Report on Economic Position – Results of Operations, Financial Position, and Net Assets of the Covestro Group

Financial Position

Statement of Cash Flows

Cash Flows from Operating Activities/Free Operating Cash Flow

Net cash flows from operating activities amounted to €970 million (previous year: €2,193 million). This was driven mainly by a significant decline in EBITDA, while a smaller amount of cash was tied up in working capital. Lower cash inflows from operating activities and higher cash outflows for additions to property, plant, equipment, and intangible assets of €832 million (previous year: €764 million) led to a decrease in free operating cash flow to €138 million (previous year: €1,429 million).

• Additional information on the calculation of indicators is available in “Key Management Indicators.”

Cash Flows from Investing Activities

In fiscal 2022, net cash used in investing activities totaled €477 million (previous year: €1,995 million). The prior-year period had been affected in particular by the net purchase price payments of €1,469 million to acquire the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). The main factors driving the cash outflows in the year 2022 were payments for additions to property, plant, equipment and intangible assets of €832 million (previous year: €764 million) and noncurrent financial assets of €124 million. In contrast, cash inflows stemmed from the net proceeds of short-term bank deposits maturing in an amount of €372 million and cash inflows of €65 million from the net sale of money market fund units.

Capital expenditures in fiscal 2022 were targeted at maintenance and improvement of existing plants as well as new capacity in both segments. In the Performance Materials segment, construction of Covestro’s own chlorine production facility, where energy-conserving technologies will be used, continued at the site in Tarragona (Spain), as it had in fiscal 2021. In addition, capital expenditure related to increasing capacity at the site in Antwerp (Belgium) to expand the production of aniline, a precursor for diphenylmethane diisocyanate (MDI). At the sites in Baytown, Texas (United States), and Shanghai (China), capital expenditure was moreover targeted at equipment maintenance and the installation of new catalysts. Strategic capital expenditure in the Solutions & Specialties segment was aimed at the construction of a plant for mechanical recycling of polycarbonates at the Shanghai (China) site and at increasing capacity for precursors in the Vulkollan® product group at the site in Map Ta Phut (Thailand).

Cash Flows from Financing Activities

Net cash inflow from the Covestro Group’s financing activities amounted to €64 million in fiscal 2022 (previous year: net cash outflow of €965 million). Cash inflows resulted from the successful placement of the Schuldschein loans of around €550 million in October 2022 and the issuance of a bond of €500 million on the basis of the Green Financing Framework published in the year 2022. In addition, net borrowing of €75 million generated further cash inflows.

In contrast, dividend payments of €654 million resulted in cash outflows, of which an amount of €651 million was attributable to Covestro AG shareholders. Other factors contributing to cash outflows were payments for lease liabilities in an amount of €160 million, the buyback of 3,479,956 treasury shares at a value of €150 million under the announced share buyback program, and interest payments of €131 million.

Net Financial Debt

In comparison with December 31, 2021, the Covestro Group’s financial debt increased by €1,140 million to €3,647 million as of December 31, 2022 (previous year: €2,507 million). In addition to an increase in liabilities to banks by €647 million, mainly due to the issuance of the Schuldschein loans and net borrowing of €75 million, this was driven by the issuance of bonds of €500 million under the Green financing Framework.

Cash and cash equivalents were up €549 million in comparison with the figure on December 31, 2021, to €1,198 million. The rise was mainly driven by positive operating cash flows amounting to €970 million, cash inflows from the issuance of Schuldschein loans in an amount equivalent to around €550 million, the issuance of a bond of €500 million under the Green Financing Framework, from the net proceeds of short-term bank deposits of €372 million, by net borrowing of €75 million, and the net sale of money market fund units of €65 million. The positive effects on cash and cash equivalents was offset above all by cash outflows 832 million for additions to property, plant, equipment and intangible assets of €832 million and dividend payments of €654 million. At the same time, the net proceeds of short-term bank deposits maturing and the net sale of money market fund units led to a €438 million decrease in current financial assets.

