UNION CARBIDE CORP /NEW/ - FORM 10-Q - November 6, 2017

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended SEPTEMBER 30, 2017

or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to___________

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.)

7501 STATE HIGHWAY 185 NORTH, SEADRIFT, TEXAS  77983
(Address of principal executive offices) (Zip Code)
 Registrant's telephone number, including area code:  361-553-2997

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).  
þ Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer   þ
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017, 935.51 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.


Union Carbide Corporation

QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2017

TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 
 

2

Union Carbide Corporation and Subsidiaries

Throughout this Quarterly Report on Form 10-Q, except as otherwise indicated by the context, the terms "Corporation" or "UCC" as used herein mean Union Carbide Corporation and its subsidiaries.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: "Management's Discussion and Analysis" and "Risk Factors." These forward-looking statements are generally identified by the words or phrases "anticipate," "believe," "estimate," "expect," "future," "intend," "may," "opportunity," "outlook," "plan," "project," "should," "strategy," "will," "would," "will be," "will continue," "will likely result" and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled "Risk Factors" (see Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016). UCC undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.


3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income

 
Three Months Ended
Nine Months Ended
In millions (Unaudited)
Sep 30,
2017
Sep 30,
2016
Sep 30,
2017
Sep 30,
2016
Net trade sales
$
31

$
27

$
113

$
77

Net sales to related companies
1,184

1,221

3,722

3,644

Total Net Sales
1,215

1,248

3,835

3,721

Cost of sales
991

957

3,056

2,726

Research and development expenses
4

5

14

14

Selling, general and administrative expenses
1

1

4

5

Restructuring and asset related charges - net
8

—

10

2

Integration and separation costs
1

—

1

—

Equity in earnings of nonconsolidated affiliate
—

—

—

3

Sundry income (expense) - net
(8
)
(10
)
6

20

Interest expense and amortization of debt discount
6

7

20

18

Income Before Income Taxes
196

268

736

979

Provision for income taxes
152

82

337

380

Net Income Attributable to Union Carbide Corporation
$
44

$
186

$
399

$
599

 
 
 
 
 
Depreciation
$
45

$
39

$
132

$
120

Capital Expenditures
$
47

$
55

$
145

$
173

See Notes to the Consolidated Financial Statements.


4

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income

 
Three Months Ended
Nine Months Ended
In millions (Unaudited)
Sep 30,
2017
Sep 30,
2016
Sep 30,
2017
Sep 30,
2016
Net Income Attributable to Union Carbide Corporation
$
44

$
186

$
399

$
599

Other Comprehensive Income, Net of Tax
 

 

 

 

Cumulative translation adjustments
1

—

4

—

Pension and other postretirement benefit plans
12

11

36

32

Total other comprehensive income
13

11

40

32

Comprehensive Income Attributable to Union Carbide Corporation
$
57

$
197

$
439

$
631

See Notes to the Consolidated Financial Statements.


5

Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
In millions, except share amounts (Unaudited)
Sep 30,
2017
Dec 31,
2016
Assets
 
 
Current Assets
 
 
Cash and cash equivalents
$
13

$
11

Accounts receivable:




Trade (net of allowance for doubtful receivables 2017: $-; 2016: $-)
20

15

Related companies
893

843

Other
48

36

Income taxes receivable
242

275

Notes receivable from related companies
1,257

1,411

Inventories
299

307

Other current assets
18

39

Total current assets
2,790

2,937

Investments
 

 

Investments in related companies
639

639

Investment in nonconsolidated affiliate
—

14

Other investments
25

30

Noncurrent receivables
58

52

Noncurrent receivables from related companies
54

57

Total investments
776

792

Property
 

 

Property
7,243

7,144

Less accumulated depreciation
5,837

5,750

Net property
1,406

1,394

Other Assets
 

 

Intangible assets (net of accumulated amortization 2017: $80; 2016: $78)
26

25

Deferred income tax assets
797

928

Deferred charges and other assets
39

70

Total other assets
862

1,023

Total Assets
$
5,834

$
6,146

Liabilities and Equity
 
 
Current Liabilities
 

 

Notes payable to related companies
$
27

$
25

Notes payable - other
2

—

Long-term debt due within one year
1

1

Accounts payable:




Trade
253

249

Related companies
537

521

Other
15

7

Income taxes payable
103

23

Asbestos-related liabilities - current
132

126

Accrued and other current liabilities
189

181

Total current liabilities
1,259

1,133

Long-Term Debt
474

475

Other Noncurrent Liabilities
 

 

Pension and other postretirement benefits - noncurrent
955

1,170

Asbestos-related liabilities - noncurrent
1,266

1,364

Other noncurrent obligations
174

206

Total other noncurrent liabilities
2,395

2,740

Stockholder's Equity
 

 

Common stock (authorized: 1,000 shares of $0.01 par value each;
issued: 935.51 shares)
—

—

Additional paid-in capital
138

138

Retained earnings
2,848

2,980

Accumulated other comprehensive loss
(1,280
)
(1,320
)
Union Carbide Corporation's stockholder's equity
1,706

1,798

Total Liabilities and Equity
$
5,834

$
6,146

See Notes to the Consolidated Financial Statements.

