**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

**SECURITIESEXCHANGE ACT OF 1934**

 

Forthe quarterly period ended** SEPTEMBER 30, 2007**

 

Commission file number: **1-1463**

 

**UNION CARBIDE CORPORATION**

(Exact name of registrantas 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 ParkwaySouth, Houston, Texas 77042**

(Address of principalexecutive offices)              (ZipCode)

 

Registrant’s telephonenumber, 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.   x Yes oNo

 

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 x |
|---------------------------|----------------------|--------------------------|

 

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

 

At September 30,2007, 1,000 shares of common stock were outstanding, all of which were held bythe registrant’s parent, The Dow Chemical Company.

 

Theregistrant meets the conditions set forth in General Instructions H(1)(a) and(b) for Form 10-Q and is therefore filing this form with a reduced disclosureformat. 

 

 

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**Union CarbideCorporation**

 

**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.**

 

**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements of Income**

 

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| In millions (Unaudited)                            | ** ** | **Sept. 30,  2007**    | ** ** | **Sept. 30,  2006**   | ** ** | **Sept. 30,  2007** | ** ** | **Sept. 30,  2006** | ** ** |
| Net trade sales                                    |       | $                      | 51         |                  | $          | 55 |   | $ | 153 |   | $ | 429 |   |
| Net sales to related companies                     |       | 1,812                  |       | 1,845                 |       | 5,335 |   | 5,300 |   |
| Total Net Sales                                    |       | 1,863                  |       | 1,900                 |       | 5,488 |   | 5,729 |   |
| Cost of sales                                      |       | 1,703                  |       | 1,727                 |       | 5,031 |   | 4,966 |   |
| Research and development expenses                  |       | 15                     |       | 17                    |       | 56 |   | 57 |   |
| Selling, general and administrative expenses       |       | 3                      |       | 4                     |       | 14 |   | 16 |   |
| Restructuring charges                              |       | —                 |       | 13                    |       | — |   | 13 |   |
| Equity in earnings of nonconsolidated affiliates   |       | 130                    |       | 144                   |       | 369 |   | 288 |   |
| Sundry expense - net                               |       | 6                      |       | 16                    |       | 33 |   | 60 |   |
| Interest income                                    |       | 49                     |       | 34                    |       | 129 |   | 92 |   |
| Interest expense and amortization of debt discount |       | 12                     |       | 14                    |       | 38 |   | 40 |   |
| Income before Income Taxes                         |       | 303                    |       | 287                   |       | 814 |   | 957 |   |
| Provision for income taxes                         |       | 167                    |       | 69                    |       | 297 |   | 301 |   |
| Net Income Available for Common Stockholder        |       | $                      | 136        |                  | $          | 218 |   | $ | 517 |   | $ | 656 |   |
| Depreciation                                       |       | $                      | 64         |                  | $          | 67 |   | $ | 202 |   | $ | 206 |   |
| Capital Expenditures                               |       | $                      | 85         |                  | $          | 51 |   | $ | 185 |   | $ | 146 |   |

*See Notes to the ConsolidatedFinancial Statements.*

 

 

3

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 

 
| In millions (Unaudited)                                                             | ** ** | **Sept. 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| **Assets**                                                                          | ** ** | ** **          | ** ** | ** **         | ** ** |
| Current Assets                                                                      |       |                |       |               |       |
| Cash and cash equivalents                                                           |       | $                   | 78         |               | $          | 71 |   |
| Accounts receivable:                                                                |       |                |       |               |       |
| Trade (net of allowance for doubtful receivables - 2007: $1; 2006:  $2)             |       | 21                  |       | 33                 |       |
| Related companies                                                                   |       | 318                 |       | 449                |       |
| Other                                                                               |       | 144                 |       | 145                |       |
| Notes receivable from related companies                                             |       | 3,031               |       | 2,547              |       |
| Inventories                                                                         |       | 179                 |       | 199                |       |
| Deferred income tax assets - current                                                |       | 41                  |       | 41                 |       |
| Total current assets                                                                |       | 3,812               |       | 3,485              |       |
| Investments                                                                         |       |                |       |               |       |
| Investments in related companies                                                    |       | 297                 |       | 297                |       |
| Investments in nonconsolidated affiliates                                           |       | 1,011               |       | 896                |       |
| Other investments                                                                   |       | 22                  |       | 23                 |       |
| Noncurrent receivables                                                              |       | 59                  |       | 58                 |       |
| Noncurrent receivables from related companies                                       |       | 307                 |       | 187                |       |
| Total investments                                                                   |       | 1,696               |       | 1,461              |       |
| Property                                                                            |       |                |       |               |       |
| Property                                                                            |       | 7,458               |       | 7,459              |       |
| Less accumulated depreciation                                                       |       | 5,500               |       | 5,489              |       |
| Net property                                                                        |       | 1,958               |       | 1,970              |       |
| Other Assets                                                                        |       |                |       |               |       |
| Goodwill                                                                            |       | 26                  |       | 26                 |       |
| Other intangible assets (net of accumulated amortization - 2007:  $126; 2006: $122) |       | 23                  |       | 25                 |       |
| Deferred income tax assets - noncurrent                                             |       | 122                 |       | 115                |       |
| Asbestos-related insurance receivables - noncurrent                                 |       | 687                 |       | 725                |       |
| Deferred charges and other assets                                                   |       | 422                 |       | 383                |       |
| Total other assets                                                                  |       | 1,280               |       | 1,274              |       |
| Total Assets                                                                        |       | $                   | 8,746      |               | $          | 8,190 |   |

*See Notesto the Consolidated Financial Statements.*

 

 

