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. "). The discussion summarizing the significant factors affecting the results of operations and financial condition for the year endedDecember 31, 2019 , 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 endedDecember 31, 2020 , which was filed with theSecurities and Exchange Commission onFebruary 25, 2021 , of which Item 7 is incorporated herein by reference.
OVERVIEW
Our 2021 results reflect robust demand for our products and tight market
conditions. During 2021 relative to 2020, EBITDA increased largely due to margin
improvements in our O&
Our 2021 cash generation allowed us to complete our goal of reducing long-term debt by$4 billion during the year and demonstrated our commitment to a solid investment-grade credit rating. We do not plan to pursue further long-term debt reduction in 2022. During 2021, we repurchased 5.2 million shares and increased our annual dividend for the eleventh consecutive year. During the second quarter of 2021, we invested$104 million to purchase a 50% interest in a joint venture with the China Petroleum & Chemical Corporation ("Sinopec") which will commission a new propylene oxide and styrene monomer unit inChina in 2022.
Results of operations for the periods discussed are presented in the table below.
Year Ended December 31,
Millions of dollars 2021 2020
Sales and other operating revenues $ 46,173 $ 27,753
Cost of sales 37,397 24,359
Impairments 624 582
Selling, general and administrative expenses 1,255 1,140
Research and development expenses 124 113
Operating income 6,773 1,559
Interest expense (519) (526)
Interest income 9 12
Other income, net 62 85
Income from equity investments 461 256
Income from continuing operations before income taxes 6,786 1,386
Provision for (benefit from) income taxes 1,163 (43)
Income from continuing operations 5,623 1,429
Loss from discontinued operations, net of tax (6) (2)
Net income $ 5,617 $ 1,427
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Table of Contents RESULTS OF OPERATIONS Revenues-Revenues increased$18,420 million , or 66%, in 2021 compared to 2020. Average sales prices in 2021 were higher for many of our products as sales prices generally correlate with crude oil prices, which increased relative to 2020. These higher prices led to a 62% increase in revenue. Higher sales volumes, driven by increased demand, resulted in a revenue increase of 3%. Favorable foreign exchange impacts resulted in a revenue increase of 1%. Cost of Sales-Cost of sales increased$13,038 million , or 54%, in 2021 compared to 2020. This increase primarily related to higher feedstock and energy costs. Fluctuations in our cost of sales are generally driven by changes in feedstock and energy costs. Feedstock and energy related costs generally represent approximately 70% 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 15% to 20% in each annual period. Impairments-Results for our Refining segment include non-cash impairment charges of$624 million and$582 million recognized in 2021 and 2020, respectively. See Note 7 to the Consolidated Financial Statements for additional information regarding impairment charges.
SG&A Expense-Selling, general and administrative ("SG&A") expense increased
Operating Income-Operating income increased by$5,214 million or 334% in 2021 compared to 2020. In 2021, Operating income increased for our O&P-Americas , O&P-EAI, I&D, Refining, Technology and APS segments by$3,382 million ,$816 million ,$466 million ,$328 million ,$184 million and$60 million , respectively. Results for each of our business segments are discussed further in the Segment Analysis section below. Income from Equity Investments-Income from equity method investments increased$205 million , or 80%, in 2021 compared to 2020. Higher demand coupled with industry supply constraints resulted in improved margins for our joint ventures in our O&P-Americas and O&P-EAI segments. Income Taxes-Our effective income tax rates of 17.1% in 2021 and -3.1% in 2020 resulted in a tax provision of$1,163 million and a tax benefit of$43 million , respectively. The 2021 effective income tax rate of 17.1%, which is lower than theU.S. statutory tax rate of 21%, was favorably impacted by exempt income (-4.5%), return to accrual adjustments primarily from a tax benefit associated with an election made in 2021 to step-up certain Italian assets to fair market value retroactively (-1.8%) and the impact of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act (-0.9%) partially offset by the effects of earnings in various countries, notably inEurope , with higher statutory tax rates (1.1%) andU.S. state and local income taxes (1.2%). The 2020 effective income tax rate of -3.1%, which is lower than theU.S. statutory tax rate of 21%, was favorably impacted by tax law changes including the CARES Act (-21.5%) coupled with exempt income (-10.4%), partially offset by changes in unrecognized tax benefits associated with uncertain tax positions (7.0%). During 2021 and 2020, we recorded an overall tax benefit in relation to the CARES Act of approximately$64 million and$300 million , respectively, due to our 2020 U.S. tax losses which we carried back to tax years with a higher tax rate. For additional information, see Note 16 to our Consolidated Financial Statements. 37
