UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

At September 30, 2017,2019, 935.51 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.

The registrant meets the conditions set forth in General InstructionsInstruction H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.

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

FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995,federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. Forward-looking statements may appear throughout this report, including without limitation, the following sections:section "Management's Discussion and Analysis" and "Risk Factors.Analysis." These forward-looking statements are generally identified by theoften address expected future business and financial performance, financial condition and other matters and often contain words or phrasessuch as "anticipate," "believe," "estimate," "expect," "future," "intend," "may," "opportunity," "outlook," "plan," "project," "seek," "should," "strategy," "will,"target," "would,"will," "will be," "will continue," "will likely result"result," "would," and similar expressions.expressions and variations or negatives of these words. 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 those projected, anticipated or implied in such forward-looking statements is included in the section titled "Risk Factors" (seein Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2016).2018. UCC undertakesassumes 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.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Statements of Income

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income

See Notes to the Consolidated Financial Statements.

Consolidated Balance Sheets

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows

See Notes to the Consolidated Financial Statements.

Consolidated Statements of Equity

See Notes to the Consolidated Financial Statements.

Table of Contents

The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the "Corporation" or "UCC") were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow"TDCC"). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.

The Corporation’s business activities comprise components of Dow’sTDCC’s global operations rather than stand-alone operations. DowTDCC conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under the accounting guidance related to segment reporting and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.

Intercompany transactionsOn April 1, 2019, DowDuPont Inc. (“DowDuPont” and balances are eliminated in consolidation. Transactions witheffective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the Corporation’sseparation of its materials science business and Dow Inc. became the direct parent company Dow, and other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note 11 for further discussion.

In the first quarter of 2019, UCC adopted Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," and associated ASUs (collectively, "Topic 842"). See Notes 2 and 9 for additional information. UCC added a significant accounting policy for leases as a result of the adoption of Topic 842:

In the second quarter of 2018, the Corporation adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which resulted in a $254 million increase to retained earnings due to the reclassification from accumulated other comprehensive loss ("AOCL") for the effect of the federal corporate income tax rate change as a result of the Tax Cuts and Jobs Act of 2017 on the Corporation's pension plans. This reclassification is reflected in the "Adoption of accounting standard" line in the consolidated statements of equity.

In the second quarter of 2019, the Corporation made a change to separately report "Interest income" which had previously been included in "Sundry income (expense) - net" in the consolidated statements of cash flows to include a new line under "Operating Activities" entitled "Asbestos-related payments." The new line captures cash payments made for asbestos-related claim and resolution activity as well as asbestos-related defense and processing costs (effective as of the fourth quarter of 2016 as a result of an accounting policy change).income.

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

postretirement benefit plans. Underclassification and initial direct lease costs. The Corporation did not elect to use the hindsight practical expedient in determining the lease term or assessing impairment of ROU assets. Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $99 million at January 1, 2019. The difference between the additional operating lease ROU assets and lease liabilities, net of deferred taxes, was recorded as an adjustment to retained earnings and was not material. The adoption of the new guidance an entity must disaggregatedid not have a material impact on the Corporation's consolidated statements of income and presenthad no impact on cash flows. See Note 9 for additional information.

On April 1, 2019, DowDuPont completed the service cost componentseparation of its materials science business and Dow Inc. became the direct parent company of TDCC. UCC remains a wholly owned subsidiary of TDCC.

In the first quarter of 2019, in anticipation of the net periodic benefitbusiness separations, UCC's assets and liabilities aligned with the specialty products business were transferred to TDCC as part of the internal reorganization steps to align TDCC's specialty products business to DowDuPont. In order to align entity ownership under TDCC, UCC distributed shares and assets to TDCC through dividends or asset distributions. As a result, in February 2019, UCC issued to TDCC a dividend of 1,067 shares of common stock of Dow International Holding Company (“DIHC”), a cost method investment. Prior to the distribution, UCC had an 11.9 percent ownership interest in DIHC with the other 88.1 percent owned by TDCC and its other wholly owned subsidiaries. After the dividend, UCC’s investment in DIHC was reduced to 4.4 percent and resulted in a reduction in "Investments in related companies" of $401 million. UCC also transferred, as an asset distribution, the assets and liabilities aligned with the specialty products business for an additional dividend of $71 million to TDCC. The results of these transactions are reflected in “Investments in related companies” and “Retained earnings” in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentationconsolidated balance sheets.

