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EX-23 - UNION CARBIDE CORP /NEW/ucc3q09ex23.htm
EX-32.1 - UNION CARBIDE CORP /NEW/ucc3q09ex32_1.htm
EX-31.2 - UNION CARBIDE CORP /NEW/ucc3q09ex31_2.htm
EX-32.2 - UNION CARBIDE CORP /NEW/ucc3q09ex32_2.htm
EX-31.1 - UNION CARBIDE CORP /NEW/ucc3q09ex31_1.htm
EX-10.5.7 - UNION CARBIDE CORP /NEW/ucc3q09ex10d5d7.htm
EX-10.7.2 - UNION CARBIDE CORP /NEW/ucc3q09ex10d7d2.htm
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended SEPTEMBER 30, 2009
 
Commission file number: 1-1463
 
UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)
 
New York
(State or other jurisdiction of
incorporation or organization)
13-1421730
(I.R.S. Employer Identification No.)
 
1254 Enclave Parkway, Houston, Texas  77077
                                                                (Address of principal executive offices)          (Zip Code)
 
Registrant's telephone number, including area code:  281-966-2727
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       þ Yes    o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                                                                                                                                                                                         o Yes    o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Smaller reporting company o
Non-accelerated filer   þ
Accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    þ No
   
At September 30, 2009, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.
 
The registrant 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 disclosure format.

 
 

 






 
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Union Carbide Corporation and Subsidiaries
                         
   
Three Months Ended
 
Nine Months Ended
 
   
Sept. 30,
   
Sept. 30,
 
Sept. 30,
   
Sept. 30,
 
In millions     (Unaudited)
 
2009
   
2008
 
2009
   
2008
 
Net trade sales
  $ 35     $ 48     $ 113     $ 144  
Net sales to related companies
    1,322       1,929       3,573       5,823  
Total Net Sales
  $ 1,357     $ 1,977     $ 3,686     $ 5,967  
Cost of sales
    1,145       1,942       3,224       5,785  
Research and development expenses
    10       16       37       54  
Selling, general and administrative expenses
    1       3       7       9  
Restructuring charges
    -       -       166       -  
Equity in earnings of nonconsolidated affiliates
    14       55       20       172  
Sundry income (expense) - net
    320       (18 )     322       38  
Interest income
    21       24       31       82  
Interest expense and amortization of debt discount
    8       12       32       37  
Income before Income Taxes
  $ 548     $ 65     $ 593     $ 374  
Provision (credit) for income taxes
    222       (16 )     183       93  
Net Income Attributable to Union Carbide Corporation
  $ 326     $ 81     $ 410     $ 281  
                                 
Depreciation
  $ 63     $ 66     $ 201     $ 197  
Capital Expenditures
  $ 21     $ 74     $ 62     $ 173  
See Notes to the Consolidated Financial Statements.
                               



Union Carbide Corporation and Subsidiaries
             
   
Sept. 30,
 
Dec. 31,
In millions     (Unaudited)
 
2009
 
2008
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 15     $ 24  
Accounts receivable:
               
     Trade (net of allowance for doubtful receivables - 2009: $1; 2008: $1)
    20       21  
     Related companies
    284       128  
     Other
    87       90  
Notes receivable from related companies
    4,562       3,934  
Inventories
    193       187  
Other current assets and deferred income taxes
    72       64  
Total current assets
    5,233       4,448  
Investments
               
Investments in related companies
    972       972  
Investments in nonconsolidated affiliates
    100       427  
Other investments
    24       19  
Noncurrent receivables
    46       46  
Noncurrent receivables from related companies
    192       187  
Total investments
    1,334       1,651  
Property
               
Property
    7,513       7,630  
Less accumulated depreciation
    5,941       5,744  
Net property
    1,572       1,886  
Other Assets
               
Other intangible assets (net of accumulated amortization 2009: $139; 2008: $135)
    11       17  
Deferred income tax assets - noncurrent
    381       439  
Asbestos-related insurance receivables - noncurrent
    618       658  
Deferred charges and other assets
    74       79  
Total other assets
    1,084       1,193  
Total Assets
  $ 9,223     $ 9,178  
Liabilities and Equity
               
Current Liabilities
               
Notes payable - related companies
  $ 2     $ 12  
Long-term debt due within one year
    -       249  
Accounts payable:
               
     Trade
    194       170  
     Related companies
    239       299  
     Other
    32       35  
Income taxes payable
    253       176  
Asbestos-related liabilities - current
    110       120  
Accrued and other current liabilities
    197       198  
Total current liabilities
    1,027       1,259  
Long-Term Debt
    571       571  
Other Noncurrent Liabilities
               
Pension and other postretirement benefits - noncurrent
    611       662  
Asbestos-related liabilities - noncurrent
    757       824  
Other noncurrent obligations
    282       298  
Total other noncurrent liabilities
    1,650       1,784  
Stockholder's Equity
               
Common stock (authorized and issued: 1,000 shares of $0.01 par value each)
    -       -  
Additional paid-in capital
    312       312  
Retained earnings
    6,504       6,094  
Accumulated other comprehensive loss
    (842 )     (844 )
Union Carbide Corporation's stockholder's equity
    5,974       5,562  
Noncontrolling interests
    1       2  
Total equity
    5,975       5,564  
Total Liabilities and Equity
  $ 9,223     $ 9,178  
See Notes to the Consolidated Financial Statements.
               



