LYONDELLBASELL INDUSTRIES N.V. GENERAL
This discussion should be read in conjunction with the information contained in our Consolidated Financial Statements, and the accompanying notes elsewhere in this report. Unless otherwise indicated, the "Company," "we," "us," "our" or similar words are used to refer toLyondellBasell Industries N.V. together with its consolidated subsidiaries ("LyondellBasell N.V. "). OVERVIEW In the third quarter, demand for our products improved with increasing global economic activity. Our year over year results reflect strong global volumes while margins are still recovering. Sequentially, third quarter volumes and margins rebounded for most of our businesses. We expect that prolonged reduction of travel and associated transportation fuels consumption resulting from the pandemic has created length in global fuel markets that will pressure refining profitability for an extended period of time. In addition, our refinery is expected to continue to be adversely affected by lower discounts for the heavy crude oil feedstocks that we utilize. Accordingly, our Refining segment recognized a non-cash impairment charge in the third quarter of 2020 of$582 million . During the first nine months of 2020, we recognized a lower of cost or market ("LCM") inventory valuation charge of$163 million related to the decline in pricing for many of our raw material and finished goods inventories largely driven by the current economic conditions. Results for our third quarter of 2020 include an LCM inventory valuation benefit of$160 million largely driven by the recovery of market pricing for many of our raw material and finished goods inventories sinceJune 30, 2020 . Further sustained price declines in our finished goods and raw materials could result in future LCM inventory valuation charges during the remainder of 2020. The extent to which further charges may occur is dependent on the pool-specific product prices and composition within each individual dollar value LIFO pool at the balance sheet date. However, if pricing trends improve, some or all of these charges could be reversed in the fourth quarter of 2020. Our actions in the second quarter of 2020 to manage inventory and maximize liquidity positioned us well for a recovering economy in the third quarter of 2020. Events surrounding the ongoing COVID-19 pandemic continue to evolve and impact global markets and demand for our products. We remain committed to the health and safety of our employees, contractors and communities and are following governmental policies and recommendations related to the virus. Our manufacturing operations have been designated as an essential industry to support society's needs during the pandemic in the majority of the regions in which we operate. Significant items that affected our results during the third quarter and first nine months of 2020 relative to the third quarter and first nine months of 2019 include: •O&P-Americas and O&P-EAI results declined primarily due to a decline in olefin and polyolefins margins; •I&D segment results declined due to margin decreases primarily driven by our intermediate chemicals and oxyfuels and related products businesses; and •Refining segment results declined due to lower refining margins and a$582 million non-cash impairment charge which was recognized during the third quarter of 2020. Other noteworthy items since the beginning of the year include the following: •Launched production at ourU.S. Gulf Coast high-density polyethylene plant usingLyondellBasell's next-generation Hyperzone technology; •InApril 2020 , issued$2,000 million of guaranteed senior notes to bolster liquidity. Net proceeds from the sale of the notes totaled$1,974 million ; 35 -------------------------------------------------------------------------------- Table of Contents •InApril 2020 , repaid$500 million outstanding under our Senior Revolving Credit Facility and$500 million outstanding under ourU.S. Receivables Facility; •Invested$472 million in our new 50/50 joint venture polyolefin complex inChina withLiaoning Bora Enterprise Group using our polyolefin technologies; •InOctober 2020 , entered into a membership interest purchase agreement withSasol Chemicals (USA) LLC to purchase a 50 percent interest in a newly formed joint venture,Louisiana Integrated PolyEthylene JV LLC ("Louisiana Joint Venture"), for a total cash consideration of$2 billion ; •InOctober 2020 , issued$3,900 million of Guaranteed Notes to be used to repay certain outstanding borrowings and fund a portion of the Louisiana Joint Venture purchase. Net proceeds from the sale of the notes totaled$3,848 million ; and •InOctober 2020 , repaid$500 million outstanding under our Term Loan due 2022 and issued a notice to redeem all amounts outstanding on our Senior Notes due 2021 and Guaranteed Notes due 2022. Results of operations for the periods discussed are presented in the table below: Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2020 2019 2020 2019 Sales and other operating revenues$ 6,776
5,885 7,269 17,647 22,257
Impairment of long-lived assets 582 - 582 -
Selling, general and administrative expenses 259 303 842 892
Research and development expenses 27 26 79 81
Operating income 23 1,124 666 3,318
Interest expense (122) (86) (336) (259)
Interest income 3 5 10 16
Other income, net 23 11 27 46
Income from equity investments 62 51 123 179
(Loss) income from continuing operations before income taxes
(11) 1,105 490 3,300
(Benefit from) provision for income taxes (125) 136 (82) 508
Income from continuing operations 114 969 572 2,792
Loss from discontinued operations, net of tax - (4) - (7)
Net income $ 114 $ 965 $ 572 $ 2,785
36-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Revenues-Revenues decreased by$1,946 million , or 22%, in the third quarter of 2020 compared to the third quarter of 2019 and by$6,732 million , or 25%, in the first nine months of 2020 compared to the first nine months of 2019. Average sales prices in the third quarter and the first nine months of 2020 were lower for most of our products as sales prices generally correlate with crude oil prices, which decreased relative to the corresponding periods in 2019. These lower prices led to a 19% and 21% decrease in revenue in the third quarter and the first nine months of 2020, respectively. Lower sales volumes resulted in a revenue decrease of 5% and 4% relative to the third quarter and first nine months of 2019, respectively. Favorable foreign exchange impacts resulted in a revenue increase of 2% during the third quarter of 2020. Cost of Sales-Cost of sales decreased by$1,384 million , or 19%, in the third quarter of 2020 compared to the third quarter of 2019 and by$4,610 million , or 21%, in the first nine months of 2020 compared to the first nine months of 2019. This decrease primarily related to lower feedstock and energy costs. In the first nine months of 2020, we recognized an LCM inventory valuation charge of$163 million related to the decline in market pricing for many of our raw material and finished goods inventories sinceDecember 31, 2019 . During the third quarter of 2020, we recognized an LCM inventory valuation benefit of$160 million largely driven by the recovery of market pricing for many of our raw material and finished goods inventories during the quarter. Impairment of Long-Lived Assets-We expect that prolonged reduction of travel and associated transportation fuels consumption resulting from the pandemic has created length in global fuel markets that will pressure refining profitability for an extended period of time. In addition, the refinery is expected to continue to be adversely affected by lower discounts for the heavy crude oil feedstocks that we utilize. Accordingly, in the third quarter of 2020 our Refining segment recognized a non-cash impairment charge of$582 million related to ourHouston refinery . Operating Income-Operating income decreased by$1,101 million , or 98%, in the third quarter of 2020 compared to the third quarter of 2019 and by$2,652 million , or 80%, in the first nine months of 2020 compared to the first nine months of 2019. Operating income includes the effects of LCM inventory valuation charges and the non-cash impairment charge in our Refinery segment as noted above. In the third quarter of 2020, operating income in our Refining, O&P-Americas , O&P-EAI and I&D segments declined by$681 million ,$215 million ,$150 million and$134 million , respectively, relative to the third quarter of 2019. The declines were partially offset by increases of$49 million and$28 million in our APS and Technology segments in the third quarter of 