6

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows

 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2017
Sep 30,
2016
Operating Activities
 
 
Net Income Attributable to Union Carbide Corporation
$
399

$
599

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
148

138

Provision (credit) for deferred income tax
109

(306
)
Earnings of nonconsolidated affiliate in excess of dividends received
—

(2
)
Net gain on sales of property and investments
(26
)
(50
)
Net gain on sale of ownership interest in nonconsolidated affiliate
(4
)
—

Restructuring and asset related charges - net
10

2

Net periodic pension benefit cost
21

21

Pension contributions
(162
)
(52
)
Other, net
—

(1
)
Changes in assets and liabilities:
 
 
Accounts and notes receivable
10

(3
)
Related company receivables
104

(82
)
Inventories
8

(24
)
Accounts payable
15

(25
)
Related company payables
18

114

Asbestos-related payments
(92
)
(39
)
Other assets and liabilities
67

272

Cash provided by operating activities
625

562

Investing Activities
 

 

Capital expenditures
(145
)
(173
)
Change in noncurrent receivable from related company
3

7

Proceeds from sale of ownership interest in nonconsolidated affiliate
22

—

Proceeds from sales of property
18

58

Proceeds from sales of investments
9

3

Cash used in investing activities
(93
)
(105
)
Financing Activities
 

 

Dividends paid to stockholder
(531
)
(455
)
Changes in short-term notes payable
2

—

Payments on long-term debt
(1
)
(1
)
Cash used in financing activities
(530
)
(456
)
Summary
 

 

Increase in cash and cash equivalents
2

1

Cash and cash equivalents at beginning of year
11

23

Cash and cash equivalents at end of period
$
13

$
24

See Notes to the Consolidated Financial Statements.


7

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Equity

In millions (Unaudited)
Common Stock
Additional Paid-in Capital
Retained Earnings
Accum. Other Comp Loss
Total Equity
2016
 
 
 
 
 
Balance at Jan 1, 2016
$
—

$
138

$
3,391

$
(1,228
)
$
2,301

Net income attributable to Union Carbide Corporation
—

—

599

—

599

Other comprehensive income
—

—

—

32

32

Dividends declared
—

—

(455
)
—

(455
)
Other
—

—

1

—

1

Balance at Sep 30, 2016
$
—

$
138

$
3,536

$
(1,196
)
$
2,478

2017
 
 
 
 
 
Balance at Jan 1, 2017
$
—

$
138

$
2,980

$
(1,320
)
$
1,798

Net income attributable to Union Carbide Corporation
—

—

399

—

399

Other comprehensive income
—

—

—

40

40

Dividends declared
—

—

(531
)
—

(531
)
Balance at Sep 30, 2017
$
—

$
138

$
2,848

$
(1,280
)
$
1,706

See Notes to the Consolidated Financial Statements.


8
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

Table of Contents


NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
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 ("U.S. 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 11 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, 2016.

Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). See Note 12 for additional information.

Significant Accounting Policy Update
Integration and Separation Costs
The Corporation classifies expenses related to the Merger as integration and separation costs. Merger-related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses and costs incurred to prepare for the separation of Dow’s agriculture business, specialty products business and materials science business.


9
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

Changes in Financial Statement Presentation
Consolidated Statements of Cash Flows
In the first quarter of 2017, the Corporation made a change to the consolidated statements of cash flows to include a new line under "Operating Activities" entitled "Asbestos-related payments." The new line captures cash payments made for asbestos-related claim and resolution activity as well as asbestos-related defense and processing costs (effective as of the fourth quarter of 2016 as a result of an accounting policy change).

