned by UCC, where remediation obligations are imposed by Superfund Law. |
In total, the Corporation's accrued liability for probable environmental remediation and restoration costs was $132 million at December 31, 2014, compared with $126 million at December 31, 2013. 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Corporation's results of operations, financial condition and cash flows. It is the opinion of the Corporation's management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Corporation's results of operations, financial condition and cash flows.
The amounts charged to income on a pretax basis related to environmental remediation totaled $62 million in 2014 and $80 million in 2013. The amounts charged to income on a pretax basis related to operating the Corporation's pollution abatement facilities totaled $91 million in 2014 and $87 million in 2013. Capital expenditures for environmental protection were $6 million in 2014 and $2 million in 2013.
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Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to UCC's products.
It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem based on criteria developed by UCC and its external consultants:
2014 | 2013 | 2012 | ||||
Claims unresolved at January 1 | 29,005 | 33,449 | 53,225 | |||
Claims filed | 8,857 | 12,069 | 9,627 | |||
Claims settled, dismissed or otherwise resolved | (11,746 | ) | (16,513 | ) | (29,403 | ) |
Claims unresolved at December 31 | 26,116 | 29,005 | 33,449 | |||
Claimants with claims against both UCC and Amchem | (8,209 | ) | (8,331 | ) | (9,542 | ) |
Individual claimants at December 31 | 17,907 | 20,674 | 23,907 | |||
Plaintiffs' lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation's litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information, see Part I, Item 3. Legal Proceedings and Asbestos-Related Matters in Note 13 to the Consolidated Financial Statements.
Debt Covenants and Default Provisions
The Corporation's outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation's size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. Management believes the Corporation was in compliance with the covenants referred to above at December 31, 2014.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
UCC's business operations give rise to market risk exposure due to changes in foreign exchange rates and interest rates. To manage such risks effectively, the Corporation can enter into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. The Corporation does not hold derivative financial instruments for trading purposes.
As a result of investments, production facilities and other operations on a global basis, the Corporation has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Corporation's foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Corporation will hedge, when appropriate, on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Main exposures are related to assets, liabilities and cash flows denominated in the currencies of Europe, Asia Pacific and Canada.
The main objective of interest rate risk management is to reduce the total funding cost to the Corporation and to alter the interest rate exposure to the desired risk profile. The Corporation's primary exposure is to the U.S. dollar yield curve. UCC will use interest rate swaps and “swaptions,” when appropriate, to accomplish this objective.
UCC uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the maximum potential loss in fair market values given a certain move in prices over a certain period of time, using specified confidence levels. In 2014, the Corporation changed the underlying methodology used to calculate VAR from a historical simulation model to a variance/covariance model after implementing a new market risk system. This new approach will provide greater insight and transparency into the contributors of the total portfolio VAR for use in the qualitative summary and will respond to risk in a more systematic fashion. This model uses a 97.5 percent confidence level and includes at least one year of historical data. The 2014 and 2013 year-end and average daily VAR for the aggregate of all positions are shown below:
Total Daily VAR at December 31 | 2014 | 2013 (1) | |||||||||||
In millions | Year-end | Average | Year-end | Average | |||||||||
Interest rate | $ | 4 | $ | 4 | $ | 6 | $ | 5 | |||||
(1) | 2013 VAR values reflect updated calculation using the variance/covariance model. |
The decrease in interest rate VAR at year end is primarily due to decreased interest rate volatility.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 8. Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Union Carbide Corporation
We have audited the accompanying consolidated balance sheets of Union Carbide Corporation and subsidiaries (the “Corporation”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Union Carbide Corporation and subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP | ||
Deloitte & Touche LLP Midland, Michigan February 13, 2015 | ||
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Operations
(In millions) For the years ended December 31 | 2014 | 2013 | 2012 | ||||||
Net trade sales | $ | 82 | $ | 161 | $ | 177 | |||
Net sales to related companies | 6,835 | 6,787 | 6,070 | ||||||
Total Net Sales | 6,917 | 6,948 | 6,247 | ||||||
Cost of sales | 5,922 | 6,214 | 6,088 | ||||||
Research and development expenses | 20 | 25 | 35 | ||||||
Selling, general and administrative expenses | 9 | 12 | 10 | ||||||
Asbestos-related charge | 78 | — | — | ||||||
Restructuring charges (credits) | (3 | ) | — | 74 | |||||
Equity in earnings of nonconsolidated affiliates | 7 | 82 | 59 | ||||||
Sundry income (expense) - net | 14 | 308 | (182 | ) | |||||
Interest income | 11 | 12 | 14 | ||||||
Interest expense and amortization of debt discount | 32 | 32 | 28 | ||||||
Income (Loss) Before Income Taxes | 891 | 1,067 | (97 | ) | |||||
Provision for income taxes | 304 | 319 | 17 | ||||||
Net Income (Loss) Attributable to Union Carbide Corporation | $ | 587 | $ | 748 | $ | (114 | ) | ||
See Notes to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In millions) For years ended December 31 | 2014 | 2013 | 2012 | ||||||
Net Income (Loss) Attributable to Union Carbide Corporation | $ | 587 | $ | 748 | $ | (114 | ) | ||
Other Comprehensive Income (Loss), Net of Tax | |||||||||
Cumulative translation adjustments | 15 | (22 | ) | (4 | ) | ||||
Pension and other postretirement benefit plan adjustments | (213 | ) | 322 | (209 | ) | ||||
Total other comprehensive income (loss) | (198 | ) | 300 | (213 | ) | ||||
Comprehensive Income (Loss) Attributable to Union Carbide Corporation | $ | 389 | $ | 1,048 | $ | (327 | ) | ||
See Notes to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
(In millions) At December 31 | 2014 | 2013 | ||||
Assets | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 23 | $ | 33 | ||
Accounts receivable: | ||||||
Trade (net of allowance for doubtful receivables 2014: $-; 2013: $-) | 29 | 25 | ||||
Related companies | 1,285 | 390 | ||||
Other | 67 | 40 | ||||
Income taxes receivable | 476 | 40 | ||||
Notes receivable from related companies | 1,292 | 2,404 | ||||
Inventories | 378 | 404 | ||||
Deferred income taxes and other current assets | 139 | 101 | ||||
Total current assets | 3,689 | 3,437 | ||||
Investments | ||||||
Investments in related companies | 813 | 823 | ||||
Investments in nonconsolidated affiliates | 13 | 6 | ||||
Other investments | 8 | 9 | ||||
Noncurrent receivables | 44 | 30 | ||||
Noncurrent receivables from related companies | 131 | 166 | ||||
Total investments | 1,009 | 1,034 | ||||
Property | ||||||
Property | 6,831 | 7,079 | ||||
Less accumulated depreciation | 5,679 | 5,840 | ||||
Net property | 1,152 | 1,239 | ||||
Other Assets | ||||||
Intangible assets (net of accumulated amortization 2014: $73; 2013: $72) | 15 | 10 | ||||
Deferred income tax assets - noncurrent | 441 | 692 | ||||
Asbestos-related insurance receivables - noncurrent | 62 | 86 | ||||
Deferred charges and other assets | 45 | 51 | ||||
Total other assets | 563 | 839 | ||||
Total Assets | $ | 6,413 | $ | 6,549 | ||
Liabilities and Equity | ||||||
Current Liabilities | ||||||
Notes payable - related companies | $ | 43 | $ | 34 | ||
Long-term debt due within one year | 1 | — | ||||
Accounts payable: | ||||||
Trade | 248 | 215 | ||||
Related companies | 872 | 398 | ||||
Other | 17 | 21 | ||||
Income taxes payable | 20 | 213 | ||||
Asbestos-related liabilities - current | 105 | 91 | ||||
Accrued and other current liabilities | 192 | 182 | ||||
Total current liabilities | 1,498 | 1,154 | ||||
Long-Term Debt | 481 | 471 | ||||
Other Noncurrent Liabilities | ||||||
Pension and other postretirement benefits - noncurrent | 1,051 | 684 | ||||
Asbestos-related liabilities - noncurrent | 438 | 434 | ||||
Other noncurrent obligations | 136 | 95 | ||||
Total other noncurrent liabilities | 1,625 | 1,213 | ||||
Stockholder's Equity | ||||||
Common stock (authorized and issued: 1,000 shares of $0.01 par value each) | — | — | ||||
Additional paid-in capital | 312 | 312 | ||||
Retained earnings | 3,740 | 4,442 | ||||
Accumulated other comprehensive loss | (1,243 | ) | (1,045 | ) | ||
Union Carbide Corporation's stockholder's equity | 2,809 | 3,709 | ||||
Noncontrolling interests | — | 2 | ||||
Total equity | 2,809 | 3,711 | ||||
Total Liabilities and Equity | $ | 6,413 | $ | 6,549 | ||
See Notes to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In millions) For the years ended December 31 | 2014 | 2013 | 2012 | ||||||
Operating Activities | |||||||||
Net Income (Loss) Attributable to Union Carbide Corporation | $ | 587 | $ | 748 | $ | (114 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 202 | 222 | 235 | ||||||
Provision (credit) for deferred income tax | 349 | (29 | ) | 12 | |||||
Earnings of nonconsolidated affiliates less than (in excess of) dividends received | (7 | ) | (21 | ) | 13 | ||||
Net gains on sales of assets | (70 | ) | (368 | ) | (4 | ) | |||
Asbestos-related charge | 78 | — | — | ||||||
Restructuring charges (credits) | (3 | ) | — | 74 | |||||
Impairment of investment in related company | — | 25 | 131 | ||||||
Pension contributions | (2 | ) | (158 | ) | (158 | ) | |||
Other, net | — | 2 | (1 | ) | |||||
Changes in assets and liabilities, net of effects of divested companies: | |||||||||
Accounts and notes receivable | (19 | ) | 4 | (6 | ) | ||||
Related company receivables | 217 | (135 | ) | 970 | |||||
Inventories | 27 | (3 | ) | (213 | ) | ||||
Accounts payable | 28 | (80 | ) | 25 | |||||
Related company payables | 484 | (32 | ) | 54 | |||||
Other assets and liabilities | (622 | ) | 105 | 82 | |||||
Cash provided by operating activities | 1,249 | 280 | 1,100 | ||||||
Investing Activities | |||||||||
Capital expenditures | (166 | ) | (121 | ) | (241 | ) | |||
Purchase of related company receivables | — | — | (8 | ) | |||||
Change in noncurrent receivable from related company | 35 | 23 | (53 | ) | |||||
Proceeds from sale of ownership interest in nonconsolidated affiliate | — | 13 | — | ||||||
Proceeds from sales of assets | 153 | 411 | 7 | ||||||
Purchases of investments | — | — | (1 | ) | |||||
Cash provided by (used in) investing activities | 22 | 326 | (296 | ) | |||||
Financing Activities | |||||||||
Dividends paid to stockholder | (1,280 | ) | (591 | ) | (775 | ) | |||
Payments on long-term debt | (1 | ) | — | (37 | ) | ||||
Cash used in financing activities | (1,281 | ) | (591 | ) | (812 | ) | |||
Summary | |||||||||
Increase (decrease) in cash and cash equivalents | (10 | ) | 15 | (8 | ) | ||||
Cash and cash equivalents at beginning of year | 33 | 18 | 26 | ||||||
Cash and cash equivalents at end of year | $ | 23 | $ | 33 | $ | 18 | |||
See Notes to the Consolidated Financial Statements.
