**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Pursuantto Section 13 or 15(d) of the**

**Securities Exchange Act of1934**

 

**FOR THE QUARTERLY PERIOD ENDED September 30,2005**

 

**Commission file number 1-1463**

 

**UNION CARBIDE CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **New York**                    | ** ** | **13-1421730**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**400 West Sam Houston Parkway South,  Houston, Texas  77042**

(Address of principal executive offices)           (ZipCode)

 

Registrant’s telephone number, including areacode:  **713-978-2016**

 

**Not applicable**

(Former name, former address and former fiscal year,if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý   No  o.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  ý.

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  ý.

 

At September 30,2005, 1,000 shares of common stock were outstanding, all of which were held bythe registrant’s parent, The Dow Chemical Company.

 

The registrantmeets the conditions set forth in General Instructions H(1)(a) and (b) forForm 10-Q and is therefore filing this form with a reduced disclosureformat.

 

 

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**Union Carbide Corporation**

** **

**TABLE OF CONTENTS**

 

 

 
| ** **                                                                                            | ** ** | **PAGE** |
|-------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I - FINANCIAL INFORMATION**                                                               |       |     |
| ** **                                                                                            |       |     |
| Item 1.  Financial Statements.                                                                        |       | 3        |
|                                                                                                  |       |     |
| Consolidated  Statements of Income                                                                    |       | 3        |
|                                                                                                  |       |     |
| Consolidated  Balance Sheets                                                                          |       | 4        |
|                                                                                                  |       |     |
| Consolidated  Statements of Cash Flows                                                                |       | 5        |
|                                                                                                  |       |     |
| Consolidated  Statements of Comprehensive Income                                                      |       | 5        |
|                                                                                                  |       |     |
| Notes  to the Consolidated Financial Statements                                                       |       | 6        |
|                                                                                                  |       |     |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations. |       | 14       |
|                                                                                                  |       |     |
| Disclosure  Regarding Forward-Looking Information                                                     |       | 14       |
|                                                                                                  |       |     |
| Results of  Operations                                                                                |       | 14       |
|                                                                                                  |       |     |
| Other Matters                                                                                         |       | 15       |
|                                                                                                  |       |     |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk.                                  |       | 18       |
|                                                                                                  |       |     |
| Item  4. Controls and Procedures.                                                                     |       | 18       |
|                                                                                                  |       |     |
| **PART II - OTHER INFORMATION**                                                                  |       |     |
| ** **                                                                                            |       |     |
| Item 1.  Legal Proceedings.                                                                           |       | 18       |
|                                                                                                  |       |     |
| Item 6. Exhibits.                                                                                     |       | 18       |
|                                                                                                  |       |     |
| **SIGNATURES**                                                                                        |       | 19       |
| ** **                                                                                            |       |     |
| **EXHIBIT INDEX**                                                                                |       | 20       |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS.**

 

**UnionCarbide Corporation and Subsidiaries****Consolidated Statements ofIncome**
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **Sept. 30,**          | ** ** | **Sept. 30,**         | ** ** | **Sept. 30,** | ** ** | **Sept. 30,** | ** ** |
| **In millions (Unaudited)**                        | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net trade sales                                    |       | $                      | 73         |                  | $          | 75 |   | $ | 218 |   | $ | 238 |   |
| Net sales to related companies                     |       | 1,392                  |       | 1,427                 |       | 4,515 |   | 3,934 |   |
| Total Net Sales                                    |       | 1,465                  |       | 1,502                 |       | 4,733 |   | 4,172 |   |
| Cost of sales                                      |       | 1,321                  |       | 1,331                 |       | 4,145 |   | 3,732 |   |
| Research and development expenses                  |       | 19                     |       | 21                    |       | 58 |   | 68 |   |
| Selling, general and administrative expenses       |       | 4                      |       | 5                     |       | 14 |   | 15 |   |
| Amortization of intangibles                        |       | —                 |       | 1                     |       | — |   | 3 |   |
| Restructuring charges                              |       | —                 |       | —                |       | — |   | 48 |   |
| Equity in earnings of nonconsolidated affiliates   |       | 105                    |       | 133                   |       | 356 |   | 427 |   |
| Sundry income (expense) - net                      |       | (2                     | )          | (23                   | )          | 51 |   | (78 | ) |
| Interest income                                    |       | 6                      |       | 2                     |       | 16 |   | 5 |   |
| Interest expense and amortization of debt discount |       | 15                     |       | 24                    |       | 57 |   | 70 |   |
| Income before Income Taxes                         |       | 215                    |       | 232                   |       | 882 |   | 590 |   |
| Provision for income taxes                         |       | 31                     |       | 64                    |       | 228 |   | 193 |   |
| Net Income Available for Common Stockholder        |       | $                      | 184        |                  | $          | 168 |   | $ | 654 |   | $ | 397 |   |
| Depreciation                                       |       | $                      | 66         |                  | $          | 81 |   | $ | 201 |   | $ | 241 |   |
| Capital Expenditures                               |       | $                      | 45         |                  | $          | 32 |   | $ | 139 |   | $ | 91 |   |

* *

*See Notes to the Consolidated Financial Statements.*

 

3

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**Union Carbide Corporation andSubsidiaries**

