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MarketScreener Homepage  >  Equities  >  Nyse  >  LyondellBasell Industries N.V.    LYB   NL0009434992

LYONDELLBASELL INDUSTRIES N.V.

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LYONDELLBASELL INDUSTRIES N : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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02/20/2020 | 04:35pm EDT

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 to LyondellBasell Industries N.V. together with
its consolidated subsidiaries ("LyondellBasell N.V.").
The discussion summarizing the significant factors affecting the results of
operations and financial condition for the year ended December 31, 2017, can be
found in Part II, "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of our Annual Report on Form 10-K for the
year ended December 31, 2018, which was filed with the Securities and Exchange
Commission on February 21, 2019 , of which Item 7 is incorporated herein by
reference.
OVERVIEW
During 2019 LyondellBasell continued to exhibit strong cash generation and
remained committed to our disciplined capital allocation strategy. Over each of
the past six years, we have consistently delivered $5 billion to $6 billion in
cash from operating activities. We affirmed our commitment to a strong and
progressive dividend during 2019 by increasing our quarterly dividend for the
eleventh time and returning a total of $5.2 billion in dividends and share
repurchases to shareholders. Our businesses benefited from abundant and low-cost
natural gas liquid feedstocks throughout the year, and we demonstrated our
capability to derive value from mergers and acquisitions through the integration
of the A. Schulman acquisition.
During the fourth quarter, margins within most of our businesses were impacted
by slow industrial demand and typical seasonality. Refining margins improved on
a higher Maya 2-1-1 crack spread and relatively strong prices for naphtha and
coke. Our Technology segment achieved record licensing revenues, contributing to
the most profitable year in the Company's history for the segment.
In 2019, we developed opportunities to expand into new markets by leveraging our
technologies to strengthen our position in Asia. In June, we announced new
polypropylene capacity through our Thailand joint venture, HMC Polymers. In
September, we signed a joint venture Memorandum of Understanding ("MoU") with
Liaoning Bora Enterprise Group to build an integrated cracker and polyolefins
project expanding our footprint in the rapidly growing Chinese market. Recently,
we announced our intention to expand our existing partnership with Sinopec to
build a second propylene oxide and styrene monomer plant in China utilizing our
advantaged technology.
Significant items that affected results in 2019 relative to 2018 include:
•     Lower Olefins and Polyolefins-Americas ("O&P-Americas") segment results due
      to a decline in polyethylene margins while olefins margins improved;

• Olefins and Polyolefins-Europe, Asia, International ("O&P-EAI") segment

results decreased due to unfavorable foreign exchange impacts and lower

      income from equity investments;


•     Intermediates and Derivatives ("I&D") segment results declined due to

margin and volume decreases primarily driven by intermediate chemicals;

• Higher Advanced Polymer Solutions ("APS") segment results primarily due to

the contribution of results from A. Schulman product lines;

• Lower Refining segment results due to a decline in margins; and

• Higher Technology segment results due to increased licensing revenue.

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Other noteworthy items in 2019 include the following:

• Redeemed $1,000 million of our 5% senior notes due 2019;



•     Executed a three-year, $4,000 million senior unsecured delayed draw term
      loan credit facility, of which $1,950 million was outstanding as of
      December 31, 2019;


• Issued €1,000 million of long-term guaranteed notes used to refinance

$1,000 million of long-term debt and repay a portion of our outstanding

      short-term debt;



•     Issued $1,000 million of long-term guaranteed notes used to repay our
      indebtedness outstanding under our Term Loan due 2020;


• Repurchased $3.8 billion of shares, primarily through the completion of a

      tender offer;


• Increased quarterly dividend from $1.00 per share to $1.05 per share in the

      second quarter;



• Commenced commissioning of our Hyperzone high density polyethylene plant; and

• Continued construction of our new PO/TBA plant at our Channelview, Texas

facility, which is on track to be completed in late 2021.

Results of operations for the periods discussed are presented in the table below.

                                                   Year Ended December 31,
Millions of dollars                                  2019             2018
Sales and other operating revenues              $     34,727$ 39,004
Cost of sales                                         29,301         32,529
Selling, general and administrative expenses           1,199          1,129
Research and development expenses                        111            115
Operating income                                       4,116          5,231
Interest expense                                        (347 )         (360 )
Interest income                                           19             45
Other income, net                                         39            106
Income from equity investments                           225            289
Provision for income taxes                               648            613
Income from continuing operations                      3,404          4,698
Loss from discontinued operations, net of tax             (7 )           (8 )
Net income                                      $      3,397$  4,690




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RESULTS OF OPERATIONS
Revenues-Revenues decreased $4,277 million, or 11%, in 2019 compared to 2018.
Average sales prices were lower for most of our products as sales prices
generally correlate with crude oil prices, which decreased relative to 2018.
These lower prices led to a revenue decrease of 10% in 2019. Lower sales volumes
resulted in a revenue decrease of 2% relative to 2018. Unfavorable foreign
exchange impacts in 2019 resulted in a revenue decrease of 2% relative to the
prior period. These decreases were partially offset by the acquired operations
of A. Schulman, which contributed an additional 3%, or $1,304 million, of
revenues in 2019 compared to 2018.
Cost of Sales-Cost of sales decreased $3,228 million, or 10%, in 2019 compared
to 2018. This decrease in cost of sales is primarily due to lower feedstock and
energy costs. Costs for crude oil, heavy liquid feedstocks and natural gas
liquids ("NGLs") and other feedstocks were lower in 2019 relative to 2018. This
decrease corresponds with the decrease in revenues as discussed above.
Fluctuations in our cost of sales are generally driven by changes in feedstock
and energy costs. Feedstock and energy related costs generally represent
approximately 75% to 80% of cost of sales, other variable costs account for
approximately 10% of cost of sales on an annual basis and fixed operating costs,
consisting primarily of expenses associated with employee compensation,
depreciation and amortization, and maintenance, range from approximately 10% to
15% in each annual period.
In 2019, our O&P-Americas segment and APS segment recognized lower of cost or
market ("LCM") inventory valuation charges of $25 million and $8 million,
respectively, primarily due to a decline in domestic polyethylene prices. Cost
of sales also includes $23 million related to A. Schulman integration costs
incurred during 2019.
Depreciation and amortization increased $71 million, or 6%, in 2019 compared to
2018. This increase is primarily due to the addition of A. Schulman assets
acquired in August 2018. In 2020, we estimate depreciation and amortization
charges will increase approximately 15% due to the completion of various capital
projects, including our Hyperzone project.
SG&A Expense-Selling, general and administrative ("SG&A") expenses increased $70
million in 2019 compared to 2018. Higher SG&A costs related to operating the A.
Schulman assets acquired in August 2018 for a full year which resulted in a $115
million, or 10%, increase. Additionally, integration costs increased by $20
million compared to 2018. These increased costs were partially offset by a 5%
decline in evaluation and pre-project planning costs of certain growth projects
and a 2% decline in employee-related expenses, relative to 2018.
Operating Income-Operating income decreased $1,115 million in 2019 compared to
2018. Operating income for our O&P-Americas, I&D, Refining, APS and O&P-EAI
segments declined by $474 million, $467 million, $212 million, $39 million and
$9 million, respectively, relative to 2018. These decreases were partially
offset by an increase in operating income in our Technology segment of $90
million. Operating results for each of our business segments are reviewed
further in the "Segment Analysis" section below.
Other Income, Net-Other income, net decreased $67 million in 2019 compared to
2018, which included a $36 million gain on the sale of our carbon black
subsidiary in France. In addition, foreign currency exchange rate fluctuations
and pension and other postretirement benefits decreased Other income by $15
million and $13 million, respectively, relative to 2018.
Income from Equity Investments-Our income from equity investments decreased $64
million in 2019 primarily due to reduced polyolefin spreads for our joint
ventures in our O&P-EAI segment.


