Dow Chemical 2015 Annual Report Download - page 137

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NOTE 20 – VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entities
The Company holds a variable interest in six 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 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 fifth joint venture provides ethylene storage 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 sixth joint venture is located in Brazil and produces 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. In August 2015, the partner exercised its equity option which requires Dow to purchase their equity investment for
approximately $200 million before July 12, 2016. As a result, in the third quarter of 2015, the Company reclassified the
partner's equity investment from "Redeemable Noncontrolling Interest" to "Accrued and other current liabilities" in the
consolidated balance sheets. The joint venture's ethanol mill commenced production in the second quarter of 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 owns 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 Company previously held an equity interest in a joint venture that owns and operates a membrane chlor-alkali
manufacturing facility. The Company’s variable interests in this joint venture related 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. During the second quarter of 2015, Mitsui & Co. Texas
Chlor-Alkali Inc. ("Mitsui"), a 50 percent equity owner in this joint venture, provided notice of its intention to transfer its
equity interest to Dow as part of the Reverse Morris Trust transaction ("Transaction") with Olin. On October 5, 2015, the
Company purchased Mitsui's equity interest in the membrane chlor-alkali joint venture for $133 million, which resulted in a
loss of $25 million included in "Sundry income (expense) - net" in the consolidated statements of income and included as a
component of the pretax gain on the Transaction. The loss is reflected in the Performance Materials & Chemicals segment. See
Note 6 for additional information on this Transaction.
The Company held a 49 percent equity interest in a joint venture that managed the growth, harvest and conditioning of soybean
seed and grain, corn and wheat in the United States. The Company's variable interest in this joint venture related to an equity
option between the partners. Terms of the equity option required the Company to purchase the partner's equity investment at a
price based on a specified formula, after a specified period of time, and satisfaction of certain conditions, if the partner elected
to sell its equity investment. On August 10, 2015, the equity option was determined to be exercisable and the partner provided
notice to the Company of its intent to exercise the equity option, which resulted in an after-tax loss of $22 million, included in
"Net income attributable to noncontrolling interests" in the consolidated statements of income. The Company purchased the
partner's equity investment on September 18, 2015, which resulted in the joint venture becoming a wholly owned subsidiary of
Dow. Subsequent to the purchase of the partner's equity investment, the Company sold its entire ownership interest in the
subsidiary to a third party and recognized a pretax gain of $44 million on the sale in the third quarter of 2015, included in
"Sundry income (expense) - net" in the consolidated statements of income and reflected in the Agricultural Sciences segment.
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