**Consolidated Balance Sheets**
| ** **                                                                          | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|
| **In millions (Unaudited)**                                                         | ** ** | **2005**      | ** ** | **2004**          | ** ** |
| **Assets**                                                                          | ** ** | ** **    | ** ** | ** **        | ** ** |
| Current Assets                                                                      |       |          |       |              |       |
| Cash and cash equivalents                                                           |       | $             | 44         |              | $          | 22 |   |
| Accounts receivable:                                                                |       |          |       |              |       |
| Trade (net of allowance for doubtful receivables -  2005: $3; 2004: $4)             |       | 43            |       | 58                |       |
| Related companies                                                                   |       | 286           |       | 504               |       |
| Other                                                                               |       | 176           |       | 191               |       |
| Notes receivable from related companies                                             |       | 505           |       | 53                |       |
| Inventories                                                                         |       | 207           |       | 186               |       |
| Deferred income tax assets - current                                                |       | 80            |       | 71                |       |
| Asbestos-related insurance receivables - current                                    |       | 115           |       | 175               |       |
| Total current assets                                                                |       | 1,456         |       | 1,260             |       |
| Investments                                                                         |       |          |       |              |       |
| Investments in related companies                                                    |       | 462           |       | 462               |       |
| Investments in nonconsolidated affiliates                                           |       | 962           |       | 1,041             |       |
| Other investments                                                                   |       | 24            |       | 23                |       |
| Noncurrent receivables                                                              |       | 10            |       | 13                |       |
| Noncurrent receivable from related company                                          |       | 209           |       | 222               |       |
| Total investments                                                                   |       | 1,667         |       | 1,761             |       |
| Property                                                                            |       |          |       |              |       |
| Property                                                                            |       | 7,331         |       | 7,304             |       |
| Less accumulated depreciation                                                       |       | 5,311         |       | 5,227             |       |
| Net property                                                                        |       | 2,020         |       | 2,077             |       |
| Other Assets                                                                        |       |          |       |              |       |
| Goodwill                                                                            |       | 26            |       | 26                |       |
| Other intangible assets (net of accumulated  amortization - 2005: $119; 2004: $124) |       | 21            |       | 20                |       |
| Deferred income tax assets - noncurrent                                             |       | 224           |       | 452               |       |
| Asbestos-related insurance receivables - noncurrent                                 |       | 854           |       | 1,028             |       |
| Prepaid pension expense                                                             |       | 732           |       | 655               |       |
| Deferred charges and other assets                                                   |       | 45            |       | 52                |       |
| Total other assets                                                                  |       | 1,902         |       | 2,233             |       |
| Total Assets                                                                        |       | $             | 7,045      |              | $          | 7,331 |   |
| ** **                                                                          | ** ** | ** **    | ** ** | ** **        | ** ** |
| **Liabilities and Stockholder’s Equity**                                       | ** ** | ** **    | ** ** | ** **        | ** ** |
| Current Liabilities                                                                 |       |          |       |              |       |
| Notes payable:                                                                      |       |          |       |              |       |
| Related companies                                                                   |       | $             | 7          |              | $          | 139 |   |
| Other                                                                               |       | 3             |       | 4                 |       |
| Long-term debt due within one year                                                  |       | 3             |       | 266               |       |
| Accounts payable:                                                                   |       |          |       |              |       |
| Trade                                                                               |       | 204           |       | 260               |       |
| Related companies                                                                   |       | 197           |       | 270               |       |
| Other                                                                               |       | 57            |       | 40                |       |
| Income taxes payable                                                                |       | 125           |       | 116               |       |
| Asbestos-related liabilities - current                                              |       | 94            |       | 92                |       |
| Accrued and other current liabilities                                               |       | 250           |       | 360               |       |
| Total current liabilities                                                           |       | 940           |       | 1,547             |       |
| Long-Term Debt                                                                      |       | 834           |       | 1,006             |       |
| Other Noncurrent Liabilities                                                        |       |          |       |              |       |
| Pension and other postretirement benefits - noncurrent                              |       | 464           |       | 470               |       |
| Asbestos-related liabilities - noncurrent                                           |       | 1,426         |       | 1,549             |       |
| Other noncurrent obligations                                                        |       | 406           |       | 433               |       |
| Total other noncurrent liabilities                                                  |       | 2,296         |       | 2,452             |       |
| Minority Interest in Subsidiaries                                                   |       | 4             |       | 4                 |       |
| Stockholder’s Equity                                                           |       |          |       |              |       |
| Common stock (1,000 shares authorized and issued)                                   |       | —        |       | —            |       |
| Additional paid-in capital                                                          |       | —        |       | —            |       |
| Retained earnings                                                                   |       | 3,087         |       | 2,433             |       |
| Accumulated other comprehensive loss                                                |       | (116          | )          | (111              | )          |
| Net stockholder’s equity                                                       |       | 2,971         |       | 2,322             |       |
| Total Liabilities and Stockholder’s Equity                                     |       | $             | 7,045      |              | $          | 7,331 |   |

* *

*See Notes to the Consolidated Financial Statements.*

 

4

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**Union Carbide Corporation and Subsidiaries****Consolidated Statements ofCash Flows**
| ** **                  | ** ** | ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | ** **                                                                                 | ** ** | **Sept. 30,**         | ** ** | **Sept. 30,** | ** ** |
| **In millions (Unaudited)** | ** ** | ** **                                                                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Operating  Activities       |       |                                                                                       | * *   | * *              | * *   | * * | * * |
|                        |       | Net Income Available for Common Stockholder                                                |       | $                     | 654        |   | $ | 397 |   |
|                        |       | Adjustments to reconcile net income to net cash  provided by                               |       |                  |       |   |   |
|                        |       | operating activities:                                                                      |       |                  |       |   |   |
|                        |       | Depreciation and amortization                                                              |       | 222                   |       | 258 |   |
|                        |       | Provision for deferred income tax                                                          |       | 208                   |       | 177 |   |
|                        |       | Earnings/losses of nonconsolidated affiliates less  than (in excess of) dividends received |       | 1                     |       | (285 | ) |
|                        |       | Gain on sales of investments, net                                                          |       | (9                    | )          | (1 | ) |
|                        |       | Gain on sales of property, net                                                             |       | (3                    | )          | (7 | ) |
|                        |       | Other (gain) loss, net                                                                     |       | (1                    | )          | 1 |   |
|                        |       | Gain on sale of ownership interest in  nonconsolidated affiliates                          |       | (70                   | )          | (1 | ) |
|                        |       | Restructuring charges                                                                      |       | —                |       | 37 |   |
|                        |       | Changes in assets and liabilities that provided  (used) cash:                              |       |                  |       |   |   |
|                        |       | Accounts and notes receivable                                                              |       | 29                    |       | 5 |   |
|                        |       | Related company receivables                                                                |       | (234                  | )          | 16 |   |
|                        |       | Inventories                                                                                |       | (21                   | )          | (8 | ) |
|                        |       | Accounts payable                                                                           |       | (9                    | )          | 4 |   |
|                        |       | Related company payables                                                                   |       | (205                  | )          | 9 |   |
|                        |       | Other assets and liabilities                                                               |       | (24                   | )          | (319 | ) |
|                        |       | Cash provided by operating activities                                                      |       | 538                   |       | 283 |   |
| Investing  Activities       |       |                                                                                       |       |                  |       |   |   |
|                        |       | Capital expenditures                                                                       |       | (139                  | )          | (91 | ) |
|                        |       | Proceeds from sales of property                                                            |       | 7                     |       | 10 |   |
|                        |       | Investments in nonconsolidated affiliates                                                  |       | —                |       | (1 | ) |
|                        |       | Distributions from nonconsolidated affiliates                                              |       | 41                    |       | — |   |
|                        |       | Changes in noncurrent receivable from related  company                                     |       | 13                    |       | (195 | ) |
|                        |       | Purchases of investments                                                                   |       | (1                    | )          | — |   |
|                        |       | Proceeds from sales of nonconsolidated affiliates                                          |       | —                |       | 1 |   |
|                        |       | Proceeds from sales of investments                                                         |       | —                |       | 9 |   |
|                        |       | Cash used in investing activities                                                          |       | (79                   | )          | (267 | ) |
| Financing  Activities       |       |                                                                                       |       |                  |       |   |   |
|                        |       | Changes in short-term notes payable                                                        |       | (1                    | )          | 2 |   |
|                        |       | Payments on long-term debt                                                                 |       | (436                  | )          | (16 | ) |
|                        |       | Cash used in financing activities                                                          |       | (437                  | )          | (14 | ) |
| Summary                     |       |                                                                                       |       |                  |       |   |   |
|                        |       | Increase in cash and cash equivalents                                                      |       | 22                    |       | 2 |   |
|                        |       | Cash and cash equivalents at beginning of year                                             |       | 22                    |       | 21 |   |
|                        |       | Cash and cash equivalents at end of period                                                 |       | $                     | 44         |   | $ | 23 |   |

* *

*See Notes to the ConsolidatedFinancial Statements.*

 