As a result, net financial debt increased by €1,029 million to €2,434 million in fiscal 2022 (previous year: €1,405 million).

Financial Management

The main purpose of financial management is to ensure solvency at all times, continuously optimize capital costs, and reduce the risks of financing measures. Financial management for the Covestro Group is performed centrally by Covestro AG.

Covestro AG operates a Debt Issuance Program with a total volume of €5.0 billion to facilitate obtaining flexible financing from the capital market. The company is thus in the position to issue fixed- and variable-rate bonds with different maturities as well as to undertake private placements. Covestro AG successfully placed several bonds from its Debt Issuance Program. The €500 million euro bond placed in March 2016 carries a fixed coupon of 1.75% and matures in September 2024. The additional €1.0 billion in euro bonds placed in June 2020 consist of one €500 million euro bond with a fixed coupon of 0.875% maturing in February 2026, and another €500 million euro bond with a fixed coupon of 1.375% maturing in June 2030. All outstanding bonds have been assigned a Baa2 rating with stable outlook by Moody’s Investors Service, London (United Kingdom).

In addition, Covestro published a Green Financing Framework in May 2022, which enables green bonds or other debt instruments to be issued where the funds raised are tied to sustainable investments that we can use, e.g., to (re)finance products or projects with a clear benefit for the environment. The framework’s conformity to the Green Bond Principles of the International Capital Markets Association (ICMA) has been confirmed by the independent ESG rating agency ISS ESG. The first green euro bond was issued in November 2022 under the Green Finance Framework with a fixed coupon of 4.75% and a volume of €500 million, maturing in November 2028. All the proceeds from the bond issue are to be used to fund sustainable projects that contribute to the circular economy and originate in areas such as renewable energy, energy efficiency, and sustainable building.

Covestro also issued its first-ever Schuldschein loans on October 7, 2022. Linked to an ESG rating, these loans were issued in tranches comprising fixed and variable interest rates with terms of three, five, and seven years. The issue is denominated in U.S. dollars and euros. Driven by strong demand, the Schuldschein loans reached a total volume of €650 million equivalent, significantly exceeding the volume of €300 million originally announced. €100 million of the firm Schuldschein loan commitment will only be paid out in the first quarter of 2023. The Schuldschein loans are also linked to an ESG rating.

In fiscal 2020, Covestro AG obtained a syndicated revolving credit facility totaling €2.5 billion with a term of five years. It included two options to extend the term by one year in each case and represents a back-up liquidity reserve. One option to extend was exercised in March 2021 to extend the term of the syndicated revolving credit facility to March 2026. Using the second of two agreed options, the term was extended in March 2022 by another year to March 2027. One feature of the credit line is its link to an environmental, social, governance (ESG) rating: The better (worse) the externally calculated ESG score is, the lower (higher) the interest component of the credit facility. The syndicated credit facility was unused as of December 31, 2022.

On August 26, 2022, Covestro additionally established a Euro Commercial Paper Programme (ECPP) with a potential total volume of €1.5 billion in order to allow the company to issue notes in different currencies and tenors of up to one year on a flexible basis. As of December 31, 2022, no commercial paper was outstanding under the ECCP.

On May 10, 2022, the rating agency Moody’s Investors Service confirmed Covestro AG’s Baa2 investment-grade rating and a stable outlook. Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating in the future.

The Covestro Group pursues a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. This is based for the most part on bonds, syndicated credit facilities, and bilateral loan agreements.

As a company with international operations, Covestro is exposed to financial opportunities and risks. These are continuously monitored within the context of Covestro’s financial management activities. Instruments including derivatives are used to minimize risks.

For a detailed presentation of financial opportunities and risks as well as further explanations, please see Covestro’s opportunities and risks report.

• See “Opportunities and Risks Report.”
• See note 24.2 “Financial Risk Management and Information on Derivatives” in the Notes to the Consolidated Financial Statements.