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Comprehensive Income-We had comprehensive income of$5,757 million in 2021 and$1,268 million in 2020. Comprehensive income increased by$4,489 million in 2021 compared to 2020, primarily due to higher net income, net favorable changes in defined pension and other post-retirement benefits, and net favorable impacts of financial derivative instruments primarily driven by periodic changes in benchmark interest rates. These increases were partially offset by net unfavorable impacts of unrealized changes in foreign currency translation adjustments. We recognized defined benefit pension and other post-retirement benefit plans pre-tax gains of$291 million and pre-tax losses of$51 million in 2021 and 2020, respectively. In 2021, changes in actuarial assumptions, primarily related to an increase in discount rates and higher actual returns versus expected returns on plan assets, resulted in a pre-tax gain of$214 million . In 2021, pre-tax gains of$77 million related to the amortization of accumulated actuarial losses and settlements were reclassified to Other income, net. In 2020, pre-tax losses of$109 million were recognized due to the decrease in discount rates and higher actual returns versus expected returns on plan assets. Pre-tax losses were partially offset by pre-tax gains of$58 million , primarily due to amortization of accumulated actuarial losses reclassified to Other income, net. In 2021, the cumulative after-tax effect of our derivatives designated as cash flow hedges was a net gain of$72 million . The weakening of the euro against theU.S. dollar in 2021 and periodic changes in benchmark interest rates resulted in a pre-tax gain of$207 million related to our cross-currency swaps. In 2021, pre-tax losses of$216 million related to our cross-currency swaps were reclassified to Other income, net. In 2021, we recognized pre-tax gains of$75 million related to forward-starting interest rate swaps primarily driven by changes in benchmark interest rates. The remaining change relates to our commodity cash flow hedges. The predominant functional currency for our operations outside of theU.S. is the euro. Relative to theU.S. dollar, the value of the euro weakened during 2021, resulting in net losses related to unrealized changes in foreign currency translation impacts which are reflected in the Consolidated Statements of Comprehensive Income. These losses were partially offset by a pre-tax gain of$199 million related to the effective portion of our net investment hedges. 38
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Segment Analysis
We use earnings from continuing operations before interest, income taxes, and
depreciation and amortization ("EBITDA") as our measure of profitability for
segment reporting purposes. This measure of segment operating results is used by
our chief operating decision maker to assess the performance of, and allocate
resources to, our operating segments. Intersegment eliminations and items that
are not directly related or allocated to business operations, such as foreign
exchange gains (losses) and components of pension and other post-retirement
benefit costs other than service cost, are included in "Other." For additional
information related to our operating segments, as well as a reconciliation of
EBITDA to its nearest generally accepted accounting principles ("GAAP") measure,
Income from continuing operations before income taxes, see Note 20 to our
Consolidated Financial Statements.
Our continuing operations are managed through six reportable segments:
O&
Year Ended December 31 ,
Millions of dollars 2021 2020
Sales and other operating revenues: O&P-Americas$ 15,002 $ 7,275 O&P-EAI 13,490 8,367 I&D 10,180 6,269 APS 5,145 3,913 Refining 8,002 4,727 Technology 843 659 Other, including segment eliminations (6,489) (3,457) Total$ 46,173 $ 27,753 Operating income (loss): O&P-Americas$ 4,552 $ 1,170 O&P-EAI 1,228 412 I&D 967 501 APS 286 226 Refining (696) (1,024) Technology 471 287 Other, including segment eliminations (35)
(13)
Total$ 6,773 $
1,559
Depreciation and amortization: O&P-Americas $ 578$ 525 O&P-EAI 197 214 I&D 379 305 APS 117 152 Refining 79 152 Technology 43 37 Total$ 1,393 $ 1,385 Income (loss) from equity investments: O&P-Americas $ 115$ 45 O&P-EAI 313 186 I&D 34 26 APS (1) (1) Total $ 461$ 256 39
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Year Ended December 31,
Millions of dollars 2021 2020
Other income (expense), net:
O&P-Americas $ 28 $ 70
O&P-EAI 11 14
I&D (2) 1
APS 7 1
Refining (7) 1
Other, including intersegment eliminations 25 (2)
Total $ 62 $ 85
EBITDA:
O&P-Americas $ 5,273 $ 1,810
O&P-EAI 1,749 826
I&D 1,378 833
APS 409 378
Refining (624) (871)
Technology 514 324
Other, including intersegment eliminations (10) (15)
Total $ 8,689 $ 3,285 Olefins and Polyolefins-Americas Segment
Overview-EBITDA improved in 2021 relative to 2020 driven by olefin and combined polyolefin margin improvements.
