Dow Chemical 2000 10-K FAS-133-Items

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE YEAR ENDED DECEMBER 31, 2000

Commission file number 1-3433

THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		38-1285128 (I.R.S. Employer Identification No.)
2030 DOW CENTER, MIDLAND, MICHIGAN (Address of principal executive offices)		48674 (Zip Code)

Registrant's telephone number, including area code: 517-636-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $2.50 per share		Common Stock registered on the New York, Chicago and Pacific Stock Exchanges
Debentures, 6.85%, final maturity 2013		Debentures registered on the New York Stock Exchange

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/

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. Yes /x/ No / /

The aggregate market value of voting stock held by nonaffiliates as of February 9, 2001 (based upon the closing price of $32.21 per common share as quoted on the New York Stock Exchange), is approximately $2.871 billion. For purposes of this computation, it is assumed that the shares of voting stock held by Directors, Officers and the Dow Employees' Pension Plan Trust would be deemed to be stock held by affiliates. Nonaffiliated common stock outstanding at February 9, 2001 numbered 891,433,400 shares. Total common stock outstanding at February 9, 2001 numbered 897,973,824.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Dow's business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. A secondary objective is to add value by creating additional exposure within established limits and policies. The potential impact of creating such additional exposures is not material to the Company's results.

The global nature of Dow's business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company'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 Company hedges on a net exposure basis using foreign currency forward contracts and over-the-counter option contracts. Main exposures are related to assets and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies—mainly the Euro and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies and the Japanese yen.

The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, "swaptions," and exchange traded instruments to accomplish this objective. The Company's primary exposure is to the U.S. dollar yield curve.

Inherent in Dow's business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Cracker feedstocks and natural gas constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks when feasible. The risk of these hedging instruments was not material in 1999.

Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company's market risk policies and procedures.

Dow uses value at risk (VAR), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two-standard-deviation move in the respective price levels. These amounts are relatively insignificant in comparison to the size of the equity and earnings of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. The following table is given as an example:

Average Daily VAR at December 31*

	2000		1999
	In millions
Foreign exchange	$	7	$	5
Interest rate		31		40
Equity exposures, net of hedges		24		13
Commodities		28		—

*: Using a 95 percent confidence level

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Income

		2000		1999		1998
		In millions except for per share amounts
Net Sales		$	23,008	$	19,989	$	19,442
	Cost of sales		18,262		15,362		14,800
	Research and development expenses		892		845		807
	Selling, general and administrative expenses		1,582		1,530		1,666
	Amortization of intangibles		125		146		88
	Purchased in-process research and development charges		6		6		349
	Special charges		—		94		458
	Insurance and finance company operations, pretax income		68		127		112
	Equity in earnings of nonconsolidated affiliates		271		82		64
	Sundry income—net		309		261		916

Earnings before Interest, Income Taxes and Minority Interests			2,789		2,476		2,366

	Interest income		119		121		139
	Interest expense and amortization of debt discount		507		431		493

Income before Income Taxes and Minority Interests			2,401		2,166		2,012

	Provision for income taxes		823		766		685
	Minority interests' share in income		65		69		17
	Preferred stock dividends		—		5		6

Net Income Available for Common Stockholders		$	1,513	$	1,326	$	1,304

Share Data
	Earnings per common share—basic	$	2.24	$	2.01	$	1.94
	Earnings per common share—diluted	$	2.22	$	1.98	$	1.92
	Common stock dividends declared per share	$	1.16	$	1.16	$	1.16
	Weighted-average common shares outstanding—basic		676.0		660.2		670.6
	Weighted-average common shares outstanding—diluted		683.0		673.3		681.8

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

			December 31
			2000		1999
			In millions
Assets
Current Assets
	Cash and cash equivalents		$	215	$	506
	Marketable securities and interest-bearing deposits			89		706
	Accounts and notes receivable:
		Trade (net of allowance for doubtful receivables—2000: $92; 1999: $107)		2,873		2,631
		Other		2,512		1,983
	Inventories:
		Finished and work in process		2,839		2,264
		Materials and supplies		624		522
	Deferred income tax assets—current			108		235

	Total current assets			9,260		8,847

Investments
	Investment in nonconsolidated affiliates			1,088		1,359
	Other investments			2,431		2,872
	Noncurrent receivables			520		390

	Total investments			4,039		4,621

Property
	Property			25,491		24,276
	Less accumulated depreciation			16,301		15,786