2020 compared to the third quarter of 2019. In the first nine months of 2020, operating income declined across most of our segments, including$758 million ,$710 million ,$665 million ,$346 million and$174 million declines in our O&P-Americas , Refining, I&D, O&P-EAI and APS segments, respectively, compared to the first nine months of 2019. The declines were partially offset by an increase of$10 million in our Technology segment in the first nine months of 2020 compared to the first nine months of 2019. Income from Equity Investments- Income from our equity investments decreased$56 million , or 31%, in the first nine months of 2020 compared to the first nine months of 2019. The decline in the first nine months of 2020 compared to the first nine months of 2019 was largely as a result of lower sales prices and reduced polyolefin spreads for our joint ventures in our O&P-EAI and O&P-Americas segments. Results for each of our business segments are discussed further in the "Segment Analysis" section below. Income Taxes-For interim tax reporting, we estimate an annual effective tax rate which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur. Our effective income tax rate fluctuates based on, among other factors, changes in pre-tax income in countries with varying statutory tax rates, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, changes in unrecognized tax benefits associated with uncertain tax positions and changes in tax laws. 37 -------------------------------------------------------------------------------- Table of Contents Our effective income tax rate for the three months endedSeptember 30, 2020 was 1,136.4% compared with 12.3% for the three months endedSeptember 30, 2019 . In the third quarter of 2020, we recognized a tax benefit of$125 million , primarily from a non-cash impairment, resulting in a tax rate of 1,136.4% on our$11 million pre-tax loss. Our effective income tax rate for the nine months endedSeptember 30, 2020 was -16.7% compared with 15.4% for the nine months endedSeptember 30, 2019 . The lower effective tax rate for the nine months endedSeptember 30, 2020 was primarily attributable to lower earnings largely from a non-cash impairment. This decreased pre-tax earnings increased the relative impact of our tax rate drivers, primarily exempt income (-28%) and to a lesser extent a tax benefit in relation to the CARES Act (-4%). OnMarch 27, 2020 , theU.S. enacted the Coronavirus Aid, Relief, and Economic Security Act, also known as the "CARES Act," which contains numerous income tax provisions and other stimulus measures. We anticipate that several of the tax measures will favorably impact our income tax on our Consolidated Financial Statements for the year endedDecember 31, 2020 . Based on our analysis as ofSeptember 30, 2020 , we recorded an overall tax benefit including the impact of an expected net operating loss carryback. We continue to assess the impact that the CARES Act will have on our Company. We now believe that our effective tax rate for 2020 will be significantly lower than our previous estimate of less than mid-teens and due to uncertainty regarding the impact of the CARES Act and the timing of certain discrete events, we will not be providing updated guidance at this time. Our exempt income primarily includes interest income, export incentives, and equity earnings of joint ventures. Interest income earned by certain of our European subsidiaries through intercompany financings is taxed at rates substantially lower than theU.S. statutory rate. Export incentives relate to tax benefits derived from elections and structures available forU.S. exports. Equity earnings attributable to the earnings of our joint ventures, when paid through dividends to certain European subsidiaries, are exempt from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for interest income, dividends, and export incentives to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The Company operates in multiple jurisdictions with complex legal and tax regulatory environments and our tax returns are periodically audited or subjected to review by tax authorities. There continues to be increased attention to the tax practices of multinational companies, theEuropean Union's state aid investigations, proposals by theOrganization for Economic Cooperation and Development with respect to base erosion and profit shifting, andEuropean Union tax directives and their implementation. Management does not believe that recent changes in income tax laws, other than those disclosed and reflected in our financial statements, will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future. 38
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Comprehensive Income
Comprehensive income decreased by $459 million in the third quarter of 2020
compared to the third quarter of 2019 and by $2,197 million in the first nine
months of 2020 compared to the first nine months of 2019, primarily due to lower
net income partially offset by foreign currency translation adjustment. In the
third quarter of 2020, these decreases were partially offset by the favorable
impacts of financial derivative instruments driven by periodic changes in
benchmark interest rates and the dollar to euro exchange rate. In the first nine
months of 2020, these decreases were supplemented by the cumulative unfavorable
impacts of financial derivative instruments driven by periodic changes in
benchmark interest rates and the dollar to euro exchange rate.
In the third quarter and first nine months of 2020, the cumulative after-tax
effects of our derivatives designated as cash flow hedges were net gains of $75
million and net losses of $289 million , respectively. Pre-tax gains of $102
million and pre-tax losses of $430 million related to forward-starting interest
rate swaps were driven by periodic changes in benchmark interest rates in the
third quarter and first nine months of 2020, respectively. The fluctuations of
the U.S. dollar against the euro in the third quarter and first nine months of
2020 and periodic changes in benchmark interest rates resulted in pre-tax losses
of $101 million and $23 million , respectively, related to our cross-currency
swaps. Pre-tax gains of $89 million and $81 million related to our
cross-currency swaps were reclassified from Accumulated other comprehensive loss
to Interest expense in the third quarter and first nine months of 2020,
respectively. The remaining change pertains to our commodity cash flow hedges.
The predominant functional currency for our operations outside of the U.S. is
the euro. Relative to the U.S. dollar, the value of the euro increased during
the third quarter and the first nine months of 2020 resulting in gains reflected
in the Consolidated Statements of Comprehensive Income. The gains related to
unrealized changes in foreign currency translation impacts were partially offset
by pre-tax losses of $62 million and $60 million in the third quarter and the
first nine months of 2020, respectively, which represent the effective portion
of our net investment hedges. Additionally, during the first nine months of 2020
we recognized unrealized foreign currency translation losses of $75 million
resulting from the decrease in value of the Mexican peso and the Brazilian real.
Relative to the U.S. dollar, the value of the euro decreased during the third
quarter and first nine months of 2019 resulting in losses as reflected in the
Consolidated Statements of Comprehensive Income. The net losses attributable to
unrealized changes in foreign currency translation impacts include pre-tax gains
of $65 million and $68 million in the third quarter and first nine months of
2019, respectively, which represent the effective portion of our net investment
hedges.
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Segment Analysis
We use earnings before interest, income taxes, and depreciation and amortization
("EBITDA") as our measure of profitability for segment reporting purposes. This
measure of segment operating results is used by our chief operating decision
maker to assess the performance of and allocate resources to our operating
segments. Intersegment eliminations and items that are not directly related or
allocated to business operations, such as foreign exchange gains or losses and
components of pension and other postretirement benefits other than service costs
are included in "Other." For additional information related to our operating
segments, as well as a reconciliation of EBITDA to its nearest GAAP measure,
Income from continuing operations before income taxes, see Note 14 to our
Consolidated Financial Statements.