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Income Taxes-Our effective income tax rates of 16.0% in 2019 and 11.5% in 2018
resulted in tax provisions of $648 million and $613 million, respectively.
We monitor tax law changes and the potential impact to our results of
operations. There continues to be increased attention to the tax practices of
multinational companies, including certain provisions of H.R.1, also known as
the U.S. Tax Cuts and Jobs Act (the "Tax Act"), the European Union's state aid
investigations, proposals by the Organization for Economic Cooperation and
Development with respect to base erosion and profit shifting, and European 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.
Our effective income tax rate fluctuates based on, among other factors, changes
in pre-tax income in countries with varying statutory tax rates, the U.S.
domestic production activity deduction that applied to periods prior to 2018,
changes in valuation allowances, changes in foreign exchange gains/losses, the
amount of exempt income and changes in unrecognized tax benefits associated with
uncertain tax positions.
Our exempt income primarily includes interest income, export incentives, and
equity earnings of our joint ventures. Interest income earned by certain of our
European subsidiaries through intercompany financings is either untaxed or taxed
at rates substantially lower than the U.S. statutory rate. Export incentives
relate to tax benefits derived from elections and structures available for U.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, including changes with respect to proposed
Treasury regulations under the Tax Act if finalized. Foreign exchange
gains/losses have a permanent impact on our effective income tax rate that can
cause unpredictable movement in our effective income tax rate. We continue to
maintain valuation allowances in various jurisdictions totaling $85 million as
of 2019, which could impact our effective income tax rate in the future. We
believe our effective income tax rate for 2020 will be approximately 20%.
The 2019 effective income tax rate of 16.0%, which was lower than the U.S.
statutory tax rate of 21%, was favorably impacted by exempt income (-4.5%), a
tax benefit related to a patent box ruling (-1.6%), a loss on the liquidation of
an entity (-1.3%), and changes in unrecognized tax benefits associated with
uncertain tax positions (-1.0%). These favorable items were partially offset by
the effects of earnings in various countries, notably in Europe, with higher
statutory tax rates (1.6%) and U.S. state and local income taxes (0.7%).
During 2019, we recognized a $113 million non-cash benefit to our effective tax
rate primarily as a result of the expiration of certain statutes of limitations.
This amount consists of the recognition of $100 million of previously
unrecognized tax benefits and the release of $13 million of previously accrued
interest.
The 2018 effective income tax rate of 11.5%, which was lower than the U.S.
statutory tax rate of 21%, was favorably impacted by changes in unrecognized tax
benefits associated with uncertain tax positions (-6.0%) and exempt income
(-5.6%). These favorable items were partially offset by the effects of earnings
in various countries, notably in Europe, with higher statutory tax rates (1.7%)
and U.S. state and local income taxes (1.0%).
During 2018, we entered into various audit settlements impacting specific
uncertain tax positions. These audit settlements resulted in a $358 million
non-cash benefit to our effective tax rate consisting of the recognition of $299
million of previously unrecognized tax benefits as a reduction for tax positions
of prior years and the release of $59 million of previously accrued interest.


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                              Comprehensive Income
We had comprehensive income of $2,976 million in 2019 and $4,682 million in
2018. Comprehensive income decreased by $1,706 million in 2019 compared to 2018,
primarily due to lower net income, net unfavorable changes in defined pension
and other postretirement benefits, and net unfavorable impacts of financial
derivative instruments primarily driven by periodic changes in benchmark
interest rates. These decreases were partially offset by net less unfavorable
impacts of unrealized changes in foreign currency translation adjustments.
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 decreased during
2019 resulting in net losses as reflected in the Consolidated Statements of
Comprehensive Income. These net losses include pre-tax gains of $26 million in
2019, which represent the effective portion of our net investment hedges.
In 2019, the cumulative after-tax effect of our derivatives designated as cash
flow hedges was a net loss of $132 million. The strengthening of the U.S. dollar
against the euro in 2019 and periodic changes in benchmark interest rates
resulted in a pre-tax gain of $109 million related to our cross-currency swaps.
A $40 million pre-tax loss related to our cross-currency swaps was reclassified
to Other income, net in 2019. In 2019, a pre-tax loss of $223 million related to
forward-starting interest rate swaps was driven by changes in benchmark interest
rates. The remaining change relates to our commodity cash flow hedges.
We recognized defined benefit pension and other post-retirement benefit plans
pre-tax losses of $361 million in 2019 and pre-tax gains of $41 million in 2018,
primarily due to the fluctuations in the discount rate assumption used in
determining the net benefit liabilities for our pension and other
post-retirement benefit plans. See Note 16 to the Consolidated Financial
Statements for additional information regarding net actuarial losses.


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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 (losses) and
components of pension and other postretirement benefit costs other than service
cost, are included in "Other." For additional information related to our
operating segments, as well as a reconciliation of EBITDA to its nearest
generally accepted accounting principles ("GAAP") measure, Income from
continuing operations before income taxes, see Note 22 to our Consolidated
Financial Statements.
Our continuing operations are managed through six reportable segments:
O&P-Americas, O&P-EAI, I&D, APS, Refining and Technology. Results for our APS
segment incorporates the businesses acquired from A. Schulman beginning August
21, 2018. The following tables reflect selected financial information for our
reportable segments.
                                           Year Ended December 31,
Millions of dollars                          2019             2018
Sales and other operating revenues:
O&P-Americas                            $      8,435$ 10,408
O&P-EAI                                        9,504         10,838
I&D                                            7,834          9,588
APS                                            4,850          4,024
Refining                                       8,251          9,157
Technology                                       663            583
Other, including segment eliminations         (4,810 )       (5,594 )
Total                                   $     34,727$ 39,004
Operating income (loss):
O&P-Americas                            $      1,777$  2,251
O&P-EAI                                          673            682
I&D                                            1,249          1,716
APS                                              290            329
Refining                                        (240 )          (28 )
Technology                                       374            284
Other, including segment eliminations             (7 )           (3 )
Total                                   $      4,116$  5,231