4

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| In millions (Unaudited)                                                         | ** ** | **Sept. 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|
| **Liabilities and Stockholder’s  Equity**                                  |       |                |       |               |       |
| Current Liabilities                                                             |       |                |       |               |       |
| Notes payable:                                                                  |       |                |       |               |       |
| Related companies                                                               |       | $                   | 4          |               | $          | 8 |   |
| Other                                                                           |       | —              |       | 1                  |       |
| Accounts payable:                                                               |       |                |       |               |       |
| Trade                                                                           |       | 209                 |       | 292                |       |
| Related companies                                                               |       | 261                 |       | 252                |       |
| Other                                                                           |       | 62                  |       | 40                 |       |
| Income taxes payable                                                            |       | 149                 |       | 49                 |       |
| Asbestos-related liabilities - current                                          |       | 103                 |       | 129                |       |
| Pension and other postretirement benefits - current                             |       | 56                  |       | 56                 |       |
| Accrued and other current liabilities                                           |       | 158                 |       | 116                |       |
| Total current liabilities                                                       |       | 1,002               |       | 943                |       |
| Long-Term Debt                                                                  |       | 820                 |       | 820                |       |
| Other Noncurrent Liabilities                                                    |       |                |       |               |       |
| Pension and other postretirement benefits - noncurrent                          |       | 499                 |       | 518                |       |
| Asbestos-related liabilities - noncurrent                                       |       | 1,061               |       | 1,079              |       |
| Other noncurrent obligations                                                    |       | 478                 |       | 407                |       |
| Total other noncurrent liabilities                                              |       | 2,038               |       | 2,004              |       |
| Minority Interest in Subsidiaries                                               |       | 2                   |       | 3                  |       |
| Stockholder’s Equity                                                       |       |                |       |               |       |
| Common stock (1,000 shares authorized and issued)                               |       | —              |       | —             |       |
| Additional paid-in capital                                                      |       | 121                 |       | 121                |       |
| Retained earnings (includes cumulative effect of adopting FIN No. 48  of $(67)) |       | 5,232               |       | 4,782              |       |
| Accumulated other comprehensive loss                                            |       | (469                | )          | (483               | )          |
| Net stockholder’s equity                                                   |       | 4,884               |       | 4,420              |       |
| Total Liabilities and Stockholder’s Equity                                 |       | $                   | 8,746      |               | $          | 8,190 |   |

*See Notesto the Consolidated Financial Statements.*

 

 

5

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements of CashFlows**

 
| ** **                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|
| In millions (Unaudited)                                                             | ** ** | **Sept. 30,  2007**   | ** ** | **Sept. 30,  2006** | ** ** |
| Operating Activities                                                                |       |                  |       |   |   |
| Net Income Available for Common Stockholder                                         |       | $                     | 517        |   | $ | 656 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:  |       |                  |       |   |   |
| Depreciation and amortization                                                       |       | 232                   |       | 227 |   |
| Provision (Credit) for deferred income tax                                          |       | 54                    |       | (3 | ) |
| Earnings of nonconsolidated affiliates less than (in excess of)  dividends received |       | (113                  | )          | 4 |   |
| Net gain on sales of property                                                       |       | (11                   | )          | — |   |
| Restructuring charges                                                               |       | —                |       | 13 |   |
| Pension contribution                                                                |       | (2                    | )          | — |   |
| Changes in assets and liabilities:                                                  |       |                  |       |   |   |
| Accounts and notes receivable                                                       |       | 8                     |       | 22 |   |
| Related company receivables                                                         |       | (460                  | )          | (588 | ) |
| Inventories                                                                         |       | 20                    |       | (23 | ) |
| Accounts payable                                                                    |       | (53                   | )          | (33 | ) |
| Related company payables                                                            |       | 5                     |       | (64 | ) |
| Other assets and liabilities                                                        |       | (7                    | )          | (59 | ) |
| Cash provided by operating activities                                               |       | 190                   |       | 152 |   |
| Investing Activities                                                                |       |                  |       |   |   |
| Capital expenditures                                                                |       | (185                  | )          | (146 | ) |
| Distributions from nonconsolidated affiliates                                       |       | —                |       | 4 |   |
| Changes in noncurrent receivable from related company                               |       | (13                   | )          | (1 | ) |
| Proceeds from sales of property                                                     |       | 17                    |       | 2 |   |
| Purchases of investments                                                            |       | (7                    | )          | (11 | ) |
| Proceeds from sales of investments                                                  |       | 6                     |       | 3 |   |
| Cash used in investing activities                                                   |       | (182                  | )          | (149 | ) |
| Financing Activities                                                                |       |                  |       |   |   |
| Changes in short-term notes payable                                                 |       | (1                    | )          | (1 | ) |
| Payments on long-term debt                                                          |       | —                |       | (2 | ) |
| Cash used in financing activities                                                   |       | (1                    | )          | (3 | ) |
| Summary                                                                             |       |                  |       |   |   |
| Increase in cash and cash equivalents                                               |       | 7                     |       | — |   |
| Cash and cash equivalents at beginning of year                                      |       | 71                    |       | 73 |   |
| Cash and cash equivalents at end of period                                          |       | $                     | 78         |   | $ | 73 |   |

*See Notesto the Consolidated Financial Statements.*

 

**UnionCarbide Corporation and Subsidiaries**

**Consolidated Statements ofComprehensive Income**

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| In millions (Unaudited)                                       | ** ** | **Sept. 30,  2007**    | ** ** | **Sept. 30,  2006**   | ** ** | **Sept. 30,  2007** | ** ** | **Sept. 30,  2006** | ** ** |
| Net Income Available for Common Stockholder                   |       | $                      | 136        |                  | $          | 218 |   | $ | 517 |   | $ | 656 |   |
| Other Comprehensive Income (Loss), Net of Tax                 |       |                   |       |                  |       |   |   |   |   |
| Translation adjustments                                       |       | 3                      |       | (1                    | )          | 1 |   | — |   |
| Adjustments to pension and other postretirement benefit plans |       | 5                      |       | —                |       | 13 |   | — |   |
| Net loss on cash flow hedging derivative instruments          |       | —                 |       | (2                    | )          | — |   | (1 | ) |
| Total other comprehensive income (loss)                       |       | 8                      |       | (3                    | )          | 14 |   | (1 | ) |
| Comprehensive Income                                          |       | $                      | 144        |                  | $          | 215 |   | $ | 531 |   | $ | 655 |   |

*See Notes to the ConsolidatedFinancial Statements.*

 

 

6

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**Union Carbide Corporation andSubsidiaries**

**Notes to the Consolidated Financial Statements**

** **

(Unaudited)

 

**NOTE A    CONSOLIDATEDFINANCIAL STATEMENTS**

 

The unaudited interimconsolidated 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 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.

 

Certain reclassifications of prior year’s amounts havebeen made to conform to the presentation adopted for 2007. These statementsshould be read in conjunction with the audited consolidated financialstatements and notes thereto included in the Corporation’s Annual Report onForm 10-K for the year ended December 31, 2006.

 

 

**NOTE B    RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in IncomeTaxes,” which clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withSFAS No. 109.This interpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN No. 48 was effectivefor fiscal years beginning after December 15, 2006.

