**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

For the quarterly period ended  **MARCH 31,2008**

 

Commission filenumber: **1-1463**

** **

**UNIONCARBIDE CORPORATION**

(Exact name ofregistrant 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’stelephone number, including area code:  **713-978-2016**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.       x Yes    o No

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
| Non-accelerated filer x   |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

At March 31,2008, 1,000 shares of common stock were outstanding, all of which were held bythe registrant’s parent, The Dow Chemical Company.

 

The registrant meets the conditions set forth inGeneral Instructions H(1)(a) and (b) for Form 10-Q and istherefore filing this form with a reduced disclosure format.

 

 

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**Union Carbide Corporation**

** **

**TABLE OFCONTENTS**

 
|                                                                                                  | **PAGE**   |
|-------------------------------------------------------------------------------------------------------|------------|
|                                                                                                  | ** ** |
| **PART I - FINANCIAL INFORMATION**                                                               | ** ** |
| ** **                                                                                            | ** ** |
| Item 1. Financial Statements.                                                                         | 3          |
|                                                                                                  |       |
| Consolidated  Statements of Income                                                                    | 3          |
|                                                                                                  |       |
| Consolidated  Balance Sheets                                                                          | 4          |
|                                                                                                  |       |
| Consolidated  Statements of Cash Flows                                                                | 6          |
|                                                                                                  |       |
| Consolidated  Statements of Comprehensive Income                                                      | 6          |
|                                                                                                  |       |
| Notes to  the Consolidated Financial Statements                                                       | 7          |
|                                                                                                  |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations. | 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 4T.  Controls and Procedures.                                                                    | 18         |
|                                                                                                  |       |
| **PART II - OTHER INFORMATION**                                                                  | ** ** |
| ** **                                                                                            | ** ** |
| Item 1. Legal Proceedings.                                                                            | 18         |
|                                                                                                  |       |
| Item 1A. Risk Factors.                                                                                | 18         |
|                                                                                                  |       |
| Item 6. Exhibits.                                                                                     | 18         |
|                                                                                                  |       |
| **SIGNATURES**                                                                                        | 19         |
| ** **                                                                                            |       |
| **EXHIBIT INDEX**                                                                                     | 20         |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**ITEM 1.Financial Statements.**

 

**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements of Income**

** **
| ** **                                          | ** **   | **Three Months Ended** | ** ** |
|-----------------------------------------------------|--------------|----------------------------------|------------|
| ** **                                          | ** **   | **March 31,**               | ** ** | **March 31,** | ** ** |
| In millions  (Unaudited)                            | *** *** | **2008**                         | ** ** | **2007** | *** *** |
| Net trade sales                                     |         | $                                | 46         |   | $ | 53 |   |
| Net sales to  related companies                     |         | 1,989                            |       | 1,673 |   |
| Total Net Sales                                     |         | 2,035                            |       | 1,726 |   |
| Cost of sales                                       |         | 1,961                            |       | 1,598 |   |
| Research and  development expenses                  |         | 19                               |       | 20 |   |
| Selling, general  and administrative expenses       |         | 3                                |       | 7 |   |
| Equity in  earnings of nonconsolidated affiliates   |         | 54                               |       | 124 |   |
| Sundry income  (expense) - net                      |         | 70                               |       | (10 | ) |
| Interest income                                     |         | 32                               |       | 37 |   |
| Interest expense  and amortization of debt discount |         | 12                               |       | 15 |   |
| Income before  Income Taxes                         |         | 196                              |       | 237 |   |
| Provision for  income taxes                         |         | 41                               |       | 51 |   |
| Net Income  Available for Common Stockholder        |         | $                                | 155        |   | $ | 186 |   |
| Depreciation                                        |         | $                                | 65         |   | $ | 68 |   |
| Capital  Expenditures                               |         | $                                | 40         |   | $ | 46 |   |

*See Notesto the Consolidated Financial Statements.*

 

3

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**Union Carbide Corporation andSubsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                          | ** ** | **March 31,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| In millions (Unaudited)                                                   | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| **Assets**                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| Current Assets                                                                      |       |               |       |              |       |
| Cash and cash  equivalents                                                          |       | $                  | 24         |              | $          | 22 |   |
| Accounts  receivable:                                                               |       |               |       |              |       |
| Trade (net of  allowance for doubtful receivables - 2008: $2; 2007: $2)             |       | 26                 |       | 26                |       |
| Related  companies                                                                  |       | 582                |       | 487               |       |
| Other                                                                               |       | 117                |       | 129               |       |
| Notes receivable  from related companies                                            |       | 3,567              |       | 3,227             |       |
| Inventories                                                                         |       | 191                |       | 178               |       |
| Deferred income  tax assets - current                                               |       | 33                 |       | 60                |       |
| Total current  assets                                                               |       | 4,540              |       | 4,129             |       |
| Investments                                                                         |       |               |       |              |       |
| Investments in  related companies                                                   |       | 972                |       | 972               |       |
| Investments in  nonconsolidated affiliates                                          |       | 432                |       | 385               |       |
| Other  investments                                                                  |       | 22                 |       | 22                |       |
| Noncurrent  receivables                                                             |       | 46                 |       | 46                |       |
| Noncurrent  receivable from related company                                         |       | 299                |       | 306               |       |
| Total  investments                                                                  |       | 1,771              |       | 1,731             |       |
| Property                                                                            |       |               |       |              |       |
| Property                                                                            |       | 7,544              |       | 7,509             |       |
| Less accumulated  depreciation                                                      |       | 5,607              |       | 5,547             |       |
| Net property                                                                        |       | 1,937              |       | 1,962             |       |
| Other Assets                                                                        |       |               |       |              |       |
| Goodwill                                                                            |       | 26                 |       | 26                |       |
| Other intangible  assets (net of accumulated amortization - 2008: $129; 2007: $128) |       | 21                 |       | 22                |       |
| Deferred income  tax assets - noncurrent                                            |       | 123                |       | 112               |       |
| Asbestos-related  insurance receivables - noncurrent                                |       | 695                |       | 696               |       |
| Pension assets                                                                      |       | 716                |       | 699               |       |
| Deferred charges  and other assets                                                  |       | 86                 |       | 88                |       |
| Total other  assets                                                                 |       | 1,667              |       | 1,643             |       |
| Total Assets                                                                        |       | $                  | 9,915      |              | $          | 9,465 |   |

