As filed with the Securities and Exchange Commission on 17, 2019June 15, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20182019
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-14862
BRASKEM S.A.
(Exact Name of Registrant as Specified in its Charter)
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N/A | The Federative Republic of Brazil |
(Translation of Registrant’s Name into English) | (Jurisdiction of Incorporation or Organization) |
Rua Lemos Monteiro, 120 – 24° andar
Butantã— – São Paulo—Paulo, SP – CEP 05501-050 – Brazil
(Address of Principal Executive Offices)
Pedro van Langendonck Teixeira de Freitas
Braskem S.A.
Rua Lemos Monteiro, 120 – 24° andar
Butantã— – São Paulo—Paulo, SP – CEP 05501-050 – Brazil
Telephone: + (55 11)55 11 3576-9000
Fax: + (55 11)55 11 3576-9532
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered |
Preferred Shares, Class A, without par value per share, each represented by American Depositary | BAK | New York Stock Exchange |
*On May 13, 2019, the New York Stock Exchange suspended trading of the Registrant’s American Depositary Shares and commenced proceedings to delist the Registrant. The Registrant has appealed the decision, which is pending.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
TITLE OF EACH CLASS:
6.450% Notes due 2024, issued by Braskem Finance Limited
The total number of issued shares of each class of stock of Braskem S.A. as of December 31, 20182019 was:
451,668,652 Common Shares, without par value
345,049,672 Preferred Shares, Class A, without par value
500,230 Preferred Shares, Class B, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Non-accelerated filer ¨ | Emerging growth company ¨ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP¨ | International Financial Reporting |
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Standards as issued by the International | ||
| Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
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EXPLANATORY NOTE
Braskem S.A., or the Company, is filing this annual report on Form 20-F for the year ended December 31, 2019 pursuant to the U.S. Securities and Exchange Commission, or the SEC, Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies of March 25, 2020 (Release No. 34-88465).
As set forth in the Company’s Form 6-K furnished to the SEC on April 30, 2020, the Company was unable to file its annual report on Form 20-F for the year ended December 31, 2019, which was originally due on April 30, 2020, due to the circumstances related to the novel coronavirus (COVID-19) pandemic. In particular, the novel coronavirus (COVID-19) pandemic has caused displacement of staff and certain other resources of the Company in order to comply with government-imposed restrictions and “stay-at-home” orders. Because of this, the Company was unable to complete certain procedures and analyses on its internal processes and controls in connection with its financial statements for the year ended December 31, 2019 prepared under PCAOB standards. This, in turn, delayed the Company’s ability to prepare and complete its annual report on a timely basis.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
All references herein to the “real,” “reais” or “R$” are to the Brazilianreal, the official currency of the Federative Republic of Brazil, or Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars, the official currency of the United States. All references to “CHF” are to Swiss francs, the official currency of Switzerland.
All references herein to (1) to “we,” “us,” “the Company” or “our company”Company” are references to Braskem S.A., its consolidated subsidiaries and jointly controlled entities, and (2) to “Braskem” are references solely to Braskem S.A. All references herein to “Braskem Europe” meanare to Braskem Europe GmbH and its consolidated subsidiaries, including Braskem America, Inc., or Braskem America.
Financial Statements
We maintain our books and records inreais. Our consolidated financial statements as of December 31, 20182019 and 20172018 and for the three years ended December 31, 20182019 have been audited, as stated in the report appearing herein,therein, and are included in this annual report. These financial statements and related notes included elsewhere in this annual report are collectively referred to as our audited consolidated financial statements herein and throughout this annual report.
We have prepared our audited consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, or IFRS.
Market Share and Other Information
We make statements in this annual report about our market share in the petrochemical industry in Brazil and our production capacity relative to that of other petrochemical producers in Brazil, other countries in Latin America, the United States and the world. We have made these statements on the basis of information obtained from third-party sources that we believe are reliable. We have calculated our Brazilian market share with respect to specific products by dividing our domestic net sales volumes of these products by the total Brazilian domestic consumption of these products. We derive information regarding the production capacity of other companies in the Brazilian petrochemical industry and the estimated total Brazilian domestic consumption of petrochemical products principally from reports published by the Brazilian Chemical Industry Association (Associação Brasileira da Indústria Química), or ABIQUIM. We derive information regarding the production capacity of other companies in the global petrochemical industry, international market prices for petrochemicalspetrochemical products and per capita consumption in certain geographic regions, principally from reports published by IHS, Inc., or IHS. We derive information relating to Brazilian imports and exports from theComexStat (http://comexstat.mdic.gov.br), produced by the Brazilian Ministry of the Economy (Ministério da Economia). We also include information and statistics regarding economic growth in emerging economies obtained from the International Monetary Fund, or IMF, and statistics regarding gross domestic product, or GDP, growth in Brazil, the United States, Europe and Mexico obtained from independent public sources such as the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE; the U.S. Department of Commerce; the statistical office of the European Union, or Eurostat; and the Mexican Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía).
We have no reason to believe that any of thisthe information described above is inaccurate in any material respect. However, we have not independently verified the production capacity, market share, market size or similar data provided by third parties or derived from industry or general publications.
We provide information regarding domestic apparent consumption of some of our products based on information available from the Brazilian government, the Institute of Applied Economic Research (Instituto de Pesquisa Econômica Aplicada) and ABIQUIM. Domestic apparent consumption is equal to domestic production plus imports minus exports. Domestic apparent consumption for any period may differ from actual consumption because this measure does not give effect to variations of inventory levels in the petrochemical supply chain.
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Certain Industry Terms
Glossary of Selected Terms in the Petrochemical Industry and in the Context of Our Business
Term | Meaning | Main uses | In the context of our business |
Aliphatics | Aliphatics are open-chain hydrocarbons that contain no stable rings connecting their atoms, in contrast to aromatics. | Used as fuels, solvents and as basic chemicals in the petrochemical industry. | We produce aliphatics, such as ethylene and propylene, in our Chemicals Unit. |
Aromatics | Aromatics are cyclic hydrocarbons with stable bonds connecting their carbon atoms. | Used as fuel additives, solvents, and basic chemicals in the petrochemical industry. | We produce aromatics, such as benzene, toluene and xylenes, as co-products in our Chemicals Unit. |
Benzene | An aromatic hydrocarbon. It is a natural constituent of crude oil. | Used primarily for the manufacture of chemicals with more complex structure, such as ethylbenzene and cumene. | We produce benzene as a by-product in our Chemicals Unit. |
BTX products | A mixture of benzene, toluene and the three xylene isomers (ortho, meta and para), all of which are aromatic hydrocarbons. | Used as fuel additives, solvents, and basic chemicals in the petrochemical industry. | We produce benzene, toluene and xylenes as BTX by-products |
Butadiene | An organic compound and a colorless gas. | Used industrially as a monomer in the production of synthetic rubber. | We produce butadiene as a by-product in our Chemicals Unit. |
Butene | A colorless gas present in crude oil. | Used as a monomer in the production of polymers, as well as a petrochemical intermediate. | We use butene for the production of HDPE and LLDPE in our Polyolefins Unit. Butene is supplied by our Chemicals Unit. |
Caustic soda | Caustic soda, or sodium hydroxide, is an inorganic compound. A colorless crystalline solid, caustic soda is toxic, corrosive and highly soluble in water. | Used in the manufacture of pulp and paper, textiles, drinking water, soaps and detergents, and as a drain cleaner. | We produce caustic soda in our Vinyls Unit. Caustic soda is a by-product of chlorine production required to produce PVC. |
Chlor-alkali | Electrolysis process used in the manufacture of chlorine, hydrogen and sodium hydroxide (caustic soda). | Main industrial process for the production of caustic soda. | We operate chlor-alkali plants in Brazil. |
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Term | Meaning | Main uses | In the context of our business |
Chlorine | Chlorine is a chemical element (Cl), a toxic, greenish yellow gas at room temperature. It has a pungent suffocating odor. | Used in the production of paper products, antiseptics, plastics, dyes, textiles, medicines, insecticides, solvents and to treat swimming pools. | We use salt to produce chlorine in our Vinyls Unit. |
Condensate | Condensate, or natural gas condensate, is a low-density mixture of hydrocarbon liquids that are present as gaseous components in the raw natural gas. | Condensate is used as an input for petrochemical plants, burned for heat and cooking, and blended into vehicle fuel. | We use condensate as a raw material in our Chemicals Unit. |
Cumene | An organic compound based on an aromatic hydrocarbon with an aliphatic substitution, cumene is a colorless liquid constituent of crude oil and refined fuels. | Used for the production of phenol and acetone. | We produce cumene as a by-product in our Chemicals Unit. |
Dicyclopentadiene | Dicyclopentadiene, or DCPD, is a yellow liquid with an acrid odor. | Used in polyester resins, inks, adhesives and paint. | We produce DCPD in our Chemicals Unit. |
Ethane | A type of natural gas liquid (NGL), ethane is a colorless, odorless gas in standard temperature and pressure, extracted from natural gas in liquid form. | Used as a feedstock for ethylene production. | Ethane is one of the main raw materials that we use to produce ethylene in our Chemicals Unit. |
Ethanol | A simple alcohol, produced by the fermentation of sugars by yeasts or via petrochemical processes. | Used as a fuel for vehicles, as a disinfectant and as a chemical intermediate. | We use ethanol as a raw material to produce green polyethylene in our Chemical Unit located in Triunfo, Brazil. |
Ethyl tertiary-butyl ether | Ethyl tertiary-butyl ether, or ETBE, is a colorless liquid manufactured by the acid etherification of isobutylene with ethanol. | Used commonly as an additive in the production of gasoline. | We produce ETBE in our Chemicals Unit. |
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Term | Meaning | Main uses | In the context of our business |
Ethylene | A hydrocarbon, colorless gas and the most widely used organic compound in the chemical industry. Produced mainly via steam cracking of raw materials such as naphtha and NGLs. | Used mainly for the production of polyolefins, primarily polyethylene, the most used thermoplastic resin in the world. | We produce ethylene in our Chemicals Unit, as a main product of the steam cracking of raw materials. |
EVA | Ethylene-vinyl acetate, or EVA, is a co-polymer of ethylene and vinyl acetate. | Used to produce rubber-like materials, with applications in adhesives, packaging, molding, and and membranes for electronic devices. | We produce EVA in our Polyolefins Unit. |
Gasoline | A flammable liquid obtained by refining crude oil. | Used primarily as a fuel in combustion engines. | We produce gasoline as a by-product in our Chemicals Unit. |
HDPE | High-density polyethylene, or HDPE, is a thermoplastic resin produced by the polymerization of ethylene. | Used in a variety of industries, to produce plastic bottles, toys, chemical containers, pipe systems, and other plastic products. | We produce HDPE in our Polyolefins Unit. |
Hexene | An aliphatic, hexane is a clear, colorless liquid with a petroleum-like odor. | Used as a solvent, paint thinner, and chemical reaction medium. Also used as a co-monomer for the production of HDPE. | We use hexene in our Mexico Unit as a raw material to produce HDPE. |
Hydrocarbon resins | Also called petroleum resins, they are produced from the polymerization of aromatic hydrocarbons. | Generally used together with other kinds of resins, in the paint, ink, adhesive and rubber industry. | We produce hydrocarbon resins in our Chemicals Unit. |
Hydrogen | A chemical element, hydrogen is a colorless, odorless gas. | Used to make ammonia in the production of fertilizers and as an intermediate chemical in the production of plastics and pharmaceuticals. | We produce hydrogen in our Vinyls Unit. |
Hydrogenated solvents | Odorless, colorless solvents treated with hydrogen. | Used in the manufacture of paints. | We produce hydrogenated solvents in our Chemicals Unit. |
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Isoprene | A common organic compound that is a component of natural rubber. Also a by-product of oil refining. | Used to produce synthetic rubber. | We produce isoprene in our Chemicals Unit. |
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Term | Meaning | Main uses | In the context of our business |
LDPE | Low-density polyethylene, or LDPE, is a thermoplastic resin made from the polymerization of ethylene. | Used for manufacturing containers, dispensing bottles, wash bottles, tubing, plastic bags and molded laboratory equipment. | We produce LDPE in our Polyolefins Unit. |
Liquefied petroleum gas (LPG) | Liquefied petroleum gas, or LPG, is a mixture of propane and butane, which are two natural gas liquids. | Used in fuel heating appliances, cooking equipment, vehicle fuel, aerosol propellant, and as a refrigerant. | We produce LPG in our Chemicals Unit. |
LLDPE | Linear low-density polyethylene, or LLDPE, is a linear polymer made by the copolymerization of ethylene with longer-chain olefins. | Used in plastic bags and sheets, plastic wrap, stretch wrap, pouches, toys, covers, lids, pipes, buckets and containers, covering of cables and flexible tubing, among others. | We produce LLDPE in our Polyolefins Unit. |
Methanol | Methanol is the simplest alcohol, a liquid produced industrially by hydrogenation of carbon monoxide. | Used as a precursor to other commodity chemicals, including formaldehyde, acetic acid and MTBE. | We use methanol as a raw material to produce MTBE in our Chemicals Unit. |
Methyl tertiary-butyl ether (MTBE) | An intermediate hydrocarbon liquid stream derived mainly from the refining of crude oil | Used almost exclusively as a fuel additive in gasoline to raise the oxygen content. | We produce MTBE in our Chemicals Unit. |
Naphtha | An intermediate hydrocarbon liquid stream derived mainly from the refining of crude oil. | Used as a solvent, fuel additive and as a raw material in the petrochemical industry. | We use naphtha as a raw material for the production of petrochemical products in our Chemicals Unit. |
Natural gas | A naturally occurring hydrocarbon gas mixture, consisting primarily of methane. | Used as a source of energy for heating, cooking and electricity generation, as a fuel for vehicles and as a chemical feedstock. | We use natural gas for electricity generation in our production processes. |
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Natural gas liquids (NGL) | A mixture of hydrocarbon components of natural gas, primarily ethane, propane and butane, which are separated from the raw natural gas in the form of liquids. | Used as raw materials in the petrochemical industry, as fuel and in applications for heating and cooking. | We use NGLs such as ethane and propane as raw materials at our plants in Rio de Janeiro and Mexico. |
N-hexane | A hydrocarbon, obtained by refining crude oil. | Used mixed with other solvents, to extract vegetable oils from crops, and as a cleaning agent in the printing, textile, furniture, and shoemaking industries. | We use n-hexane in our Polyolefins Unit as a raw material in the production of HDPE and LLDPE. |
Nonene | A hydrocarbon, nonene is a colorless liquid with an odor reminiscent of gasoline. | Used as a plasticizer to make rigid plastics flexible, and to produce chemical intermediates. | We produce nonene in our Chemicals Unit. |
Olefins | Unsaturated hydrocarbons that contain at least one carbon–carbon double bond, such as ethylene, propylene and butene. Obtained from steam cracking of raw materials. | Used as chemical intermediates for the production of other chemicals and resins. | We produce olefins in our Chemicals Unit. |
Para-xylene | An aromatic hydrocarbon, para-xylene is produced mainly in refineries and during the steam cracking of naphtha. | Used as a chemical feedstock in the production of polymers, especially PET. | We produce para-xylene as a by-product in our Chemicals Unit. |
PDH | Propane dehydrogenation, or PDH, is an on-purpose technology used for conversion of propane into propylene. | Industrial process for the production of propylene. | We use propylene from PDH units as a raw material in our plants in the United States. |
Piperylene | A volatile, flammable hydrocarbon in liquid form, obtained as a by-product of ethylene production. | Used as a monomer in the manufacture of plastics, adhesives and resins. | We produce piperylene in our Chemicals Unit. |
Polyethylene (PE) |
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| PE is the most common type of thermoplastic resin. It is lightweight and durable, and is obtained from the polymerization of ethylene. | PE has a large number of applications, such as: packaging, consumer goods, fibers, textiles, pipes, automotive, wiring, cables, construction, among others. | We produce PE in our Polyolefins Unit. |
Polyisobutylene (PIB) | PIB is a gas-permeable synthetic rubber produced by the polymerization of isobutylene with isoprene. | Used as a fuel and lubricant additive, in explosives, as the base for chewing gum, and to improve the environmental stress-cracking resistance of polyethylene. | We produce PIB in our Chemicals Unit. |
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Term | Meaning | Main uses | In the context of our business |
Polyolefins | Macromolecules formed by the polymerization of olefin monomer units. The most common are polypropylene (PP) and polyethylene (PE). | Used in a broad range of consumer and industrial applications. | We produce polyolefins in our Polyolefins Unit. |
Polypropylene (PP) | PP is a thermoplastic resin and the second most widely produced commodity plastic, after PE. Obtained by the polymerization of propylene, PP is generally harder and more heat resistant than PE. | Widely used in the automotive and furniture industry, in consumer goods, for packaging and labeling, and in other industrial applications. | We produce PP in our Polyolefins Unit. |
Polyvinyl chloride (PVC) | PVC is the world's third-most widely produced synthetic plastic polymer, after PE and PP, obtained by the polymerization of vinyl chloride monomer (VCM), a monomer generally made of ethylene and chlorine. | Used mainly in infrastructure and construction for pipes and profile applications, such as doors and windows, and also in plumbing, electrical cables, flooring, and as a replacement for rubber. | We produce PVC in our Vinyls Unit. |
Propane | A type of natural gas liquid (NGL), propane is a gas in standard temperature and pressure, and is extracted from natural gas in liquid form. | Commonly used together with butane in heating and cooking applications, and also as a raw material in the petrochemical industry. | We use propane together with ethane as a raw materials to produce petrochemical products in our Chemicals Unit. |
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Propylene | A hydrocarbon, propylene is a colorless gas, and the second most widely used olefin in the chemical industry, after ethylene. It can be obtained as a co-product of steam cracking or refining, and from on-purpose production. | Used mainly to produce polypropylene resins and a wide variety of other chemicals, such as propylene oxide and acrylonitrile. | We produce propylene in our Chemicals Unit as a by-product of steam cracking. Propylene is also the main raw material that we use to produce polypropylene in our Polyolefins and United States and Europe Units. |
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Term | Meaning | Main uses | In the context of our business |
Refinery off gas | Gas that is produced as a by-product of the refining of crude oil. It is a mixture of methane, ethane, hydrogen and other gases. | Used as a feedstock in the petrochemical industry. | We use refinery off gas as a raw material in our Chemicals Unit to produce |
Salt | Salt is a mineral composed primarily of sodium chloride. | Used in a wide variety of industries, mainly in the chlor-alkali process to produce caustic soda and chlorine, and as a food additive. | We use salt to produce chlorine and caustic soda in our Vinyls unit. |
Sodium hypochlorite | Sodium hypochlorite is a chlorine compound. | Used as a disinfectant or a bleaching agent and to produce other chemicals. | We produce sodium hypochlorite in our Vinyls Unit. |
Tetramer | Tetramer, or propylene tetramer, is an olefin. | Used as a plasticizer, surfactant, lubricating oil additive and polymerization agent. | We produce propylene tetramer in our Chemicals Unit. |
Thermoplastic resins | Raw, unshaped polymers, such as PE, PP and PVC. | Used in the plastic industry and other industries. | We produce thermoplastic resins in our Chemicals Unit. |
Toluene | An aromatic hydrocarbon. | Used predominantly as an industrial feedstock and a solvent. | We produce toluene in our Chemicals Unit. |
UHMWPE | Ultra-high molecular weight polyethylene, or UHMWPE, is a special type of thermoplastic polyethylene. | Used in industrial applications that require durability, low friction, and chemical resistance, including wear strips, chain guides, and marine dock fender pads, among others. | We produce UHMWPE in our United States and Europe Units. |
Vinyls | Vinyls, or vinyl polymers, are a group of polymers derived from vinyl monomers. The most common type of vinyl is PVC. | Used in the plastic industry and other industries. | We produce vinyls in our Vinyls Unit. |
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Certain Other Selected Terms Used in This Annual Report
As used in this annual report:
·“first generation products” means basic petrochemical products such as ethylene and propylene produced from naphtha, natural gas, and ethane. The basic petrochemical products are used as feedstocks for the production of second generation products. We also sell certain first generation products to our customers;
·“second generation products” means thermoplastics resins, such as PE, PP and PVC;
·“third generation” means plastics converters;
·“third generation products” means finished plastic products produced by molding thermoplastic resins into end-use applications;
·“annual production capacity” means the annual nominal capacity for a particular facility, calculated based on operations during the 24 hours of the day for an entire year;
· “kton” means a kiloton, which is equal to 1,000 tons, or 2,204,622.62 pounds;
·“ton” means a metric ton, which is equal to 1,000 kilograms or 2,204.62 pounds.
· | “first generation products” means basic petrochemical products such as ethylene and propylene produced from naphtha, natural gas, and ethane. The basic petrochemical products are used as feedstocks for the production of second generation products. We also sell certain first generation products to our customers; |
· | “second generation products” means thermoplastics resins, such as PE, PP and PVC; |
· | “third generation” means plastics converters; |
· | “third generation products” means finished plastic products produced by molding thermoplastic resins into end-use applications; |
· | “annual production capacity” means the annual nominal capacity for a particular facility, calculated based on operations during the 24 hours of the day for an entire year; |
· | “kton” means a kiloton, which is equal to 1,000 tons, or 2,204,622.62 pounds; |
· | “ton” means a metric ton, which is equal to 1,000 kilograms or 2,204.62 pounds. |
Rounding
We have made rounding adjustments to some of the amounts included in this annual report. As a result, numerical figures shown as totals in some tables may not be arithmetic aggregations of the amounts that precede them.
Currency Conversion
Solely for the convenience of the reader, we have translated certain amounts included in “Item 3. Key Information— Selected Financial and Other Information” and elsewhere in this annual report fromreais into U.S. dollars using the selling rate as reported by the Brazilian Central Bank as of May 29, 2020 of R$5.4263 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate.
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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended, or the Securities Act, or the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “aim,” “anticipate,” “believe,” “can,” “continue,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “would,” or the opposite of these terms or other similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us.
Our forward-looking statements may be influenced by numerous factors, including the following:
· | the adverse effect of global health crises, such as the novel coronavirus (COVID-19) pandemic and others, on our Brazilian and international sales and operations, demand for our petrochemical products, our manufacturing facilities, price of raw materials, logistics for our products and raw materials, and supply chains; |
· | general economic, political and business conditions in the markets or jurisdictions in which we operate, including demand and prices for petrochemical products; |
· | interest rate fluctuations, inflation and exchange rate movements of thereal in relation to the U.S. dollar and other currencies; |
· | the cyclical nature of the global petrochemical industry; |
· | competition in the global petrochemical industry; |
· | prices of naphtha, ethane, propane, propylene and other raw materials and the terms and conditions of the supply agreements related thereto; |
· | international prices of petrochemical products; |
· | actions taken by our major shareholders; |
· | inherent risks related to any change of our corporate control; |
· | our ability to implement our financing strategy and to obtain financing on satisfactory terms; |
· | our progress in integrating the operations of companies or assets that we may acquire in the future, so as to achieve the anticipated benefits of these acquisitions; |
· | changes in laws and regulations, including, among others, laws and regulations affecting tax and environmental matters and import tariffs in other markets or jurisdictions in which we operate or to which we export our products; |
· | future changes in Brazilian, Mexican, American and European policies and related actions undertaken by those governments; |
· | a deterioration in the world economy that could negatively impact demand for petrochemicals; |
· | decisions rendered in major pending or future tax, labor, environmental and other legal proceedings; and |
· | other factors identified or discussed under “Item 3. Key Information—Risk Factors.” |
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·general economic, political and business conditions in the markets or jurisdictions in which we operate, including demand and prices for petrochemical products;
·interest rate fluctuations, inflation and exchange rate movements of thereal in relation to the U.S. dollar and other currencies;
·the cyclical nature of the global petrochemical industry;
·competition in the global petrochemical industry;
·prices of naphtha, ethane, propane, propylene and other raw materials and the terms and conditions of the supply agreements related thereto;
·international prices of petrochemical products;
·actions taken by our major shareholders;
·inherent risks related to any change of our corporate control;
·our ability to successfully appeal the suspension of trading and eventual delisting of our American depositary shares (“ADSs”) on the New York Stock Exchange (“NYSE”);
·our ability to implement our financing strategy and to obtain financing on satisfactory terms;
·our progress in integrating the operations of companies or assets that we may acquire in the future, so as to achieve the anticipated benefits of these acquisitions;
·changes in laws and regulations, including, among others, laws and regulations affecting tax and environmental matters and import tariffs in other markets or jurisdictions in which we operate or to which we export our products;
·future changes in Brazilian, Mexican, American and European policies and related actions undertaken by those governments;
·a deterioration in the world economy that could negatively impact demand for petrochemicals;
·decisions rendered in major pending or future tax, labor, environmental and other legal proceedings; and
·other factors identified or discussed under “Item 3. Key Information—Risk Factors.”
Our forward-looking statements are not guaranteesa guarantee of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will bedifferent due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.
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Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
| xi |
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Selected Financial and Other Information
The following selected information should be read in conjunction with “Presentation of Financial and Other Information,” “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and the related notes thereto, which are included in this annual report.
The selected financial data as of December 31, 20182019 and 20172018 and for the three years ended December 31, 20182019 have been derived from our audited consolidated financial statements, prepared in accordance with IFRS, and included in this annual report.
In 2018,2019, except for the changes that occurred following the adoption of the new accounting standards described in “Item 5. Operating and Financial Review and Prospects Changes in key accounting policies” below, accounting practices were applied prospectively in the preparation of our financial statements.statements, except for IFRS 16 described in “Section 4. Information on the Company—Changes in key accounting policies.”
In 2017, Braskem’s management commenced classifying interest payments as interest paid in cash flow from operations rather than interest paid under cash used in investment activities. This change allows: (i) the direct identification of the total amount paid as interest; and (ii) greater accuracy in determining the net cash provided by operating activities. As a result of this change, we reclassified interest paid during the period ended December 31, 2016 and 2015 of R$288.4 million and R$786.1 million, respectively.
In 2017, we standardized the classification of provision for profit sharing across all of our subsidiaries, regardless of whether such subsidiaries were productive. We carried out this standardization because we deemed the current classification more appropriate, since this provision does not present recurring elements or, even when recurring, the amounts differ from year to year.
In this context, during the year ended December 31, 2016, we2019, the Company changed the classification of the profit sharing expenses in order to report the effects of these expenses by function. The Company also reclassified coststhe profit sharing expenses in the year ended December 31, 2018 from “Other expenses” (R$375.4 million in 2018) to “cost of goods sold of R$163.1sold” (R$145.4 million sellingin 2018), “selling and distribution expenses of R$7.2expenses” (R$50.3 million and generalin 2018), “general and administrative expenses of R$191.6expenses” (R$160.2 million to the “participation of members in profits2018) and results” line item under other income (expenses), net.“research and development” (R$19.4 million in 2018).
We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares and preferred shares since January 1, 20162017 inreaisand in U.S. dollars translated fromreaisat the commercial market selling rate in effect as of the payment date under the caption “Item 8. Financial Information—Dividends and Dividend Policy—Payment of Dividends.”
1
| For the Year Ended December 31, | |||||
| 2019 | 2019 | 2018 | 2017 | 2016 | 2015 |
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| Restated |
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| (in millions of US$, except per share data and as indicated) | (in millions ofreais, except per share data and as indicated) | ||||
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Statement of Profit or Loss Data: |
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Net revenue | 9,642.6 | 52,323.5 | 57,999.9 | 49,260.6 | 47,664.0 | 46,880.0 |
Cost of products sold | (8,455.0) | (45,879.1) | (46,576.6) | (36,177.4) | (34,985.6) | (36,697.8) |
Gross profit | 1,187.6 | 6,444.4 | 11,423.3 | 13,083.2 | 12,678.4 | 10,182.2 |
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Income (expenses): |
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Selling and distribution | (328.7) | (1,783.5) | (1,689.2) | (1,459.6) | (1,403.7) | (1,077.3) |
(Loss) reversals for impairment of trade accounts receivable | (1.3) | (7.1) | 87.0 |
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General and administrative | (409.9) | (2,224.2) | (1,793.2) | (1,434.3) | (1,285.6) | (1,095.4) |
Research and development | (45.7) | (247.7) | (219.2) | (167.5) | (162.0) | (169.6) |
Results from equity investments | 1.8 | 10.2 | (0.9) | 40.0 | 30.1 | 2.2 |
Other operating income (expenses), net(1) | (375.7) | (2,038.5) | 472.5 | (854.9) | (3,906.0) | (952.3) |
Operating profit | 28.3 | 153.6 | 8,280.2 | 9,206.9 | 5,951.2 | 6,889.8 |
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Financial results: |
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Financial expenses | (715.5) | (3,882.8) | (3,007.6) | (3,747.2) | (3,571.0) | (3,163.4) |
Financial income | 156.7 | 850.6 | 589.1 | 603.6 | 690.1 | 584.9 |
Exchange rate variations, net | (317.8) | (1,724.5) | (2,257.0) | (798.7) | (3,210.4) | 102.9 |
Financial expenses, net | (876.6) | (4,756.7) | (4,675.5) | (3,942.3) | (6,091.3) | (2,475.6) |
(Loss) Profit before income tax and social contribution | (848.3) | (4,603.1) | 3,604.8 | 5,264.6 | (140.1) | 4,414.2 |
Current and deferred income tax and social contribution | 361.7 | 1,962.7 | (736.6) | (1,357.7) | (616.0) | (1,660.4) |
(Loss) Profit for the year of continued operations | (486.6) | (2,640.4) | 2,868.2 | 3,906.9 | (756.1) | 2,753.8 |
Results from discontinued operations | 0.0 | 0.0 | 0.0 | 8.9 | 26.9 | 6.4 |
(Loss) Profit for the year | (486.6) | (2,640.4) | 2,868.2 | 3,915.8 | (729.2) | 2,760.2 |
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Net income attributable to shareholders of the company | (468.3) | (2,541.0) | 2,827.7 | 3,865.4 | (411.5) | 3,001.7 |
Net income attributable to non-controlling interest in subsidiaries | (18.3) | (99.4) | 40.5 | 50.3 | (317.7) | (241.5) |
| (468.6) | (2,640.4) | 2,868.2 | 3,915.8 | (729.2) | 2,760.2 |
(Loss) Profit per share: |
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Basic: |
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Common shares | (0.5883) | (3.1922) | 3.5543 | 4.8479 | (0.5511) | 3.7651 |
Preferred class “A” shares | (0.5883) | (3.1922) | 3.5543 | 4.8479 | (0.5511) | 3.7651 |
Preferred class “B” shares | (0.5883) | (3.1922) | 0.5910 | 0.6069 | 0.0000 | 0.6065 |
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Diluted: |
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Common shares | (0.5883) | (3.1922) | 3.5543 | 4.8590 | (0.5511) | 3.7651 |
Preferred class “A” shares | (0.5883) | (3.1922) | 3.5543 | 4.8590 | (0.5511) | 3.7651 |
Preferred class “B” shares | (0.5883) | (3.1922) | 0.5910 | 0.6069 | 0.0000 | 0.6065 |
ADS(2) | (1.1766) | (6.3845) | 7.1086 | 9.7180 | (1.1021) | 7.5302 |
(1) |
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(2) | For each of the years presented, each ADS represented two of our class A preferred shares. |
2
| For the Year Ended December 31, | |||||
| 2019 | 2019 | 2018 | 2017 | 2016 | 2015 |
| (in millions of US$, except per share data and as indicated) | (in millions ofreais, except per share data and as indicated) | ||||
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Statement of Financial Position Data: |
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Cash, cash equivalents and financial investments(1) | 1,564.9 | 8,491.4 | 7,905.3 | 6,077.8 | 7,892.3 | 7,458.2 |
Short-term trade accounts receivable | 421.2 | 2,285.8 | 3,075.2 | 3,281.2 | 1,634.1 | 2,755.7 |
Inventories(2) | 1,405.2 | 7,625.1 | 8,486.6 | 6,640.0 | 5,299.5 | 6,243.7 |
Property, plant and equipment, net | 5,955.3 | 32,315.2 | 31,759.9 | 29,761.6 | 29,336.7 | 34,100.3 |
Total assets | 12,555.3 | 68,129.0 | 58,807.5 | 52,731.8 | 51,821.9 | 60,626.9 |
Short-term borrowings | 142.8 | 774.9 | 737.4 | 1,184.8 | 2,594.5 | 1,970.0 |
Long-term borrowings | 5,204.7 | 28,242.1 | 24,160.7 | 22,176.6 | 20,736.6 | 25,380.5 |
Share capital | 1,482.3 | 8,043.2 | 8,043.2 | 8,043.2 | 8,043.2 | 8,043.2 |
Shareholders’ equity (including non- controlling interest) | 727.0 | 3,944.7 | 5,654.7 | 5,472.8 | 1,720.7 | 945.5 |
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Other Financial and Operating Information: |
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Statement of Cash Flow Data: |
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Net cash provided by (used in): |
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Operating activities | 417.5 | 2,265.3 | 9,250.4 | 2,461.6 | 4,457.9 | 7,091.7 |
Investing activities | (491.4) | (2,666.4) | (2,488.3) | (2,406.4) | (2,552.5) | (3,334.2) |
Financing activities | 301.4 | 1,636.8 | (4,603.4) | (2,988.5) | (2,757.3) | (97.5) |
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Other Information: |
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Capital expenditures: |
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Property, plant and equipment | (494.4) | (2,682.5) | (2,706.3) | (2,273.2) | (2,586.5) | (3,337.9) |
(1) | Includes current financial investments. |
(2) | Includes non-current advances to suppliers. |
| For the Year Ended December 31, | |||||
| 2018(1) | 2018 | 2017 | 2016 Adjusted(2) | 2015 | 2014 Adjusted(2) |
| (in millions of US$, except per share data) | (in millions ofreais, except per share data) | ||||
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Statement of Operations Data: |
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Net sales revenue | 14,968.5 | 57,999.9 | 49,260.6 | 47,664.0 | 46,880.0 | 45,135.9 |
Cost of products sold | (11,982.9) | (46,431.2) | (36,177.4) | (34,985.6) | (36,697.8) | (39,205.3) |
Gross profit | 2,985.6 | 11,568.6 | 13,083.2 | 12,678.4 | 10,182.2 | 5,930.6 |
Income (expenses): |
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Selling and Distribution | (398.9) | (1,545.6) | (1,459.6) | (1,403.7) | (1,077.3) | (1,035.2) |
General and administrative | (421.4) | (1,633.0) | (1,434.3) | (1,285.6) | (1,095.4) | (1,038.4) |
Research and development | (51.6) | (199.8) | (167.5) | (162.0) | (169.6) | (128.1) |
Results from equity investments | (0.2) | (0.9) | 40.0 | 30.1 | 2.2 | 3.9 |
Other operating income | 23.4 | 90.9 | (854.9) | (3,906.0) | (952.3) | (262.9) |
Operating profit | 2,136.9 | 8,280.2 | 9,206.9 | 5,951.2 | 6,889.8 | 3,469.9 |
Financial results: |
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Financial expenses | (776.2) | (3,007.6) | (3,747.2) | (3,571.0) | (3,163.4) | (2,716.4) |
Financial income | 152.0 | 589.1 | 603.6 | 690.1 | 584.9 | 399.9 |
Exchange rate variations, net | (582.5) | (2,257.0) | (798.8) | (3,210.4) | 102.9 | (84.1) |
Financial expenses, net | (1,206.6) | (4,675.5) | (3,942.3) | (6,091.3) | (2,475.6) | (2,400.6) |
Profit (loss) before income tax and social contribution | 930.3 | 3,604.7 | 5,264.6 | (140.1) | 4,414.2 | 1,069.3 |
Current and deferred income tax and social contribution | (190.1) | (736.6) | (1,357.7) | (616.0) | (1,660.4) | (491.0) |
Profit (loss) from continuing operations | 740.2 | 2,868.2 | 3,906.9 | (756.1) | 2,753.8 | 578.4 |
Discontinued operations results | — | — | 8.9 | 26.9 | 6.4 | 0.1 |
Profit (loss) for the year | 740.2 | 2,868.2 | 3,915.8 | (729.2) | 2,760.2 | 578.2 |
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Profit (loss) for the year attributable to Company’s shareholders | 729.8 | 2,827.7 | 3,865.4 | (411.5) | 3,001.7 | 716.0 |
Loss attributable to non-controlling interest in subsidiaries | 10.5 | 40.5 | 50.3 | (317.7) | (241.5) | (137.8) |
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Profit (loss) per share: |
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Basic: |
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Common shares | 0.9173 | 3.5543 | 4.8479 | (0.5511) | 3.7651 | 1.0857 |
Preferred class “A” shares | 0.9173 | 3.5543 | 4.8479 | (0.5511) | 3.7651 | 1.0857 |
Preferred class “B” shares | 0.1525 | 0.5910 | 0.6069 | — | 0.6065 | 0.6062 |
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Diluted: |
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Common shares | 0.9173 | 3.5543 | 4.8590 | (0.5173) | 3.7732 | 1.0857 |
Preferred class “A” shares | 0.9173 | 3.5543 | 4.8590 | (0.5173) | 3.7731 | 1.0857 |
Preferred class “B” shares | 0.1525 | 0.5910 | 0.6069 | — | 0.6065 | 0.6062 |
ADS(3) | 1.8346 | 7.1086 | 9.7180 | (1.0346) | 7.5464 | 1.7992 |
(1)Translated for convenience only using the selling rate as reported by the Central Bank as of December 31, 2018 forreais into U.S. dollars of R$3.8748=US$1.00.