	Net property			9,190		8,490

Other Assets
	Goodwill (net of accumulated amortization—2000: $405; 1999: $351)			1,887		1,834
	Deferred income tax assets—noncurrent			1,968		597
	Deferred charges and other assets			1,301		1,110

	Total other assets			5,156		3,541

Total Assets			$	27,645	$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

			December 31
			2000			1999
			In millions, except for share amounts
Liabilities and Stockholders' Equity
Current Liabilities
	Notes payable		$	1,348		$	692
	Long-term debt due within one year			311			343
	Accounts payable:
		Trade		2,272			1,782
		Other		1,527			1,087
	Income taxes payable			258			178
	Deferred income tax liabilities—current			35			38
	Dividends payable			217			213
	Accrued and other current liabilities			1,905			1,962

	Total current liabilities			7,873			6,295

Long-Term Debt				4,865			5,022
Other Noncurrent Liabilities
	Deferred income tax liabilities—noncurrent			887			839
	Pension and other postretirement benefits—noncurrent			1,746			1,843
	Other noncurrent obligations			2,178			2,219

	Total other noncurrent liabilities			4,811			4,901

Minority Interest in Subsidiaries				410			408

Preferred Securities of Subsidiary				500			500

Temporary Equity
	Preferred stock at redemption value ($1.00 par value each; Series A issued 1999: 1,316,440)			—			114
	Guaranteed ESOP obligation			—			(64	)

	Total temporary equity			—			50

Stockholders' Equity
	Common stock (authorized 1,500,000,000 shares of $2.50 par value each; issued 2000 and 1999: 981,377,562)			2,453			818
	Additional paid-in capital			16			1,321
	Guaranteed ESOP obligation			(53	)		—
	Retained earnings			14,071			13,445
	Accumulated other comprehensive income			(336	)		(251	)
	Treasury stock at cost (shares 2000: 303,874,960; 1999: 311,532,648)			(6,965	)		(7,010	)

	Net stockholders' equity			9,186			8,323

Total Liabilities and Stockholders' Equity			$	27,645		$	25,499

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Stockholders' Equity

			2000			1999			1998
			In millions
Common Stock
	Balance at beginning of year		$	818		$	818		$	818
	3-for-1 stock split			1,635			—			—

	Balance at end of year			2,453			818			818

Additional Paid-in Capital
	Balance at beginning of year			1,321			718			532
	3-for-1 stock split			(1,533	)		—			—
	Issuance of treasury stock at more than cost			176			550			121
	Other (including proceeds from sales of put options in 1999 and 1998)			52			53			65

	Balance at end of year			16			1,321			718

Guaranteed ESOP Obligation
	Balance at beginning of year			—			—			—
	Transfer from temporary equity			(64	)		—			—
	Debt repayment			11			—			—

	Balance at end of year			(53	)		—			—

Retained Earnings
	Balance at beginning of year			13,445			12,887			12,357
	Net income before preferred stock dividends			1,513			1,331			1,310
	3-for-1 stock split			(102	)		—			—
	Preferred stock dividends declared			—			(5	)		(6	)
	Common stock dividends declared			(785	)		(768	)		(774	)

	Balance at end of year			14,071			13,445			12,887

Accumulated Other Comprehensive Income
	Unrealized Gains on Investments at beginning of year			290			130			316
		Unrealized gains (losses)		25			160			(186	)

		Balance at end of year		315			290			130

	Cumulative Translation Adjustments at beginning of year			(478	)		(414	)		(429	)
		Translation adjustments		(122	)		(64	)		15

		Balance at end of year		(600	)		(478	)		(414	)

	Minimum Pension Liability at beginning of year			(63	)		(63	)		(33	)
		Adjustments		12			—			(30	)

		Balance at end of year		(51	)		(63	)		(63	)

Treasury Stock
	Balance at beginning of year			(7,010	)		(6,647	)		(5,935	)
	Purchases			(3	)		(429	)		(742	)
	Sales of treasury shares in open market			—			39			—
	Issuance to employees and employee plans			48			27			21
	Reclassification related to put options			—			—			9

	Balance at end of year			(6,965	)		(7,010	)		(6,647	)