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                                                 Year Ended December 31,
Millions of dollars                               2019              2018
Depreciation and amortization:
O&P-Americas                                 $        470$        442
O&P-EAI                                               208                208
I&D                                                   295                287
APS                                                   133                 69
Refining                                              169                192
Technology                                             37                 43
Total                                        $      1,312$      1,241
Income from equity investments:
O&P-Americas                                 $         46       $         58
O&P-EAI                                               172                225
I&D                                                     7                  6
Total                                        $        225$        289
Other income, net:
O&P-Americas                                 $          9       $         11
O&P-EAI                                                 9                 48
I&D                                                     6                  2
APS                                                     1                  2
Refining                                                6                  3
Technology                                              -                  1
Other, including intersegment eliminations              8                 39
Total                                        $         39       $        106
EBITDA:
O&P-Americas                                 $      2,302$      2,762
O&P-EAI                                             1,062              1,163
I&D                                                 1,557              2,011
APS                                                   424                400
Refining                                              (65 )              167
Technology                                            411                328
Other, including intersegment eliminations              1                 36
Total                                        $      5,692$      6,867


Olefins and Polyolefins-Americas Segment
Overview-EBITDA declined in 2019 relative to 2018 primarily due to lower
polyethylene results, partially offset by improved olefin results.
In calculating the impact of margin and volume on EBITDA, consistent with
industry practice, management offsets revenues and volumes related to ethylene
co-products against the cost to produce ethylene. Volume and price impacts of
ethylene co-products are reported in margin. Ethylene is a major building block
of olefins and polyolefins and as such, ethylene sales volumes and prices and
our internal cost of ethylene production are included in management's assessment
of the segment's performance.


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Ethylene Raw Materials-Ethylene and its co-products are produced from two major
raw material groups:
•     NGLs, principally ethane and propane, the prices of which are generally

affected by natural gas prices; and

• crude oil-based liquids ("liquids" or "heavy liquids"), including naphtha,

      condensates and gas oils, the prices of which are generally related to
      crude oil prices.


Although prices of these raw materials are generally related to crude oil and
natural gas prices, during specific periods the relationships among these
materials and benchmarks may vary significantly. We have significant flexibility
to vary the raw material mix and process conditions in our U.S. olefins plants
in order to maximize profitability as market prices for both feedstocks and
products change.
Strong supplies from the U.S. shale gas/oil boom resulted in ethane being a
preferred feedstock in our U.S. plants in 2019. Ethane remained the preferred
U.S. feedstock for ethylene despite higher prices driven by increased demand
from newly-constructed U.S. olefins units and supply constraints in the Gulf
Coast NGL fractionation and pipeline systems. In 2019 and 2018, we produced
approximately 80% of our ethylene from ethane.
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.
                                          Year Ended December 31,
Millions of dollars                           2019              2018
Sales and other operating revenues   $      8,435$ 10,408
Income from equity investments                 46                   58
EBITDA                                      2,302                2,762


Revenues-Revenues decreased by $1,973 million, or 19%, in 2019 compared to 2018.
Average olefins and polyethylene sales prices were lower in 2019 compared to
2018 due to increased market supply stemming from new industry capacity
additions and, to a lesser extent, a lower oil price environment. Polypropylene
sales prices decreased with declining propylene feedstock prices. These lower
sales prices were responsible for a revenue decrease of 18% in 2019. Lower sales
volumes, driven mainly by planned downtime at our Matagorda, Texas and Clinton,
Iowa facilities, accompanied by softer demand, also led to a revenue decrease of
1% in 2019.
EBITDA-EBITDA decreased by $460 million, or 17%, in 2019 compared to 2018.
Polyethylene results declined resulting in a 27% decrease in EBITDA driven by a
$261 per ton reduction in price spreads over ethylene as a result of increased
market supply. An offsetting increase in olefin results increased EBITDA by 8%
as ethylene margins increased by approximately $75 per ton primarily due to
lower feedstock costs partially offset by a lower propylene price. The segment
recognized LCM charges of $25 million in 2019 primarily due to a decline in
domestic polyethylene prices.
Planned maintenance during the first and second quarters of 2020 is expected to
reduce EBITDA by approximately $25 million and $30 million, respectively. In
addition, we expect additional capacity from our Hyperzone polyethylene plant in
2020.


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Olefins and Polyolefins-Europe, Asia, International Segment
Overview-EBITDA declined in 2019 compared to 2018 mainly as a result of lower
combined polyolefin results, lower income from equity investments and
unfavorable foreign exchange impacts, partially offset by higher olefin results.
In calculating the impact of margin and volume on EBITDA, consistent with
industry practice, management offsets revenues and volumes related to ethylene
co-products against the cost to produce ethylene. Volume and price impacts of
ethylene co-products are reported in margin. Ethylene is a major building block
of our olefins and polyolefins and as such, ethylene sales volumes and prices
and our internal cost of ethylene production are included in management's
assessment of the segment's performance.
Ethylene Raw Materials-In Europe, heavy liquids are the primary raw materials
for our ethylene production. In 2019 and 2018, we continued to benefit by
sourcing advantaged NGLs as market opportunities arose.
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.
                                        Year Ended December 31,
Millions of dollars                         2019              2018
Sales and other operating revenues $      9,504$ 10,838
Income from equity investments              172                  225
EBITDA                                    1,062                1,163


Revenues-Revenues in 2019 decreased by $1,334 million, or 12%, compared to 2018.
Average sales prices in 2019 were lower across most products as sales prices
generally correlate with crude oil prices, which on average, decreased compared
to 2018. These lower average sales prices were responsible for revenue decreases
of 10%. Higher sales volumes in 2019 resulted in 2% higher revenue driven by an
absence of planned maintenance compared to 2018. Foreign exchange impacts, on
average, were unfavorable and led to a revenue decrease of 4% in 2019.
EBITDA-EBITDA decreased by $101 million, or 9%, in 2019 compared to 2018.
Decreased polyethylene results led to a 5% decrease in EBITDA largely due to a
decline in margins attributed to lower price spreads over ethylene of $35 per
ton. A decline in polypropylene results decreased EBITDA by 4% as price spreads
over propylene decreased $48 per ton. Joint venture equity income decreased
largely due to reduced polyolefin spreads resulting in a 5% decrease in EBITDA.
These decreases were partially offset by higher olefins results which led to a
5% increase of EBITDA. This increase was primarily due to increased volumes
driven by improved reliability with planned and unplanned maintenance impacting
2018 results. In addition, unfavorable foreign exchange impacts reduced EBITDA
by 5% in 2019.

