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 2023, Covestro AG generated a net loss of €124 million (previous year: €316 million). The change compared with the prior year was largely attributable to the net loss from investments in affiliated companies of €70 million (previous year: €153 million). The net loss from investments was made up of a loss of €107 million from the loss absorbed under the control and profit and loss transfer agreement with Covestro Deutschland AG and the profit of €37 million distributed by Covestro First Real Estate GmbH, Leverkusen (Germany).

In addition to interest expense of €44 million (previous year: €23 million) for the euro bonds issued, the interest result included mainly interest income of €176 million (previous year: €28 million) on loans extended to Covestro Deutschland AG. Interest expense of €31 million (previous year: €8 million) was incurred in the reporting year on external loans from third parties.

Other financial income and expenses mainly comprised bank fees totaling €5 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.

General administration expenses totaling €87 million (previous year: €56 million) mainly consisted of personnel expenses for the employees of the Group holding company and members of the Board of Management. The rise in general administration expenses in fiscal 2023 was predominantly due to higher expenses for short-term and long-term variable compensation and for consultancy services.

The result of operations was €–53 million (previous year: €–232 million) and led to income taxes of €71 million (previous year: €84 million). This led to a net loss for the year of €124 million (previous year: €316 million), which also represents the net accumulated losses for the reporting year. This amount is carried forward to new account.

Based on the forecast from the Annual Report 2022, the net loss for fiscal 2023 was expected to be significantly lower than the figure recorded in the previous year. The net loss of €124 million for fiscal 2023 means that the business performed as forecast at the end of the year 2022. In addition to the decrease in the net loss from investments in affiliated companies, this was due to the increase in the interest result.

Net Assets and Financial Position

Covestro AG had total assets of €6,794 million as of December 31, 2023 (previous year: €7,358 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 (26.9% of total assets), receivables from affiliated companies (71.5% of total assets), and bonds and liabilities to banks.

Receivables from affiliated companies were down €423 million to €4,858 million (previous year: €5,281 million). The decline was primarily attributable to a reduction in the intercompany loan to Covestro Deutschland AG.

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

Property, plant and equipment was immaterial. Trade accounts receivable of €38 million (previous year: €36 million) and prepaid expenses of €10 million (previous year: €13 million) were also immaterial in relation to total assets. Other assets of €57 million (previous year: €44 million) mainly included income tax and VAT receivables.

Covestro AG’s equity amounted to €3,939 million (previous year: €4,112 million). This corresponds to an equity ratio of 58.0% (previous year: 56.0%). Share buybacks in the first half of the year caused the capital reserve to decline by €48 million in the fiscal year. By retiring 4,200,000 no-par value bearer shares, the capital stock was reduced from €193,200,000 to €189,000,000. The net loss for the year of €124 million led to a decline in equity.

Equity was set against provisions of €97 million (previous year: €65 million) and liabilities of €2,758 million (previous year: €3,181 million).

Provisions comprised provisions for pensions of €21 million (previous year: €21 million), tax provisions of €34 million (previous year: €35 million), and other provisions of €42 million (previous year: €9 million). The rise in other provisions includes a year-over-year increase in provisions for short-term and long-term variable compensation as well as provisions for consultancy services.

The reduction in liabilities was mainly due to the partial early repayment of Schuldschein loans and the settlement of tax liabilities. The euro bonds totaling €2.0 billion have the following maturities: €500 million matures in the year 2024, another €1.0 billion matures in one to five years, and another €500 million matures in or after the year 2029. Moreover, liabilities to banks totaling €5 million are due in the year 2024, another €592 million is due in one to five years, and €25 million in or after the year 2029. Other liabilities amounting to €15 million are due in fiscal 2024, and €2 million is due in one to five years. All other liabilities are due within one year.