 

On January 1, 2007, the Corporation adopted theprovisions of FIN No. 48. The cumulative effect of adoption was a$67 million reduction of retained earnings. At January 1, 2007, thetotal amount of unrecognized tax benefits was $251 million, of which $217million would impact the effective tax rate, if recognized. Interest andpenalties associated with uncertain tax positions are recognized as componentsof the “Provision for income taxes.” The Corporation’s accrual for interest andpenalties was $36 million upon adoption of FIN No. 48.

 

The Corporation is includedin Dow’s consolidated federal income tax group and consolidated tax return. ForDow, the tax years1998-2003 are currently under audit by the U.S. Internal Revenue Service andthe review of these years is expected to be completed during 2007. It isreasonably possible that a reduction in the unrecognized tax benefits may occur(which may impact UCC’s unrecognized tax benefits); however, quantification ofan estimated range cannot be made at this time.

 

While the Corporation is subject to taxation incertain foreign jurisdictions, its major tax jurisdictions are in the UnitedStates. The tax years that remain subject to examination in the United Statesare 1998 through 2006 for federal income taxes and 2002 through 2006 for stateand local income taxes. The effective tax rate for the third quarter of 2007was 55.1 percent compared with 24.0 percent for the same quarter last year. Theeffective tax rate for the third quarter of 2007 was negatively affected by anincrease in the estimated annual tax rate for 2007, caused by a revisedforecast of earnings for the Corporation, and the recognition of taxcontingencies. Year to date, the effective tax rate was 36.5 percent versus31.5 percent last year.

 

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

 

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

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fairvalue, establishes a framework for measuring fair value in GAAP, and expandsdisclosures about fair value measurements. This Statement applies under otheraccounting pronouncements that require or permit fair value measurements and iseffective for fiscal years beginning after November 15, 2007. The Corporationis currently evaluating the impact of adopting this Statement.

 

 

7

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In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities - Including anamendment of FASB Statement No. 115,” which permits entities to choose tomeasure many financial instruments and certain other items at fair value. SFASNo. 159 is effective as of the beginning of an entity’s first fiscal year thatbegins after November 15, 2007. The Corporation is currently evaluating if itwill elect the fair value option for any of its eligible financial instrumentsand other items.

 

In April 2007, the FASB issued FASB Staff Position (“FSP”)No. FIN 39-1, “Amendment of FASB Interpretation No. 39.” This FSP replacescertain terms in FIN No. 39 with “derivative instruments” (as defined in SFASNo. 133) and permits the offsetting of fair value amounts recognized for theright to reclaim cash collateral or the obligation to return cash collateralagainst fair value amounts recognized for derivative instruments executed withthe same counterparty under the same master netting arrangement. The FSP iseffective for fiscal years beginning after November 15, 2007. The Corporationis currently evaluating the impact of applying the guidance in this FSP.

 

 

**NOTE C    INVENTORIES**

 

The following table provides a breakdown of inventories:

 

** **

 
| **Inventories**

In millions | ** ** | **Sept. 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|------------------------------|------------|---------------------|------------|--------------------|------------|
| Finished goods               |       | $                   | 25         |               | $          | 35 |   |
| Work in process              |       | 33                  |       | 40                 |       |
| Raw materials                |       | 43                  |       | 37                 |       |
| Supplies                     |       | 78                  |       | 87                 |       |
| Total  inventories           |       | $                   | 179        |               | $          | 199 |   |

 

The reserves reducinginventories from the first-in, first-out (“FIFO”) basis to the last-in,first-out (“LIFO”) basis amounted to $163 million at September 30, 2007 and$160 million at December 31, 2006.

 

 

**NOTE D    OTHER INTANGIBLEASSETS**

** **

The following tableprovides information regarding the Corporation’s other intangible assets:

** **

 
| **Other  Intangible Assets**          | *** *** | **At September  30, 2007** | *** *** | **At  December 31, 2006**       | *** *** |
|---------------------------------------|--------------|----------------------------|--------------|---------------------------------|--------------|
| In millions                           | ** **   | **Gross  Carrying Amount** | ** **   | **Accumulated    Amortization** | *** *** | **Net** | ** ** | **Gross  Carrying Amount** | ** ** | **Accumulated  Amortization** | *** *** | **Net** | *** *** |
| Intangible  assets with finite lives: |         |                       |         |                            |         |   |   |   |   |   |   |   |   |
| Licenses and  intellectual property   |         | $                          | 33           |                            | $            | (33 | ) | — |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                               |         | 2                          |         | (1                              | )            | $ | 1 |   | 3 |   | (2 | ) | 1 |   |
| Software                              |         | 114                        |         | (92                             | )            | 22 |   | 111 |   | (88 | ) | 23 |   |
| Total                                 |         | $                          | 149          |                            | $            | (126 | ) | $ | 23 |   | $ | 147 |   | $ | (122 | ) | $ | 25 |   |

 

Total estimatedamortization expense for 2007 and the next five fiscal years is as follows:

** **

** **
| **Estimated  Amortization Expense**

**for Next  Five Years** | ** ** | ** **     | ** ** |
|---------------------------------------------------------------|------------|----------------|------------|
| In millions                                                   | ** ** | ** **     | ** ** |
| 2007                                                          |       | $  5 |       |
| 2008                                                          |       | $  6 |       |
| 2009                                                          |       | $  6 |       |
| 2010                                                          |       | $  6 |       |
| 2011                                                          |       | $  4 |       |
| 2012                                                          |       | —         |       |

 

8

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**NOTE E    COMMITMENTS ANDCONTINGENT 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 September 30, 2007, theCorporation had accrued obligations of $72 million for environmentalremediation and restoration costs, including $22 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 andrestoration. At December 31, 2006, the Corporation had accrued obligations of$77 million for environmental remediation and restoration costs, including $25million for the remediation of Superfund sites. It is the opinion of theCorporation’s management that the possibility is remote that costs in excess ofthose disclosed will have a material adverse impact on the Corporation’sconsolidated financial statements.

 

**Litigation**

 

The Corporation and its subsidiaries are involved in a number of legalproceedings and claims with both private and governmental parties. These covera wide range of matters, including, but not limited to: product liability;trade regulation; governmental regulatory proceedings; health, safety andenvironmental matters; employment; patents; contracts; taxes; and commercialdisputes.

