CONFIDENTIAL Innovest Strategic Value Advisors' Inc' Uncovering Hidden Value Potential for Strategic

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Dow Chemical Risks for Investors Presentation
to Analysts April 21st 2004
Marc Brammer Senior Analyst 4 Times Square 3rd
Floor Tel. [phone] mbrammer_at_innovestgroup.com
www.innovestgroup.com
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Presentation Agenda

• Introduction
• Bhopal Resolution
• History of Bhopal
• Key Points for Shareholders
• Business Risks from Organochlorines
• Environmental Liability Overview
• Midland Michigan
• Agent Orange
• Other Risks
• Disclosure Issues

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Shareholder Resolution Text

• Supporting Statement
• The proponents believe that such report
  should also assess the impacts that the Bhopal
  matter may reasonably pose on the company, its
  reputation, its finances and its expansion in
  Asia and elsewhere.

• Resolved
• that shareholders request the management of
  Dow Chemical to prepare a report to shareholders
  by October 2004, at reasonable cost and excluding
  confidential information, describing new
  initiatives instituted by the management to
  address the specific health, environmental and
  social concerns of the survivors.

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Bhopal Survivors, Shareholders and Dow Chemical

• Dow dialogue process with survivors and concerned
  shareholders begun at time of purchase and
  actively explored into 2002
• Survivors Issues
• Clean up contamination
• Health monitoring and care including disclosure
  of internal Carbide Health studies
• Social support - widows and orphans due to
  disaster
• 10, 000 persons widowed or orphaned
• Economic rehabilitation of those unable to work
• 40,000 severely disabled survivors

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Bhopal Survivors, Shareholders and Dow Chemical

• Shareholders Issues
• Financial risk from cases still pending
• Reputational risk and impacts
• Transparency/undisclosed liabilities with
  parallels
• asbestos
• agent orange
• dioxin
• Dialogues halted by Dow when Stavropoulos became
  CEO

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The Bhopal Disaster
DECEMBER 2-3, 1984 UNION CARBIDE PESTICIDE
PLANT BHOPAL, INDIA
CHEMICAL RELEASE methyl isocyanate
3,000 - 7,000 deaths overnight
Hundreds of thousands with long term injury
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Issues of Fault and LiabilityRaised After the
Incident

• UCC 51 owner
• Union Carbide India Ltd.
• Management claim
• sabotage - disputed in other
• studies and in litigation
• against UCC
• Safety system failures also necessary for
  release to occur -examples
• refrigeration off
• capture systems under scaled
• Allegations of degree of UCC control and UCC
  underinvestment

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470m Settlement

• Indian Government and Union Carbide pursuant to
  Bhopal Gas Disaster Relief Act
• Legally only covers victims liabilities for the
  disaster
• not contamination (existed prior to the disaster)
• not criminal case
• Survivors say amount was too low - based on
  drastic underestimate of victims and no long term
  health care

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India Criminal Case

• Criminal case against Union Carbide and 11 other
  defendants continues - charges against Carbide
  are criminal homicide not amounting to murder
• By law, penalties, including victims restitution,
  are limited to ability of defendant to pay

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Lasting Health Impacts
Deaths, Injuries and Long Term Mortality
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Contamination Continues at the Site Today

• Drinking water contamination, groundwater, site
• Contamination due primarily to prior operation,
  not to the gas release
• Government is seeking to require UCC/Dow to clean
  up

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India Criminal Case Dows Positions

• Absconder status of UCC and Warren Anderson
• Company position No Indian jurisdiction
• Government position UCC responsible under law
• Asset status Several Dow Chemical India
  subsidiaries
• Petition filed February 2004 by Bhopal survivors
  to summon Dow Chemical to produce Carbide

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Failed Attempt to Shed Assets and Liability

• November 1994 Union Carbide sold its interest in
  Union Carbide India Limited. Union Carbide then
  asserted that it retained no interest in or
  liability for Bhopal.
• The Chief Judicial Magistrate for Bhopal held
  that Union Carbide Corp.s transfer of shares
  was not bona fide because it was done to evade
  potential liabilities arising out of the ongoing
  criminal case in Bhopal.