Fourth quarter 2019 results decreased $147 million, or 51%, versus the third
quarter 2019. This change was primarily driven by a decline in olefin results as
ethylene margins decreased due to higher feedstock costs and a lower propylene
price.
Planned maintenance during the third and fourth quarters of 2020 is expected to
reduce EBITDA by approximately $15 million in each of the two quarters.


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Intermediates and Derivatives Segment
Overview-EBITDA for our I&D segment was lower in 2019 compared to 2018, largely
driven by margin and volume decreases primarily in our intermediate chemicals
business.
The following table sets forth selected financial information for the I&D
segment including Income from equity investments, which is a component of
EBITDA.
                                        Year Ended December 31,
Millions of dollars                         2019               2018
Sales and other operating revenues $      7,834$ 9,588
Income from equity investments                7                    6
EBITDA                                    1,557                2,011


Revenues-Revenues for 2019 decreased by $1,754 million, or 18%, compared to
2018. Lower average sales prices in 2019 for most products, which reflect the
impacts of lower feedstock and energy costs, were responsible for a revenue
decrease of 12% compared to 2018 which benefited from an elevated level of
planned and unplanned industry outages. Lower sales volumes resulted in a 4%
decrease in revenues in 2019. Foreign exchange impacts, on average, were
unfavorable and led to a revenue decrease of 2%.
EBITDA-EBITDA decreased by $454 million, or 23%, in 2019 compared to 2018.
Decreased Intermediate Chemicals results led to an EBITDA decrease of 25%. This
decrease was a result of lower margins across most businesses, in particular
styrene, as demand weakened in 2019. Lower Propylene Oxide and Derivatives
results decreased EBITDA by 5% largely due to lower volumes as demand declined.
These declines in EBITDA were partially offset by higher Oxyfuels and Related
Products results mainly due to improved margins driven by price improvements and
low-cost butane, resulting in a 8% increase in EBITDA. Unfavorable foreign
exchange impacts also reduced EBITDA by an additional 2% in 2019.
In 2020, we have planned maintenance that is expected to reduce EBITDA by
approximately $10 million in each of the first and second quarters and $25
million in each of the third and fourth quarters.
Advanced Polymer Solutions Segment
Overview-EBITDA for our APS segment increased in 2019 compared to 2018,
primarily due to the contribution of EBITDA stemming from the August 2018
acquisition of A. Schulman, partly offset by integration costs and lower volumes
across most products.
The following table sets forth selected financial information for the APS
segment:
                                        Year Ended December 31,
Millions of dollars                         2019               2018
Sales and other operating revenues $      4,850$ 4,024
EBITDA                                      424                  400


Revenues-Revenues increased in 2019 by $826 million, or 21%, compared to 2018.
Excluding the impacts of the August 2018 acquisition of A. Schulman, sales
volumes declined in 2019 stemming from lower market demand for advanced polymer
products, including lower automotive and roofing demand, which led to a 7%
decrease in revenue in 2019. Lower average sales prices, as well as unfavorable
foreign exchange impacts, each resulted in a 4% decrease in revenue. These
declines were offset by $1,304 million of additional revenues in the APS segment
due to a full year of operating the A. Schulman assets in 2019 compared to a
partial year in 2018 following the acquisition in August 2018.


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EBITDA-EBITDA increased in 2019 by $24 million, or 6%, compared to 2018.
Compounding and Solutions results improved resulting in a 27% increase of
EBITDA. This increase was largely due to an additional $108 million of EBITDA
contributed by the operations of A. Schulman in 2019. Advanced Polymers results
reduced EBITDA by 9% largely due to lower volumes driven by reduced automotive
and roofing demand. Further, transaction and integration costs related to the
acquisition of A. Schulman were $47 million higher in 2019 which reduced EBITDA
by 12% relative to 2018. Unfavorable foreign exchange impacts also reduced
EBITDA by an additional 3% in 2019.
Refining Segment
Overview-EBITDA for our Refining segment decreased due to lower industry margins
driven by a compressed Maya differential, lower gasoline crack spreads and lower
byproduct margins compared to 2018.
The following table sets forth selected financial information and heavy crude
processing rates for the Refining segment and the U.S. refining market margins
for the applicable periods. Light Louisiana Sweet "LLS" is a light crude oil,
while "Maya" is a heavy crude oil.
                                       Year Ended December 31,
Millions of dollars                     2019              2018

Sales and other operating revenues $ 8,251$ 9,157 EBITDA

                                      (65 )              167

Thousands of barrels per day
Heavy crude oil processing rates            263                231

Market margins, dollars per barrel
Light crude oil-2-1-1              $      12.44$      12.35
Light crude oil-Maya differential          5.14               7.50
Total Maya 2-1-1                   $      17.58$      19.85


Revenues-Revenues decreased by $906 million, or 10%, in 2019 compared to 2018.
Lower product prices led to a revenue decrease of 7% relative to 2018, due to an
average crude oil price decrease of approximately $6 per barrel in 2019.
Although heavy crude oil processing rates increased during 2019, overall sales
volumes decreased, driven by reduced rates on conversion units, due to crude
selection and the optimization of refinery operations. This reduction in
conversion rates resulted in a further revenue decrease of 3% during 2019.
EBITDA-EBITDA decreased by $232 million, or 139%, in 2019 compared to 2018.
Lower refining margins resulted in a 200% decrease in EBITDA relative to 2018.
Unusually low discounts for heavy sour crude oils on the U.S. Gulf Coast led to
a lower light-to-heavy crude price differential and compression in the benchmark
Maya 2-1-1 market margin. This compression, combined with the Houston refinery's
configuration which limits the amount of light sweet crude that can be
processed, created a challenging market for our Refining segment. Margins were
further compressed by a negative byproduct impact largely driven by weakness in
Naphtha and refinery grade propylene. This margin-driven decrease in EBITDA was
partly offset by a 61% increase associated with the rise in heavy crude oil
processing rates due to the completion of planned maintenance in 2018.

Fourth quarter 2019 EBITDA improved $106 million, or 126%, representing a
significant improvement compared to the fourth quarter 2018, which experienced a
loss of $84 million. Margin improvements resulted in a 76% increase in EBITDA as
the Maya 2-1-1 crack spread increased by $8.55 per barrel to $19.44 per barrel.
Heavy crude oil processing rates increased by 83 thousand barrels per day in the
fourth quarter of 2019 due to the completion of planned maintenance in the
second half of 2018. This volume driven improvement resulted in a 50% increase
in EBITDA in the fourth quarter of 2019.


