10-K 1 ucc201210k.htm 10-K UCC 201210K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2012

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.)

1254 Enclave Parkway, Houston, Texas  77077
(Address of principal executive offices)          (Zip Code)
 
Registrant's telephone number, including area code:  281-966-2727

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes    R No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes    R No
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.                                    R 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                          R 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
Accelerated filer o
Non-accelerated filer R
Small reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    R No

At February 15, 2013, 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 I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
 
DOCUMENTS INCORPORATED BY REFERENCE
None


Union Carbide Corporation
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2012


TABLE OF CONTENTS

 
 
PAGE
 
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
 
 
 
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
 
 
 
 
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
 
 
 
 
Exhibits, Financial Statement Schedules.
 
 
 


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Union Carbide Corporation and 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: “Item 1. Business,” “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words “believe,” “project”, “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “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” (Part 1, Item 1A of this Form 10-K). Union Carbide Corporation 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.


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Union Carbide Corporation and Subsidiaries
PART I, Item 1. Business.

THE CORPORATION

Union Carbide Corporation (the “Corporation” or “UCC”) is a chemicals and polymers company that has been a wholly owned subsidiary of The Dow Chemical Company (“Dow”) since 2001. In addition to its consolidated operations, the Corporation participates in partnerships and joint ventures (together, “nonconsolidated affiliates”). Except as otherwise indicated by the context, the terms “Corporation” or “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries.

Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global businesses 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. In addition, in order to simplify the customer interface process, the Corporation sells substantially all its products to Dow. Products are sold to Dow at market-based prices, in accordance with the terms of Dow's intercompany pricing policies.

BUSINESS AND PRODUCTS

The following is a description of the Corporation's principal products.

Ethylene Oxide/Ethylene Glycol (“EO/EG”) - ethylene oxide (“EO”), a chemical intermediate primarily used in the manufacture of monoethylene glycol (“MEG”), polyethylene glycol, glycol ethers, ethanolamines, surfactants and other performance chemicals and polymers; di- and triethylene glycol, used in a variety of applications, including boat construction, shoe manufacturing, natural gas-drying and other moisture-removing applications, and plasticizers for safety glasses; and tetraethylene glycol, used predominantly in the production of plasticizers for automotive windows. MEG is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids.

Industrial Chemicals and Polymers - broad range of products for specialty applications, including pharmaceutical, animal food supplements, personal care, industrial and household cleaning, coatings for beverage and food cans, industrial coatings and many other industrial uses. Product lines include acrolein and derivatives, CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols, TERGITOL™ and TRITON™ surfactants, UCAR™ deicing fluids, UCARTHERM™ heat transfer fluids and UCON™ fluids.

Polyethylene - includes FLEXOMER™ very low density polyethylene resins used as impact modifiers in other polymers and to produce flexible hose and tubing, frozen-food bags and stretch wrap; TUFLIN™ linear low density and UNIVAL™ high density polyethylene resins used in high-volume applications such as housewares; milk, water, bleach and detergent bottles; grocery sacks; trash bags; packaging; and water and gas pipe.

Solvents and Intermediates - includes oxo aldehydes, acids and alcohols used as chemical intermediates and industrial solvents and in herbicides, plasticizers, paint dryers, jet-turbine lubricants, lube oil additives, and food and feed preservatives; and esters, which serve as solvents in industrial coatings and printing inks and in the manufacturing processes for pharmaceuticals and polymers.

Technology Licensing and Catalysts - includes licensing and supply of related catalysts for the UNIPOL™ polypropylene process, catalysts supply for the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols; licensing of the UNIPOL™ polyethylene process and sale of related catalysts (including metallocene catalysts) through Univation Technologies, LLC, a 50:50 joint venture with ExxonMobil; and licensing of the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols through Dow Technology Investments LLC, a 50:50 joint venture with Dow Global Technologies LLC, a Dow subsidiary.
 
Vinyl Acetate Monomer - a building block for the manufacture of a variety of polymers used in water-based emulsion paints, adhesives, paper coatings, textiles, safety glass and acrylic fibers.


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Water Soluble Polymers - polymers used to enhance the physical and sensory properties of end-use products in a wide range of applications including food, paints and coatings, pharmaceuticals, oil and gas, personal care, building and construction, and other specialty applications. Key product lines include CELLOSIZE™ hydroxyethyl cellulose, POLYOX™ water-soluble resins, and products for hair and skin manufactured by Amerchol Corporation, a wholly owned subsidiary.

Electrical and Telecommunications - polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications, and flame-retardant wire and cable. Key product lines include: REDI-LINK™ polyethylene-based wire and cable compounds, SI-LINK™ polyethylene-based low voltage insulation compounds, UNIGARD™ HP high-performance flame-retardant compounds, UNIGARD™ RE reduced emissions flame-retardant compounds, and UNIPURGE™ purging compounds.

Divestitures
On September 30, 2011, Dow sold its global Polypropylene business which included the following Corporation assets: polypropylene manufacturing facility at Seadrift, Texas; railcars; inventory; business know-how; and certain product and process technology. The Corporation's Polypropylene Licensing and Catalyst business and related catalyst facilities were excluded from the scope of this transaction. See Note 4 to the Consolidated Financial Statements for additional information.

Competition
The chemical industry has been historically competitive and this competitive environment is expected to continue. The chemical divisions of the major international oil companies also provide substantial competition both in the United States and abroad.

Research and Development
The Corporation is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes, and to develop new applications for existing products. Research and development expenses were $35 million in 2012, $47 million in 2011 and $43 million in 2010. In addition, certain of the Corporation's nonconsolidated affiliates conduct research and development within their business fields.

Patents, Licenses and Trademarks
The Corporation continually applies for and obtains U.S. and foreign patents that relate to a wide variety of products and processes, has a substantial number of pending patent applications throughout the world, and is licensed under a number of patents. At December 31, 2012 the Corporation owned 198 active U.S. patents and 749 active foreign patents related to a wide variety of products and processes. These patents expire as follows:

Remaining Life of Patents Owned at December 31, 2012
  
 
United States

 
Foreign

Within 5 years
 
84

 
190

6 to 10 years
 
82

 
355

11 to 15 years
 
19

 
169

16 to 20 years
 
13

 
35

Total
 
198

 
749


The Corporation also has a large number of trademarks. Although the Corporation considers that its patents, licenses and trademarks in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent on any single or group of related patents, licenses or trademarks.


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Principal Partly Owned Companies
UCC's principal nonconsolidated affiliates at December 31, 2012 and the Corporation's ownership interest in each are listed below:
•
Nippon Unicar Company Limited - 50 percent - a Japan-based manufacturer of polyethylene and specialty polyethylene compounds.
•
Univation Technologies, LLC - 50 percent - a United States-based company that develops, markets and licenses the UNIPOL™ polyethylene process technology and sells related catalysts, including metallocene catalysts.

Subsequent Event
On January 31, 2013, UCC entered into a definitive agreement to sell its 50 percent ownership interest in Nippon Unicar Company, Limited to TonenGeneral Sekiyu K.K. for $13 million. This sale is expected to close in the third quarter of 2013, pending receipt of all required regulatory approvals.

Financial Information about Foreign and Domestic Operations and Export Sales
In 2012, the Corporation derived 45 percent of its trade sales to external customers from customers outside the United States and had 4 percent of its property investment located outside the United States. See Note 19 to the Consolidated Financial Statements for information on sales to external customers and long-lived assets by geographic area.

Protection of the Environment
Matters pertaining to the environment are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Notes 1 and 12 to the Consolidated Financial Statements.



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Union Carbide Corporation and Subsidiaries
PART I, Item 1A. Risk Factors.

RISK FACTORS.

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

Global Economic Conditions: The Corporation operates in a global, competitive environment, which gives rise to operating and market risk.
The Corporation sells substantially all of its products to Dow, which operates in a competitive, global environment, and competes worldwide for sales. Increased levels of competition could result in lower prices or lower sales volumes, which could have a negative impact on the Corporation's operations.

Economic conditions around the world and in certain industries in which the Corporation does business also impact sales price and volume. As a result, market uncertainty and an economic downturn in the geographic areas or industries in which UCC sells its products could reduce demand for these products and result in decreased sales volume, which could have a negative impact on UCC's results of operations.

Raw Materials: Availability of purchased feedstocks and energy and the volatility of these costs impact the Corporation's operating costs and adds variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of the Corporation's total production costs and operating expenses. The Corporation purchases hydrocarbon raw materials including ethane, propane and naphtha as feedstocks. The Corporation also purchases certain monomers, primarily ethylene and propylene, to supplement internal production, as well as other raw materials. The Corporation purchases natural gas, mainly to generate electricity, and purchases electric power.

Feedstock and energy costs generally follow price trends in crude oil and natural gas, which are sometimes volatile. Ultimately, the ability to pass on underlying cost increases is dependent on market conditions. Conversely, when feedstock and energy costs decline, selling prices generally decline as well. As a result, volatility in these costs could impact the Corporation's results of operations.
The Corporation intends to take advantage of increasing supplies of low-cost natural gas and natural gas liquids ("NGLs") from shale gas by re-starting an ethylene cracker in St. Charles, Louisiana, which was completed at the end of December 2012. As a result of this action, the Corporation's exposure to purchased ethylene and propylene is expected to decline, offset by increased exposure to ethane and propane feedstocks.
While the Corporation expects abundant and cost-advantaged supplies of NGLs in the United States to persist for the foreseeable future, if NGLs were to become significantly less advantaged than crude oil-based feedstocks, it could have a negative impact on the Corporation's results of operations and future investments.
Also, if the Corporation's key suppliers of feedstocks and energy are unable to provide the raw materials required for production, it could have a negative impact on the Company's results of operations.
Supply/Demand Balance: Earnings generated by the Corporation vary based in part on the balance of supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity, especially for basic commodities where capacity is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to the increase in supply, which could negatively impact the Corporation's results of operations.

Financial Flexibility: Market conditions could reduce Dow's financial flexibility, which could impact the financial flexibility of the Corporation.
Dow's interest and dividend payments could increase Dow's vulnerability to adverse economic conditions and reduce Dow's flexibility to respond to changing business and economic conditions. In addition, the economic environment could result in a contraction in the availability of credit in the marketplace and reduce sources of liquidity for Dow. Since Dow is a service provider, material debtor, and the major customer of the Corporation, reduced financial flexibility for Dow could potentially impact the financial flexibility of the Corporation.

7

Environmental Compliance: The costs of complying with evolving regulatory requirements could negatively impact the Corporation's financial statements. 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, greenhouse gas emissions and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. At December 31, 2012, the Corporation had accrued obligations of $95 million ($101 million at December 31, 2011) for probable environmental remediation and restoration costs, including $21 million ($21 million at December 31, 2011) 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times 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 could result in significant unanticipated costs or liabilities.

Litigation: 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 December 31, 2012, the Corporation's asbestos-related liability for pending and future claims was $602 million ($668 million at December 31, 2011) and the Corporation's receivable for insurance recoveries related to its asbestos liability was $25 million ($40 million at December 31, 2011). At December 31, 2012, the Corporation also had receivables of $154 million ($178 million at December 31, 2011) 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 impact on the Corporation's consolidated financial statements.

Chemical Safety: Increased concerns regarding the safety of chemicals in commerce and their potential impact on the environment have resulted in more restrictive regulations from local, state and federal governments and could lead to new regulations.
Concerns regarding the safe use of chemicals in commerce and their potential impact on health and the environment reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest themselves in stockholder proposals, preferred purchasing and continued pressure for more stringent regulatory intervention. These concerns could also influence public perceptions, the viability of the Corporation's products, the Corporation's reputation and the cost to comply with regulations. In addition, terrorist attacks and natural disasters have increased concerns about the security and safety of chemical production and distribution. These concerns could have a negative impact on the Corporation's results of operations.

Local, state and federal governments continue to propose new regulations related to the security of chemical plant locations and the transportation of hazardous chemicals, which would result in higher operating costs.

Operational Event: A significant operational event could negatively impact the Corporation's results of operations.
As a diversified chemical manufacturing company, the Corporation's operations, the transportation of products, cyber attacks or severe weather conditions and other natural phenomena (such as drought, hurricanes, earthquakes, tsunamis, floods, etc.) could result in an unplanned event that could be significant in scale and could negatively impact operations, neighbors or the public at large, which could have a negative impact on the Corporation's results of operations.

8

Major hurricanes have caused significant disruption in UCC's operations on the U.S. Gulf Coast, logistics across the region, and the supply of certain raw materials, which had an adverse impact on volume and cost for some of UCC's products. Due to the Corporation's substantial presence on the U.S. Gulf Coast, similar severe weather conditions or other natural phenomena in the future could negatively affect UCC's results of operations.

Pension and Other Postretirement Benefits: Increased obligations and expenses related to the Corporation's defined benefit pension plans and other postretirement benefit plan could negatively affect UCC's financial condition and results of operations.
The Corporation has defined benefit pension plans and an other postretirement benefit plan (the “plans”) in the United States. The assets of the Corporation's funded plans are primarily invested in fixed income and equity securities of U.S. and foreign issuers. Changes in the market value of plan assets, investment returns, discount rates, mortality rates, the rate of increase in compensation levels, regulations and health care cost trends may affect the funded status of the Corporation's plans and could cause volatility in the net periodic benefit cost, future funding requirements of the plans and the funded status of the plans. A significant increase in the Corporation's obligations or future funding requirements could have a negative impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.