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 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.
We have flexibility to vary the raw material mix and process conditions in our
U.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. In 2021 and 2020, approximately 60% of the
raw materials used in our North American crackers was ethane.
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The following table sets forth selected financial information for the
O&
Year Ended December 31,
Millions of dollars 2021 2020
Sales and other operating revenues $ 15,002 $ 7,275
Income from equity investments 115 45
EBITDA 5,273 1,810
Revenues-Revenues increased by $7,727 million , or 106%, in 2021 compared to
2020. Higher average sales prices resulted in a 92% increase in revenue in 2021,
primarily driven by tight market conditions. Volume improvements resulted in a
revenue increase of 14% primarily due to the 2020 acquisition of our 50%
interest in the Louisiana Joint Venture.
EBITDA-EBITDA increased by $3,463 million , or 191%, in 2021 compared to 2020,
largely driven by margin improvements. Olefins results led to a 109% increase in
EBITDA driven by higher margins as sales prices outpaced higher feedstock and
energy costs. Higher polyethylene and polypropylene results led to a 48% and 29%
increase in EBITDA, respectively, primarily due to polyolefin sales price
increases which outpaced higher feedstock costs.
Olefins and Polyolefins-Europe,
Overview-EBITDA increased in 2021 compared to 2020 mainly as a result of higher combined polyolefins margins due to strong demand and tight markets.
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 Raw Materials-In Europe, heavy liquids are the primary raw materials for our ethylene production and represents approximately two-thirds of the raw materials used in 2021 and 2020.
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 2021 2020
Sales and other operating revenues $ 13,490 $ 8,367
Income from equity investments 313 186
EBITDA 1,749 826
Revenues-Revenues increased by $5,123 million , or 61%, in 2021 compared to 2020.
Average sales prices in 2021 were higher across most products as sales prices
generally correlate with crude oil prices, which on average, increased compared
to 2020. These higher average sales prices were responsible for a 52% increase
in revenue. Volume improvements resulted in a revenue increase of 6% primarily
due to strong demand in combination with tight market supply. Favorable foreign
exchange impacts resulted in a revenue increase of 3% in 2021.
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EBITDA-EBITDA increased by$923 million , or 112%, in 2021 compared to 2020. Polyethylene and polypropylene results improved resulting in an EBITDA increase of 55% and 46%, respectively. These improvements were driven by higher margins as price increases outpaced higher feedstock costs. Higher income from our equity investments led to an increase in EBITDA of 15%, mainly attributable to higher polyolefins margins associated with increased demand. Foreign exchange impacts, which on average were favorable, resulted in a EBITDA increase of 4%.
Intermediates and Derivatives Segment
Overview-EBITDA increased in 2021 compared to 2020, primarily driven by higher margins across most businesses due to tight market supply from industry outages coupled with strong demand.
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 2021 2020
Sales and other operating revenues $ 10,180 $ 6,269
Income from equity investments 34 26
EBITDA 1,378 833
Revenues-Revenues increased by $3,911 million , or 62%, in 2021 compared to 2020.
Higher average sales prices resulted in a 64% increase in revenue in 2021 as
sales prices generally correlate with crude oil prices, which on average,
increased compared to 2020. Sales volumes declined in 2021 resulting in a 3%
decrease in revenue due to the impact of unusually cold temperatures and
associated electrical power outages that led to shutdowns of our manufacturing
facilities in Texas in early 2021, coupled with unplanned maintenance activities
in 2021. Favorable foreign exchange impacts resulted in a revenue increase of 1%
in 2021.