(2)(i) For comparability purposes, the Company changed the classification of provision for profit sharing to standardize such classification among all companies, whether or not productive, and because it deemed the current classification more appropriate, since this provision does not present recurring elements or, even when recurring, the amounts differ from year to year. In the fiscal year ended December 31, 2016, 2015 and 2014, the amounts related to this item were reclassified from “costs of goods sold” (2016 – R$163,056, 2015 – R$165,522 and 2014 – R$146,388), “selling and distribution expenses” (2016 - R$7,155, 2015 – R$5,848 and 2014 – R$2,201) and “general and administrative expenses” (2016 - R$191,586, 2015 – R$185,067 and 2014 – R$157,135) to the item “other income (expenses), net”; and (ii) for comparability purposes, the Company is presenting the amount of "Costs of idle industrial plants" for the year 2016 and 2015, reclassified from "Other income (expenses), net". The amounts reclassified in the period ended December 31, 2016 and 2015 were R$208,006 and R$135,341, respectively.
(3)American depositary shares, or ADS, are U.S. dollar-denominated equity shares of a foreign-based company on an American stock exchange. In our case, for the each of the periods presented, each ADS represented two of our class A preferred shares.
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| At and For the Year Ended December 31, | |||||
| 2018(1) | 2018 | 2017 | 2016 | 2015 | 2014 |
| (in millions of US$, except as indicated) | (in millions ofreais, except as indicated) | ||||
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Balance Sheet Data: |
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Cash and cash equivalents and financial investments(2) | 2,040.2 | 7,905.3 | 6,077.8 | 7,892.3 | 7,458.2 | 3,085.7 |
Current trade accounts receivable | 793.6 | 3,075.2 | 3,281.2 | 1,634.1 | 2,755.7 | 2,409.1 |
Inventories(3) | 2,190.2 | 8,486.6 | 6.460,0 | 5,238.0 | 6,243.7 | 5,688.3 |
Property, plant and equipment | 8,196.5 | 31,759.9 | 29,761.6 | 29,336.7 | 34,100.3 | 29,071.0 |
Total assets | 15,176.9 | 58,807.5 | 52,731.8 | 51,821.9 | 60,626.9 | 49,501.9 |
Current borrowings | 190.3 | 737.4 | 1,184.8 | 2,594.5 | 1,970.0 | 1,419.5 |
Non-current borrowings | 6,235.3 | 24,160.7 | 22,176.6 | 20,736.6 | 25,380.5 | 18,926.7 |
Capital | 2,075.8 | 8,043.2 | 8,043.2 | 8,043.2 | 8,043.2 | 8,043.2 |
Shareholders’ equity (including non-controlling interest in subsidiaries) | 1,459.3 | 5,654.7 | 5,472.8 | 1,720.7 | 945.5 | 5,597.1 |
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Other Financial and Operating Information: |
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Cash Flow Information: |
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Net cash generated by (used in): |
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Operating activities | 2,387.3 | 9,250.4 | 2,461.6 | 4,457.9 | 7,091.7 | 3,813.1 |
Investing activities | (642.2) | (2,488.3) | (2,406.4) | (2,552.5) | (3,334.2) | (5,054.1) |
Financing activities | (1,188.0) | (4,603.4) | (2,988.5) | (2,757.3) | (97.5) | 894.4 |
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Other Information: |
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Capital expenditures: |
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Property, plant and equipment and Intangible assets | (698.4) | (2,706.3) | (2,273.2) | (2,586.5) | (3,337.9) | (5,378.8) |
Investments in subsidiaries | — | — | (608.2) | — | — | 0.1 |
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Total Sales Volume Data (in thousands of tons): |
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Ethylene(4) |
| 623.6 | 624.6 | 576.1 | 548.6 | 511.4 |
Propylene(4) |
| 355.4 | 403.5 | 370.6 | 416.5 | 445.7 |
Polyethylene (PE) |
| 2,608.3 | 2,711.6 | 2,729.7 | 2,626.9 | 2,386.5 |
Polypropylene (PP) |
| 1,580.7 | 1,687.2 | 1,671.9 | 1,513.1 | 1,591.9 |
Polyvinyl chloride (PVC) |
| 535.7 | 607.7 | 645.2 | 594.9 | 659.6 |
(1) Translated for convenience only using the selling rate as reported by the Central Bank as of December 31, 2018 forreais into U.S. dollars of R$3.8748=US$1.00.
(2) Includes current financial investments.
(3) Includes non-current advances to suppliers.
(4) Includes only third-party sales.
Exchange Rates
The current laws and regulations governing the Brazilian foreign exchange system allow the purchase and sale of foreign currency and the international transfer ofreais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures. Since 1999, the Central Bank has allowed the U.S. dollar-real exchange rate to float freely, and, since then, the U.S. dollar-real exchange rate has fluctuated considerably.
In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to permit thereal to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. Thereal may depreciate or appreciate against the U.S. dollar substantially. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that such measures will not be taken by the Brazilian government in the future. See “—RiskFactors—Risks Relating to Brazil—Brazilian government exchange control policies could increase the cost of servicing our foreign currency-denominated debt, adversely affect our ability to make payments under our foreign currency-denominated debt obligations and impair our liquidity” and “—Risk Factors—Risks Relating to Our Equity and Debt Securities—If holders of the ADSs exchange them for class A preferred shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.”
3 |
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Risk Factors
Risks Relating to Us and the Petrochemical Industry
Global or regional health pandemics or epidemics, including that related to the novel coronavirus (COVID-19), may adversely affect our business, financial condition and results of operations.
Our business, financial condition and results of operations may be adversely affected by the novel coronavirus (COVID-19) pandemic, which was reported to have surfaced in China in December 2019 and spread to the rest of the world, or by other pandemics or epidemics of similar nature. In 2020, the novel coronavirus (COVID-19) pandemic has significantly impacted economic activity and markets around the world, and its severity, magnitude and duration are highly uncertain, rapidly changing and difficult to predict. At this time, our management cannot fully predict with certainty the effects that the novel coronavirus (COVID‑19) pandemic will have on our business, financial condition and results of operations and whether these effects will be material to us.The spread of the novel coronavirus (COVID-19) has caused us to modify certain of our business practices, and we may take further actions as required by government authorities or that we determine are in the best interests of our employees, customers, partners and suppliers.Based on our preliminary operating data for May 2020 and the publicly reported expected impact on certain industries that are customers to our products (such as automotive and construction), we believe the novel coronavirus (COVID-19) has affected our business in numerous ways, including, but not limited to, reduction of our production, sales volume and net revenue, increase of some of our costs, and decrease of our gross margin.
We are closely monitoring the impact of the novel coronavirus (COVID-19) pandemic on all aspects of our business and geographies, including how it may impact our customers, team members, suppliers, business partners and distribution channels. We are at this time unable to fully predict the impact that the novel coronavirus (COVID-19) pandemic will have on our financial position and results of operations due to numerous uncertainties that we are unable to predict or control, such as the severity of the virus, the duration of the outbreak, governmental, business or other actions, which could include limitations on our operations or mandates to provide products or services, impacts on our supply chains, the effect on customer demand, plant closures or changes to our operations. We cannot predict the impact that the novel coronavirus (COVID-19) pandemic will have on our customers, suppliers and other business partners, and any material effect on these parties could also adversely impact us. Theeffects on thehealth of our workforce, and our ability to meet staffing needs in our plants, distribution facilities, sale operations and other critical functions cannot be predicted.Further, the impacts of the expected worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer and corporate spending as well as other unanticipated consequences remain unknown. The pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which may reduce our ability to access capital or our customers’ability to pay us for past or future purchases, which could negatively affect our liquidity.
While we are actively managing our response topotential impacts that are identified, we may not be able to respond to all impacts on a timely basis to prevent adverse effects on our business, financial condition and results of operations.
The cyclical nature of the petrochemical industry may reduce our net sales revenue and gross margin.
The petrochemical industry, including the global markets in which we compete, is cyclical and sensitive to changes in global supply and demand. This cyclicality may reduce our net sales revenue, increase our costs and decrease our gross margin, including as follows:
·
| downturns in general business and economic activity may cause demand for our products to decline; |
· | when global demand falls, we may face competitive pressures to lower our prices; |
· | increases in prices of the main raw materials we use, principally naphtha, ethane and propylene; and |
· | if we decide to expand our plants or construct new plants, we may do so based on an estimate of future demand that may never materialize or materializes at levels lower than we predicted. |
Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase, followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. Prices in the petrochemical industry follow the global petrochemical industry, and we establish the prices for the products we sell in Brazil, other countries in Latin America, the United States and the world with reference to international market prices. Therefore, our net sales revenue, feedstock costs and gross margin are increasingly linked to global industry conditions that we cannot control, and which may adversely affect our results of operations and financial position.
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Adverse conditions in the petrochemical industry may adversely affect demand for our products.
Sales of our petrochemical products are tied to global production levels and demand, which can be affected by macro-economic factors such as interest rates, oil prices, shifts to alternative products, consumer confidence, employment trends, regulatory and legislative oversight requirements, trade agreements, as well as regional disruptions, natural disasters, epidemics, pandemics, or other global events. For example, the persistence of the recent novel coronavirus (COVID-19) pandemic could negatively impact supply chains worldwide and demand for our products. The extent to which the novel coronavirus (COVID-19) pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including the severity of the novel coronavirus (COVID-19) pandemic, actions to contain it or treat its impact, among others.
Our revenue from certain of our customers is significant, and the credit risks associated with certain of these customers could adversely affect ourresults of operations.
We engage in a number of transactions where counterparty credit risk is a relevant factor, including transactions with certain of our customers and those businesses we work with to provide services, among others. These risks are dependent upon market conditions and also the real and perceived viability of the counterparty. The failure or perceived weakness of any of our counterparties has the potential to expose us to risk of loss in certain situations. Our revenue from certain of our customers is significant, and the credit risks associated with certain of these customers could adversely affect ourresultsourresults of operations.operations. Certain contracts and arrangements that we enter into with counterparties may provide us with indemnification clauses to protect us from financial loss. To the extent the credit quality of these customers deteriorates or these customers seek bankruptcy protection, our ability to collect our receivables, and ultimately ourresultsourresults of operations,, may be adversely affected.In addition, delays in payment cycles by significant customers may adversely affect our liquidity and working capital.
Our results may be adversely affected by increases in expected credit losses.
We have a large balance of accounts receivable and have established a reserve for the portion of such accounts receivable that we estimate will not be collected because of our customers’ non-payment.
If the viability of the business viability of certain of our customers deteriorates or our credit policies are ineffective in reducing our exposure to credit risk relating to such customers, additional increases in expected credit losses accounts may be necessary, which could have a material adverse effect on our cash flows and results of operations. We record expected credit losses in an amount we consider sufficient to cover estimated losses on the realization of our trade accounts receivable, taking into account our loss experience and the aging of our accounts receivable, but we cannot assure you that these amounts will be sufficient to cover eventual losses.
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As of December 31, 2018,2019, our total trade accounts receivable, was R$3,093.0 million and thenet of expected credit losses were(R$229.3 million) was R$233.62,306.7 million.
Global macroeconomic factors have had, and may continue to have, adverse effects on the margins that we realize on our products.
Our results of operations may be materially affected by adverse conditions in the financial markets and depressed economic conditions generally. Economic downturns in geographic areas or jurisdictions in which we sell our products may substantially reduce demand for our products and result in decreased sales volumes. Recessionary environments adversely affect our business because demand for our products is reduced.
According to the IMF, the global economyworld’s GDP grew 3.3%by 2.9% in 2018, an increase2019, a decrease of 0.7 p.p.percentage points as compared to global economicthe world��s GDP growth during 2017.2018. In 2018,2019, Brazil’s GDP grew by 1.1%, compared to a 1.0% growth in 2017 and contractions of 3.5% and 3.8% in 2016 and 2015, respectively.
For the United States, the IMF reported GDP growth of 2.9% in 2018 compared to growth of 2.3%, 1.5% and 2.6%1.3% in 2018, growth of 1.0% in 2017, 2016 and 2015,a contraction of 3.5% in 2016.
According to the IMF, the U.S. GDP grew by 2.3% in 2019 as compared to growth of 2.9%, 2.3% and 1.5% in 2018, 2017 and 2016, respectively. In addition, according to the IMF, reportedEuropean GDP growthgrew by 1.2% in 2019 and the Mexican GDP stagnated in 2019.
According to the IMF, because ofthe adverse effects of 2.2% in 2018 forthe novel coronavirus (COVID-19) pandemic on the economy of several countries, the world’s GDP and the GDP of Brazil, the United States, Europe and growth of 2.2%Mexico is expected to shrink significantly in Mexico2020, leading to an economic contraction and a recession in 2018.these countries or regions.
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Our ability to export to other countries depends on the level of economic growth in those countries and other economic conditions, including prevailing inflation and interest rates. In addition, disruptions in the global balance between supply and demand may impair our ability to export our products in response to a decline in domestic demand for these products. Prolonged volatility in economic activity in our key export markets, such as South America, Europe and Asia, could continue to reduce demand for some of our products and lead to increased margin pressure by importers into Brazil, which would adversely affect our results of operations.
We face competition from producers of polyethylene, polypropylene, PVC and other petrochemical products.
We face strong competition across all of our petrochemical products. Our U.S. operations face competition in the United States from other U.S. producers of polypropylene and the other foreign producers of polypropylene that serve the United States. Our German operations face competition in Europe and the other export markets that it serves from European and other foreign producers of polypropylene. Our Mexico operations face competition from Mexican and U.S. producers of polyethylene producers. Competitors from South America are able to export to Brazil with reduced or no import duties. In addition, producers of almost all continents have regular or spot sales to trading companies and direct customers in Brazil for petrochemicals and resins.
We generally set the prices for our second generation products sold in Brazil with reference to the prices charged for these products by foreign producers in international markets. We generally set the prices for our second generation products exported from Brazil based on international spot market prices. We set the prices for polypropylene sold in the United States and Europe based on regional market pricing. The price for polyethylene in Mexico is based on prices for the polymer in the U.S. Gulf Coast region.
As a result of the recently commissioned gas-based ethylene capacity, in the United States, coupled with the competitive pricing of the ethane as feedstock for petrochemicals production, we anticipate that we may experience increased competition from producers of thermoplastic resins, especially from North American, Middle East and Chinese producers, in the markets in which we sell these products.
In addition, the appreciation of thereal against the U.S. dollar may increase the competitiveness of prices of imported products inreais,which may increase the competition in Brazil from other producers of second generation products. Some of our foreign competitors are substantially larger and have greater financial, manufacturing, technological and/or marketing resources than us. Also, the appreciation of the Euro against the U.S dollar may increase the competitiveness of prices of imported products denominated in Euro and, as a consequence, increase competition from imports.
We may face competition from producers of substitutes for our products as a result of evolving technology, consumer and industry trends and preferences, and regulatory changes.
We compete in a market that relies on technological innovation and the ability to adapt to evolving consumer and industry trends and preferences. Petrochemical products and other products produced with our petrochemical products, such as consumer plastic items, are subject to changing consumer and industry trends, demands and preferences, as well as stringent regulatory and environmental requirements. Therefore, products once favored may, over time, become disfavored by consumers or industries or no longer be perceived as the best option.option, which may, as a consequence, adversely affect our results of operations and financial position.
In addition, plastic waste management, disposal and recycling have become a growing global environmental concern and have been receiving as much attention as other environmental topics, such as global warming, fromthe population at large, national and local governments, private companies, trend setters, and consumers worldwide. There has been a growing trend to attempt to move away from the usage of plastic products, which has been backed by governmental and lawmaking initiatives, as well as investments in plastic recycling systems by private companies, public entities and national and local governments. In November 2018, we issued a statement in support of the development of certain initiatives to foster a “circular economy” (reusing and repurposing resources within the economy), including: (i) partnerships to develop new products and applications to improve efficiency and promote recycling and reuse (circular design), especially for single-use packaging;; (ii) investing in the development of new renewable products to support the circular economy at the beginning of the value chain; (iii) supporting and developing new technologies, business models and systems for collecting, recycling and recovering materials, considering the best balanceimproving recycling chains and recovery of economic, social and environmental impacts;materials; (iv) engaging consumers in recycling and recovery programs, especially through educational programs in connection with responsible consumerism to further knowledge on the value of plastic waste to the economy; (v) supporting and using life cycle assessment tools to select the most sustainable option, considering the economic, social and environmental impacts of plastic; (vi) supporting the measurement and communication of recycling and recovery indicators for plastic packaging materials; (vii) buildingengaging in partnerships to understand, prevent and solve the problemissues associated with mismanagement of plastic residues, especially debris in the oceans, with support from the scientific community and researchers;oceans; and (viii) supporting comprehensive science-basedpublic policies to understand the origins of and prevent debris in the oceans and to improve the management of solid waste management and recycling chains, especially plastics. of plastic waste.
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Despite these initiatives and other initiatives carried out within our industry, we may be unable to increase post-consumer plastic waste recycling rates, which may lead to decreased interest in our products by our customers and consumers, and impact our results of operations and financial condition.
In 2018, the European Union adopted a strategy for disposal of plastic products in a circular economy that aims to significantly increase recycling and targets the plastic products most often found on beaches and in seas. In addition, state and local governments, for example, in China and Brazil, have increasingly proposed or implemented bans on plastic products such as disposable plastic bags and straws, as well as other plastic food packaging. Additionally, the use of single-use plastic products has recently faced increased public scrutiny. Increased regulation or prohibition of the use of plastic products could increase the costs incurred by our customers to use such products or otherwise limit the use of these products, and could lead to a decrease in demand for PE, PP and other products we make. Such a decrease in demand could adversely affect our business, results of operations and financial condition.
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Our continued success depends on our ability to continue to differentiate ourselves and our products and also to react to changes in these trends. Factors that may affect consumer perception of our products, or of consumer goods produced with our products, may include health trends and attention to substitute products perceived as more environmentally friendly. For example, in recent years, we have witnessed a shift in consumer preference moving away from plastic straws and in favor of straws made from other materials, such as paper or other compounds. A failure to react to similar trends in the future could enable our competitors to grow or secure their market share before we have a chance to respond.
In addition, regulations may be amended or enacted in the future that would make it more difficult to appeal to our customers, end consumers, or to leverage the products that we produce. EvenFor example, failure to comply with applicable policies, which could lead to lower demand for our products, banning of plastic products without allowing the search for alternatives by means of efficient solutions, including resins produced by Braskem, could have a material adverse effect on our business, results of operations and financial condition. Also, even if we are able to continue to distinguish our products, there can be no assurance that our competitors (including producers of substitutes) will not be successful in persuading consumers of our products to switch to their products. Some of our competitors may have greater access to resources than we do, which may better position them to react and adapt to evolving trends, preferences, and regulatory changes. Any loss of interest in our products, or consumer products produced with our products, may have a material adverse effect on our business, results of operations and financial condition.
Higher raw materials costs would increase our cost of products sold and may reduce our gross margin and negatively affect our overall financial performance.
Naphtha, a crude oil derivative, is the principal raw material used by our Chemicals Unit (formerly our Basic Petrochemicals Unit) and, indirectly, in our other business units in Brazil. Naphtha accounted, directly and indirectly, for 41.8%40.7% of our consolidated cost of products sold in 20182019 and 40.0%41.8% in 2017,2018, respectively.
Ethane and propane are the principal raw materials that we use to produce our basic petrochemical products in our petrochemical complex located in Duque de Caxias, in the State of Rio de Janeiro, or the Rio de Janeiro Complex, and represent the principal production and operating cost of our Chemicals Unit.such Complex. Ethane and propane accounted, directly and indirectly, for 0.5% and 1.0%, respectively, of our consolidated cost of products sold in 2019 and for 0.6% and 1.2%, respectively, of our consolidated cost of products sold in 2018 and for 0.6% and 0.9%, respectively, of our consolidated cost of products sold in 2017.2018.
Propylene is the principal raw material that we use to produce polypropylene in the United States and Europe and represents the principal production and operating cost of our USA and Europe Unit. We also purchase propylene in the Brazilian market for certain of our Brazilian polypropylene plants. Propylene accounted, directly and indirectly, for 21.7%20.1% and 19.4%21.7% of our consolidated costs of products sold in 20182019 and 2017,2018, respectively.
Ethane is the principal raw material that we use to produce ethylene in the Mexico Complex and represents the principal production and operating cost of the Mexico Complex. Ethane accounted, directly and indirectly, for 1.0%1.3% and 1.4%1.0% of our consolidated costs of products sold in 2019 and 2018, and 2017, respectively.
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In Brazil, we purchase the naphtha used by our Chemicals Unit at prices based on the Amsterdam-Rotterdam-Antwerp naphtha price, or the ARA price, and the ethane and propane at Mont Belvieu market prices. We purchase ethane used by our Mexico Unit at prices based on the Mont Belvieu purity ethane. We purchase the propylene used in Brazil and USA plants at prices based on U.S. Gulf reference price, or the USG price. We purchase the propylene used in our Europe plants as reported by ICIS-LOR based on monthly contract price for propylene for Europe. We purchase refinery off gas at a price related to imported natural gas price.
The ARA price of naphtha fluctuates primarily based on changes in the U.S. dollar-based price of Brent crude oil on the Intercontinental Exchange based in London. TheIn 2019, the ARA price of naphtha averageddecreased 16.0%, from US$602601.30 per ton in 2018 up 24% from 2017,to US$505.30 per ton in line with2019, which was the 31% increase inresult of lower oil prices explained primarily by sanctions against Iran and the cutuse of more competitive feedstocks to produce ethylene at flexible petrochemical crackers, mainly in production by the Organization of the Petroleum Exporting Countries, or OPEC.United States.
In 2018,2019, the Mont Belvieu prices of ethane averaged 3321.6 cents per gallon, or US$243160.5 per ton, increasing 33%decreasing 34.0% from 2017,2018, driven by stronger demand from recently inaugurated crackers, combinedhigher supply associated with the: (i) startup of new gas fractionators and pipelines for transportation; and (ii) delays in the lackstartup of pipelines to transport gas and of crackers to extract ethane.new petrochemical crackers.
In 2018,2019, the USG price for propylene averaged US$1,189820.30 per ton, 21%31.0% lower than 2018, due to increased availability of the monomer, which was the result of the higher than 2017, which followedutilization rates of PDH plants and the upward trendhigher use of natural gas liquids in oil prices and higher demand from PP producers.petrochemical crackers.
The European price reference for propylene averaged US$1,1701,024.70 per ton in 2019, or 12.4% lower than in 2018, or 24% higher thanwhich was the result of the normalization of logistics constraints on propylene in Europe, which affected the region in the previous year explained by higher oil prices.due to low river levels.
The price of naphtha, ethane, propane and propylene in U.S. dollars has been, and may continue to be, volatile. In addition, fluctuations of the U.S. dollar in the future may effectively increase our naphtha, or natural gasethane, propane and propylene costs inreais. Any increase in naphtha, ethane, propane or propylene costs would reduce our gross margin and negatively affect our overall financial performance to the extent we are unable to pass on these increased costs to our customers and could result in reduced sales volumes of our products.
We do not hedge against changes in the price of our principal raw materials, so we are exposed to fluctuations in the price of these primary raw materials.
Currently, we do not hedge our feedstock’s price exposure. We believe the petrochemical industry has a natural hedge, mainly due to the historical correlation between itsnaphtha, which is the main feedstock (most notably, naphtha)used by a marginal producer, and its final products (polyethylene, polypropylene, PVC and others). Historically, fluctuations in the price of naphtha were followed by corresponding variations in first and second generation petrochemical products. Any hedge solely in naphtha’s price would break this natural protection, most likely making our results more volatile. However, in light of our ongoing process of feedstock diversification, and with ethane and propane representing a more significant portion of our variable costs, the natural hedge described above has weakened. This occurs because ethane and propane have a significantly lower correlation to the prices of our final products, when compared to naphtha and propylene. As result, and more so than in the past, when the price of naphtha or propyleneethane and propane fluctuate we may not be able to pass on to our end-consumers all of the corresponding increases in our feedstocks costs.
We depend on Petrobras to supply us with a substantial portion of our naphtha, ethane, propane and propylene needs.
Petróleo Brasileiro S.A. – Petrobras, or Petrobras, is the only Brazilian supplier of naphtha and has historically supplied up to 70% of the naphtha consumed by our Chemicals Unit. In 2018,2019, Petrobras supplied 50%36.5% of the naphtha consumed by our Chemicals Unit. Currently, Petrobras is also our primary supplier ofethane, propane and refinery off gas and has historically supplied the ethane, propane and refinery off gas consumed at our petrochemical complex located in the Rio de Janeiro Complex and our chemical complex located in Capuava, in the State of São Paulo, or the São Paulo Complex.
We are party to several propylene contracts with Petrobras refineries, which have historically supplied 40% of our propylene need to produce polypropylene in Brazil. As a result of limited infrastructure in Brazil to allow the importation of propylene in large quantities and substantial costs associated with the storage and transportation of the product, we are highly dependent on the propylene supplied by Petrobras.
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Our Petrobras ethane and propane supply agreements expire in January 2021, and our Petrobras naphtha purchase agreement expires in December 2020. Certain of our propylene agreements with Petrobras expire in 2021, while the remainderand others expire between 2028 and 2029. As of the date of this annual report, we cannot assureyou that these agreements will be renewed and, if renewed, whether we will be able to keep the same terms and conditions currently in force, including with respect to pricing, volume, pipeline and other infrastructure access. In June 2020, we entered into new agreements with Petrobras for the supply of petrochemical naphtha to our industrial units in Bahia and Rio Grande do Sul. The agreements will become effective for five years following the expiration of the current agreement with Petrobras in December 2020. See “Item 5—Operating and Financial Review and Prospects—Recent Developments—Naphtha Agreements with Petrobras.”
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Petrobras controls a substantial portion of the pipeline infrastructure used to transport naphtha across Brazil and is our primary supplier of naphtha, ethane, propane and propylene. A failure to renew or extend our existing agreements for the supply of raw materials or pipeline infrastructure use, or a termination of such agreements with Petrobras could lead to difficulties in accessing Petrobras’ pipeline infrastructure. The alternative would be to access pipeline infrastructure through the National Petroleum Agency, or the ANP, which would grant access to the pipeline infrastructure at a cost defined by the ANP.
Therefore, our production volumes and net sales revenue would likely decrease, while our costs would likelyincrease, and adversely affect our overall financial performance in the event of the following:
·significant damage to Petrobras’ supply infrastructure through which Petrobras and Braskem import naphtha,occurrence of one or to anymore of the pipelines connecting our plants to Petrobras’ facilities, whether as a result of an accident, natural disaster, fire or otherwise; orfollowing:
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| significant damage to Petrobras’ supply infrastructure through which Petrobras and Braskem import naphtha, or to any of the pipelines connecting our plants to Petrobras’ facilities, whether as a result of an accident, natural disaster, fire or otherwise; |
· | termination by Petrobras of the naphtha, ethane, propane or propylene supply contracts with us, which provide that Petrobras may terminate the contracts for certain reasons described in “Item 4. Information on the Company”; |
· | considering that Petrobras (and/or its subsidiaries) controls a substantial portion of the logistics infrastructure of our raw material across Brazil and our existing agreements for using its assets and their operation over certain Braskem’s assets, we could also assume that we would face difficulties to import and ensure access of raw material to our crackers in a scenario that these agreements are terminated by Petrobras (and/or its subsidiaries) and therefore with a substantial impact on the infrastructure that we currently access; or |
· | failure to renew or extend our existing agreements for the supply of raw materials or pipeline infrastructure use considering that Petrobras is conducting a divestment plan of its assets that also includes certain refineries that supply naphtha to us and some logistic infrastructure assets. |
In addition, although regulatory changes have ended Petrobras’ monopoly in the Brazilian naphtha market and have allowed us to import naphtha, any restrictions imposed on the importation of naphtha into Brazil could increase our production costs. For a discussion of additional risks related to sole-source suppliers, see “—We rely on limited or sole-source suppliers for our raw materials.”
We depend on propylene supplied by third parties in the United States and Europe.
Our reliance on third party suppliers poses significant risks to our results of operations, business and prospects. We rely upon third parties to supply our plants with propylene. We acquire propylene for our polypropylene plants in the United States under several long-term supply agreements and through the spot market. As of December 31, 2018,2019, we had fifteen long-term supply agreements with multiple suppliers. The pricing formulas for propylene under these supply agreements are generally based on market prices. As of the date of this annual report, we cannot assure you that these agreements will be renewed and, if renewed, whether we will be able to keep the same terms and conditions currently in force, including with respect to pricing, volume, pipeline and other infrastructure access.
We acquire propylene for our polypropylene plants in Germany under long-term supply agreements that provide for the supply of 88%84% of the propylene requirements of these plants. We have two main supply agreements in Germany. One will expire in September 2021 and is automatically renewable for consecutive one-year terms, unless terminated by one of the parties, and the other expires in December 2021.2023. We have entered into a third contract that will expire at the end of 2020, increasing the supply of our plants to 94%87% of the propylene required. The pricing formula for propylene under these supply agreements is based on market prices. As of the date of this annual report, we cannot assure you that these agreements will be renewed and, if renewed, whether we will be able to keep the same terms and conditions currently in force, including with respect to pricing, volume, pipeline and other infrastructure access.
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Delays in the availability of propylene of acceptable quality, or our inability to obtain such acceptable propylene in the quantities we need over what has been contracted, or at all, may adversely affect our revenue and results of operations.
We depend on ethane supplied by Pemex TRI in Mexico.
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In Mexico,We currently source most of our supply of ethane, which is the primary feedstock used in our polyethylene production process, from Pemex Transformación Industrial, or Pemex TRI, a state-owned Mexican entity, which is a subsidiary of Petróleos Mexicanos, or Pemex, the state-owned Mexican oil and gas company, pursuant to an ethane supply agreement, or the ethane supply agreement, entered into by Braskem Idesa S.A.P.I., or Braskem Idesa, which is our joint venture with Grupo Idesa, S.A. de C.V., or Idesa, has entered into a long-term delivery or paywith Pemex TRI under competitive commercial conditions at prices that reference: (i) the Mont Belvieu purity ethane price; and (ii) the Henry Hub price, which are both U.S. dollar-based international reference prices. As a result, our production volumes, net revenue and profit margins would likely decrease and materially adversely affect our overall financial performance in case one or more of the following events occur:
· | significant damage to Pemex TRI’s gas processing centers or to any of the pipelines connecting our complex to Pemex TRI’s facilities, whether as a consequence of an accident, natural disaster, fire or otherwise; |
· | any further decrease in the amount of ethane currently being delivered by Pemex TRI to our petrochemical complex; |
· | any dispute with Pemex TRI related to the ethane supply agreement, including the non-recognition or non-payment of liquidated damages; |
· | any material default by us or by Pemex TRI to supply ethane in the contractually agreed volumes or qualities under the ethane supply agreement; |
· | any repudiation or termination by Pemex TRI or by us of the ethane supply agreement; or |
· | delays in the availability of ethane of acceptable quality, or our inability to obtain acceptable ethane in the quantities and quality that we need, or at all, or at reasonable prices. |
Regarding liquidated damages due under the ethane supply contract (the “ethaneagreement, during the fourth quarter of 2019 and the first quarter of 2020, Pemex should have delivered to us credit notes relative to: (i) the first quarter of 2019, in an amount ofaround US$26 million,after the second quarter of 2019 and third quarter of 2019 contractual cure period for providing catch-up volumes has lapsed; and (ii) the second quarter of 2019, inan amountof around US$13 million,after the third quarter of 2019 and fourth quarter of 2019 contractual cure period for providing catch-up volumes has lapsed. As of the date of this annual report, Pemex has yet to provide such credit notes and has therefore not fulfilled its contractual obligation on a timely basis.
We are currently engaged in ongoing discussions with Pemex TRI to try and address the issues related to the fact that Pemex’s supply agreement”) to purchase an agreed-upon volume of ethane fromisbelow the contracted volumes and that Pemex Transformación Industrial (successorhas not paid certain liquidated damages due under the ethane supply agreement. We can give no assurances as to the outcome of such discussions and, at any time, we could initiate legal actions against Pemex Gas y Petroquímica Básica),for its defaults under the ethane supply agreement, such as arbitration proceedings against Pemex following the default and notifications triggered as a result thereof.
Furthermore, the ethane supply agreement could be modified through regulatory means, terminated or jeopardized by Pemex TRI as a state-ownedresult of political pressure to not comply with the agreement, change the terms of the agreement, initiate expropriation measures or a change in laws or regulations by the Mexican company, that is a subsidiary ofPetróleos Mexicanos, orgovernment.
A termination by Pemex the state-owned Mexican oil and gas company. This agreement’s initial expiration date is in 2035. TerminationTRI of the ethane supply agreement by Pemex TRI or any prolonged interruption, discontinuation or other disruption ina modification to the ethane supply agreement as a result of ethane to Braskem Idesapolitical pressure could significantly impact the operations of our Mexico Complex and have a material adverse effect on our overallbusiness, results of operations and financial performance.condition. The provisions for early termination by Pemex TRI include, but are not limited to,include: (i) aour failure of Braskem Idesa to pay that continues for more than 180 dayssix months after notice,notice; or (ii) an emergency stoppage in operations or force majeure event thatdue to which our insurers consider the complex to be a total loss, or after which we cannot or do not resume operations for 48 months.
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If Pemex TRI (i) delivers less than an average of 70% of the 66,000 barrels of ethane per day over a six-month period, (ii) reaches the annual limit in respect of liquidated damages owed by Pemex TRI to us and such limit is not waived by Pemex TRI, or (iii) materially breaches any of its obligations related to the supply of ethane thereunder, and such breach continues for more than 48 months. The loss of Pemex TRI as a supplier of ethane could lead to the interruption of operations in our Mexico Complex and require us to find a suitable alternative source. There can be no assurance that in the event of termination of this agreement or other disruption in the supply of ethane tosix months after notice, Braskem Idesa by Pemex TRI, we will be ablehas the right to replace such supplier in a timely manner and on favorable terms, and prevent any unscheduled interruption of our operations.