Substantially all of the income statement service costCorporation's revenues are generated by intercompany sales to TDCC. Products are sold to and purchased from TDCC at market-based prices in accordance with the terms of TDCC’s intercompany pricing policies. Approximately 99 percent of the Corporation's revenue for the three and nine months ended September 30, 2019, related to sales of product (99 percent for the three and nine months ended September 30, 2018); the remaining 1 percent primarily related to the licensing of patents and technology. The Corporation sells its products to TDCC to simplify the customer interface process.

The Corporation’s contract liabilities include payments received in advance of performance under long-term contracts for product sales and royalties, and are realized when the associated revenue is recognized under the contract with remaining contract terms that range up to 22 years. The Corporation will have rights to future consideration for revenue recognized when product is delivered to the customer. The balance of contract liabilities was $41 million at September 30, 2019 ($41 million at December 31, 2018) and was included in "Accrued and other components,current liabilities" and a prospective transition method"Other noncurrent obligations" in the consolidated balance sheets.

The Corporation disaggregates its revenue from contracts with customers by type of customer (sales to adoptrelated parties and sales to trade customers) as presented in the requirement to limitconsolidated statements of income and believes this disaggregation best depicts the capitalizationnature, amount, timing and uncertainty of benefit costits revenue and cash flows. Substantially all of the product sales are made to the service component. The Corporation is currently evaluating the impact of adopting this guidance.parent entity, TDCC, and there are no unique economic factors that affect revenue recognition and cash flows associated with these product sales.

In September and November 2017, the Corporation approved restructuring actions that arewere aligned with DowDuPont’s synergy targets. As a result of these actions,For the three months ended September 30, 2019, the Corporation recorded a pretax restructuring chargecharges of $2 million for severance and related benefit costs ($1 million for the three months ended September 30, 2018). For the nine months ended September 30, 2019, the Corporation recorded pretax restructuring charges of $8$4 million infor severance and related benefit costs ($3 million for the third quarter of 2017.nine months ended September 30, 2018). The impact of this charge isthese charges was shown as “Restructuring and asset related charges - net” in the consolidated statements of income. These actions are expected to be substantially completed by September 30,the end of 2019.

The Corporation recorded pretax restructuring charges of $79 million inception-to-date under the restructuring program, consisting of severance and related benefit costs of $17 million and $62 million for asset write-downs and write-offs of manufacturing and facility related assets at multiple UCC sites, including a steam unit in Institute, West Virginia. At September 30, 2017,2019, severance of $1$15 million washad been paid, leaving a liability of $7$2 million.

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

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies.

At September 30, 2017,2019, the Corporation had accrued obligations of $119$141 million for probable environmental remediation and restoration costs, including $20$21 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately threetwo 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 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. As new or additional information becomes available and/or certain spending trends become known, management will evaluate such information in determination of the current estimate of the environmental liability. At December 31, 2016,2018, the Corporation had accrued obligations of $145$94 million for probable environmental remediation and restoration costs, including $20$16 million for the remediation of Superfund sites.

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.

A descriptionsummary of asbestos-related matters can be found in Note 13 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016.2018.

The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises and UCC’s responsibility for asbestos suits filed against a former UCC

subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.

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

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

Based on the December 20162018 Ankura studyreview and the Corporation's own review of the data, and taking into account the change in accounting policy that occurred in the fourth quarter of 2016, the Corporation's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,490$1,260 million at December 31, 2016,2018, and was included in “Asbestos-related liabilities - current” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.

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

The Corporation’s asbestos-related liability for pending and future claims and defense and processing costs was $1,398$1,192 million at September 30, 2017,2019, and approximately 1518 percent of the recorded liability related to pending claims and approximately 8582 percent related to future claims.

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

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

While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, cash flows and financial position of the Corporation.

The following table summarizeschanges in the changes and after-tax balances offor each component of accumulated other comprehensive lossAOCL for the three and nine months ended September 30, 20172019 and 2016:2018 were as follows:

The Corporation's investments in marketable securitiesfinancial instruments are classified as available-for-sale. Proceeds from sales of available-for-sale securities were $2 million forLevel 2 measurements. For assets and liabilities classified as Level 2 measurements, where the nine-month period ended September 30, 2017 ($2 million in proceeds from the maturity of marketable securities for the nine-month period ended September 30, 2016).