Net Stockholders' Equity			$	9,186		$	8,323		$	7,429

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Comprehensive Income

In millions			2000			1999			1998
Net Income Available for Common Stockholders			$	1,513		$	1,326		$	1,304
Other Comprehensive Income, Net of Tax (tax amounts shown below for 2000, 1999, 1998)
	Unrealized gains on investments:
		Unrealized holding gains (losses) during the period (less tax of $16, $123, $(66))		27			206			(193	)
		Less: Reclassification adjustments for net amounts included in net income (less tax of $(1), $(27), $4)		(2	)		(46	)		7
	Cumulative translation adjustments (less tax of $(33), $(47), $47)			(122	)		(64	)		15
	Minimum pension liability adjustments (less tax of $5, $0, $(17))			12			—			(30	)

	Total other comprehensive income (loss)			(85	)		96			(201	)

Comprehensive Income			$	1,428		$	1,422		$	1,103

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

In millions			2000			1999			1998
Operating Activities
	Net income available for common stockholders		$	1,513		$	1,326		$	1,304
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		1,315			1,301			1,305
		Purchased in-process research and development charges		6			6			349
		Provision (credit) for deferred income tax		125			154			(15	)
		Undistributed earnings of nonconsolidated affiliates		(183	)		(2	)		(16	)
		Minority interests' share in income		65			69			17
		Net gain on sales of consolidated companies		—			(26	)		(726	)
		Net gain on sales of nonconsolidated affiliates		(13	)		—			—
		Net gain on sales of property		(103	)		(57	)		(47	)
		Other net (gain) loss		(252	)		(85	)		10
		Tax benefit — nonqualified stock option exercises		24			41			22
	Changes in assets and liabilities that provided (used) cash:
		Accounts and notes receivable		(441	)		55			498
		Inventories		(489	)		79			52
		Accounts payable		312			101			4
		Other assets and liabilities		(665	)		30			189

	Cash provided by operating activities			1,214			2,992			2,946

Investing Activities
	Capital expenditures			(1,349	)		(1,412	)		(1,546	)
	Proceeds from sales of property			156			115			96
	Purchases of consolidated companies			(678	)		(441	)		(808	)
	Proceeds from sales of consolidated companies			—			38			1,300
	Proceeds from sales of nonconsolidated affiliates			47			—			—
	Purchases from outside investors in limited partnership			—			—			(210	)
	Proceeds from outside investors in limited partnership			—			—			200
	Investments in nonconsolidated affiliates			(120	)		(100	)		(75	)
	Purchases of investments			(2,957	)		(4,136	)		(1,722	)
	Proceeds from sales of investments			4,441			3,296			1,670

	Cash used in investing activities			(460	)		(2,640	)		(1,095	)

Financing Activities
	Changes in short-term notes payable			(263	)		(749	)		(206	)
	Payments on long-term debt			(424	)		(342	)		(549	)
	Proceeds from issuance of long-term debt			384			1,353			218
	Purchases of treasury stock			(3	)		(429	)		(742	)
	Proceeds from sales of common stock			118			616			142
	Purchase of subsidiary preferred stock			—			(102	)		—
	Proceeds from issuance of preferred securities of subsidiary			—			500			—
	Distributions to minority interests			(65	)		(36	)		(33	)
	Dividends paid to stockholders			(783	)		(771	)		(786	)

	Cash provided by (used in) financing activities			(1,036	)		40			(1,956	)

Effect of Exchange Rate Changes on Cash				(9	)		(9	)		(7	)

Summary
	Increase (decrease) in cash and cash equivalents			(291	)		383			(112	)
	Cash and cash equivalents at beginning of year			506			123			235

	Cash and cash equivalents at end of year		$	215		$	506		$	123

See Notes to Financial Statements.

The Dow Chemical Company and Subsidiaries

Notes to Financial Statements

Dollars in millions, except as noted

Table of Contents

Note		Page
A	Summary of Significant Accounting Policies and Accounting Changes	45
B	Purchased In-Process Research and Development and Special Charges	49
C	Acquisitions and Divestitures	51
D	Income Taxes	53
E	Inventories	55
F	Significant Nonconsolidated Affiliates and Related Company Transactions	55
G	Property	57
H	Leased Property	57
I	Notes Payable, Long-Term Debt and Available Credit Facilities	57
J	Financial Instruments	59
K	Limited Partnerships and Preferred Securities of Subsidiary	62
L	Stockholders' Equity	63
M	Stock Compensation Plans	64
N	Redeemable Preferred Stock	66
O	Pension Plans and Other Postretirement Benefits	67
P	Commitments and Contingent Liabilities	70
Q	Supplementary Information	74
R	Operating Segments and Geographic Areas	75
S	Merger with Union Carbide Corporation	77

A Summary of Significant Accounting Policies and Accounting Changes

Foreign Currency Translation

The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency and the effects of exchange rate changes on transactions designated as hedges of net foreign investments are included in "Accumulated other comprehensive income." Where the U.S. dollar is used as the functional currency, foreign currency gains and losses are reflected in income.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less.