*See Notesto the Consolidated Financial Statements.*

 

4

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                  | ** ** | **March 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| In millions (Unaudited)                                           | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| **Liabilities and Stockholder’s Equity**                               | ** ** | ** **         | ** ** | ** **        | ** ** |
| Current  Liabilities                                                        |       |               |       |              |       |
| Notes payable -  related companies                                          |       | $                  | 6          |              | $          | 5 |   |
| Accounts  payable:                                                          |       |               |       |              |       |
| Trade                                                                       |       | 255                |       | 239               |       |
| Related  companies                                                          |       | 521                |       | 391               |       |
| Other                                                                       |       | 40                 |       | 29                |       |
| Income taxes  payable                                                       |       | 183                |       | 185               |       |
| Asbestos-related  liabilities - current                                     |       | 123                |       | 141               |       |
| Accrued and  other current liabilities                                      |       | 181                |       | 180               |       |
| Total current  liabilities                                                  |       | 1,309              |       | 1,170             |       |
| Long-Term Debt                                                              |       | 820                |       | 820               |       |
| Other Noncurrent  Liabilities                                               |       |               |       |              |       |
| Pension and  other postretirement benefits - noncurrent                     |       | 456                |       | 461               |       |
| Asbestos-related  liabilities - noncurrent                                  |       | 959                |       | 1,001             |       |
| Other noncurrent  obligations                                               |       | 362                |       | 356               |       |
| Total other  noncurrent liabilities                                         |       | 1,777              |       | 1,818             |       |
| Minority  Interest in Subsidiaries                                          |       | 2                  |       | 2                 |       |
| Stockholder’s  Equity                                                  |       |               |       |              |       |
| Common stock  (authorized and issued: 1,000 shares of $0.01 par value each) |       | —             |       | —            |       |
| Additional  paid-in capital                                                 |       | 312                |       | 121               |       |
| Retained  earnings                                                          |       | 5,922              |       | 5,767             |       |
| Accumulated  other comprehensive loss                                       |       | (227               | )          | (233              | )          |
| Net  stockholder’s equity                                              |       | 6,007              |       | 5,655             |       |
| Total  Liabilities and Stockholder’s Equity                            |       | $                  | 9,915      |              | $          | 9,465 |   |

*See Notesto the Consolidated Financial Statements.*

 

5

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**UnionCarbide Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| In millions (Unaudited)                                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Operating  Activities                                                               |       |                             |       |   |   |
| Net Income Available  for Common Stockholder                                        |       | $                                | 155        |   | $ | 186 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:  |       |                             |       |   |   |
| Depreciation and  amortization                                                      |       | 81                               |       | 78 |   |
| Provision  (credit) for deferred income tax                                         |       | 60                               |       | (37 | ) |
| Earnings of  nonconsolidated affiliates in excess of (less than) dividends received |       | (42                              | )          | 96 |   |
| Net gain on  sales of property                                                      |       | (7                               | )          | (1 | ) |
| Other gain, net                                                                     |       | (1                               | )          | — |   |
| Pension  contributions                                                              |       | (1                               | )          | — |   |
| Changes in  assets and liabilities:                                                 |       |                             |       |   |   |
| Accounts and  notes receivable                                                      |       | 11                               |       | 8 |   |
| Related company  receivables                                                        |       | (436                             | )          | (244 | ) |
| Inventories                                                                         |       | (13                              | )          | (7 | ) |
| Accounts payable                                                                    |       | 47                               |       | (51 | ) |
| Related company  payables                                                           |       | 131                              |       | (42 | ) |
| Other assets and  liabilities                                                       |       | 44                               |       | 85 |   |
| Cash provided by  operating activities                                              |       | 29                               |       | 71 |   |
| Investing  Activities                                                               |       |                             |       |   |   |
| Capital  expenditures                                                               |       | (40                              | )          | (46 | ) |
| Change in  noncurrent receivable from related company                               |       | 7                                |       | (20 | ) |
| Proceeds from  sales of property                                                    |       | 6                                |       | 3 |   |
| Purchases of  investments                                                           |       | (2                               | )          | (1 | ) |
| Proceeds from  sales of investments                                                 |       | 2                                |       | — |   |
| Cash used in  investing activities                                                  |       | (27                              | )          | (64 | ) |
| Financing  Activities                                                               |       |                             |       |   |   |
| Changes in  short-term notes payable                                                |       | —                           |       | (1 | ) |
| Cash used in  financing activities                                                  |       | —                           |       | (1 | ) |
| Summary                                                                             |       |                             |       |   |   |
| Increase in cash  and cash equivalents                                              |       | 2                                |       | 6 |   |
| Cash and cash  equivalents at beginning of year                                     |       | 22                               |       | 71 |   |
| Cash and cash  equivalents at end of period                                         |       | $                                | 24         |   | $ | 77 |   |

*See Notesto the Consolidated Financial Statements.*

 

**UnionCarbide Corporation and Subsidiaries**

**ConsolidatedStatements of Comprehensive Income**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| In millions (Unaudited)                          | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net Income  Available for Common Stockholder               |       | $                                | 155        |   | $ | 186 |   |
| Other  Comprehensive Income (Loss), Net of Tax             |       |                             |       |   |   |
| Cumulative  translation adjustment                         |       | 6                                |       | — |   |
| Pension and  other postretirement benefit plans adjustment |       | 1                                |       | 4 |   |
| Net loss on cash  flow hedging derivative instruments      |       | (1                               | )          | — |   |
| Total other  comprehensive income                          |       | 6                                |       | 4 |   |
| Comprehensive  Income                                      |       | $                                | 161        |   | $ | 190 |   |

*See Notesto the Consolidated Financial Statements.*

 

6

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**UnionCarbide Corporation and Subsidiaries**

**Notes tothe Consolidated Financial Statements**

 

(Unaudited)

 

**NOTE A    CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

 

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

 

The Corporation’sbusiness activities comprise components of Dow’s global operations rather thanstand-alone operations. Dow conducts its worldwide operations through globalbusinesses. Because there are no separable reportable business segments for UCCunder SFAS No. 131, “Disclosures about Segments of an Enterprise 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.

