**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

Washington, D.C. 20549

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended** MARCH 31, 2006**

 

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  incorporation or organization) |                                      | (I.R.S. Employer Identification No.) |
|                                                            |                                      |                                 |
| **400 West Sam Houston Parkway South, Houston, Texas  77042**   |
|                                                            | (Address of principal  executive offices) | (Zip Code)                           |   |
|                                                                 |                                           |                                      |  |  |  |

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer  o |   | Accelerated filer o |   | Non-accelerated filer ý |
|----------------------------|--------|---------------------|--------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). o Yes    ý No

 

At March 31, 2006, 1,000shares of common stock were outstanding, all of which were held by the registrant’sparent, The Dow Chemical Company.

 

The registrant meets theconditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q andis therefore filing this form with a reduced disclosure format. 

 

 

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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                                                                | 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  4. 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**

 

**Union Carbide Corporation and Subsidiaries**

**Consolidated Statements of Income**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **In millions (Unaudited)**                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Net trade sales                                     |       | $                      | 318        |   | $ | 72 |   |
| Net sales to  related companies                     |       | 1,735                  |       | 1,612 |   |
| Total Net Sales                                     |       | 2,053                  |       | 1,684 |   |
| Cost of sales                                       |       | 1,636                  |       | 1,441 |   |
| Research and  development expenses                  |       | 21                     |       | 21 |   |
| Selling, general  and administrative expenses       |       | 11                     |       | 5 |   |
| Equity in  earnings of nonconsolidated affiliates   |       | 61                     |       | 153 |   |
| Sundry income  (expense) - net                      |       | (21                    | )          | 52 |   |
| Interest income                                     |       | 23                     |       | 4 |   |
| Interest expense  and amortization of debt discount |       | 13                     |       | 23 |   |
| Income before Income Taxes                          |       | 435                    |       | 403 |   |
| Provision for  income taxes                         |       | 152                    |       | 123 |   |
| Net Income Available for Common Stockholder         |       | $                      | 283        |   | $ | 280 |   |
| Depreciation                                        |       | $                      | 68         |   | $ | 67 |   |
| Capital Expenditures                                |       | $                      | 41         |   | $ | 43 |   |

 

*See Notesto the Consolidated Financial Statements.*

 

3

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**Union Carbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                          | ** ** | **March 31,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------|------------|--------------|------------|
| **In millions (Unaudited)**                                                         | ** ** | **2006**      | ** ** | **2005**     | ** ** |
| **Assets**                                                                          |       |          |       |         |       |
| Current Assets                                                                      |       |          |       |         |       |
| Cash and cash  equivalents                                                          |       | $             | 68         |         | $          | 73 |   |
| Accounts  receivable:                                                               |       |          |       |         |       |
| Trade (net of  allowance for doubtful receivables - 2006: $3; 2005: $3)             |       | 41            |       | 53           |       |
| Related  companies                                                                  |       | 406           |       | 508          |       |
| Other                                                                               |       | 96            |       | 96           |       |
| Notes receivable  from related companies                                            |       | 2,254         |       | 1,631        |       |
| Inventories                                                                         |       | 239           |       | 181          |       |
| Deferred income  tax assets - current                                               |       | 53            |       | 58           |       |
| Asbestos-related  insurance receivables - current                                   |       | 86            |       | 117          |       |
| Total current  assets                                                               |       | 3,243         |       | 2,717        |       |
| Investments                                                                         |       |          |       |         |       |
| Investments in  related companies                                                   |       | 297           |       | 287          |       |
| Investments in  nonconsolidated affiliates                                          |       | 666           |       | 887          |       |
| Other  investments                                                                  |       | 13            |       | 13           |       |
| Noncurrent  receivables                                                             |       | 61            |       | 62           |       |
| Noncurrent  receivable from related company                                         |       | 196           |       | 197          |       |
| Total  investments                                                                  |       | 1,233         |       | 1,446        |       |
| Property                                                                            |       |          |       |         |       |
| Property                                                                            |       | 7,449         |       | 7,415        |       |
| Less accumulated  depreciation                                                      |       | 5,439         |       | 5,378        |       |
| Net property                                                                        |       | 2,010         |       | 2,037        |       |
| Other Assets                                                                        |       |          |       |         |       |
| Goodwill                                                                            |       | 26            |       | 26           |       |
| Other intangible  assets (net of accumulated amortization - 2006: $121; 2005: $120) |       | 23            |       | 22           |       |
| Asbestos-related  insurance receivables - noncurrent                                |       | 797           |       | 818          |       |
| Prepaid pension  expense                                                            |       | 823           |       | 806          |       |
| Deferred charges  and other assets                                                  |       | 66            |       | 62           |       |
| Total other  assets                                                                 |       | 1,735         |       | 1,734        |       |
| Total Assets                                                                        |       | $             | 8,221      |         | $          | 7,934 |   |

 

*See Notes to the Consolidated Financial Statements.*

 