Revenues and the components of EBITDA for the periods presented are reflected in
the table below:
Three Months Ended Nine Months Ended
September 30, September 30,
Millions of dollars 2020 2019 2020 2019
Sales and other operating revenues:
O&P-Americas segment $ 1,840 $ 2,137 $ 5,065 $ 6,362
O&P-EAI segment 1,982 2,309 5,908 7,349
I&D segment 1,538 2,046 4,465 6,002
APS segment 1,004 1,186 2,805 3,783
Refining segment 1,101 2,134 3,468 6,196
Technology segment 193 146 492 460
Other, including intersegment eliminations (882) (1,236) (2,387) (3,604)
Total $ 6,776 $ 8,722 $ 19,816 $ 26,548
Operating income (loss):
O&P-Americas segment $ 309 $ 524 $ 654 $ 1,412
O&P-EAI segment 52 202 268 614
I&D segment 180 314 335 1,000
APS segment 116 67 103 277
Refining segment (733) (52) (931) (221)
Technology segment 101 73 252 242
Other, including intersegment eliminations (2) (4) (15) (6)
Total $ 23 $ 1,124 $ 666 $ 3,318
Depreciation and amortization:
O&P-Americas segment $ 134 $ 118 $ 391 $ 350
O&P-EAI segment 55 51 161 156
I&D segment 79 75 223 221
APS segment 40 32 123 91
Refining segment 40 41 131 128
Technology segment 10 10 27 31
Total $ 358 $ 327 $ 1,056 $ 977
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Three Months Ended Nine Months Ended
September 30, September 30,
Millions of dollars 2020 2019 2020 2019
Income (loss) from equity investments:
O&P-Americas segment $ 15 $ 12 $ 24 $ 35
O&P-EAI segment 40 36 88 139
I&D segment 7 1 12 5
APS segment - 2 (1) -
Total $ 62 $ 51 $ 123 $ 179
Other income (loss), net:
O&P-Americas segment $ 16 $ (1) $ 19 $ 7
O&P-EAI segment 1 2 5 9
I&D segment 1 - 1 2
APS segment 1 1 1 2
Refining segment 1 5 1 6
Other, including intersegment eliminations 3 4 - 20
Total $ 23 $ 11 $ 27 $ 46
EBITDA:
O&P-Americas segment $ 474 $ 653 $ 1,088 $ 1,804
O&P-EAI segment 148 291 522 918
I&D segment 267 390 571 1,228
APS segment 157 102 226 370
Refining segment (692) (6) (799) (87)
Technology segment 111 83 279 273
Other, including intersegment eliminations 1 - (15) 14
Total $ 466 $ 1,513 $ 1,872 $ 4,520
41-------------------------------------------------------------------------------- Table of Contents Olefins and Polyolefins-Americas Segment Overview-EBITDA declined in the third quarter and first nine months of 2020 relative to the third quarter and first nine months of 2019 due to lower olefin and polyolefin margins in challenging market conditions arising from a low oil price environment and the impact of COVID-19. Ethylene Raw Materials-We have flexibility to vary the raw material mix and process conditions in ourU.S. olefins plants in order to maximize profitability as market prices fluctuate for both feedstocks and products. Although prices of crude-based liquids and natural gas liquids are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly. Strong supplies fromU.S. shale oil and gas in conjunction with the return ofU.S. ethane feedstock advantages inJune 2020 resulted in ethane being a preferred feedstock in ourU.S. plants. In the third quarter and first nine months of 2020 approximately 60% of the raw materials used in our North American crackers was ethane compared to approximately 50-55% in the comparable periods of 2019. The following table sets forth selected financial information for the O&P-Americas segment including Income from equity investments, which is a component of EBITDA: Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2020 2019 2020 2019 Sales and other operating revenues$ 1,840 $ 2,137 $ 5,065 $ 6,362 Income from equity investments 15 12 24 35 EBITDA 474 653 1,088 1,804 Revenues-Revenues for our O&P-Americas segment decreased by$297 million , or 14%, in the third quarter of 2020 compared to the third quarter of 2019 and by$1,297 million , or 20%, in the first nine months of 2020 compared to the first nine months of 2019. Average sales prices were lower in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019 due to the lower oil price environment and the impact of COVID-19. These lower sales prices were responsible for a revenue decrease of 14% and 24% in the third quarter and first nine months of 2020, respectively. Volume increases resulted in a revenue increase of 4% in the first nine months of 2020. EBITDA-EBITDA decreased by$179 million , or 27%, in the third quarter of 2020 compared to the third quarter of 2019 and by$716 million , or 40%, in the first nine months of 2020 compared to the first nine months of 2019. Lower olefin results led to a 21% and 16% decline in EBITDA in the third quarter and first nine months of 2020, respectively, primarily due to lower co-product prices. Polyethylene results declined resulting in a 14% decrease in EBITDA in the first nine months of 2020. This decrease was driven by a$162 per ton reduction in price spreads over ethylene in the first nine months of 2020. Polypropylene results led to a 6% and 7% decrease in EBITDA in the third quarter and first nine months of 2020, respectively, largely due to a decline in margins attributed to lower price spreads over propylene of$97 and$106 per ton, in the third quarter and first nine months of 2020, respectively, and the impact of Hurricane Laura inAugust 2020 . Third quarter of 2020 results include an LCM inventory valuation benefit of$70 million , or 11%, related to the reversal of an LCM inventory valuation charge recognized earlier in the year. These benefits were largely driven by recovery of market prices of ethylene and polymers. Results also include a LIFO inventory charge of$61 million which was recognized in the third quarter of 2020, reducing EBITDA by 9% and 3% in the third quarter and first nine months of 2020, respectively. Olefins and Polyolefins-Europe,Asia , International Segment Overview-EBITDA for the third quarter and first nine months of 2020 decreased compared to the third quarter and first nine months of 2019 mainly as a result of lower olefin and polypropylene margins. 42 -------------------------------------------------------------------------------- Table of Contents The following table sets forth selected financial information for the O&P-EAI segment including Income from equity investments, which is a component of EBITDA: Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2020 2019 2020 2019 Sales and other operating revenues$ 1,982 $ 2,309 $ 5,908 $ 7,349 Income from equity investments 40 36 88 139 EBITDA 148 291 522 918 Revenues-Revenues decreased by$327 million , or 14%, in the third quarter of 2020 compared to the third quarter of 2019 and by$1,441 million , or 20%, in the first nine months of 2020 compared to the first nine months of 2019. Average sales prices in the third quarter and first nine months of 2020 were lower across most products as sales prices generally correlate with crude oil prices, which on average, decreased compared to the comparative periods in 2019. These lower average sales prices were responsible for revenue decreases of 20% and 21% in the third quarter and first nine months of 2020, respectively. Volume improvements resulted in revenue increases of 2% and 1% in the third quarter and first nine months of 2020, respectively. Foreign exchange impacts, which on average, were favorable resulted in a revenue increase of 4% in the third quarter of 2020. EBITDA-EBITDA decreased in the third quarter of 2020 by$143 million , or 49%, compared to the third quarter of 2019 and by$396 million , or 43%, in the first nine months of 2020 compared to the first nine months of 2019. Lower olefins results led to a 40% and 17% decrease in EBITDA in the third quarter and first nine months of 2020, respectively, primarily driven by lower margins attributable to decreased ethylene prices. Polypropylene results led to a 14% and 11% decrease in EBITDA in the third quarter and first nine months of 2020, respectively, largely due to a decline in margins attributed to a reduction in price spreads over propylene by$47 and$35 per ton, in the third quarter and first nine months of 2020, respectively. Lower income from our equity investments led to decreases in EBITDA of 6% in the first nine months of 2020 mainly attributable to lower margins from our joint ventures inSaudi Arabia andAsia . EBITDA decreased by$53 million or 6% in the first nine months of 2020 compared to 2019 due to LCM inventory valuation charges resulting from a decline in the price of naphtha and polymers. During the third quarter of 2020, EBITDA increased by$17 million or 6% resulting from the recovery of market prices of naphtha and polymers during the quarter. Unfavorable foreign exchange impacts resulted in a 4% decline in EBITDA in the third quarter of 2020. Intermediates and Derivatives Segment Overview-EBITDA for our I&D segment was lower in the third quarter and first nine months of 2020 compared to the third quarter and first nine months of 2019, largely driven by margin erosion due to the impacts of COVID-19. The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA: Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2020 2019 2020 2019 Sales and other operating revenues$ 1,538 $ 2,046 $ 4,465 $ 6,002 Income from equity investments 7 1 12 5 EBITDA 267 390 571 1,228 43