Union Carbide Corporation and Subsidiaries
             
   
Nine Months Ended
   
Sept. 30,
 
Sept. 30,
In millions     (Unaudited)
 
2009
 
2008
Operating Activities
           
Net Income Attributable to Union Carbide Corporation
  $ 410     $ 281  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
          Depreciation and amortization
    219       204  
          Provision (credit) for deferred income tax
    (9 )     113  
          Earnings of nonconsolidated affiliates less than (in excess of) dividends received
    7       (136 )
          Net gain on sales of property
    (3 )     (7 )
          Restructuring charges
    166       -  
          Other gain, net
    (4 )     -  
          Gain on sale of ownership interest in nonconsolidated affiliates
    (328 )     -  
          Pension contribution
    (1 )     (2 )
Changes in assets and liabilities:
               
          Accounts and notes receivable
    (41 )     (6 )
          Related company receivables
    (784 )     (263 )
          Inventories
    (6 )     (44 )
          Accounts payable
    36       27  
          Related company payables
    (70 )     (1 )
          Other assets and liabilities
    47       (24 )
Cash provided by (used in) operating activities
    (361 )     142  
Investing Activities
               
Capital expenditures
    (62 )     (173 )
Proceeds from sale of ownership interest in nonconsolidated affiliates
    660       -  
Changes in noncurrent receivable from related company
    (5 )     29  
Proceeds from sales of property
    6       6  
Purchases of investments
    (17 )     (12 )
Proceeds from sales of investments
    19       11  
Cash provided by (used in) investing activities
    601       (139 )
Financing Activities
               
Payments on long-term debt
    (249 )     -  
Cash used in financing activities
    (249 )     -  
Summary
               
Increase (decrease) in cash and cash equivalents
    (9 )     3  
Cash and cash equivalents at beginning of year
    24       22  
Cash and cash equivalents at end of period
  $ 15     $ 25  
See Notes to the Consolidated Financial Statements.
               



Union Carbide Corporation and Subsidiaries
         
     
Nine Months Ended
     
Sept. 30,
Sept. 30,
In millions     (Unaudited)
   
2009
2008
Common Stock
       
Balance at beginning of year and end of period
   
                     -
                     -
Additional Paid-in Capital
       
Balance at beginning of year
  $
312
 $              121
Capital contribution
   
                     -
                 191
Balance at end of period
   
                 312
                 312
Retained Earnings
       
Balance at beginning of year
   
              6,094
              5,767
Net income
   
                 410
                 281
Other
   
                     -
                     1
Balance at end of period
   
              6,504
              6,049
Accumulated Other Comprehensive Loss, Net of Tax
       
Cumulative Translation Adjustments at beginning of year
   
                 (61)
                 (69)
Translation adjustments
   
                     1
                     1
Balance at end of period
   
                 (60)
                 (68)
Pension and Other Postretirement Benefit Plans at beginning of year
   
               (783)
               (164)
Adjustments to pension and other postretirement benefit plans
   
                     -
                     4
Pension and Other Postretirement Benefit Plans at end of period
   
               (783)
               (160)
Accumulated Investment Gain at beginning of year and end of period
   
                     1
                     -
Accumulated Derivative Gain at beginning of year
   
                   (1)
                     -
Net hedging results
   
                     1
                   (1)
Balance at end of period
   
                     -
                   (1)
Total accumulated other comprehensive loss
   
               (842)
               (229)
Union Carbide Corporation's Stockholder's Equity
   
              5,974
              6,132
Noncontrolling Interests
   
                     1
                     2
Total Equity
  $
5,975
 $           6,134
See Notes to the Consolidated Financial Statements.
       



Union Carbide Corporation and Subsidiaries
                         
   
Three Months Ended
 
Nine Months Ended
   
Sept. 30,
   
Sept. 30,
 
Sept. 30,
   
Sept. 30,
In millions     (Unaudited)
 
2009
   
2008
 
2009
   
2008
Net Income Attributable to Union Carbide Corporation
  $ 326     $ 81     $ 410     $ 281  
Other Comprehensive Income, Net of Tax
                               
Translation adjustments
  $ 4     $ (1 )   $ 1     $ 1  
Adjustments to pension and other postretirement benefit plans
    1       1       -       4  
Net gain (loss) on cash flow hedging derivative instruments
    1       -       1       (1 )
Total other comprehensive income
    6       -       2       4  
Comprehensive Income
  $ 332     $ 81     $ 412     $ 285  
See Notes to the Consolidated Financial Statements.
                               


6

Union Carbide Corporation and Subsidiaries
(Unaudited)


NOTE A     CONSOLIDATED FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the “Corporation” or “UCC”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented.
 
The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.
 
The Corporation’s business activities comprise components of Dow’s global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under the accounting guidance related to segment reporting and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
 
Intercompany transactions and balances are eliminated in consolidation. Transactions with the Corporation’s parent company, Dow, and other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note K for further discussion.
 
These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.


NOTE B     RECENT ACCOUNTING GUIDANCE

Accounting Standards Codification
On July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification” or “ASC”) became the single source of authoritative GAAP (other than rules and interpretive releases of the U.S. Securities and Exchange Commission). The Codification is topically based with topics organized by ASC number and updated with Accounting Standards Updates (“ASUs”). ASUs will replace accounting guidance that historically was issued as FASB Statements (“SFAS”), FASB Interpretations (“FIN”), FASB Staff Positions (“FSP”), Emerging Issue Task Force (“EITF”) Issues or other types of accounting standards. The Codification became effective September 30, 2009 for the Corporation and disclosures within this Quarterly Report on Form 10-Q have been updated to reflect the change.

Accounting for Noncontrolling Interests
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (codified in ASC Topic 810, “Consolidation”), was effective January 1, 2009 for the Corporation and established accounting and reporting standards for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. The retrospective presentation and disclosure requirements outlined by the consolidation guidance have been incorporated into this Quarterly Report on Form 10-Q for the interim period ended September 30, 2009.

Fair Value Measurements
On January 1, 2009, the Corporation adopted FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (codified in ASC Topic 820, “Fair Value Measurements and Disclosures”), related to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on the financial statements on a recurring basis. Since the Corporation’s fair value measurements for nonfinancial assets and nonfinancial liabilities were consistent with the guidance, the adoption of the guidance did not have a material impact on the Corporation’s consolidated financial statements. The required disclosures are included in Note H.
 
On June 30, 2009, the Corporation adopted FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (codified in ASC Topic 820). This FSP provides additional guidance for estimating the fair value when the market activity for an asset or liability has declined significantly. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.
 
On June 30, 2009, the Corporation adopted FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (codified in ASC Topic 270, “Interim Reporting”). This guidance requires disclosures about the fair value of financial instruments during interim reporting periods. The Corporation’s enhanced disclosures are included in Note G.
 