Financial Instruments

Interest differentials on swaps and forward rate agreements designated as hedges of exposures to interest rate risk are recorded as adjustments to expense over the contract periods. Premiums for early termination of interest derivatives designated as hedges are amortized as adjustments to expense over the original contract periods or underlying hedge exposure. Interest derivatives not designated as hedges are marked-to-market at the end of each accounting period with the results included in income.

Realized and unrealized gains and losses on foreign exchange transactions that are designated and effective as hedges are recognized in the same period as the hedged transaction. The carrying amounts of foreign currency options and option combinations are adjusted for changes in fair value at each balance sheet date. Foreign exchange contracts not designated as hedges are marked-to-market at the end of each accounting period with the results included in income.

The Company enters into various commodity contracts, including futures, options and swap agreements to hedge its purchase of commodity products used in the Company's business. These contracts are predominantly settled in cash. For those contracts that are designated and effective as

hedges, gains and losses are accounted for as part of the basis of the related commodity purchases. For contracts accounted for as hedges that are terminated before their maturity date, gains and losses are deferred and included in the basis of the related commodity purchases. Commodity contracts not accounted for as hedges are marked-to-market at the end of each accounting period with the results included in income.

The Company 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 Company uses standard pricing models, which take into account the present value of estimated future cash flows.

Accounting Changes

The FASB issued Statement of Financial Accounting Standards (SFAS) No.133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. SFAS No.133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No.137, "Accounting for

Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No.133." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133. Based on the revised effective date, the Company will adopt SFAS No.133, as amended by SFAS No. 138, on January 1, 2001. See Note J regarding the impact of adoption.

J Financial Instruments

Investments

The Company's investments in marketable securities are primarily classified as available-for-sale. Maturities for approximately one-third of the debt securities were less than five years at December 31, 2000.

Investing Results

	2000			1999			1998
Proceeds from sales of available-for-sale securities	$	4,054		$	3,229		$	1,960
Gross realized gains		331			149			120
Gross realized losses		(160	)		(103	)		(54	)

Risk Management

The Company's risk management program for both interest rate risk and foreign currency risk is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the marked-to-market valuations of positions are strictly monitored at all times. The Company uses value at risk and stress tests to monitor risk. Credit risk arising from these contracts is not significant because the counterparties to these contracts are major international financial institutions and the Company does not anticipate any such losses. The net cash requirements arising from risk management activities are not expected to be material. The Company reviews its overall financial strategies and impacts from using derivatives in its risk management program with the Board of Directors' Finance Committee and revises as market conditions dictate.

The Company minimizes concentrations of credit risk through its global orientation in diverse businesses with a large number of diverse customers and suppliers. No significant concentration of credit risk existed at December 31, 2000.

Interest Rate Risk Management

The Company enters into various interest rate contracts with the objective of lowering funding costs, diversifying sources of funding or altering interest rate exposures related to fixed and variable rate obligations. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount.

The notional principal amounts on all types of interest derivative contracts at December 31, 2000 totaled $1,052 with a weighted-average remaining life of 6.8 years. At December 31, 1999, the notional principal amounts totaled $1,299 with a weighted-average remaining life of 6.3 years.

Hedging Unrealized Gains and Losses

		2000			1999
Unrealized gains		$	32		$	2
Unrealized losses			(4	)		(11	)

Interest Derivatives at December 31, 2000

				Weighted-average Rate
	Notional Amount			Weighted-average Rate
	Notional Amount		Maturities	Receive		Pay
Receive fixed hedge	$	550	2002-2010	6.9	%	6.4	%
Receive floating hedge		340	2002-2022	7.3	%	7.5	%
Other		162	2001-2003	—		—

Interest Derivatives at December 31, 1999

				Weighted-average Rate
	Notional Amount			Weighted-average Rate
	Notional Amount		Maturities	Receive		Pay
Receive fixed hedge	$	225	2002-2004	6.6	%	5.7	%
Receive floating hedge		701	2002-2022	5.4	%	6.5	%
Other		373	2000-2009	—		—

Foreign Currency Risk Management

The Company's global operations require active participation in foreign exchange markets. The Company enters into foreign exchange forward contracts and options to hedge various currency exposures or create desired exposures. Exposures primarily relate to assets and liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The primary business objective of the activity is to optimize the U.S. dollar value of the Company's

assets, liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged.