4

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**Union Carbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                              | ** ** | **March 31,** | ** ** | **Dec. 31,** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|--------------|------------|
| **In millions (Unaudited)**                             | ** ** | **2006**      | ** ** | **2005**     | ** ** |
| **Liabilities  and Stockholder’s Equity**          | ** ** | ** **    | ** ** | ** **   | ** ** |
| Current Liabilities                                     |       |          |       |         |       |
| Notes payable:                                          |       |          |       |         |       |
| Related  companies                                      |       | $             | 4          |         | $          | 4 |   |
| Other                                                   |       | 3             |       | 4            |       |
| Long-term debt  due within one year                     |       | 2             |       | 2            |       |
| Accounts  payable:                                      |       |          |       |         |       |
| Trade                                                   |       | 227           |       | 292          |       |
| Related  companies                                      |       | 279           |       | 317          |       |
| Other                                                   |       | 35            |       | 29           |       |
| Income taxes  payable                                   |       | 249           |       | 41           |       |
| Asbestos-related  liabilities - current                 |       | 111           |       | 121          |       |
| Accrued and  other current liabilities                  |       | 235           |       | 235          |       |
| Total current  liabilities                              |       | 1,145         |       | 1,045        |       |
| Long-Term Debt                                          |       | 820           |       | 822          |       |
| Other Noncurrent Liabilities                            |       |          |       |         |       |
| Deferred income  taxes payable - noncurrent             |       | 35            |       | 89           |       |
| Pension and  other postretirement benefits - noncurrent |       | 452           |       | 455          |       |
| Asbestos-related  liabilities - noncurrent              |       | 1,366         |       | 1,384        |       |
| Other noncurrent  obligations                           |       | 342           |       | 361          |       |
| Total other  noncurrent liabilities                     |       | 2,195         |       | 2,289        |       |
| Minority Interest in Subsidiaries                       |       | 4             |       | 4            |       |
| Stockholder’s Equity                               |       |          |       |         |       |
| Common stock  (1,000 shares authorized and issued)      |       | —        |       | —       |       |
| Additional  paid-in capital                             |       | 121           |       | 121          |       |
| Retained  earnings                                      |       | 4,019         |       | 3,736        |       |
| Accumulated  other comprehensive loss                   |       | (83           | )          | (83          | )          |
| Net  stockholder’s equity                          |       | 4,057         |       | 3,774        |       |
| Total Liabilities and Stockholder’s Equity         |       | $             | 8,221      |         | $          | 7,934 |   |

 

*See Notes to the Consolidated Financial Statements.*

 

5

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**Union Carbide Corporation and Subsidiaries**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **In millions (Unaudited)**                                                        | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Operating Activities                                                               |       |                   |       |   |   |
| Net Income  Available for Common Stockholder                                       |       | $                      | 283        |   | $ | 280 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                     |       | 75                     |       | 73 |   |
| Provision  (Credit) for deferred income tax                                        |       | (52                    | )          | 122 |   |
| Earnings/losses  of nonconsolidated affiliates less than dividends received        |       | 207                    |       | 104 |   |
| Gain on sale of  ownership interest in nonconsolidated affiliate                   |       | —                 |       | (70 | ) |
| Changes in  assets and liabilities that provided (used) cash:                      |       |                   |       |   |   |
| Accounts and  notes receivable                                                     |       | 13                     |       | 6 |   |
| Related company  receivables                                                       |       | (521                   | )          | (307 | ) |
| Inventories                                                                        |       | (58                    | )          | (8 | ) |
| Accounts payable                                                                   |       | (39                    | )          | 17 |   |
| Related company  payables                                                          |       | (38                    | )          | (136 | ) |
| Other assets and  liabilities                                                      |       | 165                    |       | (77 | ) |
| Cash provided by  operating activities                                             |       | 35                     |       | 4 |   |
| Investing Activities                                                               |       |                   |       |   |   |
| Capital  expenditures                                                              |       | (41                    | )          | (43 | ) |
| Distributions  from nonconsolidated affiliates                                     |       | 4                      |       | 41 |   |
| Change in  noncurrent receivable from related company                              |       | 1                      |       | (1 | ) |
| Purchases of  investments                                                          |       | (1                     | )          | — |   |
| Cash used in  investing activities                                                 |       | (37                    | )          | (3 | ) |
| Financing Activities                                                               |       |                   |       |   |   |
| Changes in  short-term notes payable                                               |       | (1                     | )          | — |   |
| Payments on  long-term debt                                                        |       | (2                     | )          | — |   |
| Cash used in  financing activities                                                 |       | (3                     | )          | — |   |
| Summary                                                                            |       |                   |       |   |   |
| Increase  (Decrease) in cash and cash equivalents                                  |       | (5                     | )          | 1 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 73                     |       | 22 |   |
| Cash and cash  equivalents at end of period                                        |       | $                      | 68         |   | $ | 23 |   |

 

*See Notes to the Consolidated Financial Statements.*

 

**Union Carbide Corporation and Subsidiaries**

**Consolidated Statements ofComprehensive Income**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| **In millions (Unaudited)**                           | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Net Income Available for Common Stockholder           |       | $                      | 283        |   | $ | 280 |   |
| Other Comprehensive Income (Loss), Net of Tax         |       |                   |       |   |   |
| Translation  adjustments                              |       | —                 |       | (4 | ) |
| Unrealized loss  on investments                       |       | (1                     | )          | — |   |
| Minimum pension  liability adjustment                 |       | —                 |       | 7 |   |
| Net gain on cash  flow hedging derivative instruments |       | 1                      |       | 2 |   |
| Total other  comprehensive income                     |       | —                 |       | 5 |   |
| Comprehensive Income                                  |       | $                      | 283        |   | $ | 285 |   |

 

*See Notesto the Consolidated Financial Statements.*

 

6

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**Union Carbide Corporation andSubsidiaries**

**Notes to the ConsolidatedFinancial Statements**

 

(Unaudited)

 

**NOTEA     CONSOLIDATED FINANCIAL STATEMENTS**

 

Theunaudited interim consolidated financial statements of Union CarbideCorporation and its subsidiaries (the “Corporation” or “UCC”) were prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and reflect all adjustments (including normal recurringaccruals) which, in the opinion of management, are considered necessary for thefair presentation of the results for the periods presented.