Implementation of ERP system: Dow's implementation of an enterprise resource planning (“ERP”) system may adversely affect the Corporation's business and results of operations or the effectiveness of internal control over financial reporting.
During the first quarter of 2011, Dow began business implementation of a new ERP system that will deliver a new generation of information systems and work processes. Through the master services agreement, Dow provides accounting, treasury and procurement services to the Corporation. ERP implementations are complex and very time-consuming projects that involve substantial expenditures on system software and implementation activities that take several years. The staging of implementations allows a gradual build of risk in terms of business impact. If Dow does not effectively implement the ERP system or if the system does not operate as intended, it could adversely affect financial reporting systems, the Corporation's ability to produce financial reports, and/or the effectiveness of internal control over financial reporting.




9

Union Carbide Corporation and Subsidiaries
PART I, Item 1B. Unresolved Staff Comments.

UNRESOLVED STAFF COMMENTS.

None.



10

Union Carbide Corporation and Subsidiaries
PART I, Item 2. Properties.

PROPERTIES.

The Corporation operates 10 manufacturing sites in 4 countries. The Corporation considers its properties to be in good operating condition and that its machinery and equipment have been well maintained. The following are the major production sites:

United States:
Hahnville (St. Charles), Louisiana; Texas City and Seadrift, Texas.

All of UCC's plants are owned or leased, subject to certain easements of other persons that, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value.

A summary of property, classified by type, is contained in Note 6 to the Consolidated Financial Statements.



11

Union Carbide Corporation and Subsidiaries
PART I, Item 3. Legal Proceedings.

LEGAL PROCEEDINGS.

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 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.

It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense 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 of the Corporation.

For additional information, see Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 12 to the Consolidated Financial Statements.



12

Union Carbide Corporation and Subsidiaries
PART I, Item 4. Mine Safety Disclosures.

MINE SAFETY DISCLOSURES.

Not applicable.



13


Union Carbide Corporation and Subsidiaries
PART II, Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Corporation is a wholly owned subsidiary of Dow; therefore, there is no public trading market for the Corporation's common stock.



14

Union Carbide Corporation and Subsidiaries
PART II, Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA.

Omitted pursuant to General Instruction I of Form 10‑K.


15

Union Carbide Corporation and Subsidiaries
PART II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Pursuant to General Instruction I of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” this section includes only management's narrative analysis of the results of operations for the year ended December 31, 2012, the most recent fiscal year, compared with the year ended December 31, 2011, the fiscal year immediately preceding it.

References below 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, and 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
Total net sales for 2012 were $6,247 million, compared with $6,880 million for 2011, a decrease of 9 percent. Net sales to related companies, principally to Dow, were $6,070 million for 2012, compared with $6,694 million for 2011, a decrease of 9 percent. Selling prices to Dow are based on market prices for the related products.

Average selling prices for most products decreased in 2012 compared with 2011, in response to lower feedstock and other raw material costs, with oxygenated solvents, olefins and ethyleneamines reporting the most significant selling price decreases which more than offset price increases in polyglycols. Volume declined in 2012 mainly due to the September 30, 2011 divestiture of the Polypropylene business and weak demand.

Cost of sales decreased 6 percent from $6,493 million in 2011 to $6,088 million in 2012, principally due to the absence of costs related to the divested Polypropylene business, lower feedstock and energy and other raw material costs which were partially offset by increased turnaround costs and start-up costs. The increase in turnaround and start-up costs related to the December 2012 restart of an ethylene cracker in St. Charles, Louisiana, as well as continued furnace rehabilitations to increase energy utilization and to maintain continued operations of ethylene production in St. Charles, Louisiana.

Research and development (“R&D”) expenses were $35 million in 2012, compared with $47 million in 2011. The decrease of $12 million was due to a strategic realignment of research and development resources in 2011 combined with cost reduction initiatives.

In the fourth quarter of 2012 the Board of Directors approved a restructuring plan to improve the cost effectiveness of the Corporation's global operations. As a result, the Corporation recorded pretax restructuring charges totaling $71 million in the fourth quarter of 2012, which included asset write-down and write-offs of $48 million, severance costs of $10 million and costs associated with exit or disposal activities of $13 million. The restructuring will affect approximately 100 positions and result in a shutdown of certain manufacturing facilities. In the first quarter of 2012, the Corporation recorded restructuring charges totaling $3 million related to a workforce reduction of approximately 20 employees. See Note 3 to the Consolidated Financial Statements for additional information on the Corporation's restructuring activities.

Equity in earnings of nonconsolidated affiliates was $59 million in 2012, down from $69 million in 2011 due to reduced earnings at all nonconsolidated affiliates. For additional information on nonconsolidated affiliates, see Note 7 to the Consolidated Financial Statements.


16

Sundry income (expense) - net includes a variety of income and expense items such as dividend income, the gain or loss on foreign currency exchange, commissions, charges for management services provided by Dow, and gains and losses on sales of investments and assets. Sundry income (expense) - net for 2012 was net expense of $182 million compared with net expense of $96 million in 2011. The increase in expense was primarily due to the $131 million impairment of an investment in a related company partially offset by increased dividends from related company investments. See Notes 11 and 16 to the Consolidated Financial Statements for additional information.

Interest income for 2012 was $14 million, compared with $33 million in 2011. Interest income decreased due to a reduction in notes receivable from related companies during 2012 and lower interest rates. Interest expense and amortization of debt discount for 2012 was $28 million, down from $34 million for 2011. This decrease was primarily due to a reduction in long-term debt, which resulted from the early extinguishment of debt in the first quarter of 2011, and the redemption of debt in the first quarter of 2012. See Note 13 to the Consolidated Financial Statements for additional information.

The provision for income taxes was $17 million in 2012, compared with $87 million in 2011. The Corporation's overall effective tax rate was (17.5) percent for 2012, compared with 28.8 percent for 2011. The Corporation's 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. In 2012, the tax rate was primarily impacted by minimal tax relief for the impairment of the investment in related company and the inability to utilize state tax credits. The underlying factors affecting UCC's overall effective tax rates are summarized in Note 17 to the Consolidated Financial Statements.

On January 2, 2013, President Obama signed into law the “American Taxpayer Relief Act of 2012.” This law extends retroactively to 2012 and prospectively through 2013 certain temporary business tax provisions (“extenders”) that are beneficial to UCC including the research and experimentation tax credit, the controlled foreign corporation look-through rule, bonus depreciation, and various incentives for energy efficient homes and buildings. As this tax law was enacted on January 2, 2013, the retroactive impact for 2012 will be recognized in the first quarter of 2013 tax provision. The Corporation estimates the extenders will have an immaterial impact on the tax provision.

The Corporation reported a net loss of $114 million in 2012, compared with net income of $215 million for 2011. The reduced net income for 2012 reflected the impact of the divestiture of the Polypropylene business, as well as increased turnaround and start-up costs related to the restart of an ethylene cracker. In addition, an impairment of a related company investment and restructuring charges to improve the cost effectiveness of the Corporation's global operations further reduced income in 2012.

17

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 accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Following are the Corporation's critical accounting policies impacted by judgments, assumptions and estimates:

Litigation
The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known claim. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the financial impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note 12 to the Consolidated Financial Statements.

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 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. Each year, Analysis, Research and Planning Corporation ("ARPC") performs a review for Union Carbide based upon historical asbestos claims and resolution activity. Union Carbide compares current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the asbestos-related liability continues to be appropriate.

It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense 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 of the Corporation.

For additional information, see Part I, Item 3. Legal Proceedings; Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations; and Note 12 to the Consolidated Financial Statements.

Environmental Matters
The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability and emerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. At December 31, 2012, the Corporation had accrued obligations of $95 million for probable environmental remediation and restoration costs, including $21 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. At December 31, 2011, the Corporation had accrued obligations of $101 million for probable environmental remediation and restoration costs, including $21 million for the remediation of Superfund sites. For further discussion, see Environmental Matters in Notes 1 and 12 to the Consolidated Financial Statements.


18

Pension Plans and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could have been settled at December 31, 2012, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 14 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore affect expense recognized and obligations recorded in future periods.

The Corporation determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Corporation's historical experience with the pension fund asset performance is also considered. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 2012 was 6.90 percent. This assumption remained unchanged for determining 2013 net periodic pension expense. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Corporation's pension plans.

The discount rates utilized to measure the pension and other postretirement benefit obligations are based on the yield on high-quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plan are matched against the Towers Watson RATE:Link yield curve (based on 60th to 90th percentile bond yields) to arrive at a single discount rate by plan. The discount rate was 3.85 percent at December 31, 2012 and 4.85 percent at December 31, 2011.

The value of the qualified plan assets totaled $3.5 billion at December 31, 2012, an increase from $3.4 billion at December 31, 2011. The underfunded status of the qualified plan increased $199 million at December 31, 2012, compared with December 31, 2011. The increase was primarily due to the lower discount rates. For 2013, the Corporation expects to make cash contributions of approximately $160 million to its pension and other postretirement benefit plans.

The assumption for the long-term rate of increase in compensation levels was 4.50 percent, consistent with 2011. Since 2002, the Corporation has used a generational mortality table to determine the duration of its pension and other postretirement obligations.

The Corporation bases the determination of pension expense on a market-related valuation of plan assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. At December 31, 2012, $131 million of net gains remain to be recognized in the calculation of the market-related value of plan assets. These net gains will result in decreases in future pension expense as they are recognized in the market-related value of assets.

The increase in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:
Increase in Market-Related Asset Value due to Recognition of Prior Gains and Losses
In millions
2013
$
54

2014
42

2015
16

2016
19

Total
$
131



19

Based on the 2013 pension assumptions and changes in the market-related value of assets due to the recognition of prior asset gains, the Corporation expects net periodic benefit costs to increase approximately $8 million for pension and other postretirement benefits in 2013 compared with 2012. The increase in net pension benefit costs is primarily due to lower discount rates.

A 25 basis point adjustment in the long-term return on assets assumption would change total pension expense for 2013 by $8 million. A 25 basis point adjustment in the discount rate assumption would change the total pension expense for 2013 by $1 million.

Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Corporation recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered more likely than not.

At December 31, 2012, the Corporation had a net deferred tax asset balance of $841 million, after valuation allowances of $124 million. In evaluating the ability to realize the deferred tax assets, the Corporation relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.

At December 31, 2012, the Corporation had deferred tax assets for tax loss and tax credit carryforwards of $103 million, of which $52 million is subject to expiration in the years 2013-2017. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Corporation needs taxable income of approximately $1,301 million across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2013-2017 is $582 million.

The Corporation recognizes the financial statement effects of an uncertain tax position when it is more likely than not, based on technical merits, that the position will be sustained. At December 31, 2012, the Corporation had a liability for uncertain tax positions of $166 million.

The Corporation accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. At December 31, 2012, the Corporation had a non-income tax contingency reserve of $8 million. For additional information, see Note 17 to the Consolidated Financial Statements.

Environmental Matters
Environmental Policies
The Corporation is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by a long-standing commitment to Responsible Care®, as well as a strong commitment to achieve the Corporation's 2015 Sustainability Goals - goals that set the standard for sustainability in the chemical industry by focusing on improvements in UCC's local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the Corporation's environmental impact.

The EH&S management system (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve the policies, requirements, performance objectives, leadership expectations and public commitments. EMS is also designed to minimize the long-term cost of environmental protection and to comply with applicable laws and regulations. To ensure effective utilization, EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources, including implementation of the global EH&S Work Process to improve EH&S performance and to ensure ongoing compliance worldwide.

UCC first works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Next, UCC finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. UCC has specific requirements for waste that is transferred to non-UCC facilities, including the periodic auditing of these facilities.


20

Chemical Security
Public and political attention continues to be placed on the protection of U.S. critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern about the security and safety of chemical production and distribution. The focus on security is not new to UCC. UCC continues to improve its security plans, placing emphasis on the safety of UCC communities and people by being prepared to meet risks at any level and to address both internal and external identifiable risks. UCC's security plans are also developed to avert interruptions of normal business work operations, which could have a material impact on the Corporation's results of operations, liquidity and financial condition.

UCC is a Responsible Care® company and adheres to the Responsible Care® Security Code, which requires that all aspects of security - including facility, transportation, and cyberspace - be assessed and gaps addressed. Through global implementation of the Security Code, including voluntary security enhancements and upgrades made since 2002, UCC has permanently heightened the level of security - not just in the United States, but worldwide. In addition, UCC uses a risk-based approach employing the U.S. Government's Sandia National Labs methodology to repeatedly assess the risks to sites, systems and processes. UCC has expanded its comprehensive Distribution Risk Review process that had been in place for decades to address potential threats in all modes of transportation across its supply chain. To reduce vulnerabilities, UCC maintains security measures that meet or exceed regulatory and industry security standards in all areas in which UCC operates. Assessment and improvement costs are not considered material to the Corporation's consolidated financial statements.

UCC continually works to strengthen partnerships with local responders, law enforcement and security agencies, and to enhance confidence in the integrity of its security and risk management program as well as strengthen its preparedness and response capabilities. UCC also works closely with its supply chain partners and strives to educate lawmakers, regulators and communities about its resolve and actions to date which are mitigating security and crisis threats.

Climate Change
UCC takes global climate change very seriously and is committed to continuing to aggressively manage the Corporation's absolute emissions footprint for all greenhouse gases ("GHGs"), developing efficient products and processes and, over the longer term, implementing technology solutions to achieve even greater climate change improvements. Through internal energy efficiency programs and focused GHG management efforts, the Corporation has significantly reduced its GHG emissions footprint.