EBITDA-EBITDA increased $545 million , or 65%, in 2021 compared to 2020. Our
propylene oxide and derivatives and intermediate chemicals results improved
resulting in an EBITDA increase of 54% and 18%, respectively. These improvements
were primarily a result of higher margins due to strong demand coupled with
tight market supply resulting from industry outages. Higher oxyfuels and related
products results led to a 6% increase in EBITDA primarily driven by margin
improvement as a result of improved demand and higher gasoline prices. Results
declined 4% as a result of site closure costs associated with the exit of our
ethanol business.
Advanced Polymer Solutions Segment
Overview-EBITDA for our APS segment increased in 2021 compared to 2020, primarily due to higher advanced polymer margins.
The following table sets forth selected financial information for the APS segment:
Year Ended December 31,
Millions of dollars 2021 2020
Sales and other operating revenues $ 5,145 $ 3,913
Loss from equity investments (1) (1)
EBITDA 409 378
42-------------------------------------------------------------------------------- Table of Contents Revenues-Revenues increased in 2021 by$1,232 million , or 31%, compared to 2020. Average sales price increased resulting in a 25% increase in revenue in 2021 as sales prices generally correlate with raw material costs and product demand. Higher sales volumes resulted in a 3% increase in revenue stemming from higher demand. Foreign exchange impacts resulted in a revenue increase of 3% in 2021. EBITDA-EBITDA increased in 2021 by$31 million , or 8%, compared to 2020. Higher advanced polymers results led to an EBITDA increase of 13% driven by margin improvements resulting from increased construction demand. Results benefited 10% from the absence of integration costs incurred in 2020 associated with the acquisition ofA. Schulman Inc. These EBITDA improvements were offset by LIFO inventory charges which resulted in a 12% reduction in EBITDA. Compounding and solutions results remained relatively unchanged during 2021.
Refining Segment
Overview-EBITDA for our Refining segment increased in 2021 relative to 2020 primarily due to higher margins.
The following table sets forth selected financial information and heavy crude oil processing rates for the Refining segment and theU.S. refining market margins for the applicable periods. "Brent" is a light sweet crude oil and is one of the main benchmark prices for purchases of oil worldwide. "Maya" is a heavy sour crude oil grade produced inMexico that is a relevant benchmark for heavy sour crude oils in theU.S. Gulf Coast market. References to industry benchmarks for refining market margins are to industry prices reported by Platts, a division of S&P Global. Year Ended December 31, Millions of dollars 2021 2020 Sales and other operating revenues$ 8,002 $ 4,727 EBITDA (624) (871) Thousands of barrels per day Heavy crude oil processing rates 231 223 Market margins, dollars per barrel Brent - 2-1-1$ 14.39 $ 5.74 Brent - Maya differential 6.48 6.89 Total Maya 2-1-1$ 20.87 $ 12.63 Revenues-Revenues increased by$3,275 million , or 69%, in 2021 compared to 2020. Higher product prices led to a revenue increase of 71% in 2021, due to an average Brent crude oil price increase of approximately$28 per barrel. Sales volume changes resulted in a 2% decline in revenues as higher run rates were offset by changes in product mix. EBITDA-EBITDA increased by$247 million or 28%,in 2021 compared to 2020. This increase was primarily driven by margin improvements due to an increase in the Maya 2-1-1 market margin resulting from higher demand for refined products. This was partially offset by margin declines driven by higher costs for Renewable Identification Numbers ("RINs") of approximately$1 per gallon. During 2021 and 2020 we recognized non-cash impairment charges of$624 million and$582 million , respectively. For additional information see Note 7 to our Consolidated Financial Statements. We are currently weighing strategic options for our Refining segment, including a potential sale of ourHouston refinery . Any strategic option pursued for theHouston refinery remains subject to the approval of our Board of Directors and, assuming such approval is obtained, may require certain regulatory approvals or other closing conditions. 43
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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 2021 and 2020, our Technology segment
incurred approximately half of all R&D costs. EBITDA for our Technology segment
increased in 2021 compared to 2020 largely due to higher licensing revenues and
catalyst volumes.