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We anticipate improvements in our refining results in 2020 associated with the
global adoption of International Maritime Organization ("IMO") 2020.
Technology Segment
Overview-The Technology segment recognizes revenues related to the sale of
polyolefin catalysts and the licensing of chemical and polyolefin process
technologies. These revenues are offset in part by the costs incurred in the
production of catalysts, licensing and services activities and research and
development ("R&D") activities. In 2019 and 2018, our Technology segment
incurred approximately 50% and 55%, respectively, of all R&D costs. EBITDA for
our Technology segment improved in 2019 compared to 2018 largely due to higher
licensing revenues.
The following table sets forth selected financial information for the Technology
segment.
                                         Year Ended December 31,
Millions of dollars                           2019                2018
Sales and other operating revenues $        663$ 583
EBITDA                                      411                    328


Revenues-Revenues increased by $80 million, or 14%, in 2019 compared to 2018.
Higher licensing revenues resulted in an increase of 18% in 2019 compared to
2018. Increases in average catalyst sales prices resulted in revenue increases
of 4% in 2019. Lower catalyst sales volumes, driven by the timing of customer
orders, resulted in a 3% decrease in revenue in 2019. Foreign exchange impacts
that, on average, were unfavorable led to a revenue decrease of 5%.
EBITDA-EBITDA in 2019 increased by $83 million, or 25%, compared to 2018. This
increase was mainly driven by higher licensing revenues as several licensing
agreements signed in 2018, primarily in China, were recognized in revenue during
2019.


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FINANCIAL CONDITION
Operating, investing and financing activities of continuing operations, which
are discussed below, are presented in the following table:
                          Year Ended December 31,
Millions of dollars        2019             2018

Source (use) of cash: Operating activities $ 4,961$ 5,471 Investing activities (1,635 ) (3,559 ) Financing activities (2,835 ) (3,008 )



Operating Activities-Cash of $4,961 million generated by operating activities in
2019 reflected earnings adjusted for non-cash items, payments for employee
bonuses, income taxes, and cash consumed by the main components of working
capital-Accounts receivable, Inventories and Accounts payable. A $113 million
non-cash reduction in unrecognized tax benefits is reflected in Other operating
activities in 2019. For additional information on this matter, see Note 18 to
the Consolidated Financial Statements.
In 2019, the main components of working capital consumed $13 million of cash
driven by a decrease in Accounts payable and an increase in Inventories,
partially offset by a decrease in Accounts receivable. The decrease in Accounts
payable was primarily driven by weaker demand in our APS segment and a decrease
in certain raw material costs in our I&D segment. The increase in Inventories
was a result of inventory builds as a result of planned and unplanned
maintenance in our O&P-EAI segment. The decrease in Accounts receivable was
driven by decreases in our APS, I&D and O&P-Americas segments as a result of
unfavorable market conditions.
Cash of $5,471 million generated by operating activities in 2018 reflected
earnings adjusted for non-cash items and net cash provided by the main
components of working capital. A $358 million non-cash reduction in unrecognized
tax benefits is reflected in Other operating activities in 2018. For additional
information on this matter, see Note 18 to the Consolidated Financial
Statements.
In 2018, the main components of working capital provided $93 million of cash.
Lower Accounts receivable due primarily to lower sales volumes in our
O&P-Americas, O&P-EAI and I&D segments at year end and higher Accounts payable
due to higher feedstock prices were partially offset by an increase in
Inventories primarily due to the lower sales volumes at year end.
Investing Activities-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.
We received proceeds of $511 million and $423 million in 2019 and 2018,
respectively, upon the sale and maturity of certain of our available-for-sale
debt securities. Additionally, in 2019 and 2018, we received proceeds of $332
million and $97 million, respectively, on the sale of our investments in equity
securities. In 2019, we received proceeds of $527 million upon the maturity of
certain of our repurchase agreements.
In 2019 and 2018 we invested $108 million and $50 million, respectively, in debt
securities that are deemed available-for-sale. We also invested $33 million and
$64 million in equity securities in 2019 and 2018, respectively. Our investments
in available-for-sale debt securities and equity securities are classified as
Short-term investments.
Upon expiration in 2018, we settled foreign currency contracts with notional
values totaling €925 million which were designated as net investment hedges of
our investments in foreign subsidiaries. Payments to and proceeds from our
counterparties resulted in a net cash inflow of $30 million.
In August 2018, we acquired A. Schulman for $1,776 million, which is net of $81
million of cash acquired and a liability deemed as a component of the purchase
price.


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In October 2018, we received net cash proceeds of $37 million for the sale of
our carbon black subsidiary in France.
Capital Expenditures-The following table summarizes capital expenditures for the
periods presented:
                                                                   Year Ended December 31,
Millions of dollars                                                 2019                 2018
Capital expenditures by segment:
O&P-Americas                                               $      1,099$     1,079
O&P-EAI                                                             213                      248
I&D                                                               1,064                      409
APS                                                                  59                       62
Refining                                                            149                      250
Technology                                                           94                       48
Other                                                                16                        9

Consolidated capital expenditures of continuing operations $ 2,694

$ 2,105



In 2019 and 2018, our capital expenditures included construction related to our
PO/TBA plant at our Channelview, Texas facility and our Hyperzone polyethylene
plant at our La Porte, Texas facility, turnaround activities at several sites
and other plant improvement projects. The higher level of capital expenditures
for our I&D segment in 2019 compared to 2018 is largely due to the construction
of our PO/TBA plant.

In 2020, we expect to spend approximately $2.4 billion for capital expenditures
and investment in our U.S. and European PO joint ventures. The lower level of
expected capital expenditures in 2020 relative to 2019 is primarily due to the
reduction in spend related to our Hyperzone polyethylene plant. We will complete
construction of our Hyperzone project in early 2020. See Note 9 to the
Consolidated Financial Statements for additional information regarding our U.S.
and European PO joint ventures.
Financing Activities-In 2019 and 2018, we made payments of $3,752 million and
$1,854 million to acquire approximately 42.7 million and 19.2 million,
respectively, of our outstanding ordinary shares. We also made dividend payments
totaling $1,462 million and $1,554 million in 2019 and 2018, respectively. For
additional information related to our share repurchases and dividend payments,
see Note 20 to the Consolidated Financial Statements.
In September 2018, we repaid the $375 million 6.875% Senior Notes due June 2023
assumed in the acquisition of A. Schulman for a price of 105.156% of par.
In February 2019, LYB Americas Finance Company LLC ("LYB Americas Finance"), a
wholly owned subsidiary of LyondellBasell 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 by LyondellBasell 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 March 2019, LYB Americas Finance, a wholly owned subsidiary of LyondellBasell
N.V., entered into a three-year $4,000 million senior unsecured delayed draw
term loan credit facility that matures in March 2022 ("Term Loan due 2022").
Proceeds under this credit agreement, which is fully and unconditionally
guaranteed by LyondellBasell N.V., were used for general corporate purposes. In
July 2019, we borrowed $1,000 million under this facility along with $500
million from our U.S. Receivables Facility to partially fund the share
repurchase price paid pursuant to a modified Dutch Auction tender offer ("tender
offer"). In December 2019, we borrowed $1,950 million from our Term Loan due
2022 to repay amounts outstanding under our commercial paper program and $500
million outstanding under our U.S. Receivables Facility.