-------------------------------------------------------------------------------- Table of Contents Revenues-Revenues decreased by$508 million , or 25%, in the third quarter of 2020 compared to the third quarter of 2019 and by$1,537 million , or 26%, in the first nine months of 2020 compared to the first nine months of 2019. Lower average sales prices in the third quarter and first nine months of 2020 for most products, which reflect the impacts of lower feedstock and energy costs and lower demand, were responsible for a revenue decrease of 22% and 21%, respectively. Lower sales volumes driven by decreased demand due to the impacts of COVID-19 in the third quarter and first nine months of 2020 resulted in a 4% and 5% decrease in revenues, respectively. Favorable foreign exchange impacts increased EBITDA by 1% in the third quarter of 2020. EBITDA-EBITDA decreased$123 million , or 32%, in the third quarter of 2020 compared to the third quarter of 2019 and by$657 million , or 54% in the first nine months of 2020 compared to the first nine months of 2019 primarily driven by lower margins across most businesses. Oxyfuels and related products results declined, resulting in a 44% and 24% decrease in EBITDA in the third quarter and first nine months of 2020, respectively. The decline was a result of lower margins due to lower gasoline prices and higher feedstock prices relative to crude oil prices driven by impacts of the COVID-19 pandemic. Declines in intermediate chemicals results led to an EBITDA decrease of 19% in the first nine months of 2020. This decrease was a result of lower margins as market supply increased and demand weakened in 2020. Results of our I&D segment were further reduced by$76 million , or 6%, in the first nine months of 2020 due to an LCM inventory valuation charge resulting from a decline in the price of various gasoline blending components, benzene and styrene sinceDecember 31, 2019 . Results in the third quarter benefit by$22 million , or 6%, due to an LCM inventory valuation benefit resulting from price improvements for various gasoline blending components since the second quarter of 2020. Advanced Polymer Solutions Segment Overview-EBITDA for our APS segment increased in the third quarter of 2020 relative to the third quarter of 2019, primarily due to lower integration costs related to the acquisition of A. Schulman, and decreased in the first nine months of 2020 relative to the first nine months of 2019, primarily due to lower compounding and solutions volumes. The following table sets forth selected financial information for the APS segment including losses from equity investments, which is a component of EBITDA: Three Months Ended Nine Months Ended September 30, September 30, Millions of dollars 2020 2019 2020 2019 Sales and other operating revenues$ 1,004 $ 1,186 $ 2,805 $ 3,783 Income (loss) from equity investments - 2 (1) - EBITDA 157 102 226 370 Revenues-Revenues decreased by$182 million , or 15%, in the third quarter of 2020 compared to the third quarter of 2019 and by$978 million , or 26%, in the first nine months of 2020 compared to the first nine months of 2019. Sales volumes declined in the third quarter and first nine months of 2020 stemming from lower market demand for compounding and solutions, including lower automotive and construction demand, which led to a 10% and 21% decrease in revenue in the third quarter and first nine months of 2020, respectively. Average sales prices also declined resulting in a 9% and 5% decline in revenue in the third quarter and first nine months of 2020, respectively. Foreign exchange impacts resulted in a revenue increase of 4% in the third quarter of 2020.
EBITDA-EBITDA increased
44
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The increase in EBITDA in the third quarter of 2020 compared to the third
quarter of 2019 was attributable to lower integration costs related to the
acquisition of A. Schulman resulting in an increase of $37 million , or 36%,
offset by a 18% decline in advanced polymers results which were driven by lower
margins.
Decreased compounding and solutions results led to an EBITDA decrease of 31% in
the first nine months of 2020. This decrease was attributable to lower volumes
driven by reduced demand for our products utilized in the automotive and
construction end markets which were impacted by the COVID-19 pandemic. This
decrease was offset by an increase in EBITDA of $43 million , or 12%, due to
lower integration costs related to the acquisition of A. Schulman in the first
nine months of 2020.
EBITDA further decreased by $29 million , or 8%, in the first nine months of 2020
compared to the first nine months of 2019 due to an LCM inventory valuation
charge resulting from a decline in the price of polymers. During the third
quarter of 2020, EBITDA increased $40 million , or 39%, largely due to an LCM
inventory valuation benefit resulting from recovery of market prices of
polymers. Favorable foreign exchange impacts increased EBITDA by 4% in the third
quarter.
Refining Segment
Overview-EBITDA for our Refining segment decreased in the third quarter and
first nine months of 2020 relative to the third quarter and first nine months of
2019 primarily due to lower margins and a non-cash impairment charge of $582
million recognized during the third quarter.
The following table sets forth selected financial information and heavy crude
oil processing rates for the Refining segment and the U.S. refining market
margins for the applicable periods. "Brent" is a light sweet crude oil and is
one of the main benchmark prices for purchases of oil worldwide. "Maya" is a
heavy sour crude oil grade produced in Mexico that is a relevant benchmark for
heavy sour crude oils in the U.S. Gulf Coast market. References to industry
benchmarks for refining market margins are to industry prices reported by
Platts, a division of S&P Global.
Three Months Ended Nine Months Ended
September 30, September 30,
Millions of dollars 2020 2019 2020 2019
Sales and other operating revenues $ 1,101 $ 2,134 $ 3,468 $ 6,196
EBITDA (692) (6) (799) (87)
Thousands of barrels per day
Heavy crude oil processing rates 216 264 226 261
Market margins, dollars per barrel Brent - 2-1-1$ 5.71 $ 12.75 $ 5.86 $ 11.29 Brent - Maya differential 4.18 5.36 7.61 5.58 Total Maya 2-1-1$ 9.89 $ 18.11 $ 13.47 $ 16.87 Revenues-Revenues decreased by$1,033 million , or 48%, in the third quarter of 2020 compared to the third quarter of 2019 and by$2,728 million , or 44%, in the first nine months of 2020 compared to the first nine months of 2019. Lower product prices led to a revenue decrease of 32% and 36% relative to the third quarter and first nine months of 2019, respectively, due to an average crude oil price decrease of approximately$18 per barrel in the third quarter of 2020 and$23 per barrel in the first nine months of 2020. Heavy crude oil processing rates decreased during the third quarter and first nine months of 2020, leading to a decrease in overall sales volumes of 16% and 8%, respectively. Rates on conversion units were lower due to an unplanned outage at our fluid catalytic cracking unit during the first two quarters of 2020, as well as crude selection and the optimization of refinery operations. 45 -------------------------------------------------------------------------------- Table of Contents EBITDA-EBITDA decreased by$686 million in the third quarter of 2020 compared to the third quarter of 2019 and decreased by$712 million in the first nine months of 2020 compared to the first nine months of 2019. We expect a prolonged period of reduced demand and compressed margins that will decrease profitability for transportation fuels produced by ourHouston refinery . The lower profitability is primarily a result of the impacts of the COVID-19 pandemic and associated reductions in mobility affecting the global economy. In addition, the refinery is expected to continue to be adversely affected by lower discounts for the heavy crude oil feedstocks that we utilize. Due to these trends we assessed theHouston refinery for impairment and recognized a non-cash impairment charge in the third quarter of 2020 of$582 million . Refer to Note 4 to our Consolidated Financial Statements. Accordingly, we plan to operate the refinery at approximately 80 percent of nameplate crude throughput during the fourth quarter of 2020. In efforts to manage costs within the segment, we are deferring non-safety related discretionary activities and reducing the employee workforce by approximately 10 percent through early retirements and potential worker re-deployments to our other facilities. We are also evaluating options with regard to procuring crude oil and optimizing production from the asset.