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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Equity
(In millions) For the years ended December 31 | 2014 | 2013 | 2012 | ||||||
Common Stock | |||||||||
Balance at beginning and end of year | $ | — | $ | — | $ | — | |||
Additional Paid-in Capital | |||||||||
Balance at beginning and end of year | 312 | 312 | 312 | ||||||
Retained Earnings | |||||||||
Balance at beginning of year | 4,442 | 4,355 | 5,253 | ||||||
Net Income (Loss) Attributable to Union Carbide Corporation | 587 | 748 | (114 | ) | |||||
Dividends declared | (1,289 | ) | (661 | ) | (784 | ) | |||
Balance at end of year | 3,740 | 4,442 | 4,355 | ||||||
Accumulated Other Comprehensive Loss, Net of Tax | |||||||||
Balance at beginning of year | (1,045 | ) | (1,345 | ) | (1,132 | ) | |||
Other comprehensive income (loss) | (198 | ) | 300 | (213 | ) | ||||
Balance at end of year | (1,243 | ) | (1,045 | ) | (1,345 | ) | |||
Union Carbide Corporation's Stockholder's Equity | 2,809 | 3,709 | 3,322 | ||||||
Noncontrolling interests | — | 2 | 2 | ||||||
Total Equity | $ | 2,809 | $ | 3,711 | $ | 3,324 | |||
See Notes to the Consolidated Financial Statements.
30
Union Carbide Corporation and Subsidiaries |
Notes to the Consolidated Financial Statements |
Table of Contents
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Except as otherwise indicated by the context, the terms “Corporation” and “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries. The accompanying consolidated financial statements of the Corporation were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Corporation exercises control and, when applicable, entities for which the Corporation has a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies, joint ventures and partnerships) are accounted for using the equity method.
The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance with the accounting requirements for wholly owned subsidiaries, the presentation of earnings per share is not required and therefore is not provided.
Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global operations rather than stand-alone operations. The Corporation sells substantially all of its products to Dow at market-based prices, in accordance with Dow's long-standing intercompany pricing policy, in order to simplify the customer interface process. Because there are no separable reportable business segments for UCC and no detailed business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment.
Related Companies
Transactions with the Corporation's parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Corporation's consolidated
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financial statements include amounts that are based on management's best estimates and judgments. Actual results could differ from those estimates.
Foreign Currency Translation
While the Corporation's consolidated subsidiaries are primarily based in the United States, the Corporation has small subsidiaries in Asia Pacific. For those subsidiaries, the local currency has been primarily used as the functional currency. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive loss" ("AOCL"). Where the U.S. dollar is used as the functional currency, foreign currency gains and losses are reflected in income.
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets as “Accounts receivable - Other.”
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.
Financial Instruments
The Corporation calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Corporation uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.
Inventories
Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year.
The Corporation routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.
Property
Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
Impairment and Disposal of Long-Lived Assets
The Corporation evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset's carrying amount, the asset is written down to its fair value based on bids received from third parties or a discounted cash flow analysis based on market participant assumptions.
Long-lived assets to be disposed of by sale, if material, are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.
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Asset Retirement Obligations
The Corporation records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Corporation. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less.
Investments in Related Companies
Investments in related companies consist of the Corporation's ownership interests in Dow subsidiaries located in North America and Latin America. The Corporation accounts for these investments using the cost method as it does not have significant influence over the operating and financial policies of these related companies.
Investments
Investments in debt securities are classified as available-for-sale and reported at fair value with unrealized gains and losses recorded in AOCL. The cost of investments sold is determined by specific identification. 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 establishing a new cost basis.
Revenue
Substantially all of the Corporation's revenues are generated by sales to Dow. Approximately 99 percent of the Corporation's sales are related to sales of product (97 percent in 2013 and 96 percent in 2012); the remaining 1 percent is related to the licensing of patents and technology (3 percent in 2013 and 4 percent in 2012).
Revenue for product sales to related companies is recognized as risk and title to the product transfer to the related company, which occurs either at the time production is complete or free on board (“FOB”) UCC's manufacturing facility, in accordance with the sales agreement between the Corporation and Dow.
Revenue for product sales is recognized as risk and title to the product transfer to the customer, which for trade sales, usually occurs at the time shipment is made. As such, title to the product passes when the product is delivered to the freight carrier. UCC's standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. Freight costs and any directly related costs of transporting finished product to customers are recorded as “Cost of sales” in the consolidated statements of operations.
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.
Legal Costs
The Corporation expenses legal costs as incurred. Accruals for legal matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
Severance Costs
Management routinely reviews its operations around the world in an effort to ensure competitiveness across its operations and geographic areas. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination including the number of employees to be terminated, their job classifications or functions, their locations and the expected termination date.
Income Taxes
The Corporation accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date. The Corporation is included in Dow's consolidated federal income tax group and consolidated income tax return. The Corporation accounts for its income taxes following the formula in the Dow-UCC Tax Sharing Agreement used to compute the amount due to Dow or UCC for UCC's share of taxable income and tax attributes on Dow's consolidated income tax return. This method generally follows the separate return method. The amounts reported as income taxes payable or receivable represent the Corporation's payment obligation (or refundable amount) to Dow based on a theoretical tax liability calculated on a separate return method.
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Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.
The Corporation recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Corporation accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.
Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
During the fourth quarter of 2014, the Corporation adopted Accounting Standard Update ("ASU") 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance. The adoption of this standard did not have a material impact on the consolidated financial statements.
Accounting Guidance Issued But Not Adopted as of December 31, 2014
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Corporation is currently evaluating the impact of adopting this guidance.
NOTE 3 - RESTRUCTURING
On October 22, 2012, the Board of Directors of the Corporation approved a restructuring plan to improve the cost effectiveness of the Corporation's global operations. The restructuring plan affected approximately 100 positions and resulted in the shutdown of certain manufacturing facilities. These actions were substantially completed at December 31, 2014.
As a result of the restructuring activities, the Corporation recorded pretax restructuring charges of $71 million in the fourth quarter of 2012 consisting of costs associated with exit or disposal activities of $13 million, severance costs of $10 million and asset write-downs and write-offs of $48 million. The impact of these charges is shown as "Restructuring charges (credits)" in the consolidated statements of operations.
Details on the components of the restructuring charges are discussed below:
Cost Associated with Exit or Disposal Activities
The restructuring charges for costs associated with exit or disposal activities totaled $13 million in the fourth quarter of 2012 for contract cancellations fees.
Severance
The restructuring charges in the fourth quarter of 2012 included severance of $10 million for the separation of approximately 100 employees under the terms of the Corporation's ongoing benefit arrangements, primarily by March 31, 2015. At December 31, 2014, severance of $9 million had been paid and a liability of $1 million remained for nine employees.
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Impairment of Long-Lived Assets, Other Assets and Equity Method Investments
The restructuring charges related to the write-down and write-off of assets in the fourth quarter of 2012 total $48 million. Details regarding the write-downs and write-offs are as follows:
• | Certain oxygenated solvents manufacturing facilities in Texas City, Texas, have been consolidated and/or shut down, resulting in an asset write-down of $36 million. The facilities were shut down in the fourth quarter of 2012. |
• | A performance monomer manufacturing facility in South Charleston, West Virginia, was shut down, resulting in an asset write-down of $1 million and the write-off of other assets totaling $2 million. The assets were shut down in the fourth quarter of 2012. |
• | Due to a change in the Corporation's strategy regarding its ownership in Nippon Unicar Company Limited ("NUC"), a 50:50 joint venture, the Corporation had determined its equity investment in NUC to be other-than-temporarily impaired and recorded a $9 million write-down of its interest in NUC. UCC completed the sale of its 50 percent ownership interest in NUC on July 1, 2013. |
The following table summarizes the activities related to the Corporation's restructuring reserve:
Restructuring Activities | Costs Associated with Exit or Disposal Activities | Severance Costs | Impairment of Long-Lived Assets, Other Assets and Equity Method Investments | |||||||||||||
In millions | Total | |||||||||||||||
Restructuring charges recognized in the fourth quarter of 2012 | $ | 13 | $ | 10 | $ | 48 | $ | 71 | ||||||||
Charges against the reserve | — | — | (48 | ) | (48 | ) | ||||||||||
Reserve balance at December 31, 2012 | $ | 13 | $ | 10 | $ | — | $ | 23 | ||||||||
Cash payments | (2 | ) | (6 | ) | — | (8 | ) | |||||||||
Reserve balance at December 31, 2013 | $ | 11 | $ | 4 | $ | — | $ | 15 | ||||||||
Adjustments to the reserve | (3 | ) | — | — | (3 | ) | ||||||||||
Cash payments | (2 | ) | (3 | ) | — | (5 | ) | |||||||||
Reserve balance at December 31, 2014 | $ | 6 | $ | 1 | $ | — | $ | 7 | ||||||||
The reserve balance is included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."
The Corporation expects to incur additional costs in the future related to its restructuring activities, as UCC continually looks for ways to enhance the efficiency and cost effectiveness of its operations. Future costs are expected to include demolition costs related to closed facilities; these will be recognized as incurred. The Corporation also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
In the first quarter of 2012, the Corporation recorded restructuring charges totaling $3 million related to a workforce reduction of approximately 20 employees. In the third quarter of 2012, all severance related to this restructuring charge was paid.
2014 Adjustments to the 4Q12 Restructuring Plan
In 2014, the Corporation reduced the 4Q12 restructuring reserve related to contract cancellation fees by $3 million.