Additionally, our production volumes and net sales revenue would likely decrease and adversely affect our overall financial performance in the event of (i) a significant damage to Pemex TRI’s refineries or to the port facilities that Pemex TRI uses to import ethane, or to any of the pipelines connecting our plants to Pemex TRI’s facilities, whether as a consequence of an accident, natural disaster, fire, stoppage, force majeure event, or otherwise, or (ii) a failure by Pemex TRI to supply to us the agreed-upon volume of ethane, or at least the minimum volume of ethane, underterminate the ethane supply agreement (as further discussed below).
The ethane supply agreement contains a volume delivery long-term performance covenant that requiresand require Pemex TRI to meet a volume deliveryrepay certain outstanding debt and compensate Braskem and Idesa according to an agreed valuation formula including the repayment of ethane over a six-month period averaging 70%certain of the agreed-upon volume underour debt.
Any termination, cancelation or modification of the ethane supply agreement (the “Long-Term Performance Test”). Asor reduction in the amount of January 2019,liquidated damages owed to us by Pemex TRI volume deliveries under the Long-Term Performance Test remained close to the 70% threshold. In the event that Pemex TRI fails to meet the Long-Term Performance Test, in addition to the direct negative impactfor any other reason, could have an adverse effect on the production volumesour results of our Mexico Complex, it may (i) render us unable to generate sufficient cash to service our indebtedness with creditors under the Braskem Idesa Financing, (ii) cause such creditors to accelerate this indebtedness, and/or (iii) require Braskem Idesa to exercise a terminationoperations and put option against Pemex TRI that would force Pemex TRI to purchase the Mexico Complex from us. Seefinancial position.See “Item 4. Information on the Company—Mexico Unit—Supply Contracts of the Mexico Unit—Ethane” and “Item 5. Operating and Financial Review and Prospects—Capital Expenditures—Joint Venture—Mexico Complex.”
For a discussion of additional risks related to sole-source suppliers, see “—We rely on limited or sole-source suppliers for our raw materials.”
We have no control over the corporate actions or decisions of Pemex TRI, which is our main supplier of ethane and a Mexican state-owned enterprise.
The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions concerning the Mexican economy and state-owned enterprises could have a significant impact on Mexican private sector entities in general and on our operations in particular. We cannot predict the impact that political conditions will have on the Mexican economy. We can give no assurances that changes in Mexican federal government policies will not adversely affect our business, financial condition, results of operations and prospects. We currently do not have and do not intend to obtain political risk insurance.
Our main supplier of ethane, Pemex TRI, is a subsidiary of Pemex, a state-owned entity of the Mexican government, and, therefore, the Mexican government controls Pemex, as well as its annual budget, which is approved by the Mexican Congress. The Mexican government may cut spending in the future. These cuts could adversely affect Pemex’s annual budget and its ability to provide us with our contracted supply of ethane.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, U.S. domestic bribery laws, and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities, including Mexico. We may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities in Mexico, such as Pemex TRI. We could be held liable for the corrupt or other illegal activities of our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. Detecting, investigating, and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, prosecution, enforcement actions, sanctions, settlements, fines, damages, other civil or criminal penalties or injunctions, suspension or prohibition from contracting with certain persons, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any civil or criminal proceeding that may be filed against us, our business, financial condition and results of operations could be harmed.
In addition, there have been allegations released in the media in Brazil and Mexico regarding corruption at Pemex involving their procurement processes as a general matter. We can make no assurances that those allegations will not extend to the procurement process with regard to the ethane supply agreement.
Pemex’s production, over which we have no control, nor over any other corporate action or decision, have decreased over the last years according to public disclosure by Pemex. As a result, it has led to a significant decrease in oil production and associated production of natural gas, which, in turn, is the feedstock used by Pemex in the production of ethane. Any further decrease in the amount of ethane currently being delivered by Pemex TRI to our petrochemical facility pursuant to the terms of the ethane supply agreement or any reduction in, or outright failure by, Pemex TRI to pay us the liquidated damages due under the ethane supply agreement, could have an adverse effect on our financial condition and results of operation.
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We rely on limited or sole-source suppliers for our raw materials.materials, inputs and energy.
We rely on Petrobras for most or all of our supply of naphtha, ethane, propane, refinery off gas and propylene in Brazil, a few companies for a large portion of our supply of propylene in our USA and Europe Units,Unit, and Pemex TRI for most of our supply of ethane in Mexico. As a result,For naphtha supply to Brazil we rely in several international suppliers for most of the purchases to the crackers in the states of Bahia and Rio Grande do Sul, and we rely on Petrobras for the major part of the supply only to the cracker located in the state of São Paulo. Also, we are subject to substantial risks because of our reliance on these and other limited or sole-source suppliers of raw materials, inputs and energy, including the following risks:
· | if a supplier does not provide naphtha, ethane, propane, refinery off gas, propylene, input or energy, as the case may be, that meet our or their specifications in sufficient quantities and with acceptable performance or quality on time or deliver when required, then sales, production, delivery of our products to our customers on a timely manner and revenue from our plants could be adversely affected; |
· | if our relationship with a key supplier changes or is adversely affected, for example, due to competitive pressures (or conflicting interests), we may be unable to obtain naphtha, ethane, propane or propylene, as the case may be, on satisfactory financial terms; |
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· | some of our key suppliers are small companies with limited financial and other resources, and as a result, they may be more likely to experience financial and operational difficulties than larger, well-established companies, which increases the risk that they will be unable to deliver products as needed; and |
· | if a key supplier is acquired or has a significant change in business, the production and sales of our systems and services may be delayed or adversely affected, or our development programs may be delayed or may be impossible to complete. |
Delays in the availability of naphtha, ethane, propane, refinery off gas or propylene of acceptable quality, or our inability to obtain such acceptable naphtha, ethane, propane or propylene in the quantities we need or at all, may adversely affect our revenue and results of operations.
Our Polyolefins Unit and Vinyls Unit depend on our Chemicals Unit to supply them with their ethylene and propylene requirements. In addition, our plants located at the Camaçari Complex in the Brazilian state of Bahia depend on certain providers of environmental services for the treatment of effluents, industrial waste and water supply for industrial use.
Our Chemicals Unit is the only supplier of ethylene to our Vinyls Unit, the only supplier of ethylene to the polyethylene plants and the principal supplier of propylene to the polypropylene plants of our Polyolefins Unit. Because the cost of storing and transporting ethylene is substantial and there is inadequate infrastructure in Brazil to permit the importing of large quantities of ethylene and propylene, our Polyolefins Unit in Brazil and our Vinyls Unit are highly dependent on the supply of these products by our Chemicals Unit. Consequently, our production volumes of, and net sales revenue from, Polyolefins and Vinyls products would decrease, and our overall financial performance would be negatively affected, in the event of the following:
· | any significant damage to the facilities of our Chemicals Unit through which ethylene or propylene is produced, or to the pipeline or other facilities that connect our polyolefins plants or vinyls plants to our Chemicals Unit, whether as a consequence of an accident, natural disaster, fire or otherwise; |
· | any significant reduction in the supply of naphtha to our Chemicals Unit, as naphtha is the principal raw material used by our Chemicals Unit in the production of ethylene and propylene; or |
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· | any significant reduction in the supply of ethane or propane to our basic petrochemical plant in Rio de Janeiro, as ethane and propane are the principal raw materials used in the production of ethylene and propylene. |
Also, our production volumes of, and net revenue from, our Chemicals Unit products could decrease, and our overall financial performance would be negatively affected in the event of any significant damage to the facilities of our Chemicals UnitVinyls and Polyolefins Units through which ethylene or propylene is produced, or to the pipeline or other facilities that connect our polyolefins plants or vinyls plants to our Chemicals Unit, whether as a consequence of an accident, natural disaster, fire or otherwise;
·any significant reduction in the supply of naphtha to our Chemicals Unit, as naphtha is the principal raw material used by our Chemicals Unit in the production of ethylene and propylene; or
·any significant reduction in the supply of ethane or propane to our basic petrochemical plant in Rio de Janeiro, as ethane and propane are the principal raw materials used in the production of ethylene and propylene.consumed.
Our plants located at the Camaçari Complex in the Brazilian state of Bahia depend on our subsidiaries Cetrel S.A. (“Cetrel”) and, Água de Camaçari (“DAC”) and Distribuidora de Água Triunfo (“DAT”) for the: (i) treatment of effluents and industrial waste; (ii) supply of reuse water; (iii) supply of demineralized, clarified and potable water; and (iv) management of water reservoirs. An interruption in the operations of Cetrel, DAC or DACDAT may result in the shutdown of all of our plants at the Camaçari Complex and the Rio Grande do Sul Complex, in addition to increased environmental risks, which could lead to the shutdown of our entire petrochemical complex. If such a shutdown were to happen, our production volumes and net sales revenue from sales from our plants at the Camaçari Complex and the Rio Grande do Sul Complex would decrease, and our financial performance and results of operations would be adversely affected.
See also “—Our business is inherently subject to environmental, health and safety hazards. As a result, our business is also subject to stringent environmental and other regulations.” below.
We may be materially adversely affected if our transportation, storage and distribution operations are interrupted or are more costly than anticipated.
Our operations are dependent upon uninterrupted transportation, storage and distribution of our products. Transportation, storage or distribution of our products could be partially or completely, temporarily or permanently shut down as the result of any number of circumstances that are not within our control, such as:
·catastrophic events;
·strikes or other labor difficulties; and
·other disruptions in means of transportation.
· | catastrophic events; |
| strikes or other labor difficulties; and |
· | other disruptions in means of transportation. |
For example, in May 2018, Brazil experienced a national truck drivers’ strike that severely impacted the logistics operations of many companies throughout Brazil, including the delivery of our raw materials, our products, and other goods. In response to such strike, we gradually reduced the utilization rate of our petrochemical complexes in Brazil, which operated at 50% of their nominal capacity in May 2018. Following the strike, Brazil introduced a national freight cost schedule that set forth minimum prices for freight services provided by truck drivers and freight companies countrywide, which may have a lasting impact on freight prices in Brazil and lead to sustained increased transportation costs in the future in connection with our operations.
Any significant interruption at our distribution facilities, an inability to transport our products to or from these facilities, or to or from our domestic or foreign customers or suppliers, or an increase in transportation costs, for any reason, would materially adversely affect us.
In addition, the International Maritime Organization (IMO) has set a limit for sulphur in fuel oil used onboard ships of 0.50% m/m (mass by mass), which is applicable from January 2020, aimed at significantly reducing the amount of sulphur oxide emissions by ships, down from the previous 3.50% m/m (mass by mass), which could increase our shipping costs and, as a consequence, decrease our gross margin.
We rely on access to third-party licensed technology and related intellectual property, particularly in the context of the manufacturing process of certain of our products. If the licensed third-party technology and intellectual property that we use cease to be available to us on commercially reasonable terms, or at all, or if any such third party ceases to provide us with technical support under license or technical services agreements that we have entered into with them to allow us to satisfactorily operate, certain of our production facilities, our operating results and financial condition could be adversely affected.
We use technology and intellectual property licensed from third parties in the regular operation of our business, partircularly in the operation of certain machinery and equipment required for the production of certain of our products such as our first and second generation products, and we may continue to rely on access to third-party technology and intellectual property in the future.
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There can be no assurance that we will be able to continue to obtain or renew any such necessary technology and licenses on acceptable terms, or at all. Failure to obtain or renew the right to use third-party technology or intellectual property on commercially reasonable terms, or to maintain access to satisfactory technical support, could ultimately lead to stoppages in our production processes and preclude us from selling certain products, which could have a material adverse impact on our operating results and financing condition.
Additionally, our inability to maintain existing access to third-party technology, licenses and technical support on commercially reasonable terms, or at all, or to obtain additional technology, licenses or technical support necessary to manufacture current products or develop new ones, could require us to obtain substitute technology or licenses at a greater cost or of lower quality or performance standards, or require us to carry out unscheduled interruptions of our production facilities. Any of these circumstances could harm our business, financial condition and results of operations. There can be no assurance that we will be able to replace any such third-party technology, intellectual property or technical support service for any adequate substitute technology, intellectual property or technical support in a timely manner to avoid any unscheduled interruption of our production processes or facilities, or in a cost-efficient manner.
Capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns. If we are unable to complete capital projects at their expected cost and in a timely manner, or if the market conditions assumed asa basis for our project economics deteriorate, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Delays or cost increases related to capital spending programs involving engineering, procurement and construction of facilities could materially adversely affect our ability to achieve forecasted internal rates of return and results of operations. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to contract with our customers and supply certain products we produce.
Such delays or cost increases may arise as a result of unpredictable factors, many of which are beyond our control, including, but not limited to:
· | denial of or delay in receiving requisite regulatory approvals or permits; |
· | unplanned increases in the cost of construction materials or labor; |
· | disruptions in transportation of components or construction materials; |
· | change in the market conditions assumed as a basis for our project economics; |
· | adverse weather conditions, natural disasters, epidemics, pandemics or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers; |
· | shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; and |
· | nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors. Any one or more of these factors could have a significant impact on our ongoing capital projects. |
If we are unable to make up the delays associated with such factors or to recover the related costs, or if market conditions change, it could materially and adversely affect our business, financial condition, results of operations and cash flows.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit the ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our financing agreements.
Our level of indebtedness and our leverage, together with changes to our ratings and those of our debt securities by the main credit rating agencies, could have certain material consequences to us, including the following:
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· | limit our ability to obtain additional financing for working capital, additions to fixed assets, product development, debt service requirements, acquisitions and general corporate or other purposes; |
· | limit our ability to pay dividends; |
· | a portion of our cash flows from operations must be set aside for the payment of interest on existing indebtedness and is therefore not available for other purposes, including operations, additions to fixed assets and future business opportunities; |
· | limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt; |
· | we may become vulnerable in a downturn in general economic conditions; and |
· | we may be required to adjust the level of funds available for additions to fixed assets. |
As a result of the factors listed above, our financial condition and results of operations may be adversely affected.
Any downgrade in the ratings of Brazil, usour Company or our debt securities would likely result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity.
Currently, Standard & Poor’s Ratings Group, a division of McGraw Hill, Inc., or Standard & Poor’s, and Fitch Ratings Ltd., or Fitch, maintain our ratings on a global and national basis. Moody’s Investors Service, Inc., or Moody’s, only maintains our ratings on a global basis. On a global basis, we maintain an investment grade rating at: (i) Standard & Poor’s of BBB-BBB with a stablenegative outlook and (ii) Fitch Ratings of BBB-BBB with a stablenegative outlook. At Moody’s, our rating is Ba1 with a stable outlook. Our ratings are higher than the Brazilian sovereign rating by all these three main rating agencies. On a national basis, we maintain investment grade rating at: (i) Standard & Poor’s of brAAA with a stablenegative outlook and (ii) Fitch Ratings of AAA with a stablenegative outlook.
Our credit rating is sensitive to any change in the Brazilian sovereign credit rating. The credit rating of the Brazilian federal government was downgraded as recently asin January 2018 and has not been investment grade by all the main rating agencies for several years. Any decision by these agencies to downgrade the ratings of the Brazilian federal government, our ratings or those of our debt securities in the future would likely result in increased interest and other financial expenses relating to our borrowings and debt securities and the inclusion of financial covenants in the instruments governing new indebtedness, and could significantly reduce our ability to obtain such financing, on satisfactory terms or in amounts required by us, and our liquidity and would require us to post cash collateral pursuant to our obligations or to contract letters of credit to backstop guarantees provided by us in the context of the Mexican Complex.
In 2020, the novel coronavirus (COVID-19) pandemic has significantly impacted economic activity and markets around the world, and its severity, magnitude and duration are highly uncertain, rapidly changing and difficult to predict. Actual and potential impacts of the novel coronavirus (COVID-19) on the global economy, the economies of certain countries and certain companies has led ratings agencies to review and downgrade the credit ratings of sovereigns and issuers of securities around the world. Recently, Fitch Ratings has revised the outlook of the Brazilian sovereign credit rating to negative from stable. A potential further downgrade of the ratings of Brazil, our ratings, or those of our debt securities could result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity and ability to obtain additional financing under desired terms and conditions.
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We may be subject to attempts to acquire our control, which may lead to significant changes in management, the strategies that we are currently pursuing, or in our current corporate governance practices.
We may be subject to attempts to acquire our control. In the event there is a change in our corporate control, there might be significant changes in management, the strategies that we are currently pursuing, or in our current corporate governance practices.
For example, in June 2018, we were informed by Odebrecht S.A., or Odebrecht, about discussions that were being held between Odebrecht and LyondellBasell Industries N.V., or, LyondellBasell, regarding a potential transaction involving the transfer to LyondellBasell of all of Odebrecht’s interest in us. In June 2019, we were informed by Odebrecht that such discussions for a change-of-control transaction with LyondellBasell had been terminated. We cannot assure you that such negotiations will not be resumed, or that Odebrecht will not initiate discussions with other parties regarding a change-of-control transaction in the future.
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In addition, although we are not currently a party to any pending bankruptcy or other judicial restructuring proceedings in Brazil or elsewhere, we are exposed to certain risks related to the Odebrecht Judicial Restructuring Proceedings (as defined below), including risks related to the change of our corporate control resulting from decisions taken or agreed under such proceedings and the consequences derived therefrom. We have no control over the Odebrecht Judicial Restructuring Proceedings, and no assurance can be given on the outcome of the Odebrecht Judicial Restructuring Proceedings or their effect on us.
Some of our shareholders may have the ability to determine the outcome of corporate actions or decisions, which could affect the holders of our class A preferred shares and the ADSs.
Odebrecht, directly or through its wholly-owned subsidiary OSP Investimentos S.A., or OSP Inv., owns 38.3% of our outstanding share capital, including 50.1% of our voting share capital, and Petrobras holds 36.1% of our outstanding share capital, including 47.0% of our voting share capital. Nominees of Odebrecht constitute a majority of the members of our board of directors. Under a shareholders’ agreement to which Odebrecht and Petrobras are parties, which we refer to as the Braskem S.A. Shareholders’ Agreement, we may only undertakecertain actions after Odebrecht and Petrobras have reached a consensus with respect to those actions. However, Odebrecht will have the sole power to approve our business plan, through the board of directors, as described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders’ Agreements.” As a result, Odebrecht has the ability to determine the outcome of most corporate actions or decisions requiring the approval of our shareholders or our board of directors—in certain instances, with the consent of Petrobras—which could affect the holders of our class A preferred shares and of our American Depositary Shares, or ADSs.
Furthermore, on June 17, 2019, Odebrecht, together with certain of its controlling and controlled entities, filed a petition for judicial restructuring before the First Judicial Bankruptcy Court of the State of São Paulo, Brazil, seeking a voluntary judicial restructuring and emergency relief staying certain foreclosure actions by their creditors (the “Odebrecht Judicial Restructuring Proceedings”). The Odebrecht Judicial Restructuring Proceedings does not include us.
Although we are not currently a party to any pending bankruptcy or other judicial restructuring proceedings in Brazil or elsewhere, we are exposed to certain risks related to the Odebrecht Judicial Restructuring Proceedings, such as risks related to the change of our corporate control resulting from decisions taken and/or agreed under such proceedings and the consequences derived thereto, including but not limited to significant changes in our management and our strategy that may be undertaken by any new controlling shareholder(s)shareholders that may arise from the conclusion of these proceedings. We have no control over the Odebrecht Judicial Restructuring Proceedings, and no assurance can be given on the outcome of the Odebrecht Judicial Restructuring Proceedings or their effect on us.
We may face conflicts of interest in transactions with related parties.
We maintain trade accounts receivable and current and long-term payables with some of our affiliates and other related parties, including Petrobras, which is our domestic supplier of naphtha and other raw materials such as propylene, ethane, propane and refinery off gas, and Atvos (formerly Odebrecht Agroindustrial), which is one of our suppliers of ethanol.gas. These trade accounts receivable and trade accounts payable balances result mainly from purchases and sales of goods, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. These and other transactions between us and our affiliates could result in conflicting interests between us and our shareholders.
We may pursue strategic acquisitions or investments. The failure of an acquisition or investment to produce the anticipated results, or the inability to integrate an acquired company fully, could adversely affect our business.
We may from time to time acquire or invest in complementary companies or businesses. The success of an acquisition or investment will depend on our ability to make accurate assumptions regarding the valuation,operations, growth potential, integration and other factors related to that business. We cannot assure you that our acquisitions or investments will produce the results that we expect at the time we enter into or complete a given transaction. Furthermore, acquisitions may result in difficulties integrating the acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to integrate successfully the operations that we acquire, including their personnel, financial systems, distribution or operating procedures. If we fail to integrate acquisitions successfully, our business could suffer. In addition, the expense of integrating any acquired business and their results of operations may adversely affect our operating results.
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Certain acquisitions, partnerships and joint ventures we make may prevent us from competing for certain clients or in certain lines of business, and may lead to a loss of clients. We may spend time and money on projects that do not increase our revenue. To the extent we pay the purchase price of any acquisition in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with any of our shares, it could be dilutive to our shareholders. To the extent, we pay the purchase price with proceeds from the incurrence of debt, it would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. Our competitors may be willing or able to pay more than us for acquisitions, which may cause us to lose certain acquisitions that we would otherwise desire to complete. We cannot ensure that any acquisition, partnership or joint venture we make will not have a material adverse effect on our business, financial condition and results of operations.
We may face unforeseen challenges in the operation of our Mexico Complex, which could result in this business unit failing to provide expected benefits to us.
During the first half of 2016, we concluded the construction phase of an olefins complex, or the Mexico Complex, located in the Mexican state of Veracruz. For more information about this, which we refer to as the Mexico Complex, see “Item 5. Operating and Financial Review and Prospects—Capital Expenditures—Joint Venture—Mexico Complex.”
To develop our Mexico Complex, Braskem Idesa required significant capital expenditure.expenditure and incurred significant debt. Our ability to achieve the strategic objectives of this business unit will depend largely on its successful operation. Factors that could affect the operation of this business unit include:
·
| general economic, political and business conditions in Mexico and global demand for polyethylene; |
· | the occurrence of unforeseen technical and mechanical difficulties that may interrupt production or lead to unexpected downtime of the Mexico Complex’s plants; |
· | any material default by Pemex TRI under the ethane supply agreement; |
· | the ability of Braskem Idesa to service the debt under its project finance facility; |
· | the ability of Braskem Idesa’s shareholders to comply with the obligation to make certain contingent equity contributions to cover additional amounts necessary to complete the project, as agreed in the equity support agreement in connection with the project finance facility. For additional information, see “Item 5. Operating and Financial Review and Prospects—Capital Expenditures—Joint Venture—Mexico Complex—Equity Support Agreement Relating to the Mexico Complex.” |
· | an unstable and non-continuous supply of ethane and natural gas in the long term; and |
· | increased competition from domestic or foreign competitors and/or the emergence of new domestic or foreign competitors. |
We cannot assure you that the Mexico Complex will provide the expected benefits to us, even after having completed a twothree full calendar year of operations. Any significant interruption could hinder or prevent the implementation of our business plan as originally conceived, and result in revenue and net income below what is expected. Further, any material adverse effect on the financial condition or results of operations of the Mexican complex may adversly impact our own financial condition and results of operations. See also “—We depend on ethane supplied by Pemex TRI in Mexico.”
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Adjustments in tariffs on imports that compete with our products could cause us to lower our prices.
We and our second and third generation clients currently benefit from imports tariffs imposed by Mercosur countries members that allow us to charge prices for our polyolefin and vinyl products in the domestic market that include a factor based on the tariffs levied on comparable imports of those products. However, the Brazilian government has in the past used import and export tariffs to implement economic policies, resulting in varying tariff levels. For example, in September 2012, the Brazilian government increased import duties on 100 products related to various industries, including an increase in the import tariff on polyethylene. In October 2012, it increased the import tariff on polyethylene from 14% to 20%, and in October 2013, it reduced the import tariff on polyethylene to the previous level of 14%. Currently, the tariff remains at 14%. Adjustments of tariffs could lead to increased competition from imports and cause us to lower our domestic prices and impact the demand for our products, which would likely result in lower net sales revenue and could negatively affect our overall financial performance. Additionally, the products we export to the United States and Europe are subject to tariffs in the amount of 6.5% in each jurisdiction, subject to certain preferences. These tariffs generallyfavor our products produced locally and any future adjustments to these tariff structures could negatively impact our sales in these jurisdictions. Future trade agreements entered into by Brazil, the Mercosur, the United States or the European Union could also lead to increased competition from imports and lower domestic prices. Recently, the Trump administration imposed 25% tariffs on a variety of imports from China and subsequently implemented tariffs on additional goods from China.
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Changes in U.S. and global trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.
The international environment in which we operate is affected from inter-country trade agreements and tariffs. As a result of recent revisions in the U.S. administrative policy, there are, and there may be additional changes to existing trade agreements, greater restrictions on free trade and significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration and that of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear.
The escalation of a trade war, tariffs, retaliatory tariffs or other trade restrictions on products and materials either exported by us to China or raw materials imported by us from China, or other countries, may significantly hinder our ability to provide our products to customers in China or other affected locations. Such developments may result in a decrease in demand for our products as well as delays in payments from our customers. Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions, or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where our customers are located, could lead to a rebalancing of global export flows and an increase in global competition, which in turn could adversely affect our business, financial condition, results of operations and cash flows.
We may be affected by instability in the global economy and by financial turmoil.
Instability in the global markets and in the geopolitical environment in many parts of the world as well as other disruptions may continue to put pressure on global economic conditions. In the event global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate, we may experience material impacts on our business, results of operations and financial condition.
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We may not be able to specify in details technical specifications required by our customers’ or updated mechanisms to promptly attend regulatory requirements, and we could be subject to damages based on claims brought against us or our customers as a result of the failure of our products specification.
Our products specification may not meet certain technical or regulatory requirements, specifications or standards. In addition, our customers may impose stricter requirimentsrequirements on our products or governments may enact stricter regulations for the distribution, sale or use of our products. Failure to meet such standards could materially adversely affect our business, financial condition and results of operations if we are unable to sell our products in one or more markets or to important customers in such markets.
As with all quality control systems, any failure or deterioration of our quality control systems could result in defects in our products, which in turn may subject us to contractual, regulatory, product liability and other claims, which could have a material adverse effect on our reputation, business, financial condition and results of operations.
Our business and operations are inherently subject to environmental, health and safety hazards. As a result, our business is also subject to stringent environmental and other regulations.
As a company operating in the petrochemical industry, our operations involve the generation, use, handling, storage, transportation (mainly by pipeline, road, train, fluvial and maritime), treatment, discharge and disposal of hazardous substances and waste into the environment. Notwithstanding our environmental, health and safety standards, policies and controls, our operations remain subject to incidents or accidents that could adversely affect our business or reputation. Our industry is generally subject to significant risks and hazards, including fire, explosions, toxic gas leaks, spilling of polluting substances or other hazardous materials, failure of operational structures and incidents involving mobile equipment, vehicles or machinery, associated or not with the manufacture of petrochemicals and the storage and transportation of feedstock and petrochemical products. These events may occur due to technical failures, human errors or natural events, among other factors, and could result in significant environmental and social impacts, damage to ordestruction of production facilities and communities, personal injury, illness or death of employees, contractors or community members close to our operations or close to our logistic routes and pipelines, environmental damage, delays in production, and, in certain circumstances, liability in civil, labor, criminal and administrative lawsuits.
Changes to applicable laws may impose changes on standards we have already implemented, which can take time to review and update. For example, we are carrying out studies related to dams at certain of our industrial sites as a result of a change in Brazilian law that now requires that all water and waste dams have a safety plan for these structures. We have already classified all of our dams in terms of associated risks and potential damage. Atthis time, we are preparing dam safety plans, with completion scheduled for the first half of 2020, which were communicated to public authorities. All of our dams are small in volume, and our preliminary assessments did not point to significant risks in their structures. Some environmental studies that we have commissioned have indicated instances of environmental contamination at certain of our plants. If the laws and regulations applicable to risks and safety plans change, we may be required to revise the studies that we have carried out, or take further action to rectify potential issues that would not need to be addressed under current laws and regulations. In addition, we and certain of our executive officers have received certain notices related to minor environmental violations and are or have been subject to investigations or legal proceedings with respect to certain alleged environmental violations. These environmental issues, and any future environmental issues that may arise, could subject us to fines or other civil or criminal penalties imposed by Brazilian authorities.
Also, under Brazilian federal and state environmental laws and regulations, we are required to obtain operating licenses and permits for our manufacturing facilities. If any of our environmental licenses or permits lapse or are not renewed or if we fail to obtain any required environmental licenses or permits, we may be subject to fines ranging from R$500 to R$50.0 million, and the Brazilian government may partially or totally suspend our activities and impose other civil and criminal sanctions on us.
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In addition, our production and logistics processes are subject to inherent safety risks, which may lead to death or disability of our employees or individuals participating in such processes. Such risks cannot be entirely eliminated or mitigated despite full compliance with all safety measures aplicableapplicable to us or required by laws or regulations. Despite all monitoring efforts, we may have a negative impact on our image and reputation, and on our business, financial condition and results of operations.
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A sufficiently large accident at one of our plants, or storage facilities, logistic equipment or pipelines could force us to suspend our operations temporarily and result in significant remediation costs and lost net sales revenue. Although we maintain insurance coverage for losses due to fire damage and for losses of income resulting from shutdowns due to fire, explosion or electrical damage, insurance proceeds from such insurance policies may not be available on a timely basis and may be insufficient to cover all losses, which could have a material adverse effect on our financial performance.
The operation of our salt mining activities in the state of Alagoas, Brazil, which is a raw material necessary for production of certain products in our Vinyls Unit, is alsowas subject to similar risks and hazards, and any significant incident relating to our salt mining activities may also result in material adverse environmental and social impacts.hazards. For instance, in certain neighborhoods of the city of Maceió that are located near the geological area of our salt mine,mines, there have been recent allegations that the ground gave way as a result of the activities carried out by us at this mine,these mines, which allegedly may have affected certain nearby private and public properties. Certain lawsuits have been filed in the state of Alagoas in connection with this incident.
Mining operations at our salt mine in Alagoas were halted in May 2019. Even though the risk of a sinkhole formation is unlikely, it cannot be fully disregarded. A safety area covering 15 of the 35 wells at the site of our salt mine was designated, and the entirety of the mining area has been monitored. In October 2019, a conceptual project was launched to start backfilling some wells that have lost their salt, which is a condition for sinkhole formation. We expect that these wells will be stabilized as soon as possible, starting in 2020. However, these actions are part of a large operation that, following reasonable engineering efforts, may take a few years to be completed. Other caverns that are comparatively more stable will be closely monitored. Based on the results of monitoring routines and additional studies relating to numerical simulations, which provide data to monitor the stability of the caverns, there could arise the need for further stabilization and backfilling.
On April 4, 2019, in response to a request ofJanuary 3, 2020, we entered into an agreement with the Alagoas State Attorney’sPublic Defender’s Office (Defensoria Pública do Estado de Alagoas), the Federal Prosecutor’s Office (Ministério Público Federal), the State of Alagoas Prosecutor’s Office (Ministério Público do Estado de Alagoas) and the StateFederal Public Defender’s Office (Defensoria Pública do Estado de Alagoasda União) seeking to freeze our assetssupport the relocation of, and indemnification to, residents in an amountthe areas at risk located in the districts of up to R$6.7 billion to secure funds allegedly required to ensure remediationMutange, Bom Parto, Pinheiro and compensation for environmental, property and personal damages potentially resulting from this incident, a lower-court judgeBebedouro in the city of Maceió, in the state of Alagoas, as set forth in the agreement, which was ratified by the Federal Judge of the Alagoas3rd District Court in the state court orderedof Alagoas. We estimate that the freezingsupport for relocation set forth in the agreement and in surrounding areas will involve approximately 4,500 buildings and 17,000 people during the next two years.
On December 31, 2019, based on its assessment and on that of its external legal advisors, and considering the existing information that was available, discussions held with authorities and estimates of expenses with the various safety measures to benefit residents, the Company recorded a provision of R$1003,383.1 million, of which R$1,450.5 million is under current liabilities and R$1,932.6 million is under non-current liabilities. Due to the inherent change in our bank accounts. In addition, the Alagoas state court of appeals (Tribunal de Justiça do Estado de Alagoas) orderedassumptions related to the suspensionprovisions arising from new facts and circumstances, execution time and extent of the distributionaction plans, the findings of dividends forfuture studies conducted by experts and the fiscal year 2018 that had been proposedoutcome of pending lawsuits, the provision may be adjusted over time to reflect new developments.
On February 17, 2020, we entered into a settlement agreement with the Labor Prosecutor’s Office (Ministério Público do Trabalho) in the amount of R$2.7 billion,40.0 million pursuant to which we agreed to implement a program for business recovery and promotion of educational activities, or alternatively, the freezingBusiness Recovery and Promotion of assetsEducational Activities Program, for the benefit of residents and workers in the same amountdistricts of the proposed dividend distribution. This decision was subsequently reversed by a decision of the Superior Court of Justice (Superior Tribunal de Justiça, or STJ), which authorized the distribution of dividends upon posting of a judicial bondMutange, Bom Parto, Pinheiro and Bebedouro in the same amount.city of Maceió, in the state of Alagoas, Brazil. The Alagoas State Attorney’s Officeprogram consists of constructing day care centers and schools, implementing vocational training programs and providing support to civil defense authorities with regard to hiring qualified personnel for continuing the Alagoas State Public Defender’s Office amended their claim to excludeprocess of monitoring the request for indemnification for the alleged environmental damages and reduce the amount of assets to be frozen to R$3.7 billion, which according to their allegations would be equivalentareas at risk in these districts. Pursuant to the alleged damages caused to the residents of the districts affected by the geological event. Immediately thereafter, on June 26, 2019, the presiding judge of the Alagoas state court of appeals (Tribunal de Justiça do Estado de Alagoas) issued a decision ordering an amount of R$3.7 billion to be frozen. This decision was also subsequently reversed by the Superior Court of Justice (STJ), which ordered the frozen amount of R$3.7 billion to be returned to our bank accounts after posting another judicial bond in an equivalent amount. On July 25, 2019, we were informed of another civil lawsuit filed against us bysettlement agreement, the Labor Prosecutor’s Office ofagreed to withdraw the State of Alagoas, or MPT-AL, requesting injunctive relieflawsuit it had filed against us, including the request to freeze our funds made in connection with such lawsuit, as per the amount of R$2.5 billionnotices to guarantee payment of any potential damages that workers affectedthe market disclosed by the geological event may suffer. In that lawsuit, MPT-AL further requested the payment of compensation to workers for painus on July 25, 2019 and suffering. On October 10, 2019, the trial court denied the injunctive relief request. On August 19, 2019, we became aware of the filing of another civil lawsuit by the Federal Prosecutor’s Office (Ministério Público Federal) against us and other parties, requesting the following injunctive reliefs: (i) the set-up of a fund of R$3.1 billion for the benefit of social and environmental programs and emergency measures to be carried out, and the maintenance in said fund of working capital in the amount of at least R$2.0 billion or, after a financial schedule is approved for such fund, an amount equivalent to 100% of the expenses projected for the subsequent 12 months; (ii) the posting of bonds in the amount of R$20.5 billion; (iii) prohibition on us to encumber or dispose of any of our fixed assets and to distribute profits, in the form of dividends, interest on shareholders’ equity or any other form; (iv) freezing of any profits not yet distributed; and (v) suspension of receipt of government financings from BNDES (a federal development bank) and government incentives, as well as acceleration of existing indebtedness with BNDES. As of the date of this annual report, the plaintiff´s requests for injunctive relief have not yet been ruled upon. We are taking all relevant measures to defend against these lawsuits.2019. For additional information, see “Item 8. Financial Information—Legal Proceedings—Alagoas – Mining Activities.”