**Union Carbide Corporation and Subsidiaries****Consolidated Statements ofComprehensive Income**
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Sept. 30,**          | ** ** | **Sept. 30,**         | ** ** | **Sept. 30,** | ** ** | **Sept. 30,** | ** ** |
| **In millions (Unaudited)**                          | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income  Available for Common Stockholder         |       | $                      | 184        |                  | $          | 168 |   | $ | 654 |   | $ | 397 |   |
| Other  Comprehensive Income (Loss), Net of Tax       |       |                   |       |                  |       |   |   |   |   |
| Translation adjustments                              |       | (2                     | )          | (7                    | )          | (12 | ) | (8 | ) |
| Minimum pension liability adjustment                 |       | —                 |       | —                |       | 6 |   | — |   |
| Net gain on cash flow hedging derivative instruments |       | 1                      |       | 1                     |       | 1 |   | 2 |   |
| Total other comprehensive loss                       |       | (1                     | )          | (6                    | )          | (5 | ) | (6 | ) |
| Comprehensive  Income                                |       | $                      | 183        |                  | $          | 162 |   | $ | 649 |   | $ | 391 |   |

* *

*See Notes to the ConsolidatedFinancial Statements.*

 

5

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**Union Carbide Corporation and Subsidiaries**

**Notes tothe Consolidated Financial Statements**

 

(Unaudited)

 

**NOTEA     CONSOLIDATED FINANCIAL STATEMENTS**

 

The unaudited interim consolidated financialstatements of Union Carbide Corporation and its subsidiaries (the “Corporation”or “UCC”) were prepared in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”) and reflect all adjustments (includingnormal recurring accruals) which, in the opinion of management, are considerednecessary for the fair presentation of the results for the periods presented.

 

The Corporation is a wholly owned subsidiary of The Dow ChemicalCompany (“Dow”). In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 128, “Earnings Per Share,” the presentation of earnings pershare is not required in financial statements of wholly owned subsidiaries.

 

The Corporation’s business activities comprise components of Dow’sglobal operations rather than stand-alone operations. Dow conducts itsworldwide operations through global businesses. Because there are no separablereportable business segments for UCC under SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” and no detailedbusiness information is provided to a chief operating decision maker regardingthe Corporation’s stand-alone operations, the Corporation’s results arereported as a single operating segment.

 

Intercompany transactions and balances are eliminated in consolidation.Transactions with the Corporation’s parent company, Dow, or other Dowsubsidiaries have been reflected as related company transactions in theconsolidated financial statements. See Note H for further discussion.

 

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, 2004.

 

**NOTEB     ACCOUNTING CHANGES**

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “InventoryCosts – an amendment of ARB No. 43, Chapter 4,” which clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage) and also requires that the allocation offixed production overhead be based on the normal capacity of the productionfacilities. SFAS No. 151 is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Because the Corporation usesnameplate capacity to calculate product costs, UCC expects to record animmaterial favorable impact on the Corporation’s consolidated financialstatements in the period of adoption.

 

In December 2004,the FASB issued revised SFAS No. 123 (“SFAS No. 123R”), “Share-BasedPayment” which replaces SFAS No. 123, “Accounting for Stock-BasedCompensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees.” This statement, which requires thatthe cost of all share-based payment transactions be recognized in the financialstatements, establishes fair value as the measurement objective and requiresentities to apply a fair-value-based measurement method in accounting for share-basedpayment transactions. As issued, the statement applies to all awards granted,modified, repurchased or cancelled after July 1, 2005. In March 2005,the U.S. Securities and Exchange Commission (the “SEC”) issued Staff AccountingBulletin (“SAB”) No. 107, which expresses views of the SEC staff regardingthe interaction between SFAS No. 123R and certain SEC rules andregulations, and provides the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. Dow will consider theguidance of this SAB as it adopts SFAS No. 123R. On April 14, 2005,the SEC announced the adoption of a new rule that amends the compliancedate for SFAS No. 123R, allowing companies to implement the statement atthe beginning of their next fiscal year that begins after June 15, 2005,which is January 1, 2006 for Dow. The Corporation will continue to beallocated the portion of expense relating to its employees who receivestock-based compensation.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – anamendment of APB Opinion No. 29.” The statement addresses the measurementof exchanges of nonmonetary assets and eliminates the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets and replacesit with an exception for exchanges that do not have commercial substance. SFAS No. 153is effective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. The Corporation has determined that its practices areconsistent with the guidance of this statement; therefore, the adoption of SFASNo. 153 on July 1, 2005, had no impact on the Corporation’sconsolidated financial statements.

 

In December 2004,the FASB issued FASB Staff Position (“FSP”) No. FAS 109-1, “Application ofFASB Statement No. 109, Accounting for Income Taxes, to the Tax Deductionon Qualified Production Activities Provided by the American Jobs Creation Actof 2004,” indicating that this deduction should be accounted for as a specialdeduction in accordance with the provisions of SFAS No. 109. Beginning in2005, the Corporation recognizes the allowable deductions as qualifyingactivity occurs.

 

6

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In December 2004,the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance forthe Foreign Earnings Repatriation Provision within the American Jobs CreationAct of 2004,” which provides a practical exception to the SFAS No. 109requirement to reflect the effect of a new tax law in the period of enactmentby allowing additional time beyond the financial reporting period to evaluatethe effects on plans for reinvestment or repatriation of unremitted foreignearnings. The American Jobs Creation Act of 2004 (the “Act”) introduced aspecial one-time dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer, provided certain criteria are met. In May 2005,tax authorities released the clarifying language necessary to enable Dow tocomplete its determination regarding the repatriation and reinvestment offoreign earnings. Dow intends to repatriate funds from a foreign entity that ispartially owned by the Corporation. Since the Corporation is included in Dow’sconsolidated federal income tax group and consolidated tax return, as theforeign entity repatriates its earnings, the Corporation will recognizedividend income and its share of the related tax impact of the repatriationprovision of the Act, in accordance with the terms of the Dow-UCC Tax SharingAgreement.

 

In March 2005,the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting forConditional Asset Retirement Obligations,” which clarifies the term *conditional asset retirement obligation* asused in SFAS No. 143, “Accounting for Asset Retirement Obligations,” as alegal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or maynot be within the control of the Corporation. FIN No. 47 is effectiveno later than the end of fiscal years ending after December 15, 2005..TheCorporation expects the adoption of FIN No. 47 on December 31, 2005to have an immaterial impact on the Corporation’s consolidated financialstatements.

 

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements,” and providesguidance on the accounting for and reporting of accounting changes and errorcorrections. SFAS No. 154 applies to all voluntary changes in accountingprinciple and requires *retrospective application*(a term defined by the statement) to prior periods’ financial statements,unless it is impracticable to determine the effect of a change. It also appliesto changes required by an accounting pronouncement that does not includespecific transition provisions. In addition, SFAS No. 154 redefines *restatement* as the revising of previously issued financialstatements to reflect the correction of an error. The statement is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Corporation will adopt SFAS No. 154beginning January 1, 2006.