 

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, 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 the bankruptcy filings of numerousdefendants in asbestos-related litigation and the prospects of various forms ofstate and national legislative reform, the rate at which plaintiffs filedasbestos-related suits against various companies, including the Corporation andAmchem, increased in 2001, 2002 and the first half of 2003. Since then, therate of filing has significantly abated. The Corporation expects moreasbestos-related suits to be filed against it and Amchem in the future, andwill aggressively defend or reasonably resolve, as appropriate, both pendingand future claims.

 

Based on a study completed by Analysis, Research &Planning Corporation (“ARPC”) in January 2003, the Corporation increased itsDecember 31, 2002 asbestos-related liability for pending and future claims forthe 15-year period ending in 2017 to $2.2 billion, excluding future defense andprocessing costs. Since then, the Corporation has compared current asbestosclaim and resolution activity to the results of the most recent ARPC study ateach balance sheet date to determine whether the accrual continues to beappropriate.

 

In November 2004, the Corporation requested ARPC toreview the Corporation’s historical asbestos claim and resolution activity anddetermine the appropriateness of updating its January 2003 study. In January2005, ARPC provided the Corporation with a report summarizing the results ofits study. At December 31, 2004, the recorded asbestos-related liability forpending and future claims was $1.6 billion. Based on the low end of the rangein the January 2005 study, the recorded asbestos-related liability for pendingand future claims at December 31, 2004 would be sufficient to resolveasbestos-related claims against UCC and Amchem into 2019. As in its January 2003study, ARPC did provide estimates for a longer period of time in its January2005 study, but also reaffirmed its prior advice that forecasts for shorterperiods of time are more accurate than those for longer periods of time.

 

In November 2005, the Corporation requested ARPC toreview the Corporation’s 2005 asbestos claim and resolution activity anddetermine the appropriateness of updating its January 2005 study. In responseto that request, ARPC reviewed and analyzed data through October 31, 2005. InJanuary 2006, ARPC stated that an update of its study would not provide a morelikely estimate of future events than the estimate reflected in its study ofthe previous year and, therefore, the estimate in that study remainedapplicable. Based on the Corporation’s own review of the asbestos claim andresolution activity and ARPC’s response, the Corporation determined that nochange to the accrual was required. At December 31, 2005, the recordedasbestos-related liability for pending and future claims was $1.5 billion.

 

In November 2006, theCorporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2006 and concluded that the experience from 2004through 2006 was sufficient for the purpose of forecasting future filings andvalues of asbestos claims filed against UCC and Amchem, and could be used in

 

 

9

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

 

Based on ARPC’s December2006 study and the Corporation’s own review of the asbestos claim andresolution activity, the Corporation decreased its asbestos-related liabilityfor pending and future claims to $1.2 billion at December 31, 2006 which coversthe 15-year period ending in 2021 (excluding future defense and processingcosts). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

 

Based on the Corporation’s review of 2007 activity,the Corporation determined that no adjustment to the accrual was required atSeptember 30, 2007. The asbestos-related liability for pending and futureclaims was $1.2 billion at September 30, 2007. Approximately 28 percent ofthe recorded liability related to pending claims and approximately72 percent related to future claims.

 

At December 31, 2002, the Corporation increased thereceivable for insurance recoveries related to its asbestos liability to $1.35billion, substantially exhausting its asbestos product liability coverage. Theinsurance receivable related to the asbestos liability was determined after athorough review of applicable insurance policies and the 1985 WellingtonAgreement, to which the Corporation and many of its liability insurers aresignatory parties, as well as other insurance settlements, with dueconsideration given to applicable deductibles, retentions and policy limits,and taking into account the solvency and historical payment experience of variousinsurance carriers. The Wellington Agreement and other agreements with insurersare designed to facilitate an orderly resolution and collection of theCorporation’s insurance policies and to resolve issues that the insurancecarriers may raise.

 

InSeptember 2003, the Corporation filed a comprehensive insurance coverage case,now proceeding in the Supreme Court of the State of New York, County of NewYork, seeking to confirm its rights to insurance for various asbestos claimsand to facilitate an orderly and timely collection of insurance proceeds. Thislawsuit was filed against insurers that are not signatories to the WellingtonAgreement and/or do not otherwise have agreements in place with the Corporationregarding their asbestos-related insurance coverage, in order to facilitate anorderly resolution and collection of such insurance policies and to resolveissues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the third quarter of 2007, theCorporation had reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was $476million at September 30, 2007 and $495 million at December 31, 2006. At September30, 2007 and December 31, 2006, all of the receivable for insurance recoverieswas related to insurers that are not signatories to the Wellington Agreementand/or do not otherwise have agreements in place regarding theirasbestos-related insurance coverage.

 

In addition to the receivable for insurance recoveriesrelated to its asbestos liability, the Corporation had receivables for defenseand resolution costs submitted to insurance carriers for reimbursement asfollows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**

 
| **In millions**                   | ** ** | **Sept. 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------------|------------|---------------------|------------|--------------------|------------|
| Receivables for  defense costs    |       | $                   | 29         |               | $          | 34 |   |
| Receivables for  resolution costs |       | 254                 |       | 266                |       |
| Total                             |       | $                   | 283        |               | $          | 300 |   |

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $16 million in the third quarter of 2007 ($1 million inthe third quarter of 2006) and $58 million in the first nine months of 2007($29 million in the first nine months of 2006), 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; existinginsurance settlements; and the advice of outside counsel with respect to theapplicable insurance coverage law relating to the terms and conditions of itsinsurance policies, the Corporation continues to believe that its recordedreceivable for insurance recoveries from all insurance carriers is probable ofcollection.

 

The amounts recorded for the asbestos-relatedliability and related insurance receivable described above were based uponcurrent, known facts. However, future events, such as the number of new claimsto be filed and/or received each year, the average cost of disposing of eachsuch claim, coverage issues among insurers, and the continuing solvency ofvarious 

 

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insurance companies, as well as the numerous uncertainties surroundingasbestos litigation in the United States, could cause the actual costs andinsurance recoveries to be higher or lower than those projected or thoserecorded.

 

Because of the uncertainties described above, managementcannot estimate the full range of the cost of resolving pending and futureasbestos-related claims facing the Corporation and Amchem. Management believesthat it is reasonably possible that the cost of disposing of the Corporation’sasbestos-related claims, including future defense costs, could have a materialadverse impact on the results of operations and cash flows for a particularperiod and on the consolidated financial 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.