 

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

 

These statements shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Corporation’s Annual Report on Form 10-K forthe year ended December 31, 2007.

 

 

**NOTE B    RECENTACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,”which defines fair value, establishes a framework for measuring fair value inU.S. GAAP, and expands disclosures about fair value measurements. The Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements and was effective for fiscal years beginning after November 15,2007. In February 2008, the FASB issued FASB Staff Position (“FSP”)FAS 157-2 which delayed the effective date of SFAS No. 157 fornonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in the financial statement on a recurringbasis, to fiscal years beginning after November 15, 2008. On January 1,2008, the Corporation adopted the portion of SFAS No. 157 that was notdelayed, and since the Corporation’s existing fair value measurements areconsistent with the guidance of the Statement, the partial adoption of theStatement did not have a material impact on the Corporation’s consolidatedfinancial statements. The Corporation uses a December 31 measurement datefor its pension and other postretirement plans; therefore, the Corporation isstill evaluating the impact of adopting the Statement for its plan assets. Theadoption of the deferred portion of the Statement on January 1, 2009 isnot expected to have a material impact on the Corporation’s consolidatedfinancial statements. See Note F for expanded disclosures about fair valuemeasurements.

 

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

 

In December 2007, the FASB revised SFAS No. 141,“Business Combinations,” to establish revised principles and requirements forhow entities will recognize and measure assets and liabilities acquired in abusiness combination. The Statement is effective for business combinationscompleted on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. The Corporation will apply theguidance of the Statement to business combinations completed on or after January 1,2009.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51.” The Statement establishes accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. The Statement is effective on or after the beginning of the firstannual reporting period beginning on or after December 15, 2008. TheCorporation is currently evaluating the impact of adopting the Statement on January 1,2009.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof SFAS No. 133.” The Statement requires enhanced disclosures about anentity’s derivative and hedging activities. The Statement is effective forfiscal years and interim periods beginning after November 15, 2008. TheCorporation is evaluating the additional disclosures required by the Statementbeginning January 1, 2009.

 

7

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**NOTE C    RESTRUCTURING**

 

In the fourth quarter of2007, the Corporation recorded restructuring charges totaling $55 million  resulting from decisions made bymanagement to make organizational changes within targeted support functions inWest Virginia and to shut down certain assets in Louisiana to enhance theefficiency and cost effectiveness of the Corporation’s operations. The chargesincluded severance of $17 million for a workforce reduction ofapproximately 225 people; curtailment costs of $12 million associated withthe Corporation’s defined benefit plans; and the $26 million write-off ofthe net book value and associated exit costs of the polypropylene manufacturingfacility at St. Charles Operations in Hahnville, Louisiana, which was shut downat the end of 2007. As of March 31,2008, severance of $1 million had been paid to 28 employees, and a liability of$16 million remained for approximately 200 employees.

 

The following table summarizes2008 activities related to the Corporation’s restructuring reserve:

 

**2008 Activities Related to 2007 Restructuring**
| In millions                          | ** ** | **Costs  associated  with Exit or  Disposal  Activities** | ** ** | **Severance  Costs** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------|------------|-----------|------------|
| Reserve balance at December 31, 2007 |       | $                                                                   | 12         |                 | $          | 17        |       | $ | 29 |   |
| Cash payments                             |       | —                                                              |       | (1                   | )          | (1        | )          |
| Reserve balance at March 31, 2008    |       | $                                                                   | 12         |                 | $          | 16        |       | $ | 28 |   |

 

 

**NOTE D    INVENTORIES**

 

The following tableprovides a breakdown of inventories:

 

**Inventories**
| In millions   | ** ** | **March 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|
| Finished goods     |       | $                        | 49         |                    | $          | 17 |   |
| Work in process    |       | 9                        |       | 40                      |       |
| Raw materials      |       | 55                       |       | 47                      |       |
| Supplies           |       | 78                       |       | 74                      |       |
| Total  inventories |       | $                        | 191        |                    | $          | 178 |   |

 

Thereserves reducing inventories from the first-in, first-out (“FIFO”) basis tothe last-in, first-out (“LIFO”) basis amounted to $206 million at March 31,2008 and $183 million at December 31, 2007.

 

 

**NOTE E    OTHERINTANGIBLE ASSETS**

 

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

 

**Other Intangible Assets**
| ** **                            | ** ** | **At March 31, 2008** | ** ** | **At December 31, 2007** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ****In millions                  | ** ** | **Gross  Carrying  Amount**          | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible  assets with finite lives: |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| Licenses and  intellectual property   |       | $                                    | 33         |                                    | $          | (33 | ) | — |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                               |       | 2                                    |       | (1                                      | )          | $ | 1 |   | 3 |   | (2 | ) | 1 |   |
| Software                              |       | 115                                  |       | (95                                     | )          | 20 |   | 114 |   | (94 | ) | 20 |   |
| Total other  intangible assets        |       | $                                    | 150        |                                    | $          | (129 | ) | $ | 21 |   | $ | 150 |   | $ | (128 | ) | $ | 22 |   |

 

Amortizationexpense for software, which is included in “Cost of sales,” was $2 millionin the first quarter of 2008 and $1 million in the first quarter of 2007.Amortization expense for other intangible assets (not including software) wasimmaterial in the first quarter of 2008 and the first quarter of 2007. Totalestimated amortization expense for 2008 and the five succeeding fiscal years isas follows:

 

8

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| **Estimated Amortization Expense******In millions | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|
| 2008                                                             |       | $          | 7          |   |
| 2009                                                             |       | $          | 7          |   |
| 2010                                                             |       | $          | 6          |   |
| 2011                                                             |       | $          | 1          |   |
| 2012                                                             |       | —     |       |
| 2013                                                             |       | —     |       |

 

 

**NOTEF    FAIR VALUE MEASUREMENTS**

 

The following table summarizes the bases used tomeasure certain assets and liabilities at fair value on a recurring basis inthe consolidated balance sheets:

 

**Basis of Fair Value Measurements**
| ** **             | ** ** | ** **                            | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** |
|------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------|------------|
| In millions       | ** ** | **At March 31   2008** | ** ** | ** **                                                         |
| Assets at fair  value: |       |                                  |       |                                                               |       |
| Debt securities (1)    |       | $                                     | 18         |                                                               | $          | 18 |   |
|                        |            |                                       |            |                                                                    |            |  |  |

(1)          Included in “Other investments” in the consolidated balance sheets.