Environmental Remediation
UCC accrues the costs of remediation of its facilities and formerly owned facilities based on current law and existing technologies. The nature of such remediation includes, for example, the management of soil and groundwater contamination and the closure of contaminated landfills and other waste management facilities. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. The policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note 1 to the Consolidated Financial Statements. To assess the impact on the consolidated financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had an accrued liability of $74 million at December 31, 2012 and $80 million at December 31, 2011 related to the remediation of current or former UCC-owned sites.

In addition to current and former UCC-owned sites, under the Federal Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as “Superfund Law”), UCC is liable for remediation of other hazardous waste sites where UCC allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Because Superfund Law imposes joint and several liability upon each party at a site, UCC has evaluated its potential liability in light of the number of other companies that also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. Management's estimate of the Corporation's remaining liability for the remediation of Superfund sites was $21 million at December 31, 2012 and $21 million at December 31, 2011, which has been accrued, although the ultimate cost with respect to these sites could exceed that amount. The Corporation has not recorded any third-party recovery related to these sites as a receivable.


21

Information regarding environmental sites is provided below:

Environmental Sites
UCC-owned Sites (1)
 
Superfund Sites (2)
 
2012

2011

 
2012

2011

Number of sites at January 1
31

32

 
60

59

Sites added during year
1

1

 
6

3

Sites closed during year
(1
)
(2
)
 
—

(2
)
Number of sites at December 31
31

31

 
66

60

(1) UCC-owned sites are sites currently or formerly owned by UCC, where remediation obligations are imposed (in the United States) by the Resource Conservation Recovery Act or analogous state law.
(2) Superfund sites are sites, including sites not owned by UCC, where remediation obligations are imposed by Superfund Law.

In total, the Corporation's accrued liability for probable environmental remediation and restoration costs was $95 million at December 31, 2012, compared with $101 million at December 31, 2011. 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 two and a half 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, however, 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.

The amounts charged to income on a pretax basis related to environmental remediation totaled $31 million in 2012 and $41 million in 2011. The amounts charged to income on a pretax basis related to operating the Corporation's pollution abatement facilities totaled $86 million in 2012 and $84 million in 2011. Capital expenditures for environmental protection were $7 million in 2012 and $4 million in 2011.

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 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.

It is the opinion of UCC's management that it is reasonably possible that the cost of disposing of its asbestos-related claims, including future defense 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 of the Corporation.

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

 
2012

2011

2010

Claims unresolved at January 1
53,225

62,582

75,030

Claims filed
9,627

7,810

7,731

Claims settled, dismissed or otherwise resolved
(29,403
)
(17,167
)
(20,179
)
Claims unresolved at December 31
33,449

53,225

62,582

Claimants with claims against both UCC and Amchem
(9,542
)
(16,304
)
(18,890
)
Individual claimants at December 31
23,907

36,921

43,692


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.


22

For additional information, see Part I, Item 3. Legal Proceedings and Asbestos-Related Matters in Note 12 to the Consolidated Financial Statements.

Matters Involving the Formation of K-Dow Petrochemicals
Introduction
On December 13, 2007, Dow and Petrochemical Industries Company (K.S.C.) (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 global petrochemicals joint venture. The proposed joint venture, K-Dow Petrochemicals (“K-Dow”), was expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide.

On November 28, 2008, Dow entered into a Joint Venture Formation Agreement (“JVFA”) with PIC that provided for the establishment of K-Dow. To form the joint venture, Dow would transfer, by way of contribution and sale to K-Dow, assets used in the research, development, manufacture, distribution, marketing and sale of polyethylene, polypropylene, polycarbonate, polycarbonate compounds and blends, ethyleneamines, ethanolamines, and related licensing and catalyst technologies; and K-Dow would assume certain related liabilities. It was anticipated that a significant part (but not substantially all) of UCC's U.S.-based manufacturing assets would be included in the new joint venture.

Failure to Close
On December 31, 2008, Dow received a written notice from PIC with respect to the JVFA advising Dow of PIC's position that certain conditions to closing were not satisfied and, therefore, PIC was not obligated to close the transaction. On January 2, 2009, PIC refused to close the K-Dow transaction in accordance with the JVFA. Dow disagreed with the characterizations and conclusions expressed by PIC in the written notice and Dow informed PIC that it breached the JVFA. On January 6, 2009, Dow announced that it would seek to fully enforce its rights under the terms of the JVFA and various related agreements.

Arbitration
Dow's claims against PIC were subject to an agreement between the parties to arbitrate under the Rules of Arbitration of the International Court of Arbitration of the International Chamber of Commerce (“ICC”). On February 18, 2009, Dow initiated arbitration proceedings against PIC alleging that PIC breached the JVFA by failing to close the transaction on January 2, 2009, and as a result, Dow suffered substantial damages.

On May 24, 2012, the ICC released to the parties a unanimous Partial Award in favor of Dow on both liability and damages. A three-member arbitration Tribunal found that PIC breached the JVFA by not closing K-Dow on January 2, 2009, and awarded Dow $2.16 billion in damages, not including interest and arbitration costs.

On June 15, 2012, PIC filed an application for remand under the English Arbitration Act of 1996 (“Remand Application”) in the High Court of Justice in London (“High Court”). In its Remand Application, PIC did not challenge the Tribunal's finding of liability but it requested that the High Court remand the case back to the Tribunal for further consideration of Dow's claim for consequential damages. On October 11, 2012, the High Court ruled in favor of Dow and dismissed PIC's Remand Application; and on October 19, 2012, the High Court denied PIC's request for leave to appeal its ruling, bringing an end to PIC's Remand Application.

The ICC is expected to issue a Final Award covering Dow's substantial claim for pre- and post-award interest and arbitration costs in early 2013.

To the extent - if any - the Partial Award or Final Award allocate damages to the Corporation, the Corporation may record a gain when the uncertainty regarding the timing of collection and the amount to be realized has been resolved.

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 December 31, 2012.


23

Union Carbide Corporation and Subsidiaries
PART II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

UCC's business operations give rise to market risk exposure due to changes in foreign exchange rates and interest rates. To manage such risks effectively, the Corporation can enter into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. The Corporation does not hold derivative financial instruments for trading purposes.

As a result of investments, production facilities and other operations on a global basis, the Corporation has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Corporation's foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Corporation will hedge, when appropriate, on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Main exposures are related to assets, liabilities and cash flows denominated in the currencies of Europe, Asia Pacific and Canada.

The main objective of interest rate risk management is to reduce the total funding cost to the Corporation and to alter the interest rate exposure to the desired risk profile. The Corporation's primary exposure is to the U.S. dollar yield curve. UCC will use interest rate swaps and “swaptions,” when appropriate, to accomplish this objective.

UCC uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the maximum potential gain or loss in fair market values given a certain move in prices over a certain period of time, using specified confidence levels. The VAR methodology used by the Corporation is a historical simulation model which captures the co-movements in market rates across different instruments and market risk exposure categories. The historical simulation model uses a 97.5 percent confidence level and the historical scenario period includes at least six months of historical data. The 2012 and 2011 year-end and average daily VAR for the aggregate of all positions are shown below:

Total Daily VAR at December 31
2012
 
2011
In millions
Year-end

Average

 
Year-end

Average

Interest rate
$
11

$
15

 
$
29

$
18


The decrease in interest rate VAR is primarily due to the combined effect of reduced debt outstanding and lower interest rate volatility.


24

Union Carbide Corporation and Subsidiaries
PART II, Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Union Carbide Corporation

We have audited the accompanying consolidated balance sheets of Union Carbide Corporation and subsidiaries (the “Corporation”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Union Carbide Corporation and subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP
 
 
Deloitte & Touche LLP
Midland, Michigan
February 15, 2013
 
 


25


Union Carbide Corporation and Subsidiaries
Consolidated Statements of Operations

(In millions) For the years ended December 31     
2012

2011

2010

Net trade sales
$
177

$
186

$
168

Net sales to related companies
6,070

6,694

6,337

Total Net Sales
6,247

6,880

6,505

Cost of sales
6,088

6,493

5,940

Research and development expenses
35

47

43

Selling, general and administrative expenses
10

10

13

Restructuring charges
74

—

2

Asbestos-related credit
—

—

54

Equity in earnings of nonconsolidated affiliates
59

69

50

Sundry income (expense) - net
(182
)
(96
)
(10
)
Interest income
14

33

55

Interest expense and amortization of debt discount
28

34

37

Income (Loss) Before Income Taxes
(97
)
302

619

Provision for income taxes
17

87

160

Net Income (Loss) Attributable to Union Carbide Corporation
$
(114
)
$
215

$
459

See Notes to the Consolidated Financial Statements.


26

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)

(In millions) For years ended December 31
2012

2011

2010

Net Income (Loss) Attributable to Union Carbide Corporation
$
(114
)
$
215

$
459

Other Comprehensive Income (Loss), Net of Tax (tax amounts shown below for 2012, 2011, 2010)
 

 

 

Cumulative translation adjustments
(4
)
3

6

Cumulative unrealized losses on investments
—

—

(1
)
Pension and other postretirement plans:
 
 
 
Net loss arising during period (net of tax of $(141), $(83), $(31))
(250
)
(166
)
(61
)
Less: Amortization of prior service cost included in net periodic pension costs (net of tax of $2, $2, $2)
3

3

3

Less: Amortization of net loss included in net periodic pension costs (net of tax of $22, $31, $22)
38

54

37

Total other comprehensive loss
(213
)
(106
)
(16
)
Comprehensive Income (Loss) Attributable to Union Carbide Corporation
$
(327
)
$
109

$
443

See Notes to the Consolidated Financial Statements.


27

Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets

(In millions) At December 31
2012

2011

Assets
Current Assets
 
 
Cash and cash equivalents
$
18

$
26

Accounts receivable:


 
Trade (net of allowance for doubtful receivables 2012: -; 2011: $1)
35

23

Related companies
330

385

Other
86

158

Notes receivable from related companies
2,346

3,261

Inventories
420

207

Deferred income taxes and other current assets
95

93

Total current assets
3,330

4,153

Investments
 

 

Investments in related companies
840

971

Investments in nonconsolidated affiliates
106

132

Other investments
8

6

Noncurrent receivables
45

45

Noncurrent receivables from related companies
189

136

Total investments
1,188

1,290

Property
 

 

Property
7,211

7,099

Less accumulated depreciation
5,877

5,745

Net property
1,334

1,354

Other Assets
 

 

Intangible assets (net of accumulated amortization 2012: $72; 2011: $141)
7

8

Deferred income tax assets - noncurrent
775

675

Asbestos-related insurance receivables - noncurrent
155

172

Deferred charges and other assets
49

53

Total other assets
986

908

Total Assets
$
6,838

$
7,705

Liabilities and Equity
Current Liabilities
 

 

Notes payable - related companies
$
40

$
15

Long-term debt due within one year
—

37

Accounts payable:




Trade
299

256

Related companies
411

382

Other
15

31

Income taxes payable
59

—

Asbestos-related liabilities - current
85

73

Accrued and other current liabilities
146

157

Total current liabilities
1,055

951

Long-Term Debt
471

470

Other Noncurrent Liabilities
 

 

Pension and other postretirement benefits - noncurrent
1,270

1,062

Asbestos-related liabilities - noncurrent
530

608

Other noncurrent obligations
188

179

Total other noncurrent liabilities
1,988

1,849

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
4,355

5,253

Accumulated other comprehensive loss
(1,345
)
(1,132
)
Union Carbide Corporation's stockholder's equity
3,322

4,433

Noncontrolling interests
2

2

Total equity
3,324

4,435

Total Liabilities and Equity
$
6,838

$
7,705

See Notes to the Consolidated Financial Statements.

28

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows

(In millions) For the years ended December 31
2012

2011

2010

Operating Activities
 
 
 
Net Income (Loss)
$
(114
)
$
215

$
459

Adjustments to reconcile net income (loss) to net cash provided by operating activities:




Depreciation and amortization
235

270

274

Provision (credit) for deferred income tax
12

(43
)
(40
)
Earnings of nonconsolidated affiliates less than (in excess of) dividends received
13

4

(9
)
Net gains on sales of property
(4
)
(5
)
(2
)
Restructuring charges
74

—

2

Impairment of investment in related company
131

—

—

Asbestos-related credit
—

—

(54
)
Pension contributions
(158
)
(48
)
(2
)
Net loss on early extinguishment of debt
—

6

—

Other, net
(1
)
—

—

Changes in assets and liabilities:
 
 


Accounts and notes receivable
(6
)
12

(16
)
Related company receivables
970

1,092

(218
)
Inventories
(213
)
(13
)
13

Accounts payable
25

(10
)
49

Related company payables
54

(132
)
198

Other assets and liabilities
82

(171
)
140

Cash provided by operating activities
1,100

1,177

794

Investing Activities
 

 

 
Capital expenditures
(241
)
(168
)
(157
)
Purchase of related company receivables
(8
)
—

—

Change in noncurrent receivable from related company
(53
)
(11
)
(24
)
Proceeds from sales of property
7

19

2

Purchases of investments
(1
)
(11
)
(53
)
Proceeds from sales of investments
—

17

38

Cash used in investing activities
(296
)
(154
)
(194
)
Financing Activities
 

 

 
Dividends paid to stockholder
(775
)
(950
)
(600
)
Payments on long-term debt
(37
)
(69
)
—

Cash used in financing activities
(812
)
(1,019
)
(600
)
Summary
 

 

 
Increase (Decrease) in cash and cash equivalents
(8
)
4

—

Cash and cash equivalents at beginning of year
26

22

22

Cash and cash equivalents at end of period
$
18

$
26

$
22

See Notes to the Consolidated Financial Statements.


