**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended****  MARCH 31, 2007**

 

**Commissionfile number:****1-1463**

 

**UNIONCARBIDE CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

|                                                    | **New  York**                                                              | ** ** | **13-1421730**                        |
|---------------------------------------------------------|----------------------------------------------------------------------------|------------|---------------------------------------|
|                                                    | (State or other  jurisdiction of  incorporation or organization)           |       | (I.R.S. Employer  Identification No.) |
|                                                         |                                                                       | ** ** |                                  |
| ** **                                              |                                                                       | ** ** |                                  |
| **400  West Sam Houston Parkway South, Houston, Texas** |                                                                       | **77042**  |                                  |
| (Address of  principal executive offices)               |                                                                       | (Zip Code) |                                  |
|                                                    |                                                                       |       |                                  |
|                                                    | Registrant’s  telephone number, including area code: **713-978-2016** |
|                                                         |                                                                            |            |                                       |  |  |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was  required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.                         ýYes     o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):
| Large accelerated filer  o | Accelerated  filer o | Non-accelerated  filer ý |
|----------------------------|----------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).        o Yes      ýNo

 

At March 31, 2007, 1,000shares of common stock were outstanding, all of which were held by theregistrant’s parent, The Dow Chemical Company.

 

The registrant meets the conditions set forth in General InstructionsH(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduceddisclosure format.

 

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**Union Carbide Corporation**

**TABLE OFCONTENTS**
|                                                                                                      | ** ** | **PAGE** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART  I - FINANCIAL INFORMATION**                                                                  |       |     |       |
|                                                                                                 |       |     |       |
| Item  1. Financial Statements.                                                                       |       | 3        |       |
|                                                                                                 |       |     |       |
| Consolidated Statements of Income                                                                    |       | 3        |       |
|                                                                                                 |       |     |       |
| Consolidated  Balance Sheets                                                                         |       | 4        |       |
|                                                                                                 |       |     |       |
| Consolidated Statements of Cash Flows                                                                |       | 6        |       |
|                                                                                                 |       |     |       |
| Consolidated  Statements of Comprehensive Income                                                     |       | 6        |       |
|                                                                                                 |       |     |       |
| Notes to the Consolidated Financial Statements                                                       |       | 7        |       |
|                                                                                                 |       |     |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |       | 13       |       |
|                                                                                                 |       |     |       |
| Disclosure Regarding Forward-Looking Information                                                     |       | 13       |       |
|                                                                                                 |       |     |       |
| Results  of Operations                                                                               |       | 13       |       |
|                                                                                                 |       |     |       |
| Other  Matters                                                                                       |       | 14       |       |
|                                                                                                 |       |     |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk.                                 |       | 17       |       |
|                                                                                                 |       |     |       |
| Item 4. Controls and Procedures.                                                                     |       | 17       |       |
|                                                                                                 |       |     |       |
| **PART  II - OTHER INFORMATION**                                                                     |       |     |       |
| ** **                                                                                           |       |     |       |
| Item 1. Legal Proceedings.                                                                           |       | 17       |       |
|                                                                                                 |       |     |       |
| Item 1A. Risk Factors.                                                                               |       | 17       |       |
|                                                                                                 |       |     |       |
| Item 6.  Exhibits.                                                                                   |       | 17       |       |
|                                                                                                 |       |     |       |
| **SIGNATURES**                                                                                       |       | 18       |       |
| ** **                                                                                           |       |     |       |
| **EXHIBIT INDEX**                                                                                    |       | 19       |       |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

** **

**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements of Income**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| **In millions   (Unaudited)**        | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| Net trade sales                                     |       | $                                | 53         |   | $ | 318 |   |
| Net sales to  related companies                     |       | 1,673                            |       | 1,735 |   |
| Total Net Sales                                     |       | 1,726                            |       | 2,053 |   |
| Cost of sales                                       |       | 1,598                            |       | 1,636 |   |
| Research and  development expenses                  |       | 20                               |       | 21 |   |
| Selling, general  and administrative expenses       |       | 7                                |       | 11 |   |
| Equity in  earnings of nonconsolidated affiliates   |       | 124                              |       | 61 |   |
| Sundry expense -  net                               |       | (10                              | )          | (21 | ) |
| Interest income                                     |       | 37                               |       | 23 |   |
| Interest expense  and amortization of debt discount |       | 15                               |       | 13 |   |
| Income before Income  Taxes                         |       | 237                              |       | 435 |   |
| Provision for  income taxes                         |       | 51                               |       | 152 |   |
| Net Income Available  for Common Stockholder        |       | $                                | 186        |   | $ | 283 |   |
| Depreciation                                        |       | $                                | 68         |   | $ | 68 |   |
| Capital Expenditures                                |       | $                                | 46         |   | $ | 41 |   |

*See Notes to the Consolidated Financial Statements.*

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**
| **In millions   (Unaudited)**                                        | ** ** | **March 31,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Assets**                                                                          |       |
| Current Assets                                                                      |       |                     |       |                    |       |
| Cash and cash  equivalents                                                          |       | $                        | 77         |                    | $          | 71 |   |
| Accounts  receivable:                                                               |       |                     |       |                    |       |
| Trade (net of  allowance for doubtful receivables - 2007: $8; 2006: $2)             |       | 26                       |       | 33                      |       |
| Related  companies                                                                  |       | 373                      |       | 449                     |       |
| Other                                                                               |       | 132                      |       | 145                     |       |
| Notes receivable  from related companies                                            |       | 2,867                    |       | 2,547                   |       |
| Inventories                                                                         |       | 206                      |       | 199                     |       |
| Deferred income  tax assets - current                                               |       | 67                       |       | 41                      |       |
| Total current  assets                                                               |       | 3,748                    |       | 3,485                   |       |
| Investments                                                                         |       |                     |       |                    |       |
| Investments in  related companies                                                   |       | 297                      |       | 297                     |       |
| Investments in  nonconsolidated affiliates                                          |       | 799                      |       | 896                     |       |
| Other  investments                                                                  |       | 20                       |       | 23                      |       |
| Noncurrent  receivables                                                             |       | 56                       |       | 58                      |       |
| Noncurrent  receivable from related company                                         |       | 207                      |       | 187                     |       |
| Total  investments                                                                  |       | 1,379                    |       | 1,461                   |       |
| Property                                                                            |       |                     |       |                    |       |
| Property                                                                            |       | 7,470                    |       | 7,459                   |       |
| Less accumulated  depreciation                                                      |       | 5,523                    |       | 5,489                   |       |
| Net property                                                                        |       | 1,947                    |       | 1,970                   |       |
| Other Assets                                                                        |       |                     |       |                    |       |
| Goodwill                                                                            |       | 26                       |       | 26                      |       |
| Other intangible  assets (net of accumulated amortization - 2007: $124; 2006: $122) |       | 24                       |       | 25                      |       |
| Deferred income  tax assets - noncurrent                                            |       | 192                      |       | 115                     |       |
| Asbestos-related  insurance receivables - noncurrent                                |       | 725                      |       | 725                     |       |
| Deferred charges  and other assets                                                  |       | 399                      |       | 383                     |       |
| Total other  assets                                                                 |       | 1,366                    |       | 1,274                   |       |
| Total Assets                                                                        |       | $                        | 8,440      |                    | $          | 8,190 |   |