 

Assets that are measured using significant otherobservable inputs are primarily valued by reference to quoted prices of similarassets in active markets, adjusted for any terms specific to that asset. Forall other assets for which observable inputs are used, fair value is derivedthrough the use of fair value models, such as a discounted cash flow model orother standard pricing models.

 

 

**NOTE G    COMMITMENTSAND CONTINGENT LIABILITIES**

 

**Environmental Matters**

 

Accruals forenvironmental matters are recorded when it is probable that a liability hasbeen incurred and the amount of the liability can be reasonably estimated,based on current law and existing technologies. At March 31, 2008, theCorporation had accrued obligations of $72 million for environmentalremediation and restoration costs, including $21 million for theremediation of Superfund sites. This is management’s best estimate of the costsfor remediation and restoration with respect to environmental matters for whichthe Corporation has accrued liabilities, although the ultimate cost withrespect to these particular matters could range up to twice that amount.Inherent uncertainties exist in these estimates primarily due to unknownconditions, changing governmental regulations and legal standards regardingliability, and evolving technologies for handling site remediation and restoration.At December 31, 2007, the Corporation had accrued obligations of$75 million for environmental remediation and restoration costs, including$23 million for the remediation of Superfund sites. It is the opinion ofthe Corporation’s management that the possibility is remote that costs inexcess of those disclosed will have a material adverse impact on theCorporation’s consolidated financial statements.

 

**Litigation**

 

The Corporation and itssubsidiaries are involved in a number of legal proceedings and claims with bothprivate and governmental parties. These cover a wide range of matters,including, but not limited to: product liability; trade regulation;governmental regulatory proceedings; health, safety and environmental matters;employment; patents; contracts; taxes; and commercial disputes.

 

Separately, theCorporation is and has been involved in a large number of asbestos-relatedsuits filed primarily in state courts during the past three decades. Thesesuits principally allege personal injury resulting from exposure toasbestos-containing products and frequently seek both actual and punitivedamages. The alleged claims primarily relate to products that UCC sold in thepast, alleged exposure to asbestos-containing products located on UCC’spremises, and UCC’s responsibility for asbestos suits filed against a formersubsidiary, Amchem Products, Inc. (“Amchem”). In many cases, 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. Influenced by the bankruptcy filings ofnumerous defendants in asbestos-related litigation and the prospects of variousforms of state and national legislative reform, the rate at 

 

9

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which plaintiffsfiled asbestos-related suits against various companies, including theCorporation and Amchem, increased in 2001, 2002 and the first half of 2003.Since then, the rate of filing has significantly abated. The Corporationexpects more asbestos-related suits to be filed against it and Amchem in thefuture, and will aggressively defend or reasonably resolve, as appropriate,both pending and future claims.

 

Based on a studycompleted by 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$2.2 billion, excluding future defense and processing costs. Since then,the Corporation has compared current asbestos claim and resolution activity tothe results of the most recent ARPC study at each balance sheet date todetermine whether the accrual continues to be appropriate. In addition, theCorporation has requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity each November since 2004 to determine theappropriateness of updating the most recent ARPC study.

 

In November 2006,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsmost recent study from January 2005. In response to that request, ARPCreviewed and analyzed data through October 31, 2006 and concluded that theexperience from 2004 through 2006 was sufficient for the purpose of forecastingfuture filings and values of asbestos claims filed against UCC and Amchem, andcould be used in place of previous assumptions to update its January 2005study. The resulting study, completed by ARPC in December 2006, statedthat the undiscounted cost of resolving pending and future asbestos-relatedclaims against UCC and Amchem, excluding future defense and processing costs,through 2021 was estimated to be between approximately $1.2 billion and$1.5 billion. As in its January 2003 and January 2005 studies,ARPC provided estimates for a longer period of time in its December 2006study, but also reaffirmed its prior advice that forecasts for shorter periodsof time are more accurate than those for longer periods of time.

 

Basedon ARPC’s December 2006 study and the Corporation’s own review of theasbestos claim and resolution activity, the Corporation decreased itsasbestos-related liability for pending and future claims to $1.2 billionat December 31, 2006 which covered the 15-year period ending in 2021(excluding future defense and processing costs). The reduction was$177 million and was shown as “Asbestos-related credit” in theconsolidated statements of income.

 

In November 2007,the Corporation requested ARPC to review the Corporation’s 2007 asbestos claimand resolution activity and determine the appropriateness of updating its December 2006study. In response to that request, ARPC reviewed and analyzed data through October 31,2007. In December 2007, ARPC stated that an update of its study would notprovide a more likely estimate of future events than the estimate reflected inits study of the previous year and, therefore, the estimate in that studyremained applicable. Based on the Corporation’s own review of the asbestosclaim and resolution activity and ARPC’s response, the Corporation determinedthat no change to the accrual was required. At December 31, 2007, theCorporation’s asbestos-related liability for pending and future claims was$1.1 billion. At December 31, 2007, approximately 31 percent ofthe recorded liability related to pending claims and approximately69 percent related to future claims.

 

Basedon the Corporation’s review of 2008 activity, the Corporation determined thatno adjustment to the accrual was required at March 31, 2008. TheCorporation’s asbestos-related liability for pending and future claims was$1.1 billion at March 31, 2008. Approximately 30 percent of therecorded liability related to pending claims and approximately 70 percentrelated 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 by the Corporation after a thorough review ofapplicable insurance policies and the 1985 Wellington Agreement, to which theCorporation and many of its liability insurers are signatory parties, as wellas other insurance settlements, with due consideration given to applicabledeductibles, retentions and policy limits, and taking into account the solvencyand historical payment experience of various insurance carriers. The WellingtonAgreement and other agreements with insurers are designed to facilitate anorderly resolution and collection of Union Carbide’s insurance policies and toresolve issues that the insurance carriers may raise.