 

The Corporation is a wholly owned subsidiary of TheDow Chemical Company (“Dow”). In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 128, “Earnings Per Share,” the presentationof earnings per share is not required in financial statements of wholly ownedsubsidiaries.

 

The Corporation’s business activities comprisecomponents of Dow’s global operations rather than stand-alone operations. Dowconducts its worldwide operations through global businesses. Because there areno separable reportable 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 eliminatedin consolidation. Transactions with the Corporation’s parent company, Dow, orother Dow subsidiaries have been reflected as related company transactions inthe consolidated financial statements. See Note G for further discussion.

 

These statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCorporation’s Annual Report on Form 10-K for the year ended December 31,2005.

 

**NOTEB     ACCOUNTING CHANGES**

 

On January 1, 2006, Dowadopted revised SFAS No. 123 (“SFAS No. 123R”), “Share-Based Payment.” TheCorporation will continue to be allocated the portion of expense relating toits employees who receive stock-based compensation, which was immaterial in thefirst quarter of 2006.

 

In March 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 47, “Accounting for Conditional Asset Retirement Obligations,” whichclarifies the term *conditional assetretirement obligation* as used in SFAS No. 143 as a legal obligationto perform an asset retirement activity in which the timing and/or method ofsettlement are conditional on a future event that may or may not be within thecontrol of the Corporation. FIN No. 47 was effective no later thanthe end of fiscal years ending after December 15, 2005. Adoption of FIN No. 47on December 31, 2005 resulted in the recognition of an asset retirementobligation of $12 million and a charge of $8 million (net of tax of$4 million), which was included in “Cumulative effect of changes inaccounting principles” in the fourth quarter of 2005.

 

In accordance withFIN No. 47, the Corporation has recognized conditional asset retirementobligations related to asbestos encapsulation as a result of planned demolitionand remediation activities at manufacturing and administrative sites in theUnited States. At December 31, 2005, the aggregate carrying amount ofconditional asset retirement obligations recognized by the Corporation was $12million. The aggregate carrying amount of conditional asset retirementobligations was $13 million at March 31, 2006.

 

If the conditionalasset retirement obligation measurement and recognition provisions of FIN No.47 had been in effect on January 1, 2005, the aggregate carrying amount ofthose obligations on that date would have been $12 million. If the amortizationof asset retirement cost and accretion of asset retirement obligationprovisions of FIN No. 47 had been in effect during 2005, the impact on “NetIncome Available to Common Stockholder” would have been immaterial.

 

Due to the longterm, productive nature of the Corporation’s manufacturing operations, absentplans or expectations of plans to initiate asset retirement activities, theCorporation is unable to determine potential settlement dates to be used infair value calculations for estimating conditional asset retirementobligations. As such, the Corporation has not recognized conditional assetretirement obligations when there are no plans or expectations of plans toundertake a major renovation or demolition project that would require theremoval of asbestos. In addition, the Corporation has not recognizedconditional asset retirement obligations for the contractually requireddemolition of facilities at non UCC-owned sites when there are no plans orexpectations of plans to exit the site. The Corporation is unable to reasonablyestimate the fair value of such liabilities since the potential settlementdates cannot be determined at this time.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43,Chapter 4,” which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage) andalso requires that the allocation of fixed production overhead be based on thenormal capacity of the production facilities. SFAS No. 151 was effective forinventory costs incurred during fiscal years beginning after June 15, 2005.Because the Corporation previously used nameplate capacity to calculate productcosts, adoption of SFAS No. 151 on January 1, 2006 had an immaterial favorableimpact on the Corporation’s consolidated financial statements.

 

7

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**NOTEC     INVENTORIES**

 

The following tableprovides a breakdown of inventories at March 31, 2006 and December 31, 2005:

 

**Inventories**

** **
| **In  millions**  | ** ** | **March  31, 2006** | ** ** | **Dec. 31,  2005** | ** ** |
|-------------------|------------|---------------------|------------|--------------------|------------|
| Finished goods    |       | $                   | 67         |               | $          | 30 |   |
| Work in process   |       | 35                  |       | 26                 |       |
| Raw materials     |       | 54                  |       | 41                 |       |
| Supplies          |       | 83                  |       | 84                 |       |
| Total inventories |       | $                   | 239        |               | $          | 181 |   |

 

The reserves reducing inventories from the first-in, first-out (“FIFO”)basis to the last-in, first-out (“LIFO”) basis amounted to $178 million atMarch 31, 2006 and $164 million at December 31, 2005.