The following table sets forth selected financial information for the Technology
segment.
Year Ended December 31,
Millions of dollars 2021 2020
Sales and other operating revenues $ 843 $ 659
EBITDA 514 324
Revenues-Revenues increased by $184 million , or 28%, in 2021 compared to 2020.
Higher catalyst volumes resulted in a 10% increase in revenue in 2021, primarily
driven by strong demand. Licensing revenues increased by 15% in 2021. Favorable
foreign exchange impacts increased revenue by 3% in 2021.
EBITDA-EBITDA in 2021 increased by $190 million , or 59%, compared to 2020.
Higher licensing revenues led to an EBITDA improvement of 40% in 2021. Favorable
foreign exchange impacts resulted in an EBITDA increase of 3% in 2021. The
remaining increases was largely driven by higher catalyst sales volumes as a
result of improved global demand.
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FINANCIAL CONDITIONOperating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:
Year Ended December 31,
Millions of dollars 2021 2020
Cash provided by (used in):
Operating activities $ 7,695 $ 3,404
Investing activities (1,502) (4,906)
Financing activities (6,385) 2,271
Operating Activities-Cash provided by operating activities of $7,695 million in
2021 primarily reflected earnings adjusted for non-cash items and cash used by
the main components of working capital-Accounts receivable, Inventories and
Accounts payable.
In 2021, the main components of working capital used $960 million of cash driven
by an increase in Inventories and Accounts receivable, partially offset by an
increase in Accounts payable. The increase in Inventories was primarily due to
an increase in raw material costs coupled with an increase in inventory to
levels required to support improved demand and in anticipation of turnarounds in
2022. The increase in Accounts receivable was driven by higher revenues across
most businesses primarily driven by higher average sales prices. The increase in
Accounts payable was primarily driven by increased raw material and energy
costs.
Other operating activities in 2021 includes an $870 million tax refund received
in the fourth quarter of 2021 and the effects of changes in income tax accruals
primarily driven by increased pretax income. For additional information see Note
16 to our Consolidated Financial Statements.
Cash of
In 2020, the main components of working capital provided$311 million of cash driven by a decrease in Inventories and an increase in Accounts payable, partially offset by an increase in Accounts receivable. The decrease in Inventory was primarily driven by company-wide inventory reduction initiatives to maximize liquidity. The increase in Accounts payable was primarily driven by increased raw material purchases during the fourth quarter of 2020. The increase in Accounts receivable was driven by higher sales in the fourth quarter 2020 for our O&P-Americas , O&P-EAI, and I&D segments resulting from demand recovery.
Other operating activities in 2020 includes the effects of changes in tax
accruals, primarily driven by a tax refund of
Investing Activities-Capital expenditures in 2021 totaled$1,959 million compared to$1,947 million in 2020. Approximately 60% of our capital spending in both periods was for profit-generating growth projects, primarily our PO/TBA plant, with the remaining spending supporting sustaining maintenance. See Note 20 to the Consolidated Financial Statements for additional information regarding capital spending by segment.
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$346 million and$114 million in 2021 and 2020, respectively, upon the sale and maturity of certain of our available-for-sale debt securities. Additionally, in 2021 and 2020, we received proceeds of$335 million and$313 million , respectively, from the sale or liquidation of our investment in equity securities. 45
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In 2020, we invested
In 2021, we made an equity contribution of$104 million to formNingbo ZRCC LyondellBasell New Material Company Limited , a 50/50 joint venture with Sinopec. In 2020, we invested$2,440 million in cash for 50% equity interests in theBora LyondellBasell Petrochemical Co. Ltd joint venture and theLouisiana Integrated PolyEthylene JV LLC . For additional information related to our Equity investments, see Note 8 to the Consolidated Financial Statements. In 2021, foreign currency contracts with an aggregate notional value of €300 million expired. Upon settlement of these foreign currency contracts, we paid €300 million ($355 million at the expiry spot rate) to our counterparties and received$358 million from our counterparties. Financing Activities-In 2021 and 2020, we made payments of$463 million and$4 million to acquire 5.2 million and 0.1 million, respectively, of our outstanding ordinary shares. We also made dividend payments totaling$1,486 million and$1,405 million in 2021 and 2020, respectively. For additional information related to our share repurchases and dividend payments, see Note 18 to the Consolidated Financial Statements. During 2020, to bolster liquidity we issued long-term debt of$6 billion which was partially offset by repayments of$3 billion during the year. In 2021, we prioritized debt reduction resulting in a$4 billion decrease in our outstanding long-term debt. For a detailed discussion of financing activities for 2021 and 2020, see Note 11 to the Consolidated Financial Statements.