29

Union Carbide Corporation and Subsidiaries
Consolidated Statements of Equity

(In millions) For the years ended December 31
2012

2011

2010

Common Stock
 
 
 
Balance at beginning and end of year
$
—

$
—

$
—

Additional Paid-in Capital
 

 

 
Balance at beginning and end of year
312

312

312

Retained Earnings
 

 

 
Balance at beginning of year
5,253

5,990

6,131

Net Income (Loss)
(114
)
215

459

Dividends declared
(784
)
(951
)
(600
)
Other
—

(1
)
—

Balance at end of year
4,355

5,253

5,990

Accumulated Other Comprehensive Loss, Net of Tax
 

 

 
Balance at beginning of year
(1,132
)
(1,026
)
(1,010
)
Other comprehensive loss
(213
)
(106
)
(16
)
Balance at end of year
(1,345
)
(1,132
)
(1,026
)
Union Carbide Corporation's Stockholder's Equity
3,322

4,433

5,276

Noncontrolling interests
2

2

2

Total Equity
$
3,324

$
4,435

$
5,278

See Notes to the Consolidated Financial Statements.


30

Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

Table of Contents
Note
 
Page
 
 
Recent Accounting Guidance
 
3
Restructuring
 
4
Divestitures
 
5
Inventories
 
6
Property
 
7
Nonconsolidated Affiliates
 
8
Intangible Assets
 
9
Financial Instruments
 
10
Fair Value Measurements
 
11
Supplementary Information
 
12
Commitments and Contingent Liabilities
 
13
Notes Payable and Long-term Debt
 
14
Pension Plans and Other Postretirement Benefits
 
15
Leased Property
 
16
Related Party Transactions
 
17
Income Taxes
 
18
Accumulated Other Comprehensive Income
 
19
Business and Geographic Areas
 
20
Quarterly Information

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation
Except as otherwise indicated by the context, the terms “Corporation” and “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries. The accompanying consolidated financial statements of the Corporation were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Corporation exercises control and, when applicable, entities for which the Corporation has a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies, joint ventures and partnerships) are accounted for using the equity method.

The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance with the accounting requirements for wholly owned subsidiaries, the presentation of earnings per share is not required and therefore is not provided.

Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global operations rather than stand-alone operations. The Corporation sells substantially all of its products to Dow at market-based prices, in accordance with Dow's long-standing intercompany pricing policy, in order to simplify the customer interface process. 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.

Certain reclassifications of prior years' footnote disclosure amounts have been made to conform to the 2012 presentation.



31

Related Companies
Transactions with the Corporation's parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements.

Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Corporation's consolidated financial statements include amounts that are based on management's best estimates and judgments. Actual results could differ from those estimates.

Foreign Currency Translation
While the Corporation's consolidated subsidiaries are primarily based in the United States, the Corporation has small subsidiaries in Asia Pacific. For those subsidiaries, the local currency has been primarily used as the functional currency. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive income (loss)" ("AOCI"). Where the U.S. dollar is used as the functional currency, foreign currency gains and losses are reflected in income.

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. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in both “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets as “Accounts receivable - Other.”

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.

Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.

Financial Instruments
The Corporation calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Corporation uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.

Inventories
Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year.

The Corporation routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.

Property
Land, buildings and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.


32

Impairment and Disposal of Long-Lived Assets
The Corporation evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset's carrying amount, the asset is written down to its fair value based on bids received from third parties or a discounted cash flow analysis based on market participant assumptions.

Long-lived assets to be disposed of by sale are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.

Asset Retirement Obligations
The Corporation records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Corporation. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less.

Investments in Related Companies
Investments in related companies consist of the Corporation's ownership interests in Dow subsidiaries located in North America and Latin America, which are accounted for using the cost method.

Investments
Investments in debt securities are classified as available-for-sale and reported at fair value with unrealized gains and losses recorded in AOCI. The cost of investments sold is determined by specific identification. The Corporation routinely reviews available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value establishing a new cost basis.

Revenue
Substantially all of the Corporation's revenues are generated by sales to Dow. Approximately 96 percent of the Corporation's sales are related to sales of product; the remaining 4 percent is related to the licensing of patents and technology.

Revenue for product sales to related companies is recognized as risk and title to the product transfer to the related company, which occurs either at the time production is complete or free on board (“FOB”) UCC's manufacturing facility, in accordance with the sales agreement between the Corporation and Dow.

Revenue for product sales is recognized as risk and title to the product transfer to the customer, which for trade sales, usually occurs at the time shipment is made. As such, title to the product passes when the product is delivered to the freight carrier. UCC's standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. Freight costs and any directly related costs of transporting finished product to customers are recorded as “Cost of sales.”

Revenue related to the initial licensing of patents and technology is recognized when earned; revenue related to running royalties is recognized according to licensee production levels.

Legal Costs
The Corporation expenses legal costs as incurred. Accruals for legal matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.

Severance Costs
Management routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic areas. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination including the number of employees to be terminated, their job classifications or functions, their locations and the expected termination date.


33

Income Taxes
The Corporation accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date. The Corporation is included in Dow's consolidated federal income tax group and consolidated income tax return. The Corporation uses the separate return method to account for its income taxes; accordingly, there is no difference between the method used to account for income taxes at the UCC level and the formula in the Dow-UCC Tax Sharing Agreement used to compute the amount due to Dow or UCC for UCC's share of taxable income and tax attributes on Dow's consolidated income tax return.

Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.

The Corporation recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Corporation accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.


NOTE 2 - RECENT ACCOUNTING GUIDANCE

Recently Adopted Accounting Guidance
On January 1, 2012, the Corporation adopted Accounting Standards Update ("ASU") 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," as amended by ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." This standard improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. See the Consolidated Statements of Comprehensive Income and Note 18 for additional information.

On January 1, 2012, the Corporation adopted ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS," which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRS"). See Note 10 for additional information about fair value measurements.

On January 1, 2011, the Corporation adopted ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.” This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Guidance Issued But Not Adopted as of December 31, 2012
In December 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities, " which clarified the scope of the offsetting disclosures of ASU 2011-11. Both ASUs are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The Corporation is currently evaluating the impact of adopting this guidance.


34

In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This ASU is effective prospectively for reporting periods beginning after December 15, 2012. The Corporation is currently evaluating the impact of adopting this guidance.


NOTE 3 - RESTRUCTURING

On October 22, 2012, the Board of Directors of the Corporation approved a restructuring plan to improve the cost effectiveness of the Corporation's global operations. The restructuring plan will affect approximately 100 positions and result in the shutdown of certain manufacturing facilities. These actions are expected to be completed during the next two years.

As a result of the restructuring activities, the Corporation recorded pretax restructuring charges of $71 million in the fourth quarter of 2012 consisting of costs associated with exit or disposal activities of $13 million, severance costs of $10 million and asset write-downs and write-offs of $48 million. The impact of these charges is shown as "Restructuring charges" in the consolidated statements of operations.

Details on the components of the restructuring charges are discussed below:

Cost Associated with Exit or Disposal Activities
The restructuring charges for costs associated with exit or disposal activities totaled $13 million in the fourth quarter of 2012 for contract cancellations fees.

Severance
The restructuring charges in the fourth quarter of 2012 included severance of $10 million for the separation of approximately 100 employees under the terms of the Corporation's ongoing benefit arrangements, primarily over the next two years. At December 31, 2012, no severance had been paid and a liability of $10 million remained.

Impairment of Long-Lived Assets, Other Assets and Equity Method Investments
The restructuring charges related to the write-down and write-off of assets in the fourth quarter of 2012 total $48 million. Details regarding the write-downs and write-offs are as follows:

•
Certain oxygenated solvents manufacturing facilities in Texas City, Texas have been consolidated and/or shutdown, resulting in an asset write-down of $36 million. The facilities were shut down in the fourth quarter of 2012.

•
A performance monomer manufacturing facility in South Charleston, West Virginia was shut down, resulting in an asset write-down of $1 million and the write-off of other assets totaling $2 million. The assets were shut down in the fourth quarter of 2012.

•
Due to a change in the Corporation's strategy regarding its ownership in Nippon Unicar Company Limited ("NUC"), a 50:50 joint venture, the Corporation has determined its equity investment in NUC to be other-than-temporarily impaired and recorded a $9 million write-down of its interest in NUC.


35

The following table summarizes the activities related to the Corporation's restructuring reserve:
Restructuring Activities
 
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Impairment of Long-Lived Assets, Other Assets and Equity Method Investments

 
 
In millions
 
 
 
 
Total

Restructuring charges recognized in the fourth quarter of 2012
 
$
13

 
$
10

 
$
48

 
$
71

Charges against the reserve
 
—

 
—

 
(48
)
 
(48
)
Cash payments
 
—

 
—

 
—

 
—

Reserve balance at December 31, 2012
 
$
13

 
$
10

 
$
—

 
$
23


The reserve balance is included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."

The Corporation expects to incur additional costs in the future related to its restructuring activities, as UCC continually looks for ways to enhance the efficiency and cost effectiveness of its operations. Future costs are expected to include demolition costs related to closed facilities; these will be recognized as incurred. The Corporation also 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.

In the first quarter of 2012, the Corporation recorded restructuring charges totaling $3 million related to a workforce reduction of approximately 20 employees. In the third quarter of 2012, all severance related to this restructuring charge was paid.


NOTE 4 - DIVESTITURES

Divestiture of Polypropylene Business
On July 27, 2011, Dow entered into a definitive agreement to sell Dow's global Polypropylene business to Braskem SA. The definitive agreement specified the assets included in the sale, which included the following assets of the Corporation: polypropylene manufacturing facility at Seadrift, Texas; railcars; inventory; business know-how; and certain product and process technology. The Corporation's Polypropylene Licensing and Catalyst business and related catalyst facilities were excluded from the scope of the transaction. On September 30, 2011 the sale was completed. The Corporation received $19 million for the sale of its assets, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments. The carrying amount of the assets divested on September 30, 2011 are noted below:

Assets Divested
In millions
September 30, 2011

Inventories
$
2

Net property
12

Total assets divested
$
14


The Corporation recognized a pretax gain of $5 million on the sale in the third quarter of 2011. Post-closing adjustments of $1 million in the fourth quarter of 2011 reduced the pretax gain to $4 million, which is included in "Sundry income (expense) - net" in the consolidated statements of operations.



36

NOTE 5 - INVENTORIES

The following table provides a breakdown of inventories:
Inventories at December 31
In millions
2012

2011

Finished goods
$
263

$
71

Work in process
33

6

Raw materials
46

51

Supplies
78

79

Total inventories
$
420

$
207


The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to $150 million at December 31, 2012 and $162 million at December 31, 2011. Inventories that were valued on a LIFO basis, principally U.S. chemicals and plastics product inventories represented 75 percent of the total inventories at December 31, 2012 and 51 percent of the total inventories at December 31, 2011.

A reduction of certain inventories resulted in the liquidation of some of the Corporation's LIFO inventory layers, which had an immaterial impact on pretax income in 2012 and 2011, and increased pretax income $5 million in 2010.

NOTE 6 - PROPERTY

Property at December 31
Estimated

 
 
In millions
Useful Lives(Years)

2012

2011

Land
—

$
50

$
50

Land and waterway improvements
15-25

202

198

Buildings
5-50

412

415

Machinery and equipment
3-20

5,915

5,772

Utility and supply lines
5-20

153

142

Other property
3-30

285

349

Construction in progress
—

194

173

Total property

$
7,211

$
7,099


In millions
2012

2011

2010

Depreciation expense
$
217

$
236

$
248

Manufacturing maintenance and repair costs
$
324

$
280

$
244

Capitalized interest
$
8

$
6

$
5



NOTE 7 - NONCONSOLIDATED AFFILIATES

The Corporation's investments in companies accounted for by the equity method (“nonconsolidated affiliates”) were $106 million at December 31, 2012 and $132 million at December 31, 2011. Dividends received from nonconsolidated affiliates were $72 million in 2012, $73 million in 2011 and $41 million in 2010. Undistributed earnings of nonconsolidated affiliates included in retained earnings were $21 million at December 31, 2012 and $31 million at December 31, 2011.

All of the nonconsolidated affiliates in which the Corporation has investments are privately held companies; therefore, quoted market prices are not available.


37

Principal Nonconsolidated Affiliates
The Corporation's principal nonconsolidated affiliates and the Corporation's ownership interest for each at December 31, 2012, 2011 and 2010 are shown below:

Principal Nonconsolidated Affiliates at December 31
Ownership Interest
 
2012
2011
2010
Nippon Unicar Company Limited
50%
50%
50%
Univation Technologies, LLC
50%
50%
50%

The Corporation's investment in the principal nonconsolidated affiliates was $97 million at December 31, 2012 and $122 million at December 31, 2011, and its equity in earnings was $59 million in 2012, $65 million in 2011 and $50 million in 2010. The summarized financial information presented below represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates. See Note 3 for details on the impairment charge related to Nippon Unicar Company Limited.