On May 8, 2019, we became aware of the Report No. 1, prepared by the Mineral Resources Research Company (Companhia de Pesquisa de Recursos Minerais), or CPRM, an entity of the Brazilian Energy and Mining Ministry (Ministério de Minas e Energia), on the geological events that occurred in the city of Maceió. Such report indicated the occurrence of (i) destabilization of caverns resulting from sodium chloride, or salt,extraction, which created a dynamic situation that reactivated pre-existing geological structures and deformations in the districts of Pinheiro, Mutange and Bebedouro; and (ii) instability in the Pinheiro district, which was aggravated by the erosive effects caused by an increase in the infiltration of stormwater runoff in pre-existing fractures in extremely erodible soil and accelerated due to the lack of an effective stormwater runoff drainage network and of adequate basic sanitation, among other factors. In this context, due to the developments from the publication of Report No. 1 by CPRM, in accordance with applicable safety standards, on May 9, 2019, we suspended all salt extraction and, consequently, the operations of the chlor-alkali and dichloroethane plants located in the district of Pontal da Barra in Maceió, state of Alagoas and also reducing production in the Camaçari Petrochemical Complex in the state of Bahia, since they are integrated into the production chain. Given that, Braskem put in plance a non integrated business model which the Company will import (i) caustic soda to supply the Brazilian market using its logistics structure and terminals along the Brazilian coast, (ii) EDC to continue to operate its PVC plants in Alagoas and Bahia, and (iii) sea salt to supply the Chlorine Soda plant of Bahia.We have been continuously cooperating with relevant authorities and the local community. If authorities conclude that the activities at our salt mine caused such incidents, we may be held responsible for any adverse environmental and social impacts attributable to it.
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Further, we may face difficulties in obtaining or maintaining operating licenses and may suffer damage to our reputation following the occurrence of any such event. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations.
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In addition, we and other petrochemical producers are subject to stringent federal, state and local environmental laws and regulations concerning human health, the handling, storage, transportation, treatment, discharge and disposal of hazardous substances and waste into the environment. Our operations in Brazil, including those of our subsidiaries Cetrel and DAC, which are responsible for providing environmental services, waste water treatment and water supply to the Camaçari Complex in the state of Bahia, for example, are subject to extensive federal, state and local laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment and disposal of hazardous substances and waste materials. The Brazilian government enacted the Environmental Crimes Law in 1998 that imposes criminal penalties on corporations and individuals that cause environmental damage. Corporations found to be guilty of polluting the environment may be fined up to R$50.0 million, have their operations suspended, be prohibited from contracting with the government, be required to repair damage that they causescaused and lose certain tax benefits and incentives. Executive officers, directors and other individuals may also be imprisoned for up to five years for environmental violations.
Our operations in the United States, Germany and Mexico are subject to extensive U.S., German, European and Mexican federal, state and local laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. U.S. environmental laws and regulations may impose liability on us for the conduct of third parties, or for actions that complied with applicable requirements when taken, regardless of negligence or fault. Of particular significance to us are (1) regulatory programs to be established to implement air quality standards under the National Ambient Air Quality Standards for ozone and fine particles promulgated by the U.S. Environmental Protection Agency, or the EPA, and (2) various legislative and regulatory measures in the United States that are under review, discussion or implementation to address greenhouse gas emissions. In Mexico, we adhere to the comprehensive responsibility program promoted by the Mexican National Chemical Industry Association (Asociación Nacional de la Industria Química de Mexico – ANIQ), which is based on the responsible care standard adopted in the United States and Canada. We are also signatories of the responsible careResponsible Care program in the United States and Brazil.Brazil that was launched by certain entities of the chemical industry sector worldwide.
Such existing stringent environmental and other regulations require significant capital expenditures. Our consolidated annual expenditures on environmental control were R$353.3369.8 million in 2019, R$329.3 million in 2018 and R$330.1 million in 2017, and R$427.4 million in 2016, including investments, waste and wastewater treatment, emissions management, environment licenses, environmental liabilities and other environmental expenditures. In addition, evolving regulatory requirements could require significant additional capital expenditures depending on the timing of the adoption and enforcement of specific standards imposing such requirements. In addition, changes in environmental regulations could inhibit or interrupt our operations, or require modifications to our facilities. Accordingly, environmental, health or safety regulatory matters may result in significant unanticipated costs or liabilities.
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We may also, from time to time, be involved in certain claims, disputes or litigation proceedings concerning environmental risks and liabilities, health and safety hazards, among others. For more information, please see “Item 8. Financial Information––Legal Proceedings”.Proceedings.”
We could be materially adversely affected by the impacts of the Global Settlement.
In the context of allegations of improper payments in connection with the so-called Operation Car Wash (Operação Lava Jato) in Brazil, we engaged independent expert firms to conduct an investigation into such allegations (the “Investigation”) and report their findings. We have cooperated with governmental authorities in several jurisdictions, including the U.S. Department of Justice, or the DoJ, the U.S. Securities and Exchange Commission, or the SEC, Brazil’s Federal Prosecutor’s Office (Ministério Público Federal), or the MPF, and Switzerland’s Office of the Attorney General, or the OAG. On December 14, 2016, we entered into a leniency agreement with the MPF, or the Leniency Agreement, which was ratified by the competent Brazilian court on June 6, 2017. On December, 21, 2016, we filed a plea agreement in the United States District Court for the Eastern District of New York under which we agreed to plead guilty to a one-count criminal information charging us with conspiracy to violate the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act, or the FCPA. On the same date, we consented to the entry of a final judgment in a civil action brought by the SEC based on civil violations of the anti-bribery, books and records and internal accounting controls provisions of the FCPA. The competent federal courts in the United States approved the DoJ and SEC resolutions on January 26, 2017 and February 28, 2017, respectively. In addition, on December 21, 2016, the OAG closed its investigation of these matters. We refer to these actions as the Global Settlement. Under the Global Settlement, we agreed to pay to the governmental authorities in these jurisdictions an aggregate amount of US$957 million (equivalent to R$3.1 billion), based on the exchange rate of R$3.27 per U.S. Dollar, applicable at the time of the negotiation.
The MPF will distribute the majority of the amount it receives as restitution to third parties for damages caused by the misconduct. Pursuant to the Global Settlement, the MPF agreed to communicate with other public authorities or entities, as well as stated-owned companies and mixed-capital companies with which Braskem enters into discussions to address the facts under the Global Settlement and avoid making duplicate restitution payments. In this context, as announced to the market on July 10, 2018, and disclosed in a material fact on May 27, 2019, we have cooperated and engaged in negotiations with the Ministry of Transparency and Controllership (CGU) and the Office of the Attorney General (AGU) in Brazil, and our Board of Directors approved the signing of a leniency agreement with the CGU and the AGU (the "CGU/AGU Agreement").21
The CGU/AGU Agreement, in the amount of R$2.9 billion, to be adjusted by the SELIC rate, addresses the same facts that are the object of the Global Settlement executed in December 2016 with the Brazilian Federal Prosecution Office (MPF), the U.S. Department of Justice (DoJ), the U.S. Securities and Exchange Commission (SEC) and the Swiss Office of the Attorney General ("Global Settlement"). Of this amount, R$2.5 billion will be offset by the amount that Company already had undertaken to pay under the scope of the Global Settlement, resulting in an additional disbursement of R$410 million.
As of the date of this annual report, we have paid R$2 billion of the total fine established in the Global Settlement, in the following manner:
·US$94.9 million (R$296.6 million) to the DoJ on February 8, 2017;
·US$65.0 million (R$206.5 million) to the SEC on April 27, 2017;
·CHF30.2 million (R$104.3 million) to the OAG on June 27, 2017;
·R$736.4 million to the MPF on July 6, 2017;
·R$267.9 million to the MPF on January, 30 2018;
·CHF16.1 million (R$62 million) to the OAG on June 28, 2018;
·R$278 million to the MPF on January 30, 2019 ; and
·CHF16.1 million (R$58 million) to the OAG on June 27, 2019.
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The outstanding amount of R$1.6 billion related to the Global Settelement and alsothe CGU/AGU Agreementwill be paid in the following manner:
·CHF32.1 million to the OAG related to two remaining annual installments of CHF16.1 million due on June 30 of each year as from 2020;
·R$1.1 billion to the MPF in four remaining annual installments due on January 30 of each year as from 2020. To guarantee payment of future installments, Braskem pledged collateral assets from its property, plant and equipment sufficient to cover one annual installment; and
·R$409.9 million in connection with the CGU/AGU Agreement in two annual installments due on January 30, 2024 and 2025.
The MPF will distribute the majority of the amount it receives as restitution to third parties for damages caused by the misconduct. Pursuant to the Global Settlement, the MPF agreed to communicate with other public authorities or entities, as well as stated-owned companies and mixed-capital companies with which Braskem enters into discussions to address the facts under the Global Settlement and avoid making duplicate restitution payments. In this context, as announced to the market on July 10, 2018, and disclosed in a material fact on May 27, 2019, we have cooperated and engaged in negotiations with the Ministry of Transparency and Controllership (CGU) and the Office of the Attorney General (AGU) in Brazil, and our Board of Directors approved the signing of a leniency agreement with the CGU and the AGU (the "CGU/“CGU/AGU Agreement"Agreement”).
The CGU/AGU Agreement, in the amount of R$2.9 billion, to be adjusted by the SELIC rate, addresses the same facts that are the object of the Global Settlement executed in December 2016 with the Brazilian Federal Prosecution Office (MPF), the U.S. Department of Justice (DoJ), the U.S. Securities and Exchange Commission (SEC) and the Swiss Office of the Attorney General (“Global Settlement”). Of this amount, R$2.5 billion will be offset by the amount that Company already had undertaken to pay under the scope of the Global Settlement, resulting in an additional disbursement of R$410 million.
As of the date of this annual report, we have paid R$2.3 billion of the total fine established in the Global Settlement, in the following manner:
· | US$94.9 million (R$296.6 million) to the DoJ on February 8, 2017; |
· | US$65.0 million (R$206.5 million) to the SEC on April 27, 2017; |
· | CHF30.2 million (R$104.3 million) to the OAG on June 27, 2017; |
· | R$736.4 million to the MPF on July 6, 2017; |
· | R$267.9 million to the MPF on January, 30 2018; |
· | CHF16.1 million (R$62 million) to the OAG on June 28, 2018; |
· | R$278 million to the MPF on January 30, 2019 ; and |
· | CHF16.1 million (R$58 million) to the OAG on June 27, 2019. |
The outstanding amount of R$1.5 billion related to the Global Settelement and alsothe CGU/AGU Agreementwill be paid in the following manner:
· | CHF32.1 million to the OAG related to two remaining annual installments of CHF16.1 million due on June 30 of each year as from 2020; |
· | R$900 million to the MPF in four remaining annual installments due on January 30 of each year as from 2021. To guarantee payment of future installments, Braskem pledged collateral assets from its property, plant and equipment sufficient to cover one annual installment; and |
· | R$409.9 million in connection with the CGU/AGU Agreement in two annual installments due on January 30, 2024 and 2025. |
The Global Settlement does not prevent Braskem from responding to any legitimate third party, which may seek indemnification against us from damages for the facts subject to the Global Settlement. As a result, we cannot assure you that the aggregate amount disbursed as a requirement pursuant to the agreement will be sufficient to cover indemnification claims of all of the victims. We may be required to make additional disbursements to cover such claims.
Other authorities with jurisdiction over us may seek to impose monetary sanctions or fines on, or to initiate investigative proceedings against, us. As a result of entering into the Global Settlement, Braskem may be prevented from entering into certain agreements with government entities and may be subject to increased operating costs for being under the obligation to improve its governance and anti-corruption practices and procedures, including the cost of external monitorships.
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Under the terms of the Global Settlement, we arewere required to cooperate with these governmental authorities and improve our governance and anti-corruption compliance practices. We willwere also be subject to external monitorship for a period of three years as from 2017, which ended in March 2020, during which time the monitor will assessassessed compliance with the Global Settlement, including the effectiveness of our internal controls, policies and procedures to reduce the risk of any anti-corruption violations.
On May 13, 2020, the MPF, the DoJ and the SEC confirmed the conclusion of the independent compliance monitorship at Braskem, which had been established in the settlement agreements entered into by Braskem, the DoJ and the SEC on December 21, 2016. The decision of the DoJ and the SEC was based on a final report from the independent monitors, who certified that the Company implemented all of the recommendations regarding the structure and execution of its compliance program and concluded that the Company meets the standards set out in the settlement agreements entered into with the DoJ and the SEC. Following the end of the independent monitorship period may be terminated early or extended for up to one year atand the authorities’ discretion depending on our compliance with the Global Settlement. We have retained monitors pursuant to the provisions of the Global Settlement, and they have been approvedcertification by the relevant authorities. The monitors may recommend changes to our policiesMPF, the DoJ and procedures, whichthe SEC, the Company has complied with its obligations established in the settlement agreements entered into with these authorities and has successfully concluded the three-year monitorship.
We believe we must adopt unless they are unduly burdensome or otherwise inadvisable, in which case we may propose alternatives that the authorities may choose to accept. Operating under the oversight of the monitors will likely require the assumption of additional responsibilities by members of our management. The costs that we are likely to incur in connection with compliance with the Global Settlement, including the implementation of the recommended changes could be significant and could negatively impact us by requiring the efforts of our management team and diverting their attention from our ordinary business operations.
We are fully in compliance with our obligations under the Global Settlement.
Unfavorable outcomes in pending or future litigation may reduce our liquidity and negatively affect our financial performance and financial condition.
We are, and in the future may be, involved in numerous tax, civil and labor disputes, among others, involving monetary claims. If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts. For certain of these lawsuits, we have not established any provision on our balance sheet or have established provisions only for a portion of the amounts in controversy, based on our judgments as to the risk of loss for these lawsuits.
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In July 2015, two putative class action lawsuits were filed against us and certain of our then-current and former officers and directors, or the Defendants, in the United States District Court for the Southern District of New York, or the U.S. Court. In those lawsuits that were subsequently consolidated under the caption In re Braskem, S.A. Securities Litigation, No. 15-cv-5132, the Lead Plaintiff, Boilermaker-Blacksmith National Pension Trust, alleged that the Defendants made misrepresentations or omissions that inflated the price of the Company’sBraskem S.A.’s stock in violation of U.S. securities laws.
After the decision on the motion to dismiss filed by the Company,us, partially granting its arguments, the Companywe and the Lead Plaintiff signed the proposed settlement agreement ("(“Proposed Settlement"Settlement”), which was ratified by the applicable Court, which issued a final decision ending all claims from all members of the class of Investors. We have made no admission of any wrongdoing or liability as part of the settlement.
Under the terms of the Proposed Settlement, Braskem paid US$1010.0 million (R$31.7 million) to resolve all claims arising out of or relating to the subject matter of the class action of a settlement class consisting of all persons who purchased or otherwise acquired a legal or beneficial ownership interest in Braskem American Depositary Receipts between July 15, 2010 and March 11, 2015, inclusive. The amount of the agreement was deposited by Braskem in the account designated by the judge (“Escrow Account”) on October 2, 2017.
On February 21, 2018, a hearing was held in which a decision was handed down for the final approval of the agreement regarding the entire class of investors and the dismissal of the case. Said decision became final and unappealable. The individual distribution of the amount of the agreement is the responsibility of the manager of the Escrow Account, as determined by the Court and in accordance with the ratified allocation plan. The Proposed Settlement was signed solely to avoid the risk, uncertainty, and expense of further litigation and does not represent the admission of any wrongdoing or liability by Braskem.
In April 2019, the Alagoas State Attorney’s Office (Ministério Público do Estado de Alagoas) and the State Public Defender’s Office (Defensoria Pública do Estado de Alagoas) filed a lawsuit seeking to freeze our assets in an amount of up to R$6.7 billion to secure funds allegedly required to ensure remediation and compensation for environmental, property and personal damages potentially resulting from a geological incident related to our mining actitivies in the city of Maceió. A preliminary decision ordered the freezing of R$100 million in our banks accounts.
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In addition, the Alagoas state court of appeals (Tribunal de Justiça do Estado de Alagoas) ordered the suspension of the distribution of dividends for the fiscal year 2018 that had been proposed in the amount of R$2.7 billion, or, alternatively, the freezing of assets in the same amount of the proposed dividend distribution.This decision was subsequently reversed by a decision of the Superior Court of Justice (Superior Tribunal de Justiça, or STJ), which authorized the distribution of dividends upon posting of a judicial bond in the same amount. The Alagoas State Attorney’s Office and the Alagoas State Public Defender’s Office amended their claim to exclude the request for indemnification for the alleged environmental damages and reduce the amount of assets to be frozen to R$3.7 billion, which according to their allegations would be equivalent to the actual damages caused to the residents of the districts affected by the geological event. On June 26, 2019, the presiding judge of the Alagoas state court of appeals (Tribunal de Justiça do Estado de Alagoas) issued a decision ordering an amount of R$3.7 billion to be frozen. This decision was also subsequently reversed by the Superior Court of Justice (STJ), which ordered the frozen amount of R$3.7 billion to be returned to our bank accounts after posting another judicial bond in an equivalent amount.
On July 25, 2019, we were informed of another civil lawsuit filed against us by the Labor Prosecutor’s Office of the State of Alagoas, or MPT-AL, requesting injunctive relief to freeze the amount of R$2.5 billion to guarantee payment of any actual damages that workers affected by the geological event may suffer. In that lawsuit, MPT-AL further requested the payment of compensation to workers for pain and suffering. On October 10, 2019, the trial court denied the injunctive relief request.
On August 19, 2019, we became aware of the filing of another civil lawsuit by the Federal Prosecutor’s Office (Ministério Público Federal) against us and other parties, requesting the following injunctive reliefs: (i) the set-up of a fund of R$3.1 billion for the benefit of social and environmental programs and emergency measures to be carried out, and the maintenance in said fund of working capital in the amount of at least R$2.0 billion or, after a financial schedule is approved for such fund, an amount equivalent to 100% of the expenses projected for the subsequent 12 months; (ii) the posting of bonds in the amount of R$20.5 billion; (iii) prohibition on us to encumber or dispose of any of our fixed assets and to distribute profits, in the form of dividends, interest on shareholders’ equity or any other form; (iv) freezing of any profits not yet distributed; and (v) suspension of receipt of government financings and government incentives, as well as acceleration of existing indebtedness withBNDES (a federal development bank). As
On January 3, 2020, the plaintiffs agreed to: (i) release the amount of R$3.7 billion that had been frozen, of which R$1.7 billion was tobe transferred to a bank account of Braskem specifically for funding the dateFinancial Compensation and Support for Relocation Program, which must maintain at minimum balance of this annual report,R$100 million, subject to audit by an external auditor; and (ii) substitute the plaintiff´s requestssurety bonds that had been presented by Braskem inthe approximate aggregate amount of R$6.4 billion for injunctive relief have not yet been ruled upon.
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We are taking all relevant measurestwo new surety bonds in the approximate aggregate amount of R$3.0 billion to defend against these lawsuitsguarantee the public interest civil lawsuit filed by the Alagoas State Attorney’s Office (Ministério Público do Estado de Alagoas) and we have been continuously cooperating with relevant authorities to identify the causes ofState Public Defender’s Office (Defensoria Pública do Estado de Alagoas) and the incident, withpublic interest civil lawsuit filed by the support of independent experts.Federal Prosecutor’s Office (Ministério Público Federal).
For more information about our legal proceedings, see “Item 8. Financial Information—Legal Proceedings.”
Labor unrest may materially and adversely affect our operations.
Labor unrest in our plants and facilities may have a material adverse effect on our financial condition or results of operations. For example, in August 2010, the unionized employees at our Neal, West Virginia plant went on strike. During the strike, the plant operated under the supervision of management until May 2011, when Braskem America entered into a new collective bargaining agreement. Although we believe that we maintain good relations with our employees, future labor actions, including strikes, could have a material adverse effect on our financial performance.
Natural disasters, severe weather and climate conditions, or health epidemics could have a material adverse effect on our overall business.
Some of our facilities are located in places that could be affected by natural disasters, such as floods, earthquakes, hurricanes, tornados and other natural disasters, which could disrupt our operations or the operations of our customers and could damage or destroy infrastructure necessary to transport our products as part of the supply chain. Additionally, other unanticipated problems such as health epidemics or pandemics, including the novel coronavirus (COVID-19) outbreak that began in China and spread to the rest of the world, could also cause operational disruptions of varied duration. Such events could require maintenance shutdowns, delay shipments of existing inventory or result in costly repairs, replacements or other costs, all of which could have a material adverse effect on our financial performance.
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While our energy risk policy dictates that we purchase energy in advance at fixed prices through long-term contracts, the majority of Brazilian power generation capacity is provided by hydroelectric generation facilities. If the amount of water available to energy producers becomes scarce due to drought or diversion for other uses, the cost of energy may increase. In addition, if the amount of water available to industrial facilities becomes scarce, there may be a need to reduce production at the affected sites. Such conditions could have a material adverse effect on our sales and margins.
We could be materially affected by violations of the U.S. Foreign Corrupt Practices Act, the Brazilian Anti-Corruption Law and similar anti-corruption laws.
We, our subsidiaries and our joint venture partners are subject to a number of anti-corruption laws, including Law No. 12,846/2013, or the Brazilian Anti-Corruption Law, which entered into effect on January 28, 2014, the FCPA and various other anti-corruption and anti-bribery laws of other jurisdictions.
The FCPA, the Brazilian Anti-Corruption Law and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners, injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could have a material adverse effect on our business, financial condition, results of operations or liquidity. For instance, see “—We could be materially adversely affected by the impacts of the Global Settlement” for the impact on us of allegations of improper payments in connection with the Operation Car Wash.
We are exposed to behaviors of our employees and non-employees that may be incompatible with our ethics and compliance standards, and failure to timely prevent, detect or remedy any such behavior and/or process vulnerabilities may have a material adverse effect on our results of operations and financial condition.
Our business, including our relationships with third parties, is guided by ethical principles. We have adopted a Code of Conduct, a Global Compliance System Policy, an Anti-Corruption Policy, and several other internal policies designed to guide our management, employees and counterparties and reinforce our principles and rulesfor ethical behavior and professional conduct. We maintain an independent whistleblower channel (denominated “Ethics Line”) managed by a third party available for employees and non-employees (including third parties). Every whistleblower complaint is investigated and submitted for evaluation to our Ethics Committee.
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We are subject to the risk that our employees, counterparties or any person doing business with us may engage in fraudulent activity, corruption or bribery, circumvent or override our internal controls and procedures or misappropriate or manipulate our assets for their personal or business advantage. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. We have in place a robust Compliance and Anti-Corruption Program implemented through every area of our company,Company, including several processes for identifying, monitoring and mitigating these risks, but such program may not be completely effective.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act of 1934. During our assessment of internal control over financial reporting as of December 31, 20182019 (see “Item 15. Controls and Procedures”), we identified certain material weaknesses. We also identified material weaknesses in internal control over financial reporting as of December 31, 2017,2018, certain of which still existed as of December 31, 2018.2019. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
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As we were required to conduct additional procedures and analyses with respect to our internal processes and controls for the year ended December 31, 2017, we were unable to timely conclude our audited financial statements for such year and, therefore, were unable to timely file our annual report on Form 20-F for the year ended December 31, 2017. We obtained extensions from the SEC to file our annual report on Form 20-F for the year ended December 31, 2017 until May 16, 2019. Since we were not able to file our Form 20-F until the date granted by SEC and no further extensions have beenwere granted pursuant to Section 802.01E of the NYSE Listed Company Manual, on May 13, 2019, we were notified by the NYSE that it had suspended the trading of our ADSs and had initiated delisting procedures. We have appealedTrading of our ADSs resumed after we filed our annual reports on Form 20-F for the decision.years ended December 31, 2017 and December 31, 2018 on October 8, 2019 and October 17, 2019, respectively.
In the future, we may be required to conduct additional procedures and analyses with respect to our internal processes and controls that may lead to a delay in the conclusion of our audited financial statements and, as a result, prevent us from filing future annual reports in a timely manner. Any failure to timely file our annual reports in the future may have an adverse effect on our business.
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If we are unable to comply with the restrictions and covenants in the agreements governing our indebtedness, there could be a default under the terms of these agreements, which could result in an acceleration of payment of funds that we have borrowed and could affect our ability to make principal and interest payments on our debt obligations.
Any default under the agreements governing our indebtedness that is not cured or waived by the required lenders or noteholders could result in the holders of any such indebtedness accelerating the payment of amounts outstanding, which could make us unable to pay principal and interest on those and other debt obligations. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the agreements governing our indebtedness, we could be in default under the terms of such agreements. In the event of such default:
·
| the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest; |
· | the lenders or noteholders under such agreements could elect to terminate their commitments thereunder and cease making further loans; |
· | the acceleration under such indebtedness may trigger cross-acceleration provisions under other financing arrangements entered into by us; and |
· | we could be forced into bankruptcy or liquidation. |
In addition, certain of our contractual arrangements, including debt obligations, contain change of control provisions that provide our counterparties with a termination right or the ability to accelerate the maturity of our indebtedness with them in the event of a change of our control without their consent. These provisions would be triggered in the event Odebrecht ceases to own, directly or indirectly, capital stock representing more than 50% of the voting power of our capital stock outstanding. As a result, if Odebrecht ceases to control, or in some cases, own a certain percentage of our common shares, whether as a result of the Odebrecht Judicial Restructuring Proceedings, an alternative sale, foreclosure by creditors, reorganization, restructuring or other similar circumstance in connection with the Odebrecht Judicial Restructuring Proceedings or otherwise, if appropriate consents or waivers are not obtained, such counterparties could terminate such contracts or accelerate the maturity of such contractualfinancing arrangements. The termination of any of our contractual arrangements or the acceleration of the maturity of any of our financing arrangements could have a material adverse effect on our business, financial condition, results of operations and cash flows, and ultimately result in the cross-accelation of all of our indebtedness.
Furthermore, pursuant to the indentures governing our 7.00% Notes due 2020, 5.75% Notes due 2021, 5.375% Notes due 2022, 3.50% Notes due 2023, 6.45% Notes due 2024, 4.50% Notes due 2028, 4.500% Notes due 2030, 7.125% Notes due 2041, 5.875% Notes due 2050 and 7.375% Perpetual Bonds, a change of control with a ratings decline would require a repurchase of any such outstanding notes, plus accrued and unpaid interest, if any, to the repurchase date. See “Item 5. Operating and Financial Review and Prospects—Recent Developments—Odebrecht Judicial Restructuring Proceedings” and other disclosures in this Annual Report on Form 20-F for additional information relating to the Odebrecht Judicial Restructuring Proceedings.
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We may in the future need to obtain waivers under our other indebtedness to avoid being in default. If we breach any covenants under any of our debt instruments and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under such agreements, the lenders could exercise their rights or remedies, as described above, and we could be forced into bankruptcy or liquidation.
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Unauthorized disclosure, or loss of intellectual property, trade secrets, other sensitive business or personal information, or disruption in information technology by cyber-attacks, as well as our failure to comply with existing and future laws and regulations relating to data privacy and data security can subject us to significant penalties or liability and can adversely impact our operations, reputation and financial results.
We collect, store, process, and use certain confidential information and other user data in connection with our business operations. We must ensure that any processing, collection, use, storage, dissemination, transfer and disposal of data for which we are responsible complies with relevant data protection and privacy laws. The protection of our customer, employee and company data is critical to us. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential information, such as customer, employee, company and other personal information.
Data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data. For example, on August 14, 2018, Brazil enacted Law No. 13,709/2018 (Lei Geral de Proteção de Dados, or the LGPD), a comprehensive data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD establishes detailed rules for the collection, use, processing and storage of personal data and will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employers and employees, and other relationships in which personal data is collected, whether in a digital or physical manner. The LGPD iswas initially expected to come into effect in August 2020.2020, but its effective date has been postponed to at least 2021. By then, all entities subject to it, [includingincluding us, will be required to adapt their data processing activities to the new rules. Any additional privacy laws or regulations enacted or approved in Brazil or in other jurisdictions in which we operate could seriously harm our business, financial condition or results of operations. On May 25, 2018, the Regulation No. 2016/279 of the European Parliament and of the Council of April 27, 2016 on the protection of personal data (the General Data Protection Regulation, or the GDPR) became directly applicable in all member states of the European Union. The GDPR has introduced new obligations relating to data privacy, control and retention, including, among others: (i) accountability and transparency requirements; (ii) enhanced data consent requirements; (iii) obligations to consider data privacy as any new products or services are developed and limit the amount of information collected, processed, stored and its accessibility; (iv) constraints on using data to profile data subjects; (v) providing data subjects with personal datain a useable format upon request and erasing personal data in certain circumstances; and (vi) reporting breaches without undue delay.
As we seek to expand our business and operations, we expect that we will be increasingly subject to laws and regulations relating to the collection, use, retention, security, and transfer of information, including the personally identifiable information of our employees and customers. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that will materially and adversely affect our business. Any failure, real or perceived, by us to comply with any regulatory requirements or orders or other local, state, federal, or international privacy or consumer protection-related laws and regulations could cause our customers to reduce their use of our products and services and could materially and adversely affect our business. The implementation of the GDPR and the LGPD, and of any other existing or future laws and regulations relating to data privacy is expected to require revisions of our procedures and policies and significant implementation resources. There can be no guarantee that we will have sufficient financial resources to comply with any new regulations or successfully compete in the context of a shifting regulatory environment. Further, there is a risk that the measures may not be implemented correctly or that there may be non-compliance with the new procedures. If there are breaches of the GDPR or the LGPD obligations, or of other data privacy laws and regulations, as the case may be, we could face significant administrative and monetary sanctions as well as reputational damage, which could have a material adverse effect on our operations, financial condition and prospects.
In addition, despite the security measures that we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Any security incident, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or our vendors, could damage our reputation, expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business.
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For instance, in the second half of 2018, one of our information technology service providers experienced a cybersecurity incident Brazil, in which specified credentials for access to certain cloud storage accountsmaintained by such service provider were disclosed to unauthorized third parties online. We were not affected by this security incident because we were not among the customers of such service provider whose credentials were disclosed. However, we cannot assure you that our security measures, or those put in place by our service providers, will be sufficient to prevent future security breaches, which may directly or indirectly affect us, or that our failure to prevent them will not have a material adverse effect on our business, results of operations or financial condition.
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Cyber-attacks or security breaches could compromise confidential, business and other critical information, cause a disruption in our operations or harm our reputation, as our operations are heavily dependent on information technology and telecommunication systems and services. Information assets, including intellectual property, trade secrets, personal data and other business-sensitive critical information are an attractive asset to cyber criminals, cyberterrorism or other external agents. While we have a comprehensive cyber security program in place, which is continuously reviewed, maintained and upgraded, a significant cyber-attack, a human error, including from our employees and partners, or obsolescence of technology could result in the loss of critical business information and/or negatively impact our operations, which could have a negative impact on our financial results.
Risks Relating to Brazil
Brazilian political, economic and business conditions, and the Brazilian government’s economic and other policies, may negatively affect demand for our products as well as our net sales revenue and overall financial performanceperformance..
The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil.
Our results of operations and financial condition may be adversely affected by factors such as:
·fluctuations in exchange rates;
·exchange control policies;
·interest rates;
·inflation;
·tax policies;
·expansion or contraction of the Brazilian economy, as measured by rates of growth in GDP;
·liquidity of domestic capital and lending markets; and
·other political, diplomatic, social, economic and business developments in or affecting Brazil.
· | expansion or contraction of the Brazilian economy, as measured by rates of growth in GDP, which is expected to significantly contract in 2020; |
· | fluctuations in exchange rates; |
· | exchange control policies; |
· | interest rates; |
· | inflation; |
· | tax policies; |
· | liquidity of domestic capital and lending markets; and |
· | other political, diplomatic, social, economic and business developments in or affecting Brazil. |
Brazilian markets have been experiencing heightened volatility due to the uncertainties derived from the ongoing corruption investigations by the Federal Prosecutor’s Office under Operations Car Wash, Zelotes, Greenfield, Efficiency and others, and their impact on the Brazilian economy and political environment. Certain current and former members of the Brazilian government and of the legislative branch, as well as former senior officers of the state-owned oil company and our shareholder Petrobras are being prosecuted for political corruption. These government officials and former senior officers allegedly accepted bribes by means of kickbacks on contracts granted by Petrobras to several infrastructure, oil and gas and construction companies, including Odebrecht, our controlling shareholder. We cannot currently predict how the Operation Car Wash investigation, related investigations and any future decisions and actions by authorities or developments in relation to our shareholders, may impact us. The profits of these kickbacks allegedly financed the political campaigns ofpolitical parties of federal, state and city governments that were unaccounted for or not publicly disclosed, as well as served to personally enrich the recipients of the bribery scheme. As a result of the ongoing Operation Car Wash investigation, a number of current and former senior politicians, including congressman and officers of the major state-owned companies in Brazil resigned or have been arrested. Senior elected officials and other public officials in Brazil are being investigated for allegations of unethical and illegal conduct identified during the Operation Car Wash investigation.
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The potential outcome of these investigations is uncertain, but they have adversely affected and we expect that they will continue to adversely affect the Brazilian markets and trading prices of securities issued by Brazilian issuers. We cannot predict whether the allegations will lead to further political and economic instability or whether new allegations against government officials or other companies in Brazil will arise in the future. In addition, we can neither predict the outcome of any such allegations nor their effect on the Brazilian economy. The development of those unethical conduct cases could have a material adverse effect.
In addition, Brazilian politics have been characterized by considerable instability in recent years. The conviction of Former President Luiz Inácio Lula da Silva and potential ongoing judicial appeals may further increase political and economic instability. In addition, following a divisive presidential race, former Congressman Jair Bolsonaro became Brazil’s president on January 1, 2019. It is unclear if and for how long the political divisions in Brazil that arose prior to the elections will continue under Mr. Bolsonaro’s presidency and the effects that any such divisions will have on Mr. Bolsonaro’s ability to govern Brazil and implement reforms. Any continuation of such divisions could result in congressional deadlock, political unrest and massive demonstrations and/or strikes that could materially adversely affect our operations. Uncertainties in relation to the implementation by the new government of changes relating to monetary, tax and pension funds policies as well as to the relevant legislation may contribute to economic instability. These uncertainties and measures adopted by the new administration may increase market volatility of Brazilian securities issued abroad.
Also, imports of suspension PVC from the United States and Mexico have been subject to anti-dumping duties of 16.0% and 18.0%, respectively, that were imposed by the Brazilian Foreign Trade Chamber (Câmara de Comércio Exterior), or CAMEX. Since 2008, imports of suspension PVC from China have also been subject to a duty of 21.6%, and imports of suspension PVC from South Korea have been subject to duties ranging between 0% and 18.9%, depending on the producer, as a result of the imposition of anti-dumping duties by CAMEX. Theduties imposed on imports from the United States and Mexico are scheduled to expire in 2021, and, although the duties imposed on imports from China and South Korea expired in 2019, they are currently under review and therefore will remain in effect until the end of the review process, which is expected to occur in August 2020.
Additionally, in December 2010, CAMEX imposed an anti-dumping duty of 10.6% on polypropylene imports from the United States, which was extended in November 2016. In August 2014, the Brazilian government imposed anti-dumping duties on polypropylene imports from South Africa, India and South Korea of 16.0%, 6.4% to 9.9%, and 2.4% to 6.3%, respectively. The duties imposed on imports of polypropylene from the United States are scheduled to expire in 2021, and although the duties imposed on imports from South Africa, India and South Korea expired in 2019, they are currently under review and therefore will remain in effect until the end of the review process, which is expected to occur in August 2020.