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NOTE 4 - DIVESTITURES
Divestiture of Polypropylene Licensing and Catalysts Business
On October 11, 2013, Dow entered into a definitive agreement to sell its global Polypropylene Licensing and Catalysts business to W.R. Grace & Co., which included the Corporation's polypropylene catalysts manufacturing facility in Norco, Louisiana as well as customer contracts, accounts receivable, licenses, intellectual property and inventory. On December 2, 2013, the sale was completed and proceeds allocated to the Corporation for the sale were $398 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments, which were finalized in the fourth quarter of 2014. The carrying amount of the assets divested on December 2, 2013, are noted below:
Assets Divested In millions | December 2, 2013 | ||
Accounts receivable | $ | 4 | |
Inventories | 19 | ||
Net property | 7 | ||
Total assets divested | $ | 30 | |
The Corporation recognized a pretax gain of $368 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of operations and an after-tax gain of $233 million.
Post-closing adjustments were finalized in the fourth quarter of 2014 and the Corporation recorded a pretax gain of $4 million ($3 million after tax) for the post-closing adjustments. The gain was included in "Sundry income (expense) - net" in the consolidated statements of operations.
NOTE 5 - INVENTORIES
The following table provides a breakdown of inventories:
Inventories at December 31 In millions | 2014 | 2013 | ||||
Finished goods | $ | 205 | $ | 233 | ||
Work in process | 30 | 31 | ||||
Raw materials | 45 | 50 | ||||
Supplies | 98 | 90 | ||||
Total inventories | $ | 378 | $ | 404 | ||
The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to $125 million at December 31, 2014 and $132 million at December 31, 2013. Inventories that were valued on a LIFO basis, principally U.S. chemicals and plastics product inventories, represented 67 percent of the total inventories at December 31, 2014 and 70 percent of the total inventories at December 31, 2013.
A reduction of certain inventories resulted in the liquidation of some of the Corporation's LIFO inventory layers which had an immaterial impact on pretax income in 2014, 2013 and 2012.
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NOTE 6 - PROPERTY
Property at December 31 | Estimated Useful | |||||||
In millions | Lives (Years) | 2014 | 2013 | |||||
Land | — | $ | 49 | $ | 51 | |||
Land and waterway improvements | 15-25 | 208 | 204 | |||||
Buildings | 5-50 | 419 | 412 | |||||
Machinery and equipment | 3-20 | 5,744 | 5,862 | |||||
Utility and supply lines | 5-20 | 158 | 157 | |||||
Other property | 3-30 | 96 | 291 | |||||
Construction in progress | — | 157 | 102 | |||||
Total property | $ | 6,831 | $ | 7,079 | ||||
In millions | 2014 | 2013 | 2012 | ||||||
Depreciation expense | $ | 176 | $ | 204 | $ | 217 | |||
Manufacturing maintenance and repair costs | $ | 295 | $ | 304 | $ | 324 | |||
Capitalized interest | $ | 5 | $ | 5 | $ | 8 | |||
NOTE 7 - NONCONSOLIDATED AFFILIATES
The Corporation's investments in companies accounted for by the equity method (“nonconsolidated affiliates”) were $13 million at December 31, 2014 and $6 million at December 31, 2013. Dividends received from nonconsolidated affiliates were zero in 2014, $62 million in 2013 and $72 million in 2012. Undistributed earnings of nonconsolidated affiliates included in retained earnings were $7 million at December 31, 2014 and zero at December 31, 2013.
All of the nonconsolidated affiliates in which the Corporation has investments are privately held companies; therefore, quoted market prices are not available.
Principal Nonconsolidated Affiliates
The Corporation's principal nonconsolidated affiliates and the Corporation's ownership interest for each at December 31, 2014, 2013 and 2012 are shown below:
Principal Nonconsolidated Affiliates at December 31 | Ownership Interest | ||
2014 | 2013 | 2012 | |
Nippon Unicar Company Limited | —% | —% | 50% |
Univation Technologies, LLC | —% | —% | 50% |
Divestiture
On January 31, 2013, UCC entered into a definitive agreement to sell its 50 percent ownership interest in NUC to TonenGeneral Sekiyu K. K. On July 1, 2013, the sale was completed for $13 million. As a result of this share sale, the Corporation reclassified a $20 million gain, primarily attributable to cumulative translation adjustments, from "Accumulated other comprehensive loss" into earnings and is included in "Sundry income (expense) - net" in the consolidated statements of operations for the year ended December 31, 2013. Including this reclassification, the sale resulted in no pretax gain or loss.
Stock Dividend
On September 26, 2013, UCC declared a stock dividend to Dow of its 100 percent ownership interest in Union Carbide Subsidiary C, Inc., which included UCC's full ownership interest in Univation. This stock dividend was effective on September 29, 2013 and totaled $70 million.
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Summarized Income Statement Information | |||||||||
In millions | 2014 | 2013 (1) | 2012 | ||||||
Sales | $ | — | $ | 452 | $ | 773 | |||
Gross profit | $ | — | $ | 208 | $ | 209 | |||
Net income | $ | — | $ | 142 | $ | 112 | |||
(1) | Income statement information for NUC is for the six-month period ended June 30, 2013 and income statement information for Univation is for the nine-month period ended September 30, 2013. |
The Corporation had no investment in principal nonconsolidated affiliates at December 31, 2014 and December 31, 2013, and its equity in earnings was zero in 2014, $84 million in 2013 and $59 million in 2012. The summarized income statement information presented represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates. See Note 3 for details on the 2012 impairment charge related to NUC.
NOTE 8 - INVESTMENTS IN RELATED COMPANIES
The Corporation's ownership interests in related companies at December 31, 2014 and 2013 were as follows:
Investments in Related Companies at December 31 | Ownership Interest | Investment Balance | ||||||||||||
In millions (except percentages) | 2014 | 2013 | 2014 | 2013 | ||||||||||
Dow International Holdings Company | 19 | % | 19 | % | $ | 807 | $ | 807 | ||||||
Dow Quimica Argentina S.A. | 23 | % | 23 | % | — | — | ||||||||
Dow Quimica Mexicana S.A. de C.V. | 15 | % | 15 | % | 5 | 5 | ||||||||
GWN Holding, Inc. | — | % | 6 | % | — | 10 | ||||||||
Other | — | % | — | % | 1 | 1 | ||||||||
Total Investments in Related Companies | $ | 813 | $ | 823 | ||||||||||
In the fourth quarter of 2014, UCC authorized a distribution to Dow of its shares of common stock in GWN Holdings, Inc. ("GWN"). Prior to the stock distribution, GWN was owned 6.3 percent by UCC and 93.7 percent by Dow and its other wholly owned subsidiaries. Prior to this distribution, UCC's investment in GWN was $10 million, accounted for as a cost method investment. No gain or loss was recorded on the stock distribution.
In the fourth quarter of 2013, the Corporation recorded an impairment charge of $25 million for the full value of the cost method investment in Dow Quimica Argentina S.A. The related company investment, classified as a Level 3 measurement, was valued using unobservable inputs. The impairment charge was triggered by ongoing losses in the entity and is included in "Sundry income (expense) - net" in the consolidated statements of operations.
NOTE 9 - INTANGIBLE ASSETS
The following table provides information regarding the Corporation's intangible assets:
Intangible Assets at December 31 | 2014 | 2013 | |||||||||||||||||
In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||
Intangible assets with finite lives: | |||||||||||||||||||
Licenses and intellectual property | $ | 33 | $ | (33 | ) | $ | — | $ | 33 | $ | (33 | ) | $ | — | |||||
Software | 55 | (40 | ) | 15 | 49 | (39 | ) | 10 | |||||||||||
Total intangible assets | $ | 88 | $ | (73 | ) | $ | 15 | $ | 82 | $ | (72 | ) | $ | 10 | |||||
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The following table provides information regarding amortization expense:
Amortization Expense In millions | 2014 | 2013 | 2012 | ||||||
Software (1) | $ | 2 | $ | 2 | $ | 2 | |||
(1) | Included in “Cost of sales” in the consolidated statements of operations. |
Total estimated amortization expense for the next five fiscal years is as follows:
Estimated Amortization Expense for Next Five Years In millions | |||
2015 | $ | 2 | |
2016 | $ | 3 | |
2017 | $ | 3 | |
2018 | $ | 3 | |
2019 | $ | 2 | |
NOTE 10 - FINANCIAL INSTRUMENTS
Investments
The Corporation's investments in marketable securities are classified as available-for-sale. There were no proceeds from sales of available-for-sale securities in 2014, 2013 and 2012.
Portfolio managers regularly review all of the Corporation's holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred. At December 31, 2014 and December 31, 2013, there were no impairment indicators or circumstances that would result in a material adjustment of these investments.
The Corporation's investments in debt securities, shown below, had contractual maturities of less than 10 years at December 31, 2014.
Fair Value of Financial Instruments: | |||||||||||||||||||||||||
At December 31, 2014 | At December 31, 2013 | ||||||||||||||||||||||||
In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | |||||||||||||||||
Debt securities (1) | $ | 5 | $ | — | $ | — | $ | 5 | $ | 5 | $ | — | $ | — | $ | 5 | |||||||||
Long-term debt | $ | (482 | ) | $ | — | $ | (119 | ) | $ | (601 | ) | $ | (471 | ) | $ | — | $ | (85 | ) | $ | (556 | ) | |||
(1) | Marketable securities are included in “Other investments” in the consolidated balance sheets. |
Cost approximates fair value for all other financial instruments.
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NOTE 11 - FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis:
Basis of Fair Value Measurements on a Recurring Basis at December 31 | Significant Other Observable Inputs (Level 2) | Significant Other Observable Inputs (Level 2) | |||||
In millions | 2014 | 2013 | |||||
Assets at fair value: | |||||||
Debt securities (1) | $ | 5 | $ | 5 | |||
Liabilities at fair value: | |||||||
Long-term debt (2) | $ | 601 | $ | 556 | |||
(1) | Included in “Other investments” in the consolidated balance sheets. |
(2) | See Note 10 for information on fair value measurements of long-term debt. |
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
Assets that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets in active markets, adjusted for any terms specific to that asset. For all other assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. There were no transfers between Levels 1 and 2 during the years ended December 31, 2014 and 2013.
Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets in 2012:
Basis of Fair Value Measurements on a Nonrecurring Basis in 2012 | Significant Other Unobservable Inputs | Total Losses | ||||||
In millions | (Level 3) | 2012 | ||||||
Assets at fair value: | ||||||||
Long-lived assets, other assets and equity method investment | $ | 42 | $ | (179 | ) | |||
2012 Fair Value Measurements on a Nonrecurring Basis
As part of the restructuring plan that was approved on October 22, 2012, the Corporation shut down a number of manufacturing facilities during the fourth quarter of 2012. The manufacturing assets and facilities associated with this plan were written down to zero in the fourth quarter of 2012. In addition, an equity investment was impaired. The equity investment, classified as a Level 3 measurement, was valued at $33 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets. These impairment charges, totaling $48 million, were included in "Restructuring charges (credits)" in the consolidated statements of operations. See Note 3 for additional information. Also included within the losses is a charge of $131 million related to an impairment of an investment in a related company. The investment, classified as a Level 3 measurement, was valued at $9 million using unobservable inputs, including assumptions a market participant would use to measure fair value of the group of assets. See Note 17 for additional information.
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NOTE 12 - SUPPLEMENTARY INFORMATION
Sundry Income (Expense) - Net | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Dow administrative and overhead fees (1) | $ | (26 | ) | $ | (25 | ) | $ | (32 | ) |
Net commission expense - related company (1) | (21 | ) | (17 | ) | (35 | ) | |||
Dividend income - related companies (1) | 12 | 16 | 25 | ||||||
Net gain on sale of railcar fleet (1) | 66 | — | — | ||||||
Reclassification of cumulative translation adjustment | (16 | ) | — | — | |||||
Net gain on sale of Dow's Polypropylene Licensing and Catalysts business (2) | 4 | 368 | — | ||||||
Net gain on sales of property (1) | 4 | — | 5 | ||||||
Impairment of investment in related company (1) | — | (25 | ) | (131 | ) | ||||
Foreign exchange loss | — | (2 | ) | — | |||||
Other - net | (9 | ) | (7 | ) | (14 | ) | |||
Total sundry income (expense) - net | $ | 14 | $ | 308 | $ | (182 | ) | ||
(1) | See Note 17 for additional information. |
(2) | See Note 4 for additional information. |
Accrued and Other Current Liabilities
"Accrued and other current liabilities" were $192 million at December 31, 2014 and $182 million at December 31, 2013. The current portion of the Corporation's accrued obligations for environmental matters, which is a component of "Accrued and other current liabilities," was $69 million at December 31, 2014 and $58 million at December 31, 2013 (see Note 13 for additional information). No other component of accrued and other current liabilities was more than 5 percent of total current liabilities.
Supplementary Cash Flow Information | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Cash payments for interest | $ | 37 | $ | 37 | $ | 37 | |||
Cash payments (refunds) for income taxes (1) | $ | 555 | $ | 322 | $ | (94 | ) | ||
(1) | Amounts reported in 2013 have been adjusted to reflect an additional $30 million in cash paid for income taxes. |
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies.
At December 31, 2014, the Corporation had accrued obligations of $132 million for probable environmental remediation and restoration costs, including $22 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Corporation's results of operations, financial condition and cash flows. It is the opinion of the Corporation's management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Corporation's results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2013, the Corporation had accrued obligations of $126 million for probable environmental remediation and restoration costs, including $23 million for the remediation of Superfund sites.
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The following table summarizes the activity in the Corporation's accrued obligations for environmental matters for the years ended December 31, 2014 and 2013:
Accrued Liability for Environmental Matters | ||||||
In millions | 2014 | 2013 | ||||
Balance at January 1 | $ | 126 | $ | 95 | ||
Additional accruals | 62 | 80 | ||||
Charges against reserve | (56 | ) | (49 | ) | ||
Balance at December 31 | $ | 132 | $ | 126 | ||
The amounts charged to income on a pretax basis related to environmental remediation totaled $62 million in 2014, $80 million in 2013 and $31 million in 2012. Capital expenditures for environmental protection were $6 million in 2014, $2 million in 2013 and $7 million in 2012.
Litigation
The Corporation is involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes.
Asbestos-Related Matters
Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former UCC subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation's products.
The Corporation expects more asbestos-related suits to be filed against UCC and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Estimating the Liability
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review the Corporation's historical asbestos claim and resolution activity each year since 2004 to determine the appropriateness of updating the most recent ARPC study.
In October 2012, the Corporation requested ARPC to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2010 study. In response to that request, ARPC reviewed and analyzed data through September 30, 2012. In December 2012, based upon ARPC's December 2012 study and the Corporation's own review of the asbestos claim and resolution activity for 2012, it was determined that no adjustment to the accrual was required at December 31, 2012. The Corporation's asbestos-related liability for pending and future claims was $602 million at December 31, 2012.
In October 2013, the Corporation requested ARPC to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2012 study. In response to that request, ARPC reviewed and analyzed data through September 30, 2013. In December 2013, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its December 2012 study 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. The Corporation's asbestos-related liability for pending and future claims was $501 million at December 31, 2013.
In October 2014, the Corporation requested ARPC to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2012 study. In response to that request, ARPC reviewed and analyzed data through September 30, 2014. The resulting study, completed by ARPC in December 2014, estimates that the undiscounted cost
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of disposing of pending and future claims against UCC and Amchem, excluding future defense and processing costs, to be between $540 million and $640 million through 2029 based on the data as of September 30, 2014. As in earlier studies, ARPC provided longer periods of time in its December 2014 study, but also reaffirmed that forecasts for shorter periods of time are more accurate than those for longer periods of time.
In December 2014, based on ARPC's December 2014 study and the Corporation's own review of the asbestos claim and resolution activity, the Corporation determined that an adjustment to the accrual was required due to the increase in mesothelioma claim activity compared with what had been forecasted in the December 2012 study. Accordingly, the Corporation increased its asbestos-related liability for pending and future claims by $78 million and is included in "Asbestos-related charge" in the consolidated statement of operations. The Corporation's asbestos-related liability for pending and future claims was $513 million at December 31, 2014, and approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims. At December 31, 2013, approximately 19 percent of the recorded liability related to pending claims and approximately 81 percent related to future claims.
Insurance Receivables
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by the Corporation after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of the Corporation's insurance policies and to resolve issues that the insurance carriers may raise.
In September 2003, the Corporation filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds (the “Insurance Litigation”). The Insurance Litigation was filed against insurers that were not signatories to the Wellington Agreement and/or did not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Since the filing of the case, the Corporation has reached settlements with most of the carriers involved in the Insurance Litigation and continues to pursue settlement with the remaining carrier.
The Corporation's receivable for insurance recoveries related to its asbestos liability was $10 million at December 31, 2014 and $25 million at December 31, 2013. At December 31, 2014 and 2013, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
In addition to the receivable for insurance recoveries related to its asbestos liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers that have settlement agreements in place regarding their asbestos-related insurance coverage. The following table summarizes the Corporation's receivables related to its asbestos-related liability:
Receivables for Asbestos-Related Costs at December 31 In millions | 2014 | 2013 | ||||
Receivables for defense and resolution costs - carriers with settlement agreements | $ | 69 | $ | 66 | ||
Receivables for insurance recoveries - carriers without settlement agreements | 10 | 25 | ||||
Total | $ | 79 | $ | 91 | ||
After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, and after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, the Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.
The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $108 million in 2014, $107 million in 2013 and $100 million in 2012, and was reflected in “Cost of sales” in the consolidated statements of operations.
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Summary
The amounts recorded by the Corporation for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for the Corporation to be higher or lower than those projected or those recorded.
Because of the uncertainties described above, the Corporation's management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing UCC and Amchem. The Corporation's 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 impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that, except for the asbestos-related matters described above, the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse impact on the results of operations, cash flows and financial position of the Corporation. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.
Purchase Commitments
At December 31, 2014, the Corporation had various outstanding commitments for take-or-pay agreements, with remaining terms extending from 1 to 13 years. Such commitments were not in excess of current market prices. The fixed and determinable portion of obligations under purchase commitments at December 31, 2014 is presented in the following table:
Fixed and Determinable Portion of Take-or-Pay Obligations at December 31, 2014 In millions | |||
2015 | $ | 24 | |
2016 | 22 | ||
2017 | 22 | ||
2018 | 20 | ||
2019 | 18 | ||
2020 and beyond | 47 | ||
Total | $ | 153 | |
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NOTE 14 - NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable at December 31 In millions | 2014 | 2013 | ||||
Notes payable - related companies | $ | 43 | $ | 34 | ||
Year-end average interest rates | 0.82 | % | 0.92 | % | ||
Long-Term Debt at December 31 | 2014 | 2013 | ||||||||||
Average | Average | |||||||||||
In millions | Rate | 2014 | Rate | 2013 | ||||||||
Promissory notes and debentures: | ||||||||||||
Debentures due 2023 | 7.875 | % | $ | 175 | 7.875 | % | $ | 175 | ||||
Debentures due 2025 | 6.79 | % | 12 | 6.79 | % | 12 | ||||||
Debentures due 2025 | 7.50 | % | 150 | 7.50 | % | 150 | ||||||
Debentures due 2096 | 7.75 | % | 135 | 7.75 | % | 135 | ||||||
Capital lease obligations | — | 11 | — | — | ||||||||
Unamortized debt discount | — | (1 | ) | — | (1 | ) | ||||||
Long-term debt due within one year | — | (1 | ) | — | — | |||||||
Total long-term debt | $ | 481 | $ | 471 | ||||||||
Annual Installments on Long-Term Debt for Next Five Years In millions | |||
2015 | $ | 1 | |
2016 | $ | 1 | |
2017 | $ | 1 | |
2018 | $ | 1 | |
2019 | $ | 1 | |
Debt Covenants and Default Provisions
The Corporation's outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation's size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes.
NOTE 15 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Corporation has a defined benefit pension plan that covers substantially all employees in the United States. Benefits are based on length of service and the employee's three highest consecutive years of compensation. Employees hired on or after January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest. The Corporation also has a non-qualified supplemental pension plan.
The Corporation's funding policy is to contribute to the plan when pension laws or economics either require or encourage funding. In 2014, UCC contributed $2 million to its pension plans including contributions to fund benefits payments for its non-qualified supplemental plan. UCC expects to contribute approximately $2 million to its pension plans in 2015.
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The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below:
Pension Plan Assumptions | Benefit Obligations at December 31 | Net Periodic Costs for the Year | |||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||
Discount rate | 3.90 | % | 4.75 | % | 3.85 | % | 4.75 | % | 3.85 | % | 4.85 | % | |
Rate of increase in future compensation levels | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | |
Long-term rate of return on assets | — | — | — | 6.80 | % | 6.90 | % | 6.90 | % | ||||
The Corporation determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Corporation's historical experience with the pension fund asset performance is also considered. The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans 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 Towers Watson RATE:Link yield curve (based on 60th and 90th percentile bond yields) to arrive at a single discount rate by plan.