 

**Purchase Commitments**

 

At December 31, 2006, theCorporation had various outstanding commitments for take or pay agreements,with terms extending from one to ten years. Such commitments were not in excessof current market prices. The fixed and determinable portion of obligationsunder purchase commitments at December 31, 2006 is presented in the followingtable:

 

 
| **Fixed and Determinable Portion of Take or Pay Obligations**

**at December 31, 2006**

In millions | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|
| 2007                                                                                                 |       | $          | 14         |   |
| 2008                                                                                                 |       | 8          |       |
| 2009                                                                                                 |       | 8          |       |
| 2010                                                                                                 |       | 7          |       |
| 2011                                                                                                 |       | 1          |       |
| 2012 and beyond                                                                                      |       | 6          |       |
| Total                                                                                                |       | $          | 44         |   |

 

**Guarantees**

 

The Corporation has undertaken obligations toguarantee the performance of certain nonconsolidated affiliates (including theOPTIMAL Group and Nippon Unicar Company Limited) and a former subsidiary of theCorporation (via delivery of cash or other assets) if specified triggeringevents occur. Non-performance under a contract for commercial and/or financialobligations by the guaranteed party would trigger the obligation of theCorporation to make payments to the beneficiary of the guarantees. Financialobligations include debt and lease arrangements. The guarantee related to aformer subsidiary of the Corporation expired in the second quarter of 2007.

 

The following table provides a summary of the finalexpiration, maximum future payments, and recorded liability reflected in theconsolidated balance sheets for these guarantees.

 

** **

 
| **Guarantees**

In millions       | ** ** | **Final  Expiration** | ** ** | **Maximum  Future Payments** | ** ** | **Recorded  Liability** | ** ** |
|-----------------------------------|------------|-----------------------|------------|------------------------------|------------|-------------------------|------------|
| Guarantees at  September 30, 2007 |       | 2014                  |       | $                            | 75         |                    | $          | 1 |   |
| Guarantees at  December 31, 2006  |       | 2014                  |       | $                            | 84         |                    | $          | 1 |   |

 

 

**Conditional Asset Retirement Obligations**

 

In accordance with FIN No. 47, the Corporation has recognizedconditional asset retirement obligations related to asbestos encapsulation as aresult of planned demolition and remediation activities at manufacturing andadministrative sites in the United States. The aggregate carrying amount ofconditional asset retirement obligations was $13 million at September 30,2007 and December 31, 2006. The discount rate used to calculate the Corporation’sasset retirement obligations was 4.6 percent. These obligations areincluded in the consolidated balance sheets as “Accrued and other currentliabilities.”

 

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

 

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**NOTE F    PENSION AND OTHER POSTRETIREMENT BENEFITS**

 

** **

 
| **Net  Periodic Benefit Cost (Credit) for All Significant Plans** | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| In millions                                                       | ** ** | **Sept. 30,  2007**    | ** ** | **Sept. 30,  2006**   | ** ** | **Sept. 30,  2007** | ** ** | **Sept. 30,  2006** | ** ** |
| *Defined  Benefit Pension Plans:*                                 | * *   | * *               | * *   | * *              | * *   | * * | * * | * * | * * |
| Service cost                                                      |       | $                      | 6          |                  | $          | 6 |   | $ | 16 |   | $ | 18 |   |
| Interest cost                                                     |       | 53                     |       | 53                    |       | 159 |   | 159 |   |
| Expected return  on plan assets                                   |       | (79                    | )          | (83                   | )          | (237 | ) | (249 | ) |
| Amortization of  prior service cost                               |       | —                 |       | 1                     |       | 1 |   | 1 |   |
| Amortization of  net loss                                         |       | 7                      |       | 7                     |       | 21 |   | 23 |   |
| Net periodic  benefit credit                                      |       | $                      | (13        | )                     | $          | (16 | ) | $ | (40 | ) | $ | (48 | ) |
| * *                                                          | * *   | * *               | * *   | * *              | * *   | * * | * * | * * | * * |
| *Other  Postretirement Benefits:*                                 | * *   | * *               | * *   | * *              | * *   | * * | * * | * * | * * |
| Service cost                                                      |       | $                      | 1          |                  | $          | 1 |   | $ | 3 |   | $ | 3 |   |
| Interest cost                                                     |       | 7                      |       | 8                     |       | 21 |   | 24 |   |
| Amortization of  prior service credit                             |       | —                 |       | (1                    | )          | (2 | ) | (3 | ) |
| Amortization of  net loss                                         |       | —                 |       | 1                     |       | 1 |   | 3 |   |
| Net periodic  benefit cost                                        |       | $                      | 8          |                  | $          | 9 |   | $ | 23 |   | $ | 27 |   |

 

 

**NOTE G    RELATED PARTY TRANSACTIONS**

 

The Corporation sellsproducts to Dow to simplify the customer interface process. Products are soldto and purchased from Dow at market-based prices in accordance with the termsof Dow’s long-standing intercompany pricing policies. The Corporation alsoprocures certain commodities and raw materials through a Dow subsidiary andpays a commission to that Dow subsidiary based on the volume and type ofcommodities and raw materials purchased. The commission expense is included in “Sundryincome (expense) — net” in the consolidated statements of income. Purchasesfrom that Dow subsidiary were approximately $803 million in the third quarterof 2007 ($847 million in the third quarter of 2006) and $2,321 million inthe first nine months of 2007 ($2,377 million in the first nine months of2006).

 

The Corporation has amaster services agreement with Dow whereby Dow provides services, including,but not limited to, accounting, legal, treasury (investments, cash management,risk management, insurance), procurement, human resources, environmental,health and safety, and business management for UCC. Under the master servicesagreement with Dow, for general administrative and overhead type services thatDow routinely allocates to various businesses, UCC is charged the cost of thoseservices based on the Corporation’s and Dow’s relative manufacturing conversioncosts. This arrangement results in a quarterly charge of approximately $6million (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 expenses charged by Dow is reasonable. Dow provides theseservices by leveraging its centralized functional service centers to provideservices at a cost that management believes provides an advantage to theCorporation.

 

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’s cashmanagement process, UCC is a party to revolving loans with Dow that haveLIBOR-based interest rates with varying maturities. At September 30, 2007, theCorporation had a note receivable of $3.0 billion from Dow under a revolvingloan agreement. The Corporation may draw from this note receivable in supportof its daily working capital requirements and, as such, the net effect of cashinflows and outflows under this revolving loan agreement is presented in theconsolidated statements of cash flows as an operating activity.