On August 28, 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value,” to provide guidance on measuring the fair value of liabilities under ASC 820. This ASU clarifies the fair value measurements for a liability in an

 
active market and the valuation techniques in the absence of a Level 1 measurement. This ASU is effective for the first reporting period (including interim periods) beginning after issuance, which is October 1, 2009 for the Corporation. The adoption of this ASU is not anticipated to have a material impact on the Corporation’s consolidated financial statements.

Other Recently Adopted Accounting Guidance
On January 1, 2009, the Corporation adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (codified in ASC Topic 815, “Derivatives and Hedging”). This guidance requires enhanced disclosures about an entity’s derivative and hedging activities. The Corporation’s disclosures are included in Note G.
 
On January 1, 2009, the Corporation adopted FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (codified in ASC Topic 805, “Business Combinations” and ASC Topic 820), related to assets acquired and liabilities assumed in a business combination that arise from contingencies. This guidance states that assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value, if the acquisition date fair value can be reasonably determined. If the acquisition date fair value cannot be reasonably determined, then the asset or liability should be recognized in accordance with ASC Topic 450, “Contingencies” (formerly SFAS No. 5, “Accounting for Contingencies,” and FIN No. 14, “Reasonable Estimation of the Amount of a Loss - an interpretation of FASB Statement No. 5”). This guidance also requires new disclosures for the assets and liabilities within the scope of this guidance. The Corporation will apply this guidance to future business combinations.
 
On June 30, 2009 the Corporation adopted FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (codified in ASC Topic 320, “Investments - Debt and Equity Securities”). This guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.
 
On June 30, 2009 the Corporation adopted SFAS No. 165, “Subsequent Events” (codified in ASC Topic 855, “Subsequent Events”). This guidance establishes the principles and requirements for evaluating and reporting subsequent events, including the period subject to evaluation for subsequent events, the circumstances requiring recognition of subsequent events in the financial statements, and the required disclosures. The Corporation has evaluated subsequent events in accordance with this guidance through the filing of this Quarterly Report on Form 10-Q on October 30, 2009.

Accounting Guidance Issued But Not Yet Adopted
In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (codified in ASC Topic 715, “Compensation-Retirement Benefits”). The guidance requires new disclosures on investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk, and is effective for fiscal years ending after December 15, 2009, with earlier application permitted. The Corporation will include the required disclosures in the Corporation’s Annual Report on Form 10-K for the annual period ending December 31, 2009.
 
On January 1, 2010, the Corporation will be required to follow the new disclosure guidance in SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (codified in ASC Topic 860, “Transfers and Servicing”), related to transfers of assets. This guidance is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The Corporation is currently evaluating the impact of adopting the guidance.
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which amends the consolidation guidance applicable to variable interest entities and requires additional disclosures concerning an enterprise’s continuing involvement with variable interest entities. The Statement is effective for annual periods beginning after November 15, 2009, which is January 1, 2010 for the Corporation, and interim periods within that annual reporting period. The Corporation is currently evaluating the impact of adopting the Statement on January 1, 2010.
 
In September 2009, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables,” which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. This Issue is effective for fiscal periods beginning on or after June 15, 2010, which is January 1, 2011 for the Corporation. The Corporation is currently evaluating the impact of adopting the guidance.
 
In September 2009, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 09-3, “Applicability of Statement of Position 97-2 to Certain Arrangements that Include Software Elements” which clarifies the accounting guidance for sales of tangible products containing both software and hardware elements. This Issue is effective


for fiscal periods beginning on or after June 15, 2010, which is January 1, 2011 for the Corporation. The Corporation is currently evaluating the impact of adopting the guidance.


NOTE C     RESTRUCTURING

2009 Restructuring
On June 30, 2009, the Board of Directors of UCC approved a restructuring plan to improve the cost effectiveness of the Corporation’s global operations. As a result, the Corporation recorded restructuring charges of $162 million in the second quarter of 2009, which included the shutdown of certain facilities that produce ethylene as well as ethylene oxide/ethylene glycol in Hahnville, Louisiana ($38 million) and certain related capital project write-offs ($7 million). In addition, due to the expected loss arising from the United States Federal Trade Commission (“FTC”) required divestiture of certain specialty latex assets resulting from Dow’s acquisition of Rohm and Haas Company, the Corporation recognized an impairment charge in the second quarter of 2009 ($114 million). Included in the second quarter restructuring charge was severance of approximately $3 million for 41 people related to the plant shutdowns and corporate workforce reductions. During the third quarter of 2009, severance of $2 million was paid, leaving a liability of $1 million at September 30, 2009 for 16 people.
 
The following table summarizes the activities related to the Corporation’s restructuring reserve:

2009 Restructuring Activities
 
In millions
 
Impairment of Long-Lived Assets and Other Assets
 
Severance Costs
 
 
Total
Restructuring charges recognized in the second quarter of 2009
  $ 159     $ 3     $ 162  
Charges against reserve
    (159 )     -       (159 )
Reserve balance at June 30, 2009
    -     $ 3     $ 3  
Cash payments
    -       (2 )     (2 )
Reserve balance at September 30, 2009
    -     $ 1     $ 1  

2008 Restructuring
On December 5, 2008, the Board of Directors of UCC approved a restructuring plan to improve the cost effectiveness of the Corporation’s global operations. As a result, the Corporation recorded restructuring charges of $105 million in the fourth quarter of 2008, which included the write-off of the net book value of certain assets in Texas and Xiaolan, China, and a workforce reduction to improve the cost effectiveness and to enhance the efficiency of the Corporation’s operations. The charges included a $57 million write-off of the net book value associated with the shutdown of a facility that manufactures NORDELTM hydrocarbon rubber in Seadrift, Texas, the solution vinyl resins facility in Texas City, Texas and the emulsion systems facility in Xiaolan, China; severance of $24 million for a workforce reduction of 399 people; and curtailment costs of $24 million associated with the Corporation’s defined benefit plans. During the first quarter of 2009, the Corporation identified an additional 50 employees to be separated under the 2008 restructuring plan, resulting in the recognition of an additional $4 million of severance cost. During the first nine months of 2009, severance of $22 million was paid, leaving a liability at September 30, 2009 of $6 million for approximately 100 employees. The workforce reduction is expected to be completed by the end of 2010.