Results in the third quarter of 2020 also include LCM inventory valuation
benefits of
Margin declines in the third quarter and first nine months of 2020 represents
approximately four-fifths and two-thirds of the remaining decrease,
respectively. This decline was primarily due to a 45% and 20% decrease in the
Maya 2-1-1 market margin in the third quarter and first nine months of 2020,
relative to the comparable periods in 2019, driven primarily by lower refined
product cracks. The remaining decrease in EBITDA in the third quarter and first
nine months of 2020 was due to lower heavy crude oil processing rates driven by
lower demand for refined products as well as unplanned outage at our fluid
catalytic cracking unit in the first two quarters of 2020.
Technology Segment
Overview-EBITDA for our Technology segment increased in the third quarter of
2020 compared to the third quarter of 2019, primarily due to higher licensing
revenues. EBITDA also improved in the first nine months of 2020 compared to the
first nine months of 2019 driven by improved catalysts results.
The following table sets forth selected financial information for the Technology
segment:
Three Months Ended Nine Months Ended
September 30, September 30,
Millions of dollars 2020 2019 2020 2019
Sales and other operating revenues $ 193 $ 146 $ 492 $ 460
EBITDA 111 83 279 273
Revenues-Revenues increased by $47 million , or 32%, in the third quarter of 2020
compared to the third quarter of 2019 and by $32 million , or 7%, in the first
nine months of 2020 compared to the first nine months of 2019.
Higher licensing revenues resulted in a revenue increase of 24% in the third
quarter of 2020 compared to the third quarter of 2019. Higher catalyst volumes
resulted in a 3% and 5% increase in revenue in the third quarter and first nine
months of 2019, respectively. The increase in the first nine months of 2020 was
driven by increased orders as customers were likely securing inventory early
during the pandemic. Increases in average catalyst sales prices resulted in
revenue increases of 2% in both the third quarter and first nine months of 2020.
Foreign exchange impacts, which on average, were favorable led to a revenue
increase of 3% in the third quarter of 2020.
EBITDA-EBITDA increased by $28 million , or 34%, in the third quarter of 2020
compared to the third quarter of 2019 primarily due to higher licensing revenues
as more contracts reached significant milestones in the third quarter of 2020
compared to the third quarter of 2019. EBITDA increased by $6 million , or 2%, in
the first nine months of 2020 compared to the first nine months of 2019 largely
due to higher catalyst demand.
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FINANCIAL CONDITIONOperating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:
Nine Months Ended
September 30,
Millions of dollars 2020 2019
Source (use) of cash:
Operating activities $ 2,661 $ 3,719
Investing activities (2,307) (1,210)
Financing activities 1,192 (2,382)
Operating Activities-Cash of $2,661 million generated by operating activities in
the first nine months of 2020 reflected earnings adjusted for non-cash items,
payments for employee bonuses, income taxes, and cash provided by the main
components of working capital-Accounts receivable, Inventories and Accounts
payable.
In the first nine months of 2020, the main components of working capital
provided $514 million of cash driven primarily by a decrease in Inventory. The
decrease in Inventory was primarily driven by company-wide inventory reduction
initiatives and lower cost of sales across all of our segments.
Cash of $3,719 million generated by operating activities in the first nine
months of 2019 reflected earnings adjusted for non-cash items, payments for
employee bonuses, income taxes, and cash consumed by the main components of
working capital.
In the first nine months of 2019, the main components of working capital
consumed $65 million of cash driven primarily by an increase in Accounts
receivable. The increase in Accounts receivable was largely due to higher sales
volumes in our O&P-EAI segment during the period, partially offset by a decrease
in Accounts receivable in our I&D and APS segments as a result of unfavorable
market conditions.
Investing Activities
Investments- During the third quarter of 2020, we invested $472 million in cash
for a 50% equity interest in the Bora LyondellBasell Petrochemical Co. Ltd joint
venture. For additional information related to our Equity investments, see Note
7 to the Consolidated Financial Statements.
We invest cash in investment-grade and other high-quality instruments that
provide adequate flexibility to redeploy funds as needed to meet our cash flow
requirements while maximizing yield.
In the first nine months of 2020 we invested $270 million in debt securities
that are deemed available-for-sale. We also invested $267 million in equity
securities in the first nine months of 2020. Our investments in
available-for-sale debt securities and equity securities are classified as
Short-term investments.
In the first nine months of 2020 and 2019 we received proceeds of $313 million
and $332 million , respectively, on the sale of our investments in equity
securities. Additionally, we received proceeds of $90 million and $511 million
in the first nine months of 2020 and 2019, respectively, upon the sale and
maturity of certain of our available-for-sale debt securities. See Note 9 to the
Consolidated Financial Statements for additional information regarding these
investments.
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Capital Expenditures-The following table summarizes capital expenditures for the
periods presented:
Nine Months Ended
September 30,
Millions of dollars 2020 2019
Capital expenditures by segment:
O&P-Americas $ 524 $ 828
O&P-EAI 114 148
I&D 761 734
APS 41 41
Refining 52 137
Technology 80 60
Other 101 15
Consolidated capital expenditures
In the first nine months of 2020 and 2019, our capital expenditures included construction related to our PO/TBA plant at ourHouston, Texas facility, turnaround activities at several sites and other plant improvement projects. Additionally, in the first nine months of 2019, our capital expenditures included construction related to our Hyperzone polyethylene plant at ourLa Porte, Texas facility, that was completed in the first quarter of 2020. Financing Activities-In the first nine months of 2020 and 2019, we made payments of$4 million and$3,752 million to acquire approximately 0.1 million and 42.7 million, respectively, of our outstanding ordinary shares. We also made dividend payments totaling$1,053 million and$1,111 million in the first nine months of 2020 and 2019, respectively. For additional information related to our share repurchases and dividend payments, see Note 12 to the Consolidated Financial Statements. InJanuary 2020 , we amended the terms of certain forward-starting interest rate swaps to extend their maturities. Concurrently with the amendment of the swaps, we posted collateral of$238 million related to the liability position held with our counterparties as of the amendment date. For additional information see Note 9 to the Consolidated Financial Statements. InApril 2020 ,LYB International Finance III, LLC ("LYB Finance III"), a wholly owned finance subsidiary ofLyondellBasell Industries N.V. issued$500 million of 2.875% guaranteed notes due 2025 (the "2025 Notes") at a discounted price of 99.911%,$500 million of 3.375% guaranteed notes due 2030 (the "2030 Notes") at a discounted price of 99.813% and$1,000 million of 4.2% guaranteed notes due 2050 (the "2050 Notes") at a discounted price of 99.373%. Net proceeds from the sale of the notes totaled$1,974 million . We used the net proceeds from the sale of the notes for general corporate purposes, including to increase our liquidity and manage short-term debt maturities. We invested funds that were not immediately needed for these purposes in short-term investments, including marketable securities. Additionally, inApril 2020 we repaid$500 million of our Senior Revolving Credit Facility and$500 million of ourU.S. Receivables Facility borrowed inMarch 2020 to increase our liquidity. InMay 2020 , we terminated and cash settled$2,000 million in notional value of our cross-currency interest rate swaps, designated as cash flows hedges, maturing in 2021 and 2024. Upon termination of the swaps, we received$346 million from our counterparties. InFebruary 2019 ,LYB Americas Finance Company LLC , a wholly owned subsidiary ofLyondellBasell Industries N.V. , entered into a 364-day,$2,000 million senior unsecured term loan credit agreement and borrowed the entire amount. The proceeds of this term loan, which is fully and unconditionally guaranteed byLyondellBasell Industries N.V. , were used for general corporate purposes and to redeem the remaining$1,000 million outstanding of our 5% Senior Notes due 2019 at par. In the first nine months of 2019 we borrowed$1,000 million from our Term Loan due 2022 and$500 million from ourU.S. Receivables Facility which was used to partially fund theJuly 2019 share repurchase. 