 

**NOTE C     RESTRUCTURING**

 

**2004Restructuring**

 

In the second quarter of2004, the Corporation recorded restructuring charges totaling $48 millionresulting from decisions made by management in the second quarter relative toemployment levels as Dow restructured its business organization and as theCorporation finalized plans for additional plant shutdowns and divestitures.The charges included severance of $21 million for a workforce reduction ofapproximately 360 people, most of whom ended their employment with UCC by theend of the third quarter of 2004, and curtailment costs of $9 millionassociated with UCC’s defined benefit plans.

 

In thesecond quarter of 2005, the estimated workforce reduction was revised toreflect employee redeployment and the severance accrual was reduced by $2million (reflected in “Cost of sales”), bringing the 2004 employee-relatedrestructuring program to a close. As of September 30, 2005, theCorporation’s workforce had been reduced by 348 people due to thisrestructuring and severance of $19 million had been paid.

 

7

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**NOTE D     INVENTORIES**

 

The following tableprovides a breakdown of inventories at September 30, 2005 and December 31,2004:

 
| **Inventories**

**In millions** | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|----------------------------------|------------|---------------------|------------|-------------------------|------------|
| Finished goods                   |       | $                   | 65         |                    | $          | 60 |   |
| Work in process                  |       | 22                  |       | 25                      |       |
| Raw materials                    |       | 40                  |       | 32                      |       |
| Supplies                         |       | 80                  |       | 69                      |       |
| Total  inventories               |       | $                   | 207        |                    | $          | 186 |   |

 

The reserves reducing inventories from the first-in,first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $174million at September 30, 2005 and $139 million at December 31, 2004.

 

**NOTE E     OTHER INTANGIBLE ASSETS**

 

The following table provides information regarding theCorporation’s other intangible assets:

 
| **Other  Intangible Assets**          | ** ** | **At September 30, 2005** | ** ** | **At December 31, 2004** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| **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 |   | $ | 36 |   | $ | (35 | ) | $ | 1 |   |
| Patents                               |       | 4                              |       | (2                            | )          | 2 |   | 4 |   | (2 | ) | 2 |   |
| Software                              |       | 102                            |       | (84                           | )          | 18 |   | 103 |   | (86 | ) | 17 |   |
| Other                                 |       | 1                              |       | (1                            | )          | — |   | 1 |   | (1 | ) | — |   |
| Total                                 |       | $                              | 140        |                          | $          | (119 | ) | $ | 21 |   | $ | 144 |   | $ | (124 | ) | $ | 20 |   |

 

Total estimated amortization expense for 2005 and the next five fiscalyears is as follows:

 
| **Estimated  Amortization Expense  for Next Five Years****In  millions** | * * |
|--------------------------------------------------------------------------|----------|
| 2005                                                                     |     | $ | 4 |   |
| 2006                                                                     |     | 4 |   |
| 2007                                                                     |     | 4 |   |
| 2008                                                                     |     | 4 |   |
| 2009                                                                     |     | 4 |   |
| 2010                                                                     |     | 4 |   |
|                                                                          |          |  |  |  |

 

**NOTE F     COMMITMENTS AND CONTINGENT LIABILITIES**

 

**EnvironmentalMatters**

 

Accruals for environmental matters are recorded whenit is probable that a liability has been incurred and the amount of theliability can be reasonably estimated, based on current law and existingtechnologies. The Corporation had accrued obligations of $104 million at December 31,2004 for environmental remediation and restoration costs, including $39 millionfor the remediation of Superfund sites. At September 30, 2005, theCorporation had accrued obligations of $94 million for environmentalremediation and restoration costs, including $35 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****

 

8

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regulations and legal standards regarding liability,and evolving technologies for handling site remediation and restoration. It isthe opinion of the Corporation’s management that the possibility is remote thatcosts in excess of those disclosed will have a material adverse impact on theCorporation’s consolidated financial statements.

 

**Litigation**

 

The following disclosureshould be read in conjunction with the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

TheCorporation and its subsidiaries are involved in a number of legal proceedingsand claims with both private and governmental parties. These cover a wide rangeof 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 involved in a large numberof asbestos-related suits filed primarily in state courts during the past threedecades. These suits principally allege personal injury resulting from exposureto asbestos-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, plaintiffsare unable to demonstrate that they have suffered any compensable loss as aresult of such exposure, or that injuries incurred in fact resulted fromexposure to the Corporation’s products.

 

Influencedby the bankruptcy filings of numerous defendants in asbestos-related litigationand the prospects of various forms of state and national legislative reform,the rate 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.

 

Basedon a study completed by Analysis, Research & Planning Corporation (“ARPC”)in January 2003, the Corporation increased its December 31, 2002asbestos-related liability for pending and future claims for the 15-year periodending in 2017 to $2.2 billion, excluding future defense and processing costs.At each balance sheet date, the Corporation compares current asbestos claim andresolution activity to the assumptions in the most recent ARPC study to determinewhether the accrual continues to be appropriate.

 

In November 2004, the Corporation requested ARPC to review theCorporation’s historical asbestos claim and resolution activity and determinethe appropriateness of updating its January 2003 study. In response tothis request, ARPC reviewed and analyzed data through November 14, 2004,and again concluded that it was not possible to estimate the full range of thecost of resolving future asbestos-related claims against UCC and Amchem becauseof various uncertainties associated with the litigation of those claims. ARPCdid advise, however, that it was reasonable and feasible to construct a newestimate of the cost of resolving current and future asbestos-related claimsusing the same two widely used forecasting methodologies used by ARPC in its January 2003study, if certain assumptions were made. As a result, the following assumptionswere made and then used by ARPC:

 

•                  The number of future claims to befiled annually against UCC and Amchem is unlikely to exceed the level of claimsexperienced during 2004.

 

•                  The number of claims filed againstUCC and Amchem annually from 2001 to 2003 is considered anomalous for thepurpose of estimating future filings.

 

•                  The number of future claims to befiled against UCC and Amchem will decline at a fairly constant rate each yearfrom 2005.

 

•                  The averageresolution value for pending and future claims will be equivalent to thoseexperienced during 2003 and 2004 (excluding settlements from closed claimsfiled in Madison County, Illinois with respect to future claims, as changes inthe judicial environment in Madison County caused the historical experience ofclaims in that jurisdiction to not be predictive of results for future claims).

 

Theresulting study completed by ARPC in January 2005 stated that theundiscounted cost of resolving pending and future asbestos-related claimsagainst UCC and Amchem, excluding future defense and processing costs, through2017 was estimated to be between approximately $1.5 billion and $2.0 billion,depending on which of two accepted methodologies was used. At December 31,2004, the recorded asbestos-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 recorded asbestos-related liability for pending and future claims at December 31,2004 would be sufficient to resolve asbestos-related claims against UCC andAmchem into 2019. As in its January 2003 study, ARPC did provide estimatesfor a longer period of time in its January 2005 study, but also reaffirmedits prior advice that forecasts for shorter periods of time are more accuratethan those for longer periods of time. Based on

 

9

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ARPC’s studies, theCorporation’s recent asbestos litigation experience, and the uncertaintiessurrounding asbestos litigation and legislative reform efforts, managementdetermined that no change to the accrual was required at December 31,2004.