 

In September 2003,the Corporation filed a comprehensive insurance coverage case, now proceedingin the Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filedagainst insurers that are not signatories to the Wellington Agreement and/or donot otherwise have agreements in place with the Corporation regarding theirasbestos-related insurance coverage, in order to facilitate an orderlyresolution and collection of such insurance policies and to resolve issues thatthe insurance carriers may raise. Although the lawsuit is continuing, through the first quarter of 2008, theCorporation has reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$465 million at March 31, 2008 and $467 million at December 31,2007. At March 31, 2008 and December 31, 2007, all of the receivablefor insurance recoveries was related to insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in placeregarding their asbestos-related insurance coverage.

 

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

 

**Receivables for Costs Submitted to Insurance Carriers**
| In millions                  | ** ** | **March 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Receivables for  defense costs    |       | $                        | 22         |                    | $          | 18 |   |
| Receivables for  resolution costs |       | 248                      |       | 253                     |       |
| Total                             |       | $                        | 270        |                    | $          | 271 |   |

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $14 million in the first quarter of 2008 and$17 million in the first quarter of 2007, and was reflected in “Cost ofsales.”

 

Aftera review of its insurance policies, with due consideration given to applicabledeductibles, retentions and policy limits, after taking into account thesolvency and historical payment experience of various insurance carriers;existing insurance settlements; and the advice of outside counsel with respectto the applicable insurance coverage law relating to the terms and conditionsof its insurance policies, the Corporation continues to believe that itsrecorded receivable for insurance recoveries from all insurance carriers isprobable of collection.

 

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

 

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

 

While it is not possibleat this time to determine with certainty the ultimate outcome of any of thelegal proceedings and claims referred to in this filing, management believesthat adequate provisions have been made for probable losses with respect topending claims and proceedings, and that, except for the asbestos-relatedmatters described above, the ultimate outcome of all known and future claims,after provisions for insurance, will not have a material adverse impact on theresults of operations, cash flows and consolidated financial position of theCorporation. Should any losses be sustained in connection with any of suchlegal proceedings and claims in excess of provisions provided and availableinsurance, they will be charged to income when determinable.

 

**PurchaseCommitments**

 

At December 31,2007, the Corporation had various outstanding commitments for take-or-payagreements, with terms extending from one to fifteen years. Such commitmentswere not in excess of current market prices. The fixed and determinable portionof obligations under purchase commitments at December 31, 2007 ispresented in the following table:

 
| **Fixed and Determinable Portion of Take-or-Pay  Obligations at December 31, 2007 ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| In millions                                                                                                                  | ** ** | ** ** | ** ** |
| 2008                                                                                                                              |       | $          | 7          |   |
| 2009                                                                                                                              |       | 7          |       |
| 2010                                                                                                                              |       | 8          |       |
| 2011                                                                                                                              |       | 2          |       |
| 2012                                                                                                                              |       | 2          |       |
| 2013 and beyond                                                                                                                   |       | 11         |       |
| Total                                                                                                                             |       | $          | 37         |   |

 

**Guarantees**

 

The Corporation hasundertaken obligations to guarantee the performance of certain nonconsolidatedaffiliates. Non-performance under a contract for commercial and/or financialobligations by the guaranteed party would trigger the 

 

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obligation of theCorporation to make payments to the beneficiary of the guarantees. Financialobligations include debt and lease arrangements.

 

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

 
| **Guarantees**In millions        | ** ** | **Final  Expiration** | ** ** | **Maximum Future Payments** | ** ** | **Recorded  Liability** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------------|------------|-------------------------|------------|
| Guarantees at  March 31, 2008    |       | 2014                  |       | $                           | 80         |                    | $          | 1 |   |
| Guarantees at  December 31, 2007 |       | 2014                  |       | $                           | 77         |                    | $          | 1 |   |

 

**Conditional Asset RetirementObligations**

 

In accordance with FIN No. 47,the Corporation has recognized conditional asset retirement obligations relatedto asbestos encapsulation as a result of planned demolition and remediationactivities at manufacturing and administrative sites in the United States. Theaggregate carrying amount of conditional asset retirement obligations was$9 million at March 31, 2008 and December 31, 2007. The discountrate used to calculate the Corporation’s asset retirement obligations was 5.08percent, unchanged from December 31, 2007. These obligations are includedin the consolidated balance sheets as “Accrued and other current liabilities.”

 

TheCorporation has not recognized conditional asset retirement obligations forwhich a fair value cannot be reasonably estimated in its consolidated financialstatements. It is the opinion of management that the possibility is remote thatsuch conditional asset retirement obligations, when estimable, will have amaterial adverse impact on the Corporation’s consolidated financial statementsbased on current costs.

 

 

**NOTE H    PENSIONAND OTHER POSTRETIREMENT BENEFITS**

 

**Net Periodic Benefit Cost (Credit)for All Significant Plans**
| ** **                                   | ** ** | **Defined Benefit Pension Plans** | ** ** | **Other Postretirement Benefits** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended**                 | ** ** | **Three Months Ended**            | ** ** |
| In millions                             | ** ** | **March 31,  2008**                         | ** ** | **March 31,  2007**                    | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
| Service cost                                 |       | $                                                | 5          |                                        | $          | 5 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                                |       | 56                                               |       | 53                                          |       | 7 |   | 7 |   |
| Expected return  on plan assets              |       | (78                                              | )          | (79                                         | )          | — |   | — |   |
| Amortization of  prior service cost (credit) |       | 2                                                |       | 1                                           |       | (1 | ) | (1 | ) |
| Amortization of  net loss                    |       | 1                                                |       | 7                                           |       | — |   | 1 |   |
| Net periodic  benefit cost (credit)          |       | $                                                | (14        | )                                           | $          | (13 | ) | $ | 7 |   | $ | 8 |   |

 

 

**NOTE I    RELATEDPARTY TRANSACTIONS**

 

The Corporation sells products to Dow to simplify the customerinterface process. Products are sold to and purchased from Dow at market-basedprices in accordance with the terms of Dow’s long-standing intercompany pricingpolicies. The Corporation also procures certain commodities and raw materialsthrough a Dow subsidiary and pays a commission to that Dow subsidiary based onthe volume and type of commodities and raw materials purchased. The commissionexpense is included in “Sundry income (expense) – net” in the consolidatedstatements of income. Purchases from that Dow subsidiary were approximately$1.0 billion in the first quarter of 2008 and $693 million in the firstquarter of 2007.