In the third quarter of 2017, the Corporation changed the presentation to the consolidated statements of cash flows to conform to the presentation that was adopted for DowDuPont. "Net period pension benefit cost" are now separately reported and have been reclassified from "Other assets and liabilities." Prior periods have been updated to conform to the current year presentation and are summarized below:

Summary of Changes to the Consolidated Statements of Cash Flows
Nine Months Ended Sep 30, 2016
In millions
As filed
Updated
Operating Activities
 
 
Net periodic pension benefit cost
$
—

$
21

Asbestos-related payments
$
—

$
(39
)
Other assets and liabilities
$
254

$
272


Consolidated Statements of Income
In the third quarter of 2017, the Corporation changed the presentation of certain line items on the face of the consolidated statements of income to conform to the presentation that was adopted for DowDuPont. Costs associated with integration and separation activities are now separately reported as “Integration and separation costs” and “Interest income” has been reclassified to “Sundry income (expense) - net.”  The changes were retrospectively applied and are summarized below:

Summary of Changes to the Consolidated Statements of Income
Three Months Ended
Nine Months Ended
 
Sep 30, 2016
Sep 30, 2016
Sep 30, 2016
Sep 30, 2016
In millions
As Filed
Updated
As Filed
Updated
Sundry income (expense) - net
$
(14
)
$
(10
)
$
10

$
20

Interest income
$
4

$
—

$
10

$
—



NOTE 2 - RECENT ACCOUNTING GUIDANCE
Accounting Guidance Issued But Not Yet Adopted at September 30, 2017
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09.

In May 2014, the FASB and International Accounting Standards Board formed The Joint Transition Resource Group for Revenue Recognition ("TRG"), consisting of financial statement preparers, auditors and users, to seek feedback on potential issues related to the implementation of the new revenue standard. As a result of feedback from the TRG, the FASB issued additional guidance to provide clarification, implementation guidance and practical expedients to address some of the challenges of implementation. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which is an amendment on assessing whether an entity is a principal or

10
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

an agent in a revenue transaction. This amendment addresses issues to clarify the principal versus agent assessment and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarity and implementation guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The new standards have the same effective date and transition requirements as ASU 2014-09.

The Corporation has a team in place to analyze ASU 2014-09 and the related ASU's across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. The Corporation is completing contract evaluations and validating the results of applying the new revenue guidance. The Corporation is in the process of finalizing its accounting policies, drafting the new disclosures, quantifying the potential financial adjustment and completing its evaluation of the impact of the accounting and disclosure requirements on business processes, controls and systems. Full implementation will be completed by the end of 2017. Based on analysis completed to date, the Corporation expects the potential impact on the recognition of revenue from product sales and licensing arrangements to remain substantially unchanged. The Corporation expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (ASU 2014-09). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early adoption is permitted. The Corporation has a team in place to evaluate the new guidance and is in the process of implementing a software solution to facilitate the development of business processes and controls around leases to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Corporation will adopt the new guidance in the first quarter of 2018 and the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets," which clarifies the scope of guidance on nonfinancial asset derecognition in Accounting Standards Codification 610-20 and the accounting for partial sales of nonfinancial assets. The new guidance also conforms the derecognition guidance for nonfinancial assets with the model in the new revenue standard (ASU 2014-09). The new standard is effective for annual reporting periods, and interim periods within those fiscal years, beginning after December 15, 2017, and an entity is required to apply the amendments at the same time that it applies the amendments in ASU 2014-09. The Corporation is planning to apply the new guidance with the implementation of the new revenue standard in the first quarter of 2018.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other

11
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Corporation is currently evaluating the impact of adopting this guidance.


NOTE 3 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
In September 2017, the Corporation approved restructuring actions that are aligned with DowDuPont’s synergy targets. As a result of these actions, the Corporation recorded a pretax restructuring charge for severance and related benefit costs of $8 million in the third quarter of 2017. The impact of this charge is shown as “Restructuring and asset related charges - net” in the consolidated statements of income. These actions are expected to be substantially completed by September 30, 2019. At September 30, 2017, severance of $1 million was paid, leaving a liability of $7 million.

The Corporation expects to incur additional costs in the future related to restructuring activities, as UCC continually looks for ways to enhance the efficiency and cost effectiveness of its operations. The Corporation expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.


NOTE 4 - INCOME TAXES
A transaction for the sale of stock between the Corporation and Dow in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the intended separation of DowDuPont into three publicly traded companies. As a result, in the third quarter of 2017, the Corporation increased “Income taxes payable” in the consolidated balance sheets and recorded a charge to “Provision for income taxes” in the consolidated statements of income of $97 million. 

The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $1 million at September 30, 2017 and $1 million at December 31, 2016. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $1 million at September 30, 2017 and $1 million at December 31, 2016.