 

The 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 September30, 2007; however, Dow may demand repayment with a 30-day written notice to theCorporation, subject to certain restrictions. A related collateral agreementprovides for the replacement of certain existing pledged assets, primarily equityinterests in various subsidiaries and joint ventures, with cash collateral. AtSeptember 30, 2007, $812 million was available under the revolving creditagreement. The cash collateral was reported as “Noncurrent receivables fromrelated companies” in the consolidated balance sheets.

 

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The losses and additional costs incurred by theCorporation in 2005 due to hurricane Katrina were covered by the Corporation’sinsurance program. The Corporation has an insurance receivable for lossesincurred of $105 million from its insurer (an affiliate of Dow), which wasreported in “Noncurrent receivables from related companies” in the consolidatedbalance sheets at September 30, 2007. 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 September 30, 2007,and will only be recognized when the amount of recovery is realized throughagreement among the insurers.

 

 

**NOTE H    2006 RESTRUCTURING**

 

In the third quarter of 2006, the Corporationrecorded restructuring charges totaling $13 million resulting from decisionsmade by management in the third quarter to improve the competitiveness of itsglobal operations. The decision resulted in the write-off of the net book valueof three manufacturing facilities totaling $10 million (the largest of whichwas $8 million associated with the shutdown of the peroxymeric chemicalsproduction facility in St. Charles, Louisiana, in October 2006), and thewrite-off of the net book value of fixed assets related to the dissolution of aconsolidated joint venture in China (which ceased operations in October 2006)totaling $3 million. The charges were shown as “Restructuring charges” in theconsolidated statements of income.

 

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** **

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

Pursuant to GeneralInstruction H of Form 10-Q “Omission of Information by Certain Wholly-OwnedSubsidiaries,” this section includes only management’s narrative analysis ofthe results of operations for the three-and nine-month periods endedSeptember 30, 2007, the most recent periods, compared with the three-andnine-month periods ended September 30, 2006, the corresponding periods in thepreceding fiscal year.

 

References below to “Dow” refer to The Dow Chemical Company and itsconsolidated subsidiaries, except as the context otherwise indicates.

 

The Corporation’s business activities comprise components of Dow’sglobal operations rather than stand-alone operations. Dow conducts itsworldwide operations through global businesses. Because there are no separablereportable business segments for UCC under Statement of Financial AccountingStandards No. 131, “Disclosures about Segments of an Enterprise and Related Information,”and no detailed business information is provided to a chief operating decisionmaker regarding the Corporation’s stand-alone operations, the Corporation’sresults are reported as a single operating segment.

 

##### **DISCLOSUREREGARDING FORWARD-LOOKING INFORMATION**

 

The Private SecuritiesLitigation Reform Act of 1995 provides a “safe harbor” for forward-lookingstatements made by or on behalf of Union Carbide Corporation (the “Corporation”or “UCC”). This section covers the current performance and outlook of theCorporation. The forward-looking statements contained in this section and inother parts of this document involve risks and uncertainties that may affectthe Corporation’s operations, markets, products, services, prices and otherfactors as more fully discussed elsewhere and in filings with the U.S.Securities and Exchange Commission (SEC). These risks and uncertaintiesinclude, but are not limited to, economic, competitive, legal, governmental andtechnological factors. Accordingly, there is no assurance that the Corporation’sexpectations will be realized. The Corporation assumes no obligation to providerevisions to any forward-looking statements should circumstances change, exceptas otherwise required by securities and other applicable laws.

 

**RESULTS OF OPERATIONS**

** **

**Total net sales for the third quarter of 2007 were $1,863million compared with $1,900 million for the third quarter of 2006, a decreaseof 2 percent. Total net sales were $5,488 million for the first nine months of2007 compared with $5,729 million for the first nine months of 2006, a decreaseof 4 percent.**Selling prices to Doware based on market prices for the related products. Average selling prices formost products were higher in the third quarter of 2007 and on a year-to-datebasis compared with the same periods of last year, led by ethylene glycol (“EG”),wire and cable compounds and oxo products. Sales volume was mixed with overallvolume down in the third quarter of 2007 and on a year-to-date basis comparedwith the same periods of last year. Solid volume growth for several products(led by polyethylene, oxo products, and polypropylene) was more than offset bydeclines in certain of the Corporation’s other products, principally EG (due toplanned and unplanned outages at two production facilities and to therestructuring of certain sales agreements). Total net sales for the first ninemonths of 2006 included significant lump sum technology licensing revenue.Technology licensing revenue varies from period to period due to the nature ofthe business.

 

Cost of sales declined slightly from $1,727 million inthe third quarter of 2006 to $1,703 million in the third quarter of 2007principally due to lower sales volume. On a year to date basis, cost of salesincreased 1 percent from $4,966 million to $5,031 million, reflecting higherfeedstock costs.

 

Restructuring charges of $13million in the third quarter of 2006 included the write-off of the net bookvalue of three manufacturing facilities totaling $10 million (the largest ofwhich was $8 million associated with the shutdown of the peroxymeric chemicalsproduction facility in St. Charles, Louisiana, in October 2006) and thewrite-off of the net book value of fixed assets related to the dissolution of aconsolidated joint venture in China (which ceased operations in October 2006)totaling $3 million.

 

Equity in earnings of nonconsolidated affiliatesdecreased $14 million in the third quarter of 2007 compared with the samequarter last year, as improved earnings at EQUATE Petrochemical Company K.S.C.(“EQUATE”) were more than offset by lower reported earnings from UnivationTechnologies, LLC and the OPTIMAL Group (“OPTIMAL”). Year to date, equity inearnings of nonconsolidated affiliates was $369 million compared with $288million last year due to higher reported earnings from EQUATE and OPTIMAL.Year-to-date results for EQUATE and OPTIMAL in 2006 were lower due to plannedmaintenance turnarounds in the first half of 2006.

 

Sundry expense — net includes a variety of income andexpense items such as the gain or loss on foreign currency exchange, dividendsfrom investments, commissions, charges for management services provided by Dow,and gains and losses on sales of investments and assets. Sundry expense — netfor the third quarter of 2007 was $6 million compared with $16 million forthe third quarter of last year, and included a gain on the sale of land of $10million. Year to date, sundry

 

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expense — net was $33million compared with $60 million for the first nine months of last year. Inaddition to the gain on the sale of land, Sundry expense for the first ninemonths of 2007 was also impacted by a higher level of dividend income and lowercommission expense.

