Dow Chemical 2014 Annual Report Download - page 143

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NOTE 19 – VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entities
The Company holds a variable interest in eight joint ventures for which the Company is the primary beneficiary.
Three joint ventures own and operate manufacturing and logistics facilities, which produce chemicals and provide services in
Asia Pacific. The Company’s variable interest in these joint ventures relates to arrangements between the joint ventures and the
Company, involving the majority of the output on take-or-pay terms with pricing ensuring a guaranteed return to the joint
ventures.
The fourth joint venture owns and operates a membrane chlor-alkali manufacturing facility located at the Company’s Freeport,
Texas, integrated manufacturing complex. The Company’s variable interests in this joint venture relate to equity options
between the partners and a cost-plus off-take arrangement between the joint venture and the Company, involving proportional
purchase commitments on take-or-pay terms and ensuring a guaranteed return to the joint venture. The Company provides the
joint venture with operation and maintenance services, utilities and raw materials; markets the joint venture’s co-products; and
converts the other partner’s proportional purchase commitments into ethylene dichloride under a tolling arrangement. The joint
venture successfully initiated full-scale, commercial production in the first quarter of 2014.
The fifth joint venture manufactures products in Japan for the semiconductor industry. Each joint venture partner holds several
equivalent variable interests, with the exception of a royalty agreement held exclusively between the joint venture and the
Company. In addition, the entire output of the joint venture is sold to the Company for resale to third-party customers.
The sixth joint venture is an ethylene storage joint venture located in Alberta, Canada. The Company's variable interests relate
to arrangements involving a majority of the joint venture's storage capacity on take-or-pay terms with pricing ensuring a
guaranteed return to the joint venture; and favorably priced leases provided to the joint venture. The Company provides the
joint venture with operation and maintenance services and utilities.
The seventh joint venture is a development-stage enterprise located in Brazil that will initially produce ethanol from sugarcane.
The Company's variable interests in this joint venture relate to an equity option between the partners, a parental loan and
guarantee related to debt financing, and contractual arrangements limiting the partner's initial participation in the economics of
certain assets and liabilities. Since formation of the joint venture, the partners have amended the governing documents,
including terms of the equity option. These amendments did not result in a change to the Company's accounting treatment of
the joint venture. Terms of the equity option require the Company to purchase the partner's equity investment at a price based
on a specified formula if the partner elects to exit the joint venture. The Company has classified a portion of the partner's equity
investment as "Redeemable Noncontrolling Interest" in the consolidated balance sheets. The joint venture's ethanol mill is
expected to process its first harvest of sugarcane in 2015. Original plans for the joint venture's expansion into downstream
derivative products have been postponed. This joint venture also holds variable interests in an entity that will construct and own
a cogeneration facility. The joint venture's variable interests are the result of a tolling arrangement where it provides fuel to the
entity and purchases a majority of the cogeneration facility’s output on terms that ensure a return to the entity’s equity holders.
The eighth joint venture manages the growth, harvest and conditioning of soybean seed and grain, corn and wheat in several
midwestern states in the United States. On March 2, 2012, the Company acquired a 49 percent equity interest in this venture.
The Company's variable interest in this joint venture relates to an equity option between the partners. Terms of the equity
option require the Company to purchase the partner's equity investment at a fixed price, after a specified period of time if the
partner elects to sell its equity investment. The joint venture provides seed production services to the Company.
The Company previously held a variable interest in an owner trust, for which the Company was the primary beneficiary. The
owner trust leased an ethylene production facility in The Netherlands to the Company, whereby substantially all of the rights
and obligations of ownership were transferred to the Company. The Company’s variable interest in the owner trust related to a
fixed purchase price option. On January 2, 2014, the Company purchased the ethylene production facility for $406 million. The
Company classified $346 million as "Payments on long-term debt" and $60 million as "Purchases of noncontrolling interests"
in the consolidated statements of cash flows.
The Company's consolidated financial statements include the assets, liabilities and results of operations of variable interest
entities ("VIEs") for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in "Net
income (loss) attributable to noncontrolling interests" in the consolidated statements of income and "Redeemable
Noncontrolling Interest" and "Non-redeemable noncontrolling interests" in the consolidated balance sheets. The following table