*See Notes to the Consolidated Financial Statements.*

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**UnionCarbide Corporation and Subsidiaries**

**ConsolidatedBalance Sheets**
| **In millions   (Unaudited)**                                    | ** ** | **March 31,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Liabilities and Stockholder’s Equity**                                   | * *   |
| Current  Liabilities                                                            |       |                     |       |                    |       |
| Notes payable:                                                                  |       |                     |       |                    |       |
| Related companies                                                               |       | $                        | 9          |                    | $          | 8 |   |
| Other                                                                           |       | —                   |       | 1                       |       |
| Accounts payable:                                                               |       |                     |       |                    |       |
| Trade                                                                           |       | 232                      |       | 292                     |       |
| Related companies                                                               |       | 208                      |       | 252                     |       |
| Other                                                                           |       | 30                       |       | 40                      |       |
| Income taxes payable                                                            |       | 205                      |       | 49                      |       |
| Asbestos-related liabilities – current                                     |       | 133                      |       | 129                     |       |
| Pension and other postretirement benefits – current                        |       | 56                       |       | 56                      |       |
| Accrued and other current liabilities                                           |       | 141                      |       | 116                     |       |
| Total current liabilities                                                       |       | 1,014                    |       | 943                     |       |
| Long-Term Debt                                                                  |       | 820                      |       | 820                     |       |
| Other Noncurrent  Liabilities                                                   |       |                     |       |                    |       |
| Pension and other postretirement benefits –  noncurrent                    |       | 510                      |       | 518                     |       |
| Asbestos-related liabilities - noncurrent                                       |       | 1,063                    |       | 1,079                   |       |
| Other noncurrent obligations                                                    |       | 488                      |       | 407                     |       |
| Total other noncurrent liabilities                                              |       | 2,061                    |       | 2,004                   |       |
| Minority  Interest in Subsidiaries                                              |       | 2                        |       | 3                       |       |
| Stockholder’s  Equity                                                      |       |                     |       |                    |       |
| Common stock (1,000 shares authorized and issued)                               |       | —                   |       | —                  |       |
| Additional paid-in capital                                                      |       | 121                      |       | 121                     |       |
| Retained earnings (includes cumulative effect of  adopting FIN No. 48 of $(67)) |       | 4,901                    |       | 4,782                   |       |
| Accumulated other comprehensive loss                                            |       | (479                     | )          | (483                    | )          |
| Net stockholder’s equity                                                   |       | 4,543                    |       | 4,420                   |       |
| Total Liabilities and  Stockholder’s Equity                                |       | $                        | 8,440      |                    | $          | 8,190 |   |

*See Notes to the Consolidated Financial Statements.*

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements of Cash Flows**
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| **In millions   (Unaudited)**                         | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| Operating  Activities                                                | * *   | * *                         | * *   | * * | * * |
| Net Income Available for Common Stockholder                          |       | $                                | 186        |   | $ | 283 |   |
| Adjustments to reconcile net income to net cash  provided by         |       |                             |       |   |   |
| operating activities:                                                |       |                             |       |   |   |
| Depreciation and amortization                                        |       | 78                               |       | 75 |   |
| Credit for deferred income tax                                       |       | (37                              | )          | (52 | ) |
| Earnings of nonconsolidated affiliates less than  dividends received |       | 96                               |       | 207 |   |
| Net gain on sales of property                                        |       | (1                               | )          | — |   |
| Changes in assets and liabilities:                                   |       |                             |       |   |   |
| Accounts and notes receivable                                        |       | 8                                |       | 13 |   |
| Related company receivables                                          |       | (244                             | )          | (521 | ) |
| Inventories                                                          |       | (7                               | )          | (58 | ) |
| Accounts payable                                                     |       | (51                              | )          | (39 | ) |
| Related company payables                                             |       | (42                              | )          | (38 | ) |
| Other assets and liabilities                                         |       | 85                               |       | 165 |   |
| Cash provided by operating activities                                |       | 71                               |       | 35 |   |
| Investing  Activities                                                |       |                             |       |   |   |
| Capital expenditures                                                 |       | (46                              | )          | (41 | ) |
| Distributions from nonconsolidated affiliates                        |       | —                           |       | 4 |   |
| Change in noncurrent receivable from related company                 |       | (20                              | )          | 1 |   |
| Proceeds from sales of property                                      |       | 3                                |       | — |   |
| Purchases of investments                                             |       | (1                               | )          | (1 | ) |
| Cash used in investing activities                                    |       | (64                              | )          | (37 | ) |
| Financing  Activities                                                |       |                             |       |   |   |
| Changes in short-term notes payable                                  |       | (1                               | )          | (1 | ) |
| Payments on long-term debt                                           |       | —                           |       | (2 | ) |
| Cash used in financing activities                                    |       | (1                               | )          | (3 | ) |
| Summary                                                              |       |                             |       |   |   |
| Increase (Decrease) in cash and cash equivalents                     |       | 6                                |       | (5 | ) |
| Cash and cash equivalents at beginning of year                       |       | 71                               |       | 73 |   |
| Cash and cash equivalents at end of period                           |       | $                                | 77         |   | $ | 68 |   |
| *See  Notes to the Consolidated Financial Statements.*               |       |                             |       |   |   |
|                                                                 |       |                             |       |   |   |
|                                                                 |       |                             |       |   |   |
| **Union Carbide Corporation and Subsidiaries**                       | ** ** |
| **Consolidated Statements of Comprehensive Income**                  | ** ** |
| * *                                                             | * *   | **Three Months Ended**           | * *   |
|  

In millions   (Unaudited)                          | * *   | **March 31,  2007**              | ** ** | **March 31,  2006** | * * |
| Net Income  Available for Common Stockholder                         |       | $                                | 186        |   | $ | 283 |   |
| Other Comprehensive  Income (Loss), Net of Tax                       |       |                             |       |   |   |
| Unrealized loss on investments                                       |       | —                           |       | (1 | ) |
| Pension and other postretirement benefit plans  adjustment           |       | 4                                |       | — |   |
| Net gain on cash flow hedging derivative instruments                 |       | —                           |       | 1 |   |
| Total other comprehensive income                                     |       | 4                                |       | — |   |
| Comprehensive  Income                                                |       | $                                | 190        |   | $ | 283 |   |
| *See Notes to the Consolidated  Financial Statements.*               |       |                             |       |   |   |

 

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**Union Carbide Corporation andSubsidiaries**

**Notes to the Consolidated Financial Statements**

(Unaudited)

**NOTE A    CONSOLIDATED FINANCIAL STATEMENTS**

The unauditedinterim consolidated financial statements of Union Carbide Corporation and itssubsidiaries (the “Corporation” or “UCC”) were prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)and reflect all adjustments (including normal recurring accruals) which, in theopinion of management, are considered necessary for the fair presentation ofthe results for the periods presented.