48 -------------------------------------------------------------------------------- Table of Contents InSeptember 2019 ,LYB International Finance II B.V . ("LYB Finance II"), a wholly owned finance subsidiary ofLyondellBasell N.V. , issued €500 million of 0.875% guaranteed notes due 2026 (the "2026 Notes") at a discounted price of 99.642% and €500 million of 1.625% guaranteed notes due 2031 (the "2031 Notes") at a discounted price of 98.924%. We used the net proceeds from the 2026 Notes and the 2031 Notes to repay$1,000 million outstanding under our Term Loan due 2022, and a portion of borrowings from our commercial paper program. Through the issuance and repurchase of commercial paper instruments under our commercial paper program, we received net proceeds of$194 million in the first nine months of 2020 and made net repayments of$23 million in the first nine months of 2019. Additional information related to the issuance of debt and commercial paper can be found in the Liquidity and Capital Resources section below and in Note 8 to the Consolidated Financial Statements. InFebruary 2019 , we purchased the non-controlling interest in our subsidiary that holds ourLa Porte, Texas methanol facility for$63 million . Liquidity and Capital Resources Overview As a result of COVID-19, we continue to take actions to manage our financial risk. In 2020, we increased liquidity through the issuance of guaranteed senior notes and we continue to focus on cost savings while minimizing working capital. InApril 2020 , we announced that we reduced our budgeted 2020 capital expenditures by$500 million , bringing our total budget to$1.9 billion . InOctober 2020 , we amended (collectively, the "October Amendments") our (i) Senior Revolving Credit Facility, (ii) Term Loan due 2022, and (iii)U.S. Receivables Facility (collectively, as amended, the "Credit Agreements"). Among other things, the October Amendments amended each Credit Agreement's maximum leverage ratio financial covenant for certain periods. Additionally, we issued$3,900 million of Guaranteed Notes; net proceeds from the sale of the notes totaled$3,848 million . We intend to continue to declare and pay quarterly dividends, with the goal of increasing the dividend over time, after giving consideration to our cash balances and expected results from operations. Our focus on funding our dividends while remaining committed to a strong investment grade balance sheet continues to be the foundation of our capital deployment strategy.
Cash and cash equivalents, cash from our short-term investments, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the purchase of shares under our share repurchase authorization.
We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. We believe that our current liquidity availability and cash from operating activities provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due. Further, we believe the current economic environment will not have an adverse effect on our ability to be in compliance with our debt covenants. Cash and Liquid Investments As ofSeptember 30, 2020 , we had Cash and cash equivalents and marketable securities classified as Short-term investments totaling$2,820 million . AtSeptember 30, 2020 , we held$1,143 million of cash in jurisdictions outside of theU.S. , principally in theUnited Kingdom . There are currently no legal or economic restrictions that would materially impede our transfers of cash. 49 -------------------------------------------------------------------------------- Table of Contents Credit Arrangements AtSeptember 30, 2020 , we had total debt, including current maturities, of$14,377 million , and$200 million of outstanding letters of credit, bank guarantees and surety bonds issued under uncommitted credit facilities. We had total unused availability under our credit facilities of$2,691 million atSeptember 30, 2020 , which included the following: •$2,045 million under our$2,500 million Senior Revolving Credit Facility, which backs our$2,500 million commercial paper program. Availability under this facility is net of outstanding borrowings, outstanding letters of credit provided under the facility and notes issued under our commercial paper program. A small portion of our availability under this facility is impacted by changes in the euro/U.S. dollar exchange rate. AtSeptember 30, 2020 , we had$455 million of outstanding commercial paper, net of discount, no borrowings or letters of credit outstanding under this facility; and •$646 million under our$900 million U.S. Receivables Facility. Availability under this facility is subject to a borrowing base of eligible receivables, which is reduced by outstanding borrowings and letters of credit, if any. AtSeptember 30, 2020 , we had no borrowings or letters of credit outstanding under this facility. InOctober 2020 , we entered into the October Amendments to our Credit Agreements. Among other things, the October Amendments amended each Credit Agreement's maximum leverage ratio (calculated as the ratio of total net funded debt to consolidated earnings before interest, taxes and depreciation and amortization, both as defined in our Credit Agreements) financial covenant to (i) 4.25 to 1.00 for the fiscal quarter endingDecember 31, 2020 ; (ii) 4.50 to 1.00 for the fiscal quarter endingMarch 31, 2021 ; (iii) 4.00 to 1.00 for the fiscal quarter endingJune 30, 2021 ; (iv) 3.75 to 1.00 for the fiscal quarter endingSeptember 30, 2021 ; and (v) 3.50 to 1.00 for the fiscal quarter endingDecember 31, 2021 and thereafter; provided, that, to the extent our recently announced Louisiana Joint Venture is consummated, the maximum leverage ratio financial covenant will automatically adjust to (i) 5.00 to 1.00 for the fiscal quarters endingDecember 31, 2020 andMarch 31,2021 ; (ii) 4.75 to 1.00 for the fiscal quarter endingJune 30, 2021 ; (iii) 4.50 to 1.00 for the fiscal quarters endingSeptember 30, 2021 andDecember 31, 2021 ; (iv) 4.00 to 1.00 for the fiscal quarter endingMarch 30, 2022 ; (iv) 3.50 to 1.00 for the fiscal quarter endingJune 30, 2022 (or, if the Louisiana Joint Venture is consummated afterDecember 31, 2020 , 4.00 to 1.00); and (vi) 3.50 to 1.00 for the fiscal quarter endingSeptember 30, 2022 and thereafter. In addition, with respect to the Senior Revolving Credit Facility and the Term Loan due 2022, the October Amendments further restrict certain dividends and other specified restricted payments. InOctober 2020 , we also further amended our Amended and Restated Credit Agreement (the "Amendment and Consent Agreement") to extend the term of$2,440 million of the$2,500 million Senior Revolving Credit Facility for one year untilJune 2023 , the remainder expires inJune 2022 . The Amendment and Consent Agreement also included customary LIBOR replacement language, which took effect inOctober 2020 . All other material terms of the Credit Agreement remain unchanged. Additionally, inOctober 2020 , LYB Finance III issued$650 million aggregate principal amount of Guaranteed Floating Rate Notes due 2023 (the "Floating Rate Notes"),$500 million aggregate principal amount of 1.25% Guaranteed Notes due 2025 (the "1.25% 2025 Notes"),$500 million aggregate principal amount of 2.25% Guaranteed Notes due 2030 (the "2.25% 2030 Notes"),$750 million aggregate principal amount of 3.375% Guaranteed Notes due 2040 (the "2040 Notes"),$1,000 million aggregate principal amount of 3.625% Guaranteed Notes due 2051 (the "2051 Notes"), and$500 million aggregate principal amount of 3.8% Guaranteed Notes due 2060 (the "2060 Notes" and, collectively with the Floating Rate Notes, the 1.25% 2025 notes, the 2.25% 2030 notes, the 2040 notes and the 2051 notes, the "October Notes"). The net proceeds of the October Notes was$3,848 million . In October we used$500 million of the net proceeds to repay a portion of the indebtedness outstanding under our Term Loan due 2022. The remaining net proceeds will be used in the fourth quarter to fund a portion of the purchase price for the Louisiana Joint Venture, redeem or repay up to$1 billion aggregate principal amount of our 6.0% senior notes due 2021, and redeem or repay up to €750 million aggregate principal amount of our 1.875% guaranteed notes due 2022. Such redemption notices have been issued inOctober 2020 . In conjunction with the redemption of these notes, we expect to pay an estimated$116 million in related premiums, accrued interest and fees and expenses associated with such redemption or repayment of both notes. 50