 

**NOTED     OTHER INTANGIBLE ASSETS**

 

The followingtable provides information regarding the Corporation’s other intangible assets:

 

**OtherIntangible Assets**

 
| ** **                           | ** ** | **At March 31, 2006**       | ** ** | **At December 31, 2005**      | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **In millions**                      | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible assets with finite lives: |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Licenses and  intellectual property  |       | $                           | 33         |                          | $          | (32 | ) | $ | 1 |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                              |       | 4                           |       | (2                            | )          | 2 |   | 4 |   | (2 | ) | 2 |   |
| Software                             |       | 106                         |       | (86                           | )          | 20 |   | 104 |   | (85 | ) | 19 |   |
| Other                                |       | 1                           |       | (1                            | )          | - |   | 1 |   | (1 | ) | — |   |
| Total                                |       | $                           | 144        |                          | $          | (121 | ) | $ | 23 |   | $ | 142 |   | $ | (120 | ) | $ | 22 |   |

 

Total estimated amortization expense for 2006 and thenext five fiscal years is as follows:

** **

**EstimatedAmortization Expense for Next Five Years**

 
| **In millions** | *** *** | *** *** | *** *** |
|-----------------|--------------|--------------|--------------|
| 2006            |         | $            | 4            |   |
| 2007            |         | $            | 4            |   |
| 2008            |         | $            | 4            |   |
| 2009            |         | $            | 4            |   |
| 2010            |         | $            | 4            |   |
| 2011            |         | $            | 1            |   |

 

**NOTEE     COMMITMENTS AND CONTINGENTLIABILITIES**

 

**EnvironmentalMatters**

 

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. The Corporation had accruedobligations of $87 million at December 31, 2005 for environmental remediationand restoration costs, including $34 million for the remediation of Superfundsites. At March 31, 2006, the Corporation had accrued obligations of $83million for environmental remediation and restoration costs, including $31million for the remediation of Superfund sites. This is management’s bestestimate of the costs for remediation and restoration with respect toenvironmental matters for which the Corporation has accrued liabilities,although the ultimate cost with respect to these particular matters could rangeup to twice that amount. Inherent uncertainties exist in these estimatesprimarily due to unknown conditions, changing governmental

 

8

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regulations andlegal standards regarding liability, and evolving technologies for handlingsite remediation and restoration. It is the opinion of the Corporation’smanagement that the possibility is remote that costs in excess of those disclosedwill have a material adverse impact on the Corporation’s consolidated financialstatements.

 

**Litigation**

 

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

 

Separately,the Corporation is and has been 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, plaintiffs areunable to demonstrate that they have suffered any compensable loss as a resultof such exposure, or that injuries incurred in fact resulted from exposure tothe Corporation’s products.

 

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

 

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January2003, the Corporation increased its December 31, 2002 asbestos-relatedliability for pending and future claims for the 15-year period ending in 2017to $2.2 billion, excluding future defense and processing costs. At each balancesheet date, the Corporation compares current asbestos claim and resolutionactivity to the assumptions in the most recent ARPC study to determine whetherthe accrual continues to be appropriate.

 

InNovember 2004, the Corporation requested ARPC to review the Corporation’shistorical asbestos claim and resolution activity and determine theappropriateness of updating its January 2003 study. In response to thatrequest, ARPC reviewed and analyzed data through November 14, 2004, and againconcluded that it was not possible to estimate the full range of the cost ofresolving future asbestos-related claims against UCC and Amchem because ofvarious uncertainties associated with the litigation of those claims. ARPC didadvise, 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 itsJanuary 2003 study, if certain assumptions were made. As a result, thefollowing assumptions were 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 average resolution value forpending and future claims will be equivalent to those experienced during 2003and 2004 (excluding settlements from closed claims filed in Madison County,Illinois with respect to future claims, as changes in the judicial environmentin Madison County caused the historical experience of claims in thatjurisdiction to not be predictive of results for future claims).

 

The resultingstudy completed by ARPC in January 2005 stated that the undiscounted cost ofresolving pending and future asbestos-related claims against UCC and Amchem,excluding future defense and processing costs, through 2017 was estimated to bebetween approximately $1.5 billion and $2.0 billion, depending on which of twoaccepted methodologies was used. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC provided estimates for a longerperiod of time in its January 2005 study, but also reaffirmed its prior advicethat forecasts for shorter periods of time are more accurate than those forlonger periods of time. Based on ARPC’s studies, the Corporation’s asbestoslitigation experience, and the uncertainties surrounding asbestos litigationand legislative reform efforts, management determined that no change to theaccrual was required at December 31, 2004.

 

9

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In November 2005,the Corporation requested ARPC to review the Corporation’s 2005 asbestos claimand resolution activity and determine the appropriateness of updating theJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2005. In January 2006, ARPC stated that an update ofthe study would not provide a more likely estimate of future events than theestimate reflected in its study of the previous year and, therefore, theestimate in that study remained applicable.

 

Based on theCorporation’s own review of the asbestos claim and resolution activity andARPC’s response, the Corporation determined that no change to the accrual wasrequired at December 31, 2005. The asbestos-related liability for pending andfuture claims was $1.5 billion at December 31, 2005. Approximately 39 percentof the recorded liability related to pending claims and approximately61 percent related to future claims.