The Corporation is awholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings PerShare,” the presentation of earnings per share is not required in financialstatements of wholly owned subsidiaries.

The Corporation’sbusiness activities comprise components of Dow’s global operations rather thanstand-alone operations. Dow conducts its worldwide operations through globalbusinesses. Because there are no separable reportable business segments for UCCunder SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” and no detailed business information is provided to a chiefoperating decision maker regarding the Corporation’s stand-alone operations,the Corporation’s results are reported as a single operating segment.

Intercompany transactionsand balances are eliminated in consolidation. Transactions with the Corporation’sparent company, Dow, or other Dow subsidiaries have been reflected as relatedcompany transactions in the consolidated financial statements. See Note G forfurther discussion.

Certain reclassificationsof prior year’s amounts have been made to conform to the presentation adoptedfor 2007. These statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2006.

**NOTE B     RECENT ACCOUNTING PRONOUNCEMENTS**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith SFAS No. 109. Thisinterpretation prescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN No. 48 was effective for fiscal yearsbeginning after December 15, 2006.

On January 1,2007, the Corporation adopted the provisions of FIN No. 48. The cumulativeeffect of adoption was a $67 million reduction of retained earnings. AtJanuary 1, 2007, the total amount of unrecognized tax benefits was $251million, of which $217 million would impact the effective tax rate, ifrecognized. Interest and penalties associated with uncertain tax positions arerecognized as components of the “Provision for income taxes.” The Corporation’saccrual for interest and penalties was $36 million upon adoption of FIN No. 48.

The Corporation is included in Dow’s consolidated federal income taxgroup and consolidated tax return. For Dow, the tax years 1998-2003 arecurrently under audit by the U.S. Internal Revenue Service and the review ofthese years is expected to be completed during 2007. It is reasonably possiblethat a reduction in the unrecognized tax benefits may occur (which may impactUCC’s unrecognized tax benefits); however, quantification of an estimated rangecannot be made at this time.

While theCorporation is subject to taxation in certain foreign jurisdictions, its majortax jurisdictions are in the United States. The tax years that remain subjectto examination in the United States are 1998 through 2006 for federal incometaxes and 2002 through 2006 for state and local income taxes.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans - an amendment of FASB Statements No.87, 88, 106, and 132(R).” This Statement, which was effective December 31, 2006for the Corporation, required employers to recognize the funded status ofdefined benefit postretirement plans as an asset or liability on the balancesheet and to recognize changes in that funded status through comprehensiveincome. See Note F for the Corporation’s disclosures related to pension andother postretirement benefits.

**SAB No. 74 Disclosures for Accounting StandardsIssued But Not Yet Adopted**

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements,” which defines fair value, establishes a framework formeasuring fair value in GAAP, and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements and is effective for fiscal yearsbeginning after November 15, 2007. The Corporation is currently evaluating theimpact of adopting this Statement.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No. 115,”which permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year 

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that begins afterNovember 15, 2007. The Corporation is currently evaluating if it will elect thefair value option for any of its eligible financial instruments and otheritems.

**NOTE C     INVENTORIES**

The following tableprovides a breakdown of inventories:
| **Inventories**In millions | ** ** | **March 31,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------------------|------------|
| Finished goods                  |       | $                   | 30         |                    | $          | 35 |   |
| Work in process                 |       | 45                  |       | 40                      |       |
| Raw materials                   |       | 45                  |       | 37                      |       |
| Supplies                        |       | 86                  |       | 87                      |       |
| Total inventories               |       | $                   | 206        |                    | $          | 199 |   |

 

The reserves reducing inventories from the first-in, first-out (“FIFO”)basis to the last-in, first-out (“LIFO”) basis amounted to $142 million at March31, 2007 and $160 million at December 31, 2006.

**NOTE D   OTHER INTANGIBLEASSETS**

The following table provides information regarding the Corporation’sother intangible assets:

**Other Intangible Assets**
| ** **                            | ** ** | **At March 31, 2007**  | ** ** | **At December 31, 2006** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|
| **In millions**                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible assets  with finite lives: |       |                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Licenses and intellectual property    |       | $                           | 33         |                                    | $          | (32 | ) | $ | 1 |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                               |       | 3                           |       | (2                                      | )          | 1 |   | 3 |   | (2 | ) | 1 |   |
| Software                              |       | 112                         |       | (90                                     | )          | 22 |   | 111 |   | (88 | ) | 23 |   |
| Total                                 |       | $                           | 148        |                                    | $          | (124 | ) | $ | 24 |   | $ | 147 |   | $ | (122 | ) | $ | 25 |   |

 

Amortization expensefor software, which is included in “Cost of sales,” was $1 million in the firstquarter of 2007 and the first quarter of 2006. Amortization expense for otherintangible assets (not including software) was immaterial in the first quarterof 2007 and the first quarter of 2006. Total estimated amortization expense for2007 and the next five fiscal years is as follows:

**Estimated Amortization Expensefor Next Five Years**
| In millions | ** ** |
|------------------|------------|
| 2007             |       | $ | 5 |   |
| 2008             |       | $ | 5 |   |
| 2009             |       | $ | 5 |   |
| 2010             |       | $ | 5 |   |
| 2011             |       | $ | 3 |   |
| 2012             |       | — |   |

 

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**NOTE E     COMMITMENTS AND CONTINGENT LIABILITIES**

**Environmental Matters**

 

Accruals forenvironmental matters are recorded when it is probable that a liability hasbeen incurred and the amount of the liability can be reasonably estimated,based on current law and existing technologies. At March 31, 2007, theCorporation had accrued obligations of $81 million for environmentalremediation and restoration costs, including $28 million for the remediation ofSuperfund sites. This is management’s best estimate of the costs forremediation and restoration with respect to environmental matters for which theCorporation has accrued liabilities, although the ultimate cost with respect tothese particular matters could range up to twice that amount. Inherentuncertainties exist in these estimates primarily due to unknown conditions,changing governmental regulations and legal standards regarding liability, andevolving technologies for handling site remediation and restoration. AtDecember 31, 2006, the Corporation had accrued obligations of $77 million forenvironmental remediation and restoration costs, including $25 million for theremediation of Superfund sites. It is the opinion of the Corporation’smanagement that the possibility is remote that costs in excess of thosedisclosed will have a material adverse impact on the Corporation’s consolidatedfinancial statements.