In 2021 and 2020, we made net repayments of
InNovember 2021 , foreign currency contracts previously designated as cash flow hedges with an aggregate notional value of$855 million expired. Upon settlement of these foreign currency contracts we paid €790 million ($904 million at the expiry spot rate) to our counterparties and received$855 million from our counterparties.
In
In 2020, we posted collateral of
InNovember 2020 , we paid$882 million to our counterparties and received €750 million ($887 million at the expiry spot rate) from our counterparties upon expiration and settlement of the foreign currency contracts entered to economically hedge the redemption of €750 million aggregate principal amount of our 1.875% guaranteed notes originally due in 2022.
For additional information related to our swaps and currency contracts, see Note 13 to the Consolidated Financial Statements.
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Liquidity and Capital Resources
Overview
We plan to fund our ongoing working capital, capital expenditures, debt service, dividends and other cash requirements with our current available liquidity and 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. Our focus on funding our dividends while remaining committed to a strong investment grade balance sheet continues to be the foundation of our capital allocation strategy.
Cash and Liquid Investments
As ofDecember 31, 2021 , we had Cash and cash equivalents and marketable securities classified as Short-term investments totaling$1,481 million , which includes$1,136 million 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.
Credit Arrangements
At
We had total unused availability under our credit facilities of
•$3,046 million under our$3,250 million Senior Revolving Credit Facility, which backs our$2,500 million commercial paper program. InNovember 2021 , we entered into a second amendment and restatement of our credit agreement to increase our availability under the Senior Revolving Credit Facility from$2,500 million to$3,250 million . See Note 11 for additional detail. 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. AtDecember 31, 2021 , we had$204 million of outstanding commercial paper, net of discount, and no borrowings or letters of credit outstanding under this facility; and •$900 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. AtDecember 31, 2021 we had no borrowings or letters of credit outstanding under this facility. InJune 2021 , we extended the term of the facility toJune 2024 in accordance with the terms of the agreement. At any time and from time to time, we may repay or redeem our outstanding debt, including purchases of our outstanding bonds in the open market, through privately negotiated transactions or a combination thereof, in each case using cash and cash equivalents, cash from our short-term investments, cash from operating activities, proceeds from the issuance of debt or proceeds from asset divestitures. Any repayment or redemption of our debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In connection with such repurchases or redemptions, we may incur cash and non-cash charges, which could be material in the period in which they are incurred. 47
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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 2021 , our shareholders approved a proposal to authorize us to repurchase up to 34.0 million ordinary shares, throughNovember 28, 2022 ("2021 Share Repurchase Authorization"), 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 2021, we purchased 5.2 million shares under our share repurchase authorization for$477 million . As ofFebruary 22, 2022 , we had approximately 27.2 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. In addition, 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. For additional information related to our share repurchase authorization, see Note 18 to the Consolidated Financial Statements. Capital Budget In 2022, we are planning to invest approximately$2.1 billion in capital expenditures, which includes approximately$79 million for investments in ourU.S. and European PO joint ventures andLouisiana joint venture. Approximately 40% of the 2022 budget is planned for profit-generating growth projects, primarily our PO/TBA plant, with the remaining budget supporting sustaining maintenance.