 
The following table summarizes the 2009 activities related to the Corporation’s 2008 restructuring reserve:

2009 Activities Related to 2008 Restructuring
 
In millions
 
Costs associated with Exit or
Disposal Activities
   
Severance Costs
 
Total
Reserve balance at December 31, 2008
  $ 24     $ 24     $ 48  
Adjustment to the reserve
    -       4       4  
Cash payments
    -       (8 )     (8 )
Reserve balance at March 31, 2009
  $ 24     $ 20     $ 44  
Cash payments
    -       (10 )     (10 )
Reserve balance at June 30, 2009
  $ 24     $ 10     $ 34  
Cash payments
    -       (4 )     (4 )
Reserve balance at September 30, 2009
  $ 24     $ 6     $ 30  

2007 Restructuring
On November 30, 2007, the Board of Directors of UCC approved a plan to shut down certain assets and make organizational changes to enhance the efficiency and cost effectiveness of the Corporation's operations. As a result, based on decisions made by management, the Corporation recorded restructuring charges of $55 million in the fourth quarter of 2007. The charges included a $26 million write-off of the net book value of the polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana, which was shut down at the end of 2007; severance of $17 million for a workforce reduction of 231 people; and curtailment costs of $12 million associated with the Corporation’s defined benefit pension plans. At December 31, 2008, severance of $2 million had been paid and a liability of $15 million remained for 187 employees. In the first nine months of 2009, severance of $6 million was paid, leaving a liability at September 30, 2009 of $9 million for approximately 67 employees. The workforce reduction is expected to be completed by December 31, 2009.
 
The following table summarizes the 2009 activities related to the Corporation’s 2007 restructuring reserve:

2009 Activities Related to 2007 Restructuring
 
In millions
 
Costs associated with Exit or
Disposal Activities
   
Severance Costs
 
Total
Reserve balance at December 31, 2008
  $ 12     $ 15     $ 27  
Cash payments
    -       (2 )     (2 )
Reserve balance at March 31, 2009
  $ 12     $ 13     $ 25  
Cash payments
    -       (1 )     (1 )
Reserve balance at June 30, 2009
  $ 12     $ 12     $ 24  
Cash payments
    -       (3 )     (3 )
Reserve balance at September 30, 2009
  $ 12     $ 9     $ 21  


NOTE D     DIVESTITURE OF NONCONSOLIDATED AFFILIATES

On September 30, 2009, the Corporation completed the sale of its ownership interest in the OPTIMAL Group of Companies (“OPTIMAL”), nonconsolidated affiliates, for $660 million This resulted in a pretax gain of $328 million included in “Sundry income (expense) - net.”



 
NOTE E     INVENTORIES

The following table provides a breakdown of inventories:

Inventories
In millions
 
Sept. 30,
2009
   
Dec. 31,
2008
 
Finished goods
  $ 58     $ 48  
Work in process
    11       10  
Raw materials
    45       55  
Supplies
    79       74  
Total inventories
  $ 193     $ 187  

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $100 million at September 30, 2009 and $115 million at December 31, 2008.


NOTE F     OTHER INTANGIBLE ASSETS

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

Other Intangible Assets
 
At September 30, 2009
   
At December 31, 2008
 
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     $ (33 )     -  
Patents
    2       (1 )   $ 1       2       (1 )   $ 1  
Software
    115       (105 )     10       117       (101 )     16  
Total other intangible assets
  $ 150     $ (139 )   $ 11     $ 152     $ (135 )   $ 17  

Amortization expense for software, which is included in “Cost of sales,” was $1 million in the third quarter of 2009 and $2 million in the third quarter of 2008. Amortization expense for software was $4 million for the nine months ended September 30, 2009 and $5 million for the nine months ended September 30, 2008. Amortization expense for other intangible assets (not including software) was immaterial in the third quarters of 2009 and 2008 as well as for the first nine months of 2009 and 2008. Total estimated amortization expense for 2009 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
 
2009
  $ 6  
2010
  $ 5  
2011
  $ 4  
2012
  $ 2  
2013
    -  
2014
    -  


NOTE G     FINANCIAL INSTRUMENTS

The Corporation’s investments in marketable securities are classified as available-for-sale.
 
Investing Results
In millions
 
Nine Months Ended Sept. 30, 2009
 
Proceeds from sales of available-for-sale securities
  $ 5  


 
The Corporation’s investments in debt securities had contractual maturities of less than 10 years.

Fair Value of Financial Instruments:
 
   
At September 30, 2009
   
At December 31, 2008
 
In millions
 
Cost
 
Gain
   
Loss
   
Fair Value
 
Cost
 
Gain
   
Loss
   
Fair Value
Marketable securities (1):
                                               
Debt securities
  $ 19     $ 1       -     $ 20     $ 13     $ 1       -     $ 14  
Equity securities
    1       -       -       1       -       -       -       -  
Total marketable securities
  $ 20     $ 1       -     $ 21     $ 13     $ 1       -     $ 14  
Long-term debt including debt due within one year
  $ (571 )   $ 98       -     $ (473 )   $ (820 )   $ 145       -     $ (675 )
(1)
Included in “Other investments” in the consolidated balance sheets.

Cost approximates fair value for all other financial instruments.
 
The Corporation enters into foreign exchange forward contracts to hedge various currency exposures, primarily related to assets and liabilities denominated in foreign currencies. The primary business objective of the activity is to optimize the U.S. dollar value of the Corporation’s assets and liabilities. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged. The Corporation had forward contracts to buy, sell or exchange foreign currencies that expired in the third quarter of 2009, and which were immaterial. The Corporation did not designate any derivatives as hedges at December 31, 2008.
 
At September 30, 2009 and December 31, 2008, nonconsolidated affiliates of the Corporation had hedging activities that were accounted for as cash flow hedges in accordance with the accounting guidance for derivatives and hedging. The Corporation’s proportionate share of the hedging results recorded in accumulated other comprehensive income by the nonconsolidated affiliates is reported as net hedging results in the Corporation’s consolidated statements of equity in accordance with the accounting guidance for reporting comprehensive income.