In the second quarter of 2016, an adjustment was made to a reserve for a tax matter regarding a historical change in the legal ownership structure of a former nonconsolidated affiliate. The adjustment arose due to legal proceedings and the Corporation’s ongoing assessment of the unrecognized tax benefits, which resulted in an unfavorable impact of $57 million to “Provision for income taxes” in the consolidated statements of income.

Interest and penalties associated with uncertain tax positions are recognized as components of "Provision for income taxes" in the consolidated statements of income which totaled an insignificant amount for the three months ended September 30, 2017 and 2016. In the nine months ended September 30, 2017, the Corporation recognized a benefit of $2 million for interest and penalties (a charge of $82 million in the nine months ended September 30, 2016).

The Corporation is included in Dow's consolidated federal income tax group and consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. Positions challenged by the tax authorities may be settled or appealed by the Corporation. As a result, there is an uncertainty in income taxes recognized in the Corporation’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. Net reductions to the Corporation’s global unrecognized tax benefits are not expected to be material within the next twelve months.



12
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 5 - INVENTORIES
The following table provides a breakdown of inventories:

Inventories

Sep 30,
2017
Dec 31,
2016
In millions
Finished goods
$
210

$
186

Work in process
44

38

Raw materials
53

50

Supplies
79

87

Total
$
386

$
361

Adjustment of inventories to a LIFO basis
(87
)
(54
)
Total inventories
$
299

$
307



NOTE 6 - INTANGIBLE ASSETS
The following table provides information regarding the Corporation’s intangible assets:

Intangible Assets
Sep 30, 2017
Dec 31, 2016
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
)
$
—

Software
73

(47
)
26

70

(45
)
25

Total intangible assets
$
106

$
(80
)
$
26

$
103

$
(78
)
$
25


Total estimated amortization expense for 2017 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense

In millions
2017
$
4

2018
$
6

2019
$
6

2020
$
6

2021
$
4

2022
$
2




13
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 7 - 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, 2017, the Corporation had accrued obligations of $119 million for probable environmental remediation and restoration costs, including $20 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately three times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Corporation's results of operations, financial condition and cash flows. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Corporation’s results of operations, financial condition and cash flows. 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, 2016, the Corporation had accrued obligations of $145 million for probable environmental remediation and restoration costs, including $20 million for the remediation of Superfund sites.

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.

Asbestos-Related Matters
A description of asbestos-related matters can be found in Note 13 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016.

Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four 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 UCC 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.

The Corporation expects more asbestos-related suits to be filed against UCC and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

Estimating the Asbestos-Related Liability
Since 2003, the Corporation has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review the Corporation's historical asbestos-related claim and resolution activity in order to assist UCC management in estimating the Corporation's asbestos-related liability. Each year, Ankura has reviewed the claim and resolution activity to determine the appropriateness of updating the most recent Ankura study. Historically, every other year beginning in October, Ankura has completed a full review and formal update to the most recent Ankura study.

Based on the December 2016 Ankura study and the Corporation's own review of the data, and taking into account the change in accounting policy that occurred in the fourth quarter of 2016, the Corporation's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,490 million at December 31, 2016, and was included in “Asbestos-related liabilities - current” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.

Each quarter, the Corporation reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. The Corporation also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of the Corporation and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future

14
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

resolution costs. UCC management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on the Corporation's review of 2017 activity, it was determined that no adjustment to the accrual was required at September 30, 2017.

The Corporation’s asbestos-related liability for pending and future claims and defense and processing costs was $1,398 million at September 30, 2017, and approximately 15 percent of the recorded liability related to pending claims and approximately 85 percent related to future claims.

Summary
The Corporation's management believes the amounts recorded for the asbestos-related liability (including defense and processing costs) reflect reasonable and probable estimates of the liability based on current, known facts. However, future events, such as the number of new claims to be filed and/or received each year and the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for the Corporation to be higher or lower than those projected or those recorded. Any such event could result in an increase or decrease in the recorded liability.

Because of the uncertainties described above, the Corporation cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing UCC and Amchem. As a result, it is reasonably possible that an additional cost of disposing of asbestos-related claims, including future defense and processing costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position.

Other Litigation
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 the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, cash flows and financial position of the Corporation.


NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes and after-tax balances of each component of accumulated other comprehensive loss for the nine months ended September 30, 2017 and 2016:

Accumulated Other Comprehensive Loss
Cumulative Translation Adj
Pension and Other Postretire Benefits
Accum Other Comp Loss
In millions
Balance at Jan 1, 2016
$
(61
)
$
(1,167
)
$
(1,228
)
Amounts reclassified from accumulated other comprehensive income
—

32

32

Net other comprehensive income
—

32

32

Balance at Sep 30, 2016
$
(61
)
$
(1,135
)
$
(1,196
)
 
 
 
 
Balance at Jan 1, 2017
$
(62
)
$
(1,258
)
$
(1,320
)
Other comprehensive income before reclassifications
1

—

1

Amounts reclassified from accumulated other comprehensive income
3

36

39

Net other comprehensive income
4

36

40

Balance at Sep 30, 2017
$
(58
)
$
(1,222
)
$
(1,280
)


15
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

The tax effects on the net activity related to each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 were as follows:

Tax Benefit
Three Months Ended
Nine Months Ended
In millions
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Pension and other postretirement benefits
$
6

$
6

$
22

$
20


A summary of the reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 is provided as follows:

Reclassifications Out of Accumulated Other Comprehensive Loss
Three Months Ended
Nine Months Ended
Consolidated Statements of Income Classification
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
In millions
Cumulative translation adjustments
$
—

$
—

$
3

$
—

See (1) below
Pension and other postretirement benefits
18

17

58

52

See (2) below
Tax benefit
(6
)
(6
)
(22
)
(20
)
See (3) below
After-tax
12

11

36

32

 
Total reclassifications for the period, after-tax
$
12

$
11

$
39

$
32

 
1.
"Sundry income (expense) - net."
2.
Included in the computation of net periodic benefit cost of the Corporation's pension and other postretirement plans. See Note 9 for additional information.
3.
"Provision for income taxes."


NOTE 9 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Net Periodic Benefit Cost for All Significant Plans
Three Months Ended
Nine Months Ended
In millions
Sep 30,
2017
Sep 30,
2016
Sep 30,
2017
Sep 30,
2016
Defined Benefit Pension Plans:
 
 
 
 
Service cost
$
10

$
9

$
28

$
27

Interest cost
33

33

97

99

Expected return on plan assets
(56
)
(54
)
(166
)
(162
)
Amortization of net loss
20

19

62

57

Net periodic benefit cost
$
7

$
7

$
21

$
21

 
 
 
 
 
Other Postretirement Benefits:
 
 
 
 
Interest cost
$
2

$
2

$
6

$
6

Amortization of net gain
(2
)
(2
)
(4
)
(5
)
Net periodic benefit cost
$
—

$
—

$
2

$
1




16
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 10 - FINANCIAL INSTRUMENTS
Investments
The Corporation's investments in marketable securities are classified as available-for-sale. Proceeds from sales of available-for-sale securities were $2 million for the nine-month period ended September 30, 2017 ($2 million in proceeds from the maturity of marketable securities for the nine-month period ended September 30, 2016).

For securities frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.

Fair Value of Financial Instruments
Sep 30, 2017
Dec 31, 2016
In millions
Cost
Gain
Loss
Fair Value
Cost
Gain
Loss
Fair Value
Cash equivalents
$
9

$
—

$
—

$
9

$
7

$
—

$
—

$
7

Debt securities 1
$
—

$
—

$
—

$
—

$
2

$
—

$
—

$
2

Long-term debt including debt due within one year
$
(475
)
$
—

$
(134
)
$
(609
)
$
(476
)
$
—

$
(95
)
$
(571
)
1. Marketable securities are included in "Other investments" in the consolidated balance sheets.

For all other financial instruments, cost approximates fair value.


NOTE 11 - 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 intercompany pricing policies. After each quarter, the Corporation and Dow analyze the pricing used for the sales in that quarter and reach agreement on any necessary adjustments, at which point the prices are final. 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 $377 million in the third quarter of 2017 ($379 million in the third quarter of 2016) and $1,213 million in the first nine months of 2017 ($1,011 million in the first nine months of 2016). The increase in purchase costs in the first nine months of 2017 when compared with the same period last year is due to higher feedstock and energy costs.

The Corporation has a master 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 services agreement with Dow, general administrative and overhead type services that Dow routinely allocates to various businesses are charged to UCC. The master services agreement cost allocation basis is headcount and includes a 10 percent service fee. This agreement resulted in expense of $8 million in the third quarter of 2017 ($7 million in the third quarter of 2016) and $24 million in the first nine months of 2017 ($21 million in the first nine months of 2016) for general administrative and overhead type services and the 10 percent service fee, included in "Sundry income (expense) - net" in the consolidated statements of income. The remaining activity-based costs were $20 million in the third quarter of 2017 ($19 million in the third quarter of 2016) and $60 million in the first nine months of 2017 ($53 million in the first nine months of 2016), and were included in "Cost of sales" in the consolidated statements of income.