 

The Corporationhas a master services agreement with Dow whereby Dow provides servicesincluding but not limited to, accounting, legal, treasury (investments, cashmanagement, risk management, insurance), procurement, human resources,environmental, health and safety, and business management for UCC. Under themaster services agreement with Dow, for general administrative and overheadtype services that Dow routinely allocates to various businesses, UCC ischarged the cost of those services based on the Corporation’s and Dow’srelative manufacturing conversion costs. This arrangement results in aquarterly charge of approximately $6 million (included in “Sundry income(expense) – net”).

 

For services that Dowroutinely charges based on effort, UCC is charged the cost of such services ona fully absorbed basis, which includes direct and indirect costs. Additionally,certain Dow employees are contracted to UCC and Dow is reimbursed for alldirect employment costs of such employees. Management believes the method usedfor determining 

 

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expenses charged by Dow is reasonable. Dow provides these services byleveraging its centralized functional service centers to provide services at acost that management believes provides an advantage to the Corporation.

 

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

 

As part of Dow’scash management process, UCC is a party to revolving loans with Dow that haveLIBOR-based interest rates with varying maturities. At March 31, 2008, theCorporation had a note receivable of $3.5 billion ($3.2 billion at December 31,2007) from Dow under a revolving loan agreement. The Corporation may draw fromthis note receivable in support of its daily working capital requirements and,as such, the net effect of cash inflows and outflows under this revolving loanagreement is presented in the consolidated statements of cash flows as anoperating activity.

 

The Corporation also hasa separate revolving credit agreement with Dow that allows the Corporation toborrow or obtain credit enhancements up to an aggregate of $1 billion thatmatures December 30, 2008, pursuant to an amendment effective as of September 30,2007. Dow may demand repayment with a 30-day written notice to the Corporation,subject to certain restrictions. A related collateral agreement provides forthe replacement of certain existing pledged assets, primarily equity interestsin various subsidiaries and joint ventures, with cash collateral. At March 31,2008, $811 million ($813 million at December 31, 2007) wasavailable under the revolving credit agreement. The cash collateral is reportedas “Noncurrent receivables from related companies” in the consolidated balancesheets.

 

The losses and additionalcosts incurred by the Corporation in 2005 due to hurricane Katrina were coveredby the Corporation’s insurance program. The Corporation has an insurancereceivable for losses incurred of $99 million at March 31, 2008 fromits insurer (an affiliate of Dow). Additionally, the Corporation has insurancecoverage for lost sales and margins caused by hurricane Katrina. No amount ofrecovery for lost sales and margins had been recognized at March 31, 2008,and will only be recognized when the amount of recovery is realized throughagreement among the insurers.

 

The Corporation receivedcash dividends from its related company investments of $77 million in thefirst quarter of 2008, including $75 million from Dow InternationalHoldings LLC (“DIHC”). These dividends were included in “Sundry income(expense) – net.”

 

In December 2007,under the terms of a contribution agreement among UCC, Dow and DIHC, theCorporation contributed its 42.5 percent ownership interest in EQUATEPetrochemical Company K.S.C. (“EQUATE”) to UC Investment B.V. (“UCIBV”), anewly formed Dutch limited liability company in which the Corporation was thesole shareholder. The Corporation then contributed its ownership interest inUCIBV to DIHC in exchange for an increased ownership interest in DIHC. At March 31,2008, the Corporation had a 19.13 percent ownership interest in DIHC whichthe Corporation accounts for using the cost method. The Corporation has theright to sell its shares in DIHC to Dow (anytime during the period January 1,2009 through December 31, 2011) for an amount calculated using a formulain the agreement, which intends to approximate fair value. In accordance withthe terms of the contribution agreement, Dow made a capital contribution to UCCin the amount of $191 million in the first quarter of 2008.

 

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

** **

Pursuant toGeneral Instruction H of Form 10-Q “Omission of Information by CertainWholly-Owned Subsidiaries,” this section includes only management’s narrativeanalysis of the results of operations for the three-month period ended March 31,2008, the most recent period, compared with the three-month period ended March 31,2007, the corresponding period in the preceding fiscal year.

 

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

 

Union Carbide Corporation’s(the “Corporation” or “UCC”) 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 Statement of Financial AccountingStandards 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 PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements made by or on behalf of the Corporation. Thissection covers the current performance and outlook of the Corporation. Theforward-looking statements contained in this section and in other parts of thisdocument involve risks and uncertainties that may affect the Corporation’soperations, markets, products, services, prices and other factors as more fullydiscussed elsewhere and in filings with the U.S. Securities and ExchangeCommission. These risks and uncertainties include, but are not limited to,economic, competitive, legal, governmental and technological factors.Accordingly, there is no assurance that the Corporation’s expectations will berealized. The Corporation assumes no obligation to provide revisions to anyforward-looking statements should circumstances change, except as otherwiserequired by securities and other applicable laws.

 

**RESULTSOF OPERATIONS**

 

**Total net sales for the firstquarter of 2008 were $2,035 million compared with $1,726 million forthe first quarter of 2007, an increase of 18 percent.**

** **

**Netsales to related companies for the first quarter of 2008 were$1,989 million compared with $1,673 million for the first quarter of2007, an increase of 19 percent. Selling prices to Dow are based on marketprices for the related products. Average selling prices for most products werehigher in the first quarter of 2008 compared with the first quarter of 2007,led by ethylene glycol (“EG”), polyethylene (“PE”) and polypropylene (“PP”).Sales volume was mixed with overall volume up in the first quarter of 2008compared with the first quarter of 2007. Volume growth for several products(led by EG and PE) more than offset declines in the Corporation’s otherproducts, principally PP. The decline in PP volume was related to the shutdownof the PP plant in St. Charles, Louisiana in the fourth quarter of 2007.**

** **

Cost of sales increased23 percent from $1,598 million in the first quarter of 2007 to$1,961 million in the first quarter of 2008 principally due to higherfeedstock and energy costs and higher sales volume.