Cash Requirements from Contractual and Other Obligations
As part of our ongoing operations, we enter into contractual arrangements that may require us to make future cash payments under certain circumstances. Our cash requirements related to contractual and other obligations primarily consist of purchase obligations, principal and interest payments on outstanding debt, lease payments, pension and other post-retirement benefits and income taxes. For more information regarding our debt arrangements, lease obligations, pension and other post-retirement benefits and income taxes see Notes 11, 12, 14 and 16 to the Consolidated Financial Statements, respectively. We are party to obligations to purchase raw materials, utilities and industrial gases which are designed to ensure sources of supply and are not expected to be in excess of normal requirements. These purchase arrangements include provisions which state minimum purchase quantities; however, in the event we do not take the contractual minimum volumes, we are obligated to compensate the vendor only for any resulting economic losses they suffer. No material fees were paid to vendors for such losses in 2021. Assuming that contractual minimum volumes are purchased at contract prices as ofDecember 31, 2021 , these commitments represent approximately 20% of our annual Cost of sales with a weighted average remaining term of 7 years. We also have purchase obligations under take-or-pay agreements which require us to either buy and take delivery of a minimum quantity of goods or to pay for any shortfall. These arrangements primarily relate to product off-take agreements with joint ventures located inPoland . No material shortfall was paid for quantities not taken under these contracts in 2021. When valued using a contract price as ofDecember 31, 2021 , these commitments represent approximately 5% of our annual Cost of sales with a weighted average remaining term of 12 years. 48
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CURRENT BUSINESS OUTLOOK
We expect continued strength in demand for our products. Supply chain disruptions and virus surges have been restraining pent-up consumer demand across the global economy. As vaccinations facilitate a more sustainable global reopening and supply chains normalize, our businesses should benefit from continued strong demand for both goods and services. We are closely monitoring rising feedstock and energy costs, particularly at our European operations. Elevated levels of ethylene industry maintenance activities scheduled for the first half of 2022 are likely to constrain supply. We expect tight markets for acetyls and propylene oxide will continue to drive strong profitability within our I&D segment. Further, we expect to expand our production with the commissioning of new facilities within our I&D segment inChina and theU.S. during 2022. In January, our Advanced Polymers Solutions segment benefited from increased order volumes for our products used in automotive production. Planned maintenance in 2022 for our O&P-Americas , O&P-EAI and I&D segments is expected to impact EBITDA by approximately$125 million ,$60 million and$80 million , respectively. 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 4 to the Consolidated Financial Statements for additional related party disclosures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management applies those accounting policies that it believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in theU.S. , see Note 2 to the Consolidated Financial Statements. Inherent in such policies are certain key assumptions and estimates made by management and updated periodically based on its latest assessment of the current and projected business and general economic environment. Management believes the following accounting policies and estimates, and the judgments and uncertainties affecting them, are critical in understanding our reported operating results and financial condition.
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.
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.
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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.
No LCM inventory valuation charge was recorded in 2021, and we do not believe any of our inventory balance at year-end is at risk for impairment. Given the inherent volatility in the prices of our finished goods and raw materials, sustained price declines could result in LCM inventory valuation charges. During 2020, we recognized an LCM inventory valuation charge of$16 million related to the decline in pricing for our raw material and finished goods inventories. In the first quarter of 2020, we recognized LCM inventory valuation charges of$419 million which was driven by a decline in pricing for many of our raw material and finished goods inventories. During the second, third and fourth quarters of 2020, we recognized LCM inventory valuation benefits of$96 million ,$160 million and$147 million , respectively, as market prices began to recover subsequent to the first quarter of 2020. Market price volatility for crude oil, heavy liquids and ethylene were the primary contributors to the LCM inventory valuation charges, and representative prices used to determine the LCM inventory valuation charges recognized during 2020 ranged from$12.14 to$41.75 per barrel for crude oil,$13.50 to$51.07 per barrel for heavy liquids and$205 to$767 per ton for ethylene. Long-Lived Assets Impairment Assessment-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, an expectation that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, 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 using an income approach or a market approach when appropriate, and the carrying value is written down to the calculated fair value. For purposes of impairment evaluation, long-lived assets including finite-lived intangible assets must be grouped at the lowest level for which independent cash flows can be identified. Significant judgment is involved in developing estimates of future cash flows 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 and 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. When an income approach is used to estimate fair value of our long-lived assets, the cash flows are discounted using a rate that is 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. Houston Refinery Impairment-During the fourth quarter of 2021 and during the third quarter of 2020, we identified impairment triggers relating to ourHouston refinery's asset group which resulted in non-cash impairment charges of$624 million and$582 million , respectively. Refer to Note 7 to our Consolidated Financial Statements. 50
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In 2021, the estimate of theHouston refinery's undiscounted pre-tax cash flows 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 required 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 determination will prove to be an accurate prediction of the future.The Houston refinery's estimated fair value was calculated using a market approach which utilized unobservable inputs, which generally consist of market information provided by unrelated third parties. In 2020, the estimates of theHouston refinery's undiscounted pre-tax cash flows utilized significant assumptions similar to those utilized during 2021.The Houston refinery's estimated fair value was determined using an income approach that was based on projected financial information and significant inputs that were not observable in the market.