 

Based on theCorporation’s review of 2006 activity, the Corporation determined that nochange to the accrual was required at March 31, 2006. The asbestos-relatedliability for pending and future claims was $1.5 billion at March 31, 2006.Approximately 38 percent of the recorded liability related to pending claimsand approximately 62 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 other insurancesettlements, with due consideration given to applicable deductibles, retentionsand policy limits, and taking into account the solvency and historical paymentexperience of various insurance carriers. The Wellington Agreement and otheragreements with insurers are designed to facilitate an orderly resolution andcollection of the Corporation’s insurance policies and to resolve issues thatthe insurance carriers may raise.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was $503million at March 31, 2006 and $535 million at December 31, 2005. At March 31,2006 and December 31, 2005, $398 million of the receivable for insurancerecoveries was related to insurers that are not signatories to the WellingtonAgreement and/or do not otherwise have agreements in place regarding theirasbestos-related insurance coverage.

 

In addition, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**

 
| **In millions**                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|---------------------|------------|------------------------|------------|
| Receivables for defense costs    |       | $                   | 62         |                   | $          | 73 |   |
| Receivables for resolution costs |       | 318                 |       | 327                    |       |
| Total                            |       | $                   | 380        |                   | $          | 400 |   |

 

The Corporation expenses defense costs as incurred.The pretax impact for defense and resolution costs, net of insurance, was $14million in the first quarter of 2006 and $18 million in the first quarter of2005, and was reflected in “Cost of sales.”

 

In September 2003, the Corporation filed a comprehensive insurancecoverage case, now proceeding in the Supreme Court of the State of New York,County of New York, seeking to confirm its rights to insurance for variousasbestos claims and to facilitate an orderly and timely collection of insuranceproceeds. Although the Corporation already has settlements in place concerningcoverage for asbestos claims with many of its insurers, including those coveredby the 1985 Wellington Agreement, this lawsuit was filed against insurers thatare not signatories to the Wellington Agreement and/or do not otherwise haveagreements in place with the Corporation regarding their asbestos-relatedinsurance coverage, in order to facilitate an orderly resolution and collectionof such insurance policies and to resolve issues that the insurance carriersmay raise. The insurance carriers are contesting this litigation. Through the first quarter of 2006, theCorporation reached settlements with several of the carriers involved in thislitigation. After a further review of its insurance policies, with dueconsideration given to applicable deductibles, retentions and policy limits,after taking into account the solvency and historical payment experience ofvarious insurance carriers; existing insurance settlements; and the advice ofoutside counsel with respect to the applicable insurance coverage law relatingto the terms and conditions of its insurance policies, the Corporationcontinues to believe that its recorded receivable for insurance recoveries fromall insurance carriers is probable of collection.

 

10

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The amountsrecorded for the asbestos-related liability and related insurance receivabledescribed above were based upon current, known facts. However, future events,such as the number of new claims to be filed and/or received each year, theaverage cost of disposing of each such claim, coverage issues among insurers,and the continuing solvency of various insurance companies, as well as thenumerous uncertainties surrounding asbestos litigation in the United States,could cause the actual costs and insurance recoveries to be higher or lowerthan those projected or those recorded.

 

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

 

While it is notpossible at this time to determine with certainty the ultimate outcome of anyof the legal proceedings and claims referred to in this filing, managementbelieves that adequate provisions have been made for probable losses withrespect to pending claims and proceedings, and that, except for theasbestos-related matters described above, the ultimate outcome of all known andfuture claims, after provisions for insurance, will not have a material adverseimpact on the results of operations, cash flows and consolidated financialposition of the Corporation. Should any losses be sustained in connection withany of such legal proceedings and claims in excess of provisions provided andavailable insurance, they will be charged to income when determinable.

 

**PurchaseCommitments**

 

At December 31, 2005, theCorporation had various outstanding commitments for take or pay agreements,with terms extending from one to five years. Such commitments were not inexcess of current market prices. The Corporation had an agreement for thepurchase of ethylene-related products in Canada; the Corporation assigned itsrights and obligations under this purchase agreement to a wholly ownedsubsidiary of Dow in December 2003. Total purchases under the ethylene-relatedagreement were $93 million in 2003.

 

The fixed anddeterminable portion of obligations under purchase commitments at December 31,2005 is presented in the following table:

 

**Fixed and Determinable Portion ofTake or Pay Obligations**

**at December 31, 2005**
| **In millions** | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|
| 2006            |       | $          | 10         |   |
| 2007            |       | 10         |       |
| 2008            |       | 8          |       |
| 2009            |       | 8          |       |
| 2010            |       | 5          |       |
| Total           |       | $          | 41         |   |

 

**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 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, 2006    |       | 2014                  |       | $                            | 93         |                    | $          | 1 |   |
| Guarantees at December 31, 2005 |       | 2014                  |       | $                            | 92         |                    | $          | 2 |   |

 

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**NOTEF     PENSION AND OTHER POSTRETIREMENTBENEFITS**

 

**NetPeriodic Benefit Cost (Credit) for All Significant Plans**

 
| ** **                           | ** ** | **Defined Benefit Pension Plans** | ** ** | **Other Postretirement Benefits** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**            | ** ** | **Three Months Ended**            | ** ** |
| **In millions**                      | ** ** | **March 31,  2006**               | ** ** | **March 31,  2005**               | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
| Service cost                         |       | $                                 | 6          |                              | $          | 7 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                        |       | 53                                |       | 54                                |       | 8 |   | 9 |   |
| Expected return on plan assets       |       | (83                               | )          | (85                               | )          | — |   | — |   |
| Amortization of prior service credit |       | —                            |       | —                            |       | (1 | ) | (1 | ) |
| Amortization of net loss             |       | 8                                 |       | 1                                 |       | 1 |   | 1 |   |
| Net periodic benefit cost (credit)   |       | $                                 | (16        | )                                 | $          | (23 | ) | $ | 9 |   | $ | 10 |   |