 

Equity in earnings ofnonconsolidated affiliates decreased $70 million in the first quarter of2008 compared with the same quarter in 2007 principally due to the Corporation’sfourth quarter of 2007 contribution of its 42.5 percent ownership interest inEQUATE Petrochemical Company K.S.C. (“EQUATE”) to Dow International HoldingCompany (“DIHC”) for an increased ownership share in DIHC. Offsetting thisdecline was an increase in sundry income – net, due to a dividend of$75 million from DIHC in the first quarter of 2008. Sundry income(expense) – net includes a variety of income and expense items such as the gainor loss on foreign currency exchange, dividends from investments, commissions,charges for management services provided by Dow and gains and losses on salesof investments and assets. Sundry income (expense) – net for the first quarterof 2008 was income of $70 million compared with expense of $10 million forthe first quarter of 2007.

 

See Note I to theConsolidated Financial Statements for information regarding the change inownership.

 

Interest income was $32million in the first quarter of 2008 compared with $37 million in the firstquarter of 2007, due to lower interest rates, partially offset by an increasedlevel of interest bearing assets. Interest expense and amortization of debtdiscount decreased $3 million in the first quarter of 2008 compared with thefirst quarter of 2007.

 

The effective tax ratefluctuates based on, among other factors, where income is earned, the level ofafter-tax income from joint ventures, dividends received from investments inrelated companies and the level of income relative to tax credits available.The effective tax rate for the first quarter of 2008 was 20.9 percentcompared with 21.5 percent for the same quarter last year.

 

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The Corporation reportednet income of $155 million for the first quarter of 2008, compared with $186million for the first quarter of 2007. While the results for the first quarterof 2008 were favorably impacted by higher dividends from investments, thisimprovement was more than offset by lower margins due to increased feedstockand energy costs, and lower equity earnings.

 

On December 13,2007, Dow and Petrochemical Industries Company of the State of Kuwait, a whollyowned subsidiary of Kuwait Petroleum Corporation, announced plans to form a50:50 joint venture that will be a market-leading, global petrochemicalscompany. The joint venture, to be headquartered in the United States, willmanufacture and market polyethylene, ethyleneamines, ethanolamines,polypropylene, and polycarbonate. The joint venture is expected to haverevenues of more than $11 billion and employ more than 5,000 peopleworldwide. It is anticipated that a significant part of UCC’s U.S.-basedmanufacturing assets will be included in the new joint venture. While thetransaction is subject to the completion of definitive agreements, customaryconditions and regulatory approvals, it is anticipated that the joint venturebetween Dow and PIC will close in late 2008. Management is currently evaluatingthe accounting treatment and the impact on the Corporation’s financialstatements.

 

 

**OTHERMATTERS**

 

**RecentAccounting Pronouncements**

 

SeeNote B to the Consolidated Financial Statements for a summary of recentaccounting pronouncements. In addition, see Note F to the ConsolidatedFinancial Statements for the Corporation’s disclosures about fair valuemeasurements. The sensitivity of fair value estimates is immaterial relative tothe assets and liabilities measured at fair value, as well as to the totalequity of the Corporation.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America 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, 2007 (“2007 10-K”)describes the significant accounting policies and methods used in thepreparation of the Consolidated Financial Statements. The Corporation’scritical accounting policies that are impacted by judgments, assumptions andestimates are described in Management’s Discussion and Analysis of Financial Conditionand Results of Operations in the Corporation’s 2007 10-K. Since December 31,2007, there have been no material changes in the Corporation’s criticalaccounting policies.

 

**Asbestos-Related Matters**

 

*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 toasbestos-containing products located on UCC’s premises, and UCC’sresponsibility for asbestos suits filed against a former subsidiary, AmchemProducts, Inc. (“Amchem”). In many cases, plaintiffs are unable todemonstrate that they have suffered any compensable loss as a result of suchexposure, or that injuries incurred in fact resulted from exposure to theCorporation’s products.

 

Influenced by the bankruptcyfilings of numerous defendants in asbestos-related litigation and the prospectsof various forms of state and national legislative reform, the rate at whichplaintiffs filed asbestos-related suits against various companies, includingthe Corporation and Amchem, increased in 2001, 2002 and the first half of 2003.Since then, the rate of filing has significantly abated. The Corporationexpects more asbestos-related suits to be filed against it and Amchem in thefuture, and will aggressively defend or reasonably resolve, as appropriate,both pending and future claims.

 

The table below providesinformation regarding asbestos-related claims filed against the Corporation andAmchem:

 
| ** **                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1               |       | 90,322   |       | 111,887  |       |
| Claims filed                                       |       | 2,716    |       | 3,085    |       |
| Claims settled,  dismissed or otherwise resolved   |       | (2,854   | )          | (2,225   | )          |
| Claims  unresolved at March 31                |       | 90,184   |       | 112,747  |       |
| Claimants with  claims against both UCC and Amchem |       | 28,893   |       | 38,901   |       |
| Individual  claimants at March 31             |       | 61,291   |       | 73,846   |       |

 

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Plaintiffs’lawyers often sue dozens or even hundreds of defendants in individual lawsuitson behalf of hundreds or even thousands of claimants. As a result, the damagesalleged are not expressly identified as to UCC, Amchem or any other particulardefendant, even when specific damages are alleged with respect to a specificdisease or injury. In fact, there are no personal injury cases in which onlythe Corporation and/or Amchem are the sole named defendants. For thesereasons and based upon the Corporation’s litigation and settlement experience,the Corporation does not consider the damages alleged against it and Amchem tobe a meaningful factor in its determination of any potential asbestos liability.

 

*Estimatingthe Liability*

 

Based on a studycompleted by 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$2.2 billion, excluding future defense and processing costs. Since then,the Corporation has compared current asbestos claim and resolution activity tothe results of the most recent ARPC study at each balance sheet date to determinewhether the accrual continues to be appropriate. In addition, the Corporationhas requested ARPC to review Union Carbide’s historical asbestos claim andresolution activity each November since 2004 to determine theappropriateness of updating the most recent ARPC study.

 

In November 2006,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsmost recent study from January 2005. In response to that request, ARPCreviewed and analyzed data through October 31, 2006 and concluded that theexperience from 2004 through 2006 was sufficient for the purpose of forecastingfuture filings and values of asbestos claims filed against UCC and Amchem, andcould be used in place of previous assumptions to update its January 2005study. The resulting study, completed by ARPC in December 2006, statedthat the undiscounted cost of resolving pending and future asbestos-relatedclaims against UCC and Amchem, excluding future defense and processing costs,through 2021 was estimated to be between approximately $1.2 billion and$1.5 billion. As in its January 2003 and January 2005 studies,ARPC provided estimates for a longer period of time in its December 2006study, but also reaffirmed its prior advice that forecasts for shorter periodsof time are more accurate than those for longer periods of time.

