Related Party Transactions

9 Months Ended

Sep. 30, 2011

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

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 long-standing intercompany pricing policies. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in “Sundry income (expense) – net” in the consolidated statements of income. Purchases from that Dow subsidiary were $963 million in the third quarter of 2011 ($758 million in the third quarter of 2010) and $2,777 million during the nine-month period ended September 30, 2011 ($2,366 million during the nine-month period ended September 30, 2010).

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.

In the first quarter of 2011, the master services agreement was amended to change the basis of cost allocation for general administrative and overhead type services from conversion costs to headcount and to include a 10 percent service fee. The new allocation basis includes certain costs that were previously charged to UCC based on the activities’ cost, including employee costs, as well as direct and indirect costs. This arrangement resulted in expense of approximately $12 million in the third quarter of 2011 and $37 million for the first nine months of 2011, for general administrative and overhead type services and the 10 percent service fee, included in “Sundry income (expense) – net.” The remaining activity-based costs were approximately $9 million for the third quarter of 2011 and $26 million for the first nine months of 2011 and were included in “Cost of sales.”

Under the master services agreement in place for 2010, costs related to general administrative and overhead services were allocated to UCC based on the Corporation’s and Dow’s relative manufacturing conversion costs. This arrangement resulted in an average quarterly charge of approximately $5 million in the first nine months of 2010, included in “Sundry income (expense) – net.”

Additionally, for services that Dow routinely charged based on effort, UCC was charged the cost of such services on a fully absorbed basis in 2010, which included direct and indirect costs. Certain Dow employees were contracted to UCC and Dow was reimbursed for all direct employment costs of such employees. These activity-based costs resulted in a quarterly charge of approximately $15 million in the third quarter of 2010 and $40 million for the first nine months of 2010, which were included in “Cost of sales.”

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 September 30, 2011, the Corporation had a note receivable of $3.7 billion ($4.3 billion at December 31, 2010) from Dow under a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.

The Corporation also has a separate revolving credit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures December 31, 2012. 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 September 30, 2011, $881 million ($881 million at December 31, 2010) was available under the revolving credit agreement. The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.

In September 2011, the Corporation declared and paid a dividend of $275 million to Dow; dividends to Dow totaled $675 million for the nine months ended September 30, 2011. In September 2010, the Corporation declared and paid a dividend of $150 million to Dow; dividends to Dow totaled $450 million for the nine months ended September 30, 2010.

The Corporation received cash dividends from its related company investments of $2 million in the third quarter of 2011 and $3 million during the nine-month period ended September 30, 2011. The Corporation received cash dividends from its related company investments of $19 million in the third quarter of 2010 and $39 million during the nine-month period ended September 30, 2010. These dividends are included in “Sundry income (expense) – net.”