 

**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.

 

The Corporation’sfunding policy is to contribute to the plans when pension laws and economicseither require or encourage funding. As previously disclosed in theCorporation’s Annual Report on Form 10-K for the year ended December 31,2005, UCC does not expect to contribute assets to its qualified pension plan in2006. Consistent with that expectation, no contributions were made in the firstquarter of 2006. The Corporation also has a non-qualified supplemental pensionplan. Benefit payments to retirees under this plan are expected to be $2million in 2006. In the first quarter of 2006, benefit payments of $0.5 millionwere 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. TheCorporation and the retiree share the cost of these benefits, with theCorporation portion increasing as the retiree has increased years of creditedservice. There is a cap on the Corporation portion. The Corporation has theability to change these benefits at any time.

 

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 Form10-K for the year ended December 31, 2005, UCC does not expect to contributeassets to its other postretirement benefit plans in 2006. Consistent with thatexpectation, no contributions were made in the first quarter of 2006. Benefitpayments to retirees under these plans are expected to be $60 million in 2006.In the first quarter of 2006, benefit payments of $12 million were made.

 

**NOTEG     RELATED PARTY TRANSACTIONS**

 

The Corporationsells products to Dow to simplify the customer interface process. Products aresold to and purchased from Dow in accordance with the terms of Dow’slong-standing intercompany pricing policies. The application of these policiesresults in products being sold to and purchased from Dow at market-basedprices. 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$805 million in the first quarter of 2006 and $603 million in the firstquarter of 2005.

 

TheCorporation has a master services agreement with Dow whereby Dow providesservices, 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 $5 million (included in “Sundry income(expense) – net”).

 

Forservices that Dow routinely charges based on effort, UCC is charged the cost ofsuch services on a fully absorbed basis, which includes direct and indirectcosts. Additionally, certain Dow employees are contracted to UCC and Dow is

 

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reimbursed for all directemployment costs of such employees. Management believes the method used fordetermining expenses charged by Dow is reasonable. Dow provides these servicesby leveraging its centralized functional service centers to provide services ata cost that management believes provides an advantage to the Corporation.

 

Themonitoring and execution of risk management policies related to interest rateand foreign currency risks, which are based on Dow’s risk managementphilosophy, are provided as a service to UCC.

 

Aspart of Dow’s cash management process, UCC is a party to revolving loans withDow that have LIBOR-based interest rates with varying maturities. At March 31,2006, the Corporation had a note receivable of $2,221 million from Dow under arevolving loan agreement. The Corporation may draw from this note receivable insupport of its daily working capital requirements and as such, the net effectof cash inflows and outflows under this revolving loan agreement is presentedin the consolidated statements of cash flows as an operating activity.

 

TheCorporation also has a separate revolving credit agreement with Dow that allowsthe Corporation to borrow or obtain credit enhancements up to an aggregate of$1 billion that matures December 30, 2006; however, Dow may demand repaymentwith a 30-day written notice to the Corporation, subject to certainrestrictions. A related collateral agreement provides for the replacement ofcertain existing pledged assets, primarily equity interests in varioussubsidiaries and joint ventures, with cash collateral. At March 31, 2006,$812 million was available under the revolving credit agreement. The cashcollateral was reported as “Noncurrent receivable from related company” in theconsolidated balance sheets.

 

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 $105 million at March 31, 2006 from itsinsurer (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 has been recognized at March 31, 2006, andwill only be recognized when the amount of recovery is realized throughagreement amongst the insurers.

 

The Corporation recordedequity earnings of approximately $10 million from Dow Canada Holding LP(“DCHLP”) for the first two months of 2006 which increased the investmentbalance to $10 million. On March 1, 2006, the Corporation transferred its 11.2percent partnership interest in DCHLP to a newly formed corporation, GWNHolding, Inc. (“GWN”), in exchange for 11.2 percent of GWN’s common stock. TheCorporation accounts for its 11.2 percent ownership interest in GWN using thecost method.

 

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**UnionCarbide Corporation and Subsidiaries**

** **

**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 March31, 2006, the most recent period, compared with the three-month period endedMarch 31, 2005, 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 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 and RelatedInformation,” and no detailed business information is provided to a chiefoperating decision maker regarding the Corporation’s stand-alone operations,the Corporation’s results are reported as a single operating segment.

 

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

##### ** **

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

 

**RESULTSOF OPERATIONS**

 

The Corporationreported net income of $283 million for the first quarter of 2006, comparedwith $280 million for the first quarter of 2005.

 

Theincrease in net trade sales was due to lump sum technology licensing revenueearned in the first quarter of 2006.