 

Basedon the Corporation’s review of 2005 activity, the Corporation determined thatno change to the accrual was required at September 30, 2005.

 

Theasbestos-related liability for pending and future claims was $1.5 billion at September 30,2005 and $1.6 billion at December 31, 2004. At September 30, 2005,approximately 36 percent of the recorded liability related to pending claimsand approximately 64 percent related to future claims. At December 31,2004, approximately 37 percent of the recorded liability related to pendingclaims and approximately 63 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.

 

The Corporation’s receivable for insurance recoveries related to itsasbestos liability was $550 million at September 30, 2005 and $712 millionat December 31, 2004. At September 30, 2005, $443 million ($543million at December 31, 2004) of the receivable for insurance recoverieswas related to insurers that are not signatories to the Wellington Agreementand/or do not otherwise have agreements in place regarding theirasbestos-related insurance coverage.

 

Inaddition, the Corporation had receivables for defense and resolution costssubmitted to insurance carriers for reimbursement as follows:

 

**Receivables for Costs Submitted toInsurance Carriers**
| **In millions**                   | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables for  defense costs    |       | $                            | 86         |                        | $          | 85 |   |
| Receivables for  resolution costs |       | 333                          |       | 406                         |       |
| Total                             |       | $                            | 419        |                        | $          | 491 |   |

 

The Corporation expenses defense costs as incurred. The pretax impactfor defense and resolution costs, net of insurance, was $24 million in the thirdquarter of 2005 ($19 million in the third quarter of 2004) and $56 million inthe first nine months of 2005 ($92 million in the first nine months of2004), and was reflected in “Cost of sales.”

 

In September 2003, the Corporation filed acomprehensive insurance coverage case in the Circuit Court for Kanawha Countyin Charleston, West Virginia, seeking to confirm its rights to insurance forvarious asbestos claims (the “West Virginia action”) and to facilitate anorderly and timely collection of insurance proceeds. Although the Corporationalready has settlements in place concerning coverage for asbestos claims withmany of its insurers, including those covered by the 1985 Wellington Agreement,this lawsuit was filed against insurers that are not signatories to theWellington Agreement and/or do not otherwise have agreements in place with theCorporation regarding their asbestos-related insurance coverage, in order tofacilitate an orderly resolution and collection of such insurance policies andto resolve issues that the insurance carriers may raise. In early 2004,several of the defendant insurers in the West Virginia action filed a competingaction in the Supreme Court of the State of New York, County of New York. As aresult of motion practice, the West Virginia action was dismissed in August 2004on the basis of *forum non conveniens*(i.e.,West Virginia is an inconvenient location for the parties). The comprehensiveinsurance coverage litigation is now proceeding in the New York courts (the “NewYork action”). Through the third quarter of2005, the Corporation reached settlements with several of the carriers involvedin the New York action. After a further review of its insurance policies, withdue consideration given to applicable deductibles, retentions and policylimits, after taking into account the solvency and historical paymentexperience of various insurance carriers; existing insurance settlements; andthe advice of outside counsel with respect to the applicable insurance coveragelaw relating to the terms and conditions of its insurance policies, theCorporation continues to believe that its recorded receivable for insurancerecoveries from all insurance carriers is probable of collection.

 

Theamounts recorded for the asbestos-related liability and related insurancereceivable described above were based upon current, known facts. However,projecting future events, such as the number of new claims to be filed and/orreceived each year, the average cost of disposing of each such claim, coverageissues among insurers, and the continuing solvency of various insurancecompanies, as well as the numerous uncertainties surrounding asbestoslitigation in the United States, could cause the actual costs and insurancerecoveries to be higher or lower than those projected or those recorded.

 

10

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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.

 

While it is not possible at this time to determine with certainty theultimate outcome of any of the legal proceedings and claims referred to in thisfiling, management believes that adequate provisions have been made forprobable losses with respect to pending claims and proceedings, and that, exceptfor the asbestos-related matters described above, the ultimate outcome of allknown and future claims, after provisions for insurance, will not have amaterial 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 31,2004, the Corporation had various outstanding commitments for take or payagreements, with terms extending from one to six years. Such commitments werenot in excess of current market prices. The fixed and determinable portion ofobligations under purchase commitments at December 31, 2004 is presentedin the following table:

 
| **Fixed  and Determinable Portion of Take or Pay Obligations  at December 31, 2004**

**In  millions** |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| 2005                                                                                                        |   | $ | 10 |   |
| 2006                                                                                                        |   | 10 |   |
| 2007                                                                                                        |   | 10 |   |
| 2008                                                                                                        |   | 8 |   |
| 2009                                                                                                        |   | 5 |   |
| 2010 through  expiration of contracts                                                                       |   | 5 |   |
| Total                                                                                                       |   | $ | 48 |   |

 

**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 table provides a summary of the final expiration, maximumfuture payments, and recorded liability reflected in the consolidated balancesheet for these guarantees.

 
| **Guarantees**

**In millions**        | ** ** | **Final  Expiration** | ** ** | **Maximum Future  Payments** | ** ** | **Recorded  Liability** | ** ** |
|----------------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------|------------|
| Guarantees at September 30,  2005 |       | 2014                  |       | $                            | 94         |                    | $          | 2 |   |
| Guarantees at December 31,  2004  |       | 2014                  |       | $                            | 114        |                    | $          | 2 |   |

 

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**NOTE G     PENSION AND OTHER POSTRETIREMENT BENEFITS**

 

**Net Periodic Benefit Cost (Credit) for AllSignificant Plans**
| ** **                               | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **In millions**                          | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| *Defined Benefit Pension Plans:*         |       |                         |       |                         |       |   |   |   |   |
| Service cost                             |       | $                            | 7          |                         | $          | 6 |   | $ | 20 |   | $ | 20 |   |
| Interest cost                            |       | 54                           |       | 56                           |       | 163 |   | 168 |   |
| Expected return on plan assets           |       | (85                          | )          | (89                          | )          | (256 | ) | (265 | ) |
| Amortization of prior service cost       |       | —                       |       | 1                            |       | 1 |   | 3 |   |
| Amortization of net loss                 |       | 1                            |       | —                       |       | 2 |   | — |   |
| Special termination/curtailment cost (1) |       | —                       |       | —                       |       | — |   | 2 |   |
| Net periodic benefit credit              |       | $                            | (23        | )                            | $          | (26 | ) | $ | (70 | ) | $ | (72 | ) |
| ** **                               | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Other Postretirement Benefits:*         |       |                         |       |                         |       |   |   |   |   |
| Service cost                             |       | $                            | 1          |                         | $          | 1 |   | $ | 3 |   | $ | 3 |   |
| Interest cost                            |       | 9                            |       | 9                            |       | 26 |   | 29 |   |
| Amortization of prior service credit     |       | —                       |       | (1                           | )          | (1 | ) | (5 | ) |
| Amortization of net loss                 |       | 1                            |       | 1                            |       | 4 |   | 3 |   |
| Special termination/curtailment cost (1) |       | —                       |       | —                       |       | — |   | 7 |   |
| Net periodic benefit cost                |       | $                            | 11         |                         | $          | 10 |   | $ | 32 |   | $ | 37 |   |

 

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(1) See Note C for information regarding curtailment costs recorded in the secondquarter of 2004.