**Litigation**

 

The Corporation and itssubsidiaries are involved in a number of legal proceedings and claims with bothprivate 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.

Separately, the Corporation is and has been involvedin a large number of asbestos-related suits filed primarily in state courtsduring the past three decades. These suits principally allege personal injuryresulting from exposure to asbestos-containing products and frequently seekboth actual and punitive damages. The alleged claims primarily relate toproducts that UCC sold in the past, alleged exposure to asbestos-containingproducts located on UCC’s premises, and UCC’s responsibility for asbestos suitsfiled against a former subsidiary, Amchem Products, Inc. (“Amchem”). In manycases, plaintiffs are unable to demonstrate that they have suffered anycompensable loss as a result of such exposure, or that injuries incurred infact resulted from exposure to the Corporation’s products.

Influenced by thebankruptcy filings of numerous defendants in asbestos-related litigation andthe prospects of various forms of state and national legislative reform, therate at which plaintiffs filed asbestos-related suits against variouscompanies, including the Corporation and Amchem, increased in 2001, 2002 andthe first half of 2003. Since then, the rate of filing has significantlyabated. The Corporation expects more asbestos-related suits to be filed againstit and Amchem in the future, and will aggressively defend or reasonablyresolve, as appropriate, both pending and future claims.

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January2003, the Corporation increased its December 31, 2002 asbestos-relatedliability for pending and future claims for the 15-year period ending in 2017to $2.2 billion, excluding future defense and processing costs. Since then, theCorporation has compared current asbestos claim and resolution activity to theresults of the most recent ARPC study at each balance sheet date to determinewhether the accrual continues to be appropriate.

In November 2004,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2003 study. In January 2005, ARPC provided the Corporation with areport summarizing the results of its study. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC did provide estimates for alonger period of time in its January 2005 study, but also reaffirmed its prioradvice that forecasts for shorter periods of time are more accurate than thosefor longer periods of time.

In November 2005,the Corporation requested ARPC to review the Corporation’s 2005 asbestos claimand resolution activity and determine the appropriateness of updating itsJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2005. In January 2006, ARPC stated that an update ofits study would not provide a more likely estimate of future events than theestimate reflected in its study of the previous year and, therefore, theestimate in that study remained applicable. Based on the Corporation’s ownreview of the asbestos claim and resolution activity and ARPC’s response, theCorporation determined that no change to the accrual was required. At December31, 2005, the recorded asbestos-related liability for pending and future claimswas $1.5 billion.

InNovember 2006, the Corporation requested ARPC to review the Corporation’shistorical asbestos claim and resolution activity and determine theappropriateness of updating its January 2005 study. In response to thatrequest, ARPC reviewed and analyzed data through October 31, 2006 and concludedthat the experience from 2004 through 2006 was sufficient for the purpose offorecasting future filings and values of asbestos claims filed against UCC and Amchem,and could be used in 

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place of previousassumptions to update its January 2005 study. The resulting study, completed byARPC in December 2006, stated that the undiscounted cost of resolving pendingand future asbestos-related claims against UCC and Amchem, excluding futuredefense and processing costs, through 2021 was estimated to be betweenapproximately $1.2 billion and $1.5 billion. As in its January 2005 study, ARPCprovided estimates for a longer period of time in its December 2006 study, butalso reaffirmed its prior advice that forecasts for shorter periods of time aremore accurate than those for longer periods of time.

Based onARPC’s December 2006 study and the Corporation’s own review of the asbestosclaim and resolution activity, the Corporation decreased its asbestos-relatedliability for pending and future claims to $1.2 billion at December 31, 2006which covers the 15-year period ending in 2021 (excluding future defense andprocessing costs). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

Based on theCorporation’s review of 2007 activity, the Corporation determined that noadjustment to the accrual was required at March 31, 2007. The asbestos-relatedliability for pending and future claims was $1.2 billion at March 31,2007. Approximately 28 percent of the recorded liability related to pendingclaims and approximately 72 percent related to future claims.

At December 31,2002, the Corporation increased the receivable for insurance recoveries relatedto its asbestos liability to $1.35 billion, substantially exhausting itsasbestos product liability coverage. The insurance receivable related to theasbestos liability was determined after a thorough review of applicableinsurance policies and the 1985 Wellington Agreement, to which the Corporationand many of its liability insurers are signatory parties, as well as otherinsurance settlements, with due consideration given to applicable deductibles,retentions and policy limits, and taking into account the solvency andhistorical payment experience of various insurance carriers. The WellingtonAgreement and other agreements with insurers are designed to facilitate anorderly resolution and collection of the Corporation’s insurance policies andto resolve issues that the insurance carriers may raise.

In September 2003, theCorporation filed a comprehensive insurance coverage case, now proceeding inthe Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filedagainst insurers that are not signatories to the Wellington Agreement and/or donot otherwise have agreements in place with the Corporation regarding theirasbestos-related insurance coverage, in order to facilitate an orderlyresolution and collection of such insurance policies and to resolve issues thatthe insurance carriers may raise. Although the lawsuit is continuing, through the end of the first quarter of 2007, theCorporation had reached settlements with several of the carriers involved inthis litigation.

The Corporation’s receivable for insurance recoveriesrelated to its asbestos liability was $484 million at March 31, 2007 and $495million at December 31, 2006. At March 31, 2007 and December 31, 2006, all ofthe receivable for insurance recoveries was related to insurers that are notsignatories to the Wellington Agreement and/or do not otherwise have agreementsin place regarding their asbestos-related insurance coverage.

In addition to thereceivable for insurance recoveries related to its asbestos liability, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

**Receivables for CostsSubmitted to Insurance Carriers**
| In millions                  | *** *** | **March 31,   2007** | ** ** | **Dec. 31,  2006** | *** *** |
|-----------------------------------|--------------|----------------------|------------|-------------------------|--------------|
| Receivables for  defense costs    |         | $                    | 35         |                    | $            | 34 |   |
| Receivables for  resolution costs |         | 265                  |       | 266                     |         |
| Total                             |         | $                    | 300        |                    | $            | 300 |   |

 

The Corporation expenses defense costs as incurred.The pretax impact for defense and resolution costs, net of insurance, was $17million in the first quarter of 2007 and $14 million in the first quarter of2006, and was reflected in “Cost of sales.”