On October 27, 2014, the Society of Actuaries ("SOA") published updated mortality tables and mortality improvement scales (generational mortality tables), which reflect increased life expectancy. Based on an evaluation of the mortality experience of the Corporation's U.S. pension plans and the SOA's tables, the Corporation adopted updated generational mortality tables for purposes of measuring U.S. pension and other postretirement obligations at year-end. The mortality assumption change increased the pension and other postretirement benefit obligations by $139 million at December 31, 2014.
The accumulated benefit obligation for all defined benefit pension plans was $4.3 billion at December 31, 2014 and $4.0 billion at December 31, 2013.
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31 | ||||||
In millions | 2014 | 2013 | ||||
Projected benefit obligation | $ | 4,345 | $ | 3,995 | ||
Accumulated benefit obligation | $ | 4,302 | $ | 3,963 | ||
Fair value of plan assets | $ | 3,543 | $ | 3,586 | ||
Other Postretirement Benefits
The Corporation provides certain health care and life insurance benefits to retired U.S. employees. The plan provides health care benefits, including hospital, physicians' services, drug and major medical expense coverage, and life insurance benefits. The Corporation and the retiree share the cost of these benefits, with the Corporation portion increasing as the retiree has increased years of credited service, although there is a cap on the Corporation portion. The Corporation has the ability to change these benefits at any time. Employees hired after January 1, 2008 are not covered under this plan.
During the fourth quarter of 2013, the Corporation started implementing an Employer Group Waiver Plan (“EGWP”) for its Medicare-eligible, retiree medical plan participants, which became effective on January 1, 2014. As a result, the Medicare Part D Retiree Drug Subsidy program (“RDS”) was eliminated on January 1, 2014. The EGWP does not significantly alter the benefits provided to retiree medical plan participants. The federal subsidies to be earned under the EGWP are expected to exceed those earned under the RDS and will be partially offset by increased costs related to the administration of the EGWP. The formation of the EGWP and the resulting change in assumption generated an actuarial gain of $55 million at December 31, 2013, included in "Accumulated other comprehensive loss" in the consolidated balance sheets. The Corporation also recognized a reduction in the postretirement benefit obligation of $55 million at December 31, 2013. The net periodic benefit cost decreased by $10 million in 2014 due to the EGWP.
The Corporation funds most of the cost of these health care and life insurance benefits as incurred. In 2014, UCC did not make any contributions to its other postretirement benefit plan trust. Likewise, UCC does not expect to contribute assets to its other postretirement benefit plan trust in 2015.
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The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the plan are provided in the following table:
Plan Assumptions for Other Postretirement Benefits | Benefit Obligations at December 31 | Net Periodic Costs for the Year | |||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||
Discount rate | 3.75 | % | 4.40 | % | 3.65 | % | 4.40 | % | 3.65 | % | 4.60 | % | |
Initial health care cost trend rate | 7.05 | % | 7.46 | % | 7.85 | % | 7.46 | % | 7.85 | % | 8.30 | % | |
Ultimate health care cost trend rate | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | |
Year ultimate trend rate to be reached | 2020 | 2020 | 2019 | 2020 | 2020 | 2019 | |||||||
Increasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2014 by $6 million and the net periodic postretirement benefit cost for the year by an immaterial amount. Decreasing the assumed medical cost trend rate by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2014 by $16 million and the net periodic postretirement benefit cost for the year by an immaterial amount.
Net Periodic Benefit Cost for all Plans | |||||||||||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||
In millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||
Service cost | $ | 30 | $ | 31 | $ | 28 | $ | 1 | $ | 2 | $ | 2 | |||||||
Interest cost | 183 | 165 | 189 | 13 | 14 | 17 | |||||||||||||
Expected return on plan assets | (232 | ) | (232 | ) | (235 | ) | — | — | — | ||||||||||
Amortization of prior service cost (credit) | 6 | 7 | 7 | — | (1 | ) | (2 | ) | |||||||||||
Amortization of net loss | 66 | 88 | 60 | (10 | ) | — | — | ||||||||||||
Net periodic benefit cost | $ | 53 | $ | 59 | $ | 49 | $ | 4 | $ | 15 | $ | 17 | |||||||
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss for all Plans | |||||||||||||||||||
Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||||
In millions | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||
Net (gain) loss | $ | 450 | $ | (283 | ) | $ | 375 | $ | (12 | ) | $ | (102 | ) | $ | 16 | ||||
Prior service credit arising during period | (38 | ) | — | — | — | — | — | ||||||||||||
Amortization of prior service (cost) credit | (6 | ) | (7 | ) | (7 | ) | — | 1 | 2 | ||||||||||
Amortization of net gain (loss) | (66 | ) | (88 | ) | (60 | ) | 10 | — | — | ||||||||||
Total recognized in other comprehensive (income) loss | $ | 340 | $ | (378 | ) | $ | 308 | $ | (2 | ) | $ | (101 | ) | $ | 18 | ||||
Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 393 | $ | (319 | ) | $ | 357 | $ | 2 | $ | (86 | ) | $ | 35 | |||||
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Change in Projected Benefit Obligations, Plan Assets and Funded Status for all Plans | |||||||||||||
In millions | Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||
Change in projected benefit obligation: | 2014 | 2013 | 2014 | 2013 | |||||||||
Benefit obligation at beginning of year | $ | 3,995 | $ | 4,433 | $ | 302 | $ | 414 | |||||
Service cost | 30 | 31 | 1 | 2 | |||||||||
Interest cost | 183 | 165 | 13 | 14 | |||||||||
Plan amendments | (38 | ) | — | — | — | ||||||||
Actuarial changes in assumptions and experience | 531 | (342 | ) | (13 | ) | (102 | ) | ||||||
Benefits paid | (340 | ) | (285 | ) | (33 | ) | (26 | ) | |||||
Other | (16 | ) | (7 | ) | — | — | |||||||
Benefit obligation at end of year | $ | 4,345 | $ | 3,995 | $ | 270 | $ | 302 | |||||
Change in plan assets: | |||||||||||||
Fair value of plan assets at beginning of year | $ | 3,586 | $ | 3,548 | $ | — | $ | — | |||||
Actual return on plan assets | 312 | 174 | — | — | |||||||||
Employer contributions | 2 | 158 | — | — | |||||||||
Asset transfer | (17 | ) | (9 | ) | — | — | |||||||
Benefits paid | (340 | ) | (285 | ) | — | — | |||||||
Fair value of plan assets at end of year | $ | 3,543 | $ | 3,586 | $ | — | $ | — | |||||
Funded status at end of year | $ | (802 | ) | $ | (409 | ) | $ | (270 | ) | $ | (302 | ) | |
Net amounts recognized in the consolidated balance sheets at December 31: | |||||||||||||
Current liabilities | $ | (1 | ) | $ | (1 | ) | $ | (27 | ) | $ | (33 | ) | |
Noncurrent liabilities | (801 | ) | (408 | ) | (243 | ) | (269 | ) | |||||
Net amounts recognized in the consolidated balance sheets | $ | (802 | ) | $ | (409 | ) | $ | (270 | ) | $ | (302 | ) | |
Pretax amounts recognized in AOCL at December 31: | |||||||||||||
Net loss (gain) | $ | 1,955 | $ | 1,570 | $ | (109 | ) | $ | (107 | ) | |||
Prior service cost (credit) | (19 | ) | 26 | (1 | ) | (1 | ) | ||||||
Pretax balance in AOCL at end of year | $ | 1,936 | $ | 1,596 | $ | (110 | ) | $ | (108 | ) | |||
In 2015, an estimated net loss of $87 million and prior service credit of $1 million for the defined benefit pension plans will be amortized from AOCL to net periodic benefit cost. In 2015, an estimated net gain of $11 million for the other postretirement benefit plan will be amortized from AOCL to net periodic benefit cost.
Estimated Future Benefit Payments
The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:
Estimated Future Benefit Payments at December 31, 2014 | ||||||
In millions | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||
2015 | $ | 280 | $ | 28 | ||
2016 | 278 | 23 | ||||
2017 | 278 | 21 | ||||
2018 | 277 | 20 | ||||
2019 | 277 | 19 | ||||
2020 through 2024 | 1,361 | 88 | ||||
Total | $ | 2,751 | $ | 199 | ||
Plan Assets
Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private equity and other absolute return strategies. At December 31, 2014, plan assets totaled $3.5 billion and $3.6 billion at December 31, 2013 which included no Dow common stock.
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Investment Strategy and Risk Management for Plan Assets
The Corporation's investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various markets risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plan.
The plan is permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposures and rebalancing the asset allocation. The plan uses value at risk, stress testing, scenario analysis and Monte Carlo simulation to monitor and manage both asset risk in the portfolios and surplus risk.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities are primarily U.S. dollar based and include U.S. treasuries and investment grade corporate bonds of companies diversified across industries. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts; and interest rate, equity and foreign exchange derivative investments and hedges.
Strategic Target Allocation of Plan Assets | ||
Asset Category | Target Allocation | |
Equity securities | 23 | % |
Fixed income securities | 45 | % |
Alternative investments | 27 | % |
Other | 5 | % |
Total | 100 | % |
Concentration of Risk
The Corporation mitigates the credit risk of investments by establishing guidelines with the investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Corporation and the external managers. Credit risk for hedging activity is mitigated by utilizing multiple counterparties, collateral support agreements, and centralized clearing where appropriate.
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the pension plan, which from time to time can represent a significant investment. Approximately 40 percent of the liability of the pension plan is covered by a participating group annuity issued by Prudential Insurance Company.