NOTE H     FAIR VALUE MEASUREMENTS

The following table summarizes the basis used to measure certain assets at fair value on a recurring basis in the consolidated balance sheets:

Basis of Fair Value Measurements
on a Recurring Basis at
September 30, 2009
 
In millions
 
Significant Other Observable Inputs
 (Level 2)
 
Assets at fair value:
     
    Debt securities (1)
  $ 20  
(1)
Included in “Other investments” in the consolidated balance sheets.

Assets that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets in active markets, adjusted for any terms specific to that asset. For all other assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
 
The prices for Level 2 items (significant other observable inputs) are based on the price a dealer would pay for the security or similar securities. Market inputs are obtained from well-established and recognized vendors of market data and placed through tolerance/quality checks.

 
The following table summarizes the basis used to measure certain assets at fair value on a nonrecurring basis in the consolidated balance sheets:

Basis of Fair Value Measurements
on a Nonrecurring Basis at
September 30, 2009
 
In millions
 
Significant Other Unobservable Inputs
(Level 3)
   
Total
   
Total Losses Three Months Ended
 Sept. 30,
2009
   
Total Losses Nine Months Ended
Sept. 30, 2009
 
Assets at fair value:
                       
Long-lived assets
    -       -       -     $ (159 )

As part of the restructuring plan that was approved on June 30, 2009, the Corporation shut down certain manufacturing facilities and will divest certain specialty latex assets resulting from Dow’s acquisition of Rohm and Haas Company as required by the FTC. As a result, long-lived assets with a carrying value of $159 million were written down to fair value, less cost to sell, resulting in an impairment charge of $159 million, which was included in the second quarter of 2009 restructuring charge (see Note C). The long-lived assets were valued based on bids received from third parties and using discounted cash flow analysis based on assumptions that market participants would use. Key inputs included anticipated revenues, associated manufacturing costs, capital expenditures and discount, growth and tax rates.


NOTE I     COMMITMENTS AND CONTINGENT LIABILITIES

Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At September 30, 2009, the Corporation had accrued obligations of $79 million for environmental remediation and restoration costs, including $20 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2008, the Corporation had accrued obligations of $67 million for environmental remediation and restoration costs, including $18 million for the remediation of Superfund sites. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Corporation’s consolidated financial statements.

Litigation
The Corporation is involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes.
 
Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
 
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
 
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review the

 
Corporation’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.
 
Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased the asbestos-related liability for pending and future claims for the 15-year period ending in 2021 to $1.2 billion at December 31, 2006.
 
In November 2008, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating ARPC’s December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
 
In December 2008, based on ARPC’s December 2008 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased the asbestos-related liability for pending and future claims by $54 million to $952 million, which covered the 15-year period ending in 2023, excluding future defense and processing costs. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million. At December 31, 2008, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims.
 
Based on the Corporation’s review of 2009 activity, the Corporation determined that no adjustment to the accrual was required at September 30, 2009. The Corporation’s asbestos-related liability for pending and future claims was $857 million at September 30, 2009. Approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims.
 
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by the Corporation after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of the Corporation’s insurance policies and to resolve issues that the insurance carriers may raise.
 
In September 2003, the Corporation filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the third quarter of 2009, the Corporation had reached settlements with several of the carriers involved in this litigation.
 
The Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million at September 30, 2009 and December 31, 2008. At September 30, 2009 and December 31, 2008, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
 
In addition to the receivable for insurance recoveries related to the asbestos-related liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers
 
In millions
 
Sept.30,
2009
   
Dec. 31, 2008
 
Receivables for defense costs
  $ 21     $ 28  
Receivables for resolution costs
    231       244  
Total
  $ 252     $ 272  

The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $20 million in the third quarter of 2009 ($14 million in the third quarter of 2008) and $40 million in the first nine months of 2009 ($30 million in the first nine months of 2008), and was reflected in “Cost of sales.”
 
After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, and after taking into account the solvency and historical payment experience of various insurance carriers, existing insurance settlements, and the advice of outside counsel with respect to the applicable insurance coverage law relating to the


terms and conditions of its insurance policies, the Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.
 
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
 
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
 
While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that, except for the asbestos-related matters described above, the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse impact on the results of operations, cash flows and consolidated financial position of the Corporation. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.

Purchase Commitments
At December 31, 2008, the Corporation had various outstanding commitments for take-or-pay agreements, with terms extending from one to fifteen years. Such commitments were not in excess of current market prices. The fixed and determinable portion of obligations under purchase commitments at December 31, 2008 is presented in the following table. There have been no material changes to purchase commitments since December 31, 2008.

Fixed and Determinable Portion of Take-or-Pay Obligations
at December 31, 2008
In millions
 
2009
  $ 13  
2010
    14  
2011
    6  
2012
    4  
2013
    4  
2014 and beyond
    14  
Total
  $ 55  

Guarantees
During the third quarter of 2009, the non-performance guarantees undertaken by the Corporation for its nonconsolidated affiliate Nippon Unicar Company Limited expired. In addition, during the third quarter of 2009, the Corporation sold its ownership interest in OPTIMAL, thereby eliminating all outstanding non-performance guarantees (see Note D). The Corporation has no outstanding guarantee obligations at September 30, 2009.

Conditional Asset Retirement Obligations
The Corporation has recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States. The aggregate carrying amount of conditional asset retirement obligations was $8 million at September 30, 2009 and $9 million at December 31, 2008. The discount rate used to calculate the Corporation’s asset retirement obligations was 7.13 percent, unchanged from December 31, 2008. These obligations are included in the consolidated balance sheets as “Accrued and other current liabilities.”
 
The Corporation has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Corporation’s consolidated financial statements based on current costs.