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 loans with Dow that have interest rates based on LIBOR (London Interbank Offered Rate) with varying maturities. At September 30, 2017, the Corporation had a note receivable of

17
 Union Carbide Corporation and Subsidiaries
 Notes to the Consolidated Financial Statements
(Unaudited)

$1.2 billion ($1.4 billion at December 31, 2016) from Dow under 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, 2017. 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, with cash collateral. At September 30, 2017, $949 million was available under the revolving credit agreement ($947 million at December 31, 2016). The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.

On a quarterly basis, the Corporation's Board of Directors reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution. In the third quarter of 2017, the Corporation declared and paid a cash dividend of $181 million to Dow; dividends to Dow totaled $531 million in the first nine months of 2017. In the third quarter of 2016, the Corporation declared and paid a cash dividend of $55 million to Dow; dividends to Dow totaled $455 million in the first nine months of 2016.


NOTE 12 - MERGER WITH DUPONT
Effective August 31, 2017, Dow and DuPont completed the previously announced merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"), by and among Dow, DuPont, DowDuPont, Diamond Merger Sub, Inc. and Orion Merger Sub, Inc. Pursuant to the Merger Agreement, (i) Diamond Merger Sub, Inc. was merged with and into Dow, with Dow surviving the merger as a subsidiary of DowDuPont (the "Diamond Merger") and (ii) Orion Merger Sub, Inc. was merged with and into DuPont, with DuPont surviving the merger as a subsidiary of DowDuPont (the "Orion Merger" and, together with the Diamond Merger, the "Mergers"). Following the consummation of the Mergers, each of Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to the receipt of regulatory approvals and approval by the board of directors of DowDuPont ("DowDuPont Board"), the separation of the combined company's agriculture business, specialty products business and materials science business through one or more tax-efficient transactions ("Intended Business Separations").

On August 31, 2017, following the Diamond Merger, Dow requested that the New York Stock Exchange ("NYSE") withdraw the shares of Dow Common Stock from listing on the NYSE and file a Form 25 with the U.S. Securities and Exchange Commission ("SEC") to report that the shares of Dow Common Stock are no longer listed on the NYSE. The shares of Dow Common Stock were suspended from trading on the NYSE prior to the open of trading on September 1, 2017.

On September 12, 2017, DowDuPont announced that the DowDuPont Board and management, with the assistance of independent advisors, completed their comprehensive review of the portfolio composition of the three intended independent companies. The DowDuPont Board unanimously concluded that, in light of knowledge gained since the announcement of the proposed merger of equals, certain targeted adjustments will be made between the materials science and specialty products businesses, which will enhance the competitive advantages of the intended resulting companies. As a result of this change, it is expected that a portion of UCC's business will move to the specialty products business as part of the intended spin-off transactions, and the Corporation does not expect the intended spin-off transactions to have a material impact on the Consolidated Financial Statements.



18
Union Carbide Corporation and Subsidiaries

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 nine-month period ended September 30, 2017, the most recent period, compared with the nine-month period ended September 30, 2016, the corresponding period in the preceding fiscal year.

References to "Dow" refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context.

Dow conducts its worldwide operations through global businesses. Union Carbide Corporation’s (the "Corporation" or "UCC") business activities comprise components of Dow’s global operations rather than stand-alone operations. Because there are no separable reportable business segments for UCC 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.


RESULTS OF OPERATIONS
Net Sales
Total net sales were $1,215 million in the third quarter of 2017 compared with $1,248 million in the third quarter of 2016, a decrease of 3 percent. Total net sales were $3,835 million in the first nine months of 2017 compared with $3,721 million in the first nine months of 2016, an increase of 3 percent. Net sales to related companies, principally to Dow, and based on market prices for the related products, were $1,184 million in the third quarter of 2017 compared with $1,221 million in the third quarter of 2016, a decrease of 3 percent. Net sales to related companies were $3,722 million in the first nine months of 2017 compared with $3,644 million in the first nine months of 2016, an increase of 2 percent.

Average selling prices increased 5 percent in the third quarter of 2017 compared with the same quarter last year. Price increases across almost all products were primarily driven by tight market supply as a result of hurricane-related supply disruptions, with the largest price increases in polyethylene, ethylene oxide/ethylene glycol ("EO/EG"), oxo alcohols and vinyl acetate monomers. Total sales volume was down 8 percent in the third quarter of 2017 compared with the third quarter of 2016 as a result of hurricane-related production disruptions and the impact of planned maintenance turnarounds. Increases in sales volume in water soluble polymers and glutaraldehydes were more than offset by lower sales volume in electrical and telecommunications, polyethylene, EO/EG, glycol ethers and ethanolamines.