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In September 2019, LYB International Finance II B.V. ("LYB Finance II"), a
wholly owned finance subsidiary of LyondellBasell 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.
In October 2019, LYB International Finance III LLC ("LYB Finance III"), a wholly
owned finance subsidiary of LyondellBasell N.V., issued $1,000 million of 4.2%
guaranteed notes due 2049 (the "2049 Notes") at a discounted price of 98.488%.
Net proceeds from the sale of the notes of $974 million, along with commercial
paper and operating cash, was used to repay $2,000 million of the indebtedness
outstanding under our Term Loan due 2020.
Through the issuance and repurchase of commercial paper instruments under our
commercial paper program, we made net repayments of $549 million in 2019 and
received net proceeds of $810 million in 2018.
Additional information related to commercial paper and debt activity can be
found in the Liquidity and Capital Resources section below and in Note 13 to the
Consolidated Financial Statements.
In February 2019, we purchased the non-controlling interest in our subsidiary
that holds our La Porte, Texas methanol facility for $63 million.
In January 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 15 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Overview

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. 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 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.


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.
Cash and Liquid Investments
As of December 31, 2019, we had $1,054 million of unrestricted cash and cash
equivalents as well as marketable securities classified as Short-term
investments. At December 31, 2019, we held $363 million of cash in jurisdictions
outside of the U.S., principally in the United Kingdom and China. There are
currently no legal or economic restrictions that would materially impede our
transfers of cash.


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Credit Arrangements
At December 31, 2019, we had total debt, including current maturities, of
$12,062 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 $2,919 million
at December 31, 2019, which included the following:
•     $2,229 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. At December 31,

2019, we had $262 million of outstanding commercial paper, net of discount,

      no outstanding letters of credit and no outstanding borrowings under the
      facility; and

$690 million under our $900 millionU.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.
      This facility had no outstanding borrowings or letters of credit at
      December 31, 2019.


Our $2,500 million senior revolving credit facility contains customary covenants
and warranties, including specified restrictions on indebtedness and liens. In
addition, we are required to maintain a leverage ratio at the end of every
fiscal quarter of 3.50 to 1.00, or less, for the period covering the most recent
four quarters.
The U.S. Receivables Facility is subject to customary warranties and covenants,
including limits and reserves and the maintenance of specified financial ratios.
We are required to maintain a leverage ratio at the end of every fiscal quarter
of 3.50 to 1.00, or less, for the period covering the most recent four quarters.
Performance obligations under the facility are guaranteed by LyondellBasell N.V.
In March 2019, we entered into the Term Loan due 2022. Borrowings under the
credit agreement bear interest at either a base rate or LIBOR rate, as defined,
plus in each case, an applicable margin determined by reference to
LyondellBasell N.V.'s current credit ratings. The credit agreement contains
customary representations and warranties and contains certain restrictive
covenants regarding, among other things, secured indebtedness, subsidiary
indebtedness, mergers and sales of assets. In addition, we are required to
maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00, or
less, for the period covering the most recent four quarters.
In September 2019, we issued the 2026 Notes and the 2031 Notes. The 2026 Notes
and 2031 Notes may be redeemed before the date that is three months prior to the
scheduled maturity date at a redemption price equal to the greater of 100% of
the principal amount of the notes redeemed and the sum of the present values of
the remaining scheduled payments of principal and interest (discounted at the
applicable comparable government bond rate plus 30 basis points in the case of
the 2026 Notes and plus 35 basis points in the case of the 2031 Notes) on the
notes to be redeemed. The notes may also be redeemed on or after the date that
is three months prior to the scheduled maturity date of the notes at a
redemption price equal to 100% of the principal amount of the notes redeemed
plus accrued and unpaid interest. The notes are also redeemable upon certain tax
events.
In October 2019, we issued the 2049 Notes. The 2049 Notes may be redeemed before
the date that is six months prior to the scheduled maturity date at a redemption
price equal to the greater of 100% of the principal amount of the notes redeemed
and the sum of the present values of the remaining scheduled payments of
principal and interest (discounted at the applicable treasury yield plus 35
basis points) on the notes to be redeemed. The notes may also be redeemed on or
after the date that is six months prior to the final maturity date of the notes
at a redemption price equal to 100% of the principal amount of the notes
redeemed plus accrued and unpaid interest. The notes are also redeemable upon
certain tax events.


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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 and tri-party repurchase agreements, cash from operating activities,
proceeds from the issuance of debt, proceeds from asset divestitures, or a
combination thereof. 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.
For additional information, see Note 13 to our Consolidated Financial
Statements.
Share Repurchases

Upon completion of the tender offer in July 2019, we repurchased 35.1 million
ordinary shares at a tender offer price of $88.00 per share for a total of
$3,099 million, including $6 million of fees and expenses related to the tender
offer. In conjunction with the tender offer, we financed the share repurchase by
borrowing $1,000 million from our Term Loan due 2022, $500 million from our U.S.
Receivables Facility, and $1,280 million from our commercial paper program, with
the remainder funded by operating cash.
In September 2019, our shareholders approved a proposal to authorize us to
repurchase up to 33.3 million of our ordinary shares through March 12, 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 2019,
we purchased approximately 42.7 million shares under our share repurchase
authorizations for approximately $3,728 million.
As of February 18, 2020, we had approximately 33.3 million shares remaining
under the current authorization. The timing and amounts of additional shares
repurchased will be determined based on our evaluation of market conditions and
other factors, including any additional authorizations approved by our
shareholders. For additional information related to our share repurchase
authorization, see Note 20 to the Consolidated Financial Statements.

Capital Budget


In 2020, we expect to spend approximately $2.4 billion in our capital budget,
which includes approximately $75 million for investments in our U.S. and
European PO joint ventures. Our capital budget includes investment to build our
world-scale PO/TBA plant in Channelview, Texas which will have the capacity to
produce 470 thousand tons of PO and 1.0 million tons of tertiary butyl alcohol.
We broke ground on this project in August 2018 and anticipate the project will
be completed in late 2021. See Note 9 to the Consolidated Financial Statements
for additional information regarding our U.S. and European PO joint ventures.