ForCost approximates fair value for all other financial instruments,instruments.

In the third quarter of 2019, the Corporation recognized an impairment charge of $75 million resulting from the planned divestiture of its acetone derivatives product line to ALTIVIA Ketones & Additives, LLC. The divestiture includes the Corporation's acetone derivatives related inventory and production assets located in Institute, West Virginia, in addition to the site infrastructure, land and utilities. The assets, classified as Level 3 measurements and valued using unobservable inputs, were written down to zero in the third quarter of 2019, except for inventory, which will be sold at the lower of cost approximates fair value.or market. The impairment charge was included in "Restructuring and asset related charges - net" in the consolidated statements of income. See Note 5 for additional information.

The Corporation sells its products to DowTDCC to simplify the customer interface process. Products are sold to and purchased from DowTDCC at market-based prices in accordance with the terms of Dow’sTDCC’s intercompany pricing policies. After each quarter, the Corporation and DowTDCC analyze the pricing used for the sales in that quarter and reach agreement on any necessary adjustments, at which point the prices are final. The Corporation also procures certain commodities and raw materials through a DowTDCC subsidiary and pays a commission to that DowTDCC subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry income (expense) - net" in the consolidated statements of income. Purchases from that DowTDCC subsidiary were $377$247 million in the third quarter of 20172019 ($379407 million in the third quarter of 2016)2018) and $1,213$861 million induring the first nine months of 20172019 ($1,0111,219 million induring the first nine months of 2016)2018). The increasedecrease in purchase costs infor the firstthree and nine months of 2017ended 2019 when compared with the same period last year iswas due to higherlower feedstock and energy costs.costs, lower demand and the impact of the separation of the specialty products business. See Note 3 for additional information.

The Corporation has a master services agreement with DowTDCC, whereby DowTDCC 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,TDCC, general administrative and overhead type services that DowTDCC routinely allocates to various businesses are charged to UCC. The master services agreement cost allocation basis is headcount and includes a 10 percent service fee. This agreement resulted in expense of $8$6 million in the third quarter of 20172019 ($78 million in the third quarter of 2016)2018) and $24$18 million infor the first nine months of 20172019 ($2122 million infor the first nine months of 2016)2018) for general administrative and overhead type services and the 10 percent service fee, included in "Sundry income (expense) - net" in the consolidated statements of income. The remaining activity-based costs were $20$21 million in the third quarter of 20172019 ($1923 million in the third quarter of 2016)2018) and $60$65 million infor the first nine months of 20172019 ($5367 million infor the first nine months of 2016)2018), and were included in "Cost of sales" in the consolidated statements of income.

Management believes the method used for determining expenses charged by DowTDCC is reasonable. DowTDCC 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’sTDCC’s risk management philosophy, are provided as a service to UCC.

As part of Dow’sTDCC’s cash management process, UCC is a party to revolving loans with DowTDCC that have interest rates based on LIBOR (London Interbank Offered Rate) with varying maturities. At September 30, 2017,2019, the Corporation had a note receivable of

The Corporation also has a separate revolving credit agreement with DowTDCC that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures on December 30, 2017. Dow2019. TDCC may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries, with cash collateral. At September 30, 2017, $9492019, $936 million was available under the revolving credit agreement ($947949 million at December 31, 2016)2018). The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.

On a quarterly basis, the Corporation's Boardboard of Directorsdirectors reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow.TDCC. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution. In the third quarter of 2017,2019, the Corporation declared a cash dividend of $112 million to TDCC, which was paid on October 3, 2019; cash dividends paid to TDCC totaled $338 million for the first nine months of 2019. In the third quarter of 2018, the Corporation declared and paid a cash dividend of $181$177 million to Dow;TDCC; cash dividends to DowTDCC totaled $531$423 million infor the first nine months of 2017. In the third quarter of 2016, the Corporation declared and paid a cash dividend of $55 million to Dow; dividends to Dow totaled $455 million2018.

Also, in the first nine monthsquarter of 2016.

Pursuant to General Instruction H ofH(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," the Corporation is filing this section includes only management's narrative analysis of the results of operations for the nine-month period ended September 30, 2017, the most recent period, comparedForm 10-Q with the nine-month period ended September 30, 2016, the corresponding period in the preceding fiscal year.a reduced disclosure format.