After a review of its insurancepolicies, with due consideration given to applicable deductibles, retentionsand policy limits, after taking into account the solvency and historicalpayment experience of various insurance carriers; existing insurancesettlements; and the advice of outside counsel with respect to the applicable insurancecoverage law relating to the terms and conditions of its insurance policies,the Corporation continues to believe that its recorded receivable for insurancerecoveries from all insurance carriers is probable of collection.

The amountsrecorded for the asbestos-related liability and related insurance receivabledescribed 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, theaverage cost of disposing of each such claim, coverage issues among insurers,and the continuing solvency of various 

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insurance companies, aswell as the numerous uncertainties surrounding asbestos litigation in theUnited States, could cause the actual costs and insurance recoveries to be higheror lower than those projected or those recorded.

Because of theuncertainties described above, management cannot estimate the full range of thecost of resolving pending and future asbestos-related claims facing theCorporation and Amchem. Management believes that it is reasonably possible thatthe cost of disposing of the Corporation’s asbestos-related claims, includingfuture defense costs, could have a material adverse impact on the results ofoperations and cash flows for a particular period and on the consolidatedfinancial position of the Corporation.

While it is not possible at this time to determinewith certainty the ultimate outcome of any of the legal proceedings and claimsreferred to in this filing, management believes that adequate provisions havebeen made for probable losses with respect to pending claims and proceedings,and that, except for the asbestos-related matters described above, the ultimateoutcome of all known and future claims, after provisions for insurance, willnot have a material adverse impact on the results of operations, cash flows andconsolidated financial position of the Corporation. Should any losses besustained in connection with any of such legal proceedings and claims in excessof provisions provided and available insurance, they will be charged to incomewhen determinable.

**PurchaseCommitments**

 

At December 31, 2006, the Corporation had variousoutstanding commitments for take or pay agreements, with terms extending fromone to ten years. Such commitments were not in excess of current market prices.The fixed and determinable portion of obligations under purchase commitments atDecember 31, 2006 is presented in the following table:

**Fixed and Determinable Portion of Take or PayObligations at December 31, 2006**
| **In millions** | ** ** |
|----------------------|------------|
| 2007                 |       | $ | 14 |   |
| 2008                 |       | 8 |   |
| 2009                 |       | 8 |   |
| 2010                 |       | 7 |   |
| 2011                 |       | 1 |   |
| 2012 and beyond      |       | 6 |   |
| Total                |       | $ | 44 |   |

 

**Guarantees**

 

The Corporation hasundertaken obligations to guarantee the performance of certain nonconsolidatedaffiliates (including the OPTIMAL Group and Nippon Unicar Company Limited) anda former subsidiary of the Corporation (via delivery of cash or other assets)if specified triggering events occur. Non-performance under a contract forcommercial and/or financial obligations by the guaranteed party would triggerthe obligation of the Corporation to make payments to the beneficiary of theguarantees. Financial obligations include debt and lease arrangements.

The following tableprovides a summary of the final expiration, maximum future payments, andrecorded liability reflected in the consolidated balance sheets for theseguarantees.

**Guarantees**

 
| In millions                 | ** ** | **Final  Expiration** | ** ** | **Maximum Future  Payments** | ** ** | **Recorded  Liability** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------------------|------------|-------------------------|------------|
| Guarantees at March  31, 2007    |       | 2014                  |       | $                                 | 84         |                    | $          | 1 |   |
| Guarantees at December  31, 2006 |       | 2014                  |       | $                                 | 84         |                    | $          | 1 |   |

 

**Conditional Asset Retirement Obligations**

 

In accordance with FINNo. 47, the Corporation has recognized conditional asset retirement obligationsrelated to asbestos encapsulation as a result of planned demolition andremediation activities at manufacturing and administrative sites in the UnitedStates. The aggregate carrying amount of conditional asset retirementobligations was $13 million at March 31, 2007 and December 31, 2006. Thediscount rate used to calculate the Corporation’s asset retirement obligationswas 4.6 percent. These obligations are included in the consolidated balancesheets as “Accrued and other current liabilities.”

The Corporation has not recognized conditional assetretirement obligations for which a fair value cannot be reasonably estimated inits consolidated financial statements. It is the opinion of management that thepossibility is remote that such conditional asset retirement obligations, whenestimable, will have a material adverse impact on the Corporation’sconsolidated financial statements based on current costs.

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**NOTE F    PENSION AND OTHER POSTRETIREMENT BENEFITS**

**Net Periodic Benefit Cost (Credit)for All Significant Plans**

** **
| ** **                                  | *** *** | **Defined Benefit Pension Plans** | ** ** | **Other Postretirement Benefits** | *** *** |
|---------------------------------------------|--------------|-----------------------------------|------------|-----------------------------------|--------------|
| ** **                                  | *** *** | **Three Months Ended**  | ** ** | **Three Months Ended**  | *** *** |
| **In millions**                        | *** *** | **March 31,  2007**               | ** ** | **March 31,   2006**              | ** **   | **March 31,   2007** | ** ** | **March 31,   2006** | *** *** |
| Service cost                                |         | $                                 | 5          |                              | $            | 6 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                               |         | 53                                |       | 53                                |         | 7 |   | 8 |   |
| Expected return on plan assets              |         | (79                               | )          | (83                               | )            | — |   | — |   |
| Amortization of prior service cost (credit) |         | 1                                 |       | —                            |         | (1 | ) | (1 | ) |
| Amortization of net loss                    |         | 7                                 |       | 8                                 |         | 1 |   | 1 |   |
| Net periodic benefit cost (credit)          |         | $                                 | (13        | )                                 | $            | (16 | ) | $ | 8 |   | $ | 9 |   |

** **

**NOTE G     RELATED PARTY TRANSACTIONS**

The Corporation sells products to Dow to simplify the customerinterface process. Products are sold to and purchased from Dow at market-basedprices in accordance with the terms of Dow’s long-standing intercompany pricingpolicies. The Corporation also procures certain commodities and raw materials througha Dow subsidiary and pays a commission to that Dow subsidiary based on thevolume and type of commodities and raw materials purchased. The commissionexpense is included in “Sundry income (expense) — net” in the consolidatedstatements of income. Purchases from that Dow subsidiary were approximately$693 million in the first quarter of 2007 and $805 million in the first quarterof 2006.

The Corporationhas a master services agreement with Dow whereby Dow provides services,including, but not limited to, accounting, legal, treasury (investments, cashmanagement, risk management, insurance), procurement, human resources,environmental, health and safety, and business management for UCC. Under themaster services agreement with Dow, for general administrative and overheadtype services that Dow routinely allocates to various businesses, UCC ischarged the cost of those services based on the Corporation’s and Dow’srelative manufacturing conversion costs. This arrangement results in aquarterly charge of approximately $5 million (included in “Sundry income(expense) — net”).