 

**EmployerContributions**

 

*PensionPlans*

 

The Corporation has adefined benefit pension plan that covers substantially all employees in theUnited States. Benefits are based on length of service and the employee’s threehighest consecutive years of compensation.

 

TheCorporation’s funding policy is to contribute to the plan when pension laws andeconomics either require or encourage funding. As previously disclosed in theCorporation’s Annual Report on Form 10-K for the year ended December 31,2004, UCC does not expect to contribute assets to its qualified pension plantrust in 2005. Consistent with that expectation, no contributions were made inthe first nine months of 2005. The Corporation also has a non-qualifiedsupplemental pension plan. Benefit payments to retirees under this plan areexpected to be $6 million in 2005. In the first nine months of 2005, benefitpayments of $3 million were made.

 

*OtherPostretirement Benefits*

 

The Corporation providescertain health care and life insurance benefits to retired U.S. employees. Theplan provides health care benefits, including hospital, physicians’ services,drug and major medical expense coverage, and life insurance benefits. The Corporationand the retiree share the cost of these benefits, with the Corporation portionincreasing as the retiree has increased years of credited service. There is acap on the Corporation portion. These benefits are subject to change at anytime.

 

The Corporationfunds most of the cost of these health care and life insurance benefits asincurred. As previously disclosed in the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2004, UCC does not expect to contributeassets to its other postretirement benefit plans in 2005. Consistent with thatexpectation, no contributions were made in the first nine months of 2005. Benefitpayments to retirees under these plans are expected to be $63 million in 2005.In the first nine months of 2005, benefit payments of $36 million were made.

 

**NOTE H     RELATED PARTY TRANSACTIONS**

 

The Corporation sells products to Dow to simplify thecustomer interface process. Products are sold to and purchased from Dow inaccordance with the terms of Dow’s long-standing intercompany pricing policies.The application of these policies results in products being sold to andpurchased from Dow at market-based prices. The Corporation also procurescertain commodities and raw materials through a Dow subsidiary and pays a commissionto that Dow subsidiary based on the volume and type of commodities and rawmaterials purchased. The commission expense is included in “Sundry income

 

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(expense) – net” in the consolidated statements ofincome. Purchases from that Dow subsidiary were approximately $550 millionin the third quarter of 2005 ($570 million in the third quarter of 2004) and $1,725million in the first nine months of 2005 ($1,459 million in the first ninemonths of 2004).

 

The Corporation has a master services agreement with Dow whereby Dowprovides services, including, but not limited to, accounting, legal, treasury(investments, cash management, risk management, insurance), procurement, humanresources, environmental, health and safety, and business management for UCC.Under the master services agreement with Dow, for general administrative andoverhead type services that Dow routinely allocates to various businesses, UCCis charged the cost of those services based on the Corporation’s and Dow’srelative manufacturing conversion costs. This arrangement results in aquarterly charge of approximately $4 million (included in “Sundry income(expense) – net”).

 

For services that Dow routinely charges based on effort, UCC is chargedthe cost of such services on a fully absorbed basis, which includes direct andindirect costs. Additionally, certain Dow employees are contracted to UCC andDow is reimbursed for all direct employment costs of such employees. Managementbelieves the method used for determining expenses charged by Dow is reasonable.Dow provides these services by leveraging its centralized functional servicecenters to provide services at a cost that management believes provides anadvantage to the Corporation.

 

The monitoring and execution of risk management policies related tointerest rate and foreign currency risks, which are based on Dow’s riskmanagement philosophy, are provided as a service to UCC.

 

As part of Dow’s cash management process, UCC is a party to revolvingloans with Dow that have LIBOR-based interest rates with varying maturities. AtSeptember 30, 2005, the Corporation had a note receivable of $472 millionfrom Dow under a revolving loan agreement. The Corporation also has a separate revolvingcredit agreement with Dow that allows the Corporation to borrow or obtaincredit enhancements up to an aggregate of $1 billion that matures December 30,2006, however, Dow may demand repayment with a 30-day written notice to theCorporation, subject to certain restrictions. In the third quarter of 2005, therevolving credit agreement was amended to extend the maturity date from December 30,2005 to December 30, 2006. A related collateral agreement provides for thereplacement of certain existing pledged assets, primarily equity interests invarious subsidiaries and joint ventures, with cash collateral. At September 30,2005, $805 million was available under the revolving credit agreement. Thecash collateral was reported as “Noncurrent receivable from related company” inthe consolidated balance sheets.

 

In June 2005,the Corporation received a cash dividend of approximately $29 million from Dow ChemicalCanada Inc. (“Dow Canada”) which was included in “Sundry income (expense) –net.” The Corporation accounts for its 11.2 percent ownership interest in DowCanada using the cost method.

 

**NOTEI     SUBSEQUENT EVENT**

 

On October 3, 2005,the Corporation filed a Form 8-K disclosing its wholly owned subsidiary,Catalysts, Adsorbents and Process Systems Inc., had signed a definitiveagreement on September 30, 2005, to sell its 50 percent interest in UOPLLC (“UOP”) to Honeywell Specialty Materials LLC (which currently owns theremaining 50 percent interest in UOP) for a purchase price of $825 million plusor minus 50 percent of UOP’s net cash at closing. The transaction, which issubject to regulatory review, is expected to be completed in the fourth quarterof 2005 and result in the recording of a gain.

 

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**Union Carbide Corporation and Subsidiaries**

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

** **

Pursuant to General Instruction H of Form 10-Q “Omissionof Information by Certain Wholly-Owned Subsidiaries,” this section includesonly management’s narrative analysis of the results of operations for the three-and nine-month periods ended September 30, 2005, the most recent periods,compared with the three- and nine-month periods ended September 30, 2004,the corresponding periods in the preceding fiscal year.

 

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

 

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 andRelated Information,” and no detailed business information is provided to achief operating decision maker regarding the Corporation’s stand-aloneoperations, the Corporation’s results are reported as a single operatingsegment.

 

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

##### ** **

The Private Securities Litigation Reform Act of 1995provides a “safe harbor” for forward-looking statements made by or on behalf ofUnion Carbide Corporation (the “Corporation” or “UCC”). This section coversthe current performance and outlook of the Corporation. The forward-lookingstatements contained in this section and in other parts of this documentinvolve risks and uncertainties that may affect the Corporation’s operations,markets, products, services, prices and other factors as more fully discussedelsewhere and in filings with the U.S. Securities and Exchange Commission(SEC). These risks and uncertainties include, but are not limited to, economic,competitive, legal, governmental and technological factors. Accordingly, thereis no assurance that the Corporation’s expectations will be realized. TheCorporation assumes no obligation to provide revisions to any forward-lookingstatements should circumstances change, except as otherwise required bysecurities and other applicable laws.