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The following tables summarize the bases used to measure the Corporation's pension plan assets at fair value for the years ended December 31, 2014 and 2013:
Basis of Fair Value Measurements at December 31, 2014 In millions | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||
Cash and cash equivalents | $ | 3 | $ | 131 | $ | — | $ | 134 | ||||
Equity securities: | ||||||||||||
U.S. equity | $ | 360 | $ | 78 | $ | 1 | $ | 439 | ||||
Non-U.S. equity - developed countries | 166 | 160 | — | 326 | ||||||||
Emerging markets | 40 | 62 | 3 | 105 | ||||||||
Equity derivatives | — | (1 | ) | — | (1 | ) | ||||||
Total equity securities | $ | 566 | $ | 299 | $ | 4 | $ | 869 | ||||
Fixed income securities: | ||||||||||||
U.S. government and municipalities | $ | — | $ | 673 | $ | — | $ | 673 | ||||
U.S. agency mortgage backed securities | — | 66 | — | 66 | ||||||||
Corporates - investment grade | — | 743 | — | 743 | ||||||||
Non-U.S. governments - developed countries | — | 6 | — | 6 | ||||||||
Non-U.S. corporates - developed countries | — | 160 | — | 160 | ||||||||
Emerging markets debt | — | 14 | — | 14 | ||||||||
Other asset-backed securities | — | 11 | 1 | 12 | ||||||||
Other fixed income funds | — | — | 32 | 32 | ||||||||
High yield bonds | — | 2 | — | 2 | ||||||||
Total fixed income securities | $ | — | $ | 1,675 | $ | 33 | $ | 1,708 | ||||
Alternative investments: | ||||||||||||
Real estate | $ | — | $ | — | $ | 288 | $ | 288 | ||||
Private equity | — | — | 233 | 233 | ||||||||
Absolute return | — | 126 | 166 | 292 | ||||||||
Total alternative investments | $ | — | $ | 126 | $ | 687 | $ | 813 | ||||
Total other securities | $ | — | $ | (3 | ) | $ | 22 | $ | 19 | |||
Total pension plan assets at fair value | $ | 569 | $ | 2,228 | $ | 746 | $ | 3,543 | ||||
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Basis of Fair Value Measurements at December 31, 2013 In millions | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||
Cash and cash equivalents | $ | 3 | $ | 304 | $ | — | $ | 307 | ||||
Equity securities: | ||||||||||||
U.S. equity | $ | 388 | $ | 143 | $ | — | $ | 531 | ||||
Non-U.S. equity - developed countries | 181 | 85 | — | 266 | ||||||||
Emerging markets | 119 | 67 | 2 | 188 | ||||||||
Total equity securities | $ | 688 | $ | 295 | $ | 2 | $ | 985 | ||||
Fixed income securities: | ||||||||||||
U.S. government and municipalities | $ | — | $ | 606 | $ | — | $ | 606 | ||||
U.S. agency mortgage backed securities | — | 63 | — | 63 | ||||||||
Corporates - investment grade | — | 635 | — | 635 | ||||||||
Non-U.S. governments - developed countries | — | 2 | — | 2 | ||||||||
Non-U.S. corporates - developed countries | — | 159 | — | 159 | ||||||||
Emerging markets debt | — | 22 | — | 22 | ||||||||
Other asset-backed securities | — | 9 | 2 | 11 | ||||||||
Other fixed income funds | — | — | 12 | 12 | ||||||||
High yield bonds | — | 3 | — | 3 | ||||||||
Fixed income derivatives | — | (3 | ) | — | (3 | ) | ||||||
Total fixed income securities | $ | — | $ | 1,496 | $ | 14 | $ | 1,510 | ||||
Alternative investments: | ||||||||||||
Real estate | $ | — | $ | — | $ | 292 | $ | 292 | ||||
Private equity | — | — | 228 | 228 | ||||||||
Absolute return | — | 127 | 103 | 230 | ||||||||
Total alternative investments | $ | — | $ | 127 | $ | 623 | $ | 750 | ||||
Total other securities | $ | — | $ | 12 | $ | 22 | $ | 34 | ||||
Total pension plan assets at fair value | $ | 691 | $ | 2,234 | $ | 661 | $ | 3,586 | ||||
For assets classified as Level 1 measurements (measured using quoted prices in active markets), the total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs such as foreign exchange rates, commodity prices, swap rates, interest rates, and implied volatilities obtained from various market sources.
Some plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 2 or 3 measurements) is determined based on the lowest level classification of significant holdings within the fund. For all other assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
For assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager's investment valuation.
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The following table summarizes the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2014 and 2013:
Fair Value Measurement of Level 3 Pension Plan Assets In millions | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total | ||||||||||
Balance at January 1, 2013 | $ | 3 | $ | 17 | $ | 552 | $ | 22 | $ | 594 | |||||
Actual return on plan assets: | |||||||||||||||
Relating to assets held at Dec 31, 2013 | (2 | ) | — | 22 | — | 20 | |||||||||
Relating to assets sold during 2013 | — | — | 40 | — | 40 | ||||||||||
Purchases, sales and settlements | 1 | (3 | ) | 9 | — | 7 | |||||||||
Balance at December 31, 2013 | $ | 2 | $ | 14 | $ | 623 | $ | 22 | $ | 661 | |||||
Actual return on plan assets: | |||||||||||||||
Relating to assets held at Dec 31, 2014 | (2 | ) | — | (22 | ) | — | (24 | ) | |||||||
Relating to assets sold during 2014 | — | — | 35 | — | 35 | ||||||||||
Purchases, sales and settlements | 4 | 20 | 53 | — | 77 | ||||||||||
Transfers out of Level 3, net | — | (1 | ) | — | — | (1 | ) | ||||||||
Foreign currency impact | — | — | (2 | ) | — | (2 | ) | ||||||||
Balance at December 31, 2014 | $ | 4 | $ | 33 | $ | 687 | $ | 22 | $ | 746 | |||||
NOTE 16 - LEASED PROPERTY
The Corporation has leases primarily for facilities and distribution equipment. The future minimum rental payments under leases with remaining noncancelable terms in excess of one year are as follows:
Minimum Lease Commitments at December 31, 2014 In millions | |||
2015 | $ | 7 | |
2016 | 5 | ||
2017 | 4 | ||
2018 | 3 | ||
2019 | 2 | ||
2020 and thereafter | 8 | ||
Total | $ | 29 | |
Rental expenses under leases were $27 million in 2014, $31 million in 2013 and $35 million in 2012.
NOTE 17 - RELATED PARTY TRANSACTIONS
The Corporation sells its products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow at market-based prices in accordance with the terms of Dow’s intercompany pricing policies. After each quarter, the Corporation and Dow analyze the pricing used for the sales in that quarter and reach agreement on any necessary adjustments, at which point the prices are final. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in “Sundry income (expense) - net” in the consolidated statements of operations. Purchases from that Dow subsidiary were approximately $2.9 billion in 2014, $2.9 billion in 2013 and $3.1 billion in 2012.
The Corporation has a master services agreement with Dow whereby Dow provides services including, but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety, and business management for UCC. Under the master services agreement with Dow, general administrative and overhead type services that Dow routinely allocates to various businesses are charged to UCC. The master services agreement cost allocation basis is headcount and includes a 10 percent service fee. This agreement resulted in expense of approximately $26 million in 2014, $25 million in 2013 and $32 million in 2012 for general administrative and overhead
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type services and the 10 percent service fee, included in “Sundry income (expense) - net” in the consolidated statements of operations. The decrease in general administrative and overhead type services from 2012, including the service fee, was due to a simplification of the cost structure as well as cost reduction initiatives by Dow. The remaining activity-based costs were approximately $53 million in 2014, $46 million in 2013 and $51 million in 2012 and were included in “Cost of sales” in the consolidated statements of operations.
Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
The monitoring and execution of risk management policies related to interest rate and foreign currency risks, which are based on Dow’s risk management philosophy, are provided as a service to UCC.
As part of Dow’s cash management process, UCC is a party to revolving loans with Dow that have interest rates based on LIBOR (London Interbank Offered Rate) with varying maturities. At December 31, 2014, the Corporation had a note receivable of $1.2 billion ($2.4 billion at December 31, 2013) from Dow under a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.
The Corporation also has a separate revolving credit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures on December 30, 2015. Dow may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries and joint ventures, with cash collateral. At December 31, 2014, $875 million ($843 million at December 31, 2013) was available under the revolving credit agreement. The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.
Related company accounts payable and accounts receivable between UCC and Dow are settled on a regular basis. As a result of the phased implementation of the Corporation's new ERP system, as well as the implementation of an in-house banking system in the third quarter of 2014, intercompany balances are now settled on a monthly basis instead of throughout the month. As a result of this change, "Accounts receivable - Related companies" and "Accounts payable - Related companies" in the consolidated balance sheets reflect an increase when compared with previous years.
In October 2014, UCC authorized a distribution to Dow of its shares of common stock in GWN Holdings, Inc. ("GWN"). Prior to the stock distribution, GWN was owned 6.3 percent by UCC and 93.7 percent by Dow and its other wholly-owned subsidiaries. Prior to this distribution, UCC's investment in GWN was $10 million, accounted for as a cost method investment, and included in "Investments in related companies" in the consolidated balance sheets. No gain or loss was recorded on the stock distribution.
The Corporation recorded an impairment charge of $25 million in the fourth quarter of 2013 for the full value of the cost method investment in Dow Quimica Argentina S.A., a related company. The impairment charge, triggered by ongoing losses in the entity, is included in "Sundry income (expense) - net" in the consolidated statements of operations.
In the fourth quarter of 2012, UCC recorded an impairment charge of $131 million related to its investment in Modeland International Holdings Inc. ("Modeland"), a related company, representing the difference between the investment's cost and its fair value. The impairment was triggered by an ownership reorganization of Modeland's subsidiaries. The amount of the impairment charge was calculated based on an appraisal of the fair value of Modeland's assets and liabilities. The fair value was determined through the use of both income and market valuation approaches. The impairment charge is included in "Sundry income (expense) -net" in the consolidated statements of operations. Subsequent to recording the impairment charge, the Corporation also declared and paid a stock dividend to Dow for its ownership interest in Modeland totaling $9 million.
On a quarterly basis, the Corporation's Board of Directors reviews and approves a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution. During 2014, the Corporation declared and paid dividends totaling $1.3 billion to Dow. In September 2013, UCC declared a stock dividend to Dow of its 100 percent ownership interest in Union Carbide Subsidiary C, Inc., which included UCC's full ownership interest in Univation. This stock dividend was effective on September 29, 2013 and totaled $70 million. During 2013, the Corporation declared and paid dividends totaling $661 million to Dow, which included cash dividends to Dow totaling $591 million.
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The Corporation received cash dividends of $12 million from its related company investments in 2014 ($16 million in 2013 and $25 million in 2012). These dividends were included in "Sundry income (expense) - net" in the consolidated statements of operations.
In the third quarter of 2014, as part of a sale-leaseback transaction entered into by Dow for a significant portion of Dow's North America railcar fleet, UCC sold all of the railcars owned by UCC to Dow at fair value for $145 million in cash. The sale of the railcars resulted in a pretax gain of $66 million, and is included in "Sundry income (expense) - net" in the consolidated statements of operations.
In accordance with the Tax Sharing Agreement between the Corporation and Dow, the Corporation makes payments to Dow to cover the Corporation's estimated federal tax liability; payments were $579 million in 2014, $163 million in 2013 and zero in 2012.