In 2019, 31% of Brazilian polyethylene, polypropylene and PVC resins were imported products, which reflected an 8.5% annual increase in the volume of resins imported.
In 2018, 25% of Brazilian polyethylene, polypropylene and PVC resins were imported products, which reflected a 12.3% annual increase in the volume of resins imported, due to higher availability of products from plants that recently started to operate.
Changes in industrial policy and related actions undertaken by the Brazilian government may negatively affect demand for our products as well as our net sales revenue and overall financial performance.
We currently benefit from certain industrial policies and related actions undertaken by the Brazilian government intended to strengthen the domestic economy and certain local industries. Some of these policies and actions have recently included reductions in payroll taxes for plastic manufacturers, a program to improve the competitiveness of Brazilian producers in the export markets by refunding the federal taxes levied on their export sale, intervention of the federal government to reduce incentives to imports at local ports, increases in import duties on certain products, including polyethylene, and the reduction in the rates of the Social Integration Program (Programa de Integração Social), or PIS, a federal value-added tax, and Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social), or COFINS, taxes on feedstock purchases by first- and second-generation petrochemical producers.
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These taxes on feedstock purchases were set at a rate of 5.6% for naphtha and 9.25% for other feedstocks prior to June 2013. After September 2013, naphtha and also other feedstocks taxestax rates were lowered to 1% in 2015, increased to 3% in 2016, 5% in 2017 and further increased to 5.6% in 2018. On May 30, 2018, the Brazilian government issued Provisional Measure No. 836/18, which revoked the tax rebates for social contribution taxes, PIS and COFINS, beginning on September 1, 2018. Further, in early October 2018, the petrochemical industry special regime (REIQ) was not passed into law, which kept the PIS/COFINS taxes levied on the acquisition of domestic and imported feedstocks unchanged at 5.6%.
We cannot predict or control which policies will be renewed or discontinued and whether future changes to Brazilian industrial policy will be proposed and enacted in the future. If industrial policies that benefit us expire, or policies detrimental to us are implemented, our business, results of operations and financial condition may be adversely affected.
Fluctuations in thereal/U.S. dollar exchange rate could increase inflation in Brazil, raise the cost of servicing our foreign currency-denominated debt and negatively affect our overall financial performance.
The exchange rate between thereal and the U.S. dollar and the relative rates of depreciation and appreciation of thereal have affected our results of operations and may continue to do so.
The Brazilian currencyreal has been devalued on several occasions. Throughout the last several decades, the Brazilian government has implemented various economic plans and various exchange rate policies, includingsudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. On average, thereal depreciated by 13.4%47.0% against the U.S. dollar during 2014, by 47.0% during 2015, appreciated by 16.5% during 2016 and appreciated by 8.5% during 2017, and depreciated by 14.5% during 2018.2018 and depreciated by 7.9% during 2019.
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Depreciation of thereal relative to the U.S. dollar also could result in inflationary pressures in Brazil by generally increasing the price of imported products and services. On the other hand, the appreciation of thereal against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments and may dampen export-driven growth.
We had total foreign currency-denominated debt obligations, all of which were denominated in U.S. dollars, in an aggregate amount of R$24,167.037,633.2 million (US$6,237.09,336.6 million) as of December 31, 20182019 (inclusive of an aggregate amount of R$373.69,981.7 million (US$96.42,476.4 million) outstanding as of December 31, 20182019 in connection with the Leniency Agreement)our secured debt related to our Mexico Complex), representing 97%96.0% of our consolidated indebtedness, net of transaction costs. This indebtedness does not include an aggregate amount of R$10,504.6 million (US$2,711.0 million) outstanding as of December 31, 2018 in connection with the Braskem Idesa Financing (as defined elsewhere in this annual report). As of December 31, 2018,2019, we had R$2,698.56,803.9 million (US$696.41,688.0 million) in foreign currency-denominated cash and cash equivalents, not including the aggregate amount of R$963.41,017.2 million (US$248.6252.4 million) of Braskem Idesa’s cash and cash equivalents.
A significant depreciation of thereal in relation to the U.S. dollar or other currencies could increase our financial expenses as a result of foreign exchange losses that we must record and could reduce our ability to meet debt service requirements of our foreign currency-denominated obligations. To enable us to more efficiently manage the effects of exchange rate fluctuations on our results, in 2013 we decided to designate part of our U.S. dollar-denominated liabilities as a hedge for our future exports.
The prices of naphtha, our most important raw material, and of some of our other raw materials, are denominated in or linked to the U.S. dollar. Naphtha accounted, directly and indirectly, for 41.8%40.7% of our consolidated cost of products sold in 2018.2019. When thereal depreciates against the U.S. dollar, the cost inreais of our U.S. dollar-denominated and U.S. dollar-linked raw materials increases, and our operating income inreais may decrease to the extent that we are unable to pass on these cost increases to our customers.
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Therefore, with the goal of partially mitigating the long-term exchange risk, in September 2016, the Company started to contract financial derivatives to establish a long-term foreign exchange hedge program. The program aims to mitigate dollar call and put option contracts by hedging expected cash flows over a 24-month period.
The Brazilian government’s actions to combat inflation may contribute significantly to economic uncertainty in Brazil and reduce demand for our products.
Historically, Brazil has experienced high rates of inflation. Inflation, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. The inflation rate, as measured by the General Price Index—Internal Availability (Índice Geral de Preços—Disponibilidade Interna), or the IGP-DI, reached 2,708% in 1993. Although inflation rates have been substantially lower since 1995 than in previous periods,years, inflationary pressures persist. Inflation rates, as measured by the IGP-DI, were 3.8% in 2014,10.7% in 2015,7.2% in 2016, negative 0.4% in 2017, and 7.1% in 2018.2018 and 7.3% in 2019. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions also may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
Brazil may experience high levels of inflation. Increasing prices for petroleum, the depreciation of thereal and future governmental measures seeking to maintain the value of thereal in relation to the U.S. dollar may trigger increases in inflation in Brazil. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which would lead to reduced demand for our products in Brazil and decreased net sales revenue. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing ourreal-denominated debt may increase, causing our net income to be reduced. Inflation and its effect on domestic interest rates can in addition, lead to reduced liquidity in the domestic capital and lending markets, which could adversely affect our ability to refinance our indebtedness in those markets. Any decline in our net sales revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our securities, including class A preferred shares and the ADSs.
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Fluctuations or changes in, or the replacement of, interest rates could raise the cost of servicing our debt or reduce our financial revenue, negatively affecting our overall financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31, 2018,2019, we had, among other debt obligations:
· R$0.3 million of loans and financing that were subject to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TLP (which was formerly referred to as TJLP in connection with agreements entered into prior to January 1, · R$ · R$ · R$ The TLP includes an inflation factor and is determined quarterly by the Central Bank. In particular, the TLP, the CDI and the SELIC rates have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” A significant increase in any of these interest rates could adversely affect our financial expenses and negatively affect our overall financial performance. In addition, as a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation or under-reporting of LIBOR. Actions by the BBA, regulators or law enforcement agencies, as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based indebtedness and/or investments. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based indebtedness and/or investments. 31·R$0.52018)2019);489.61,031.5 million of loans and financing that were subject to the Interbank Deposit Certificate (Certificado de Depósito Interbancário), or CDI, rate;211.2479.1 million of loans and financing that were subject to the Extended National Consumer Price Index (Índice de Preços ao Consumidor Amplo), or IPCA; and1,957.97,794.9 million of loans and financing that were subject to the London Interbank Offered Rate, or LIBOR.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on future indebtedness may be adversely affected or we may need to renegotiate the terms of our existing facilities to replace LIBOR with the new standard that is established, if any, or to otherwise agree with lenders, trustees or agents, as applicable, on a new means of calculating interest. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have a material adverse effect on our financial expenses and/or financial revenue and materially adversely affect our overall financial performance.
Brazilian government exchange control policies could increase the cost of servicing our foreign currency-denominated debt, adversely affect our ability to make payments under our foreign currency-denominated debt obligations and impair our liquidity.
The purchase and sale of foreign currency in Brazil is subject to governmental control. The current laws and regulations governing the Brazilian foreign exchange system allow the purchase and sale of foreign currency and the international transfer ofreais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures. Many factors could cause the Brazilian government to institute more restrictive exchange control policies, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy towards the IMF and political constraints to which Brazil may be subject. A more restrictive policy could increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-denominated debt obligations and other liabilities.
Our foreign-currency debt denominated in U.S. dollars represented an aggregate of 96.0% of our indebtedness on a consolidated basis as of December 31, 2019, including transaction costs and Braskem Idesa Financing. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our securities, including our class A preferred shares and ADSs.
Changes in tax laws may result in increases in certain direct and indirect taxes, which could reduce our gross margin and negatively affect our overall financial performance.
The Brazilian government implements from time to time changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. We cannot predict the changes to Brazilian tax law that may be proposed and enacted in the future, in particular in view of the novel coronavirus (COVID-19) pandemic. However, future changes in Brazilian tax law may result in increases in our overall tax burden, which could reduce our gross margin and negatively affect our overall financial performance.
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RisksRelating to Mexico
Mexico has experienced adverse economic conditions, which may adversely affect our business.
Mexico has historically experienced uneven periods of economic growth. In 2017, Mexico’s GDP only increased by 2.1%, while inflation increased to 6.8%. At the end of 2017, Mexico’s inflation rate reached a 17-year high, primarily due to a weakerPeso compared to the U.S. dollar and the termination of government controls on gasoline and other fuels.In 2018, Mexico’s economy rebounded slightly from the prior high inflation rate, decreasing to 4.8%. Inflation remained above the consumer price index target of 3%, and Mexico’s GDP growth for 2018 decreased slightly to 2.0%, from 2.1% in 2017. In 2019, Mexico’s GDP stagnated in relation to 2018.According to the IMF, because ofthe adverse effects of the novel coronavirus (COVID-19) pandemic, the GDP of Mexico is expected to shrink significantly in 2020, leading to an economic contraction and a recession in the country.
Decreases in the growth rate of the Mexican economy, periods of negative growth or reductions in disposable income may result in lower demand for our products. The Mexican government recently cut spending in response to an austerity policy and a downward trend in international crude oil prices, and it may further cut spending in the future. These cuts could adversely affect the Mexican economy and, consequently, our business, financial condition, operating results and prospects. In addition, there can be no assurance that the recent Mexican sovereign debt rating downgrades will not adversely affect our business, financial condition or results of operations.
Our revenues are subject to the risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies. As a result, the actions of the Mexican government concerning the economy and regulating certain industries could have a significant effect on Mexican private sector entities, including us, and on market conditions, prices and returns on Mexican securities, including our securities.
A renegotiation of commercial treaties or changes in foreign policy among Mexico, Canada and the United States may negatively affect our business, financial condition, results of operations and prospects.
In recent years, economic conditions in Mexico have become increasingly correlated with economic conditions in the United States as a result of the North American Free Trade Agreement, or NAFTA, and increased economic activity between the two countries. Adverse economic conditions in the United States or other related events could have a significant adverse effect on the Mexican economy, which could adversely affect our business. As a result of talks to renegotiate NAFTA, on November 30, 2018, the United States, Canada, and Mexico signed the United States-Mexico-Canada Agreement, or USMCA. Although the USMCA is intended to replace NAFTA, the USMCA is not yet in effect and may fail to be approved and implemented. If such events occurred, they could adversely impact our business and operations. Since 2003, exports of petrochemical products from Mexico to the United States have enjoyed a zero-tariff rate under NAFTA. Any action taken by the current U.S. or Mexico administrations, including changes to NAFTA or the USMCA that would increase the tariff rate between the countries, could have a negative impact on the Mexican economy, such as reductions in the levels of remittances, reduced commercial activity or bilateral trade, or declining foreign direct investment in Mexico. In addition, increased or perceptions of increased economic protectionism in the United States and other countriescould potentially lead to lower levels of trade and investment and economic growth, which could have a similarly negative impact on the Mexican economy. These economic and political consequences could adversely affect our business, results of operations and financial condition.
The 2016 U.S. presidential election and the change in the U.S. administration have had an impact on the worldwide economy and in Mexico. The current U.S. governmental policies towards Mexico have created instability, uncertainty and may adversely affect the Mexican economy. For example, President Donald Trump has instituted import tariffs on a limited amount of products imported from Mexico and enforced measures intended to control illegal immigration from Mexico, which have created friction between the U.S. and Mexican governments and may reduce economic activity between these countries. In addition, in June 2019, the Trump administration announced plans to impose an escalating series of tariffs on Mexico unless the Mexican government enacted certain policy changes. While the Mexican and U.S. governments were able to reach an understanding, we cannot assure you that the U.S. government will not impose escalating or other tariffs on Mexico and that we will not be materially adversely affected by tariffs in the future.
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Our profitability is affected by numerous factors including demand for the products we provide. The demand for our products in Mexico, Central and South America, the Caribbean, Europe the U.S. and in the other countries in which we operate may be adversely affected by the tightening of credit markets and economic downturns. As a global company, we depend on the demand from customers in Mexico, the U.S. and the other countries in which we operate, and reduced consumer spending that falls short of our projections could adversely affect our business, results of operations and financial condition.
Political events in Mexico could affect Mexican economic policy and our business, financial condition and results of operations.
The last Mexican presidential and congressional elections took place in July 2018. Andrés Manuel López Obrador, presidential candidate for the National Regeneration Movement Party (Movimiento de Regeneración Nacional), or Morena, was elected President of Mexico and took office on December 1, 2018. Additionally, Mexican congressional elections took place in July 2018, resulting in Morena effectively controlling the Mexican House of Representatives (Cámara de Diputados) and having a significant influence in the Mexican Senate (Senado de la República), obtaining a historical absolute majority and reducing the rest of the political forces to a level of marginal influence. Mexico’s next federal legislative election will be in July 2021.
During the presidential campaign, the candidates for the presidency and the federal legislatures presented diverse proposals to, among other things, modify or terminate certain structural reforms introduced in the previous administration, with the purpose of reducing the participation of private investment in sectors such as energy. Accordingly, as has happened historically in any change of administration or congress, the Mexican government could implement significant changes in laws, policies and regulations, and could reduce or eliminate the independence of organizations or of semi-autonomous or decentralized dependencies, which could affect the economic and political situation in Mexico. We cannot predict if the current administration will implement substantial changes in law, policy and regulations in Mexico, which could affect our business, results of operations or financial condition.
Morena’s control over the Mexican Congress, as described above, could result in further reforms and secondary legislation of key sectors of the Mexican economy. The ruling political coalition led by Morena has been strengthened by fragmented support from the Green Ecologist Party of Mexico (Partido Verde Ecologísta), the Institutional Revolutionary Party (PRI) and a deficient organization of dissident political groups. As a result, in the state elections of 2019, Morena expanded its influence in the entities acquiring control of 21 of 32 local congresses. We cannot ascertain whether, and to what extent, such policies may affect our business, results of operations and financial condition or the legal framework in which we operate.
In addition, the new administration canceled the New Mexico City Airport (Nuevo Aeropuerto Internacional de la Ciudad de México) project, and has announced the kickoff of the main infrastructure projects that were promised during campaign (including a new refinery at Dos Bocas, the “Mayan train,” and the construction of a new airport in Santa Lucía). Several investors and credit rating agencies are still cautious about the new administration’s policies, which could contribute to a decrease in the Mexican economy’s resilience in the event of a global economic downturn. Morena’s led coalition control in the Congress and in various local Congresses are enough to implement significant reforms without the approval of the rest of the other Mexican political parties, including amendments to the Mexican Constitution. Such concentration of power and any instability in Mexicanpolitics or the Mexican economy as a result of the above can have a negative impact on our business, financial position or operating results. The extent of such impact cannot be accurately predicted.
Political and economic conditions and government policies in Mexico and elsewhere may have a material impact on our operations.
Deterioration in Mexico’s economic condition, social instability, political unrest or other adverse social developments in Mexico could adversely affect our business and financial condition. These events could also lead to increased volatility in the financial markets, thereby affecting our ability to maintain financial liquidity and service our debt. Additionally, spending cuts related to Pemex or other government expenditures, or lack of investments in natural gas and ethane recovery, could adversely affect Pemex, Pemex’s ability to produce and recover ethane, the Mexican economy and, consequently, our business, financial condition, operating results and prospects.
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In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. These problems may worsen or reemerge, as applicable, in the future and could adversely affect our business and ability to service our debt. A worsening of international financial or economic conditions, such as a slowdown in growth or recessionary conditions in Mexico’s trading partners, including the United States, or the emergence of a new financial crisis, could have adverse effects on the Mexican economy, our financial condition and our ability to service our debt.
Furthermore, our long-term supply agreement to purchase ethane from Pemex TRI, a state-owned Mexican entity, could be modified through regulatory means, terminated or jeopardized by them as a result of political pressure to not comply with the agreement, to change the terms of the agreement, expropriation measures, or change in laws regulations by the Mexican government. Any non-compliance, modification, termination or interruption of this supply agreement could have a material adverse effect on the results of our operations or our financial condition.
Developments in other countries could adversely affect the Mexican economy, our financial performance and the price of our shares.
The Mexican economy and the market value of Mexican companies may be affected to varying degrees by global economic and market conditions, and the economic and market conditions in other emerging market countries and major trading partners, in particular the United States. In recent years, economic conditions in Mexico have become increasingly correlated with economic conditions in the United States as a result of the North American Free Trade Agreement, or NAFTA, increased economic activity between the two countries, and the remittance of funds from Mexican immigrants working in the United States to Mexican residents. Therefore, adverse economic conditions in the United States, the termination of, or modifications to, NAFTA or its successor agreement, USMCA, or other related events, including global trade disputes and instability, could have a significant adverse effect on the Mexican economy. We cannot assure you that events in other emerging market countries, in the United States or elsewhere will not adversely affect our financial performance.
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Mexico has experienced a period of increased criminal activity, including violence associated with drug trafficking and organized crime, and such activities could adversely affect our financing costs and exposure to our customers and counterparties.
During recent years, Mexico has experienced a period of increased criminal activity and violence, primarily due to organized crime. This violence has taken place throughout Mexico, including the State of Veracruz, where our Mexico Complex is located. Despite the efforts of the Mexican government to increase security measures by strengthening its military and police forces, drug-related violence and crime continues to threaten the Mexican economy and the peace and security of certain regions, resulting in economic and political instability and uncertainty in Mexico. Systematic criminal activity and isolated criminal events could interrupt our operations, affect our ability to generate revenue and increase the cost of our operations. Continued violence could result in the Mexican government adopting additional security measures, such as transport restrictions, prohibiting the transit of goods and people at certain times, and cross-border trade. We cannot assure you that these activities, their escalation and the violence associated with them, over which we have no control, could have a negative impact on the business environment in which we operate, and therefore on our results of operations and financial condition.
We may interpret certain provisions of our ethane supply agreement differently than our counterparty Pemex TRI.
As of the date of this annual report, we source substantially all of the ethane for the production of polyethylene at our Mexico Complex from Pemex TRI pursuant to the take-or-pay long-term ethane supply agreement with Pemex TRI. The ethane supply agreement is a complex agreement, and we may interpret certain of its provisions differently than Pemex TRI does. For instance, if Pemex TRI fails to supply a determined percentage of the ethane contractually specified under the ethane supply agreement for six consecutive months, we will have the right to terminate the ethane supply agreement and require Pemex TRI to pay to the other parties involved in the project an amount equal to the termination value of this project (the value of which is determined pursuant to the contract and takes into consideration, among other factors, the outstanding debt of the project and the amount invested in the project at such time). A difference of interpretation between us and Pemex TRI of certain provisions of the ethane supply agreement, including the provisions relating to calculation of the termination value, could have an adverse effect on our results of operations and financial position. See “—We have no control over the corporate actions or decisions of Pemex TRI, which is our main supplier of ethane and a Mexican state-owned enterprise.”
If we fail to develop an alternative source of ethane, it may have a negative impact on our business because we cannot operate our Mexico Complex at full capacity.
In order to increase the operating rate of our Mexico Complex, we need to obtain additional quantities of ethane to offset the shortfall in the amount of ethane supplied by Pemex TRI under the ethane supply agreement. As of the date of this annual report, our Mexico Complex is importing additional supplies of ethane through a private terminal in Coatzacoalcos and transporting it to our complex via a logistical solution, or the Fast-Track Solution. In the future, we may consider the development and construction of a new terminal, or the Ethane Import Terminal. However, we cannot guarantee that the potential construction of the Ethane Import Terminal will be completed or that the Fast-Track Solution will be able to increase our production to our expected level of output. In addition, we cannot guarantee that we will be able to import ethane at current market prices, which could also adversely affect our business, results of operations and financial condition.
The development and construction of the Ethane Import Terminal and the establishment of the Fast-Track Solution for the importation of ethane may involve significant risks and uncertainties, such as:
· | failure to obtain or maintain requisite approvals from the applicable regulators and governmental entities; |
· | negotiation of satisfactory engineering, procurement and construction agreements; |
· | negotiation of satisfactory operations and maintenance agreements; |
· | failure to achieve expected results; |
· | failure to obtain rights of way required for the construction of the Ethane Import Terminal; |
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The spread of the novel coronavirus (COVID-19) has caused us to modify certain of our business practices, and we may take further actions as required by government authorities, including closure of ports, or that we determine are in the best interests of our employees, customers, partners and suppliers. These actions could impactthe development and construction of the Ethane Import Terminal and the establishment of the Fast-Track Solution for the importation of ethane.Wecurrentlyexpect PemexTRI’sundersupply of ethane to continue.
Developments in other countries could adversely affect the Mexican economy, our financial performance and the price of our shares.
The Mexican economy and the market value of Mexican companies may be affected to varying degrees by global economic and market conditions, and the economic and market conditions in other emerging market countries and major trading partners, in particular the United States. In recent years, economic conditions in Mexico have become increasingly correlated with economic conditions in the United States as a result of the North American Free Trade Agreement, or NAFTA, increased economic activity between the two countries, and the remittance of funds from Mexican immigrants working in the United States to Mexican residents. Therefore,adverse economic conditions in the United States, the termination of, or modifications to, NAFTA or its successor agreement, USMCA, or other related events, including global trade disputes and instability, could have a significant adverse effect on the Mexican economy. We cannot assure you that events in other emerging market countries, in the United States or elsewhere will not adversely affect our financial performance.
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Mexico has experienced a period of increasing criminal activity, which could affect our operations.
In recent years, Mexico has experienced a period of increasing criminal activity, primarily due to the activities of drug cartels and related criminal organizations. In addition, the development of the illicit market in fuels in Mexico has led to increases in theft and illegal trade in the fuels that Pemex TRI, our principal supplier in Mexico, produces. In response, the Mexican government has implemented various security measures and strengthened its military and police forces aimed at decreasing incidents of theft and other criminal activity directed at petrochemical facilities and petrochemical products. Despite these efforts, criminal activity continues to exist in Mexico, some of which may target our facilities and products, including thefts of our products while transported by truck or rail, or those of Pemex TRI and other suppliers. These activities, their possible escalation and the violence associated with them may have a negative impact on our financial condition and results of operations.
Risks Relating to Our Equity and Debt Securities
The totality of the shares issued by Braskem and owned by OSP Investimentos S.A. were given as collateral in financing agreements entered into by the Odebrecht Group.
Pursuant to a shares fiduciary assignment agreement (alienação fiduciária em garantia) entered into by the Odebrecht Group on November 27, 2013, as amended on May 13, 2016, July 19, 2016, April 24, 2017 and May 23, 2018, all shares issued by Braskem and held by OSP Investimentos S.A. have been given as collateral in connection with certain financing agreements entered into by Odebrecht S.A. and certain of its subsidiaries. In the event that Odebrecht Group defaults on such financing agreements, or if such financing agreements are accelerated and, as a result, such collateral is seized by a creditor (assuming that Petróleo Brasileiro S.A. – PetrobrásPetrobras does not exercise its preemptive rights to acquire such shares) we may be subject to a change of control following statutory and procedural formalities required pursuant to our shareholders’s agreement. A change of control under these circumstances may adversely affect us.
A foreclosure on or sale of our shares held by OSP Investimentos S.A. - whether within or outside the Odebrecht Judicial Restructuring Proceedings - may result in a change of control. As we do not have the ability to consent to or otherwise influence or control the Odebrecht Judicial Restructuring Proceedings or otherwise the acquirer of the shares from any such foreclosure, we may have a change in our corporate control in the foreseeable future.
Shareholders of our class A preferred shares or the ADSs may not receive any dividends or interest on shareholders’ equity.
As permitted by the Brazilian CorporationCorporations Law, our by-laws specify that 25% of our adjusted net profit for each fiscal year must be distributed to shareholders as mandatory dividends, or the Mandatory Distribution of Dividends. Under our by-laws, our class A and class B preferred shareholders are entitled to a minimuman annual non-cumulative preferential dividend, or the Minimum Preferred Dividend, equal to 6% of theirpro rata share of our capital before dividends may be paid to our common shareholders. The Brazilian Corporations Law allows a publicly traded company like ours to suspend the mandatory distributionMandatory Distribution of dividendsDividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability, provided that such suspension does not affect the Minimum Preferred Dividend, which is still payable to the holders of preferred shares. However, the shareholders, including the holders of our class A preferred shares or the ADSs, may not receive any dividends or interest on shareholders’ equity in any given year if our board of directors makes suchwe do not record a determination or if our operations fail to generate net incomeprofit.
Our class A preferred shares and the ADSs have limited voting rights and are not entitled to vote to approve corporate transactions, including mergers or consolidations of our companyCompany with other companies, or the declaration of dividends.
Under the Brazilian Corporations Law and our by-laws, holders of our class A preferred shares and, consequently, the ADSs underlying these shares are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of class A preferred shares,such as modifying basic terms of our class A preferred shares or creating a new class of preferred shares with superiorwithsuperior rights. Holders of preferred shares without voting rights are entitled to elect one member and his or her respective alternate to our board of directors and our fiscal council, depending on specific circumstancesrequirements provided in the Brazilian Corporations Law. Holders of our class A preferred shares and the ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our companyCompany with other companies, or the declaration of dividends. However, if we do not pay dividends for three consecutive years, holders of our class A preferred shares and the ADSs will be granted voting rights. See “Item 10. Additional Information—Description of Our By-laws—Voting Rights.”
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Holders of the ADSs may find it difficult to exercise even their limited voting rights at our shareholders’ meetings.
Under Brazilian law, only shareholders registered as such in our corporate books may attend our shareholders’ meetings. All class A preferred shares underlying the ADSs are registered in the name of the depositary. ADS holders may exercise the limited voting rights with respect to our class A preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs, which provides that voting rights are only available to ADS holders at our discretion. Therediscretion.There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our class A preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person, or voting by proxy.proxy or by remote voting, if applicable. By contrast, holders of the ADSs will receive notice of a shareholders’ meeting by mail from the depositary following our notice to the ADRADS depository requesting the ADRADS depository to do so. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of class A preferred shares. If it fails to receive timely voting instructions for all or part of the ADSs, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
In the limited circumstances in which holders of the ADSs have voting rights, they may not receive the voting materials in time to instruct the depositary to vote the class A preferred shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out the voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise their voting rights, and they will have no recourse if the class A preferred shares underlying their ADSs are not voted as requested.
If holders of the ADSs exchange them for class A preferred shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.
The Brazilian custodian for the preferred shares underlying the ADSs must obtain an electronic registration number with the Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the class A preferred shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of the ADSs decide to exchange them for the underlying preferred shares, they will only be entitled to rely on the custodian’s certificate of registration with the Central Bank for five business days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic certificate of foreign capital registration in connection with the preferred shares, which may result in expenses and may cause delays in receiving distributions. See “Item 10. Additional Information—Exchange Controls.”
Also, if holders of the ADSs that exchange the ADSs for our Class A preferred shares do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the proceeds from any sale of, our preferred shares. See “Item 10. Additional information—Exchange Controls” and “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
Restrictions on the movement of capital out of Brazil may impair the ability of holders of our shares, ADSs and debt securities to receive payments on their respective obligations or guarantees and may restrict our ability to make payments in U.S. dollars.
In the past, the Brazilian economy has experienced balance of payment deficits and shortages in foreign exchange reserves, and the government has responded by restricting the ability of Brazilian or foreign persons orentities to convertreais into foreign currencies. The government may institute a restrictive exchange control policycontrolpolicy in the future. Any restrictive exchange control policy could prevent or restrict our access to U.S. dollars, and consequently our ability to meet our U.S. dollar obligations under our shares, ADSs and the guarantees we granted pursuant to our outstanding senior notes, and could also have a material adverse effect on our business, financial condition and results of operations. We cannot predict the impact of any such measures on the Brazilian economy.
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The foreign exchange policy of Brazil may affect the ability of Braskem to make money remittances outside Brazil in respect of our equity securities or debt securities.
Under current Brazilian regulations, Brazilian companies are not required to obtain authorization from the Central Bank in order to make payments under guarantees in favor of foreign persons, such as the holders of our shares, ADSs or theour outstanding senior notes. We cannot assure you that these regulations will continue to be in force in the event that Braskem is required to perform its payment obligations under its shares, ADSs or the guarantees under our outstanding senior notes. If these regulations or their interpretation are modified and an authorization from the Central Bank is required, Braskem would need to seek an authorization from the Central Bank to transfer the amounts under such obligations out of Brazil or, alternatively, make such payments with funds held by Braskem outside Brazil. We cannot assure you that such an authorization will be obtained or that such funds will be available. If such authorization is not obtained, we may be unable to make payments to holders of our shares, ADSs and/or the applicable senior notes in U.S. dollars. If we are unable to obtain the required approvals, if needed for the payment of amounts owed by Braskem through remittances from Brazil, we may have to seek other lawful mechanisms to effect payment of amounts due under the shares, ADSs or the senior notes. However, we cannot assure you that other remittance mechanisms will be available in the future, and even if they are available in the future, we cannot assure you that payment on the outstanding senior notes would be possible through such mechanism.
Holders of the ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.rights than under the laws of other jurisdictions, including in a jurisdiction in the Unites States.
Holders of the ADSs are not our direct shareholders and are unable to enforce the rights of shareholders under our by-laws and the Brazilian Corporations Law.
Our corporate affairs are governed by our by-laws and the Brazilian Corporations Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of the class A preferred shares underlying the ADSs under the Brazilian Corporations Law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law and are the subject of continuously evolving regulations promulgated by the Brazilian Securities and Exchange Commission, or the CVM, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our class A preferred shares and the ADSs at a potential disadvantage.disadvantage when compared to holders of shares of companies incorporated in other jurisdictions. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.
Holders of the ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are a corporation (sociedade por ações) organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because a substantial portion of our assets and all of our directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based uponthe U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
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Judgments of Brazilian courts enforcing Braskem’s obligations under our equity securities or the guarantees would be payable only inreais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations under our shares, ADSs, the guarantees under our outstanding senior notes or our other indebtedness, we would not be required to discharge our obligations in a currency other thanreais. Any judgment obtained against us in Brazilian courts in respect of any payment obligations under such shares, ADSs, guarantees or other indebtedness would be expressed inreais. We cannot assure you that this amount inreais will afford the holders of the shares, ADSs, senior notes or our other indebtedness full compensation of the amount sought in any such litigation.
The New York Stock Exchange has commenced delisting procedures with respect to our ADSs.
On May 13, 2019, the New York Stock Exchange suspended trading of our ADSs on the exchange and commenced proceedings to delist us due to our delay in filing our annual report for the fiscal year ended December 31, 2017 and this annual report. We have appealed the decision. As a result, our ADSs have traded on the over-thecounter (OTC) market in the United States since May 15, 2019, which is a less liquid market than the New York Stock Exchange. If our appeal is unsuccessful and the New York Stock Exchange does not resume trading of our ADSs on the exchange and halts the delisting process, our ADSs may not trade on the New York Stock Exchange in the future. In addition, although we may continue to be subject to reporting and corporate governance requirements applicable under U.S. securities laws and regulations, we would not be subject to the listing requirements under the New York Stock Exchange. If we are not able to resume the trading of our ADSs on the New York Stock Exchange, this could materially impact the market price of our ADSs.
Actual or anticipated sales of a substantial number of class A preferred shares could decrease the market prices of our class A preferred shares and the ADSs.
Sales of a substantial number of our class A preferred shares could negatively affect the market prices of our class A preferred shares and the ADSs. If substantial sales of shares are made through the securities markets by our controlling shareholders or other class A preferred shares, the market price of our class A preferred shares and, by extension, the ADSs may decrease significantly. As a result, holders of the ADSs may not be able to sell the ADSs at or above the price they paid for them.
Holders of the ADSs or class A preferred shares in the United States may not be entitled to the same preemptive rights as Brazilian shareholders have, pursuant to Brazilian legislation, in the subscription of shares resulting from capital increases made by us.
Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be permitted to allow holders of ADSs or class A preferred shares in the United States to exercise any preemptive rights in any future capital increase unless (1) we file a registration statement for an offering of shares resulting from the capital increase with the U.S. Securities and Exchange Commission, or the SEC, or (2) the offering of shares resulting from the capital increase qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of the ADSs or class A preferred shares in the United States that we will file a registration statement with the SEC to allow them to participate in any of our capital increases. As a result, the equity interest of such holders into us may be diluted.
Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of our ADSs and preferred shares.
According to Law No. 10,833, of December 29, 2003, if a nonresident of Brazil disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another nonresident. Dispositions of our ADSs between nonresidents, however, arecurrently not subject to taxation in Brazil. Nevertheless, in the event that the concept of “disposition of assets” is interpreted to include the disposition between nonresidents of assets located outside Brazil, this tax law could result in the imposition of withholding taxes in the event of a disposition of our ADSs made between nonresidents of Brazil. Due to the fact that, as of the date of this annual report, there is no judicial guidance on the application of Law No. 10,833/2003, we are unable to predict whether an interpretation applying such tax laws to dispositions of our ADSs between nonresidents could ultimately prevail in Brazilian courts. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.”
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The relative volatility and liquidity of the Brazilian securities markets may adversely affect holders of our class A preferred shares and ADSs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States and other jurisdictions, and may be regulated differently from the manner in which U.S. investors are accustomed. Factors that may specifically affect the Brazilian equity markets may limit the ability of holders of the ADSs to sell class A preferred shares underlying ADSs at a price and at a time when they wish to do so and, as a result, could negatively impact the market price of the ADSs themselves.
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Economic developments and investor perceptions of risk in other countries, including both in developed or emerging market economies, may adversely affect the trading price of Brazilian securities, including our common shares and ADSs, as well as any outstanding debt securities.
The market value of securities of Brazilian issuers is affected in varying degrees by economic and market conditions in other countries, including in developed countries, such as the United States and certain European countries, and in emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Brazil, the reaction of investors to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. The price of shares traded in the Brazilian capital markets, for instance, has been historically subject to fluctuation of interest rates in the United States and the variation in the main U.S. stock exchanges. In addition, crises in other emerging countries may diminish investor interest in securities of Brazilian issuers, including our common shares and ADSs and our debt securities. This could adversely affect the market price of our common shares, ADSs and outstanding debt securities and could also make it more difficult for us to access capital markets, affecting our ability to finance our operations on acceptable terms.
Recently, heightened volatility in the Brazilian market was due to, among other factors, uncertainties regarding adjustments to the implications of the policies of the current U.S. administration, U.S. monetary policy, the United Kingdom’s vote to leave the European Union (popularly known as Brexit) and their consequences on international financial markets, increased aversion to risk in emerging countries, and uncertainties regarding macroeconomic and political conditions. We have no control over and cannot predict the effects of Donald Trump’s administration, policies or actions. Furthermore, we have no control over and cannot fully predict the effects of the United Kingdom’s Brexit negotiations, which requires the United Kingdom andleaving the European Union to reach an agreement by October 31, 2019, absent further extensions to the initial two-year negotiating period.(Brexit). In addition, we are exposed to disruption and volatility of global financial markets due to their effects on the economic and financial environment, particularly in Brazil, such as economic downturn, increased unemployment rate, decreased purchasing power of consumers and unavailability of credit.