Summarized Balance Sheet Information at December 31
In millions
2012

2011

Current assets
$
311

$
396

Noncurrent assets
165

166

Total assets
$
476

$
562

Current liabilities
$
164

$
133

Noncurrent liabilities
86

121

Total liabilities
$
250

$
254


Summarized Income Statement Information
In millions
2012

2011

2010

Sales
$
773

$
715

$
655

Gross profit
$
209

$
244

$
180

Net income
$
112

$
145

$
122


Subsequent Event
On January 31, 2013, UCC entered into a definitive agreement to sell its 50 percent ownership interest in Nippon Unicar Company, Limited to TonenGeneral Sekiyu K. K. for $13 million. This sale is expected to close in the third quarter of 2013, pending receipt of all required regulatory approvals.


NOTE 8 - INTANGIBLE ASSETS

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

Intangible Assets at December 31
2012
 
 
 
2011
 
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
46

(39
)
7

 
116

(108
)
8

Total intangible assets
$
79

$
(72
)
$
7

 
$
149

$
(141
)
$
8


In the third quarter of 2012, the Corporation retired $71 million of fully amortized software.


38

The following table provides information regarding amortization expense:

Amortization Expense
In millions
2012

2011

2010

Software, included in “Cost of sales”
$
2

$
3

$
4


Total estimated amortization expense for the next five fiscal years is as follows:

Estimated Amortization Expense for Next Five Years
In millions
2013
$
3

2014
$
3

2015
$
1

2016
$
—

2017
$
—



NOTE 9 - FINANCIAL INSTRUMENTS

Investments
The Corporation's investments in marketable securities are classified as available-for-sale.

Investing Results
 
 
 
In millions
2012

2011

2010

Proceeds from sales of available-for-sale securities
$
—

$
9

$
25


Portfolio managers regularly review all of the Corporation's holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred. At December 31, 2012 and December 31, 2011, there were no impairment indicators or circumstances that would result in a material adjustment of these investments.

The Corporation's investments in debt securities had contractual maturities of less than 10 years at December 31, 2012.

Fair Value of Financial Instruments:
 
At December 31, 2012
 
At December 31, 2011
In millions
Cost

Gain

Loss

Fair Value

 
Cost

Gain

Loss

Fair Value

Marketable securities (1):
 
 
 
 
 
 
 
 
 
Debt securities
$
5

$
—

$
—

$
5

 
$
3

$
—

$
—

$
3

Total marketable securities
$
5

$
—

$
—

$
5

 
$
3

$
—

$
—

$
3

Long-term debt
$
(471
)
$
—

$
(116
)
$
(587
)
 
$
(507
)
$
—

$
(148
)
$
(655
)
(1)
Included in “Other investments” in the consolidated balance sheets.

Cost approximates fair value for all other financial instruments.



39

NOTE 10 - FAIR VALUE MEASUREMENTS

Fair Value Measurements on a Recurring Basis
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis:

Basis of Fair Value Measurements on a Recurring Basis
at December 31
Significant Other Observable Inputs
 (Level 2)

Significant Other Observable Inputs
 (Level 2)

In millions
2012

2011

Assets at fair value:
 
 
Debt securities (1)
$
5

$
3

Liabilities at fair value:
 
 
Long-term debt (2)
$
587

$
655

(1)
Included in “Other investments” in the consolidated balance sheets.
(2)
See Note 9 for information on fair value adjustments to long-term debt included at cost in the consolidated balance sheets.

For assets and liabilities classified as Level 2 measurements, where the security is 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.

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. There were no transfers between Levels 1 and 2 during the years ended December 31, 2012 and 2011.

Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets in 2012:

Basis of Fair Value Measurements on a Nonrecurring Basis in 2012
 
Significant Other Unobservable Inputs

 
Total Losses

In millions
 
(Level 3)

 
2012

Assets at fair value:
 
 
 
 
Long-lived assets, other assets and equity method investments
 
$
42

 
$
(179
)
2012 Fair Value Measurements on a Nonrecurring Basis
As part of the restructuring plan that was approved on October 22, 2012, the Corporation shut down a number of manufacturing facilities during the fourth quarter of 2012. The manufacturing assets and facilities associated with this plan were written down to zero in the fourth quarter of 2012. In addition, an equity investment was impaired. The equity investment, classified as Level 3 measurements, was valued at $33 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets. These impairment charges, totaling $48 million, were included in "Restructuring charges" in the consolidated statements of operations. See Note 3 for additional information. Also included within the losses is a charge of $131 million related to an impairment of a investment in related companies. The investment in related companies, classified as Level 3 measurements, was valued at $9 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets. See Note 16 for additional information.



40

NOTE 11 - SUPPLEMENTARY INFORMATION

Sundry Income (Expense) - Net
 
 
 
In millions
2012

2011

2010

Net gain on sales of property
$
5

$
4

$
2

Loss on early extinguishment of debt
—

(6
)
—

Impairment of investment in related company (1)
(131
)
—

—

Foreign exchange gain (loss)
—

(1
)
1

Net commission expense - related company (1)
(35
)
(34
)
(31
)
Dividend income - related companies (1)
25

7

40

Dow administrative and overhead fees (1)
(32
)
(48
)
(21
)
Other - net
(14
)
(18
)
(1
)
Total Sundry income (expense) - net
$
(182
)
$
(96
)
$
(10
)
(1)
See Note 16.

Accrued and Other Current Liabilities
"Accrued and other current liabilities" were $146 million at December 31, 2012 and $157 million at December 31, 2011. The current portion of the Corporation's accrued obligations for environmental matters, which is a component of "Accrued and other current liabilities" was $48 million at December 31, 2012 and $54 million at December 31, 2011 (see Note 12). No other component of accrued and other current liabilities was more than 5 percent of total current liabilities.

Supplementary Cash Flow Information
 
 
 
In millions
2012

2011

2010

Cash payments for interest
$
37

$
41

$
45

Cash payments (refunds) for income taxes
$
(94
)
$
316

$
264



NOTE 12 - 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 December 31, 2012, the Corporation had accrued obligations of $95 million for probable environmental remediation and restoration costs, including $21 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half 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, however, 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, 2011, the Corporation had accrued obligations of $101 million for probable environmental remediation and restoration costs, including $21 million for the remediation of Superfund sites.

The following table summarizes the activity in the Corporation's accrued obligations for environmental matters for the years ended December 31, 2012 and 2011:

Accrued Liability for Environmental Matters
 
 
In millions
2012

2011

Balance at January 1
$
101

$
95

Additional accruals
31

41

Charges against reserve
(37
)
(35
)
Balance at December 31
$
95

$
101



41

The amounts charged to income on a pretax basis related to environmental remediation totaled $31 million in 2012, $41 million in 2011 and $45 million in 2010. Capital expenditures for environmental protection were $7 million in 2012, $4 million in 2011 and $3 million in 2010.

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
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 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 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 year since 2004 to determine the appropriateness of updating the most recent ARPC study.

In November 2010, the Corporation requested ARPC to review the Corporation's historical asbestos claim and resolution activity and determine the appropriateness of updating its most recent study completed in December 2008. In response to that request, ARPC reviewed and analyzed data through October 31, 2010. The resulting study, completed by ARPC in December 2010, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2025 was estimated to be between $744 million and $835 million. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2010 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 2010, based on ARPC's December 2010 study and the Corporation's own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $744 million, which covered the 15-year period ending 2025, excluding future defense and processing costs. The reduction of $54 million was shown as “Asbestos-related credit” in the consolidated statements of operations. At December 31, 2010, the asbestos-related liability for pending and future claims was $728 million.

In November 2011, the Corporation requested ARPC to review the Corporation's 2011 asbestos claim and resolution activity and determine the appropriateness of updating its December 2010 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2011. In January 2012, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its December 2010 study and, therefore, the estimate in that study remained applicable. Based on the Corporation's own review of the asbestos claim and resolution activity and ARPC's response, the Corporation determined that no change to the accrual was required. At December 31, 2011, the Corporation's asbestos-related liability for pending and future claims was $668 million.

In October 2012, the Corporation requested ARPC to review the Corporation's historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2010 study. In response to that request, ARPC reviewed and analyzed data through September 30, 2012. In December, 2012, based upon ARPC's December 2012 study and the Corporation's own review of the asbestos claim and resolution activity for 2012, it was determined that no adjustment to the accrual was required at December 31, 2012. The Corporations asbestos-related liability for pending and future claims was $602 million at December 31, 2012.


42

At December 31, 2012, approximately 18 percent of the recorded liability related to pending claims and approximately 82 percent related to future claims. At December 31, 2011, approximately 18 percent of the recorded liability related to pending claim and approximately 82 percent related to future claims.

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 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 (the “Insurance Litigation”). The Insurance Litigation was filed against insurers that were not signatories to the Wellington Agreement and/or did 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. Since the filing of the case, the Corporation has reached settlements with several of the carriers involved in the Insurance Litigation, including settlements reached with two significant carriers in the fourth quarter of 2009. The Insurance Litigation is ongoing.

The Corporation's receivable for insurance recoveries related to its asbestos liability was $25 million at December 31, 2012 and $40 million at December 31, 2011. At December 31, 2012 and 2011, 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 its asbestos liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers that have settlement agreements in place regarding their asbestos-related insurance coverage.

The following table summarizes the Corporation's receivables related to its asbestos-related liability:

Receivables for Asbestos-Related Costs at December 31
In millions
2012

2011

Receivables for defense costs - carriers with settlement agreements
$
17

$
20

Receivables for resolution costs - carriers with settlement agreements
137

158

Receivables for insurance recoveries - carriers without settlement agreements
25

40

Total
$
179

$
218


The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $100 million in 2012, $88 million in 2011 and $73 million in 2010, and was reflected in “Cost of sales” in the consolidated statements of operations.

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 by the Corporation 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 for the Corporation to be higher or lower than those projected or those recorded.


43

Because of the uncertainties described above, the Corporation's management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing UCC and Amchem. The Corporation's 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 impact on the Corporation's 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 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, 2012, the Corporation had various outstanding commitments for take-or-pay agreements, with remaining terms extending from two to thirteen years. Such commitments were not in excess of current market prices. The fixed and determinable portion of obligations under purchase commitments at December 31, 2012 is presented in the following table:

Fixed and Determinable Portion of Take-or-Pay Obligations
at December 31, 2012
In millions
2013
$
11

2014
11

2015
8

2016
6

2017
6

2018 and beyond
10

Total
$
52


Asset Retirement Obligations
The Corporation has recognized asset retirement obligations related to capping activities at landfill sites in the United States. The aggregate carrying amount of these asset retirement obligations was $4 million at December 31, 2012 and $4 million at December 31, 2011. The Corporation also 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 $7 million at December 31, 2012 and $10 million at December 31, 2011. The discount rate used to calculate the Corporation's asset retirement obligations and conditional asset retirement obligations was 0.87 percent  at December 31, 2012 and 1.96 percent at December 31, 2011. These obligations are included in the consolidated balance sheets as “Accrued and other current liabilities” and "Other noncurrent obligations."

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 impact on the Corporation's consolidated financial statements based on current costs.

Gain Contingency
Matters Involving the Formation of K-Dow Petrochemicals
Introduction
On December 13, 2007, Dow and Petrochemical Industries Company (K.S.C.) (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 global petrochemicals joint venture. The proposed joint venture, K-Dow Petrochemicals (“K-Dow”), was expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide.

On November 28, 2008, Dow entered into a Joint Venture Formation Agreement (“JVFA”) with PIC that provided for the establishment of K-Dow. To form the joint venture, Dow would transfer, by way of contribution and sale to K-Dow, assets used in the research, development, manufacture, distribution, marketing and sale of polyethylene, polypropylene, polycarbonate,

44

polycarbonate compounds and blends, ethyleneamines, ethanolamines, and related licensing and catalyst technologies; and K-Dow would assume certain related liabilities. It was anticipated that a significant part (but not substantially all) of UCC's U.S.-based manufacturing assets would be included in the new joint venture.

Failure to Close
On December 31, 2008, Dow received a written notice from PIC with respect to the JVFA advising Dow of PIC's position that certain conditions to closing were not satisfied and, therefore, PIC was not obligated to close the transaction. On January 2, 2009, PIC refused to close the K-Dow transaction in accordance with the JVFA. Dow disagreed with the characterizations and conclusions expressed by PIC in the written notice and Dow informed PIC that it breached the JVFA. On January 6, 2009, Dow announced that it would seek to fully enforce its rights under the terms of the JVFA and various related agreements.

Arbitration
Dow's claims against PIC were subject to an agreement between the parties to arbitrate under the Rules of Arbitration of the International Court of Arbitration of the International Chamber of Commerce (“ICC”). On February 18, 2009, Dow initiated arbitration proceedings against PIC alleging that PIC breached the JVFA by failing to close the transaction on January 2, 2009, and as a result, Dow suffered substantial damages.

On May 24, 2012, the ICC released to the parties a unanimous Partial Award in favor of Dow on both liability and damages. A three-member arbitration Tribunal found that PIC breached the JVFA by not closing K-Dow on January 2, 2009, and awarded Dow $2.16 billion in damages, not including interest and arbitration costs.

On June 15, 2012, PIC filed an application for remand under the English Arbitration Act of 1996 (“Remand Application”) in the High Court of Justice in London (“High Court”). In its Remand Application, PIC did not challenge the Tribunal's finding of liability but it requested that the High Court remand the case back to the Tribunal for further consideration of Dow's claim for consequential damages. On October 11, 2012, the High Court ruled in favor of Dow and dismissed PIC's Remand Application; and on October 19, 2012, the High Court denied PIC's request for leave to appeal its ruling, bringing an end to PIC's Remand Application.