NOTE J     PENSION AND OTHER POSTRETIREMENT BENEFITS

Net Periodic Benefit Cost (Credit) for All Significant Plans
 
Three Months Ended
 
Nine Months Ended
In millions
 
Sept. 30,
2009
 
Sept. 30,
2008
 
Sept. 30,
2009
 
Sept. 30,
2008
 
Defined Benefit Pension Plans:
                       
Service cost
  $ 4     $ 5     $ 12     $ 15  
Interest cost
    56       56       168       168  
Expected return on plan assets
    (75 )     (78 )     (225 )     (234 )
Amortization of prior service cost
    2       2       4       6  
Amortization of net loss
    -       1       2       2  
Net periodic benefit credit
  $ (13 )   $ (14 )   $ (39 )   $ (43 )
Other Postretirement Benefits:
                               
Service cost
    -     $ 1       -     $ 3  
Interest cost
  $ 8       7     $ 24       21  
Amortization of prior service credit
    -       (1 )     -       (2 )
Net periodic benefit cost
  $ 8     $ 7     $ 24     $ 22  


NOTE K     RELATED PARTY TRANSACTIONS

The Corporation sells its products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow at market-based prices in accordance with the terms of Dow’s long-standing intercompany pricing policies. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in “Sundry income (expense) – net” in the consolidated statements of income. Purchases from that Dow subsidiary were approximately $516 million in the third quarter of 2009 ($1.1 billion in the third quarter of 2008) and $1.3 billion in the first nine months of 2009 ($3.2 billion in the first nine months of 2008).
 
The Corporation has a master services agreement with Dow whereby Dow provides services that include but are 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 services agreement with Dow, for general administrative and overhead type services that Dow routinely allocates to various businesses, UCC is charged the cost of those services based on the Corporation’s and Dow’s relative manufacturing conversion costs. For the first nine months of 2009, this charge was approximately $16 million, nearly unchanged from the same period last year (included in “Sundry income (expense) – net”).
 
For services that Dow routinely charges based on effort, UCC is charged the cost of such services on a fully absorbed basis, which includes direct and indirect costs. Additionally, certain Dow employees are contracted to UCC and Dow is reimbursed for all direct employment costs of such employees. Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
 
The monitoring and execution of risk management policies related to interest rate and foreign currency risks, which are based on Dow’s risk management philosophy, are provided as a service to UCC.
 
As part of Dow’s cash management process, UCC is a party to revolving loan agreements with Dow that have LIBOR-based interest rates with varying maturities. At September 30, 2009, the Corporation had a note receivable of $4.5 billion ($3.9 billion at December 31, 2008) from Dow pursuant to a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.
 
The Corporation also has a separate revolving credit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures December 30, 2010, pursuant to an amendment effective as of September 30, 2009. Dow may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries and joint ventures, with cash collateral. At September 30, 2009, $862 million ($826 million at December 31, 2008) was available under the revolving credit agreement. The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.


At December 31, 2008, the Corporation had an insurance receivable of $47 million reported in “Accounts receivable – Related companies” in the consolidated balance sheets from its insurer (an affiliate of Dow) for losses incurred from Hurricanes Katrina, Rita, Gustav and Ike. During the first nine months of 2009, the Corporation settled the remaining balance of $45 million of the receivable with its insurer for $43 million with the balance charged to “Cost of sales.”
 
The Corporation received cash dividends from its related company investments of $5 million in the third quarter of 2009 ($31 million for the first nine months of 2009). In the first nine months of 2008, the Corporation received $82 million in dividends from its related company investments, which included $75 million from Dow International Holdings Company (“DIHC”). These dividends are included in “Sundry income (expense) – net.”


 
 
Union Carbide Corporation and Subsidiaries
 


Pursuant to General Instruction H of Form 10-Q “Omission of Information by Certain Wholly-Owned Subsidiaries,” this section includes only management's narrative analysis of the results of operations for the three- and nine-month periods ended September 30, 2009, the most recent periods, compared with the three- and nine-month periods ended September 30, 2008, the corresponding periods in the preceding fiscal year.

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

Union Carbide Corporation’s (the “Corporation” or “UCC”) business activities comprise components of Dow’s global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC per the accounting guidance for disclosures about segments of an enterprise and other related information and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of the Corporation. This section covers the current performance and outlook of the Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Corporation's operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Corporation's expectations will be realized. The Corporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Total net sales for the third quarter of 2009 were $1,357 million compared with $1,977 million for the third quarter of 2008, a decrease of 31 percent. Total net sales were $3,686 million for the first nine months of 2009 compared with $5,967 million for the first nine months of 2008, a decrease of 38 percent.
 
Net sales to related companies for the third quarter of 2009 were $1,322 million compared with $1,929 million for the third quarter of 2008, a decrease of 31 percent. Net sales to related companies were $3,573 million for the first nine months of 2009 compared with $5,823 million for the first nine months of 2008, a decrease of 39 percent. Selling prices to Dow, which are based on market prices for the related products, were lower for most products in the third quarter of 2009 compared with the third quarter of 2008, as prices declined with lower raw material costs. The most significant declines were reported in ethylene glycols and polyethylene which experienced lower prices and lower volume. Vinyl acetate monomer, oxo products, polyglycols and surfactants all reported higher sales compared with the third quarter of 2008 as increased volume more than offset lower prices. Prices for most products were also lower for the first nine months of 2009 compared with the first nine months of 2008 with ethylene glycols, propylene products and polyethylene experiencing the most significant price declines. The lower prices on a year-to-date basis compared with the prior year also reflected declines in feedstock and energy and raw material costs. The increase in sales volume for ethyleneamines, vinyl acetate monomer and oxo products for the first nine months of 2009 compared with the first nine months of 2008 was more than offset by the lower sales demand for other products.
 
Cost of sales decreased 41 percent from $1,942 million in the third quarter of 2008 to $1,145 million in the third quarter of 2009, principally due to lower feedstock and energy costs, lower sales volume and cost control measures. On a year-to-date basis, cost of sales decreased 44 percent from $5,785 million in the first nine months of 2008 to $3,224 million in the first nine months of 2009, again reflecting lower feedstock and energy costs and lower sales volume.
 
Equity in earnings of nonconsolidated affiliates was $14 million in the third quarter of 2009 compared with $55 million in the third quarter of 2008. The OPTIMAL Group of Companies (“OPTIMAL”) reported a significant decline in earnings in the third quarter of 2009 compared with the third quarter of 2008. For the first nine months of 2009 equity in earnings of nonconsolidated affiliates were $20 million compared with $172 million for the first nine months of 2008, as the Corporation’s joint ventures were also impacted by the severe recessionary environment.
 