References to "Dow""TDCC" refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context. Union Carbide Corporation (the "Corporation" or "UCC") has been a wholly owned subsidiary of TDCC since 2001. On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries ("Historical DuPont") each merged with subsidiaries of DowDuPont, and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. This included transferring certain Corporation assets and liabilities aligned with the specialty products business to TDCC (the "Business Separation"). Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. UCC remains a wholly owned subsidiary of TDCC.

DowTDCC conducts its worldwide operations through global businesses. Union Carbide Corporation’s (the "Corporation" or "UCC")UCC's business activities comprise components of Dow’sTDCC’s global operationsbusinesses 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.

Total net sales were $1,215$1,059 million in the third quarter of 20172019 compared with $1,248$1,424 million in the third quarter of 2016,2018, a decrease of 326 percent. Total net sales were $3,835$3,376 million infor the first nine months of 20172019 compared with $3,721$4,103 million infor the first nine months of 2016, an increase2018, a decrease of 318 percent. Net sales to related companies, principally to Dow,TDCC, and based on market prices for the related products, were $1,184$1,028 million in the third quarter of 20172019 compared with $1,221$1,385 million in the third quarter of 2016,2018, a decrease of 326 percent. Net sales to related companies were $3,722$3,270 million in the first nine months of 20172019 compared with $3,644$3,998 million in the first nine months of 2016, an increase2018, a decrease of 218 percent.

Average selling prices increased 5decreased 19 percent in the third quarter of 20172019 compared with the same quarter last year. Price increasesdecreased across almost allmost products, were primarily driven by tight market supply as a result of hurricane-related supply disruptions,in response to lower feedstock and other raw material costs, with the largest price increasesdecreases in polyethylene, oxo alcohols and ethylene oxide/ethylene glycol ("EO/EG"), oxo alcohols and vinyl acetate monomers. Total sales volume. Volume was down 87 percent in the third quarter of 20172019 compared with the third quarter of 20162018, as a result of hurricane-related production disruptionslower demand for vinyl acetate monomers and plastics for wire and cable applications as well as lower volume resulting from the impact of planned maintenance turnarounds. Increases in sales volume in water soluble polymers and glutaraldehydes wereBusiness Separation more than offset by lower sales volumeincreases in electricalpolyethylene and telecommunications, polyethylene, EO/EG, glycol ethers and ethanolamines.surfactants.

InFor the first nine months of 2017,2019, average selling prices were up 5decreased 14 percent with price increases in most products compared with the first nine months of 2016,2018, with price decreases across all products, driven by higherlower feedstock energy and other raw material costs, with the largest decreases in polyethylene, oxo alcohols and tight market supply as a result of hurricane-related supply disruptions in the third quarter of 2017. Sales volume inEO/EG. Volume for the first nine months of 20172019 was down 24 percent when compared with the first nine months of 2016. Sales volume increases2018, as lower demand in vinyl acetate monomers,plastics for wire and cable applications and acrylic monomers and glutaraldehydes weredecreases resulting from the Business Separation more than offset demand growth in polyethylene and ethyleneamines. Volume was also negatively impacted by lower sales volume in electrical and telecommunications, EO/EG and oxo alcohols.planned maintenance turnaround activity at multiple production facilities during the first nine months of 2019.

Cost of sales were $991was $854 million in the third quarter of 20172019 compared with $957$1,062 million in the third quarter of 2016, an increase2018, a decrease of 420 percent. Cost of sales increased 12decreased 13 percent from $2,726$3,102 million in the first nine months of 20162018 to $3,056$2,706 million in the first nine months of 2017. Increases2019. The decline in cost of sales for the three-three and nine-month periodsnine months ended September 30, 2017, were2019, was driven primarily by higherlower feedstock energy and other raw material costs, as well as increased planned maintenance turnaround spending when compared withlower volume and the same periods last year, and hurricane-related production and supply disruptions and repair costs inimpact from the third quarter of 2017.Business Separation, which more than offset charges for environmental remediation matters.