The ICC is expected to issue a Final Award covering Dow's substantial claim for pre- and post-award interest and arbitration costs in early 2013.

To the extent - if any - the Partial Award or Final Award allocate damages to the Corporation, the Corporation may record a gain when the uncertainty regarding the timing of collection and the amount to be realized has been resolved.


NOTE 13 - NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable at December 31
In millions
2012

2011

Notes payable - related companies
$
40

$
15

Year-end average interest rates
0.86
%
0.95
%

Long-Term Debt at December 31

2012

 
2011

 
Average

 
Average

 
In millions
Rate

2012

Rate

2011

Promissory notes and debentures:
 
 
 
 
Debentures due 2023
7.875
%
$
175

7.875
%
$
175

Debentures due 2025
6.79
%
12

6.79
%
12

Debentures due 2025
7.50
%
150

7.50
%
150

Debentures due 2096
7.75
%
135

7.75
%
135

Other facilities:
 
 
 
 
Pollution control/industrial revenue bonds
—

—

5.09
%
37

Unamortized debt discount
—

(1
)
—

(2
)
Long-term debt due within one year
 
—

 
(37
)
Total long-term debt
 
$
471

 
$
470


The Corporation does not have any maturities related to long-term debt during the next five years.

45

In the first quarter of 2012, the corporation redeemed $37 million aggregate principal amount of pollution control/industrial revenue bonds that matured on January 1, 2012.

On March 22, 2011, the Corporation concluded a cash tender offer for $65 million aggregate principal amount of certain notes issued by the Corporation. As a result of the tender offer, the Corporation redeemed $65 million of the notes and recognized a $6 million pretax loss on early extinguishment of debt, included in “Sundry income (expense) – net” in the consolidated statements of operations.

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.


NOTE 14 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans
The Corporation has a defined benefit pension plan that covers substantially all employees in the United States. Benefits are based on length of service and the employee's three highest consecutive years of compensation. Employees hired on or after January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest. The Corporation also has a non-qualified supplemental pension plan.

The Corporation's funding policy is to contribute to the plan when pension laws or economics either require or encourage funding. In 2012, UCC contributed $158 million to its pension plans including contributions to fund benefits payments for its non-qualified supplemental plan. UCC expects to contribute approximately $160 million to its pension plans in 2013.

The weighted‑average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below:

Pension Plan Assumptions
Benefit Obligations
at December 31
 
Net Periodic Costs
for the Year
 
2012

2011

2010

 
2012

2011

2010

Discount rate
3.85
%
4.85
%
5.35
%
 
4.85
%
5.35
%
5.85
%
Rate of increase in future compensation levels
4.50
%
4.50
%
4.50
%
 
4.50
%
4.50
%
4.50
%
Long-term rate of return on assets
—

—

—

 
6.90
%
7.40
%
7.40
%

The Corporation determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Corporation's historical experience with the pension fund asset performance is also considered. The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plans are matched against the Towers Watson RATE:Link yield curve (based on 60th and 90th percentile bond yields) to arrive at a single discount rate by plan.


46

The accumulated benefit obligation for all defined benefit pension plans was $4.4 billion at December 31, 2012 and $4.0 billion at December 31, 2011.

Pension Plans with Accumulated Benefit Obligations
in Excess of Plan Assets at December 31
In millions
2012

2011

Projected benefit obligation
$
4,433

$
4,037

Accumulated benefit obligation
$
4,383

$
3,993

Fair value of plan assets
$
3,548

$
3,351


Other Postretirement Benefits
The Corporation provides certain health care and life insurance benefits to retired U.S. employees. The plan provides health care benefits, including hospital, physicians' services, drug and major medical expense coverage, and life insurance benefits. The Corporation and the retiree share the cost of these benefits, with the Corporation portion increasing as the retiree has increased years of credited service, although there is a cap on the Corporation portion. The Corporation has the ability to change these benefits at any time. Employees hired after January 1, 2008 are not covered under this plan.

The Corporation funds most of the cost of these health care and life insurance benefits as incurred. In 2012, UCC did not make any contributions to its other postretirement benefit plan trust. Likewise, UCC does not expect to contribute assets to its other postretirement benefit plan trust in 2013.

The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the plan are provided in the following table:

Plan Assumptions for Other Postretirement Benefits
Benefit Obligations
at December 31
 
Net Periodic Costs
for the Year
 
2012

2011

2010

 
2012

2011

2010

Discount rate
3.65
%
4.60
%
5.10
%
 
4.60
%
5.10
%
5.60
%
Initial health care cost trend rate
7.85
%
8.30
%
8.72
%
 
8.30
%
8.72
%
9.17
%
Ultimate health care cost trend rate
5.00
%
5.00
%
5.00
%
 
5.00
%
5.00
%
5.00
%
Year ultimate trend rate to be reached
2019

2019

2019

 
2019

2019

2019


Increasing the assumed medical cost trend rate by one percentage point in each year would decrease the accumulated postretirement benefit obligation at December 31, 2012 by $5 million and the net periodic postretirement benefit cost for the year by an immaterial amount. Decreasing the assumed medical cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation at December 31, 2012 by $5 million and the net periodic postretirement benefit cost for the year by an immaterial amount.

Net Periodic Benefit Cost for all Plans
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
In millions
2012

2011

2010

 
2012

2011

2010

Service cost
$
28

$
25

$
16

 
$
2

$
2

$
2

Interest cost
189

200

209

 
17

19

23

Expected return on plan assets
(235
)
(255
)
(264
)
 
—

—

—

Amortization of prior service cost (credit)
7

7

7

 
(2
)
(2
)
(2
)
Amortization of net loss
60

85

59

 
—

—

—

Net periodic benefit cost
$
49

$
62

$
27

 
$
17

$
19

$
23




47

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
for all Plans
 
Defined Benefit Pension Plans
 
Other Postretirement Benefits
In millions
2012

2011

2010

 
2012

2011

2010

Net (gain) loss
$
375

$
254

$
100

 
$
16

$
(4
)
$
(7
)
Amortization of prior service (cost) credit
(7
)
(7
)
(7
)
 
2

2

2

Amortization of net loss
(60
)
(85
)
(59
)
 
—

—

—

Total recognized in other comprehensive (income) loss
$
308

$
162

$
34

 
$
18

$
(2
)
$
(5
)
Total recognized in net periodic benefit cost and other comprehensive loss
$
357

$
224

$
61

 
$
35

$
17

$
18



Change in Projected Benefit Obligations, Plan Assets and Funded Status for all Plans
 
Defined Benefit
Pension Plans
 
Other Postretirement Benefits
In millions
2012

2011

 
2012

2011

Change in projected benefit obligation:
 
 
 
 
 
Benefit obligation at beginning of year
$
4,037

$
3,867

 
$
412

$
423

Service cost
28

25

 
2

2

Interest cost
189

200

 
17

19

Actuarial changes in assumptions and experience
472

237

 
16

(4
)
Benefits paid
(286
)
(288
)
 
(33
)
(33
)
Other
(7
)
(4
)
 
—

5

Benefit obligation at end of year
$
4,433

$
4,037

 
$
414

$
412

 
 
 
 
 
 
Change in plan assets:
 
 
 
 
 
Fair value of plan assets at beginning of year
$
3,351

$
3,357

 
$
—

$
—

Actual return on plan assets
331

238

 
—

—

Employer contributions
158

48

 
—

—

Asset transfer
(6
)
(4
)
 
—

—

Benefits paid
(286
)
(288
)
 
—

—

Fair value of plan assets at end of year
$
3,548

$
3,351

 
$
—

$
—

 
 
 
 
 
 
Funded status at end of year
$
(885
)
$
(686
)
 
$
(414
)
$
(412
)
Net amounts recognized in the consolidated balance sheets at December 31:
 


Current liabilities
$
(1
)
$
(2
)
 
$
(36
)
$
(42
)
Noncurrent liabilities
(884
)
(684
)
 
(378
)
(370
)
Net amounts recognized in the consolidated balance sheets
$
(885
)
$
(686
)
 
$
(414
)
$
(412
)
 
 
 
 
 
 
Pretax amounts recognized in AOCI at December 31:
 
 




Net loss (gain)
$
1,941

$
1,626

 
$
(5
)
$
(21
)
Prior service cost (credit)
33

40

 
(2
)
(4
)
Pretax balance in AOCI at end of year
$
1,974

$
1,666

 
$
(7
)
$
(25
)

In 2013, an estimated net loss of $88 million and prior service cost of $7 million for the defined benefit pension plans will be amortized from AOCI to net periodic benefit cost. In 2013, an estimated prior service credit of $1 million for the other postretirement benefit plan will be amortized from AOCI to net periodic benefit cost.


48

Estimated Future Benefit Payments
The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:

Estimated Future Benefit Payments at December 31, 2012
In millions
Defined Benefit Pension Plans

Other Postretirement Benefits

2013
$
283

$
36

2014
280

35

2015
277

35

2016
275

33

2017
273

32

2018 through 2022
1,345

133

Total
$
2,733

$
304


Plan Assets
Plan assets consist mainly of equity and fixed income securities of U.S. and foreign issuers, and may include alternative investments such as real estate, private equity and other absolute return strategies. At December 31, 2012, plan assets totaled $3.5 billion and $3.4 billion at December 31, 2011 which included no Dow common stock.

Investment Strategy and Risk Management for Plan Assets
The Corporation's investment strategy for the plan assets is to manage the assets in order to pay retirement benefits to plan participants while minimizing cash contributions from the Corporation over the life of the plans. This is accomplished by diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plan.

The plan is permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposures and rebalancing the asset allocation. The plan uses value at risk, stress testing, scenario analysis and Monte Carlo simulation to monitor and manage both asset risk in the portfolios and surplus risk.

Equity securities include investments in large and small cap companies located in both developed and emerging markets around the world. Fixed income securities are primarily U.S. dollar based and include investment grade corporate bonds of companies diversified across industries, and U.S. treasuries. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts; and interest rate, equity and foreign derivative investments and hedges.

Strategic Target Allocation of Plan Assets
Asset Category
Target Allocation

Equity securities
25
%
Fixed income securities
45
%
Alternative investments
25
%
Other
5
%
Total
100
%

Concentration of Risk
The Corporation mitigates the credit risk of investments by establishing guidelines with the investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Corporation and the external managers. Credit risk for hedging activity is mitigated by utilizing multiple counterparties and through collateral support agreements.
 
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plan, which from time to time can represent a significant investment. Approximately half of the liability of the U.S. plan is covered by a participating group annuity issued by Prudential Insurance Company.


49

The following tables summarize the bases used to measure the Corporation's pension plan assets at fair value for the years ended December 31, 2012 and 2011:

Basis of Fair Value Measurements at December 31, 2012


In millions
Quoted Prices in Active Markets for Identical Items
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Total

Cash and cash equivalents
$
5

$
371

$
—

$
376

Equity securities:
 
 
 
 
U.S. equity
$
211

$
42

$
—

$
253

Non-U.S. equity - developed countries
208

71

—

279

Emerging markets
133

137

3

273

Convertible bonds
—

2

—

2

Equity derivatives
—

1

—

1

Total equity securities
$
552

$
253

$
3

$
808

Fixed income securities:
 
 
 
 
U.S. government and municipalities
$
—

$
733

$
—

$
733

U.S. agency mortgage backed securities
—

115

—

115

Corporates - investment grade
—

685

—

685

Non-U.S. governments - developed countries
—

3

—

3

Non-U.S. corporates - developed countries
—

104

—

104

Emerging markets debt
—

10

—

10

Other asset-backed securities
—

6

—

6

Other fixed income funds
—

—

17

17

High yield bonds
—

2

—

2

Total fixed income securities
$
—

$
1,658

$
17

$
1,675

Alternative investments:
 
 
 
 
Real estate
$
—

$
—

$
248

$
248

Private equity
—

—

230

230

Absolute return
—

115

74

189

Total alternative investments
$
—

$
115

$
552

$
667

Other securities:
 
 
 
 
Insurance contracts
$
—

$
—

$
22

$
22

Total other securities
$
—

$
—

$
22

$
22

Total pension plan assets at fair value
$
557

$
2,397

$
594

$
3,548




50

Basis of Fair Value Measurements at December 31, 2011


In millions
Quoted Prices in Active Markets for Identical Items
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Total

Cash and cash equivalents
$
5

$
515

$
—

$
520

Equity securities:
 
 
 
 
U.S. equity
$
228

$
4

$
1

$
233

Non-U.S. equity - developed countries
136

77

—

213

Emerging markets
69

122

1

192

Equity derivatives
—

8

—

8

Total equity securities
$
433

$
211

$
2

$
646

Fixed income securities:
 
 
 
 
U.S. government and municipalities
$
—

$
601

$
—

$
601

U.S. agency mortgage backed securities
—

116

—

116

Corporates - investment grade
—

687

—

687

Non-U.S. governments - developed countries
—

8

—

8

Non-U.S. corporates - developed countries
—

110

—

110

Emerging markets debt
—

6

—

6

Other asset-backed securities
—

5

—

5

Other fixed income funds
—

—

11

11

High yield bonds
—

3

—

3

Fixed income derivatives
—

2

—

2

Total fixed income securities
$
—

$
1,538

$
11

$
1,549

Alternative investments:
 
 
 
 
Real estate
$
—

$
—

$
191

$
191

Private equity
—

—

247

247

Absolute return
—

128

46

174

Total alternative investments
$
—

$
128

$
484

$
612

Other securities:
 
 
 
 
Foreign exchange derivatives
$
—

$
2

$
—

$
2

Insurance contracts
—

—

22

22

Total other securities
$
—

$
2

$
22

$
24

Total pension plan assets at fair value
$
438

$
2,394

$
519

$
3,351


For assets classified as Level 1 measurements (measured using quoted prices in active markets), the total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For assets classified as Level 2 measurements, where the security is 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. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs such as foreign exchange rates, commodity prices, swap rates, interest rates, and implied volatilities obtained from various market sources.