Sundry income (expense) – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, commissions, charges for management services provided by Dow, and gains and losses on sales of investments and assets. Sundry income (expense) – net for the third quarter of 2009 was income of $320 million compared with expense of $18 million for the third quarter of 2008. Sundry income (expense) - net was favorably impacted in the third quarter of 2009 by a pretax gain of $328 million on the sale of the Corporation’s ownership


interest in OPTIMAL (See Note D to the Consolidated Financial Statements). Year to date, sundry income (expense) - net was income of $322 million compared with income of $38 million for the first nine months of 2008. Sundry income (expense) - net for the first nine months of 2008 was favorably impacted by a dividend of $75 million from Dow International Holdings Company (“DIHC”) in the first quarter of 2008 (see Note K to the Consolidated Financial Statements).
 
Interest income was $21 million in the third quarter of 2009 compared with $24 million in the third quarter of 2008. Year to date, interest income was $31 million, down from $82 million in the first nine months of 2008. Interest income was lower in 2009 compared with the same periods of last year due to lower interest rates. Interest expense and amortization of debt discount was $8 million in the third quarter of 2009 compared with $12 million in the third quarter of 2008. In the first nine months of 2009, interest expense and amortization of debt discount was $32 million compared with $37 million for the first nine months of 2008.
 
The Corporation reported a provision for income taxes of $222 million in the third quarter of 2009 due primarily to the sale of its ownership interest in OPTIMAL. For the first nine months of 2009, the provision for income taxes was $183 million. The effective tax rate fluctuates based on, among other factors, where income is earned, the level of after-tax income from joint ventures, dividends received from investments in related companies and the level of income relative to tax credits available. The effective tax rate for the first nine months of 2009 was 30.9 percent compared with 24.9 percent for the same period last year.
 
The Corporation reported net income of $326 million for the third quarter of 2009 compared with $81 million for the third quarter of 2008, and net income for the first nine months of 2009 of $410 million compared with $281 million for the first nine months of 2008. Excluding the pretax gain from the Corporation’s sale of its ownership interest in OPTIMAL, the results for the first nine months of 2009 reflected the continuing global recession, as lower demand continued to put downward pressure on prices, which more than offset lower feedstock and energy costs, resulting in lower margins.
 
On July 31, 2009, Dow entered into a definitive agreement that included the sale of certain specialty latex assets of the Corporation, located in the United States, Canada, Puerto Rico, and Mexico, as required by the United States Federal Trade Commission (“FTC”) for the approval of Dow’s acquisition of Rohm and Haas Company. An impairment charge of $114 million for these assets was recognized in the second quarter 2009 restructuring charge (see Note C to the Consolidated Financial Statements). The transaction is subject to approval by the FTC and other customary closing conditions and is expected to close by the end of 2009.



Recent Accounting Guidance
See Note B to the Consolidated Financial Statements for a summary of recent accounting guidance. In addition, see Note H to the Consolidated Financial Statements for the Corporation’s disclosures about fair value measurements. The sensitivity of fair value measurements is immaterial relative to the assets and liabilities measured at fair value, as well as to the total equity of the Corporation.

Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 10-K”) describes the significant accounting policies and 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 Analysis of Financial Condition and Results of Operations in the Corporation’s 2008 10-K. Since December 31, 2008, there have been no material changes in the Corporation’s critical accounting policies.

Asbestos-Related Matters
Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
 
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various


companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
 
The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem:

   
2009
   
2008
 
Claims unresolved at January 1
    75,706       90,322  
Claims filed
    6,379       8,357  
Claims settled, dismissed or otherwise resolved
    (6,728 )     (15,856 )
Claims unresolved at September 30
    75,357       82,823  
Claimants with claims against both UCC and Amchem
    24,328       26,184  
Individual claimants at September 30
    51,029       56,639  

Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation’s litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.

Estimating the Liability
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review the Corporation’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.
 
Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased the asbestos-related liability for pending and future claims for the 15-year period ending in 2021 to $1.2 billion at December 31, 2006.
 
In November 2008, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating ARPC’s December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
 
In December 2008, based on ARPC’s December 2008 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased the asbestos-related liability for pending and future claims by $54 million to $952 million, which covered the 15-year period ending in 2023, excluding future defense and processing costs. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million. At December 31, 2008, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims.
 
Based on the Corporation’s review of 2009 activity, the Corporation determined that no adjustment to the accrual was required at September 30, 2009. The Corporation’s asbestos-related liability for pending and future claims was $857 million at September 30, 2009. Approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims.

Defense and Resolution Costs
The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:

Defense and Resolution Costs
 
Nine Months Ended
   
Aggregate Costs
 
In millions
 
Sept. 30,
2009
   
Sept. 30,
2008
   
to Date as of
Sept. 30, 2009
 
Defense costs
  $ 40     $ 37     $ 665  
Resolution costs
  $ 77     $ 90     $ 1,463  



The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated since the beginning of 2001. The Corporation’s management expects such fluctuation to continue based upon a number of factors, including the number and type of claims settled in a particular period, the jurisdictions in which such claims arose and the extent to which any proposed legislative reform related to asbestos litigation is being considered.
 
The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $20 million in the third quarter of 2009 ($14 million in the third quarter of 2008) and $40 million in the first nine months of 2009 ($30 million in the first nine months of 2008), and was reflected in “Cost of sales.”

Insurance Receivables
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of the Corporation’s insurance policies and to resolve issues that the insurance carriers may raise.
 
In September 2003, the Corporation filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the third quarter of 2009, the Corporation had reached settlements with several of the carriers involved in this litigation.
 
The Corporation’s receivable for insurance recoveries related to the asbestos liability was $403 million at September 30, 2009 and December 31, 2008. At September 30, 2009 and December 31, 2008, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
 
In addition to the receivable for insurance recoveries related to the asbestos-related liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers
 
In millions
 
Sept. 30, 2009
   
Dec. 31, 2008
 
Receivables for defense costs
  $ 21     $ 28  
Receivables for resolution costs
    231       244  
Total
  $ 252     $ 272  

After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, and after taking into account the solvency and historical payment experience of various insurance carriers, existing insurance settlements, and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, the Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

Summary
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
 
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the Corporation’s results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.