NOTE 18 - INCOME TAXES
Domestic and Foreign Components of Income (Loss) Before Income Taxes | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Domestic (1) | $ | 896 | $ | 1,077 | $ | (95 | ) | ||
Foreign | (5 | ) | (10 | ) | (2 | ) | |||
Total | $ | 891 | $ | 1,067 | $ | (97 | ) | ||
(1) | In 2013, the domestic component of "Income Before Income Taxes" included a gain of $368 million for the sale of Dow's Polypropylene Licensing and Catalysts business. |
Provision for Income Taxes | |||||||||||||||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||||||||||||||
In millions | Current | Deferred | Total | Current | Deferred | Total | Current | Deferred | Total | ||||||||||||||||||||
Federal (1) | $ | (41 | ) | $ | 311 | $ | 270 | $ | 337 | $ | 18 | $ | 355 | $ | 10 | $ | 15 | $ | 25 | ||||||||||
State and local | (5 | ) | 38 | 33 | 5 | (47 | ) | (42 | ) | (5 | ) | (3 | ) | (8 | ) | ||||||||||||||
Foreign | 1 | — | 1 | 6 | — | 6 | — | — | — | ||||||||||||||||||||
Total | $ | (45 | ) | $ | 349 | $ | 304 | $ | 348 | $ | (29 | ) | $ | 319 | $ | 5 | $ | 12 | $ | 17 | |||||||||
(1) | Reflects the 2014 impact of accelerated deductions. |
Reconciliation to U.S. Statutory Rate | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Taxes at U.S. statutory rate | $ | 312 | $ | 374 | $ | (34 | ) | ||
Equity earnings effect | (4 | ) | (1 | ) | 2 | ||||
U.S. manufacturing deductions | (26 | ) | (7 | ) | — | ||||
Benefit of dividend income from investments in related companies | — | (6 | ) | (9 | ) | ||||
Audit settlement and court case impact | — | 20 | — | ||||||
Unrecognized tax benefits | — | (30 | ) | 9 | |||||
Impairment of investment in related company | — | 1 | 46 | ||||||
Federal tax accrual adjustments | (14 | ) | (5 | ) | (8 | ) | |||
State and local tax impact | 42 | (38 | ) | 12 | |||||
Other - net | (6 | ) | 11 | (1 | ) | ||||
Total tax provision | $ | 304 | $ | 319 | $ | 17 | |||
Effective tax rate | 34.1 | % | 29.9 | % | (17.5 | )% | |||
The tax rate for 2014 was unfavorably impacted by changes in valuation allowances on state income tax attributes, partially offset by favorable manufacturing deductions in the United States. UCC's reported effective tax rate for 2014 was 34.1 percent.
The tax rate for 2013 was favorably impacted by changes in valuation allowances in the United States on state income tax attributes, audit settlements and remeasurement of tax positions. The 2013 tax rate was unfavorably impacted by an unfavorable court ruling in the first quarter of 2013. UCC's reported effective tax rate for 2013 was 29.9 percent.
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The tax rate for 2012 was unfavorably impacted primarily by the minimal tax relief related to the impairment of the investment in related company and the inability to utilize state tax credits. UCC's reported effective tax rate for 2012 was negative 17.5 percent.
Deferred Tax Balances at December 31 | 2014 | 2013 | |||||||||||
In millions | Deferred Tax Assets | Deferred Tax Liabilities | Deferred Tax Assets | Deferred Tax Liabilities | |||||||||
Property | $ | — | $ | 197 | $ | — | $ | 235 | |||||
Tax loss and credit carryforwards | 82 | — | 95 | — | |||||||||
Postretirement benefit obligations | 818 | 420 | 706 | 440 | |||||||||
Other accruals and reserves (1) | 263 | 3 | 656 | 4 | |||||||||
Inventory | 53 | — | 30 | — | |||||||||
Long-term debt | — | — | — | 1 | |||||||||
Investments | — | 1 | 7 | — | |||||||||
Other - net | 2 | — | 2 | 1 | |||||||||
Subtotal | $ | 1,218 | $ | 621 | $ | 1,496 | $ | 681 | |||||
Valuation allowances | (53 | ) | — | (50 | ) | — | |||||||
Total | $ | 1,165 | $ | 621 | $ | 1,446 | $ | 681 | |||||
(1) | The reduction in 2014 reflects the impact of accelerated deductions. |
Gross operating loss carryforwards, primarily related to state operating losses, amounted to $1,035 million at December 31, 2014, compared with $1,188 million at the end of 2013. At December 31, 2014, $530 million of the operating loss carryforwards were subject to expiration in the years 2015 through 2019. The remaining balances expire in years beyond 2019 or have an indefinite carryforward period. Tax credit carryforwards amounted to $5 million at December 31, 2014 and $7 million at December 31, 2013, which all expire in years beyond 2019 or have an indefinite carryforward period.
Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $50 million at December 31, 2014, $48 million at December 31, 2013 and $53 million at December 31, 2012. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.
The Corporation had valuation allowances that were primarily related to the realization of recorded tax benefits on state tax loss carryforwards from operations in the United States of $53 million at December 31, 2014 and $50 million at December 31, 2013.
Total Gross Unrecognized Tax Benefits | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Balance at January 1 | $ | 4 | $ | 166 | $ | 161 | |||
Increases related to positions taken on items from prior years | — | 1 | — | ||||||
Decreases related to positions taken on items from prior years | — | (7 | ) | — | |||||
Increases related to positions taken in current year | — | — | 8 | ||||||
Settlement of uncertain tax positions with tax authorities | — | (154 | ) | — | |||||
Decreases due to expiration of statutes of limitations | (3 | ) | (2 | ) | (3 | ) | |||
Balance at December 31 | $ | 1 | $ | 4 | $ | 166 | |||
At December 31, 2014, the total amount of unrecognized tax benefits was $1 million ($4 million at December 31, 2013), of which $1 million ($3 million at December 31, 2013) would impact the effective tax rate, if recognized.
Interest and penalties associated with unrecognized tax benefits are recognized as components of “Provision for income taxes” in the consolidated statements of operations and was a benefit of $6 million in 2014, $15 million in 2013 and $1 million in 2012. The Corporation's accrual for interest and penalties was zero at December 31, 2014 and a payable of $1 million at December 31, 2013.
During 2013, the U.S. Supreme Court denied certiorari in UCC's research tax credit case. Through the denial of certiorari, the U.S. Court of Appeals decision denying UCC's tax credit claim for supplies used in process-related research and development at its manufacturing facilities became final. As a result of this ruling, UCC reversed the uncertain tax positions related to this matter, which resulted in a decrease to "Other noncurrent obligations" and an increase to "Income taxes payable" in the
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consolidated balance sheets in accordance with the Tax Sharing Agreement between the Corporation and Dow. In addition, UCC recognized a tax charge of $41 million in the first quarter of 2013 included in "Provision for income taxes" in the consolidated statements of operations. An audit settlement in the second quarter of 2013 resulted in a tax benefit of $22 million, included in "Provision for income taxes" and various balance sheet reclassifications from noncurrent to current accruals and receivables.
Tax years that remain subject to examination for the Corporation's major tax jurisdictions are shown below:
Tax Years Subject to Examination by Major Tax Jurisdiction at December 31 | ||
Jurisdiction | Earliest Open Year | |
2014 | 2013 | |
United States: | ||
Federal income tax | 2004 | 2004 |
State and local income tax | 2004 | 2004 |
The Corporation is included in Dow's consolidated federal income tax group and consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. It is reasonably possible that these examinations may be resolved within twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Corporation at December 31, 2014, will be reduced by approximately $1 million from resolution of these examinations.
The reserve for non-income tax contingencies related to issues in the United States was zero at December 31, 2014 and zero at December 31, 2013. This is management's best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued will have a material impact on the Corporation's consolidated financial statements.
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NOTE 19 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table provides an analysis of the changes in accumulated other comprehensive loss for the years ended December 31, 2014, 2013 and 2012:
Accumulated Other Comprehensive Loss | |||||||||
In millions | 2014 | 2013 | 2012 | ||||||
Cumulative Translation Adjustments at beginning of year | $ | (78 | ) | $ | (56 | ) | $ | (52 | ) |
Translation adjustments | (1 | ) | (1 | ) | (4 | ) | |||
Reclassification to earnings - Sundry income (expense) - net (1) | 16 | (21 | ) | — | |||||
Balance at end of period | $ | (63 | ) | $ | (78 | ) | $ | (56 | ) |
Pension and Other Postretirement Benefit Plans at beginning of year | $ | (967 | ) | $ | (1,289 | ) | $ | (1,080 | ) |
Net gain (loss) during period (net of tax of $(165), $122, $(141)) (2) (3) | (273 | ) | 263 | (250 | ) | ||||
Prior service credit arising during the period (net of tax of $13, $-, $-) | 25 | — | — | ||||||
Amortization of prior service cost included in net periodic pension costs (net of tax of $2, $2, $2) (2) (3) | 4 | 4 | 3 | ||||||
Amortization of net loss included in net periodic pension costs (net of tax of $25, $33, $22) (2) (3) | 31 | 55 | 38 | ||||||
Balance at end of period | $ | (1,180 | ) | $ | (967 | ) | $ | (1,289 | ) |
Total accumulated other comprehensive loss | $ | (1,243 | ) | $ | (1,045 | ) | $ | (1,345 | ) |
(1) | In 2014, reclassification resulted from the divestiture or liquidation of subsidiaries. In 2013, reclassification resulted from the divestiture of a nonconsolidated affiliate. |
(2) See Note 15 for additional information.
(3) Tax amounts are included in "Provision for income taxes" in the consolidated statements of operations.
NOTE 20 - BUSINESS AND GEOGRAPHIC AREAS
Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global businesses rather than stand-alone operations. The Corporation sells its products to Dow in order to simplify the customer interface process at market-based prices in accordance with Dow's intercompany pricing policy. Because there are no separable reportable business segments for the Corporation and no detailed business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment.