 

**RESULTS OF OPERATIONS**

 

The Corporation reported net income of $184 millionfor the third quarter of 2005, compared with $168 million for the third quarterof 2004. Net income for the first nine months of 2005 was $654 million,compared with $397 million for the first nine months of 2004. The significant improvementin year-to-date net income was due to higher selling prices, improved operatingmargins, and a gain on the sale of a portion of the Corporation’s ownershipinterest in EQUATE Petrochemical Company K.S.C (“EQUATE”) which more thanoffset a decline in volume.

 

Total net sales for the third quarter of 2005 were $1,465 millioncompared with $1,502 million for the third quarter of 2004, a decrease of 2percent. Selling prices to Dow are based on market prices for the relatedproducts. Increases in average selling prices for most products in the thirdquarter of 2005, compared with the same period of last year, were more than offsetby lower sales volume for all products. The decline in sales volume wasprimarily due to disruptions in production and distribution caused by twohurricanes affecting the U.S. Gulf Coast late in the third quarter. Year todate, total net sales were $4,733 million, an increase of 13 percent from$4,172 million for the first nine months of 2004. Significant increases inaverage selling prices, led by polyethylene, polypropylene, glycol ethers andUCARTMEmulsion Systems, more than offset an overall decline in volume. Price andvolume for ethylene glycol were somewhat lower than the very high levels of2004. On a year-to-date basis, volume was also impacted by a decline in ethyleneglycol volume due to scheduled plant turnarounds in the first quarter of 2005and lower ethanol sales volume resulting from the Corporation’s exit of theindustrial ethanol business in the second quarter of 2004.

 

Gross margin for the third quarter of 2005 was $144 million comparedwith $171 million for the third quarter of 2004. The decline in gross marginwas principally due to higher feedstock and energy costs and the negativeimpact of lower operating rates resulting from plant outages caused by thehurricanes. The Corporation’s two ethylene crackers at its St. Charles facilityin Hahnville, Louisiana were not restarted following the shutdown for HurricaneKatrina in late August because of plant turnarounds already scheduled forlate in the third quarter of 2005. The scheduled turnarounds are expected toextend through much of the fourth quarter of 2005. Year to date, gross margin was$588 million compared with $440 million for the first nine months of 2004. Year-to-dategross margin improved as increases in selling prices more than offset higherfeedstock and energy costs and lower volumes.

 

Equity in earnings of nonconsolidated affiliates decreased to $105million in the third quarter of 2005 from $133 million in the thirdquarter of 2004. Equity earnings were impacted by an unplanned outage at EQUATEearly in the third quarter of 2005. Despite strong results reported by EQUATEand UOP LLC for the first nine months of 2005, equity earnings were

 

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$71 million lower than in the first nine monthsof 2004 due principally to the benefit of investment tax allowances at one ofthe Corporation’s joint ventures in the second quarter of 2004.

 

The Corporation recorded a restructuring charge totaling $48 million inthe second quarter of 2004. The charge included severance of $21 million for aworkforce reduction of 360 people, curtailment costs of $9 million associatedwith UCC’s defined benefit plans, an asset write off of $8 million associatedwith the shutdown of a latex manufacturing facility and a write down of the netbook value of a marine terminal (sold in the third quarter of 2004) of $10million.

 

Sundry income (expense) – net includes a variety of income and expenseitems such as the gain or loss on foreign currency exchange, dividends frominvestments, commissions, charges for management services provided by Dow, andgains and losses on sales of investments and assets. Sundry income (expense) –net for the third quarter of 2005 was net expense of $2 million comparedwith net expense of $23 million for the third quarter last year. Net sundryexpense for the third quarter of 2005 included a gain of $9 million associated withthe sale of investments, and reflected lower commission expense on feedstockpurchases due to commission rate changes implemented in the second quarter of2005. Year to date, sundry income (expense) was net income of $51 million comparedwith net expense of $78 million last year. Net sundry income for the first ninemonths of this year included dividend income of $29 million from Dow ChemicalCanada Inc. (“Dow Canada”), a loss of $9 million associated with the earlyextinguishment of $423 million of debt, and a $70 million pretax gain onthe sale of a portion of the Corporation’s interest in EQUATE in the firstquarter of 2005. In November 2004, the Corporation sold a 2.5 percentinterest in EQUATE to National Bank of Kuwait for $104 million. In March 2005,these shares were sold to private Kuwaiti investors thereby completing therestricted transfer, which resulted in the first quarter gain and reduced theCorporation’s ownership interest from 45 percent to 42.5 percent.

 

The effective tax rate fluctuates based on, among other factors, whereincome is earned, the level of after-tax income from joint ventures, and thelevel of income relative to tax credits available. The effective tax rate forthe third quarter of 2005 was 14.4 percent compared with 27.6 percent for thesame quarter last year. The effective tax rate for the third quarter of 2005reflects the favorable impact of $21 million for adjustments resulting from thefinalization of calculations following the closure of prior tax years. Managementevaluated the significance of these adjustments to the third quarter anddetermined to record them in the current period. Year to date, the effectivetax rate was 25.9 percent versus 32.7 percent last year. The effective tax ratefor 2005 also reflects the favorable impact of $29 million of dividend incomefrom Dow Canada, which was based on previously taxed income.

 

**OTHER MATTERS**

 

**AccountingChanges**

 

See Note B to theConsolidated Financial Statements for a discussion of accounting changes andrecently issued accounting pronouncements.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements and related disclosures in conformity with 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, 2004 (“2004 10-K”) describesthe significant 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 2004 10-K. Since December 31,2004, there have been no material changes in the Corporation’s criticalaccounting policies.

 

**Asbestos-RelatedMatters**

 

The following disclosureshould be read in conjunction with the Corporation’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

*Introduction*

 

The Corporation is andhas been involved in a large number of asbestos-related suits filed primarilyin state courts during the past three decades. These suits principally allegepersonal injury resulting from exposure to asbestos-containing products andfrequently seek both actual and punitive damages. The alleged claims primarilyrelate to products 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”). Inmany cases, plaintiffs are unable to demonstrate 

 

15

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that they have sufferedany compensable loss as a result of such exposure, or that injuries incurred infact resulted from exposure to the Corporation’s products.

 

Influencedby the bankruptcy filings of numerous defendants in asbestos-related litigationand the prospects of various forms of state and national legislative reform,the rate 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.

 

Thetable below provides information regarding asbestos-related claims filedagainst the Corporation and Amchem for the nine months ended September 30,2005 and 2004:

 
| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1               |       | 203,416  |       | 193,891  |       |
| Claims filed                                       |       | 27,715   |       | 45,324   |       |
| Claims settled,  dismissed or otherwise resolved   |       | (51,928  | )          | (37,110  | )          |
| Claims  unresolved at September 30            |       | 179,203  |       | 202,105  |       |
| Claimants with  claims against both UCC and Amchem |       | 61,524   |       | 72,302   |       |
| Individual  claimants at September 30         |       | 117,679  |       | 129,803  |       |

 

Plaintiffs’ lawyers often sue dozens or even hundreds ofdefendants in individual lawsuits on behalf of hundreds or even thousands ofclaimants. As a result, those damages are not expressly identified as to UCC,Amchem or any other particular defendant, even when specific damages arealleged with respect to a specific disease or injury. In fact, there are nopersonal injury cases in which only the Corporation and/or Amchem are the solenamed defendants. For these reasons and based upon the Corporation’slitigation and settlement experience, the Corporation does not consider thedamages alleged against it and Amchem to be a meaningful factor in itsdetermination of any potential asbestos liability.