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



Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s Disclosure Committee and the Corporation’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.








The factors described below represent the Corporation’s principal risks.

Volatility in purchased feedstock and energy costs impacts UCC’s operating costs and adds variability to earnings.
Purchased feedstock and energy costs are expected to remain volatile throughout 2009. When these costs increase, the Corporation is not always able to immediately raise selling prices and, ultimately, its ability to pass on underlying cost increases is greatly dependent on market conditions. Conversely, when these costs decline, selling prices decline as well. As a result, increases in these costs could negatively impact the Corporation’s results of operations.

Issues involving the acquisition of Rohm and Haas Company by The Dow Chemical Company, the Corporation’s parent company, could have a liquidity impact on the Corporation.
Because Dow is a service provider, material debtor, and the major customer of the Corporation, certain events and situations affecting Dow’s acquisition of Rohm and Haas Company (“Rohm and Haas”), as noted below, could potentially impact sources of liquidity for the Corporation.
 
Dow’s integration of Rohm and Haas, which was acquired on April 1, 2009, could present significant challenges to Dow. The integration is requiring the attention of Dow management and employees, which could lessen time spent on services and administrative functions provided to the Corporation pursuant to negotiated agreements. Moreover, if the integration is not completed as planned, it could negatively impact Dow’s financial condition and results of operations.
 
At September 30, 2009, Dow had outstanding borrowings of $1.0 billion pursuant to a Term Loan Agreement (fully repaid on October 1, 2009), additional debt securities of $8.75 billion and preferred equity securities in the amount of $4.0 billion largely to finance the April 1, 2009 acquisition of Rohm and Haas. This financing requires Dow to make additional interest and dividend payments and thus may reduce Dow’s flexibility to respond to changing business and economic conditions. Although Dow’s credit rating was reduced in 2009, Dow is currently investment grade. If Dow’s credit rating is reduced below investment grade, it could have a negative impact on Dow’s ability to access credit markets. Dow is focused on reducing its indebtedness and intends to continue a strategy of divesting certain assets to achieve this goal. If Dow


is unable to successfully sell such assets, Dow could have difficulty reducing its indebtedness, which could result in further downgrades of its credit ratings, adversely affecting Dow’s financial condition and results of operations.

The value of investments are influenced by economic and market conditions.
The current economic environment is negatively impacting the fair value of pension assets, which could trigger increased future funding requirements of the pension trust.

Adverse conditions in the global economy and disruption of financial markets could continue to negatively impact UCC’s results of operations.
The continuing economic downturn in the United States and globally could further reduce demand for the Corporation’s products, resulting in a continued decrease in sales volume that could have a negative impact on UCC’s results of operations.

Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
The Corporation is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. At September 30, 2009, the Corporation had accrued obligations of $79 million for environmental remediation and restoration costs, including $20 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and will depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Corporation’s operations, or require modifications to its facilities. Accordingly, environmental, health or safety regulatory matters may result in significant unanticipated costs or liabilities.

The Corporation is party to a number of claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions.
The Corporation is involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. With the exception of the possible effect of the asbestos-related liability described below, it is the opinion of the Corporation’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on the Corporation’s consolidated financial statements.
 
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. At September 30, 2009, the Corporation’s asbestos-related liability for pending and future claims was $857 million and the Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million. At September 30, 2009, the Corporation also had receivables of $252 million for insurance recoveries for defense and resolution costs. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the Corporation’s consolidated financial statements.

Local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals.
Growing public and political attention has been placed on protecting critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern regarding the security of chemical production and distribution. In addition, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals, which could result in higher operating costs and interruptions in normal business operations.

Increased concerns regarding the safety of chemicals in commerce and their potential impact on the environment could lead to new regulations.
Concerns regarding the safety of chemicals in commerce and the potential impact on the environment reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest into additional pressure for more stringent regulatory intervention. In addition, these concerns could influence public perceptions, the viability of the Corporation’s products, the Corporation’s reputation, the cost to comply with regulations, and the ability to attract and retain employees, which could have a negative impact on the Corporation’s results of operations.


Weather-related matters could impact the Corporation’s results of operations.
In 2005 and again in the third quarter of 2008, major hurricanes caused significant disruption in UCC’s operations on the U.S. Gulf Coast, logistics across the region and in the supply of certain raw materials which had an adverse impact on volume and cost for some of UCC’s products. If similar weather-related matters occur in the future, it could negatively affect UCC’s results of operations, due to the Corporation’s substantial presence on the U.S. Gulf Coast.



See the Exhibit Index on page 26 of this Quarterly Report on Form 10-Q for exhibits filed with this report.

TRADEMARKS

The following trademark of the Financial Accounting Standards Board appears in this report:  FASB Accounting Standards Codification






Union Carbide Corporation and Subsidiaries




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 the undersigned thereunto duly authorized.


   
UNION CARBIDE CORPORATION
   
Registrant
     
     
Date:  October 30, 2009
   
 
By:
/s/ WILLIAM H. WEIDEMAN
   
William H. Weideman
   
Vice President and Controller
   
The Dow Chemical Company
   
Authorized Representative of
   
Union Carbide Corporation
     
     
     
     
 
By:
/s/ EUDIO GIL
   
Eudio Gil
   
Vice President, Treasurer and
   
Chief Financial Officer



25

Union Carbide Corporation and Subsidiaries

EXHIBIT NO.
                                                      DESCRIPTION
 
2.2
Agreement for the Sale & Purchase of Shares, dated as of August 17, 2009, among Union Carbide Corporation, UCMG L.L.C. and Petroliam Nasional Berhad, (See Exhibit 2.1 of the Corporation’s Current Report on Form 8-K dated September 30, 2009).
 
Seventh Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2009, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors.
 
Second Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2009, between the Corporation and The Dow Chemical Company.
 
Analysis, Research & Planning Corporation’s Consent.
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




26