Some plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 2 or 3 measurements) is determined based on the lowest level classification of significant holdings within the fund. 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.


51

For assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager's investment valuation.

The following tables summarize the changes in fair value of Level 3 pension plan assets for the years ended December 31, 2012 and 2011:

Fair Value Measurement of Level 3
Pension Plan Assets
In millions
Equity Securities

Fixed Income Securities

Alternative Investments

Other Investments

Total

 
Balance at January 1, 2011
$
—

$
5

$
477

$
22

$
504

 
Actual return on plan assets:








 
 
Relating to assets held at Dec. 31, 2011
—

—

3

—

3

 
Relating to assets sold during 2011
—

—

33

—

33

 
Purchases, sales and settlements
—

6

(29
)
—

(23
)
 
Transfers into Level 3, net
2

—

—

—

2

 
Balance at December 31, 2011
$
2

$
11

$
484

$
22

$
519

 
Actual return on plan assets:
 
 
 
 
 
 
Relating to assets held at Dec. 31, 2012
$
(1
)
$
—

$
53

$
—

52

 
Relating to assets sold during 2012
(1
)
—

(7
)
—

(8
)
 
Purchases, sales and settlements
3

6

(7
)
—

2

 
Transfers into Level 3, net
—

—

29

—

29

 
Balance at December 31, 2012
$
3

$
17

$
552

$
22

$
594

 


NOTE 15 - LEASED PROPERTY

The Corporation has operating leases primarily for facilities and distribution equipment. The future minimum rental payments under operating leases with remaining noncancelable terms in excess of one year are as follows:

Minimum Operating Lease Commitments
at December 31, 2012
In millions
2013
$
6

2014
5

2015
4

2016
2

2017
2

2018 and thereafter
2

Total
$
21


Rental expenses under operating leases were $35 million in 2012, $31 million in 2011 and $26 million in 2010.


NOTE 16 - 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. 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 operations. Purchases from that Dow subsidiary were approximately $3.1 billion in 2012, $3.5 billion in 2011 and $3.0 billion in 2010.


52

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 approximately $32 million in 2012 and $48 million in 2011 for general administrative and overhead type services and the 10 percent service fee, included in “Sundry income (expense) - net.” The decrease in general administrative and overhead type services including the service fee was due to a simplification of the cost structure and how items are allocated to UCC. The remaining activity-based costs were approximately $51 million in 2012 and $35 million in 2011 and were included in “Cost of sales.” The increase in 2012 activity-based costs was due to costs related to the restart of the cracker in St. Charles, Louisiana, in December 2012.

Under the master services agreement in place for 2010, costs related to general administrative and overhead services were allocated to UCC based on the Corporation's and Dow's relative manufacturing conversion costs. This arrangement resulted in an average quarterly charge of approximately $5 million in 2010 included in "Sundry income (expense) - net."

Additionally, for services that Dow routinely charged based on effort, UCC was charged the cost of such services on a fully absorbed basis in 2010, which included direct and indirect costs. Certain Dow employees were contracted to UCC and Dow was reimbursed for all direct employment costs of such employees. These activity-based costs were approximately $52 million in 2010 and were included in "Cost of sales."

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 December 31, 2012, the Corporation had a note receivable of $2.3 billion ($3.2 billion at December 2011) 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 at December 31, 2013. 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 December 31, 2012, $820 million ($870 million at December, 2011) was available under the revolving credit agreement. The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.

In the fourth quarter of 2012, UCC recorded an impairment charge of $131 million related to its investment in Modeland International Holdings Inc. ("Modeland"), a related company, representing the difference between the investment's cost and its fair value. The impairment was triggered by an ownership reorganization of Modeland's subsidiairies. The amount of the impairment charge was calculated based on an appraisal of the fair value of Modeland's assets and liablities. The fair value was determined through the use of both income and market valuation approaches. The impairment charge is included in "Sundry income (expense) -net." Subsequent to recording the impairment charge, the Corporation also declared and paid a stock dividend to Dow for its ownership interest in Modeland totaling $9 million.

During 2012, the Corporation declared and paid dividends totaling $784 million which included cash dividends to Dow totaling $775 million and a stock dividend to Dow of $9 million for its ownership interest in Modeland. During 2011, the Corporation declared and paid dividends totaling $951 million to Dow which included cash dividends to Dow totaling $950 million and a stock dividend to Dow for its ownership interest in Dow Venezuela C.A. totaling $1 million.


53

The Corporation received cash dividends from its investments in related companies of $25 million in 2012 ($7 million in 2011) including $25 million ($5 million in 2011) from Dow Technology Investments, LLC. The Corporation received cash dividends from its investment in related companies of $40 million in 2010, including $20 million from GWN Holding, Inc. and $17 million from Modeland International Holdings Inc. These dividends were included in "Sundry income (expense) - net."

In accordance with the Tax Sharing Agreement between the Corporation and Dow, the Corporation makes payments to Dow to cover the Corporation's estimated federal tax liability; payments were zero in 2012, $227 million in 2011 and $168 million in 2010. In 2011, the Corporation's estimated payments exceeded the estimated tax liability and a refund of approximately $42 million is recorded in "Accounts receivables - other" in the consolidated balance sheets at December 31, 2011.


NOTE 17 - INCOME TAXES

Domestic and Foreign Components of Income (Loss) Before Income Taxes
In millions
2012

2011

2010

Domestic
$
(95
)
$
303

$
611

Foreign
(2
)
(1
)
8

Total
$
(97
)
$
302

$
619



Provision for Income Taxes
 
 
2012

 
 
2011

 
 
2010

 
In millions
Current

Deferred

Total

Current

Deferred

Total

Current

Deferred

Total

Federal
$
10

$
15

$
25

$
126

$
(41
)
$
85

$
237

$
(38
)
$
199

State and local
(5
)
(3
)
(8
)
(2
)
(2
)
(4
)
(42
)
(2
)
(44
)
Foreign
—

—

—

6

—

6

5

—

5

Total
$
5

$
12

$
17

$
130

$
(43
)
$
87

$
200

$
(40
)
$
160



Reconciliation to U.S. Statutory Rate
 
 
 
In millions
2012

2011

2010

Taxes at U.S. statutory rate
$
(34
)
$
106

$
216

Equity earnings effect (1)
2

—

—

U.S. business credits
—

(6
)
—

Benefit of dividend income from investments in related companies
(9
)
(2
)
(14
)
Unrecognized tax benefits
9

(1
)
(28
)
Miscellaneous U.S. permanent differences
(3
)
—

—

Impairment of investment in related company
46

—

—

Federal tax accrual adjustments (1)
(8
)
—

—

State and local tax impact
12

(7
)
(7
)
Other - net
2

(3
)
(7
)
Total tax provision
$
17

$
87

$
160

Effective tax rate
(17.5
)%
28.8
%
25.8
%
(1)
The amount for the noted reconciliation item is immaterial for 2011 and 2010 and has been included in the “Other - net” category.

The tax rate for 2012 was negatively impacted primarily by the minimal tax relief related to the impairment of the investment in related company and the inability to utilize state tax credits. UCC's reported effective tax rate for 2012 was (17.5) percent.

The tax rate for 2011 was positively impacted by U.S. state and business credits. These events resulted in an effective tax rate for 2011 that was lower than the U.S. statutory rate. UCC's reported effective tax rate for 2011 was 28.8 percent.


54

The tax rate for 2010 was positively impacted by dividends received from investments in related companies accounted for using the cost method and the reversal of certain state tax liabilities (uncertain tax positions). These events resulted in an effective tax rate for 2010 that was lower than the U.S. statutory rate. UCC's reported effective tax rate for 2010 was 25.8 percent.

Deferred Tax Balances at December 31

In millions
2012
2011
Deferred Tax Assets

Deferred Tax Liabilities

Deferred Tax Assets

Deferred Tax Liabilities

Property
$
—

$
202

$
—

$
229

Tax loss and credit carryforwards
103

—

122

—

Postretirement benefit obligations
887

403

772

363

Other accruals and reserves
595

4

576

4

Inventory
10

1

9

—

Long-term debt
—

1

—

1

Investments
—

1

—

1

Other - net
28

46

26

48

Subtotal
$
1,623

$
658

$
1,505

$
646

Valuation allowances
(124
)
—

(121
)
—

Total
$
1,499

$
658

$
1,384

$
646


Gross operating loss carryforwards at December 31, 2012 amounted to $1,255 million compared with $1,348 million at the end of 2011. At December 31, 2012, $582 million of the operating loss carryforwards were subject to expiration in the years 2013 through 2017. The remaining balances expire in years beyond 2017 or have an indefinite carryforward period. Tax credit carryforwards amounted to $39 million at December 31, 2012 and $39 million at December 31, 2011, all of which expire in years beyond 2017 or have an indefinite carryforward period.

Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $53 million at December 31, 2012, $63 million at December 31, 2011 and $103 million at December 31, 2010. It is not practicable to calculate the unrecognized deferred tax liability on those earnings.

The Corporation had valuation allowances that were primarily related to the realization of recorded tax benefits on tax loss carryforwards from operations in the United States of $124 million at December 31, 2012 and $121 million at December 31, 2011.

Total Gross Unrecognized Tax Benefits
 
 
 
In millions
2012

2011

2010

Balance at January 1
$
161

$
163

$
208

Decreases related to positions taken on items from prior years
—

(1
)
(18
)
Increases related to positions taken in current year
8

1

5

Settlement of uncertain tax positions with tax authorities
—

—

(8
)
Decreases due to expiration of statutes of limitations
(3
)
(2
)
(24
)
Balance at December 31
$
166

$
161

$
163


At December 31, 2012, the total amount of unrecognized tax benefits was $166 million ($161 million at December 31, 2011), of which $158 million ($152 million at December 31, 2011) would impact the effective tax rate, if recognized.

Interest and penalties associated with unrecognized tax benefits are recognized as components of the “Provision for income taxes” and was a credit of $1 million in 2012, a credit of $2 million in 2011 and expense of $6 million in 2010. The Corporation's accrual for interest and penalties was a credit of $4 million at December 31, 2012 and a credit of $2 million at December 31, 2011.


55

Tax years that remain subject to examination for the Corporation's major tax jurisdictions are shown below:
 
Tax Years Subject to Examination by Major Tax Jurisdiction at December 31
Jurisdiction
Earliest Open Year
2012
2011
United States:
 
 
Federal income tax
2004
2004
State and local income tax
2004
2004

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. It is reasonably possible that these examinations may be resolved within twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Corporation at December 31, 2012, will be reduced by approximately $7 million to $150 million primarily related to litigation of R&D credits.

The reserve for non-income tax contingencies related to issues in the United States was $8 million at December 31, 2012 and $10 million at December 31, 2011. This is management's best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued will have a material impact on the Corporation's consolidated financial statements.

Subsequent Event
On January 2, 2013, President Obama signed into law the “American Taxpayer Relief Act of 2012.” This law extends retroactively to 2012 and prospectively through 2013 certain temporary business tax provisions (“extenders”) that are beneficial to UCC including the research and experimentation tax credit, the controlled foreign corporation look-through rule, bonus depreciation, and various incentives for energy efficient homes and buildings. As this tax law was enacted on January 2, 2013, the retroactive impact for 2012 will be recognized in the first quarter of 2013 tax provision. The Corporation estimates the extenders will have an immaterial impact on the tax provision.


NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides an analysis of the changes in accumulated other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010:

Accumulated Other Comprehensive Income (Loss)
In millions
2012

2011

2010

Cumulative Translation Adjustments at beginning of year
$
(52
)
$
(55
)
$
(61
)
Translation adjustments
(4
)
3

6

Cumulative Translation Adjustments at end of period
$
(56
)
$
(52
)
$
(55
)
Accumulated Investment Gain at beginning of year
$
—

$
—

$
1

Net investment results
—

—

(1
)
Accumulated Investment Gain at end of year
$
—

$
—

$
—

Pension and Other Postretirement Benefit Plans at beginning of year
$
(1,080
)
$
(971
)
$
(950
)
Net prior service credit
3

3

3

Net loss
(212
)
(112
)
(24
)
Pension and Other Postretirement Benefit Plans at end of period
$
(1,289
)
$
(1,080
)
$
(971
)
Total accumulated other comprehensive loss
$
(1,345
)
$
(1,132
)
$
(1,026
)

  

56

NOTE 19 - BUSINESS AND GEOGRAPHIC AREAS

Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global businesses rather than stand-alone operations. The Corporation sells its products to Dow in order to simplify the customer interface process at market-based prices in accordance with Dow's intercompany pricing policy. Because there are no separable reportable business segments for the Corporation 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.