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, discount rates, and market information provided by unrelated third parties 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. Equity Method Investments Impairment-Investments in nonconsolidated entities accounted for under the equity method are assessed for impairment when there are indicators of a loss in value, such as a lack of sustained earnings capacity or a current fair value less than the investment's carrying amount. When it is determined such a loss in value is other than temporary, an impairment charge is recognized for the difference between the investment's carrying value and its estimated fair value. When determining whether a decline in value is other than temporary, management considers factors such as the length of time and extent of the decline, the investee's financial condition and near-term prospects, and our ability and intention to retain our investment for a period that will be sufficient to allow for any anticipated recovery in the value of the investment. Management's estimate of fair value of an investment is based on the income approach and/or market approach. For the income approach, the fair value is typically based on the present value of expected future cash flows using discount rates believed to be consistent with those used by principal market participants. For the market approach, since quoted market prices are usually not available, we utilize market multiples of revenue and earnings derived from comparable publicly-traded industrial gases companies. Goodwill-As ofDecember 31, 2021 , we had goodwill of$1,875 million . Of this amount,$1,357 million is related to the acquisition ofA. Schulman in 2018, which is included in our APS segment, and is mainly attributed to acquired workforce and expected synergies. The remaining goodwill atDecember 31, 2021 primarily represents the tax effect of the differences between the tax and book basis 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 7 and Note 20 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. 51
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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 2021 and 2020, management performed a qualitative impairment assessment of our reporting units, which indicated that the fair value of our reporting units was greater than their carrying value including goodwill. Accordingly, a quantitative goodwill impairment test was not required, and no goodwill impairment was recognized in 2021 or 2020. Long-Term Employee Benefit Costs-Our costs for long-term employee benefits, particularly pension and other post-retirement 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. The current benefit service costs, as well as the existing liabilities, for pensions and other post-retirement 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 atDecember 31, 2021 , we used a weighted average discount rate of 2.80% for theU.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 atDecember 31, 2021 , was 1.45%, reflecting market interest rates. The discount rates in effect atDecember 31, 2021 will be used to measure net periodic benefit cost during 2022. The benefit obligation and the net periodic benefit cost of other post-retirement medical benefits are also measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As ofDecember 31, 2021 , the assumed rate of increase for ourU.S. plans was 6.3%, decreasing to 4.5% in 2029 and thereafter. The net periodic benefit 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 ourU.S. plans of 7.25% 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 1.44% is based on expectations and asset allocations that vary by region. The asset allocations are summarized in Note 14 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. 52
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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 greater of the projected benefit obligation or the market related value of
the plan assets 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 2021 Costs in 2022
Millions of dollars U.S. Non-U.S. U.S. Non-U.S.
Projected benefit obligations at December 31,
2021 $ 1,916 $ 1,924 $ - $ -
Projected net periodic pension costs in 2022 - - (1) 57
Discount rate increases by 100 basis points (176) (253) (9) (6)
Discount rate decreases by 100 basis points 212 318 11 13
The sensitivity of our post-retirement 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 2021 Costs in 2022
Millions of dollars U.S. Non-U.S. U.S. Non-U.S.
Projected benefit obligations at December 31,
2021 $ 203 $ 68 $ - $ -
Projected net periodic benefit costs in 2022 - - - 4
Discount rate increases by 100 basis points (17) - (1) -
Discount rate decreases by 100 basis points 21 - 2 -
Additional information on the key assumptions underlying these benefit costs appears in Note 14 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 basis, 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.
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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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