Report on Economic Position

Results of Operations, Financial Position, and Net Assets of Covestro AG

Covestro AG is the parent company and strategic management holding company of the Covestro Group. The principal management functions for the entire Group are performed by the Board of Management. These include strategic planning for the Group, resource allocation, and executive and financial management. Covestro AG’s results of operations, financial position, and net assets are largely determined by the business performance of its subsidiaries.

The Financial Statements of Covestro AG are prepared in accordance with the German Commercial Code (HGB) and the German Stock Corporation Act (AktG). The company, headquartered in Leverkusen (Germany), is registered in the commercial register of the Local Court of Cologne under No. HRB 85281.

Covestro AG performs energy-specific services for Covestro Brunsbüttel Energie GmbH, Brunsbüttel (Germany), (affiliated power and gas grid operator) and therefore prepares activity reports in the areas of electricity supply and gas supply pursuant to Section 6b (3) Sentence 1 Nos. 2 and 4 of the German Energy Industry Act (EnWG).

There is a control and profit and loss transfer agreement between Covestro AG and Covestro Deutschland AG, Leverkusen (Germany). All profit not subject to a prohibition on transfer is transferred in full to Covestro AG at the end of the year. Losses are absorbed in full. Other retained earnings recognized during the term of the agreement must be released upon request by Covestro AG and used to compensate a net loss for the year or transferred as profit.

Results of Operations

In fiscal 2022, Covestro AG generated a net loss of €316 million (previous year: net income of €648 million). The change compared with the prior year was largely attributable to the loss from investments in affiliated companies of €153 million (previous year: income of €757 million). Income from investments in affiliated companies was solely due to the loss absorbed under the control and profit and loss transfer agreement with Covestro Deutschland AG.

In addition to interest expense of €23 million (previous year: €23 million) for the euro bonds issued and interest expense on loans from third parties, the interest result included mainly interest income of €28 million (previous year: €2 million) on loans extended to Covestro Deutschland AG.

Other financial income and expenses mainly comprised bank fees totaling €7 million (previous year: €7 million). These included fees for the provision of credit lines and the pro rata reversal of the discount on the bonds issued, as well as nonrecurring fees relating to the issuance of the new bond and Schuldschein loans.

General administration expenses totaling €56 million (previous year: €80 million) mainly consisted of personnel expenses for the employees of the Group holding company and members of the Board of Management. The decline in general administration expenses in fiscal 2022 resulted mainly from lower expenses for short-term variable compensation, a decrease in costs associated with setting up the new organizational structure as of July 1, 2021, and a decline in expenses for the integration of the Resins & Functional Materials (RFM) business acquired from Koninklijke DSM N.V., Heerlen (Netherlands).

Other operating income related primarily to reversals of unutilized personnel-related provisions. In the previous year, other operating income had been materially affected by a one-time transfer of costs amounting to €33 million in connection with the acquisition of the RFM business to Group company Covestro (Netherlands) B.V., Nieuwegein (Netherlands).

The decrease in other operating expenses mainly resulted from nonrecurring expenses associated with the acquisition of the RFM business in the amount of €3 million incurred in the previous year.

The result of operations was €–232 million (previous year: €677 million) and led to income taxes of €84 million (previous year: €29 million). After adding retained earnings brought forward from the prior year of €5 million (previous year: €0 million) and withdrawing €311 million from other retained earnings (previous year: €9 million), distributable profit amounted to €0 million (previous year: €657 million). The Board of Management will not submit a proposal for the use of the distributable profit.

For fiscal 2022, net income was expected to far exceed the level in fiscal 2021 in line with our forecast from the Annual Report 2021. Given the net loss of €316 million for fiscal year 2022, business performance was different from the expectations at the end of the year 2021; this is mainly attributable to the Russian war against Ukraine and the resulting effects on energy prices. Moreover, a sharp decline in demand was recorded in the European market in the second half of 2022. This led in particular to a decrease in the investment income generated from the control and profit and loss transfer agreement with Covestro Deutschland AG.

Net Assets and Financial Position

Covestro AG had total assets of €7,358 million as of December 31, 2022 (previous year: €7,155 million). The net assets and financial position of Covestro AG are dominated by its role as a holding company in managing subsidiaries and financing corporate activities. This is primarily reflected in the levels of financial assets (27.0% of total assets), receivables from affiliated companies (71.8% of total assets), and bonds and liabilities to banks.

Receivables from affiliated companies were up €62 million to €5,281 million (previous year: €5,219 million). The rise was mainly attributable to an increase in the intercompany loan to Covestro Deutschland AG, which was set against the receivable from the control and profit and loss transfer agreement with Covestro Deutschland AG recognized in the previous year. In contrast, as of December 31, 2022, Covestro Deutschland AG’s loss was reported under liabilities to affiliated companies.

All receivables and other assets have maturities of less than one year.

Intangible assets and property, plant and equipment were immaterial. Trade accounts receivable of €36 million (previous year: €67 million) and prepaid expenses of €13 million (previous year: €12 million) were also immaterial in relation to total assets. Other assets of €44 million (previous year: €85 million) mainly included income tax and VAT receivables.

Covestro AG’s equity amounted to €4,112 million (previous year: €5,222 million). This corresponds to an equity ratio of 56.0% (previous year: 73.0%). Share buybacks in the first half of the year caused the capital reserve to decline by €139 million in the fiscal year. This was offset by the issuance of treasury shares to employees under the share-based participation program (Covestment). The net loss of €316 million was covered by the profit of €5 million carried forward from fiscal 2021 and a withdrawal of €311 million from retained earnings. The payment of dividends for fiscal 2021 in the amount of €651 million also reduced equity.

Equity was set against provisions of €65 million (previous year: €129 million) and liabilities of €3,181 million (previous year: €1,804 million).

Provisions comprised provisions for pensions of €21 million (previous year: €9 million), tax provisions of €35 million (previous year: €92 million), and other provisions of €9 million (previous year: €28 million).

The main reasons for the increase in liabilities was the issuance of a euro bond of €500 million in November 2022 and the raising of Schuldschein loans of around €550 million. The euro bonds totaling €2.0 billion have the following maturities: €1.0 billion mature in one to five years and another €1.0 billion mature in 2028 or later. Moreover, liabilities to banks totaling €131 million are due in 2023, €739 million are due in one to five years, and €37 million in the year 2028 or later. Other liabilities amounting to €107 million are due in fiscal 2023, and €1 million are due in one to five years. All other liabilities are due within one year.