 

Netsales to related companies for the first quarter of 2006 were $1,735 millioncompared with $1,612 million for the first quarter of 2005, an increase of 8percent. Selling prices to Dow are based on market prices for the relatedproducts. Average selling prices for most products were higher in the firstquarter of 2006 compared with the first quarter of 2005; however, sellingprices for ethylene glycol (“EG”) were down in the first quarter of 2006.Overall volume for the first quarter of 2006 was essentially flat compared withthe same quarter of last year. Lower volumes for polyethylene, vinyl acetate monomerand isopropanol were offset by an increase in EG volume in the first quarter of2006. Scheduled plant turnarounds negatively impacted EG volume in the firstquarter of 2005.

 

Costof sales increased 13 percent from $1,441 million in the first quarter of 2005to $1,636 million in the first quarter of 2006 principally due to higher rawmaterial costs.

 

Equityin earnings of nonconsolidated affiliates decreased $92 million in the firstquarter of 2006 compared with the same quarter last year. The decline isattributable to lower earnings from EQUATE Petrochemical Co. K.S.C. (“EQUATE”)and the OPTIMAL Group (“OPTIMAL”), and the absence of equity earnings from UOPLLC, which the Corporation exited in the fourth quarter of 2005. Results fromEQUATE and OPTIMAL were lower in the first quarter of 2006 due to plannedmaintenance turnarounds at the joint ventures.

 

Interestincome was $23 million in the first quarter of 2006 compared with $4 million inthe first quarter of 2005, due to higher interest rates and a significantlyhigher level of interest bearing assets. Interest expense and amortization ofdebt discount declined $10 million in the first quarter of 2006 compared withthe first quarter of 2005, as reduced levels of long-term debt were achievedthrough the early extinguishment of approximately $436 million of debt, most ofwhich occurred in the second quarter of 2005.

 

Sundryincome (expense) – net includes a variety of income and expense items such asthe gain or loss on foreign currency exchange, dividends from investments,commissions, charges for management services provided by Dow, and gains andlosses on sales of investments and assets. Sundry income (expense) – net forthe first quarter of 2006 was net expense of $21 million compared with netincome of $52 million for the first quarter last year. Sundry income in thefirst quarter of 2005 included a $70 million pretax gain on the sale of aportion of the Corporation’s interest in EQUATE.

 

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The effective tax rate fluctuates based on, amongother factors, where income is earned, the level of after-tax income from jointventures, and the level of income relative to tax credits available. Theeffective tax rate for the first quarter of 2006 was 34.9 percent compared with30.5 percent for the same quarter last year.

 

**OTHERMATTERS**

 

**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, 2005 (“2005 10-K”) describes thesignificant accounting policies and methods used in the preparation of theConsolidated Financial Statements. The Corporation’s critical accountingpolicies that are impacted by judgments, assumptions and estimates aredescribed in Management’s Discussion and Analysis of Financial Condition andResults of Operations in the Corporation’s 2005 10-K. Since December 31, 2005,there have been no material changes in the Corporation’s critical accountingpolicies.

 

**Asbestos-RelatedMatters**

 

*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 to demonstratethat they have suffered any compensable loss as a result of such exposure, orthat injuries incurred in fact resulted from exposure to the Corporation’sproducts.

 

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

 

The table belowprovides information regarding asbestos-related claims filed against theCorporation and Amchem:

 
| ** **                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Claims unresolved at January 1                    |       | 146,325  |       | 203,416  |       |
| Claims filed                                      |       | 5,402    |       | 10,084   |       |
| Claims settled, dismissed or otherwise resolved   |       | (7,921   | )          | (14,818  | )          |
| Claims unresolved at March 31                     |       | 143,806  |       | 198,682  |       |
| Claimants with claims against both UCC and Amchem |       | 47,779   |       | 68,278   |       |
| Individual claimants at March 31                  |       | 96,027   |       | 130,404  |       |

 

Plaintiffs’ lawyers often sue dozens or even hundreds of defendants inindividual lawsuits on behalf of hundreds or even thousands of claimants. As aresult, the damages alleged are not expressly identified as to UCC, Amchem orany other particular defendant, even when specific damages are alleged withrespect to a specific disease or injury. In fact, there are no personal injurycases in which only the Corporation and/or Amchem are the sole nameddefendants. For these reasons and based upon the Corporation’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.

 

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*Estimating the Liability*

 

Based on a study completedby Analysis, Research & Planning Corporation (“ARPC”) in January 2003, theCorporation increased its December 31, 2002 asbestos-related liability forpending 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 Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2003 study. In January 2005, ARPC provided the Corporation with areport summarizing the results of its study. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC provided estimates for a longerperiod of time in its January 2005 study, but also reaffirmed its prior advicethat forecasts for shorter periods of time are more accurate than those forlonger periods of time. Based on ARPC’s studies, the Corporation’s asbestoslitigation experience, and the uncertainties surrounding asbestos litigationand legislative reform efforts, management determined that no change to theaccrual was required at December 31, 2004.

 

In November 2005,the Corporation requested ARPC to review the Corporation’s 2005 asbestos claimand resolution activity and determine the appropriateness of updating theJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2005. In January 2006, ARPC stated that an update ofthe study would not provide a more likely estimate of future events than theestimate reflected in its study of the previous year and, therefore, theestimate in that study remained applicable.

 

Based on theCorporation’s own review of the asbestos claim and resolution activity andARPC’s response, the Corporation determined that no change to the accrual wasrequired at December 31, 2005. The asbestos-related liability for pending andfuture claims was $1.5 billion at December 31, 2005. Approximately 39 percentof the recorded liability related to pending claims and approximately 61 percentrelated to future claims.