For services thatDow routinely charges based on effort, UCC is charged the cost of such serviceson a fully absorbed basis, which includes direct and indirect costs.Additionally, certain Dow employees are contracted to UCC and Dow is reimbursedfor all direct employment costs of such employees. Management believes themethod used for determining expenses charged by Dow is reasonable. Dow providesthese services by leveraging its centralized functional service centers toprovide services at a cost that management believes provides an advantage tothe Corporation.

The monitoring andexecution of risk management policies related to interest rate and foreigncurrency risks, which are based on Dow’s risk management philosophy, areprovided as a service to UCC.

As part of Dow’scash management process, UCC is a party to revolving loans with Dow that haveLIBOR-based interest rates with varying maturities. At March 31, 2007, theCorporation had a note receivable of $2.8 billion from Dow under a revolvingloan agreement. The Corporation may draw from this note receivable in supportof its daily working capital requirements and, as such, the net effect of cashinflows and outflows under this revolving loan agreement is presented in theconsolidated statements of cash flows as an operating activity.

The Corporationalso has a separate revolving credit agreement with Dow that allows theCorporation to borrow or obtain credit enhancements up to an aggregate of $1billion that matures December 30, 2007 pursuant to an amendment effective as ofSeptember 30, 2006; however, Dow may demand repayment with a 30-day writtennotice to the Corporation, subject to certain restrictions. A relatedcollateral agreement provides for the replacement of certain existing pledgedassets, primarily equity interests in various subsidiaries and joint ventures,with cash collateral. At March 31, 2007, $809 million was available underthe revolving credit agreement. The cash collateral was reported as “Noncurrentreceivable from related company” in the consolidated balance sheets.

The losses andadditional costs incurred by the Corporation in 2005 due to hurricane Katrinawere covered by the Corporation’s insurance program. The Corporation has aninsurance receivable for losses incurred of $105 million at March 31, 2007from its insurer (an affiliate of Dow). Additionally, the Corporation hasinsurance coverage for lost sales and margins caused by hurricane Katrina. Noamount of recovery for lost sales and margins had been recognized atMarch 31, 2007, and will only be recognized when the amount of recovery isrealized through agreement among the insurers.

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**UnionCarbide Corporation and Subsidiaries**

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

Pursuant toGeneral Instruction H of Form 10-Q “Omission of Information by CertainWholly-Owned Subsidiaries,” this section includes only management’s narrativeanalysis of the results of operations for the three-month period endedMarch 31, 2007, the most recent period, compared with the three-monthperiod ended March 31, 2006, the corresponding period in the preceding fiscalyear.

References below to “Dow”refer to The Dow Chemical Company and its consolidated subsidiaries, except asthe context otherwise indicates.

The Corporation’sbusiness activities comprise components of Dow’s global operations rather thanstand-alone operations. Dow conducts its worldwide operations through globalbusinesses. Because there are no separable reportable business segments for UCCunder Statement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” and no detailed businessinformation is provided to a chief operating decision maker regarding theCorporation’s stand-alone operations, the Corporation’s results are reported asa single operating segment.

##### **DISCLOSURE REGARDINGFORWARD-LOOKING INFORMATION**

 

The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements made by or on behalf of Union Carbide Corporation(the “Corporation” or “UCC”). This section covers the current performance andoutlook of the Corporation. The forward-looking statements contained in thissection and in other parts of this document involve risks and uncertaintiesthat may affect the Corporation’s operations, markets, products, services,prices and other factors as more fully discussed elsewhere and in filings withthe U.S. Securities and Exchange Commission (SEC). These risks anduncertainties include, but are not limited to, economic, competitive, legal,governmental and technological factors. Accordingly, there is no assurance thatthe Corporation’s expectations will be realized. The Corporation assumes noobligation to provide revisions to any forward-looking statements shouldcircumstances change, except as otherwise required by securities and otherapplicable laws.

**RESULTS OF OPERATIONS**

 

**Total net sales for the firstquarter of 2007 were $1,726 million compared with $2,053 million for the firstquarter of 2006, a decrease of 16 percent. Total net sales for the firstquarter of last year included significant lump sum technology licensingrevenue. Technology licensing revenue varies from period to period due to thenature of the business.**

**Netsales to related companies for the first quarter of 2007 were $1,673 millioncompared with $1,735 million for the first quarter of 2006, a decrease of 4percent. Selling prices to Dow are based on market prices for the relatedproducts. Average selling prices for most products were higher in the firstquarter of 2007 compared with the first quarter of 2006, led by ethylene glycol(“EG”), vinyl acetate monomer (“VAM”) and oxo products. Sales volume was mixedwith overall volume down in the first quarter of 2007 compared with the firstquarter of 2006. Volume growth for several products (led by VAM, oxo products,and polyethylene) was more than offset by declines in the Corporation’s otherproducts, principally EG. The decline in EG volume was related to scheduledplant turnarounds in the first quarter of 2007.**

Cost of sales decreased 2percent from $1,636 million in the first quarter of 2006 to $1,598 million inthe first quarter of 2007 principally due to lower feedstock and energy costsand lower sales volume.

Equity in earnings ofnonconsolidated affiliates increased $63 million in the first quarter of 2007compared with the same quarter last year, led by a substantial improvement inearnings reported by the OPTIMAL Group (“OPTIMAL”), as well as higher reportedearnings from EQUATE Petrochemical Company K.S.C. (“EQUATE”) and UnivationTechnologies, LLC. Results from EQUATE and OPTIMAL were lower in the firstquarter of 2006 due to planned maintenance turnarounds at the joint ventures.

Sundry expense — netincludes a variety of income and expense items such as the gain or loss onforeign currency exchange, dividends from investments, commissions, charges formanagement services provided by Dow, and gains and losses on sales ofinvestments and assets. Sundry expense — net for the first quarter of 2007 was$10 million compared with $21 million for the first quarter of last year.Sundry expense for the first quarter of 2007 was favorably impacted by a higherlevel of dividend income and lower commission expense.

Interest income was $37million in the first quarter of 2007 compared with $23 million in the firstquarter of 2006, due to higher interest rates and an increased level ofinterest bearing assets. Interest expense and amortization of debt discountincreased $2 million in the first quarter of 2007 compared with the firstquarter of 2006.

The effective tax ratefluctuates based on, among other factors, where income is earned, the level ofafter-tax income from joint ventures, and the level of income relative to taxcredits available. The effective tax rate for the first quarter of 2007 was21.5 percent compared with 34.9 percent for the same quarter last year. Sincemost of the earnings from nonconsolidated 

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affiliates aretaxed at the joint venture level, the impact of higher equity earningsdecreased the Corporation’s overall effective tax rate.

The Corporation reportednet income of $186 million for the first quarter of 2007, compared with $283million for the first quarter of 2006. While the results for the first quarterof 2007 were favorably impacted by higher equity earnings, this improvement wasmore than offset by a significant decline in technology licensing revenue.