-------------------------------------------------------------------------------- Table of Contents If the Louisiana Joint Venture transaction does not close on or prior toMarch 31, 2021 , or is terminated on or prior to completion, we will be required to redeem all of the outstanding 1.25% 2025 Notes, 2.25% 2030 Notes and 2060 Notes at a redemption price equal to 101% of the aggregate principal amount plus accrued and unpaid interest for each of these notes. We may also use net proceeds of this offering to fund such redemption. We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash and cash equivalents, cash from our short-term investments, cash from operating activities, proceeds from the issuance of debt, proceeds from asset divestitures, or a combination thereof. For additional information regarding redemption provisions of our bonds, see Note 8 to our Consolidated Financial Statements. In connection with any repayment or redemption of our debt, we may incur cash and non-cash charges, which could be material in the period in which they are incurred. In accordance with our current interest rate risk management strategy and subject to management's evaluation of market conditions and the availability of favorable interest rates among other factors, we may from time to time enter into interest rate swap agreements to economically convert a portion of our fixed rate debt to variable rate debt or convert a portion of our variable rate debt to fixed rate debt. Share Repurchases InMay 2020 , our shareholders approved a proposal to authorize us to repurchase up to 34.0 million of our ordinary shares throughNovember 29, 2021 , which superseded any prior repurchase authorizations. Our share repurchase authorization does not have a stated dollar amount, and purchases may be made through open market purchases, private market transactions or other structured transactions. Repurchased shares could be retired or used for general corporate purposes, including for various employee benefit and compensation plans. The maximum number of shares that may yet be purchased is not necessarily an indication of the number of shares that will ultimately be purchased. In the first nine months of 2020, we purchased approximately 0.1 million shares under our share repurchase authorization for approximately$4 million . As ofOctober 28, 2020 , we had approximately 34.0 million shares remaining under the current authorization. The timing and amounts of additional shares repurchased, if any, will be determined based on our evaluation of market conditions and other factors, including any additional authorizations approved by our shareholders. We will prioritize debt repayment over share repurchases for the remainder of 2020. For additional information related to our share repurchase authorizations, see Note 12 to the Consolidated Financial Statements. Capital Budget As a result of the coronavirus and current market conditions, the Company has postponed selected growth projects and planned maintenance, including slowing construction activities on our PO/TBA plant, allowing us to prevent the spread of the virus at the construction site and conserve capital as we prepared for an uncertain economic environment caused by the pandemic. We currently expect that these actions will reduce 2020 capital expenditures to$1.9 billion . This represents a 20% decrease compared to our budget as ofDecember 31, 2019 . Our capital expenditures budget includes approximately$80 million for investments in ourU.S. and European PO joint ventures. We have begun to reactivate construction on our PO/TBA project and expect to return to a full pace in the fourth quarter of 2020. We expect the project to be completed in the fourth quarter of 2022, approximately one year later than originally estimated. The delayed timing of the startup should provide benefits from a more fully recovered global economy as well as another year of global demand growth for the products. Higher costs arising from the delayed project execution, more extensive civil construction and unexpected tariffs on materials are expected to add at least 30 percent to our original cost estimate of$2.4 billion dollars . Once complete, our world-scale PO/TBA plant will have the capacity to produce 470 thousand tons of PO and 1.0 million tons of tertiary butyl alcohol. 51
-------------------------------------------------------------------------------- Table of ContentsEquity Investment OnOctober 1, 2020 we signed a definitive agreement withSasol Chemicals (USA) LLC ("Sasol") to form theLouisiana Integrated PolyEthylene JV LLC joint venture. Through the creation of this joint venture, we will acquire 50% of the 1.5 million ton ethane cracker, 0.9 million ton low and linear-low density polyethylene plants and associated infrastructure located inLake Charles, Louisiana , for a total cash consideration of$2 billion subject to customary adjustments for working capital and other items. The transaction is expected to close by the end of 2020, subject to customary regulatory approvals and approval by Sasol shareholders. CURRENT BUSINESS OUTLOOK Recovery in global economies should continue to benefit the petrochemical industry. Despite the backdrop of both the pandemic and a recession, we expect global polyethylene demand to grow for 2020.China continues to have a polyethylene trade deficit which supports North American exports and tightens theU.S. domestic market. We expect continued strength in North American integrated polyethylene margins during the fourth quarter of 2020, perhaps with some seasonal moderation by the end of the year. Slow recovery in global mobility is weighing on demand for gasoline and jet fuel which will prolong headwinds for our Refining segment and our oxyfuels and related products businesses in our Intermediates and Derivatives segment. After several years of advancing on our value-driven growth strategy, we are poised to reap the rewards of our investments as our industry benefits from a recovering economy. InOctober 2020 , we announced a new integrated polyethylene joint venture with Sasol inLouisiana . This partnership represents a measured approach to extend one of our core businesses and increase free cash flow. Our new Hyperzone polyethylene capacity, several expansions across our joint venture network and the integration of our A. Schulman acquisition should all add to our profitability over the coming years. We remain committed to an investment grade balance sheet while focusing on funding our dividend with cash from operations. Upon closing of the transaction for theLouisiana joint venture, we will prioritize debt repayment over share repurchases. 52 -------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES Impairment Assessment of Property, Plant and Equipment-The need to test for impairment can be based on several indicators, including a significant reduction in prices of or demand for products produced, a weakened outlook for profitability, a significant reduction in margins, other changes to contracts or changes in the regulatory environment. If the sum of the undiscounted estimated pre-tax cash flows for an asset group is less than the asset group's carrying value, fair value is calculated for the asset group, and the carrying value is written down to the calculated fair value. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified. Fair value calculated for the purpose of testing our property, plant and equipment for impairment is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted financial information prepared using significant assumptions which may include, among other things, projected changes in supply and demand fundamentals (including industry-wide capacity, our planned utilization rate, end-user demand), new technological developments, capital expenditures, new competitors with significant raw material or other cost advantages, changes associated with world economies, the cyclical nature of the chemical and refining industries, uncertainties associated with governmental actions and other economic conditions. Such estimates are consistent with those used in our planning and capital investment and business performance reviews. We apply a discount rate to our cash flows based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible. Assumptions about the effects of COVID-19 and the macroeconomic environment are inherently subjective and contingent upon the duration of the pandemic and its impact on the macroeconomic environment, which is difficult to forecast. We base our fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections. During the third quarter of 2020, we identified impairment triggers relating to ourHouston refinery's asset group which resulted in a$582 million impairment charge recognized during the third quarter of 2020. Refer to Note 4 to our Consolidated Financial Statements. The estimates of theHouston refinery's undiscounted pre-tax cash flows and estimated fair value utilized significant assumptions including management's best estimates of the expected future cash flows, the estimated useful lives of the asset group, and the residual value of the refinery. These estimates require considerable judgment and are sensitive to changes in underlying assumptions such as future commodity prices, margins on refined products, operating rates and capital expenditures including repairs and maintenance. As a result, there can be no assurance that the estimates and assumptions made for purposes of our impairment analysis will prove to be an accurate prediction of the future. Should our estimates and assumptions significantly change in future periods, it is possible that we may determine future impairment charges. An estimate of the sensitivity to net income resulting from impairment calculations is not practicable, given the numerous assumptions, including pricing, volumes and discount rates, that can materially affect our estimates. That is, unfavorable adjustments to some of the above listed assumptions may be offset by favorable adjustments in other assumptions. Inventory-Our inventories are stated at the lower of cost or market ("LCM"). Cost is determined using the last-in, first-out ("LIFO") inventory valuation methodology, which means that the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. Market value is determined based on an assessment of the current estimated replacement cost and selling price of the inventory. 