Sales are attributed to geographic areas based on customer location; long-lived assets are attributed to geographic areas based on asset location. Sales to external customers and long-lived assets by geographic area were as follows:
Geographic Area Information In millions | United States | Asia Pacific | Rest of World | Total | ||||||||
2014 | ||||||||||||
Sales to external customers (1) | $ | 62 | $ | 1 | $ | 19 | $ | 82 | ||||
Long-lived assets | $ | 1,113 | $ | 6 | $ | 33 | $ | 1,152 | ||||
2013 | ||||||||||||
Sales to external customers (1) | $ | 100 | $ | 43 | $ | 18 | $ | 161 | ||||
Long-lived assets | $ | 1,197 | $ | 6 | $ | 36 | $ | 1,239 | ||||
2012 | ||||||||||||
Sales to external customers (1) | $ | 98 | $ | 64 | $ | 15 | $ | 177 | ||||
Long-lived assets | $ | 1,287 | $ | 8 | $ | 39 | $ | 1,334 | ||||
(1) | Of the total sales to external customers, China was less than 1 percent in 2014, approximately 21 percent in 2013 and 21 percent in 2012; and Malaysia was less than 1 percent in 2014, approximately 4 percent in 2013 and 10 percent in 2012, both of which are included in Asia Pacific. |
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Union Carbide Corporation and Subsidiaries |
PART II, Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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Union Carbide Corporation and Subsidiaries |
PART II, Item 9A. Controls and Procedures. |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by the Annual Report on Form 10-K, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Disclosure Committee and the Corporation's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 15d - 15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During 2014, the Corporation completed the implementation of a new enterprise resource planning ("ERP") system that delivered a new generation of information systems and work processes. The Corporation has updated the internal control processes and procedures that have been affected by the ERP system implementation and believes that controls remain effective.
Other than as described above, there were no changes in the Corporation's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that materially affected or were reasonably likely to materially affect the Corporation's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control framework and processes are designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation's consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
The Corporation's internal control over financial reporting includes those policies and procedures that:
• | pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; |
• | provide reasonable assurance that transactions are recorded as necessary to permit 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; and |
• | 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. |
Because of its inherent limitations, any system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.
Management assessed the effectiveness of the Corporation's internal control over financial reporting and concluded that, as of December 31, 2014, such internal control is effective. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control--Integrated Framework (2013).
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The Corporation's internal control over financial reporting was not subject to attestation by the Corporation's independent registered public accounting firm, Deloitte & Touche LLP, pursuant to the 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 controls over financial reporting from Deloitte & Touche LLP.
February 13, 2015
/s/ RICHARD A. WELLS | /s/ IGNACIO MOLINA | |
Richard A. Wells President and Chief Executive Officer | Ignacio Molina Vice President, Treasurer and Chief Financial Officer | |
/s/ RONALD C. EDMONDS | ||
Ronald C. Edmonds, Vice President and Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation | ||
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Union Carbide Corporation and Subsidiaries |
PART II, Item 9B. Other Information. |
ITEM 9B. OTHER INFORMATION
None.
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Union Carbide Corporation and Subsidiaries |
PART III |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Dow's Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for Dow and its subsidiaries (including the Corporation) by its independent auditor, subject to the de minimus exception for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act, which are approved by Dow's Audit Committee prior to the completion of the audit. The Corporation's management and its Board of Directors subscribe to these policies and procedures. For the years ended December 31, 2014 and 2013, professional services were performed for the Corporation by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu Limited, and their respective affiliates (collectively, the “Deloitte Entities”).
Total fees paid to the Deloitte Entities were:
In thousands | 2014 | 2013 | ||||
Audit fees (1) | $ | 1,635 | $ | 1,576 | ||
Audit-related fees | — | 94 | ||||
Total | $ | 1,635 | $ | 1,670 | ||
(1) | The aggregate fees billed for the audit of the Corporation's annual financial statements, the reviews of the financial statements in Quarterly Reports on Form 10-Q, statutory audits and other regulatory filings. |
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Union Carbide Corporation and Subsidiaries |
PART IV |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. The Corporation's 2014 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the information called for is included in the Consolidated Financial Statements or Notes thereto.
3. See the Exhibit Index for exhibits filed with this Annual Report on Form 10-K (see below) and for exhibits incorporated by reference.
The Corporation will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Corporation's principal executive offices (address provided at the end of the Exhibit Index).
The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K.
Exhibit No. | Description of Exhibit |
10.5.12 | Twelfth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 17, 2014, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors. |
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. |
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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Union Carbide Corporation and Subsidiaries |
Trademark Listing |
The following trademarks of Union Carbide Corporation or its subsidiaries appear in this report:
CARBOWAX, CELLOSIZE, FLEXOMER, POLYOX, REDI-LINK, SI-LINK, SENTRY, TERGITOL, TRITON, TUFLIN, UCAR, UCARTHERM, UCON, UNIGARD, UNIPOL, UNIPURGE, UNIVAL
The following trademark of The Dow Chemical Company appears in this report: METEOR
The following registered service mark of American Chemistry Council appears in this report: Responsible Care
® ™Trademark of The Dow Chemical Company (“Dow”) or an affiliated company of Dow
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Union Carbide Corporation and Subsidiaries |
Signatures |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of February 2015.
UNION CARBIDE CORPORATION | ||
By: | /s/ RONALD C. EDMONDS | |
Ronald C. Edmonds, Vice President and Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on the 13th day of February 2015 by the following persons on behalf of the Registrant and in the capacities indicated:
/s/ RICHARD A. WELLS | /s/ GLENN J. MORAN | |
Richard A. Wells | Glenn J. Moran, Director | |
President and Chief Executive Officer | ||
/s/ IGNACIO MOLINA | /s/ MARK R. BASSETT | |
Ignacio Molina Vice President, Treasurer and Chief Financial Officer | Mark R. Bassett, Director | |
/s/ RONALD C. EDMONDS | ||
Ronald C. Edmonds, Vice President and Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation | ||
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Union Carbide Corporation and Subsidiaries |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow") and, as such, does not send an annual report to security holders or proxy material with respect to any annual or other meeting of security holders to Dow or any other security holders.
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Union Carbide Corporation and Subsidiaries |
Exhibit Index |
EXHIBIT NO. | DESCRIPTION |
2.1 | Agreement and Plan of Merger dated as of August 3, 1999 among Union Carbide Corporation, The Dow Chemical Company and Transition Sub Inc., incorporated by reference to Exhibit 2 of the Corporation's Current Report on Form 8-K dated August 3, 1999. |
2.2 | Agreement for the Sale & Purchase of Shares, dated as of August 17, 2009, among Union Carbide Corporation, UCMG L.L.C. and Petroliam Nasional Berhad, incorporated by reference to Exhibit 2.1 of the Corporation's Current Report on Form 8-K dated September 30, 2009. |
3.1 | Restated Certificate of Incorporation of Union Carbide Corporation under Section 807 of the Business Corporation Law, as filed on May 13, 2008, incorporated by reference to Exhibit 3.1.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008. |
3.2 | Amended and Restated Bylaws of Union Carbide Corporation, amended as of April 22, 2004, incorporated by reference to Exhibit 3.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004. |
4.1 | Indenture dated as of June 1, 1995, between the Corporation and the Chase Manhattan Bank (formerly Chemical Bank), Trustee, incorporated by reference to Exhibit 4.1.2 to the Corporation's Form S-3 effective October 13, 1995, Reg. No. 33-60705. |
4.2 | The Corporation will furnish to the Commission upon request any other debt instrument referred to in Item 601(b)(4)(iii)(A) of Regulation S-K. |
10.1 | Amended and Restated Service Agreement, effective as of July 1, 2002, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.23 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. |
10.1.1 | Service Addendum No. 2 to the Service Agreement, effective as of August 1, 2001, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.23.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. |
10.1.2 | Restated Service Addendum No. 1 to the Service Agreement, effective as of February 6, 2001, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.23.3 of the Corporation's 2002 Form 10-K. |
10.1.3 | Service Addendum No. 3 to the Amended and Restated Service Agreement, effective as of January 1, 2005, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.1.3 of the Corporation's 2004 Form 10-K. |
10.1.4 | First Amendment to Amended and Restated Service Agreement, effective as of January 1, 2011, between the Corporation and The Dow Chemical Company incorporated by reference to Exhibit 10.1.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. |
10.2 | Second Amended and Restated Sales Promotion Agreement, effective January 1, 2004, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.24 of the Corporation's 2003 Form 10-K. |
10.2.1 | First Amendment to Second Amended and Restated Sales Promotion Agreement, effective as of March 22, 2013, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.2.1 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. |
10.3 | Third Amended and Restated Agreement (to Provide Materials and Services), dated as of March 1, 2008, between the Corporation and Dow Hydrocarbons and Resources LLC, incorporated by reference to Exhibit 10.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. |
10.4 | Amended and Restated Tax Sharing Agreement, effective as of February 7, 2001, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.27 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. |
10.5 | Amended and Restated Revolving Credit Agreement dated as of May 28, 2004, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.28 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
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, incorporated by reference to Exhibit 10.5.1 of the Corporation's 2004 Form 10-K. |
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EXHIBIT NO. | DESCRIPTION |
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, incorporated by reference to Exhibit 10.5.2 of the Corporation's 2004 Form 10-K. |
10.5.3 | Third Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2005, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. |
10.5.4 | Fourth Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2006, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. |
10.5.5 | Fifth Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2007, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors incorporated by reference to Exhibit 10.5.5 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. |
10.5.6 | Sixth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2008, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.6 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. |
10.5.7 | Seventh Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2009, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.7 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. |
10.5.8 | Eighth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2010, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.8 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. |
10.5.9 | Ninth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2011, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.9 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. |
10.5.10 | Tenth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 6, 2012, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.10 of the Corporation's 2012 10-K. |
10.5.11 | Eleventh Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 16, 2013, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors, incorporated by reference to Exhibit 10.5.11 of the Corporation's 2013 10-K. |
10.5.12 | Twelfth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 17, 2014, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors. |
10.6 | Amended and Restated Pledge and Security Agreement dated as of May 28, 2004, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.29 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
10.7 | Second Amended and Restated Revolving Loan Agreement, effective as of November 1, 2005, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7 of the Corporation's 2005 Annual Report on Form 10‑K. |
10.7.1 | First Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of December 31, 2007, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.1 of the Corporation's 2007 Annual Report on Form 10-K. |
10.7.2 | Second Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2009, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. |
10.7.3 | Third Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of February 1, 2010, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. |
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EXHIBIT NO. | DESCRIPTION |
10.7.4 | Fourth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2010, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. |
10.7.5 | Fifth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2011, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.5 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. |
10.7.6 | Sixth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of April 1, 2012, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.6 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012. |
10.7.7 | Seventh Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2013, between the Corporation and The Dow Chemical Company, incorporated by reference to Exhibit 10.7.7 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. |
10.9 | Contribution Agreement dated as of December 21, 2007, among the Corporation, Dow International Holdings Company and The Dow Chemical Company, incorporated by reference to Exhibit 10.9 of the Corporation's 2007 Annual Report on Form 10‑K. |
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. |
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
A copy of any exhibit listed above may be obtained on written request to the Secretary's Office, Union Carbide Corporation, 1254 Enclave Parkway, Houston, Texas, 77077.
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