 

Based on theCorporation’s review of 2006 activity, the Corporation determined that nochange to the accrual was required at March 31, 2006. The asbestos-relatedliability for pending and future claims was $1.5 billion at March 31, 2006.Approximately 38 percent of the recorded liability related to pending claimsand approximately 62 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** | ** ** | **Three Months Ended** | ** ** | **Aggregate Costs  to Date as of  March 31, 2006** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------------------------------|------------|
| **In millions**                  | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005**                                 | ** ** | ** ** |
| Defense costs                    |       | $                      | 14         |                                               | $          | 18 |   | $ | 433 |   |
| Resolution costs                 |       | $                      | 27         |                                               | $          | 67 |   | $ | 1,092 |   |

 

The averageresolution payment per asbestos claimant and the rate of new claim filings hasfluctuated both up and down since the beginning of 2001. Union Carbide’smanagement expects such fluctuations to continue in the future based upon thenumber and type of claims settled in a particular period, the jurisdictions inwhich such claims arose, and the extent to which any proposed legislativereform related to asbestos litigation is being considered.

 

*InsuranceReceivables*

 

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

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was $503 millionat March 31, 2006 and $535 million at December 31, 2005. At March 31, 2006 andDecember 31, 2005, $398 million of the receivable for

 

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insurance recoveries was related to insurers that arenot signatories to the Wellington Agreement and/or do not otherwise haveagreements in place regarding their asbestos-related insurance coverage.

 

In addition, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**

 
| **In millions**                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|---------------------|------------|------------------------|------------|
| Receivables for defense costs    |       | $                   | 62         |                   | $          | 73 |   |
| Receivables for resolution costs |       | 318                 |       | 327                    |       |
| Total                            |       | $                   | 380        |                   | $          | 400 |   |

 

The Corporationexpenses defense costs as incurred. The pretax impact for defense andresolution costs, net of insurance, was $14 million in the first quarter of2006 and $18 million in the first quarter of 2005, and was reflected in “Costof sales.”

 

In September 2003, the Corporation filed a comprehensive insurancecoverage case, now proceeding in the Supreme Court of the State of New York,County of New York, seeking to confirm its rights to insurance for variousasbestos claims and to facilitate an orderly and timely collection of insuranceproceeds. Although the Corporation already has settlements in place concerningcoverage for asbestos claims with many of its insurers, including those coveredby the 1985 Wellington Agreement, this lawsuit was filed against insurers thatare not signatories to the Wellington Agreement and/or do not otherwise haveagreements in place with the Corporation regarding their asbestos-relatedinsurance coverage, in order to facilitate an orderly resolution and collectionof such insurance policies and to resolve issues that the insurance carriersmay raise.  The insurance carriersare contesting this litigation. Through the first quarter of 2006, theCorporation reached settlements with several of the carriers involved in thislitigation. After a further review of its insurance policies, with dueconsideration given to applicable deductibles, retentions and policy limits,after taking into account the solvency and historical payment experience ofvarious insurance carriers; existing insurance settlements; and the advice ofoutside counsel with respect to the applicable insurance coverage law relatingto the terms and conditions of its insurance policies, the Corporationcontinues to believe that its recorded receivable for insurance recoveries fromall insurance carriers is probable of collection.

 

*Summary*

 

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

 

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.

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 Corporation carriedout an evaluation, under the supervision and with the participation of theCorporation’s Disclosure Committee and the Corporation’s management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures pursuant to Exchange Act Rule 15d-15(b); and whetherany change has occurred in the Corporation’s internal control over financialreporting pursuant to Exchange Act Rule 15d-15(d). Based upon that evaluation,the Chief Executive Officer and the Chief Financial Officer concluded that theCorporation’s disclosure controls and procedures are effective and that nochange in the Corporation’s internal control over financial reporting occurredduring the Corporation’s most recent fiscal quarter that materially affected,or is reasonably likely to materially affect, the Corporation’s internalcontrol over financial reporting.

 

**PART II –OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS.**

 

No materialdevelopments in asbestos-related matters occurred during the first quarter of2006. For a summary of the history and current status of asbestos-relatedmatters, see Management’s Discussion and Analysis of Financial Condition andResults of Operations, Asbestos-Related Matters; and Note E to the ConsolidatedFinancial Statements.

 

**ITEM 1A.RISK FACTORS.**

 

There were no materialchanges in the Corporation’s risk factors in the first quarter of 2006.

 

**ITEM 6.EXHIBITS.**

 

See the Exhibit Index onpage 20 of this Quarterly Report on Form 10-Q for exhibits filed with thisreport.

 

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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 28, 2006 |   |                                    |   |
|                 |   |                                    |   |
|                 |   |                                    |   |
|                 | 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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**UnionCarbide Corporation and Subsidiaries**

**Exhibit Index**

 
| **EXHIBIT NO.** | ** ** | **DESCRIPTION**                                                           |
|-----------------|------------|---------------------------------------------------------------------------|
|            |       |                                                                      |
| 23              |       | Analysis, Research & Planning Corporation’s  Consent.            |
|            |       |                                                                      |
| 31.1            |       | Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                      |
| 31.2            |       | Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                      |
| 32.1            |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|            |       |                                                                      |
| 32.2            |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

20

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