These disruptions or volatility in global financial markets may increase even further the negative effects on the Brazilian economic and financial environment, adversely affecting us.
Because Braskem Finance Limited and Braskem Netherlands Finance B.V. have no operations of their own, holders of our outstanding senior notes issued by Braskem Finance Limited or Braskem Netherlands Finance B.V. depend on Braskem to provide Braskem Finance Limited or Braskem Netherlands Finance B.V., respectively, with sufficient funds to make payments on these notes when they become due.
Braskem Finance Limited, a wholly-owned subsidiary of Braskem incorporated in the Cayman Islands, and Braskem Netherlands Finance B.V., or Braskem Netherlands Finance, an indirect wholly-owned subsidiary of Braskem incorporated under the laws of The Netherlands, have no operations of their own other than the issuing and making of payments on their respective senior notes and other indebtedness, ranking equally with such senior notes, and using the proceeds therefrom as permitted by the agreements governing these issuances, including lending the net proceeds of the senior notes and other indebtedness incurred by Braskem Finance Limited and Braskem Netherlands Finance to Braskem and subsidiaries of Braskem. Accordingly, the ability of either BraskemFinance Limited or Braskem Netherlands Finance to pay principal, interest and other amounts due on the outstanding senior notes issued by it and other indebtedness will depend upon our financial condition and results of operations and our subsidiaries that are creditors of Braskem Finance Limited or Braskem Netherlands Finance, respectively. In the event of an adverse change in our financial condition or results of operations and our subsidiaries that are creditors of Braskem Finance Limited or Braskem Netherlands Finance, these entities may be unable to service their indebtedness to Braskem Finance Limited or Braskem Netherlands Finance, as the case may be, which would result in the failure of Braskem Finance Limited or Braskem Netherlands Finance, as the case may be, to have sufficient funds to repay all amounts due on or with respect to the respective outstanding senior notes.
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Payments on Braskem’s guarantees will be junior to Braskem’s secured debt obligations and effectively junior to debt obligations of Braskem’s subsidiaries and jointly controlled companies.
The outstanding senior notes are fully guaranteed by Braskem on an unsecured basis. The Braskem guarantees will constitute senior unsecured obligations of Braskem. The guarantees will rank equal in right of payment with all of Braskem’s other existing and future senior unsecured indebtedness. Although the guarantees will provide the holders of the senior notes with a direct, but unsecured claim on Braskem’s assets and property, payment on the guarantees will be subordinated to secured debt of Braskem to the extent of the assets and property securing such debt.
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Upon any liquidation or reorganization of Braskem, any right of the holders of the notes, through enforcement of Braskem’s guarantees (i) to participate in the assets of Braskem, including the capital stock of its subsidiaries and jointly controlled entities, will be subject to the prior claims of Braskem’s secured creditors, and (ii) to participate in the assets of Braskem’s subsidiaries and jointly controlled entities, and will be subject to the prior claims of the creditors of such subsidiaries and jointly controlled entities. The indentures relating to the outstanding senior notes include a covenant limiting the ability of Braskem and its subsidiaries to create or suffer to exist liens, although this limitation is subject to significant exceptions.
Our Mexico complexComplex was financed under a project finance structure, in which the construction loan must be repaid using exclusively the cash generated by us with shareholders pledging limited guarantees. Accordingly, this financing structure includes guarantees typical to transactions of this kind, such as assets, receivables, cash generation and other rights of Braskem Idesa.
As of December 31, 2018,2019, Braskem had (1) consolidated corporate debt, net of transaction costs, of R$25,192.729,291.5 million (US$6,501.77,267.1 million), and (2) consolidated project financeBraskem Idesa debt related to our Mexico Complex of R$10,504.69,981.7 million (US$2,711.02,476.4 million). Of the consolidated corporate debt, R$1,982.11,992.4 million (US$511.5494.3 million) was unsecured debt of Braskem S.A., R$188.936.0 million (US$48.88.9 million) was secured debt of Braskem S.A., R$23,016.827,262.7 million (US$5,9406,763.8 million) was unsecured debt of Braskem’s subsidiaries and special purpose entities (other than Braskem Idesa S.A.P.I.), and R$4.80.6 million (US$1.20.1 million) was secured debt of Braskem’s subsidiaries and special purpose entities (other than Braskem Idesa S.A.P.I.).
Braskem conducts a portion of its business operations through subsidiaries and jointly controlled companies. In servicing payments to be made on its guarantees of the outstanding senior notes, Braskem may rely, in part, on cash flows from its subsidiaries and jointly controlled companies, mainly in the form of dividend payments and interest on shareholders’ equity. The ability of these subsidiaries and jointly controlled entities to make dividend payments to Braskem will be affected by, among other factors, the obligations of these entities to their creditors, requirements of Brazilian corporate and other law, and restrictions contained in agreements entered into by or relating to these entities. In the event that these subsidiaries and jointly controlled entities failare unable to make dividend payments to Braskem due to insufficient cash flows, Braskem may be required to utilize its own cash flowflows to service paymentspayments. Further, if these subsidiaries and jointly controlled entities are unable to pay their debt, they may become subject to bankrupcty or insolvency proceedings. Any bankruptcy or insolvency proceedings of these subsidiaries and jointly controlled entities may have an adverse effect on its outstanding senior notes.our financial condition and results of operations.
Braskem’s obligations under the guarantees under the outstanding senior notes are subordinated to certain statutory preferences.
Under Brazilian law, Braskem’s obligations under the guarantees under the outstanding senior notes are subordinated to certain statutory preferences. In the event of a liquidation, bankruptcy or judicial restructuring of Braskem, such statutory preferences, including post-petition claims, claims for salaries, wages, social security, taxes and court fees and expenses and claims secured by collateral, among others, will have preference over any other claims, including claims by any investor in respect of the guarantees. In such event, enforcement of the guarantees may be unsuccessful, and holders of the outstanding senior notes may be unable to collect amounts that they are due under the outstanding senior notes.
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Brazilian bankruptcy laws may be less favorable to holders of our shares, ADSs and outstanding senior notes than bankruptcy and insolvency laws in other jurisdictions.
If we are unable to pay our indebtedness, including our obligations under the shares, ADSs and guarantees under the outstanding senior notes, then we may become subject to bankruptcy proceedings in Brazil. The bankruptcy laws of Brazil currently in effect are significantly different from, and may be less favorable to creditors than, those of certain other jurisdictions. For example, holders of our outstanding debt securities may have limited voting rights at creditors’ meetings in the context of a court reorganization proceeding. In addition, any judgment obtained against us in Brazilian courts in respect of any payment obligations under the guarantees normally would be expressed in thereal equivalent of the U.S. dollar amount of such sum at the exchange rate in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered, or (3) on the date on which collection or enforcement proceedings are started against us. Consequently, in the event of our bankruptcy, all of our debt obligations that are denominated in foreign currency, including the guarantees, will be converted intoreais at the prevailing exchange rate on the date of declaration of our bankruptcy by the court. We cannot assure you that such rate of exchange will afford full compensation of the amount invested in our outstanding debt securities plus accrued interest.
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Item 4. Information on the Company
According to IHS, we are the largest producer of thermoplastic resins in the Americas, based on the annual production capacity of our 29 plants in Brazil, six plants in the United States, two plants in Germany and four plants in Mexico as of December 31, 2018.2019. We are the only producer of ethylene, polyethylene and polypropylene in Brazil. We produce a diversified portfolio of petrochemical and thermoplastic products and have a strategic focus on thermoplastic resins, including polyethylene, polypropylene and PVC.
As of December 31, 2018,2019, our business operations were organized into five business units, which corresponded to our principal production processes, products and services. Our business unitssegments were as follows:
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· | our Polyolefins Unit, which includes the production and sale of polyethylene, including the production of “green polyethylene” from renewable resources, and polypropylene produced by us in Brazil. This segment accounted for net revenue of R$21,191.9 million, or 33.0% of our consolidated net revenue of all reportable segments, including net revenue to our other business units; |
· | our USA and Europe Unit, which includes our production, operations and sale of polypropylene in the United States and Germany. This segment accounted for net revenue of R$10,044.3 million, or 15.7% of our consolidated net revenue of all reportable segments, including net revenue to our other business units; |
· | our Mexico Unit, which includes our production, operations and sale of ethylene, HDPE (high-density polyethylene) and LDPE (low-density polyethylene) in Mexico. This segment accounted for net revenue of R$3,051.4 million, or 4.8% of our consolidated net revenue of all reportable segments, including net revenue to our other business units; and |
· | our Vinyls Unit, which includes our production and sale of PVC and caustic soda. This segment accounted for net revenue of R$2,692.8 million, or 4.2% of our consolidated net revenue of all reportable segments, including net revenue to our other business units. |
In 2017, 2018 and 2019, 53.1%, which includes our production54.8% and sale of chemicals at the chemical complex located in Camaçari in the State of Bahia, or the Northeastern Complex, the chemical complex located in Triunfo in the State of Rio Grande do Sul, or the Southern Complex, the chemical complex located in Capuava in the State of São Paulo, or the São Paulo Complex and the chemical complex located in Duque de Caxias in the State of Rio de Janeiro, or the Rio de Janeiro Complex, and our supply of electricity produced at these complexes to second generation producers, including producers owned or controlled by us. This segment accounted for net sales revenue of R$31,111.7 million, or 43.1%54.5% of our consolidated net sales revenue of all reportable segments, including net sales revenue to our other business units;
·our Polyolefins Unit, which includes the production and sale of polyethylene, including the production of “green polyethylene” from renewable resources, and polypropylene produced by us in Brazil. This segment accounted for net sales revenue of R$22,483.9 million, or 31.1% of our consolidated net sales revenue of all reportable segments, including net sales revenue to our other business units;
·our USA and Europe Unit, which includes our production, operations and sale of polypropylene in the United States and Germany. This segment accounted for net sales revenue of R$11,724.8 million, or 16.2% of our consolidated net sales revenue of all reportable segments, including net sales revenue to our other business units;
·our Mexico Unit, which includes our production, operations and sale of ethylene, HDPE (high-density polyethylene) and LDPE (low-density polyethylene) in Mexico. This segment accounted for net sales revenue of R$3,770.5 million, or 5.2% of our consolidated net sales revenue of all reportable segments, including net sales revenue to our other business units; and
·our Vinyls Unit, which includes our production and sale of PVC and caustic soda. This segment accounted for net sales revenue of R$3,167.4 million, or 4.4% of our consolidated net sales revenue of all reportable segments, including net sales revenue to our other business units.
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In 2016, 2017 and 2018, 51.7%, 53.1% and 54.8% of our net sales revenue, respectively, related to sales performed in Brazil, and 48.3%46.9%, 46.9%45.2% and 45.2%45.5% of our net sales revenue in 2016, 2017, 2018 and 20182019 was derived from our international operations.
Our Strategy
Our strategic objective is to satisfy clients in the chemicals and plastics value chain in a sustainable way and maximize return on the capital invested by shareholders, with a focus on:
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| polyethylene, or PE, resins, polypropylene, or PP, polyvinyl chloride, or PVC, chemicals and renewable chemistry; and |
· | Brazil and in the Americas, including Europe as an export platform. |
The key pillars of our strategy include:
· Productivity and Competitiveness
The petrochemical industry is constantly evolving through investments in the current asset base, advances in innovation and technology, and addition of new capacities with enhanced productivity and competitiveness. Therefore, in order to maintain our leadership position in the industry a key element of ourofour strategy is to pursue improvements in productivity and competitiveness of our current operations, focused on operational efficiency and excellence, commercial and logistics effectiveness, and cost leadership and differentiation through our relationships with clients.
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Innovation and technology remains an important path to increase productivity and competitiveness and we are currently focusing efforts on development and innovation to constantly improve our operations. Focus on innovation extends not only to operations and our product portfolio but also to new management models and business practices. We seek to position ourselves to adopt and implement new digital technologies and solutions that bring greater efficiency to our industrial processes and business management.
This strategy will allow us to ensure optimal operational performance, considering reliability, production optimization, cost reductions, investment discipline and improvements of our industrial processes.
· Feedstock Diversification
Feedstock is a key element of competitiveness in the petrochemical industry, driving a large part of production costs. Petrochemical feedstocks follow the volatile nature of commodity markets with the competitive gap between different feedstocks fluctuating over time and presenting different opportunities in specific regions.
We are constantly seeking to diversify our feedstock profile in order to reduce the volatility of our results, reduce risks related to feedstock availability, and position ourselves to capture opportunities. We are currently working to increase our exposure to gas, diversifying away from naphtha while investing in the flexibility of our assets to consume different feedstocks.
In 2017, we started a project that enables us to produce up to 15% of ethylene from ethane in the Northeastern complex of Brazil with a long-term ethane supply agreement with an U.S. based supplier with pricing based on the Mont Belvieu reference, and during 2018 we were able to successfully operate the assets taking advantage of the increasing flexibility it provided to the complex. In 2019, 1.5% of the ethylene production of our Northeastern Complex was ethane-based. We are also focused on capturing available feedstock opportunities in our current asset base by operating our US PP assets and Mexico cracker at full capacity, capturing propylene and ethane competitive advantage in the North American market and securing competitive feedstock contracts with a long-term view.
Additionally we are constantly monitoring opportunities to grow our asset base in feedstock advantaged regions and position our assets to capture local feedstock opportunities further diversifying our feedstock matrix, enhancing competitiveness and reducing exposure to feedstock related risks.
· Geographic Diversification
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Regional markets are influenced by the local supply and demand balance, macro-economic factors and the political environment. Having a local presence in a given market not only provides easier access to regional customers, feedstock opportunities and industrial policies, but also exposes the player to a number of risks related to government decisions, feedstock availability and demand growth. Having a diversified footprint is important to have access to regional opportunities but also to hedging our operations against local risks.
An important pillar of our strategy is to diversify geographically, growing our global footprint outside Brazil and increasing our competitive scale in PE and PP, enhancing our leadership in the Americas.
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Braskem intends to continue its strategy to diversify geographically while continuing to strengthen our position in the Americas in PE and PP.
· People, Governance and Reputation
We are committed to strengthening our image and reputation among key stakeholders - team members, society and investors, through advances in our compliance system, sustainability, innovation and people management, while strengthening our culture and financial health.
We are committed to strengthening our compliance system, guaranteeing the involvement and responsibility of all leaders and implementing all policies and actions defined by our compliance committee, guided by transparency, integrity and ethics.
Sustainability will continue to be an important aspect of our strategy and we will continue to drive improvements to our health, environment, safety, and eco-indicators, and strengthen our influence in local and international agendas of sustainable development.
In people management, we intend to develop a work environment that reinforces diversity and stimulates the attraction and integration of talented young people, preparing our team for our increasing globalization and preparing us for the new paradigms of managing people.
By these means, we intend to continue strengthening our image and reputation together with our stakeholders, positioning ourselves as a human-oriented, forward-thinking global company that cultivates strong relationships and generates value to all, offering sustainable solutions in chemicals and plastics.
Our History and Development
Our business began when the Odebrecht Group (comprised of Odebrecht S.A. and its subsidiaries) and Mariani Group acquired control of Copene, a raw materials petrochemical complex in Camaçari, in July 2001, and then subsequently integrated their assets in the petrochemical sector with Copene. From 2001 to 2004, we underwent a corporate reorganization and merged many companies that had been acquired. In addition, we acquired Polialden in 2005 and Politeno in 2006.
Through a partnership with Petrobras, we began consolidating the Southern Complex in Brazil in March 2007 with the acquired petrochemical assets from the Ipiranga group. In November 2007, we signed an agreement with Petrobras and Odebrecht, which required them to contribute part of their assets in the petrochemical sector to Braskem. In September 2008, Ipiranga Petroquímica, Petroquímica Paulínia and the spun-off portion of Ipiranga Química were merged into us. In May 2009, our merger with Triunfo was approved.
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In January 2010, we announced the acquisition of Quattor in order to strengthen the Brazilian petrochemical sector and establish ourselves among the five largest and most competitive petrochemical companies in the world. In February 2010, we announced the acquisition of the polypropylene assets of Sunoco Chemicals, the fourth largest producer of this resin in the United States. This acquisition represented an important step towards strengthening our internationalization strategy, which combines our growth in the U.S. market with alternative access to competitive raw materials and main consumer markets. As a result of this acquisition, we became a leader of thermoplastic resins in the Americas, consolidating our position as a major player in the international petrochemical market and the third largest global player in the polypropylene industry. In 2010, Braskem inaugurated its green ethylene plant in Triunfo, Rio Grande do Sul, becoming the world leader in biopolymers and launched the brand I’m greenTM, which identifies Braskem’s products made from renewable sources.
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In July 2011, we announced the acquisition of Dow Chemical’s polypropylene business, including four plants (two plants in the United States and two plants in Germany). The U.S. assets, located in Freeport and Seadrift, Texas, have a combined annual production capacity of 545,000 tons, which represented a 50% increase in annual capacity polypropylene production in the United States. The German assets, located in the cities of Wesseling and Schkopau, have a combined annual production capacity of 545,000 tons. This acquisition represented an important step in the consolidation of our international strategy, positioning us as the largest producer of polypropylene in the United States.
Beginning of Operations of Our Mexico Unit
In April, 2016 Braskem Idesa, our joint venture with the Mexican Idesa group, reached an important milestone with the production of the first batch of polyethylene in the Mexico Petrochemical Complex following a gradual start-up process initiated in December 2015 with the beginning of utilities area operations, followed by the start-up of the cracker in March 2016.
Located in the state of Veracruz, the Mexico Complex includes an ethane cracker integrated with three polyethylene plants, as well as utilities plants (electric power, water and steam). Ethane supply is assured through a 20-year contract with Pemex TRI at a price pegged to the U.S. gas price.
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Our Corporate Structure
The following chart presents our simplified ownership structure and the corporate structure of our principal subsidiaries as of the date of this annual report. The percentages in bold italics represent the direct and indirect percentage of the voting share capital owned by each entity, and the percentages not in bold italics represent the direct and indirect percentage of the total share capital owned by each entity.
In November 2017, Braskem Petroquímica Ltda., or Braskem Petro, merged with and into Braskem S.A., with Braskem S.A. as the surviving entity. This merger simplified our corporate structure by consolidating our activities to reduce financial and operating costs.
In January 2019, Odebrecht informed us of the Odebrecht Reorganization, which was effective as of December 31, 2018. For additional information on the Odebrecht Reorganization, see “Item 5. Operating and Financial Review and Prospects—Recent Developments—Odebrecht Reorganization.”
The SEC maintains an internet website atwww.sec.gov that contains reports, proxy and information statements and other information regarding companies that file or funish documents electronically to the SEC, including us. Our internet website iswww.braskem.com.br, and the internet website of our investors relations’ department iswww.braskem-ri.com.br. The information included on our internet website, the internet website of our investor relations’ deparment, or the information that might be accessed through such websites is not included in this annual report and is not incorporated into this annual report by reference.
We are a corporation (sociedade por ações) organized under the laws of Brazil. Our registered office is at Rua Eteno, 1561, Pólo Petroquímico, Camaçari, Bahia, CEP 42810-000, Brazil, and our telephone number at this address is 55-71-3413-2102.+55 71 3413-2102. Our principal executive office is at Rua Lemos Monteiro, 120 – 24° andar, Butantã, São Paulo, SP, CEP 05501-050, Brazil, and our telephone number at this address is 55-11-3576-9000.+55 11 3576-9000.
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Chemicals Unit
Nomenclature of Segment
In September 2017, our Basic Petrochemicals Unit changed its name to “Chemicals Unit” in order to reflect the nomenclature used by other companies in the same market.
As of December 31, 2018,2019, according to IHS, our Chemicals Unit’s facilities had one of the largest annual production capacities of all first generation producers in the Americas, including net sales revenue to our other business units, our Chemicals Unit generated net sales revenue of R$31,111.727,172.3 million in 2018,2019, or 43.1%42.3% of the net sales revenue of all of our reportable segments.
Our Chemicals Unit is comprised of the Chemicals operations conducted by us in the Northeastern Complex, the Southern Complex, the São Paulo Complex and the Rio de Janeiro Complex.
Our Chemicals Unit produces:
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| olefins, such as ethylene, polymer and chemical grade propylene, butadiene and butene-1; |
· | BTX products; |
· | fuels, such as automotive gasoline, liquefied petroleum gas, or LPG, ethyl tertiary-butyl ether, or ETBE, and methyl tertiary-butyl ether, or MTBE; |
· | intermediates, such as cumene; |
· | aliphatics, aromatics and hydrogenated solvents; and |
· | specialties such as isoprene, dicyclopentadiene, or DCPD, piperylene, nonene, tetramer, polyisobutylene, or PIB, and hydrocarbon resins. |
The products of our Chemicals Unit are used primarily in the manufacture of intermediate second generation petrochemical products, including those manufactured by our Polyolefins Unit and our Vinyls Unit. Our Chemicals Unit also supplies other second generation producers in each of the petrochemical complexes in which we operate and other companies located outside of these complexes, and renders services to those producers. In 2018, 47%2019, 45.3% of our Chemicals Unit’s net sales revenue was derived from intra-company sales of basic petrochemicals, 37%and 56.5% from the sale of basic petrochemicals to third parties, 8% from the sale of fuels, 1% from the resale of naphtha and condensate, 4% from the sale of intermediates and 3% from the sale of utilities and services.parties.
Products of Our Chemicals Unit
Our other business units and third-party petrochemical producers use ethylene and propylene produced by our Chemicals Unit to produce second generation products such as polyethylene, polypropylene and PVC. We also sell butadiene, a variety of aromatics, including BTX products, and intermediates, such as cumene, to third-party petrochemical producers for use as raw materials in the production of a variety of second generation products, including synthetic rubber, elastomers, resins, nylon fibers, ethyl benzene (which is used to make styrene monomer/polystyrene), linear alkyl benzene, purified terephthalic acid, dimethyl terephthalate, bisphenol A, a feedstock for the production of polycarbonate resins, phthalic anhydride, plasticizers and paint.
The following table sets forth the sales volume of basic petrochemicalspetrochemical products by our Chemicals Unit (excluding our intra-company sales) for the periods indicated.
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| Year Ended December 31, | Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (thousands of tons) | (in thousands of tons) | ||||
Domestic sales: |
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Ethylene | 509.1 | 523.6 | 511.9 | 464.1 | 509.1 | 523.6 |
Propylene | 345.8 | 360.4 | 291.3 | 341.9 | 345.8 | 360.4 |
Cumene | 234.1 | 199.8 | 194.5 | 219.0 | 234.1 | 199.8 |
Butadiene | 192.0 | 183.8 | 198.5 | 161.0 | 192.0 | 183.8 |
BTX products(1) | 743.8 | 644.6 | 677.0 | 618.7 | 648.0 | 644.6 |
Gasoline | 942.9 | 925.9 | 745.1 | 1,007.3 | 942.9 | 925.9 |
Others | 441.4 | 679.3 | 666.4 | 443.8 | 492.0 | 477.3 |
Total domestic sales of Chemicals | 3,402.6 | 3.317.6 | 3,090.2 | 3,255.8 | 3,364.5 | 3.315.5 |
Total export sales of Chemicals | 1,188.8 | 1,321.8 | 1,318.2 | 1,060.9 | 1,028.9 | 1,320.1 |
Total sales of Chemicals | 4,591.2 | 4,639.4 | 4,408.4 | 4,316.7 | 4,393.4 | 4,635.6 |
(1) Includes benzene, toluene and para-xylene.
In addition, we had the following intra-company sales:
| Year Ended December 31, | Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (thousands of tons) | (in thousands of tons) | ||||
Ethylene | 2,779.6 | 2,888.8 | 2,856.5 | 2,584.9 | 2,779.6 | 2,888.8 |
Propylene | 969.5 | 1,041.1 | 1,023.1 | 944.0 | 969.5 | 1,041.1 |
Production Facilities of Our Chemicals Unit
We believe that the technological processes we use at plants in our Chemicals Unit are among the most advanced in the world. Our Chemicals Unit currently owns and operates:
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| five major production facilities in the Northeastern Complex (two olefins units, two aromatics units and one utilities unit); |
· | five major production facilities in the Southern Complex (two olefins units, one green ethylene unit, one aromatics unit and one utilities unit); |
· | three production facilities in the São Paulo Complex (one olefins unit, one aromatics unit and one utilities unit); and |
· | two production facilities in the Rio de Janeiro Complex (one olefins unit and one utilities unit). |
We define the term “unit” to mean several production lines that are linked together to produce olefins, aromatics or utilities.
The table below sets forth the primary products of our Chemicals Unit, annual production capacity as of December 31, 20182019 and annual production for the years presented.
| Annual Production | Production | Annual Production | Production | ||||
Primary Products | Capacity | 2018 | 2017 | 2016 | Capacity | 2019 | 2018 | 2017 |
| (in tons) | (in tons) | ||||||
Olefins: |
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Ethylene | 3,952,000 | 3,399,610 | 3,518,658 | 3,459,861 | 3,952,000 | 3,185,203 | 3,399,610 | 3,518,658 |
Propylene | 1,585,000 | 1,324,358 | 1,445,887 | 1,400,466 | 1,585,000 | 1,310,028 | 1,324,358 | 1,445,887 |
Butadiene | 480,000 | 394,998 | 430,040 | 411,630 | 480,000 | 397,762 | 394,998 | 430,040 |
Aromatics: |
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BTX products(1) | 1,367,000 | 841,485 | 977,184 | 1,000,489 | 1,367,000 | 825,253 | 841,485 | 977,184 |
(1) Consists of benzene, toluene and para-xylene.
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Raw Materials of Our Chemicals Unit
The main raw material that we use for chemical production is naphtha, with a total consumption capacity of 10 million tons per year. One million tons of naphtha can be substituted by condensate, which has happened in recent years. Natural gasoline is also a feedstock that can be used as a replacement for naphtha. The cracker located in Rio de Janeiro uses ethane and propane, and its consumption is 0.4 million tons of each of these raw materials per year. The São Paulo cracker can also consume refinery off gas in a quantity equivalent to about 15% of the ethylene production capacity.
Naphtha
Naphtha is the main raw material that we use to produce our chemical products and represents the principal production and operating cost of our Chemicals Unit. We also use condensate as a raw material in the Southern Complex. The following table shows the average Amsterdam-Rotterdam-Antwerp, or the ARA price, of naphtha for the periods indicated.
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
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| (in US$) | |||
Average(1) | US$601.26 | US$483.84 | US$385.41 | US$505.33 | US$601.26 | US$483.84 |
Month ended: |
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January | 592.23 | 499.37 | 317.82 | 459.16 | 592.23 | 499.37 |
February | 555.15 | 498.26 | 292.71 | 499.83 | 555.15 | 498.26 |
March | 571.44 | 459.41 | 350.64 | 533.15 | 571.44 | 459.41 |
April | 607.20 | 467.94 | 379.27 | 563.16 | 607.20 | 467.94 |
May | 666.82 | 434.62 | 402.43 | 544.57 | 666.82 | 434.62 |
June | 632.55 | 400.68 | 417.19 | 472.94 | 632.55 | 400.68 |
July | 642.73 | 424.81 | 380.15 | 503.46 | 642.73 | 424.81 |
August | 640.60 | 459.16 | 369.00 | 446.86 | 640.60 | 459.16 |
September | 676.13 | 503.96 | 395.89 | 479.46 | 676.13 | 503.96 |
October | 661.82 | 519.13 | 441.79 | 491.00 | 661.82 | 519.13 |
November | 505.59 | 571.73 | 415.97 | 529.99 | 505.59 | 571.73 |
December | 462.87 | 566.98 | 463.16 | 540.33 | 462.87 | 566.98 |
(1) The information in the “Average” row represents the mean average monthly naphtha prices during each respective year.
Source
:Supply Contracts and Pricing of the Chemicals Unit
Naphtha and Condensate
The following table shows the distribution of the naphtha plus condensate purchases by our Chemicals Unit for the periods indicated by geographic location of the suppliers.
| Year Ended December 31, | Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
Brazil | 43% | 53% | 62% | 37% | 43% | 53% |
Algeria | 19% | 18% | 16% | 11% | 19% | 18% |
Europe | 14% | 6% | 4% | 16% | 14% | 6% |
South America | 10% | 10% | 8% | 10% | 10% | |
North America | 5% | 4% | 3% | 16% | 5% | 4% |
West Africa | 4% | 6% | 4% | 4% | 4% | 6% |
Others | 5% | 3% | 6% | 5% | 3% | |
Total | 100% | 100% | 100% | 100% |
Supply Contracts with Petrobras
On December 23, 2015, we and Petrobras entered into a new five-year Naphtha Purchase Agreement. This contract replaced the naphtha supply contract between us and Petrobras for the supply of naphtha to our Chemicals plantsChemicalsplants located in the Northeastern Complex and superseded the naphtha supply contract between us Petrobras forthe supply of naphtha to our Chemicals plants located in the Southern Complex, Northeastern Complex and São Paulo Complex. The contract will expire in December 2020.
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Under the terms of this agreement:
·Petrobras has agreed to sell and deliver naphtha, for a period of five years, to our Chemicals plants in the Northeastern, Southeastern and the Southern Complex exclusively for our use as a feedstock;
·we are required to purchase a minimum monthly volume of naphtha;
·we provide Petrobras with a firm commitment order for naphtha each month, together with an estimate of the volume of naphtha that we will purchase over the following six months;
·we may request volumes of naphtha that exceed a monthly firm commitment order, which Petrobras may supply at its discretion;
·the price we pay for naphtha is equal to 102.1% of the ARA price;
·the contract could be terminated or amended in the event that unforeseen extraordinary events occur that cause a disruption in the economic-financial equilibrium of the contract;
·beginning in January 2018, either party may renegotiate the contract upon the occurrence of certain market events. Certain of these market events have occurred, but we have not started, and have no intention to initiate, a renegotiation of the contract.
·either party may terminate the contract, without prior notice, in the event of: (1) failure to cure any breach of the contract following a 30-day grace period; (2) a force majeure event that continues for more than 90 days; (3) transfer or offer as a guaranty all or part of either party’s rights and obligations under the contract to a third party without the other party’s consent; (4) an alteration of ownership or corporate purposes that conflicts with the purpose of the contract; (5) dissolution; or (6) failure to comply with the compliance obligations of the contract; and
·Petrobras may terminate the contract, without prior notice, in the event of our bankruptcy or liquidation.
Supply Arrangements with SONATRACH
The Association for the Research, Production, Transport, Transformation and Sale of Hydrocarbons (Société Nationale pour la Recherche, la Production, le Transport, la Transformation et la Commercialisation des Hydrocarbures), or SONATRACH (the Algerian national oil company), is one of our suppliers of imported naphtha and condensate. We have imported naphtha supplied by SONATRACH since 2002. On an annual basis, we negotiate the minimum and maximum volumes of naphtha and condensate that we will purchase from SONATRACH. On average, we buy one million tons of condensate and 400 thousand tons of naphtha from SONATRACH.
In the event that we were unable to renew our supply arrangements with SONATRACH, we believe that we could purchase sufficient quantities of naphtha from other suppliers to meet the supply needs of our chemicals plants.
· | Petrobras has agreed to sell and deliver naphtha, for a period of five years, to our Chemicals plants in the Northeastern, Southeastern and the Southern Complex exclusively for our use as a feedstock; |
· | we are required to purchase a minimum monthly volume of naphtha; |
· | we provide Petrobras with a firm commitment order for naphtha each month, together with an estimate of the volume of naphtha that we will purchase over the following six months; |
· | we may request volumes of naphtha that exceed a monthly firm commitment order, which Petrobras may supply at its discretion; |
· | the price we pay for naphtha is equal to 102.1% of the ARA price; |
· | the contract could be terminated or amended in the event that unforeseen extraordinary events occur that cause a disruption in the economic-financial equilibrium of the contract; |
· | either party may terminate the contract, without prior notice, in the event of: (1) failure to cure any breach of the contract following a 30-day grace period; (2) a force majeure event that continues for more than 90 days; (3) transfer or offer as a guaranty all or part of either party’s rights and obligations under the contract to a third party without the other party’s consent; (4) an alteration of ownership or corporate purposes that conflicts with the purpose of the contract; (5) dissolution; or (6) failure to comply with the compliance obligations of the contract; and |
· | Petrobras may terminate the contract, without prior notice, in the event of our bankruptcy or liquidation. |
Other Supply Contracts
As part of our strategy to diversify our sources of supply of naphtha, we are acquiring naphtha under annual supply arrangements with international suppliers.
Spot Market Purchases of Naphtha
In addition to our supplies of feedstock under the agreements described above, we purchase naphtha on the spot market from time to time from foreign suppliers located in Africa, Europe, North America and Latin America.
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Spot Market Purchases of Condensate
In addition to our supplies of feedstock under the agreements described above, we purchase condensate on the spot market from time to time from foreign suppliers.
Ethane and Propane
Ethane and propane are the principal feedstocks that we use to produce our chemical products in the Rio de Janeiro Complex and represent the principal production and operating cost of the Chemical unit in the Rio de Janeiro Complex. The price of ethane and propane that we purchase varies primarily based on changes in the U.S. dollar-based international price of these feedstocks.
· | in December 2000, we and Petrobras entered into an ethane and propane supply agreement. The initial term of this contract expires in January 2021 and this agreement is automatically renewable for one two-year period, unless either party notifies the other party in writing, at least one year prior to the expiration of the contract, that it does not intend to renew this agreement. Under the terms of this agreement,Petrobras agrees to sell and deliver ethane and propane to our chemical plant in the Rio de Janeiro Complex exclusively for use as a raw material; |
·In December 2000, we and Petrobras entered into an ethane and propane supply agreement. The initial term of this contract expires in January 2021 and this agreement is automatically renewable for one two-year period, unless either party notifies the other party in writing, at least one year prior to the expiration of the contract, that it does not intend to renew this agreement. Under the terms of this agreement, Petrobras agrees to sell and deliver ethane and propane to our chemical plant in the Rio de Janeiro Complex exclusively for use as a raw material;51
·
| in 2019, Petrobras informed us that it would not renew this agreement on the same terms. We are currently negotiating the terms and conditions of a future agreement for the purchase and sale of ethane and propane with Petrobras, which would become effective following the expiration of the current agreement in 2021. Currently, we cannot assure you that the impact of the new terms and conditions of a future agreement and any failure to successfully negotiate with Petrobras would not impair our ability to satisfy our ethane and propane needs; |
· | we are required to purchase and Petrobras is required to deliver a minimum annual volume of ethane and/or propane; |
· | we agree to provide Petrobras with a firm commitment order for ethane and propane each month, together with an estimate of the volume of ethane and propane that we will purchase over the immediately succeeding four months; |
· | the price for ethane and propane is based on the Mont Belvieu price; and |
· | Petrobras may terminate the contract, without prior notice, in the event of: (1) our failure to cure any breach of the contract following a 60-day grace period; (2) a force majeure event that continues for more than 365 days; (3) we transfer or offer as a guaranty all or part of our rights and obligations under the contract to a third party without Petrobras’ consent; and (4) the dissolution, bankruptcy or liquidation of RioPol. |
Braskem also has an ethane supply contract with Enterprise Products Operating LLC, or Enterprise Products, to supply ethane from the United States to Brazil. This agreement will remain valid until 2027. The price of ethane is based on the Mont Belvieu ethane price plus a Terminal Fee, basis FOB USGC. The logistics to move the ethane to Brazil is managed by Braskem.
Since February 2017, Braskem has had the capability to receive imported ethane at the Rio de Janeiro Complex. The imported ethane is marginal to domestic supply and the quantity imported in 20172019 was 1735.3 ktons, and in 2018 it was 4444.2 ktons.