53 -------------------------------------------------------------------------------- Table of Contents During the first nine months of 2020, we recognized LCM inventory valuation charges of$163 million related to the decline in pricing for many of our raw material and finished goods inventories. During the third quarter of 2020, we recognized LCM inventory valuation benefits of$160 million , largely driven by the recovery of market prices during the quarter. In the first quarter of 2020, market price declines in crude oil, heavy liquids and ethylene were the primary contributors to the LCM inventory valuation charges, and representative prices used in the calculation of this LCM inventory valuation charge were$12.14 per barrel for crude oil,$13.50 per barrel for heavy liquids and$205 per ton for ethylene. In the second quarter of 2020, market price recoveries in crude oil, heavy liquids and ethylene were the primary contributors to LCM inventory valuation benefits, and representative prices used in such calculation were$32.22 per barrel for crude oil,$40.42 per barrel for heavy liquids and$276 per ton for ethylene. In the third quarter of 2020, continued market price recovery in ethylene was the primary contributor to the LCM inventory valuation benefit, and representative prices used in the calculation of the LCM inventory valuation benefit as ofSeptember 30, 2020 were$32.58 per barrel for crude oil,$41.46 per barrel for heavy liquids and$514 per ton for ethylene. Since our inventory consists of manufactured products derived from crude oil, natural gas, natural gas liquids and correlated materials, as well as the associated feedstocks and intermediate chemicals, our inventory market values are generally influenced by changes in the benchmark of crude oil and heavy liquid values and prices for manufactured finished goods. The degree of influence of a particular benchmark may vary from period to period, as the composition of the dollar value LIFO pools change. Additionally, an LCM condition may arise due to a volumetric decline in a particular material that had previously provided a positive impact within a pool. As a result, market valuations and LCM conditions are dependent upon the inventory composition at the balance sheet date. In the measurement of an LCM adjustment, the numeric input value for determining the crude oil market price includes pricing that is weighted by volume of inventories held at a point in time, including WTI, Brent and Maya crude oils. Currently, ten out of our eleven LIFO inventory pools are "at-risk" for further adjustment as each impacted LIFO pool has been reduced to, or close to, the calculated market value at the last balance sheet measurement date. "At-risk" inventory accounts for$2.9 billion of our total inventory carrying value as ofSeptember 30, 2020 . The extent to which further adjustment may occur is dependent on the pool specific product prices and composition within each individual dollar value LIFO pool at the balance sheet date. Further sustained price declines in our finished goods and raw materials could result in future LCM inventory valuation charges. However, if pricing trends reverse, some, or all of these charges could be reversed in future quarterly periods. ACCOUNTING AND REPORTING CHANGES For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note 2 to the Consolidated Financial Statements. 54
-------------------------------------------------------------------------------- Table of Contents CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words "anticipate," "estimate," "believe," "continue," "could," "intend," "may," "plan," "potential," "predict," "should," "will," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions. We based forward-looking statements on our current expectations, estimates and projections of our business and the industries in which we operate. We caution you that these statements are not guarantees of future performance. They involve assumptions about future events that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following: •the cost of raw materials represents a substantial portion of our operating expenses, and energy costs generally follow price trends of crude oil, natural gas liquids and/or natural gas; price volatility can significantly affect our results of operations and we may be unable to pass raw material and energy cost increases on to our customers due to the significant competition that we face, the commodity nature of our products and the time required to implement pricing changes; •our operations inthe United States ("U.S.") have benefited from low-cost natural gas and natural gas liquids; decreased availability of these materials (for example, from their export or regulations impacting hydraulic fracturing in theU.S. ) could reduce the current benefits we receive; •if crude oil prices fall materially, or decrease relative toU.S. natural gas prices, we would see less benefit from low-cost natural gas and natural gas liquids and it could have a negative effect on our results of operations; •industry production capacities and operating rates may lead to periods of oversupply and low profitability; for example, substantial capacity expansions are underway in theU.S. olefins industry; •we may face unplanned operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failures, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental incidents) at any of our facilities, which would negatively impact our operating results; for example, because theHouston refinery is our only refining operation, we would not have the ability to increase production elsewhere to mitigate the impact of any outage at that facility; •changes in general economic, business, political and regulatory conditions in the countries or regions in which we operate could increase our costs, restrict our operations and reduce our operating results; •our ability to execute our organic growth plans may be negatively affected by our ability to complete projects on time and on budget; •our ability to acquire new businesses and assets and integrate those operations into our existing operations and make cost-saving changes in operations; •uncertainties associated with worldwide economies could create reductions in demand and pricing, as well as increased counterparty risks, which could reduce liquidity or cause financial losses resulting from counterparty default; •uncertainties related to the extent and duration of the pandemic-related decline in demand, or other impacts due to the pandemic in geographic regions or markets served by us, or where our operations are located, including the risk of prolonged recession; 55
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Table of Contents •the negative outcome of any legal, tax and environmental proceedings or changes in laws or regulations regarding legal, tax and environmental matters may increase our costs, reduce demand for our products, or otherwise limit our ability to achieve savings under current regulations; •any loss or non-renewal of favorable tax treatment under agreements or treaties, or changes in laws, regulations or treaties, may substantially increase our tax liabilities; •we may be required to reduce production or idle certain facilities because of the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries, which would negatively affect our operating results; •we rely on continuing technological innovation, and an inability to protect our technology, or others' technological developments could negatively impact our competitive position; •we have significant international operations, and fluctuations in exchange rates, valuations of currencies and our possible inability to access cash from operations in certain jurisdictions on a tax-efficient basis, if at all, could negatively affect our liquidity and our results of operations; •we are subject to the risks of doing business at a global level, including wars, terrorist activities, political and economic instability and disruptions and changes in governmental policies, which could cause increased expenses, decreased demand or prices for our products and/or disruptions in operations, all of which could reduce our operating results; •if we are unable to comply with the terms of our credit facilities, indebtedness and other financing arrangements, those obligations could be accelerated, which we may not be able to repay; and •we may be unable to incur additional indebtedness or obtain financing on terms that we deem acceptable, including for refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses. Any of these factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.
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