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Contractual and Other Obligations-The following table summarizes, as of December 31, 2019, our future minimum payments for long-term debt, including current maturities, short-term debt, and contractual and other obligations:


                                                                  Payments 

Due By Period

                                               Less than 1                                      More than 5
Millions of dollars                Total           Year          1-3 Years       3-5 Years         Years
Total debt                      $  12,167$        448$     3,795$     1,751$     6,173
Interest on total debt              6,306              468             841             616           4,381
Contract liabilities                  124              103              18               -               3
Other                               1,801            1,235             115              33             418
Deferred income taxes               2,015              371             279             250           1,115
Other obligations:
Purchase obligations:
Take-or-pay contracts              26,004            3,019           5,568           5,434          11,983
Other contracts                    22,065            6,650           6,260           2,727           6,428
Operating leases                    2,422              479             549             423             971
Total                           $  72,904$     12,773$    17,425$    11,234$    31,472


Total Debt-Our debt includes unsecured senior notes, guaranteed notes and
various other U.S. and non-U.S. loans. See Note 13 to the Consolidated Financial
Statements for a discussion of covenant requirements under our credit facilities
and indentures and additional information regarding our debt facilities.
Interest on Total Debt-Our debt and related party debt agreements contain
provisions for the payment of monthly, quarterly or semi-annual interest at a
stated or variable rate of interest over the term of the debt. Interest on
variable rate debt is calculated based on the rate in effect as of December 31,
2019.
Pension and other Postretirement Benefits-We maintain several defined benefit
pension plans, as described in Note 16 to the Consolidated Financial Statements.
Many of our U.S. and non-U.S. plans are subject to minimum funding requirements;
however, the amounts of required future contributions for all our plans are not
fixed and can vary significantly due to changes in economic assumptions,
liability experience and investment return on plan assets. As a result, we have
excluded pension and other postretirement benefit obligations from the
Contractual and Other Obligations table above. Our annual contributions may
include amounts in excess of minimum required funding levels. Contributions to
our non-U.S. plans in years beyond 2020 are not expected to be materially
different than the expected 2020 contributions disclosed in Note 16 to the
Consolidated Financial Statements. At December 31, 2019, the projected benefit
obligation for our pension plans exceeded the fair value of plan assets by
$1,287 million. Subject to future actuarial gains and losses, as well as future
asset earnings, we, together with our consolidated subsidiaries, will be
required to fund the discounted obligation of $1,287 million in future years. We
contributed $97 million and $100 million to our pension plans in 2019 and 2018,
respectively. We provide other postretirement benefits, primarily medical
benefits to eligible participants, as described in Note 16 to the Consolidated
Financial Statements. We pay other unfunded postretirement benefits as incurred.
Contract Liabilities-We are obligated to deliver products or services in
connection with sales agreements under which customer payments were received
before transfer of control to the customers occurs. These contract liabilities
will be recognized in earnings when control of the product or service is
transferred to the customer, which range from 1 to 20 years. The long-term
portion of such advances totaled $21 million as of December 31, 2019.
Other-Other primarily consists of accruals for taxes and employee-related
expenses.


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Deferred Income Taxes-The scheduled settlement of the deferred tax liabilities
shown in the table is based on the scheduled reversal of the underlying
temporary differences. Actual cash tax payments will vary depending upon future
taxable income. See Note 18 to the Consolidated Financial Statements for
additional information related to our deferred tax liabilities.
Purchase Obligations-We are party to various obligations to purchase products
and services, principally for raw materials, utilities and industrial gases.
These commitments are designed to ensure sources of supply and are not expected
to be in excess of normal requirements. The commitments are segregated into
take-or-pay contracts and other contracts. Under the take-or-pay contracts, we
are obligated to make minimum payments whether or not we take the product or
service. Other contracts include contracts that specify minimum quantities;
however, in the event that we do not take the contractual minimum, we are only
obligated for any resulting economic loss suffered by the vendor. The payments
shown for the other contracts assume that minimum quantities are purchased. For
contracts with variable pricing terms, the minimum payments reflect the contract
price at December 31, 2019.
Operating Leases-We lease various facilities and equipment under noncancelable
lease arrangements for various periods. See Note 14 to the Consolidated
Financial Statements for related lease disclosures.
CURRENT BUSINESS OUTLOOK
Our foundations of operational excellence, cost management and disciplined
capital allocation continue to serve us well in the current challenging
environment. We anticipate typical seasonal improvements for our businesses as
we progress through the second and third quarters of 2020. Favorable resolution
of trade policies and a rebound in industrial demand could provide significant
upside for our industry. We expect benefits from the IMO 2020 regulations for
our Houston Refinery and the completion of our new Hyperzone project in 2020.
RELATED PARTY TRANSACTIONS
We have related party transactions with our joint venture partners. We believe
that such transactions are effected on terms substantially no more or less
favorable than those that would have been agreed upon by unrelated parties on an
arm's length basis. See Note 5 to the Consolidated Financial Statements for
additional related party disclosures.
CRITICAL ACCOUNTING POLICIES
Management applies those accounting policies that it believes best reflect the
underlying business and economic events, consistent with accounting principles
generally accepted in the U.S. (see Note 2 to the Consolidated Financial
Statements). Our more critical accounting policies include those related to the
valuation of inventories, goodwill, accruals for long-term employee benefit
costs such as pension and other postretirement costs, and accruals for taxes
based on income. Inherent in such policies are certain key assumptions and
estimates made by management. Management periodically updates its estimates used
in the preparation of the financial statements based on its latest assessment of
the current and projected business and general economic environment.
Inventories-We account for our raw materials, work-in-progress and finished
goods inventories using the last-in, first-out ("LIFO") method of accounting.
The cost of raw materials, which represents a substantial portion of our
operating expenses, and energy costs generally follow price trends for crude oil
and/or natural gas. Crude oil and natural gas prices are subject to many
factors, including changes in economic conditions.
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. Due to natural inventory
composition changes, variation in pricing from period to period does not
necessarily result in a linear lower of cost or market ("LCM") impact.