 

Basedon ARPC’s December 2006 study and the Corporation’s own review of theasbestos claim and resolution activity, the Corporation decreased itsasbestos-related liability for pending and future claims to $1.2 billionat December 31, 2006 which covered the 15-year period ending in 2021(excluding future defense and processing costs). The reduction was$177 million and was shown as “Asbestos-related credit” in theconsolidated statements of income.

 

In November 2007,the Corporation requested ARPC to review the Corporation’s 2007 asbestos claimand resolution activity and determine the appropriateness of updating its December 2006study. In response to that request, ARPC reviewed and analyzed data through October 31,2007. In December 2007, ARPC stated that an update of its study would notprovide a more likely estimate of future events than the estimate reflected inits study of the previous year and, therefore, the estimate in that studyremained applicable. Based on the Corporation’s own review of the asbestosclaim and resolution activity and ARPC’s response, the Corporation determinedthat no change to the accrual was required. At December 31, 2007, theCorporation’s asbestos-related liability for pending and future claims was$1.1 billion. At December 31, 2007, approximately 31 percent of therecorded liability related to pending claims and approximately 69 percentrelated to future claims.

 

Basedon the Corporation’s review of 2008 activity, the Corporation determined thatno adjustment to the accrual was required at March 31, 2008. TheCorporation’s asbestos-related liability for pending and future claims was$1.1 billion at March 31, 2008. Approximately 30 percent of therecorded liability related to pending claims and approximately 70 percentrelated to future claims.

 

*Defense and Resolution Costs*

 

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

 

**Defense and Resolution Costs**

 
| ** **       | ** ** | **Three Months Ended** | ** ** | **Aggregate Costs** | ** ** |
|------------------|------------|----------------------------------|------------|--------------------------|------------|
| In millions | ** ** | **March 31,  2008**         | ** ** | **March 31,  2007** | ** ** | **to Date as of  March 31, 2008** | ** ** |
| Defense costs    |       | $                                | 14         |                     | $          | 17 |   | $ | 579 |   |
| Resolution costs |       | $                                | 42         |                     | $          | 16 |   | $ | 1,312 |   |

 

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

 

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The Corporationexpenses defense costs as incurred. The pretax impact for defense andresolution costs, net of insurance, was $14 million in the first quarterof 2008 and $17 million in the first quarter of 2007, and was reflected in“Cost of sales.”

 

*Insurance Receivables*

 

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

 

In September 2003,the Corporation filed a comprehensive insurance coverage case, now proceedingin the Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filedagainst insurers that are not signatories to the Wellington Agreement and/or donot otherwise have agreements in place with the Corporation regarding theirasbestos-related insurance coverage, in order to facilitate an orderlyresolution and collection of such insurance policies and to resolve issues thatthe insurance carriers may raise. Although the lawsuit is continuing, through the end of the first quarter of 2008, theCorporation had reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$465 million at March 31, 2008 and $467 million at December 31,2007. At March 31, 2008 and December 31, 2007, all of the receivablefor insurance recoveries was related to insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in placeregarding their asbestos-related insurance coverage.

 

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

 

**Receivables for Costs Submitted to Insurance Carriers**
| In millions                  | ** ** | **March 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Receivables for  defense costs    |       | $                        | 22         |                    | $          | 18 |   |
| Receivables for  resolution costs |       | 248                      |       | 253                     |       |
| Total                             |       | $                        | 270        |                    | $          | 271 |   |

 

Aftera review of its insurance policies, with due consideration given to applicabledeductibles, retentions and policy limits, after taking into account thesolvency and historical payment experience of various insurance carriers;existing insurance settlements; and the advice of outside counsel with respectto the applicable insurance coverage law relating to the terms and conditionsof its insurance policies, the Corporation continues to believe that itsrecorded receivable for insurance recoveries from all insurance carriers isprobable of collection.

 

*Summary*

 

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

 

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

 

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

 

Omitted pursuant toGeneral Instruction H of Form 10-Q.

 

**ITEM4T.  CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure 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 paragraph (b) of Exchange Act Rules 13a-15or 15d-15. Based upon that evaluation, the Chief Executive Officer and theChief Financial Officer concluded that the Corporation’s disclosure controlsand procedures were effective.

 

**Changesin Internal Control Over Financial Reporting**

 

There were no changes inthe Corporation’s internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15or 15d-15 that was conducted during the last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, theCorporation’s internal control over financial reporting.

 

**PART II– OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

No materialdevelopments in asbestos-related matters occurred during the first quarter of2008. For a summary of the history and current status of asbestos-relatedmatters, see Management’s Discussion and Analysis of Financial Condition andResults of Operations, Asbestos-Related Matters; and Note G to the ConsolidatedFinancial Statements.

 

**ITEM1A.  RISK FACTORS.**

 

There were no materialchanges in the Corporation’s risk factors in the first quarter of 2008.

 

**ITEM6.  EXHIBITS.**

 

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

 

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**UnionCarbide 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:  April 29, 2008

 

 
|   |   | By:    | /s/ WILLIAM H. WEIDEMAN       |
|--------|--------|--------|-------------------------------|
|   |   |   | William H. Weideman           |
|   |   |   | Vice President and Controller |
|   |   |   | The Dow Chemical Company      |
|   |   |   | Authorized Representative of  |
|   |   |   | Union Carbide Corporation     |

 

 
|   |   | By:    | /s/ EDWARD W. RICH            |
|--------|--------|--------|-------------------------------|
|   |   |   | Edward W. Rich                |
|   |   |   | Vice President, Treasurer and |
|   |   |   | Chief Financial Officer       |

 

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**UnionCarbide Corporation and Subsidiaries**

**Exhibit Index**

 
| EXHIBIT NO. |   | DESCRIPTION                                                                                                                                                                  |   |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|        |   |                                                                                                                                                                         |
| 10.3        |   | Third Amended and  Restated Agreement (to Provide Materials and Services), dated as of  March 1, 2008, between the Corporation and Dow Hydrocarbons and  Resources 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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