 

Interest income was $49 million in the third quarterof 2007 compared with $34 million in the third quarter of 2006. Year to date,interest income was $129 million, up from $92 million in the first nine monthsof 2006. The increase for the quarter and on a year-to-date basis was due tothe significantly higher level of interest-bearing assets.

 

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 third quarter of 2007 was 55.1 percent compared with24.0 percent for the same quarter last year. The effective tax rate for thethird quarter of 2007 was negatively affected by an increase in the estimatedannual tax rate for 2007, caused by a revised forecast of earnings for theCorporation, and the recognition of tax contingencies. Year to date, theeffective tax rate was 36.5 percent versus 31.5 percent last year.

 

The Corporation reported net income of $136 millionfor the third quarter of 2007, down significantly from $218 million for thethird quarter of 2006, due primarily to an increase in the provision for incometaxes. Net income for the first nine months of 2007 declined to $517 millionfrom $656 million for the first nine months of last year as a significantdecline in technology licensing revenue more than offset the improvement inequity earnings for the first nine months of 2007.

 

 

**OTHER MATTERS**

 

**Accounting Changes**

 

See Note B to the Consolidated Financial Statements for a discussion ofrecent accounting pronouncements.

 

**Critical Accounting Policies**

 

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to make judgments, assumptions andestimates that affect the amounts reported in the Consolidated FinancialStatements and accompanying notes. Note A to the Consolidated FinancialStatements in the Corporation’s Annual Report on Form 10-K for the year endedDecember 31, 2006 (“2006 10-K”) describes the significant accounting policiesand methods used in the preparation of the Consolidated Financial Statements.The Corporation’s critical accounting policies that are impacted by judgments,assumptions and estimates are described in Management’s Discussion and Analysisof Financial Condition and Results of Operations in the Corporation’s 200610-K. Since December 31, 2006, there have been no material changes in theCorporation’s critical accounting 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 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 the bankruptcy filings of numerousdefendants in asbestos-related litigation and the prospects of various forms ofstate and national legislative reform, the rate at which plaintiffs filedasbestos-related suits against various companies, including the Corporation andAmchem, increased in 2001, 2002 and the first half of 2003. Since then, therate of filing has significantly abated. The Corporation expects moreasbestos-related suits to be filed against it and Amchem in the future, andwill aggressively defend or reasonably resolve, as appropriate, both pendingand future claims.

 

The table below provides information regardingasbestos-related claims filed against the Corporation and Amchem:

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1                    |       | 111,887  |       | 146,325  |       |
| Claims filed                                       |       | 7,696    |       | 12,388   |       |
| Claims settled,  dismissed or otherwise resolved   |       | (15,681  | )          | (45,006  | )          |
| Claims  unresolved at September 30                 |       | 103,902  |       | 113,707  |       |
| Claimants with  claims against both UCC and Amchem |       | 35,114   |       | 39,432   |       |
| Individual  claimants at September 30              |       | 68,788   |       | 74,275   |       |

 

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Plaintiffs’ lawyers often suedozens or even hundreds of defendants in individual lawsuits on behalf ofhundreds or even thousands of claimants. As a result, the damages alleged arenot expressly identified as to UCC, Amchem or any other particular defendant,even when specific damages are alleged with respect to a specific disease orinjury. In fact, there are no personal injury cases in which only theCorporation and/or Amchem are the sole named defendants. For these reasons and based upon theCorporation’s litigation and settlement experience, the Corporation does notconsider the damages alleged against it and Amchem to be a meaningful factor inits determination of any potential asbestos liability.

 

*Estimating the Liability*

 

Based on a study completed by Analysis, Research & PlanningCorporation (“ARPC”) in January 2003, the Corporation increased its December31, 2002 asbestos-related liability for pending and future claims for the15-year period ending in 2017 to $2.2 billion, excluding future defense andprocessing costs. Since then, the Corporation has compared current asbestosclaim and resolution activity to the results of the most recent ARPC study ateach balance sheet date to determine whether the accrual continues to beappropriate.

 

In November 2004, the Corporation requested ARPC toreview the Corporation’s historical asbestos claim and resolution activity anddetermine the appropriateness of updating its January 2003 study. In January2005, ARPC provided the Corporation with a report summarizing the results ofits study. At December 31, 2004, the recorded asbestos-related liability forpending and future claims was $1.6 billion. Based on the low end of the rangein the January 2005 study, the recorded asbestos-related liability for pendingand future claims at December 31, 2004 would be sufficient to resolveasbestos-related claims against UCC and Amchem into 2019. As in its January2003 study, ARPC did provide estimates for a longer period of time in itsJanuary 2005 study, but also reaffirmed its prior advice that forecasts forshorter periods of time are more accurate than those for longer periods oftime.

 

In November 2005, theCorporation requested ARPC to review the Corporation’s 2005 asbestos claim andresolution activity and determine the appropriateness of updating its January2005 study. In response to that request, ARPC reviewed and analyzed datathrough October 31, 2005. In January 2006, ARPC stated that an update of itsstudy would not provide a more likely estimate of future events than theestimate reflected in its study of the previous year and, therefore, theestimate in that study remained applicable. Based on the Corporation’s ownreview of the asbestos claim and resolution activity and ARPC’s response, theCorporation determined that no change to the accrual was required. At December31, 2005, the recorded asbestos-related liability for pending and future claimswas $1.5 billion.

 

In November 2006, theCorporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2006 and concluded that the experience from 2004through 2006 was sufficient for the purpose of forecasting future filings andvalues of asbestos claims filed against UCC and Amchem, and could be used inplace of previous assumptions to update its January 2005 study. The resultingstudy, completed by ARPC in December 2006, stated that the undiscounted cost ofresolving pending and future asbestos-related claims against UCC and Amchem,excluding future defense and processing costs, through 2021 was estimated to bebetween approximately $1.2 billion and $1.5 billion. As in its January 2005study, 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.