The Company had forward contracts and options to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of $11,017 at December 31, 2000 and $6,866 at December 31, 1999. These contracts and options had various expiration dates, primarily in the first quarter of the next year. The net unrealized loss based on the foreign exchange rates at December 31, 2000 was $(146). The net unrealized gain based on the foreign exchange rates at December 31, 1999 was $45. The effect of foreign exchange derivatives is primarily recognized in "Sundry income—net." The effect of hedges of net investments in subsidiaries is recognized in "Accumulated other comprehensive income."

Fair Value of Financial Instruments at December 31

		2000											1999
		Cost			Gain		Loss			Fair Value			Cost			Gain		Loss			Fair Value
Marketable securities:
	Debt securities	$	1,004		$	35	$	(6	)	$	1,033		$	1,771		$	20	$	(31	)	$	1,760
	Equity securities		890			527		(56	)		1,361			1,043			580		(47	)		1,576
Other			11			—		—			11			138			2		—			140

Total		$	1,905		$	562	$	(62	)	$	2,405		$	2,952		$	602	$	(78	)	$	3,476

Long-term debt including debt due within one year		$	(5,176	)	$	12	$	(176	)	$	(5,340	)	$	(5,365	)		—	$	(118	)	$	(5,483	)

Derivatives relating to:
	Foreign currency		—		$	441	$	(587	)	$	(146	)		—		$	174	$	(129	)	$	45
	Interest rates		—			32		(7	)		25			—			2		(20	)		(18	)

Cost approximates fair value for all other financial instruments.

Accounting for Derivative Instruments and Hedging Activities

Effective January 1, 2001, the Company will adopt SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument (i.e., gains or losses) depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or net investments in foreign operations.

If the hedged exposure is a fair value exposure, the gain or loss from changes in the fair value of the derivative instrument is recognized in earnings in the period of change together with the offsetting gain or loss from changes in the fair value of the hedged item. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of "Accumulated other comprehensive income (AOCI)" and subsequently recognized in

earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the hedge, are reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the hedged exposure is a net investment exposure, the effective portion of the hedge is recorded in AOCI and any ineffective portion is reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss from changes in the fair value is recognized in earnings in the period of change.

Adoption of SFAS No. 133 will result in the Company recording a transition adjustment gain of $32 (net of related income tax of $19) in net income and a net transition adjustment gain of $65 (net of related income tax of $38) in AOCI at January 1, 2001. Further, the adoption of the statement will result in the Company recognizing $195 of derivative instrument assets and $29 of derivative instrument liabilities, increasing the carrying amount of hedged liabilities by $25, and derecognizing deferred gains of $13. The short-cut method under SFAS No. 133 will be used where the criteria are met. The Company anticipates volatility in AOCI and net income from its cash flow hedges. The amount of volatility will vary with the level of derivative activities and market conditions during any period.

P Commitments and Contingent Liabilities

A Canadian subsidiary entered into two 20-year agreements, one that expired in 1998 and one that expires in 2004, to purchase ethylene. The purchase price is determined on a cost-of-service basis which, in addition to covering all operating expenses and debt service costs, provides the owner of the manufacturing plants with a specified return on capital. Total purchases under the agreements were $113 in 2000, $92 in 1999 and $221 in 1998.

At December 31, 2000, the Company had various outstanding commitments for take or pay and throughput agreements, including the Canadian subsidiary's ethylene contract, for terms extending from one to 20 years. In general, such commitments were at prices not in excess of current market prices.

Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2000

2001	$	425
2002		407
2003		387
2004		343
2005		312
2006 through expiration of contracts		2,089

Total	$	3,963

In addition to the take or pay obligations at December 31, 2000, the Company had outstanding purchase commitments which ranged from one to 20 years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $117. In general, such commitments were at prices not in excess of current market prices. The Company also had outstanding direct and indirect commitments for construction performance and lease payment guarantees and other obligations of $465. The Company is also committed to lease manufacturing facilities under construction in Argentina and The Netherlands.