Sales are attributed to geographic areas based on customer location; long-lived assets are attributed to geographic areas based on asset location. Sales to external customers and long-lived assets by geographic area were as follows:

In millions
United States

Asia Pacific

Rest of World

Total

2012
 
 
 
 
Sales to external customers (1)
$
98

$
64

$
15

$
177

Long-lived assets
$
1,287

$
8

$
39

$
1,334

2011
 
 
 
 
Sales to external customers (1)
$
126

$
45

$
15

$
186

Long-lived assets
$
1,322

$
9

$
23

$
1,354

2010
 
 
 
 
Sales to external customers (1)
$
122

$
30

$
16

$
168

Long-lived assets
$
1,425

$
7

$
8

$
1,440

(1)
Of the total sales to external customers, China represented approximately 21 percent in 2012, 7 percent in 2011 and 2 percent in 2010, and Malaysia represented approximately 10 percent in 2012, 5 percent in 2011 and 6 percent in 2010, both of which are included in Asia Pacific.


NOTE 20 - QUARTERLY INFORMATION (UNAUDITED)

During the fourth quarter of 2012, the Corporation recorded a cumulative out-of-period adjustment relating to sales from the Corporation to Dow. The adjustment decreased "Total Net Sales" and "Income (Loss) Before Income Taxes" by $2 million, and "Net Income (Loss) Attributable to Union Carbide Corporation" by $1 million in the fourth quarter of 2012. Had the amounts pertaining to the first, second and third quarters of 2012 been reflected in those periods, "Total Net Sales" and "Income (Loss) Before Income Taxes" would have increased (decreased) by $(47) million, $34 million, and $(7) million, respectively, resulting in an increase (decrease) to "Net Income (Loss) Attributable to Union Carbide Corporation" of $(31) million, $22 million and $(5) million, respectively. "Total Net Sales" for 2012 included $43 million that related to prior years. Management believes the correcting adjustment was not material to the Corporation's full year results for 2012 or to the previously reported financial information for any prior fiscal year or interim period.



57

Union Carbide Corporation and Subsidiaries
PART II

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

58

Union Carbide Corporation and Subsidiaries
PART II

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures
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 Exchange Act Rule 15d - 15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were not effective as of December 31, 2012 as a result of the material weakness in the Corporation's internal control over financial reporting described below in Management's Report on Internal Control Over Financial Reporting.

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 fiscal quarter ended December 31, 2012 and through the date of this filing that materially affected or were reasonably likely to materially affect the Corporation's internal control over financial reporting. However, Management is in the process of remediating the material weakness described below in Management's Report on Internal Control Over Financial Reporting by adding resources and developing new processes, procedures and controls to ensure the accuracy and timely reporting of the Corporation's sales to related companies.

Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control framework and processes are designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation's consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

The Corporation's internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;
•
provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and Directors of the Corporation;
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on the consolidated financial statements; and
•
provide reasonable assurance as to the detection of fraud.

Because of its inherent limitations, any system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.
Management assessed the effectiveness of the Corporation's internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework and concluded that, as of December 31, 2012 such internal control was not effective as a result of a material weakness in internal control over financial reporting.
During the fourth quarter of 2012, several current period and prior period errors in the recording of sales to related companies were identified. Management concluded that the errors were not material to the Corporation's full year results for 2012 or to the previously reported financial information for any prior fiscal year or interim period. The errors were caused by deficiencies in several controls that were not effective in ensuring the accuracy of related company selling prices and the timeliness of recording related company sales transactions. When considered in the aggregate, the deficiencies constitute a material weakness in internal control over financial reporting since there was a reasonable possibility that a material misstatement in the Corporation's sales to related companies would not have been prevented or detected on a timely basis.

59

The Corporation's internal control over financial reporting was not subject to attestation by the Corporation's independent registered public accounting firm, Deloitte & Touche LLP, pursuant to the rules of the Securities and Exchange Commission that permit the Corporation to provide only management's report. Therefore, this annual report does not include an attestation report regarding internal control over financial reporting from Deloitte & Touche LLP.


February 15, 2013

/s/ PATRICK E. GOTTSCHALK
 
/s/ IGNACIO MOLINA
Patrick E. Gottschalk
President and Chief Executive Officer
 
Ignacio Molina
Vice President, Treasurer and
Chief Financial Officer
 
 
 
/s/ RONALD C. EDMONDS
 
 
Ronald C. Edmonds, Vice President and Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation
 
 



60

Union Carbide Corporation and Subsidiaries
PART II

ITEM 9B. OTHER INFORMATION.

None.

61


Union Carbide Corporation and Subsidiaries
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Omitted pursuant to General Instruction I of Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION.

Omitted pursuant to General Instruction I of Form 10-K.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Omitted pursuant to General Instruction I of Form 10-K.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Omitted pursuant to General Instruction I of Form 10-K.


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Dow's Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for Dow and its subsidiaries (including the Corporation) by its independent auditor, subject to the de minimus exception for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act, which are approved by Dow's Audit Committee prior to the completion of the audit. The Corporation's management and its Board of Directors subscribe to these policies and procedures. For the years ended December 31, 2012 and 2011, professional services were performed for the Corporation by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu Limited, and their respective affiliates (collectively, the “Deloitte Entities”).

Total fees paid to the Deloitte Entities were:

In thousands
2012

2011

Audit fees (1)
$
1,621

$
1,694

Audit-related fees (2)
250

158

Total
$
1,871

$
1,852

(1)
The aggregate fees billed for the audit of the Corporation's annual financial statements, the reviews of the financial statements in Quarterly Reports on Form 10-Q, statutory audits and other regulatory filings.
(2)
Primarily for agreed-upon procedure engagements.

62


Union Carbide Corporation and Subsidiaries
PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are filed as part of this report:

1. The Corporation's 2012 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Item 8 of this Annual Report on Form 10-K.

2. Financial Statement Schedules.
Financial Statement Schedules are omitted because of the absence of the conditions under which they are required or because the information called for is included in the Consolidated Financial Statements or Notes thereto.

3. See the Exhibit Index for exhibits filed with this Annual Report on Form 10-K (see below) and for exhibits incorporated by reference.

The Corporation will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Corporation's principal executive offices (address provided at the end of the Exhibit Index).

The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10‑K:

Exhibit No.
Description of Exhibit
10.5.10
Tenth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 6, 2012, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors.
23
Analysis, Research & Planning Corporation's Consent.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1)
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.


TRADEMARKS

The following trademarks of Union Carbide Corporation or its subsidiaries appear in this report:
CARBOWAX, CELLOSIZE, FLEXOMER, LP OXO, POLYOX, REDI-LINK, SI-LINK, SENTRY, TERGITOL, TRITON, TUFLIN, UCAR, UCARTHERM, UCON, UNIGARD, UNIPOL, UNIPURGE, UNIVAL

The following trademark of The Dow Chemical Company appears in this report: METEOR

The following registered service mark of American Chemistry Council appears in this report: Responsible Care


63

Union Carbide Corporation and Subsidiaries
Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of February 2013.


 
UNION CARBIDE CORPORATION
 
 
 
 
By:
/s/ RONALD C. EDMONDS
 
 
Ronald C. Edmonds, Vice President and Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation


Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below on the 15th day of February 2013 by the following persons on behalf of the Registrant and in the capacities indicated:


/s/ PATRICK E. GOTTSCHALK
 
/s/ GLENN J. MORAN
Patrick E. Gottschalk, Director
 
Glenn J. Moran, Director
President and Chief Executive Officer
 
 
 
 
 
 
 
 
/s/ IGNACIO MOLINA
 
/s/ EUDIO GIL
Ignacio Molina
Vice President, Treasurer and
Chief Financial Officer
 
Eudio Gil, Director
 
 
 
 
 
 
/s/ RONALD C. EDMONDS
 
 
Ronald C. Edmonds, Vice President and Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation
 
 


64

 
Union Carbide Corporation and Subsidiaries

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow") and, as such, does not send an annual report to security holders or proxy material with respect to any annual or other meeting of security holders to Dow or any other security holders.


65

Union Carbide Corporation and Subsidiaries
Exhibit Index
 
EXHIBIT NO.
DESCRIPTION
2.1
Agreement and Plan of Merger dated as of August 3, 1999 among Union Carbide Corporation, The Dow Chemical Company and Transition Sub Inc. (see Exhibit 2 of the Corporation's Current Report on Form 8-K dated August 3, 1999).
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).
3.1
Restated Certificate of Incorporation of Union Carbide Corporation under Section 807 of the Business Corporation Law, as filed on May 13, 2008 (see Exhibit 3.1.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
3.2
Amended and Restated Bylaws of Union Carbide Corporation, amended as of April 22, 2004 (see Exhibit 3.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
4.1
Indenture dated as of June 1, 1995, between the Corporation and the Chase Manhattan Bank (formerly Chemical Bank), Trustee (see Exhibit 4.1.2 to the Corporation's Form S-3 effective October 13, 1995, Reg. No. 33-60705).
4.2
The Corporation will furnish to the Commission upon request any other debt instrument referred to in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1
Amended and Restated Service Agreement, effective as of July 1, 2002, between the Corporation and The Dow Chemical Company (see Exhibit 10.23 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.1.1
Service Addendum No. 2 to the Service Agreement, effective as of August 1, 2001, between the Corporation and The Dow Chemical Company (see Exhibit 10.23.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.1.2
Restated Service Addendum No. 1 to the Service Agreement, effective as of February 6, 2001, between the Corporation and The Dow Chemical Company (see Exhibit 10.23.3 of the Corporation's 2002 Form 10-K).
10.1.3
Service Addendum No. 3 to the Amended and Restated Service Agreement, effective as of January 1, 2005, between the Corporation and The Dow Chemical Company (see Exhibit 10.1.3 of the Corporation's 2004 Form 10-K).
10.1.4
First Amendment to Amended and Restated Service Agreement, effective as of January 1, 2011, between the Corporation and The Dow Chemical Company (See Exhibit 10.1.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
10.2
Second Amended and Restated Sales Promotion Agreement, effective January 1, 2004, between the Corporation and The Dow Chemical Company (see Exhibit 10.24 of the Corporation's 2003 Form 10-K).
10.3
Third Amended and Restated Agreement (to Provide Materials and Services), dated as of March 1, 2008, between the Corporation and Dow Hydrocarbons and Resources LLC (see Exhibit 10.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
10.4
Amended and Restated Tax Sharing Agreement, effective as of February 7, 2001, between the Corporation and The Dow Chemical Company (see Exhibit 10.27 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
10.5
Amended and Restated Revolving Credit Agreement dated as of May 28, 2004, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.28 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.5.1
First Amendment dated October 29, 2004 to the Amended and Restated Revolving Credit Agreement, dated as of May 28, 2004, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.1 of the Corporation's 2004 Form 10-K).
10.5.2
Second Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 30, 2004, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.2 of the Corporation's 2004 Form 10-K).

66

EXHIBIT NO.
DESCRIPTION
10.5.3
Third Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2005, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.5.4
Fourth Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2006, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
10.5.5
Fifth Amendment to the Amended and Restated Revolving Credit Agreement, dated as of September 30, 2007, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.5 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
10.5.6
Sixth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2008, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.6 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008).
10.5.7
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 (see Exhibit 10.5.7 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.5.8
Eighth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2010, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.8 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.5.9
Ninth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of September 30, 2011, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors (see Exhibit 10.5.9 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.5.10
Tenth Amendment to the Amended and Restated Revolving Credit Agreement, effective as of December 6, 2012, among the Corporation, The Dow Chemical Company and certain Subsidiary Guarantors.
10.6
Amended and Restated Pledge and Security Agreement dated as of May 28, 2004, between the Corporation and The Dow Chemical Company (see Exhibit 10.29 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.7
Second Amended and Restated Revolving Loan Agreement, effective as of November 1, 2005, between the Corporation and The Dow Chemical Company (see Exhibit 10.7 of the Corporation's 2005 Annual Report on Form 10‑K).
10.7.1
First Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of December 31, 2007, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.1 of the Corporation's 2007 Annual Report on Form 10-K).
10.7.2
Second Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2009, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.2 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.7.3
Third Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of February 1, 2010, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.3 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.7.4
Fourth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2010, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.4 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
10.7.5
Fifth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of August 1, 2011, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.5 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011).
10.7.6
Sixth Amendment to Second Amended and Restated Revolving Loan Agreement, effective as of April 1, 2012, between the Corporation and The Dow Chemical Company (see Exhibit 10.7.6 of the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).

67

EXHIBIT NO.
DESCRIPTION
10.8
Purchase and Sale Agreement dated as of September 30, 2005, between Catalysts, Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials LLC (see Exhibit 10.8 of the Corporation's Quarterly Report on Form 10‑Q for the quarter ended September 30, 2005).
10.9
Contribution Agreement dated as of December 21, 2007, among the Corporation, Dow International Holdings Company and The Dow Chemical Company (see Exhibit 10.9 of the Corporation's 2007 Annual Report on Form 10‑K).
21
Omitted pursuant to General Instruction I of Form 10‑K.
23
Analysis, Research & Planning Corporation's Consent.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document (1)
101.SCH
XBRL Taxonomy Extension Schema Document (1)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1)
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

Wherever an exhibit listed above refers to another exhibit or document (e.g., "see Exhibit 6 of . . ."), that exhibit or document is incorporated herein by such reference.

A copy of any exhibit listed above may be obtained on written request to the Secretary's Office, Union Carbide Corporation, 1254 Enclave Parkway, Houston, Texas 77077.


68