**OTHERMATTERS**

**Accounting Changes**

See Note B to theConsolidated Financial Statements for a discussion of recent accountingpronouncements.

**CriticalAccounting Policies**

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make judgments, assumptions and estimates that affect the amountsreported in the Consolidated Financial Statements and accompanying notes. NoteA to the Consolidated Financial Statements in the Corporation’s Annual Reporton Form 10-K for the year ended December 31, 2006 (“2006 10-K”) describes thesignificant accounting policies and methods used in the preparation of theConsolidated Financial Statements. The Corporation’s critical accountingpolicies that are impacted by judgments, assumptions and estimates aredescribed in Management’s Discussion and Analysis of Financial Condition andResults of Operations in the Corporation’s 2006 10-K. Since December 31, 2006,there have been no material changes in the Corporation’s critical accountingpolicies.

**Asbestos-Related Matters**

*Introduction*

The Corporation isand has been involved in a large number of asbestos-related suits filedprimarily in state courts during the past three decades. These suitsprincipally allege personal injury resulting from exposure toasbestos-containing products and frequently seek both actual and punitivedamages. The alleged claims primarily relate to products that UCC sold in thepast, alleged exposure to asbestos-containing products located on UCC’spremises, and UCC’s responsibility for asbestos suits filed against a formersubsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs areunable to demonstrate that they have suffered any compensable loss as a resultof such exposure, or that injuries incurred in fact resulted from exposure tothe Corporation’s products.

Influenced by thebankruptcy filings of numerous defendants in asbestos-related litigation andthe prospects of various forms of state and national legislative reform, therate at which plaintiffs filed asbestos-related suits against variouscompanies, including the Corporation and Amchem, increased in 2001, 2002 andthe first half of 2003. Since then, the rate of filing has significantlyabated. The Corporation expects more asbestos-related suits to be filed againstit and Amchem in the future, and will aggressively defend or reasonablyresolve, as appropriate, both pending and future claims.

The table belowprovides information regarding asbestos-related claims filed against theCorporation and Amchem:
|                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1                    |       | 111,887  |       | 146,325  |       |
| Claims filed                                       |       | 3,085    |       | 5,402    |       |
| Claims settled,  dismissed or otherwise resolved   |       | (2,225   | )          | (7,921   | )          |
| Claims  unresolved at March 31                     |       | 112,747  |       | 143,806  |       |
| Claimants with  claims against both UCC and Amchem |       | 38,901   |       | 47,779   |       |
| Individual claimants at  March 31                  |       | 73,846   |       | 96,027   |       |

 

Plaintiffs’ lawyers often sue dozens or even hundreds of defendants inindividual lawsuits on behalf of hundreds or even thousands of claimants. As aresult, the damages alleged are not expressly identified as to UCC, Amchem orany other particular defendant, even when specific damages are alleged withrespect to a specific disease or injury. In fact, there are no personal injurycases in which only the Corporation and/or Amchem are the sole nameddefendants. For these reasons and based upon the Corporation’s litigationand settlement experience, the Corporation does not consider the damagesalleged against it and Amchem to be a meaningful factor in its determination ofany potential asbestos liability.

*Estimatingthe Liability*

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January2003, the Corporation increased its December 31, 2002 asbestos-relatedliability for pending and future claims for the 15-year period ending in 

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**Asbestos-Related Matters—Continued**

2017 to $2.2 billion, excludingfuture defense and processing costs. Since then, the Corporation has comparedcurrent asbestos claim and resolution activity to the results of the mostrecent ARPC study at each balance sheet date to determine whether the accrualcontinues to be appropriate.

In November 2004,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2003 study. In January 2005, ARPC provided the Corporation with areport summarizing the results of its study. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC did provide estimates for alonger period of time in its January 2005 study, but also reaffirmed its prioradvice that forecasts for shorter periods of time are more accurate than thosefor longer periods of time.

InNovember 2005, the Corporation requested ARPC to review the Corporation’s 2005asbestos claim and resolution activity and determine the appropriateness ofupdating its January 2005 study. In response to that request, ARPC reviewed andanalyzed data through October 31, 2005. In January 2006, ARPC stated that anupdate of its study would not provide a more likely estimate of future eventsthan the estimate reflected in its study of the previous year and, therefore,the estimate in that study remained applicable. Based on the Corporation’s ownreview of the asbestos claim and resolution activity and ARPC’s response, theCorporation determined that no change to the accrual was required. At December31, 2005, the recorded asbestos-related liability for pending and future claimswas $1.5 billion.

InNovember 2006, the Corporation requested ARPC to review the Corporation’s historicalasbestos claim and resolution activity and determine the appropriateness ofupdating its January 2005 study. In response to that request, ARPC reviewed andanalyzed data through October 31, 2006 and concluded that the experience from2004 through 2006 was sufficient for the purpose of forecasting future filingsand values of asbestos claims filed against UCC and Amchem, and could be usedin place of previous assumptions to update its January 2005 study. Theresulting study, completed by ARPC in December 2006, stated that theundiscounted cost of resolving pending and future asbestos-related claimsagainst UCC and Amchem, excluding future defense and processing costs, through2021 was estimated to be between approximately $1.2 billion and $1.5 billion.As in its January 2005 study, ARPC provided estimates for a longer period oftime in its December 2006 study, but also reaffirmed its prior advice thatforecasts for shorter periods of time are more accurate than those for longerperiods of time.

Based onARPC’s December 2006 study and the Corporation’s own review of the asbestosclaim and resolution activity, the Corporation decreased its asbestos-relatedliability for pending and future claims to $1.2 billion at December 31, 2006which covers the 15-year period ending in 2021 (excluding future defense andprocessing costs). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

Based onthe Corporation’s review of 2007 activity, the Corporation determined that noadjustment to the accrual was required at March 31, 2007. The asbestos-relatedliability for pending and future claims was $1.2 billion at March 31, 2007.Approximately 28 percent of the recorded liability related to pending claimsand approximately 72 percent related to future claims.

*Defense and Resolution Costs*

The following tableprovides information regarding defense and resolution costs related toasbestos-related claims filed against the Corporation and Amchem:

**Defense and Resolution Costs**
|                      | ** ** | **Three Months Ended** | ** ** | **Aggregate Costs** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------|------------|
| **In millions** | ** ** | **March 31,  2007**              | ** ** | **March 31,   2006**     | ** ** | **to Date as of  March 31, 2007** | ** ** |
| Defense costs        |       | $                                | 17         |                     | $          | 14 |   | $ | 498 |   |
| Resolution costs     |       | $                                | 16         |                     | $          | 27 |   | $ | 1,198 |   |

 

Theaverage resolution payment per asbestos claimant and the rate of new claimfilings has fluctuated both up and down since the beginning of 2001. UnionCarbide’s management expects such fluctuations to continue in the future basedupon a number of factors, including the number and type of claims settled in aparticular period, the jurisdictions in which such claims arose, and the extentto which any proposed legislative reform related to asbestos litigation isbeing considered.