In the first nine months of 2017, average selling prices were up 5 percent with price increases in most products compared with the first nine months of 2016, driven by higher feedstock, energy and other raw material costs and tight market supply as a result of hurricane-related supply disruptions in the third quarter of 2017. Sales volume in the first nine months of 2017 was down 2 percent when compared with the first nine months of 2016. Sales volume increases in vinyl acetate monomers, acrylic monomers and glutaraldehydes were more than offset by lower sales volume in electrical and telecommunications, EO/EG and oxo alcohols.

Cost of Sales
Cost of sales were $991 million in the third quarter of 2017 compared with $957 million in the third quarter of 2016, an increase of 4 percent. Cost of sales increased 12 percent from $2,726 million in the first nine months of 2016 to $3,056 million in the first nine months of 2017. Increases for the three- and nine-month periods ended September 30, 2017, were driven by higher feedstock, energy and other raw material costs as well as increased planned maintenance turnaround spending when compared with the same periods last year, and hurricane-related production and supply disruptions and repair costs in the third quarter of 2017.

Research and Development ("R&D"), Selling, General and Administrative ("SG&A") Expenses
R&D expenses were $4 million in the third quarter of 2017 compared with $5 million in the third quarter of 2016. In the first nine months of 2017, R&D expenses were $14 million, flat when compared with the first nine months of 2016. SG&A expenses were $1 million in the third quarter of 2017 and the third quarter of 2016. In the first nine months of 2017, SG&A expenses were $4 million compared with $5 million in the first nine months of 2016.

Restructuring and Asset Related Charges - Net
In the third quarter of 2017, the Corporation approved restructuring actions that are aligned with DowDuPont’s synergy targets. As a result of these actions, the Corporation recorded a pretax restructuring charge for severance and related benefit costs of $8 million in the third quarter of 2017. The impact of this charge is shown as “Restructuring and asset related charges - net” in the consolidated

19
Union Carbide Corporation and Subsidiaries

statements of income. See Note 3 to the Consolidated Financial Statements for additional information on the Corporation's restructuring activities.

Equity in Earnings of Nonconsolidated Affiliate
Equity in earnings of a nonconsolidated affiliate was zero in the third quarter of 2017 and the first nine months of 2017, compared with zero in the third quarter of 2016 and $3 million in the first nine months of 2016. On March 16, 2017, UCC entered into a share sale and purchase agreement to sell its ownership interest in Asian Acetyls Co., Ltd. ("ASACCO"), a nonconsolidated affiliate accounted for under the equity method of accounting. ASACCO agreed to purchase all of the shares of registered common stock owned by UCC. On April 24, 2017, the sale was completed for proceeds of $22 million. In the second quarter of 2017, the Corporation recorded a pretax gain of $4 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.

Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, commissions, charges for management services provided by Dow, interest income, and gains and losses on sales of investments and assets. Sundry income (expense) - net in the third quarter of 2017 was expense of $8 million compared with expense of $10 million in the same quarter last year. In the first nine months of 2017, sundry income (expense) - net was income of $6 million compared with income of $20 million in the first nine months of 2016. Sundry income (expense) - net includes the pretax gains on the sales of land at the Corporation's Texas City, Texas, site in the second quarters of 2016 and 2017.

Texas City, Texas, Land Sales
On June 27, 2016, UCC signed agreements for the sale of excess land at the Texas City, Texas, manufacturing site. As a result, in the second quarter of 2016, UCC recorded a pretax gain of $46 million on the sale of one parcel of land. On April 3, 2017, the Corporation sold a second parcel of land, which also included terminal assets and ancillary agreements for the supply of energy and site and terminal services, and recorded a pretax gain of $23 million in the second quarter of 2017.

Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $6 million in the third quarter of 2017 ($20 million in the first nine months of 2017) compared with $7 million in the third quarter of 2016 ($18 million in the first nine months of 2016).