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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
composition and mix of materials on hand 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.
As indicated above, fluctuation in the prices of crude oil, natural gas and
correlated products from period to period may result in the recognition of
charges to adjust the value of inventory to the lower of cost or market in
periods of falling prices and the reversal of those charges in subsequent
interim periods as market prices recover. Accordingly, our cost of sales and
results of operations may be affected by such fluctuations.
During the fourth quarter of 2019, EBITDA for our O&P-Americas segment and APS
segment results include a non-cash, LCM inventory valuation charges of $25
million and $8 million, respectively, primarily due to a decline in domestic
polyethylene prices.
Goodwill-As of December 31, 2019, we have goodwill of $1,891 million. Of this
amount, $1,357 million is related to the acquisition of A. Schulman in 2018,
which is included in our APS segment, and is mainly attributed to acquired
workforce and expected synergies. The remaining goodwill at December 31, 2019,
primarily represents the tax effect of the differences between the tax and book
bases of our assets and liabilities resulting from the revaluation of those
assets and liabilities to fair value in connection with the Company's emergence
from bankruptcy and fresh-start accounting in 2010. Additional information on
the amount of goodwill allocated to our reporting units appears in Note 8 and
Note 22 to the Consolidated Financial Statements.
We evaluate the recoverability of the carrying value of goodwill annually or
more frequently if events or changes in circumstances indicate that the carrying
amount of the goodwill of a reporting unit may not be fully recoverable. We have
the option to first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its
carrying value. Qualitative factors assessed for each of the reporting units
include, but are not limited to, changes in long-term commodity prices, discount
rates, competitive environments, planned capacity, cost factors such as raw
material prices, and financial performance of the reporting units. If the
qualitative assessment indicates that it is more likely than not that the
carrying value of a reporting unit exceeds its estimated fair value, a
quantitative test is required.
We also have the option to proceed directly to the quantitative impairment test.
Under the quantitative impairment test, the fair value of each reporting unit,
calculated using a discounted cash flow model, is compared to its carrying
value, including goodwill. The discounted cash flow model inherently utilizes a
significant number of estimates and assumptions, including operating margins,
tax rates, discount rates, capital expenditures and working capital changes. If
the carrying value of the reporting unit including goodwill exceeds its fair
value, an impairment charge equal to the excess would be recognized, up to a
maximum amount of goodwill allocated to that reporting unit.
For 2019 and 2018, management performed a qualitative impairment assessment of
our reporting units, which indicated that the fair value of our reporting units
was more likely than not greater than their carrying value including goodwill.
Accordingly, a quantitative goodwill impairment test was not required, and no
goodwill impairment was recognized in 2019 or 2018.
Long-Term Employee Benefit Costs-Our costs for long-term employee benefits,
particularly pension and other postretirement medical and life insurance
benefits, are incurred over long periods of time, and involve many uncertainties
over those periods. The net periodic benefit cost attributable to current
periods is based on several assumptions about such future uncertainties and is
sensitive to changes in those assumptions. It is management's responsibility,
often with the assistance of independent experts, to select assumptions that in
its judgment represent its best estimates of the future effects of those
uncertainties and to review those assumptions periodically to reflect changes in
economic or other factors.


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The current benefit service costs, as well as the existing liabilities, for
pensions and other postretirement benefits are measured on a discounted present
value basis. The discount rate is a current rate, related to the rate at which
the liabilities could be settled. Our assumed discount rate is based on yield
information for high-quality corporate bonds with durations comparable to the
expected cash settlement of our obligations. For the purpose of measuring the
benefit obligations at December 31, 2019, we used a weighted average discount
rate of 3.16% for the U.S. plans, which reflects the different terms of the
related benefit obligations. The weighted average discount rate used to measure
obligations for non-U.S. plans at December 31, 2019, was 1.03%, reflecting
market interest rates. The discount rates in effect at December 31, 2019, will
be used to measure net periodic benefit cost during 2020.
The benefit obligation and the periodic cost of other postretirement medical
benefits are also measured based on assumed rates of future increase in the per
capita cost of covered health care benefits. As of December 31, 2019, the
assumed rate of increase for our U.S. plans was 6.1%, decreasing to 4.5% in 2038
and thereafter. However, changing the assumed health care cost trend rates by
one percentage point in each year would increase or decrease the accumulated
other postretirement benefit liability as of December 31, 2019, by $24 million
and $15 million, respectively, for non-U.S. plans and by less than $1 million
for U.S. plans. A one percentage point change would not have a material effect
on the aggregate service and interest cost components of the net periodic other
postretirement benefit cost for the year then ended.
The net periodic cost of pension benefits included in expense is affected by the
expected long-term rate of return on plan assets assumption. Investment returns
that are recognized currently in net income represent the expected long-term
rate of return on plan assets applied to a market-related value of plan assets,
which is defined as the market value of assets. The expected rate of return on
plan assets is a longer-term rate and is expected to change less frequently than
the current assumed discount rate, reflecting long-term market expectations,
rather than current fluctuations in market conditions.
The weighted average expected long-term rate of return on assets in our U.S.
plans of 7.50% is based on the average level of earnings that our independent
pension investment advisor advised could be expected to be earned over time. The
weighted average expected long-term rate of return on assets in our non-U.S.
plans of 2.79% is based on expectations and asset allocations that vary by
region. The asset allocations are summarized in Note 16 to the Consolidated
Financial Statements.
The actual rate of return on plan assets may differ from the expected rate due
to the volatility normally experienced in capital markets. Management's goal is
to manage the investments over the long term to achieve optimal returns with an
acceptable level of risk and volatility.
Net periodic pension cost recognized each year includes the expected asset
earnings, rather than the actual earnings or loss. Along with other gains and
losses, this unrecognized amount, to the extent it cumulatively exceeds 10% of
the projected benefit obligation for the respective plan, is recognized as
additional net periodic benefit cost over the average remaining service period
of the participants in each plan.
The following table reflects the sensitivity of the benefit obligations and the
net periodic benefit costs of our pension plans to changes in the actuarial
assumptions:
                                               Effects on                        Effects on Net
                                          Benefit Obligations                   Periodic Pension
                                                in 2019                           Costs in 2020
Millions of dollars                       U.S.          Non-U.S.            U.S.               Non-U.S.
Projected benefit obligations at
December 31, 2019                    $     1,965$     2,017     $          -         $            -
Projected net periodic pension costs
in 2020                                        -                -               29                     73
Discount rate increases by 100 basis
points                                      (180 )           (286 )             (6 )                   (8 )
Discount rate decreases by 100 basis
points                                       219              353                7                     23




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The sensitivity of our postretirement benefit plans obligations and net periodic
benefit costs to changes in actuarial assumptions are reflected in the following
table:
                                                 Effects on                            Effects on Net
                                             Benefit Obligations                      Periodic Benefit
                                                   in 2019                             Costs in 2020
Millions of dollars                        U.S.              Non-U.S.            U.S.               Non-U.S.
Projected benefit obligations at
December 31, 2019                    $        251         $         79     $          -         $             -
Projected net periodic benefit costs
in 2020                                         -                    -                6                       7
Discount rate increases by 100 basis
points                                        (22 )                  -               (2 )                     -
Discount rate decreases by 100 basis
points                                         26                    -                1                       -


Additional information on the key assumptions underlying these benefit costs
appears in Note 16 to the Consolidated Financial Statements.
Accruals for Taxes Based on Income-The determination of our provision for income
taxes and the calculation of our tax benefits and liabilities is subject to
management's estimates and judgments due to the complexity of the tax laws and
regulations in the tax jurisdictions in which we operate. Uncertainties exist
with respect to interpretation of these complex laws and regulations.
Deferred tax assets and liabilities are determined based on temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse.
We recognize future tax benefits to the extent that the realization of these
benefits is more likely than not. Our current provision for income taxes is
impacted by the recognition and release of valuation allowances related to net
deferred tax assets in certain jurisdictions. Further changes to these valuation
allowances may impact our future provision for income taxes, which will include
no tax benefit with respect to losses incurred and no tax expense with respect
to income generated in these countries until the respective valuation allowance
is eliminated.
We recognize the financial statement benefits with respect to an uncertain
income tax position that we have taken or may take on an income tax return when
we believe it is more likely than not that the position will be sustained with
the tax authorities.
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.


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