Since November 2017, Braskem has the capacity to consume ethane in the cracker in Bahia, partially replacing naphtha. Braskem has invested to create the flexibility to substitute naphtha for ethane in a ratio equivalent to 15% of the ethylene production of the site.
2018 was the first year in which we operated our cracker in Bahia using imported ethane as feedstock. Of the total ethylene produced by the cracker, 11%1.5% was from ethane feedstock.feedstock in 2019 and 11% in 2018.
Refinery Off Gas
In January 2005, we entered into an agreement with Petrobras for the purchase and sale of steam from refinery off gas, from which we separate ethylene and propylene. This agreement provides that we and Petrobras will negotiate the renewal of this agreement prior to its expiration in 2020 and that, in the event that Petrobras does not intend to renew this agreement, it must notify us at least two years prior to the expiration of this agreement and must perform under the terms and conditions of this agreement until 2028.
Under the terms of this agreement, which represents 100% of our refinery off gas supply:
· | we are required to purchase a minimum daily volume of refinery off gas, and Petrobras is required to sell a minimum daily volume to us; |
· | the price for refinery off gas is based on a variety of market references; |
· | the contract will be amended in the event that unforeseen extraordinary events occur that cause a disruption in the economic-financial equilibrium of the contract; |
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· |
| Petrobras may terminate the contract, without prior notice, in the event of: (1) our failure to cure any breach of the contract following a 30-day grace period; (2) a force majeure event that prevents the execution of the contract; (3) a transfer or pledge by us, as a guarantee for indebtedness, of all or part of our rights, obligations and credits under this contract to a third party without Petrobras’ consent, unless the third party is a member of our economic group; (4) the dissolution or bankruptcy of Braskem S.A.; or (5) a change in business structure, merger, sale, spin-off or any other corporate reorganization of Braskem S.A. that conflicts with or impedes the execution of contract’s purpose. |
·we are required to purchase a minimum daily volume of refinery off gas and Petrobras to sell;
·the price for refinery off gas is based on a variety of market references;
·the contract will be amended in the event that unforeseen extraordinary events occur that cause a disruption in the economic-financial equilibrium of the contract;
·Petrobras may terminate the contract, without prior notice, in the event of: (1) our failure to cure any breach of the contract following a 30-day grace period; (2) a force majeure event that prevents the execution of the contract; (3) a transfer or pledge by us, as a guarantee for indebtedness, of all or part of our rights, obligations and credits under this contract to a third party without Petrobras’ consent, unless the third party is a member of our economic group; (4) the dissolution or bankruptcy of Braskem S.A.; or (5) a change in business structure, merger, sale, spin-off or any other corporate reorganization of Braskem S.A. that conflicts with or impedes the execution of contract’s purpose.
In December 2017, Petrobras informed us that it would not renew this agreement on the same terms. We are currently negotiating the terms and conditions of a future agreement for the purchase and sale of steam from refinery off gas with Petrobras, which would become effective following the expiration of the current agreement in 2028. By now, we cannot assure you the impact of the new terms and conditions of a possible future agreement and any failure to successfully negotiate with Petrobras could impair our ability to satisfy our refinery off gas needs.
Electricity
To supply our industrial operations in Brazil, which represents 87%represented 79% of our global electric consumption in 2019, we self-generate 21%self-generated 24% of our electrical energy consumption. 31%26% of our demand isin 2019 was supplied by Companhia Hidrelétrica do São Francisco, or CHESF, a Brazilian government-owned electric power generation company, pursuant to a power purchase agreement that will remain valid until 2037. The remaining energy is supplied primarily under long-term contracts with several suppliers in the free energy market (Mercado Livre de Energia).
·In the Bahia Complex, we self-generate 35% of the energy consumption, and about 52% of the demand is supplied by CHESF. The remaining energy is acquired primarily from several suppliers in the free energy market.
·In the Alagoas Complex, 64% of the energy consumption is supplied by CHESF. Therefore, the remaining energy from the Alagoas Complex is acquired primarily from several suppliers in the free energy market.
·In the Southern Complex, we self-generate 31% of the energy consumption, and the remaining energy is acquired primarily from several suppliers in the free energy market.
·In the São Paulo Complex, we self-generate 12% of the energy consumption, and the remaining energy is acquired primarily from several suppliers in the free energy market.
·In the Rio de Janeiro Complex, the energy consumption is acquired primarily from several suppliers in the free energy market.
· | In the Bahia Complex, we self-generate 34% of the energy consumption, and about 55% of the demand is supplied by CHESF. The remaining energy is acquired primarily from several suppliers in the free energy market. |
· | In the Alagoas Complex, 57% of the energy consumption is supplied by CHESF. Therefore, the remaining energy from the Alagoas Complex is acquired primarily from several suppliers in the free energy market. |
· | In the Southern Complex, we self-generate 33% of the energy consumption, and the remaining energy is acquired primarily from several suppliers in the free energy market. |
· | In the São Paulo Complex, we self-generate 11% of the energy consumption, and the remaining energy is acquired primarily from several suppliers in the free energy market. |
· | In the Rio de Janeiro Complex, the energy consumption is acquired primarily from several suppliers in the free energy market. |
Natural Gas
Natural gas is supplied to our industrial operations in Brazil under long-term contracts in the regulated market by companies that have government licenses and exclusivity to deliver it in each state. The natural gas consumed by our operations in Brazil in 20182019 represented 63%65% of our consolidated consumption.
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| In the Bahia Complex, natural gas is supplied by Companhia de Gás da Bahia, or Bahiagás, which represents 49% of our consumption in Brazil. |
· | In the Alagoas Complex, natural gas is supplied by Gás de Alagoas S.A., or Algás, which represents 14% of our consumption in Brazil. |
· | In the Rio Grande do Sul Complex, natural gas is supplied by Companhia de Gás do Estado do Rio Grande do Sul, or Sulgás, which represents 15% of our consumption in Brazil. |
· | In the São Paulo Complex, natural gas is supplied by Companhia de Gás do Estado de São Paulo, or Comgás, which represents 20% of our consumption in Brazil. |
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· |
| In the Rio de Janeiro Complex, natural gas is supplied by Naturgy Brasil, which represents 4% of our consumption in Brazil. |
·In the Rio Grande do Sul Complex, natural gas is supplied by Companhia de Gás do Estado do Rio Grande do Sul, or Sulgás, which represents 19% of our consumption in Brazil.
·In the São Paulo Complex, natural gas is supplied by Companhia de Gás do Estado de São Paulo, or Comgás, which represents 10% of our consumption in Brazil.
·In the Rio de Janeiro Complex, natural gas is supplied by CEG Rio S.A., or CEG, which represents 4% of our consumption in Brazil.
Others
In the Southern Complex we also buy methanol to produce MTBE and ethanol to produce the “green polyethylene.” Methanol is imported and price is based in international market quotations. Ethanol is bought in the domestic market from several producers. In the Bahia Complex, we also buy ethanol to produce ETBE.
Sales and Marketing of Our Chemicals Unit
We sell 79%most of our Chemical products in Brazil to third-party petrochemical producers. We sell the remainder of our Chemical products to customers in the United States, Europe, South America and Asia. The following table sets forth our net sales revenue derived from domestic and export sales, excluding inter-company sales, by our Chemicals Unit for the years indicated:
| For the Year Ended December 31, | For the Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (in millions ofreais) | (in millions ofreais) | ||||
Net sales revenue(1): |
| |||||
Net revenue(1): |
| |||||
Domestic sales | R$12,021.9 | 9,367.7 | 8,201.7 | 11,002.5 | 12,309.9 | 9,367.7 |
Export sales | R$4,285.3 | 4,182.5 | 5,572.3 | 3,820.4 | 4,077.0 | 4,182.5 |
Total net sales revenue | R$16,307.2 | 13,550.2 | 13,744.0 | |||
Total net revenue | 14,822.9 | 16,386.9 | 13,550.2 |
(1)Does not include inter-company sales
Domestic Sales of Chemicals
As part of our commercial strategy, our Chemicals Unit focuses on developing long-term relationships with our customers and entering into long-term supply contracts that provide for minimum and maximum quantities to be purchased on a monthly basis. The domestic market pricing is based on international market references. Net revenue of our Chemicals Unit to third parties in Brazil represented 70.2% of our Chemicals Unit’s net revenue during 2019.
Export Sales of Chemicals
International market prices are also based on international market references, which usually vary according to the region to which the product is exported.
We are focused on maintaining our leading position in the Brazilian market, while continuing to use our exports to optimize our operations and adjust the imbalances between demand and production. Since we export large volumes of certain products, we also develop long-term relationships with international customers through contracts that minimize our exposure to market conditions and mitigate risk. Export net sales of our Chemicals Unit to third parties represented 14%29.7% of our Chemicals Unit’s net sales revenue during 2018.2019.
Additionally, we have applied our expertise in commodities trading to resale of naphtha and ethane in the international markets. In order to meet our crackers’ naphtha and ethane requirements (in terms of timing, pricing and quality), we maintain an excess supply of feedstock and resell the surplus on the spot market. During 2018,2019, we recorded resale operations of R$316790.3 million.
Competition
Our chemical customers, which are mostly second generation petrochemical producers with plants located in the Brazilian petrochemical complexes, would have difficulty obtaining their feedstocks from other sources at lower prices due to the high cost of transportation of these products, as well as other logistical difficulties. Inaddition, because Brazil produces sufficient quantities of olefins to meet domestic demand, imports of these products are generally sporadic and usually related to scheduled plant maintenance shutdowns or to meet unsatisfied domestic demand.
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During the past several years, as the relative cost of naphtha and gas as feedstock for petrochemical crackers has diverged, many crackers using gas as a feedstock have become low-cost producers in the global markets and have seen their margins improve as compared to naphtha crackers. However, as gas crackers are able to produce fewer of the co-products and byproducts that naphtha crackers generate, such as propylene, butadiene and BTX products, and in smaller quantities, the prices of these products in the international markets have increased. As a result of the increased prices available for these co-products and byproducts, our net sales revenue from export sales of these products increased. Competition in the international markets for these products is primarily based on the price of delivered products and competition has increased since mid-2008 as the balance between supply and demand was disrupted due to the impact of the global economic downturn on consumers of these products. In the international markets for our Chemical products, we compete with a large number of producers, some of which are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than us.
Polyolefins Unit
As of December 31, 2018,2019, our polyolefins production facilities had the largest annual production capacity of all second generation producers of polyolefins products in Latin America. Our Polyolefins Unit generated net sales revenue of R$22,48421,191.9 million during 2018.2019, or 33.0% of the net revenue of all of our reportable segments.
Our Polyolefins Unit is comprised of the operations conducted by us at nine polyethylene plants and five polypropylene plants located in the Northeastern Complex, the Southern Complex, the São Paulo Complex and the Rio de Janeiro Complex.
Products of Our Polyolefins Unit
Our Polyolefins Unit produces:
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| polyethylene, including LDPE, LLDPE, HDPE, ultra-high molecular weight polyethylene, or UHMWPE, EVA and “green polyethylene” from renewable resources; and |
· | polypropylene. |
We manufacture a broad range of polyolefins for use in consumer and industrial applications, including:
·plastic films for food, agricultural and industrial packaging;
·bottles, shopping bags and other consumer goods containers;
·automotive parts;
·engineering and infra-structure goods; and
·household appliances.
· | plastic films for food, agricultural and industrial packaging; |
| bottles, shopping bags and other consumer goods containers; |
· | automotive parts; |
· | engineering and infra-structure goods; and |
· | household appliances. |
The following table sets forth a breakdown of the sales volume of our Polyolefins Unit by product and by market for the years indicated.
| Year Ended December 31, | Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (thousands of tons) | (in thousands of tons) | ||||
Domestic sales: |
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Polyethylene(1) | 1,790.27 | 1,796.94 | 1,705.46 | 1,789.7 | 1,788.3 | 1,795.4 |
Polypropylene | 1,143.33 | 1,164.95 | 1,105.68 | 1,142.8 | 1,143.3 | 1,165.0 |
Other | - | — | — | |||
Total domestic sales | 2,933.60 | 2,961.88 | 2,811.14 | 2,932.5 | 2,931.7 | 2,960.4 |
Total export sales | 1,291.18 | 1,357.75 | 1,498.55 | 1,391.8 | 1,257.3 | 1,438.3 |
Total Polyolefins Unit sales | 4,224.78 | 4,429.87 | 4,401.63 | 4,324.3 | 4,189.0 | 4,398.7 |
(1) Includes EVA UHMWPE and Green PE.
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We provide technical assistance to our customers to meet their specific needs by adapting and modifying our polyethylene and polypropylene products. We believe that the variety of technological processes at our polyolefins plants provides us with a competitive advantage in meeting our customers’ needs.
Production Facilities of Our Polyolefins Unit
As of December 31, 2018,2019, our Polyolefins Unit owned 14 production facilities. Our Polyolefins Unit operates five plants located in the Southern Complex, three plants located in the Northeastern Complex, four plants located in the São Paulo Complex and two plants located in the Rio de Janeiro Complex.
The table below sets forth for each of our primary polyolefins products, our annual production capacity as of December 31, 20182019 and annual production for the years presented.
| Annual Production | Production | Annual Production | Production | ||||
Primary Products | Capacity | 2018 | 2017 | 2016 | Capacity | 2019 | 2018 | 2017 |
| (in tons) | (in tons) | (in tons) | |||||
Polyethylene: |
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|
|
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LDPE/EVA(1) | 795,000 | 663,285 | 682,030 | 720,240 | 795,000 | 675,075 | 663,285 | 682,030 |
HDPE/LLDPE/UHMWPE(2) | 2,260,000 | 2,009,389 | 2,066,004 | 1,988,228 | 2,260,000 | 1,935,752 | 2,009,389 | 2,066,004 |
Polypropylene(3) | 1,850,000 | 1,592,480 | 1,711,741 | 1,592,474 | 1,850,000 | 1,638,974 | 1,592,480 | 1,711,741 |
(1) Represents capacity and production at five production lines with swing line capacity capable of producing two types of resins.
(2) Represents capacity and production at eight production lines with swing line capacity capable of producing two types of resins. Capacity varies depending on actual production demands.
(3) Represents capacity and production at five plants.
In September 2010, we commenced production of ethylene at a new plant located in the Southern Complex that produces “green” ethylene using sugar cane ethanol received through the Santa Clara Terminal as its primary raw material. This plant has an annual production capacity of 200,000 tons of ethylene.
During 2014, we converted and expanded, by 25,000 tons, one of our polyethylene lines in the state of Bahia to produce metallocene-based LLDPE. This project began its operations in January 2015.
Raw Materials of Our Polyolefins Unit
Ethylene and Propylene
The most significant direct costs associated with our production of polyethylene and polypropylene are the costs of purchasing ethylene and propylene, which together accounted for 87,9%85.2% of our Polyolefins Unit’s total variable cost of production during 2018.2019. In the same period, our Polyolefins Unit purchased all of the ethylene and part of the propylene that it used from our Chemicals Unit.
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Propylene Contracts with Petrobras and its Subsidiaries
We have entered into multiple propylene agreements, which have initial terms expiring at various dates between May 2021 and April 2028,December 2029, and are priced based on international references to assure competitiveness of feedstock. In 2016, Braskem entered into an agreement with Petrobras for a 5-year propylene supply contract with Refap S.A., a subsidiary of Petrobras. This supply contract is also priced based on international references.
Petrobras may terminate these contracts, without prior notice, in the event of: (1) our failure to cure any breach of the contract following a 30-day grace period; (2) a force majeure event occurs, although some of these contracts require that the force majeure event continues for more than 180 days; (3) we transfer or offer as a guaranty all or part of its rights and obligations under the contract to a third party without Petrobras’ consent; (4) an alteration of Braskem management or corporate purposes that conflicts with the purpose of the contract; (5) the dissolution, bankruptcy or liquidation of Braskem; and (6) a change of entity type, merger, sale, spin-off or any other corporate reconstruction of Braskem that conflicts with or impedes the execution of contract’s purpose.
Ethanol Supply Contracts
We hold multiple ethanol contracts with major producers of ethanol to supply our facility that produces ethylene using sugar cane ethanol. These supply contracts have initial terms expiring at various dates between April 2019 anduntil July 2019.2021. Under these contracts, we are or will be required to purchase an annual supply of ethanol sufficient to meet atmeetat least 90% of the capacity of this ethylene plant. The price we pay under these contracts is or will be determined by reference to the monthly price of combustible hydrated alcohol as published by the Center for Advanced Studies in Applied Economics of the Superior School of Agriculture (Centro de Estudos Avançados em Economia Aplicada da Escola Superior de Agricultura–Agricultura– CEPEA/ESALQ).
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We also purchase ethanol on the spot market from time to time to supplement the supplies that we obtain under these contracts. The price that we pay for ethanol under most of these contracts is determined by reference to market indexes.
Other Materials and Utilities
Our Polyolefins Unit uses butene and n-hexane as raw materials in the production of HDPE and LLDPE. Butene is supplied by our Chemicals Unit, and we import n-hexane from suppliers located in South Africa and U.S. Gulf Coast.
Our Unipol polyethylene plants in the Northeastern Complex and Rio de Janeiro Complex use catalysts supplied by Univation Technologies. Our HDPE plant in the São Paulo Complex uses catalysts supplied by W.R. Grace & Co. The catalysts for our swing line LLDPE/HDPE plants are purchased from Basell Polyolefins Company N.V.,Poliolefine Italia S.R.L. and Equistar Chemicals, L.P, or, collectivelly, Basell. We produce our own catalysts for our HDPE slurry plants in the Southern and Northeastern Complexes, and we purchase the inputs that we need to produce these catalysts from various suppliers at market prices. Our polypropylene plants use catalysts primarily supplied by Basell, while we import certain catalysts from suppliers in the United States and Europe.
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Sales and Marketing of Our Polyolefins Unit
Our Polyolefins Unit sells polyethylene and polypropylene products to more than 1,5001,400 customers worldwide. We have a diversified product mix that allows us to serve a broad range of end users in several industries. The customers of our Polyolefins Unit generally are third generation petrochemical producers that manufacture a wide variety of plastic-based consumer and industrial goods.
The following table sets forth our net sales revenue derived from domestic and export sales by our Polyolefins Unit for the years indicated:
| For the Year Ended December 31, | For the Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (in millions ofreais) | (in millions ofreais) | ||||
|
| |||||
Net sales revenue: |
| |||||
Net revenue: |
| |||||
Domestic sales | R$16,116.8 | R$13,856.4 | R$13,903.1 | R$14,799.7 | R$16,116.8 | R$13,856.4 |
Export sales: |
|
| ||||
South America (excluding Brazil) | 3,261.7 | 3,289.8 | 3,286.5 | 3,073.1 | 3,261.7 | 3,289.8 |
Europe | 1,154.4 | 607.7 | 1,750.3 | 1,419.2 | 1,154.4 | 607.7 |
North America | 467.7 | 683.8 | 82.4 | 723.9 | 467.7 | 683.8 |
Asia | 940.2 | 269.1 | 879.7 | 987.0 | 940.2 | 269.1 |
Other | 543.1 | 943.6 | 405.4 | 189.1 | 543.1 | 943.6 |
Total export sales | 6,367.0 | 5,794.0 | 6,404.3 | 6,392.2 | 6,367.0 | 5,794.0 |
| R$22,483.9 | R$19,650.4 | R$20,307.4 | R$21,191.9 | R$22,483.9 | R$19,650.4 |
Domestic Sales
We are focused on developing long-term relationships with our customers. Given the cyclical nature of the markets for our polyolefins products, we believe that we can strengthen customer loyalty during periods of reduced demand for polyethylene or polypropylene by providing a reliable source of supply to these customers during periods of high demand. We work closely with our customers to provide technical assistance and to coordinate the production and delivery of our products. Customers submit annual proposals giving their estimated monthly requirements for the upcoming year for each of our polyolefins products, including technical specifications, delivery terms and proposed payment conditions. We evaluate these proposals on a monthly basis to make any required adjustments and to monitor and attempt to ensure adequate supply for each customer. Despite having a regular client basis in the domestic market, prices in such market are driven by monthly spot negotiations.spotnegotiations. Both sales volume per client and the types of products our clients purchase may vary on a monthly basis.
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In addition to direct sales of polyolefins to our customers, our Polyolefins Unit sells products in Brazil through exclusive independent distributors. Our Polyolefins Unit is served by five distributors, through which we distribute our products pursuant to formal agreements and spot market transactions. We have selected our distributors based on their ability to provide full service to their customers, and also based on their background. These distributors sell our polyethylene and polypropylene products to manufacturers with lower volume requirements and are able to aggregate multiple orders for delivery. They have a wide coverage network in Brazil and, as a result, expand the Braskem brand.
Furthermore, by providing customized services and serving smaller customers through a network of distributors, our account managers focus their efforts on delivering high quality service to a smaller number of large and medium direct customers.
Export Sales
Our volume of polyolefins export sales has generally varied based upon the level of domestic demand and the total production availability for our products. Our Polyolefins Unit has sales office in Argentina, Chile, Peru and Colombia. These offices are used to consolidate our marketing efforts in South America, one of our key markets outside of Brazil for this business unit. Our Polyolefins Unit also uses our European, Mexican and U.S. sales force in order to improve the profitability of our sales. In each of these regions, we have specific commercial strategies in connection with exports coming from Brazil, which complements our local product availability.
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We have established a strategic position in the polyolefins business in South America, North America and Europe through regular direct sales, local distributors and agents who understand their respective markets. Our strategy to increase our presence in these foreign markets is intended, among other things, to reduce our exposure to the cyclicality of the international spot market for polyolefins through the development of long-term relationships with customers in neighboring countries. Our local presence in the United States and Europe allows us to further enhance our position in those markets and sell our Polyolefins Unit products through our USA and Europe Unit.
The main focus of our Polyolefins Unit is to maintain our leading position in the Brazil and South America reinforcing our commitment to the plastic industry chain in the region, maintaining our position as a leader in polyolefins through a continued local presence and regular product supply.
Prices and Sales Terms
We determine the prices of our products in accordance with international pricing references. In addition, we take into account segment, volume, and other information when we set our prices. Our customers in Brazil may pay in full on delivery or elect credit terms that require payment in full within three to 60 days following delivery. We charge interest based on prevailing market rates to our Brazilian customers that elect to pay on credit.
In addition, besides our strategic sales to South America, Europe, Mexico and the United States, our Polyolefins Unit generally conducts export sales to buyers in Asia and Africa through the international spot market. Our customer base in these markets consists primarily of trading houses and distributors. Pricing is based on international spot market prices.
Competition
We are the only producer of polyethylene and polypropylene in Brazil. We compete with polyolefins producers worldwide. In 2018,2019, Brazilian polyethylene and polypropylene imports increased by 13%8.0% and represented 30%31.4% of Brazilian polyolefin consumption.
We compete for export sales of our polyolefins products in other countries in Latin America and in the North American, Asian and European markets. Similar to Braskem, those competitors also have a wide portfolio, ample research and development capabilities and sufficient production capacity. Our competitive position in the export markets that we serve is based on customer relationship, extensive product portfolio, product quality and customer service and support.
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We are the only green polyethylene producer in the world, made by sugar cane that is 100% verified by ASTM D6866.
USA and Europe Unit
Our USA and Europe Unit includes:
· |
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· | the operations of two polypropylene plants in Germany. |
As of December 31, 2018,2019, our USA and Europe Unit’s facilities had the largest annual polypropylene production capacity in the United States. Our USA and Europe Unit generated net sales revenue of R$11,724.810,044.3 million during 2018.2019, or 15.7% of the net revenue of all of our reportable segments, including inter-segment sales.
In June 2014, we announced the construction of an UHMWPE production line in our La Porte, Texas site, which began producing UTEC® in the first quarter of 2017. We believe that the production of specialized UHMWPE at this new line complements our existing portfolio of products and will enable us to access new markets and to develop close relationships with new and existing clients.
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Products of Our USA and Europe Unit
Our USA and Europe Unit produces polypropylene. The sales volume of polypropylene by this unit was 1,925,036 tons in 2019, 1,923,227 tons in 2018 2,116.529and 2,116,529 tons in 2017 and 2,008,473 tons in 2016.2017. For a description of the uses of our polypropylene products, see “—Polyolefins Unit.”
Production Facilities of our USA and Europe Unit
The table below sets forth the annual production capacity as of December 31, 20182019 of the USA and Europe Unit’s polypropylene plants in the United States and Germany and the annual production for the years presented.
| Annual Production | Production | Annual Production | Production | ||||
Plant | Capacity | 2018 | 2017 | 2016 | Capacity | 2019 | 2018 | 2017 |
| (in tons) | (in tons) | ||||||
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United States | 1,570,400 | 1,394,099 | 1,521,894 | 1,413,607 | 1,570,400 | 1,435,298 | 1,388,600 | 1,521,894 |
Germany | 625,000 | 523,797 | 591,417 | 593,569 | 625,000 | 494,241 | 523,797 | 591,417 |
Raw Materials of Our USA and Europe Unit
Propylene
The most significant direct cost associated with the production of polypropylene by our USA and Europe Unit is the cost of purchasing propylene.
We acquire propylene for our polypropylene plants in the Unites States under a variety of long-term supply agreements and through the spot market. As of December 31, 2018,2019, we had long-termfifteen supply agreements with multiple suppliers. The pricing formulas for propylene under these supply agreements are generally based on market prices.
As a result of rising natural gas production and related production of natural gas liquids, several companies have announced plans to build propane dehydrogenation, or PDH plants, which would produce on-purpose propylene. We have secured a long-term propylene agreement of 15 years with one such company, Enterprise Products, which recently completed construction of a PDH plant in Texas in 2017 with an annual capacity of 750,000 tons. We expect this agreement with an established producer to provide us with a competitive, long-term supply of propylene, using shale gas and other nontraditional sources as its feedstock. This plant has commenced operations by the end of 2017. Under this arrangement, the pricing of these contracts will be based on market prices for propane and other market costs.
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We acquire propylene for our polypropylene plants in Germany under long-term supply agreements that provide for the supply of 88%84% of the propylene requirements of these plants. We have two main supply agreements in Germany. One of them will expire in September 2021 and is automatically renewable for consecutive one-year terms, unless terminated by one of the parties, and the other expires in December 2021.2023. We have entered into a third contract that will expire at the end of 2020, increasing the supply of our plants to 94%87% of the propylene required. The pricing formula for propylene under these supply agreements is based on market prices. We purchase the propylene used in our Europe plants based on monthly contract price for propylene for Europe (as reported by ICIS-LOR).
Sales and Marketing of Our USA and Europe Unit
Our USA and Europe Unit sells polypropylene products to around 465 customers. We have a diversified product mix that allows us to serve a broad range of end users in several industries. The customers of our USA and Europe Unit generally are third generation petrochemical producers that manufacture a wide variety of plastic-based consumer and industrial goods.
The following table sets forth our net sales revenue derived from sales of our USA and Europe Unit for the years indicated:
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| For the Year Ended December 31, | For the Year Ended December 31, | ||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| (in millions ofreais) | (in millions ofreais) | ||||
Net sales revenue: |
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Net revenue: |
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USA and Europe | R$11,724.8 | R$9,854.5 | R$8,896.1 | 10,044.3 | 11,724.8 | 9,854.5 |
A 30%28% of the sales of polypropylene by the USA and Europe Unit are made under long-term supply agreements with our customers. These supply contracts generally have an initial two-year term and are automatically renewable for one-year periods unless one party notifies the other of its intention not to renew. These contracts also provide for minimum and maximum quantities to be purchased and monthly deliveries.
The remainder of the polypropylene production of the USA and Europe Unit is sold through (1) our direct sales force that seeks to establish supply relationships with customers, (2) a select number of distributors authorized to represent the Braskem brand in the U.S. and European markets, (3) resellers that trade these products under private labels in the North American and European markets, and (4) traders that resell these products in the export markets.
Competition
The USA and Europe Unit is largely a commodities business and competes with local, regional, national and international companies, some of which have greater financial, research and development, production and other resources than us. Although competitive factors may vary among product lines, our competitive position is primarily based on raw material and production costs, selling prices, product quality, product technology, manufacturing technology, access to new markets, proximity to the market and customer service and support.
Our primary competitors for sales in the polypropylene industry in North America are other large international petrochemical companies. In general, demand is a function of economic growth in North America and elsewhere in the world.
Our primary competitors for sales in the polypropylene industry in Europe are other large international petrochemical companies. In general, demand is a function of economic growth in Europe and elsewhere in the world.
Braskem and Idesa, one of Mexico’s leading petrochemical groups, formed Braskem Idesa S.A.P.I. in April 2010, with Braskem holding 75% of the total share capital and Idesa holding the remaining 25%, to develop, construct and operate the Mexico Complex, located in the Mexican state of Veracruz. During April 2016, Braskem Idesa commenced commercial operations of the Mexico Complex. As a result of the commencement of operations ofoperationsof the Mexico Complex, we commenced recording the results of our Mexico business unit as a separate segment in our financial statements as of dates and for periods ended after January 1, 2017.
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As of December 31, 2019, our Mexico Unit had the largest annual polyethylene production capacity in Mexico. Our Mexico Unit generated net revenue of R$3,051.4 million during 2019, or 4.8% of the net revenue of all of our reportable segments, including inter-segment sales.
Products of Our Mexico Unit
Our Mexico business unit produces ethylene, HDPE and LDPE at our Mexico Complex. We use all of the ethylene produced by our Mexico Complex as raw material for the production of polyethylene by this complex. The sales volume of polyethylene by this unit was 798,840813,105 tons in 2018.2019. As with our Polyolefins Unit, our Mexico Complex manufactures a broad range of polyethylene grades for use in consumer and industrial applications, including plastic films for food and industrial packaging, bottles, shopping bags and other consumer goods containers, automotive parts, and household appliances.
Technologies selected for the Mexico Unit are proven and considered stated of the art with excellent track records in the petrochemical market and provides a competitive advantage in serving our customers to meet their specific needs by adapting and modifying our polyethylene products.
Production Facilities of Our Mexico Unit
Our Mexico Unit operates four plants located in the Mexico Complex, consisting of:
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· | ·two high density polyethylene plants, with a combined annual production capacity of 750,000 tons, which commenced operations in April 2016; and |
· | ·a low density polyethylene plant, with an annual production capacity of 300,000 tons, which commenced operations in June 2016. |
·an ethylene cracker, with an annual production capacity of 1,050,000 tons of ethylene, which commenced operations in March 2016;
·two high density polyethylene plants, with a combined annual production capacity of 750,000 tons, which commenced operations in April 2016; and
·a low density polyethylene plant, with an annual production capacity of 300,000 tons, which commenced operations in June 2016.
| Annual Production | Production | Annual Production | Production | ||||
Plant | Capacity | 2018 | 2017 | 2016 | Capacity | 2019 | 2018 | 2017 |
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Mexico (Polyethylene) | 1,050,000 | 808,388 | 923,540 | 443,180 | 1,050,000 | 800,783 | 808,388 | 923,540 |
Raw Materials of Our Mexico Unit
The principal raw material used in our Mexico Complex is ethane, in addition to other raw materials such as hexane, propylene and polyaldehyde (PAL). Other chemicals, catalyzers, additives and utilities such as natural natural gas, electricity and nitrogen are used to produce polyethylene in the Mexico Complex.
Ethane
Ethane is the principal raw material that we use to produce ethylene in the Mexico Complex and represent the principal production and operating cost of the Mexico Complex. The price of ethane that we purchase varies based on changes in the U.S. dollar-based U.S. reference price of these feedstocks. We currently source most of our supply of ethane, which is the primary feedstock used in our polyethylene production process, from Pemex TRI, a state-owned Mexican entity, which is a subsidiary of Pemex, the state-owned Mexican oil and gas company, pursuant to an ethane supply agreement.
Ethylene
All of the ethylene produced by our Mexico Complex is used by the polyethylene plants in our Mexico Complex.
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Other Materials and Utilities
Our Mexico Unit uses natural gas as the main fuel for its production process, which is supplied by PEMEX through CENAGAS.
Our Mexico Unit uses hexene as raw materials in the production of HDPE. We import hexene for the Mexico Complex from suppliers located in the United States.
Our Mexico Unit uses catalysts supplied by Ineos Europe Limited.
Supply Contracts of the Mexico Unit
Ethane
Braskem Idesa is party to an ethane supply agreement with Pemex TRI, a subsidiary of Pemex, dated February 19, 2010, pursuant to which Pemex TRI is obligated to provide, and Braskem Idesa is required to purchase, 66,000 barrels per day of ethane for the Mexico Complex for a period of 20 years at prices based on the highest reference between Mont Belvieu purity ethane or Henry Hub Natural Gas reference U.S. dollar-based international reference price of these feedstocks. Under this agreement, any daily amount rejected by Braskem Idesa mustcould be purchased in installments in subsequent deliveries until the deficit has been resolved. This contract commenced in June 2015, will initially expire in 2035, and is renewable for three consecutive five-year periods if prior notice to renew is given be either party at least two years before it expires. Pemex TRI may terminate the contract in the event of: (1) a failure by Braskem Idesa to pay that continues for more than 180 days after notice, or (2) an emergency stoppage in operations or force majeure event that continues for more than 48 months.
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The ethane supply agreement contains a volume delivery long-term performance covenant that requires Pemex TRI to meet a volume delivery of ethane over a six-month period averaging 70% of the agreed-upon volume under the ethane supply agreement (the “Long-Term Performance Test”). As of January 2019,2020, Pemex TRI volume deliveries under the Long-Term Performance Test remained close tobut above the 70% threshold. In the event that Pemex TRI fails to meet the Long-Term Performance Test, in addition to the direct negative impact on the production volumes of our Mexico Complex, it may (i) render us unable to generate sufficient cash to service our indebtedness with creditors under the Braskem Idesa Financing, (ii) cause such creditors to accelerate this indebtedness, and/or (iii) require Braskem Idesa to exercise a termination and put option against Pemex TRI that would force Pemex TRI to purchase the Mexico Complex from us. For further information, see “Item 3. Key Information—Risks Relating to Us and the Petrochemical Industry—We depend on ethane supplied by Pemex TRI in Mexico” and “Item 5. Operating and Financial Review and Prospects—Capital Expenditures—Joint Venture—Mexico Complex.”
Electricity
The Mexico Complex has its own power generation plant consisting of one gas turbine and two steam turbines, which generates more than 100% of the Mexico Complex’s energy consumption. In addition, the Mexico Complex is also connected to the high-voltage power grid of Comisión Federal de Electricidad (the Mexican government-owned power supplier)electricity company) as a back-up power source and to sell excess power on the spot market. The Mexico complex generates all of its requirements of steam and its water requirements are supplied by the Comisión Nacional del Agua (the Mexican government-owned water commission) underpursuant to an agreement that expires in 20292022 and is subject to renewal.
In general, we believe that there are sufficient alternative sources available at reasonable prices for each of these other inputs used in our polyethylene production process such that the loss of any single supplier would not have a material adverse effect on our operations.
The main feedstock used for power generation is natural gas, which is currentlymainly supplied by PEMEXPemex through CENAGAS.Cenagas, but also by other natural gas suppliers in Mexico.
Sales and Marketing of Our Mexico Unit
Our Mexico Unit sells polyethylene products to approximately 250 customers in the Mexican market. We have a diversified product mix that allows us to serve a broad range of end users in several industries. The customersThecustomers of our Mexico Unit generally are third generation petrochemical producers that manufacture a wide variety of plastic-based consumer and industrial goods.
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Domestic Mexican Sales
In the first full year operation of our Mexico Complex since its start-up, we were focused on the domestic market and obtaining the customer approval of our products. One of our priorities has been to develop long-term relationships with our customers and, given the cyclical nature of the markets for our polyethylene products, we believe that we can strengthen customer loyalty during periods of reduced demand for polyethylene by providing a reliable source of supply to these customers during periods of high demand. We work closely with our customers to determine their needs, to provide technical assistance and to coordinate the production and delivery of our products.