 

*Estimating the Liability*

 

Based on a study completedby Analysis, Research & Planning Corporation (“ARPC”) in January 2003,the Corporation increased its December 31, 2002 asbestos-related liabilityfor pending and future claims for the 15-year period ending in 2017 to $2.2billion, excluding future defense and processing costs. At each balance sheetdate, the Corporation compares current asbestos claim and resolution activityto the assumptions in the most recent ARPC study to determine whether theaccrual continues to be appropriate. In November 2004, the Corporationrequested ARPC to review the Corporation’s historical asbestos claim andresolution activity and determine the appropriateness of updating its January 2003study. In January 2005, ARPC provided the Corporation with a reportsummarizing the results of its study. Based on ARPC’s studies, the Corporation’srecent asbestos litigation experience, and the uncertainties surroundingasbestos litigation and legislative reform efforts, management determined thatno change to the accrual was required at December 31, 2004.

 

Basedon the Corporation’s review of 2005 activity, the Corporation determined thatno change to the accrual was required at September 30, 2005.

 

Theasbestos-related liability for pending and future claims was $1.5 billion at September 30,2005 and $1.6 billion at December 31, 2004. At September 30, 2005,approximately 36 percent of the recorded liability related to pending claimsand approximately 64 percent related to future claims. At December 31,2004, approximately 37 percent of the recorded liability related to pendingclaims and approximately 63 percent related to future claims.

 

*Defenseand 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** | ** ** | **Nine Months Ended** | ** ** | **Aggregate Costs** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| **In millions**                   | ** ** | **Sept. 30,  2005**   | ** ** | **Sept. 30,  2004** | ** ** | **to Date as of  Sept. 30, 2005** | ** ** |
| Defense costs                     |       | $                     | 55         |                | $          | 66 |   | $ | 399 |   |
| Resolution costs                  |       | $                     | 122        |                | $          | 250 |   | $ | 1,048 |   |

 

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 the

 

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number and type of claimssettled in a particular period, the jurisdictions in which such claims arose,and the extent to which any proposed legislative reform related to asbestoslitigation is being considered.

 

*InsuranceReceivables*

 

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.

 

TheCorporation’s receivable for insurance recoveries related to its asbestosliability was $550 million at September 30, 2005 and $712 million at December 31,2004. At September 30, 2005, $443 million ($543 million at December 31,2004) of the receivable for insurance recoveries was related to insurers thatare not signatories to the Wellington Agreement and/or do not otherwise haveagreements in place regarding their asbestos-related insurance coverage.

 

Inaddition, the Corporation had receivables for defense and resolution costssubmitted to insurance carriers for reimbursement as follows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**
| **In millions**                   | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Receivables for  defense costs    |       | $                            | 86         |                        | $          | 85 |   |
| Receivables for  resolution costs |       | 333                          |       | 406                         |       |
| Total                             |       | $                            | 419        |                        | $          | 491 |   |

 

TheCorporation expenses defense costs as incurred. The pretax impact for defenseand resolution costs, net of insurance, was $24 million in the third quarter of2005 ($19 million in the third quarter of 2004) and $56 million in the first ninemonths of 2005 ($92 million in the first nine months of 2004), and wasreflected in “Cost of sales.”

 

In September 2003, the Corporation filed acomprehensive insurance coverage case in the Circuit Court for Kanawha Countyin Charleston, West Virginia, seeking to confirm its rights to insurance forvarious asbestos claims (the “West Virginia action”) and to facilitate anorderly and timely collection of insurance proceeds. Although the Corporationalready has settlements in place concerning coverage for asbestos claims withmany of its insurers, including those covered by the 1985 Wellington Agreement,this lawsuit was filed against insurers that are not signatories to theWellington Agreement and/or do not otherwise have agreements in place with theCorporation regarding their asbestos-related insurance coverage, in order tofacilitate an orderly resolution and collection of such insurance policies andto resolve issues that the insurance carriers may raise. In early 2004,several of the defendant insurers in the West Virginia action filed a competingaction in the Supreme Court of the State of New York, County of New York. As aresult of motion practice, the West Virginia action was dismissed in August 2004on the basis of *forum non conveniens*(i.e.,West Virginia is an inconvenient location for the parties). The comprehensiveinsurance coverage litigation is now proceeding in the New York courts (the “NewYork action”). Through the third quarter of2005, the Corporation reached settlements with several of the carriers involvedin the New York action. After a further review of its insurance policies, withdue consideration given to applicable deductibles, retentions and policylimits, after taking into account the solvency and historical paymentexperience of various insurance carriers; existing insurance settlements; andthe advice of outside counsel with respect to the applicable insurance coveragelaw relating to the terms and conditions of its insurance policies, theCorporation continues to believe that its recorded receivable for insurance recoveriesfrom 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, projecting future events, suchas the number of new claims to be filed and/or received each year, the averagecost of disposing 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.

 

**ITEM 4.  CONTROLS AND PROCEDURES.**

 

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, the Corporationcarried out an evaluation, under the supervision and with the participation ofthe Corporation’s Disclosure Committee and the Corporation’s management,including the 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); andwhether any change has occurred in the Corporation’s internal control overfinancial reporting pursuant to Exchange Act Rule 15d-15(d). Based uponthat evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the Corporation’s disclosure controls and procedures areeffective and that no change in the Corporation’s internal control overfinancial reporting occurred during the Corporation’s most recent fiscalquarter that materially affected, or is reasonably likely to materially affect,the Corporation’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

No material developments in any legal proceedings,including asbestos-related matters, occurred during the third quarter of 2005.For a summary of the history and current status of legal proceedings, includingasbestos-related matters, see Management’s Discussion and Analysis of FinancialCondition and Results of Operations, Asbestos-Related Matters; and Note F tothe Consolidated Financial Statements.

 

**ITEM 6. EXHIBITS.**

 

See the Exhibit Indexon page 20 of this Quarterly Report on Form 10-Q for exhibits filedwith this report.

 

 

**TRADEMARKS**

 

The following trademark of Union Carbide Corporationappears in this report:  UCAR

 

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**Union Carbide Corporation and Subsidiaries**

**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:  November 1, 2005

 

 
|   | By:    | /s/ FRANK H. BROD                       |
|--------|--------|-----------------------------------------|
|   |   | Frank H. Brod                           |
|   |   | Corporate 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                 |

 

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**Union Carbide Corporation and Subsidiaries**

**Exhibit Index**

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                        | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                                                                                                                                                                                   |       |
| 10.5.3               |       | Third Amendment  to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2005,  among the Corporation, The Dow Chemical Company and certain Subsidary  Guarantors. |       |
|                 |       |                                                                                                                                                                                                   |       |
| 10.8                 |       | Purchase and  Sale Agreement dated as of September 30, 2005, between Catalysts,  Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials  LLC.                                |       |
|                 |       |                                                                                                                                                                                                   |       |
| 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.                                                                                                                         |       |

 

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