R&D expenses were $4$6 million in the third quarter of 20172019, compared with $5$4 million in the same period last year. For the first nine months of 2019, R&D expenses were $19 million compared with $14 million in the first nine months of 2018. SG&A expenses were $2 million in the third quarter of 2016. In the first nine months of 2017, R&D expenses were $14 million, flat when2019 compared with the first nine months of 2016. SG&A expenses were $1 million in the third quarter of 2017 and the third quarter of 2016. In2018. For the first nine months of 2017,2019, SG&A expenses were $4 million compared with $5 million in the first nine months of 2016.2018.

In the third quarter ofSeptember and November 2017, the Corporation approved restructuring actions that arewere aligned with DowDuPont’s synergy targets. As a result of these actions,For the three months ended September 30, 2019, the Corporation recorded a pretax restructuring chargecharges of $2 million for severance and related benefit costs ($1 million for the three months ended September 30, 2018). For the nine months ended September 30, 2019, the Corporation recorded pretax restructuring charges of $8$4 million infor severance and related benefit costs ($3 million for the third quarter of 2017. The impact of this charge is shown as “Restructuring and asset related charges - net” in the consolidated

EquityOn August 13, 2019, the Corporation entered into a definitive agreement to sell its acetone derivatives product line to ALTIVIA Ketones & Additives, LLC. The divestiture includes the Corporation's acetone derivatives related inventory and production assets located in EarningsInstitute, West Virginia, in addition to the site infrastructure, land and utilities. The divestiture is expected to close in the fourth quarter of Nonconsolidated Affiliate

Sundry income (expense) – net includes a variety of income and expense items such as the gaingains or losslosses on foreign currency exchange, commissions, charges for management services provided by Dow, interest income,TDCC, non-operating pension and other postretirement benefit plan credits or costs, and gains and losses on sales of investments and assets. Sundry income (expense) - net in the third quarter of 20172019 was an expense of $8$19 million compared with an expense of $10$20 million in the same quarter last year. InFor the first nine months of 2017,2019, sundry income (expense) - net was incomean expense of $6$58 million compared with incomean expense of $20$48 million in the first nine months of 2016. Sundry income (expense) - net includes the pretax gains on the sales of land at the Corporation's Texas City, Texas, site2018. The increase in the second quarters of 2016 and 2017.

Interest income was $9 million in the secondthird quarter of 2017.2019 ($28 million for the first nine months of 2019) compared with $8 million in the third quarter of 2018 ($20 million for the first nine months of 2018). The increase in interest income for the nine months ended September 30, 2019, was primarily the result of higher interest rates and an increase in notes receivable from related parties.

Interest expense and amortization of debt discount was $6$7 million in the third quarter of 2017 ($202019 compared with $9 million in the third quarter of 2018. For the first nine months of 2019, interest expense and amortization of debt discount was $21 million compared with $22 million in the first nine months of 2017) compared with $7 million in the third quarter of 2016 ($18 million in the first nine months of 2016).2018.

The Corporation reported a tax provisioncredit for income taxes of $152$19 million in the third quarter of 2017,2019, which resulted in an effective tax rate of 77.6 percent. Thisnegative 18.4 percent, compared with a tax provision of $82$62 million in the third quarter of 2016,2018, which resulted in an effective tax rate of 30.618.6 percent. InFor the first nine months of 2017,2019, the Corporation reported a tax provision of $337$38 million, which resulted in an effective tax rate of 45.87.4 percent. This compared with a tax provision of $380$184 million in the first nine months of 2016,2018, which resulted in an effective tax rate of 38.819.8 percent. The effective tax rate fluctuates based on, among other factors, where income is earned, dividends received from investmentsearned. The change in related companies and the level of income relative to tax credits available. The effective tax rate forin the third quarter of 2017 was impacted bythree and nine months ended September 30, 2019, resulted from amended returns that reflect a deferred gainrecent court judgment that did not involve the Corporation and a tax accounting method change related to the saledepreciation of stock between UCC and Dow in 2014. The gain on the transaction was deferred for tax purposes, but with the activities that were executed in anticipation of the intended separation of DowDuPont into three publicly traded companies, the gain became taxable,fixed assets, both resulting in a chargefavorable adjustment to the tax provision of $97 million. In the second quarter of 2016, the Corporation adjusted the reserve(credit) for uncertain tax positions for a tax matter regarding the historical change in the legal ownership structure of a former nonconsolidated affiliate, resulting in a charge to the tax provision of $57 million. See Note 4 to the Consolidated Financial Statements for additional information.income taxes.