Provision for Income Taxes
The Corporation reported a tax provision of $152 million in the third quarter of 2017, which resulted in an effective tax rate of 77.6 percent. This compared with a tax provision of $82 million in the third quarter of 2016, which resulted in an effective tax rate of 30.6 percent. In the first nine months of 2017, the Corporation reported a tax provision of $337 million, which resulted in an effective tax rate of 45.8 percent. This compared with a tax provision of $380 million in the first nine months of 2016, which resulted in an effective tax rate of 38.8 percent. The effective tax rate fluctuates based on, among other factors, where income is earned, dividends received from investments in related companies and the level of income relative to tax credits available. The effective tax rate for the third quarter of 2017 was impacted by a deferred gain related to the sale of stock between UCC and Dow in 2014. The gain on the transaction was deferred for tax purposes, but with the activities that were executed in anticipation of the intended separation of DowDuPont into three publicly traded companies, the gain became taxable, resulting in a charge to the tax provision of $97 million. In the second quarter of 2016, the Corporation adjusted the reserve for uncertain tax positions for a tax matter regarding the historical change in the legal ownership structure of a former nonconsolidated affiliate, resulting in a charge to the tax provision of $57 million. See Note 4 to the Consolidated Financial Statements for additional information.

Net Income Attributable to UCC
The Corporation reported net income of $44 million in the third quarter of 2017 compared with $186 million in the third quarter of 2016. Net income in the first nine months of 2017 was $399 million compared with $599 million in the first nine months of 2016.

Capital Expenditures
Capital spending in the third quarter of 2017 was $47 million ($145 million in the first nine months of 2017) compared with $55 million in the third quarter of 2016 ($173 million in the first nine months of 2016), reflecting spending for U.S. Gulf Coast and site infrastructure projects in both years.



20
Union Carbide Corporation and Subsidiaries

OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.

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 1 to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 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 2016 10-K. Since December 31, 2016, there have been no material changes in the Corporation’s critical accounting policies.

Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four 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 UCC 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 UCC’s products.

The table below provides information regarding asbestos-related claims pending against the Corporation and Amchem based on criteria developed by UCC and its external consultants.

Asbestos-Related Claim Activity
2017
2016
Claims unresolved at Jan 1
16,141

18,778

Claims filed
5,598

5,909

Claims settled, dismissed or otherwise resolved
(6,560
)
(7,052
)
Claims unresolved at Sep 30
15,179

17,635

Claimants with claims against both UCC and Amchem
(5,544
)
(6,444
)
Individual claimants at Sep 30
9,635

11,191


Plaintiffs' lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous 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.

For additional information see Asbestos-Related Matters in Note 7 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.

Debt Covenants and Default Provisions
The Corporation’s outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation’s size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. Management believes the Corporation was in compliance with the covenants referred to above at September 30, 2017.


21
Union Carbide Corporation and Subsidiaries

Dividends
On a quarterly basis, the Corporation's Board of Directors reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution.

In the third quarter of 2017, the Corporation declared and paid a cash dividend of $181 million to Dow; dividends paid to Dow totaled $531 million in the first nine months of 2017. In the third quarter of 2016, the Corporation declared and paid a cash dividend of $55 million to Dow; dividends paid to Dow totaled $455 million in the first nine months of 2016. On November 2, 2017, the UCC Board of Directors approved a dividend to Dow of $72 million, payable on December 22, 2017.



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Union Carbide Corporation and Subsidiaries


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q.


ITEM 4. CONTROLS AND PROCEDURES
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 and 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 and 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. 

Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company (“DuPont”) each merged with subsidiaries of DowDuPont Inc. and, as a result, Dow and DuPont became subsidiaries of DowDuPont Inc. The Corporation’s internal control over financial reporting continued to operate as designed to support the consolidation of the Corporation into Dow.


PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
No material developments in asbestos-related matters occurred in the third quarter of 2017. For a current status of asbestos-related matters, see Note 7 to the Consolidated Financial Statements.


ITEM 1A.  RISK FACTORS
There were no material changes in the Corporation's risk factors in the third quarter of 2017.


ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.


ITEM 6.  EXHIBITS
See the Exhibit Index of this Quarterly Report on Form 10-Q for exhibits filed with this report.


23

 Union Carbide 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 the undersigned thereunto duly authorized.


UNION CARBIDE CORPORATION
Registrant

Date: November 6, 2017
 
 
 
By:
/s/ RONALD C. EDMONDS
 
 
Ronald C. Edmonds
 
 
Controller and Vice President
 
 
of Controllers and Tax
 
 
The Dow Chemical Company
 
 
Authorized Representative of
 
 
Union Carbide Corporation
 
 
 
 
 
 
 
By:
/s/ IGNACIO MOLINA
 
 
Ignacio Molina
 
 
Vice President, Treasurer and
 
 
Chief Financial Officer


24

 Union Carbide Corporation and Subsidiaries
Exhibit Index
 

EXHIBIT NO.
 
DESCRIPTION
 
 
 
 
Ankura Consulting Group, LLC'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.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


25

UNION CARBIDE CORP /NEW/ Reports

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