The Corporation expenses defense costs as incurred.The pretax impact for defense and resolution costs, net of insurance, was $17million in the first quarter of 2007 and $14 million in the first quarter of2006, and was reflected in “Cost of sales.”

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*Insurance Receivables*

At December 31, 2002, theCorporation increased the receivable for insurance recoveries related to itsasbestos liability to $1.35 billion, substantially exhausting its asbestosproduct liability coverage. The insurance receivable related to the asbestosliability was determined after a thorough review of applicable insurancepolicies and the 1985 Wellington Agreement, to which the Corporation and manyof its liability insurers are signatory parties, as well as other insurancesettlements, with due consideration given to applicable deductibles, retentionsand policy limits, and taking into account the solvency and historical paymentexperience of various insurance carriers. The Wellington Agreement and otheragreements with insurers are designed to facilitate an orderly resolution andcollection of the Corporation’s insurance policies and to resolve issues thatthe insurance carriers may raise.

In September 2003, the Corporation filed a comprehensive insurancecoverage 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 variousasbestos claims and to facilitate an orderly and timely collection of insuranceproceeds. This lawsuit was filed against insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in place withthe Corporation regarding their asbestos-related insurance coverage, in orderto facilitate an orderly resolution and collection of such insurance policiesand to resolve issues that the insurance carriers may raise. Althoughthe lawsuit is continuing, through the endof the first quarter of 2007, the Corporation had reached settlements withseveral of the carriers involved in this litigation.

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$484 million at March 31, 2007 and $495 million at December 31, 2006. AtMarch 31, 2007 and December 31, 2006, all of the receivable for insurancerecoveries was related to insurers that are not signatories to the WellingtonAgreement and/or do not otherwise have agreements in place regarding theirasbestos-related insurance coverage.

In addition to thereceivable for insurance recoveries related to its asbestos liability, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

**Receivablesfor Costs Submitted to Insurance Carriers**
| In millions                  | ** ** | **March 31,  2007** | ** ** | **Dec 31,  2006** | ** ** |
|-----------------------------------|------------|---------------------|------------|------------------------|------------|
| Receivables for  defense costs    |       | $                   | 35         |                   | $          | 34 |   |
| Receivables for  resolution costs |       | 265                 |       | 266                    |       |
| Total                             |       | $                   | 300        |                   | $          | 300 |   |

 

After a review of its insurancepolicies, with due consideration given to applicable deductibles, retentionsand policy limits, after taking into account the solvency and historicalpayment experience of various insurance carriers; existing insurancesettlements; and the advice of outside counsel with respect to the applicableinsurance coverage law relating to the terms and conditions of its insurancepolicies, the Corporation continues to believe that its recorded receivable forinsurance recoveries from all insurance carriers is probable of collection.

*Summary*

The amounts recorded forthe asbestos-related liability and related insurance receivable described abovewere based upon current, known facts. However, future events, such as thenumber of new claims to be filed and/or received each year, the average cost ofdisposing of each such claim, coverage issues among insurers, and thecontinuing solvency of various insurance companies, as well as the numerousuncertainties surrounding asbestos litigation in the United States, could causethe actual costs and insurance recoveries to be higher or lower than thoseprojected or those recorded.

Becauseof the uncertainties described above, management cannot estimate the full rangeof the cost of resolving pending and future asbestos-related claims facing theCorporation and Amchem. Management believes that it is reasonably possible thatthe cost of disposing of the Corporation’s asbestos-related claims, includingfuture defense costs, could have a material adverse impact on the results ofoperations and cash flows for a particular period and on the consolidatedfinancial position of the Corporation.

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

Omitted pursuant toGeneral Instruction H of Form 10-Q.

**ITEM4.  CONTROLS AND PROCEDURES.**

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, the Corporation carriedout an evaluation, under the supervision and with the participation of theCorporation’s Disclosure Committee and the Corporation’s management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures pursuant to Exchange Act Rule 15d-15(b); and whetherany change has occurred in the Corporation’s internal control over financialreporting pursuant to Exchange Act Rule 15d-15(d). Based upon that evaluation,the Chief Executive Officer and the Chief Financial Officer concluded that theCorporation’s disclosure controls and procedures are effective and that nochange in the Corporation’s internal control over financial reporting occurredduring the Corporation’s most recent fiscal quarter that materially affected,or is reasonably likely to materially affect, the Corporation’s internalcontrol over financial reporting.

**PART II —OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS.**

No materialdevelopments in asbestos-related matters occurred during the first quarter of2007. For a summary of the history and current status of asbestos-relatedmatters, see Management’s Discussion and Analysis of Financial Condition andResults of Operations, Asbestos-Related Matters; and Note E to the ConsolidatedFinancial Statements.

**ITEM1A.  RISK FACTORS.**

There were no materialchanges in the Corporation’s risk factors in the first quarter of 2007.

**ITEM6.  EXHIBITS.**

See the Exhibit Index onpage 19 of this Quarterly Report on Form 10-Q for exhibits filed with thisreport.

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**Union Carbide Corporation andSubsidiaries**

**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                   | UNION CARBIDE CORPORATION |                          |
|-------------------|---------------------------|-------------------------------|
|              | Registrant                |                          |
|              |                      |                          |   |
|              |                      |                          |   |
| Date: May 1, 2007 |                      |                          |   |
|              |                      |                          |   |
|              |                      |                          |   |
|              | By:                       | /s/ WILLIAM H.  WEIDEMAN      |   |
|              |                      | William H. Weideman           |   |
|              |                      | Vice President and Controller |   |
|              |                      | The Dow Chemical Company      |   |
|              |                      | Authorized Representative of  |   |
|              |                      | Union Carbide Corporation     |   |
|              |                      |                          |   |
|              |                      |                          |   |
|              |                      |                          |   |
|              |                      |                          |   |
|              | By:                       | /s/ EDWARD W.  RICH           |   |
|              |                      | Edward W. Rich                |   |
|              |                      | Vice President, Treasurer and |   |
|              |                      | Chief Financial Officer       |   |
|                   |                           |                               |  |  |  |  |  |  |

18

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**Union Carbide Corporation andSubsidiaries**

**ExhibitIndex**

 
| EXHIBIT NO. |   |                                                                      | DESCRIPTION |
|-------------|--------|---------------------------------------------------------------------------|-------------|
|        |   |                                                                      |
| 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. |

 

19

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