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Dow Chemical Acquisition of Union Carbide

• Statements of Position by Dow Management
• when Dow acquired Union Carbide's shares in
  February of 2001, "the company conducted an
  exhaustive assessment to ensure that there was
  absolutely no outstanding liability in relation
  to Bhopal. There was none the company that Dow
  acquired retained absolutely no responsibility
  for either the tragedy or for the Bhopal site. -
  Dow website
• "We respect that for some people, responsibility
  for the Bhopal tragedy continues to be an
  unresolved issue.. upon acquiring Union Carbide,
  Dow inherited no responsibility. Still, some
  people would have us take action to resolve their
  concerns. But, we are aware of potentially
  significant legal risks associated with such
  actions and we will not compromise our obligation
  to protect our shareholder interests. - Global
  Report

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Dow Chemical Acquisition of Union Carbide

• Evaluating Statements of
• Position by Dow Management
• Dow says no outstanding liability
• Dow also says potentially significant legal
  risks associated with such actions
• These statements appear inconsistent - is there a
  liability risk or not?
• These statements appear misleading in light of
  ongoing criminal case in which UCC is a leading
  defendant, and given government efforts to ensure
  remediation by UCC/Dow.
• Where is the balancing of interests - legal vs.
  business/market loss in India?

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Dow and India
Indias Increased Economic Importance

• India is a growing player in the globalized
  chemical industry and it would be harmful to Dow
  to be constrained by substantial legal risk
  issues in such a large and growing market.
• The Indian economy is projected to grow by 7.2
  in 2004.
• It boasts the worlds 12th largest chemical
  industry in terms of production, which is valued
  at Rs 1200 Billion (26 bn) and is growing at
  twice the rate of Asias overall chemical market
  since 1998.
• In the late 1990s India became a net exporter of
  chemicals.

Source Dows statement about Bhopal on the
companys website.
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Dow and India
Indias Increased Economic Importance

• Indias Agricultural market, a key constituency
  for the chemical industry, is projected to grow
  at twice the rate of Indias economy as a whole
  13.8
• Chlorpyrifos (Marketed by Dow under the Dursban
  trademark) a widely used pesticide was found in
  Coke Pepsi products in India, causing further
  reputational damage to Dow. Dow is creating a
  negative image for itself in a large and growing
  market

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Dow and India
As a growing net export market in chemicals,
India will be an important player in Asia where
Dow has 12 of revenues but only 2 of Fixed
Assets. Potential legal liability could be a
factor in physical expansion in India by Dow.
Thus Bhopal represents a financial constraint for
Dows presence in India due to risk of asset
attachment by Indian courts should Dow become a
party to Bhopal suits.
Source William S. Stravropoulos, Chairman and
CEO, Dow Chemical, Presentation to Morgan Stanley
Conference, Feb. 24,2004
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Key Points

• Management should act consistent with prior
  dialogue with shareholders and survivors
• Management should engage in proper disclosure to
  investors
• not misleading
• materially complete
• identifying opportunity costs of continued Bhopal
  controversy

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Business Risks

• Risks associated with Organochlorine chemicals.
• Bio accumulating Toxins Dioxins and other
  chemicals
• Increasing economic viability of alternatives
• Reoccurring tort claims liability and site
  liability to the manufacture, sale and disposal
  of toxic chemicals and byproducts.

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Uses of Industrially Produced Chlorine.
Source Chlorine Chemistry Council
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The Chemical Structure of Dioxin and Related
Compounds
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Dow Dioxin Reduction Goals
Dow states that the chlorine industry is only 3
of dioxin emissions. .But nearly all dioxin is
generated by the combustion of chlorinated
products produced by the chlorine industry or
chlorine production. Therefore Dow is
mis-informing stakeholders and shareholders by
representing PRODUCT RISKS as production risks.

• Dows Dioxin reduction programs have several
  reporting short-comings
• Not verifiable
• - Dont address transfers to solid waste.

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Avenues of Risk from Bio-monitoring
Incidences of Diseases, Birth Defects,
Developmental and Learning Disorders with Unknown
or Untraced Causes.
Corresponding Set of Known Health Impacts Caused
by Organochlorines and Other Chemicals.
Bio-monitoring and testing for the presence of
chemicals in human tissues will begin to draw
connections between chemicals with complex
avenues of exposure and human health impacts. It
will also facilitate more accurate tracking of
chemically exposed populations such as workers,
communities near facilities, and the general
public.
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Risk Screening environmental Indicators (RSEI)
versus TRI
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Concerns about PBTs or POPs by political
affiliation.
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Environmental Liability Overview
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Contamination in Midland Michigan

• Dioxin Contamination on 22 miles of the
  Tittabawassee River
• 300 plaintiffs suing over property damage from
  contamination and requesting medical monitoring.
• Up to 2000 properties along the contaminated part
  of the river.
• Contamination of Dioxin in the Saginaw River and
  Saginaw Bay other potential sources present.
  Study detailing attribution of contamination for
  Saginaw River and Saginaw Bay due out in June
  2007. Remediation is likely to commence
  beforehand.