 

Based on ARPC’s December2006 study and the Corporation’s own review of the asbestos claim andresolution activity, the Corporation decreased its asbestos-related liabilityfor pending and future claims to $1.2 billion at December 31, 2006 which coversthe 15-year period ending in 2021 (excluding future defense and processingcosts). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

 

Based on the Corporation’sreview of 2007 activity, the Corporation determined that no adjustment to theaccrual was required at September 30, 2007. The asbestos-related liability forpending and future claims was $1.2 billion at September 30, 2007. Approximately28 percent of the recorded liability related to pending claims andapproximately 72 percent related to future claims.

 

*Defense and Resolution Costs*

 

The following table provides information regarding defense andresolution costs related to asbestos-related claims filed against theCorporation and Amchem:

 

 
| **Defense and Resolution Costs** | ** ** | **Nine Months Ended** | ** ** | **Aggregate Costs**  | ** ** |
|----------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **

In millions          | ** ** | **Sept.  30,   2007** | ** ** | **Sept.  30,  2006** | ** ** | **to****Date as of  Sept. 30, 2007** | ** ** |
| Defense costs                    |       | $                     | 58         |                 | $          | 45 |   | $ | 539 |   |
| Resolution costs                 |       | $                     | 48         |                 | $          | 95 |   | $ | 1,230 |   |

 

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The average resolutionpayment per asbestos claimant and the rate of new claim filings has fluctuatedboth up and down since the beginning of 2001. Union Carbide’s managementexpects such fluctuations to continue in the future based upon a number offactors, including the number and type of claims settled in a particularperiod, the jurisdictions in which such claims arose, and the extent to whichany proposed legislative reform related to asbestos litigation is beingconsidered.

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $16 million in the third quarter of 2007 ($1 million inthe third quarter of 2006) and $58 million for the first nine months of 2007($29 million for the first nine months of 2006), and was reflected in “Cost ofsales.”

 

*Insurance Receivables*

 

At December 31, 2002, the Corporation increased the receivable forinsurance recoveries related to its asbestos liability to $1.35 billion,substantially exhausting its asbestos product liability coverage. The insurancereceivable related to the asbestos liability was determined after a thoroughreview of applicable insurance policies and the 1985 Wellington Agreement, towhich the Corporation and many of its liability insurers are signatory parties,as well as other insurance settlements, with due consideration given toapplicable deductibles, retentions and policy limits, and taking into accountthe solvency and historical payment experience of various insurance carriers.The Wellington Agreement and other agreements with insurers are designed tofacilitate an orderly resolution and collection of the Corporation’s insurancepolicies and to resolve issues that the insurance carriers may raise.

 

In September 2003, theCorporation filed a comprehensive insurance coverage case, now proceeding inthe Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filed againstinsurers that are not signatories to the Wellington Agreement and/or do nototherwise 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 third quarter of 2007, theCorporation had reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’s receivable for insurance recoveriesrelated to its asbestos liability was $476 million at September 30, 2007and $495 million at December 31, 2006. At September 30, 2007 and December 31,2006, all of the receivable for insurance recoveries was related to insurersthat are not signatories to the Wellington Agreement and/or do not otherwisehave agreements in place regarding their asbestos-related insurance coverage.

 

In addition to the receivable for insurance recoveriesrelated to its asbestos liability, the Corporation had receivables for defenseand resolution costs submitted to insurance carriers for reimbursement asfollows:

 

**Receivables for Costs Submitted toInsurance Carriers**

 
| In millions                       | ** ** | **Sept.  30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------------|------------|----------------------|------------|--------------------|------------|
| Receivables for  defense costs    |       | $                    | 29         |               | $          | 34 |   |
| Receivables for  resolution costs |       | 254                  |       | 266                |       |
| Total                             |       | $                    | 283        |               | $          | 300 |   |

 

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

 

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 DISCLOSURESABOUT MARKET RISK.**

 

Omitted pursuant to General Instruction H of Form 10-Q.

 

**ITEM 4.  CONTROLS AND PROCEDURES.**

 

As of the end of the period covered by this Quarterly Report on Form10-Q, the Corporation carried out an evaluation, under the supervision and withthe participation of the Corporation’s Disclosure Committee and the Corporation’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, of the effectiveness of the design and operation of the Corporation’sdisclosure controls and procedures pursuant to Exchange Act Rule 15d-15(b); andwhether any change has occurred in the Corporation’s internal control overfinancial reporting pursuant to Exchange Act Rule 15d-15(d). Based upon thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the Corporation’s disclosure controls and procedures areeffective and that no change in the Corporation’s internal control overfinancial reporting occurred during the Corporation’s most recent fiscalquarter that materially affected, or is reasonably likely to materially affect,the Corporation’s internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

No material developmentsin asbestos-related matters occurred during the third quarter of 2007. For asummary of the history and current status of asbestos-related matters, seeManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, Asbestos-Related Matters; and Note E to the Consolidated FinancialStatements.

 

**ITEM 1A.  RISK FACTORS.**

 

There were no material changes in the Corporation’s risk factors in thethird quarter of 2007.

 

**ITEM 6.  EXHIBITS.**

 

See the Exhibit Index on page 20 of this Quarterly Report on Form 10-Qfor exhibits filed with this report.

 

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**UnionCarbide Corporation and Subsidiaries**

**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

 

 
|   |   | UNION CARBIDE  CORPORATION |
|--------|--------|----------------------------|
|   |   | Registrant                 |

 

 

Date:  October 29, 2007

 

 

 

 
|   |   | By:    | /s/ WILLIAM H. WEIDEMAN       |
|--------|--------|--------|-------------------------------|
|   |   |   | William H. Weideman           |
|   |   |   | Vice President and Controller |
|   |   |   | The Dow Chemical Company      |
|   |   |   | Authorized Representative of  |
|   |   |   | Union Carbide Corporation     |
|   |   |   |                          |   |
|   |   |   |                          |   |
|   |   | By:    | /s/ EDWARD W. RICH            |
|   |   |   | Edward W. Rich                |
|   |   |   | Vice President, Treasurer and |
|   |   |   | Chief Financial Officer       |
|   |   |   |                          |   |

 

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**Union Carbide Corporation andSubsidiaries**

**Exhibit Index**

** **
| EXHIBIT  NO. |   | DESCRIPTION                                                                                                                                                                                  |   |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |   |                                                                                                                                                                                         |
| 10.5.5       |   | Fifth Amendment to the Amended and Restated  Revolving Credit Agreement, dated as of September 30, 2007, among the  Corporation, The Dow Chemical Company and certain Subsidiary Guarantors. |
|         |   |                                                                                                                                                                                         |
| 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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