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Contamination in Midland, MI.
Comparison of two cases Green Bay Wisconsin
Tittabawassee/Saginaw Michigan
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Another Case..
GEs cleanup on the Hudson 500 million plus an
estimated 200 to 300 million in legal expenses.
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54 million currently accrued. Likely costs as
many as 6 times higher300 million or more.
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• Agent Orange

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The 1984 Settlement
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Agent Orange Claims

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Spraying Agent Orange in Vietnam
The use of Agent Orange as a defoliant and
herbicide in Vietnam was the largest chemical
warfare operation in history, producing
considerable ecological as well as public health
damage.
- Dr. Arthur Galston, Professor Emeritus at the
Yale School of Forestry Environmental Studies,
who spoke at the Yale University conference, The
Ecological and Health Effects of the Vietnam War
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Key Points

• Expanded set of health effects known to be
  related to Agent Orange Exposure. Diabetes, etc
• Vietnamese citizens filed first suit against
  manufacturers on Jan. 30th 2004.
• Supreme Court has affirmed veterans right to sue
  for those left out of the original settlement.
• Original settlement with veterans determined by
  level of production and dioxin contamination of
  the chemical those levels are now known to be
  higher than previously thought.
• largest chemical warfare operation in history
  up 500,000 have died as a result of exposure and
  500,000 1,000,000 are suffering as a result of
  exposure.

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Other Environmental Liabilities

• Semiconductor Liability Trichlorethylene
• Dursban study showed that Chlorpyrifos stunted
  fetal growth and umbilical cord size.
  Contamination in Indian soft-drinks.
• DBCP sterilization of Banana workers and other
  agricultural workers exposed.
• Genetic Engineering - Starlink Corn
  contamination cost Aventis over 1 Billion.
  Contamination of US conventional crops by GE crop
  genes widespread.

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Additional Risks Global Warming a.k.a. Climate
Change
Dows Energy efficiency programs are paying
dividends but more may be required.
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Disclosure Issues

• The EPA found in 2002 that 74 of publicly traded
  firms violate SEC rules for environmental debt
  accounting regulations.

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Dows Disclosure of Environmental Liabilities
Dows environmental accruals and expenditures
1998 - 2003
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Disclosure Issues Key Points

• Remediation expenditures difficult to track -
  Union Carbide and Dow accounted for these issues
  differently.
• Union Carbide Stated in 2001 that worldwide
  expenses related to environmental protection,
  expressed in 2000 dollars, should average about
  105 million annually over the next five years.
• These numbers are not reflected in the following
  years on Dows balance sheet.
• Dow is not resolving doubts in favor of
  disclosure - Dows reporting of issues such as
  Midland are not complete and Agent Orange issues
  do not appear in the MDA.

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Questions for Management

• Can management define Bhopal Risks?
• How will the management now avoid damage to Dows
  reputation?
• How would the companys reporting of its
  environmental liabilities change under the ASTM
  guidelines?
• How has the companys strategy been adjusted to
  reflect the lifecycle impacts of its products and
  the market and regulatory risks that come with
  such impacts, such as dioxin pollution?
• Under Sarbanes-Oxley, Dows management must have
  an established protocol for identifying,
  tracking, estimating and judging the materiality
  of environmental matters. Will the company
  publish this protocol for investors and
  stakeholders?
• Will Dows future dioxin assessment reporting
  include a life-cycle approach?
• What is the managements best estimate for the
  upper range of costs for remediation of Midland,
  the Tittabawassee River, the Saginaw River, and
  Saginaw Bay?
• What is the companys assessment of Agent Orange
  liability?
• Can Dow comment more extensively on its
  outstanding DBCP related liabilities in the U.S.
  and other countries? Are there similar
  liabilities associated with any other pesticides
  that Dow produces? For example, for Dursban?