Considering our Mexico Complex’s logistical infrastructure and logistics centers in different regions, we are able to project customer demand by region. Thus, we can anticipate and plan our production and logistics in order to make the products available on time and at the points of shipment. As our products portfolio can adjust to the nature of the demand of the Mexican market, we have greater flexibility to adapt and better serve the market.
In addition to direct sales of polyethylene to our customers, our Mexico Unit sells products in Mexico through independent distributors. Our Mexico Unit is served by distributors through which we distribute our products pursuant to formal agreements and spot market transactions.
We have selected our distributors based on their ability to provide full service to their customers, including the ability to prepare our products on a customized basis. These distributors sell our polyethylene products to manufacturers with lower volume requirements and are able to aggregate multiple orders for delivery to customers that would otherwise be uneconomical for us to serve. Furthermore, by serving smaller customers through anetwork of distributors, our account managers focus their efforts on delivering high quality service to a smaller number of large, direct customers.
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Export Sales
The main focus of our Mexico Unit is to maintain our leading position in the Mexican market while continuing to export in order to manage the relationship between our production capacity and domestic demand for our products. We believe that our continued presence in export markets is essential to help manage any overcapacity in the Mexican market. The excess volume is exported to several regions such North America, Asia, and Europe, using our existing sales force and complementing our portfolio in those regions, together with products exported from Brazil. In order to use the already established Braskem sales channels in the United States and Europe, the strategy of exports of the Mexico unit production, for these regions, is to develop and retain customers, in order to seek a greater added value in exports, especially considering the competitive logistics for serving the United States. This new polyethylene complex reinforces our position with polyethylene customers worldwide, which enhances our position in North America.
Prices and Sales Terms
We determine the Mexican domestic prices for polyethylene by reference to North American export prices. Our customers in Mexico may pay in full on delivery or elect credit terms that require payment in full within up to 60 days, on average, following delivery.delivery for most customers.
Our Mexico Unit’s export sales consist of volumes to Asia, Europe and the United States through traders and distributors. Pricing is based on international spot market prices. We make all sales in these markets with letters of credit.price references. As discussed under “—Export Sales” above, since the beginning of 2017, the Mexico Unit has been focused on export sales directly to customers in the United States and Europe, so the netback price of exports has been increasing.
Competition
We have the largest annual production capacity of polyethylene in Mexico. We compete in Mexico with a subsidiary of Pemex and with importers of polyethylene, primarily producers located in the United States and South America.Canada. We compete for export sales of our polyethylene products with producers from other countries in Latin America and in markets in the United States, Asia and Europe. Our export business is a commodities business and we compete with a variety of resin producers, some of which have greater financial, research and development,production and other resources than us. Our competitive position in the export markets that we serve is primarily based on raw material costs, selling prices, product quality and customer service and support.
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Vinyls Unit
We were the leading producer of PVC in Brazil, based on sales volumes and installed capacity in 2018.2019. As of December 31, 2018,2019, our PVC production facilities had the second largest annual production capacity in Latin America. Our Vinyls Unit generated net sales revenue of R$3,167.42,692.8 million in 2018,2019, or 4.4%4.2% of our net sales revenue of all reportable segments.segments, including inter-segment sales.
Our Vinyls Unit is the only vertically integrated producer of PVC in Brazil. Our PVC production is integrated through our production of chlorine, ethylene and other raw materials. The main use of PVC is for pipes and fittings and other products related to the civil construction market. Our Vinyls Unit also manufactures caustic soda, which is mainly used by producers of alumina, pulp and paper, and in the soap industry.
In 2018,2019, we had an approximate 49%48% share of the Brazilian PVC market and a 22%16% share of the Brazilian caustic soda market (excluding consumption of alumina by companies located in the North and Northeast of Brazil), based on sales volumes of our Vinyls Unit.
Products of Our Vinyls Unit
The following table sets forth a breakdown of the sales volume of our Vinyls Unit by product line for the years indicated.
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| For the Year Ended December 31, | ||
| 2019 | 2018 | 2017 |
| (in thousands of tons) | ||
PVC | 491.3 | 490.1 | 525.7 |
Caustic soda | 243.2 | 344.2 | 407.5 |
Other(1) | 72.1 | 85.9 | 103.7 |
Total domestic sales | 806.7 | 920.5 | 1,036.9 |
Total export sales | 22.2 | 49.4 | 89.6 |
Total Vinyls Unit sales | 828.8 | 969.9 | 1,126.5 |
| For the Year Ended December 31, | ||
| 2018* | 2017* | 2016* |
| (thousands of tons) | ||
PVC | 490.1 | 525.7 | 528.3 |
Caustic soda | 345.5 | 407.6 | 442.5 |
Other(1) | 86.2 | 103.7 | 112.1 |
Total domestic sales | 921.8 | 1,037.0 | 1,083.0 |
Total export sales | 49.4 | 89.5 | 122.7 |
Total Vinyls Unit sales | 971.2 | 1,126.5 | 1,205.7 |
(1) Includes chlorine, hydrogen, caustic soda flake and sodium hypochlorite.
(*) Unaudited.
Production Facilities of Our Vinyls Unit
We own five vinyls production facilities. Two of our facilities are located in the Northeastern Complex, and three others are located in the State of Alagoas.
The table below sets forth for each of our primary vinyls products, our annual production capacity as of December 31, 20182019 and annual production for the years presented.
| Annual Production | Production | Annual Production | Production | ||||
Primary Products | Capacity | 2018 | 2017 | 2016 | Capacity | 2019 | 2018 | 2017 |
| (in tons) | (in tons) | ||||||
PVC | 710.0 | 533.2 | 611.2 | 594.0 | 710.0 | 461.1 | 533.2 | 611.2 |
Caustic Soda | 539.0 | 329.2 | 423.6 | 453.2 | 539.0 | 123.2 | 317.8 | 409.0 |
Raw Materials of Our Vinyls Unit
Ethylene
The most significant direct cost associated with the production of PVC is the cost of ethylene, which accounted for 48%21% of our Vinyls Unit’s total cost of products sold in 2018.2019. Our Chemicals Unit supplies all of the ethylene required by our Vinyls Unit.
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Electricity
Electric power is a significant cost component in our production of chlorine and caustic soda. Electric power accounted for 14%10% of our Vinyls Unit’s total cost of products sold in 2018.2019. Our Vinyls Unit obtains its electric power requirements from various generators under long-term power purchase agreements (see “Chemicals Unit—Supply Contracts and Pricing of the Chemicals Unit—Electricity”).
Salt
We used 594,348212,000 tons of salt during 2018.2019. Salt accounted for 1% of our Vinyls Unit’s total cost of products sold in 2018. We have exclusive2019.
However, salt exploration rightsmining operations at our mine were halted in May 2019, as described in “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Petrochemical Industry—Our business and operations are inherently subject to environmental, health and safety hazards. As a salt mineresult, our business is also subject to stringent environmental and other regulations” and “Item 8. Financial Information—Legal Proceedings—Alagoas – Mining Activities.” Production of caustic soda and ethylene dichloride at our chlor-alkali facility located near ourin the state of Alagoas plant. We estimate that the salt reserves of this mine are sufficient to allow us to produce chlorine at expected rates of production for 35 to 45 years. We enjoy significant cost advantages when compared to certain of our competitorswas also interrupted due to the low extraction costslack of rock salt (particularly compared to sea salt), and low transportation costs due to the proximitysalt. Ethylene dichloride, or EDC, is consumed in PVC production. Because of the interruption, we needed to import 139,000 tons of caustic soda to supply our customers and 295,000 tons of EDC to supply our PVC facilities located in the state of Alagoas and in the Northeastern Complex.
Seeking to resume our chlor-alkali operations, we launched a project to modify the feedstock base of our chlor-alkali plants by acquiring sea salt minefrom third parties in Brazil or abroad. The product will be stocked, dissolved in water to make brine and then treated and sent for processing. The estimated cost of the project is R$59.3 million, of which R$21.2 million was already disbursed in 2019. See “Item 5. Operating and financial review and prospects—Other Investments—Technology change at our production facility.chlor-alkali facility in Alagoas.”
Sales and Marketing of Our Vinyls Unit
There is a structural link between the PVC and caustic soda markets because caustic soda is a byproductco-product of the production of chlorine required to produce PVC. WhenMost of the time, when demand for PVC is high, greater amounts of caustic soda are produced, leading to an increase in supply and generally lower prices for caustic soda. Conversely, when demand for PVC is low, prices for caustic soda tend to rise.
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We make most of our sales of PVC and caustic soda directly to Brazilian customers, without thebut we use of third-party distributors.distributors to serve smaller caustic soda customers. However, our Vinyls Unit maintains contractual relationships through five distribution centers that provide logistical support, located in Paulínia and Barueri, both in the State of São Paulo, Joinville, in the State of Santa Catarina, Extrema, in the State of Minas Gerais, and Araucaria, in the State of Paraná. In addition, we operate twelve warehouse facilities for PVC, on a non-exclusive basis, and sixfive terminal tank facilities for caustic soda strategically located along the Brazilian coast to enable us to deliver our products to our customers on a “just-in-time” basis. Our Vinyls Unit develops its business through close collaboration with its customers, working together to improve existing products as well as to develop new applications for PVC. Our marketing and technical assistance groups also advise customers and potential customers that are considering the installation of manufacturing equipment for PVC end products.
In addition, our Vinyls Unit supplies the Brazilian market with emulsion PVC and other copolymers with higher value by imports from Colombia under a long-term contract with Mexichem. Our primary customers operate in the laminated, shoe and automobile sectors. These products represented 1.9%1.7% of our consolidated sales volume in 20182019.
Prices and Sales Terms
We determine the domestic prices for our PVC resins with reference principally to the prices paid by third generation producers in Brazil for imports of PVC, which generally reflect the Northeast Asian spot market price. Delivery time, quality and technical service also affect the levels of sales of PVC resins. We establish our domestic price for caustic soda based on North American spot market prices. 48% of our caustic soda sales in 2018 were made pursuant to agreements that are generally for one - to three-year terms and may include minimum and maximum prices and volumes.
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Competition
PVC
Unipar Indupa (formerly Carbocloro (formerlyand Solvay), or Unipar, and Braskem are the only two producers of PVC in Brazil. Unipar’s total Brazilian installed annual production capacity is 300,000 tons, compared to our annual production capacity of 710,000 tons. Unipar’s Brazilian production facilities are located in São Paulo, which is closer to the primary PVC market in Brazil than our facilities. However, we believe that our vertically integrated production capabilities, our modern PVC suspension plants, our strong relationship with our customers and our technical assistance programs enable us to make up for any competitive disadvantage due to distance and compete effectively with Unipar.
Braskem also competes with Unipar’s Argentina production facilities and other importers of PVC. Unipar has a PVC plant in Argentina in addition to its plants in Brazil. Imports from all regions accounted for 7%34% of Brazilian PVC consumption in 2018.2019. Domestically produced PVC is currently competitively priced with imported PVC, considering that our price is based on international market.
In addition, Braskem competes with other producers of thermoplastics that manufacture the same PVC products or substitutes for products in our PVC product line. Thermoplastic resins, principally polyethylene and polypropylene, are used in certain applications as substitutes for PVC. Wood, glass and metals also are used in some cases as substitutes for PVC.
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Caustic Soda
According to IHS and Abiclor (Associação Brasileira da Indústria de Álcalis, Cloro e Derivados), the three largest Brazilian producers of caustic soda, including Braskem, accounted for 92%89% of capacity in Brazil in 2018. We and another international petrochemical company operate in this market throughout Brazil, while the other2019. Most domestic producers of caustic soda generally operate on a local or regional basis.basis, with the exception of Braskem and another producer located in the Northeast region of Brazil that operate in the whole country through terminal tanks located on the Brazilian coast. Imports accounted for 31%42% of Brazil’s total caustic soda consumption in 2018.2019, excluding Braskem imports.
Our principal competitors in the caustic soda market elsewhere in South America are other international petrochemical companies operating in Brazil and producers located on the U.S. Gulf Coast.
Technology, Research and Development
Technology Licenses
We rely on technology from third parties for the production processes at several of our facilities, including our crackers and our PE and PP manufacturing units. Our operations could be adversely affected if such third party licensors choose not to renew or continue to provide sufficient technical support under the license or technical services agreements that we have entered into with them.
Most of the original license agreements with regard to our Chemicals units in Brazil have already expired. However, new Technical Services Agreements have been entered into to optimize plant performance. No new license agreements for the construction of plants were signed since 2016. In Mexico, we also have a License Agreement in place with regard to our cracker unit.
We operate Vinyls units only in Brazil. The most recent license agreement with regard to our Vinyls units was signed in 2008 and terminated in 2013. The effects of such license agreement with regard to the interim period after its termination continued until the year ended December 31, 2018, and there is currenlty no technical services agreement in place. No new license agreements for the construction of plants were signed since 2016.
With respect to our Polyolefin units, Braskem uses various process technologies licensed from leading licensor companies under non-exclusive agreements in Brazil, Mexico, the United States and Germany. For some of these licenses, Braskem pays royalty fees based on production volume using the licensed technology on a quarterly basis and also participates in technical exchange meetings to share and receive information regarding improvements pursuant to the respective license agreement or technical service agreement. For some specific projects, Braskem has entered into joint development agreements, or JDA, with the original licensors and/or other technology partners under exclusive terms and cost-sharing conditions. No new license Agreements for the construction of plants were signed since 2016.
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Research and Development
Our ability to compete in the markets that we serve depends on our ability to integrate new technologies developed by us and third parties in order to lower our costs and offer new products. In addition, our relationships with our customers are enhanced by our ability to develop new products and customize existing products to meet their needs.
We develop technology at our research and development centers: (1) Innovation and Technology Center in Triunfo, Rio Grande do Sul, Brazil; (2) Innovation and Technology Center in Pittsburgh, Pennsylvania, United States; (3) Renewable Chemicals Research Center in Campinas, São Paulo, Brazil; (4) Process Technology Development Center in Mauá, São Paulo, Brazil; (5) European Technical Center in Wesseling, North Rhein Westphalia, Germany; and (6) Mexican Technical Center in Nanchital, Vera Cruz, Mexico, where we develop new processes, products and applications for many market segments and which, as of December 31, 2018,2019, collectively had 299297 employees. Through these centers, we coordinate and conduct our research and development programs, which include the operation of (1) pilot plants, (2) catalysis, polymerization and polymer sciences laboratories, and (3) process engineering and research for renewable sources.
Braskem continues its efforts to develop solutions for products from renewable raw materials through internal projects and collaborations and partnerships with various third parties.
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In November 2017, Braskem and Danish-based Haldor Topsoe, a world leader in catalysts and surface science, have signed a technological cooperation agreement to develop a pioneering route to produce monoethylene glycol (MEG) from sugar. With the agreement, Braskem seeks to expand its portfolio of renewable products to offer new solutions that complement its bio-based polyethylene marketed with the I’m greenTM seal.
In 2019, to accelerate our efforts toward circular economy solutions, we created an innovation platform for recycling to strengthen our reputation as a sustainability leader. The platform coordinates all efforts relating to chemical and mechanical recycling of plastic waste and aims to convert post-consumer plastic into recycled resins. Our focus is to expand certified recycled resins in our portfolio.
Maintenance
Most of our maintenance is performed by third-party service providers. For example, we have contracts with Construtora Norberto Odebrecht, or CNO, a subsidiary of our controlling shareholder Odebrecht, Asea Brown Boveri Ltd., Cegelec Ltda., Rip Serviços Industriais S.A., Cl EngenhariaSulzer Ltda. and other service providers to perform maintenance for our basic petrochemical plants in the Northeastern Complex and in the Southern Complex. We also perform some of our ordinary course maintenance with our small team of maintenance technicians, which also coordinate the planning and execution of maintenance services performed by third parties.
Chemicals Plants
Regular chemicals plant maintenance requires complete plant shutdowns from time to time, and these shutdowns usually take 30 to 45 days to complete. We occasionally undertake brief shutdowns of the chemical operations at our basic petrochemical plants that do not materially affect our production output, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. In addition, because we have two independent olefins units and two independent aromatics units at the Northeastern Complex and two independent olefins units at the Southern Complex, we may continue production of chemicals at these complexes without interruption, even while we perform certain maintenance services.
The next scheduled general maintenance shutdown of:
·the Northeastern Complex’s aromatics 1 and olefins 1 units is scheduled to take place in 2019;
·the São Paulo Complex’s olefins and aromatics units is scheduled to take place in 2020;
·the Southern Complex’s olefins 1 and aromatics 1 units is scheduled to take place in 2021; and
·the Northeastern Complex’s olefins 2 and aromatics 2 units is scheduled to take place in 2022.
· | the São Paulo Complex’s olefins and aromatics units is scheduled to take place in 2020; |
· | the Southern Complex’s olefins 1 and aromatics 1 units is scheduled to take place in 2021; |
· | the Northeastern Complex’s olefins 2 and aromatics 2 units is scheduled to take place in 2023; and |
· | the Rio de Janeiro Complex’s olefins unit is scheduled to take place in 2024. |
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Plants of Our Polyolefins, Vinyls and USA and Europe UnitsUnit
We have a regular maintenance program for each of our polyolefins plants. Production at each of our polyolefins plants generally is shut down for seven7 to 20 days every two2 to three3 years to allow for regular inspection and maintenance. In addition, we undertake other brief shutdowns for maintenance purposes that do not materially affect our production of polyolefins. We coordinate the maintenance cycles of our polyolefins plants with those of our basic petrochemicals plants. While our chemicals facilities must be shut down for up to 30 days for maintenance, our polyolefins facilities may be shut down for shorter periods because these facilities are less complex to operate and maintain than our chemicals plants. Similarly, plants of our USA and Europe Unit attempt to coordinate their maintenance cycles with the routines of their largest suppliers.
We have a regular maintenance program for each of our vinyls plants. Our Camaçari and Alagoas PVC plants are generally shut down for 15 to 20 days every two years to allow for regular inspection and maintenance. Our caustic soda and chlorine plant in Alagoas shuts down once a year for three days of maintenance in different parts of the plant. Our caustic soda and chlorine plant in Camaçari does not require prolonged maintenance shutdowns and is shut down for two or three days each year.
Environmental Regulation
We, like other petrochemical producers, are subject to stringent federal, state and local environmental laws and regulations concerning human health, the handling and disposal of solid and hazardous wastes and discharges of pollutants into the air, water and water.soil. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations.
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Our consolidated annual expenditures on environmental control were R$353.3369.8 million in 2019, R$329.3 million in 2018 and R$330.1 million in 2017, and R$427.1 million in 2016, which included investments, waste and wastewater treatment, emissions management, environment licenses, environmental liabilities and other environmental expenditures.
Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and will depend on the timing of the promulgation and enforcement of specific standards which impose the requirements.
Compliance with Environmental Laws in Brazil
The Brazilian government enacted an Environmental Crimes Law in 1998 that imposes criminal penalties on corporations and individuals causing environmental damage. Corporations found to be polluting can be fined up to R$50.0 million, have their operations suspended, be prohibited from government contracting, be required to repair damage that they cause and lose certain tax benefits and incentives. Executive officers, directors and other individuals may be imprisoned for up to five years for environmental violations.
OurWe make all reasonable efforts to ensure that our operations are in compliance in all material respects with applicable Brazilian environmental laws and regulations currently in effect. Our internal audit processes and our management system in place aim to ensure that the permits that will expire be renewed in a timely manner. However, changes to applicable laws and regulations may require us to revise our standards, which may take time to implement. Some environmental studies that we have commissioned have indicated instances of environmental contamination at certain of our plants. In addition, we and certain of our executive officers have received notices from time to time related to minor environmental violations and are or have been subject to investigations or legal proceedings with respect to certain alleged environmental violations. These environmental issues, and any future environmental issues that may arise, could subject us to fines or other civil or criminal penalties imposed by Brazilian authorities.
Operating Permits
Under Brazilian federal and state environmental laws and regulations, we are required to obtain operating permits for our manufacturing facilities. If any of our environmental licenses and permits lapse or are not renewed or if we fail to obtain any required environmental licenses and permits, we may be subject to fines ranging from R$500 to R$50.0 million, and the Brazilian government may partially or totally suspend our activities and impose civil and criminal sanctions on us.
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Each State in which we operate has its own environmental standards and state authorities in each state have issued operating permits that must be renewed periodically. Additionally, all projects for the installation and operation of industrial facilities in the Northeastern Complex, Southern Complex, São Paulo Complex and Rio de Janeiro Complex are subject to approval by various environmental protection agencies, which must approve installed projects prior to their commencement of operations and must renew such approval periodically thereafter. State authorities have issued operating permits for all of our plants, as follows: the Northeastern Complex (State of Bahia); Southern Complex (State of Rio Grande do Sul), São Paulo Complex and Cubatão, Santo André, Mauá and Paulínia plants (State of São Paulo), Rio de Janeiro Complex (State of Rio de Janeiro) and our Alagoas plants (State of Alagoas). We make all reasonable efforts to ensure that our operations in Brazil are in possession ofcompliance in all necessary permits,material respects with applicable Brazilian federal, state and local environmental laws and regulations currently in effect, and we have an internal audit process and a management system in place assuring that the permits whichthat will expire are submitted for renovationbe renewed in a timely manner.
Industrial Waste
Companhia Riograndense de Saneamento, or Corsan, a state-owned sanitation company, operates an integrated system for liquid effluents treatment, or Sitel, in the Southern Complex. Sitel treats wastewater generated by us and the other petrochemical producers at the Southern Complex at a liquid effluents treatment station located in the Southern Complex. This treatment station also includes a system for the collection of contaminated wastewater and disposal after treatment. We treat wastewater generated by us at the Rio de Janeiro Complex at a liquid effluents treatment station located in the Rio de Janeiro Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Hazardous solid waste is co-processed in cement kilns or incinerated and other kinds of solid waste are disposed of in landfills at facilities approved by us.
We treat wastewater generated by us at the São Paulo Complex at a liquid effluents treatment station located in the São Paulo Complex. This treatment station also includes a system for the collection and disposal of contaminated wastewater. Hazardous waste generated at the São Paulo Complex is incinerated in cement kilns and other kinds of solid waste are disposed of in landfills.
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In our Bahia facilities, all wastewater is transported to our wastewater treatment facility. Solidfacility at Cetrel. Hazardous liquid and solid waste are incinerated at high temperatures and non-hazardous solid waste is incineratedcoprocessed and sent to cement customers to be used as energy in cement kilns or incinerators and the remaining waste is disposed of in landfills.kilns.
In our Alagoas Complex, organochlorines waste is incinerated, producing steam and wastewater. All wastewater is treated at a treatment station located in the complex. Solid waste is separated and disposed of in landfills.
Additionally, we have a series of recycling programs that include recycling of solid waste and wastewater. We recycle or reuse 38.3%42.9 % of the solid waste generated by our facilities and 26.9%25.3 % of the water used in our production processes.
AsbestosMercury
Our largestAs of December 31, 2019, Braskem had a chlor-alkali plant located in Alagoas previously used asbestosBahia based on mercury cell technologytechnology. On April 20, 2020, our chlor-alkali plant in Bahia shut down following the end of the facility’s useful life, and it will be decommissioned. The preferred decommissioning strategy involves structure decontamination and demolition, and we are currenlty planning the most appropriate strategies for waste destination and remediation of contaminated areas, which are expected to produce chlorine and caustic soda. Such technology can no longer be used in new petrochemical production facilities under Brazilian legislation andimplemented soon after the global trend has been to ban this technology. As a result, in November 2016, we concluded our shift to newer diaphragm technology and banned asbestos technology from our plants.plant shutdown.
Compliance with Environmental Laws in the United States
Our operations in the United States are subject to U.S. federal, state and local laws and regulations governing the discharge of effluents and emissions into the environment; the generation, storage, handling, management, transportation and disposal of hazardous waste, industrial waste and other types of waste; the use, storage, and handling of various types of products and materials; and the protection of human health, safety and the environment. In many instances, specific permits must be obtained for particular types of operations, emissions or discharges. For example, our facilities in Texas, Pennsylvania and West Virginia are required to maintain various permits relating to air quality and treatment of industrial wastewater, and to comply with regulatory requirements relating to waste management. We are in possession of necessary permits to operate our facilities. We believemake allreasonable efforts to ensure that our operations in the United States are in compliance in all material respects with applicable U.S. federal, state and local environmental laws and regulations currently in effect.
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As with the U.S. petrochemical industry generally, compliance with existing and anticipated laws and regulations increases the overall cost of operating our U.S. plants, including operating costs and capital costs to construct, maintain and upgrade equipment and facilities. These laws and regulations have required, and are expected to continue to require us to make, expenditures of both a capital and an expense nature.
The Clean Air Act, which was last amended in 1990, requires the United States Environmental Protection Agency, or the EPA, to set National Ambient Air Quality Standards, or the NAAQS, for pollutants considered harmful to public health and the environment. The Clean Air Act requires periodic review of the science upon which the standards are based and the standards themselves. NAAQS for ozone and fine particulate matter (referred to as PM2.5), promulgated by the EPA have resulted in identification of nonattainment areas throughout the country, including certain areas within Texas, Pennsylvania and West Virginia, where Braskem America operates facilities. As a result of these nonattainment designations by the EPA, state or local air pollution control agencies are required to apply permitting and/or control requirements intended to reduce emissions of ozone precursors (nitrogen oxides and volatile organic compounds), and fine particles (including PM2.5 precursors), in order to demonstrate attainment with the applicable NAAQS. Such requirements may include imposition of offset requirements, and could result in enhanced emission control standards. In addition, on August 24, 2016, the EPA finalized requirements for state and local agencies charged with the current PM2.5 NAAQS. These requirements could in turn translate into additional state-specific requirements to further reduce allowable emission rates for PM2.5 or its precursor pollutants. In October 2015, the EPA lowered the primary and secondary NAAQS for ozone from 0.075 ppm to 0.070 ppm. Such state-specific requirements would become applicable, if at all, following a multi-year process. Regulations implementing this change will likely not be promulgated for several years.
In addition to permitting and/or control requirements that may result from the implementation of the NAAQS at the state or local level, the EPA may promulgate new or revised federal New Source Performance Standards or National Emission Standards for Hazardous Air Pollutants that would apply directly to certain facility operations and may require the installation or upgrade of control equipment in order to satisfy applicable emission limits and/or operating standards under these regulatory programs. The EPA’s currently-proposed regulations in this area would not specifically apply to Braskem America’s operations.
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Additionally, there are various legislative and regulatory measures to address greenhouse gas emissions which are in various stages of review, discussion or implementation by Congress and the EPA. In October 2015, the EPA finalized new regulations (known as the Clean Power Plan) aimed at lowering greenhouse gas emissions from existing, new and reconstructed electric generating units. In February 2016, the Supreme Court stayed implementation of the Clean Power Plan pending judicial review. On October 16, 2017, the EPA proposed repealing the Clean Power Plan, but this proposal has not been finalized. On August 21, 2018, the EPA proposed a replacement to the ClanClean Power Plan, the Affordable Clean Energy Rule. While it is currently not possible to predict the final impact, if any, that these regulations may have on Braskem America or the U.S. petrochemical industry in general, they could result in increased utility costs to operate our facilities in the United States. In addition, future regulations limiting greenhouse gas emissions of carbon content of products, which target specific industries such as petrochemical manufacturing could adversely affect our ability to conduct Braskem America’s business and also may reduce demand for its products. The EPA’s currently-proposed regulations in this area would not specifically apply to Braskem America’s operations.
Compliance with Environmental Laws in Mexico
Braskem IDESA in Mexico is subject to federal, state and local laws and regulations that govern the discharge of effluents and emissions to the environment; the generation, storage, handling, management, transportation and disposal of hazardous waste, industrial waste and other types of waste; the use, storage and handling of various types of products and materials; and the protection of human health, safety and the environment. Specific permits may be required for certain types of operations.
Ethylene and Aromatic Hydrocarbons Mixture production require permission of the Secretary of Energy and Federal Commission for Sanitary Risks (COFEPRIS) related to risk management and public health, The Mexican legislation regulates the emission of particles, ozone, fixed sources and everything related to GHGs,GHGs. There are regulations on water, effluent treatments and specific conditions for discharge of the effluent. We make all reasonable efforts to ensure that our operations in Mexico operations complyare in compliance in all material respects with allapplicable Mexican federal, state and local environmental laws and regulations.regulations currently in effect.
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In Mexico, the Federal Attorney´s Office for Federal Environmental Protection (PROFEPA) verifies compliance with the Mexican Regulation and Permits through audits.
Failure to comply with Mexican regulations may lead to economic and administrative penalties, including Operations shutdown in certain cases.
Compliance with Environmental Laws in Germany and the European Union
Our operations in Germany are subject to German federal, state and local laws and regulations governing the discharge of effluents and emissions into the environment and the handling and disposal of industrial waste and otherwise relating to the protection of the environment and waste management. Our operations in Germany are in compliance in all material respects with applicable German federal, state and local environmental laws and regulations currently in effect.
As with the petrochemical industry in the European Union generally, compliance with existing and anticipated German laws and regulations increases the overall cost of operating our European business, including operating costs and capital costs to construct, maintain and upgrade equipment and facilities. These laws and regulations have required, and are expected to continue to require us to make expenditures of both a capital and an expense nature.
At our Schkopau and Wesseling facilities in Germany, we are required to maintain air, radiation, waste water and waste management permits. We are in possession of all necessary permits.
Furthermore, our Wesseling and Schkopau facilities in Germany are subject to existing European GHG regulations and a cap and trade program relating to emissions. We have purchased sufficient carbon dioxide emissions permits for its operations until 2019/2020, provided it operates under normal business conditions. We will purchase any additional permits that may be required on the emission trade market. We are not aware of any new environmental regulations that would materially affect our European operations. Accordingly, we cannot estimate the potential financial impact of any future European Union or German environmental regulations.
Sustainability
In April 2018, our board of directors approved our policy on global sustainable development. Its objective is to encourage economic growth, environmental preservation and social justice by developing sustainable solutions related to chemical and plastic production. In connection with these goals, we have developed a three-prongedapproach: (1) seek and develop sustainable sources and operations, (2) develop and deliver a portfolio of sustainable products and services, and (3) work with our clients to offer sustainable solutions that benefit society as a whole.
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Circular Economy
Consistent with our purpose of contributing to the transition from a linear economy into a circular economy, effectively demonstrating our commitment to sustainable development, we announced our global positioning statement titled “Braskem’s Positioning in the Circular Economy.”
Through this positioning statement, we assumed a voluntary commitment to adopt best practices at all of our industrial units to further reduce the loss of pellets (i.e., granulated raw material used to make plastic products, a form in which most of our products are sold) in our industrial processes by 2020, and undertook industry commitments to work towards having all plastic packaging reused, recycled or recovered by 2040.
In the statement, we also announced eight key global initiatives to achieve these targets, which are: (i) partnerships with clients and value chain to develop new products that increase efficiency, recycling and reuse; (ii) more investments in renewable products; (iii) development and support of new technologies and the recycling chain; (iv) programs to engage consumers in conscientious consumerism, proper disposal and recycling; (v) use of science tools to select the most sustainable options; (vi) adoption of recycling indicators for plastic packaging; (vii) partnerships to understand, prevent and solve the problem of marine debris; and (viii) incentives for policies to improve solid waste management.
Property, Plant and Equipment
Our properties consist primarily of petrochemical production facilities in:
· | · Camaçari, in the State of Bahia;
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· | Triunfo, in the State of Rio Grande do Sul; |
· | Duque de Caxias, in the State of Rio de Janeiro; |
· | São Paulo, Paulínia, Cubatão, Santo André and Mauá, in the State of São Paulo; |
· | Maceió and Marechal Deodoro, in the State of Alagoas; |
· | the United States, in La Porte, Freeport and Seadrift, Texas; Marcus Hook, in Pennsylvania; Neal and West Virginia; |
· | Germany, in Schkopau and Wesseling; and |
· | Coatzacoalcos, in Mexico. |
For more information, see note 12 to our audited consolidated financial statements included elsewhere in this annual report.
Our principal executive offices are located in São Paulo, in the State of São Paulo, and we have an administrative support office in the City of Salvador, in the State of Bahia. We also have equity interests in investments located in other parts of the country. We own all our production facilities, but we generally rent our administrative offices.
The following table sets forth our properties as of December 31, 20182019 by location of facilities, products produced and size of plant.
Type of Product or Service | Location of Facilities | Size of Plant |
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| (in hectares)(1) |
Chemicals | Triunfo | 152.8 |
Chemicals | Santo André | 74.1 |
Chemicals | Camaçari | 65.5 |
Chemicals | Duque de Caxias | 53.0 |
Chemicals | Mexico | 23.6 |
Polypropylene | Paulínia | 39.7 |
Polyethylene | Triunfo | 30.5 |
Polyethylene | Camaçari | 24.5 |
Polyethylene | Cubatão | 17.6 |
Polyethylene | Santo André | 15.8 |
Polyethylene | Duque de Caxias | 15.0 |
Polyethylene | Mexico | 14.9 |
Polypropylene | La Porte, Texas | 87.0 |
Polypropylene | Neal, West Virginia | 27.1 |
Polypropylene | Mauá | 15.8 |
Polypropylene | Duque de Caxias | 15.0 |
Polypropylene | Camaçari | 13.2 |
Polypropylene | Triunfo | 10.0 |
Polypropylene | Marcus Hook, Pennsylvania | 6.9 |
Polypropylene | Freeport, Texas | 8.9 |
Polypropylene | Seadrift, Texas | 2.5 |
Polypropylene | Schkopau, Germany | 3.7 |
Polypropylene | Wesseling, Germany | 26.0 |
Caustic soda/chlorine | Maceió | 15.0 |
PVC/caustic soda/chlorine | Camaçari | 12.6 |
PVC | Marechal Deodoro | 186.7 |
Distribution Center | Vila Prudente/Capuava | 3.2 |
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(1) One hectare equals 10,000 square meters.
We believe that all of our production facilities are in good operating condition. As of December 31, 2018,2019, the consolidated net book value of our property, plant and equipment was R$31,759.932,315.2 million.
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The following properties are mortgaged or pledged to secure certain of our financial transactions: (1) our chemicals plant and our polyethylene plant located in the Southern Complex; (2) our chlor-alkali plant and PVC plant located in the Northeastern Complex; (3) our chemicals plant and our polyethylene plant located in São Paulo Complex; (4) our chlor-alkali plant and PVC plant located in the State of Alagoas; (5) our chemicals plant, our polyethylene plant and our polypropylene plant located in the Rio de Janeiro Complex; and (6) our chemical plant and our polyethylene plants located in Mexico.
Insurance
In addition to the policies described below for our Brazilian and international operations, we maintain other insurance policies for specific risks, including general and product liability, directors and officers liability coverage, workers’ compensation, marine cargo and charterer’s liability insurance, among others.
We believe that our insurance coverage is reasonable in amount and consistent with industry standards applicable to chemical companies operating globally.
Operations in Brazil, Mexico, the United States and Germany
We carry insurance for all our plants against material damage and consequent business interruption through comprehensive “all risk” insurance policies.
The “all risks” insurance program for our plants provides for a total replacement value of US$29.534.5 billion for property damage. This insurance program is underwritten through separate policies in Brazil, Mexico, the United States and Germany by large insurance companies. The leading insurers are Mapfre (rating S&P BBB+), Inbursa (rating S&P AAA) and FM Global (rating S&P A+). These policies are valid until April 2020.
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Set forth is a table with additional information related to our all risk insurance policies.
Policy / Region | Value at risk - | Combined Property Damage and Business Interruption Limit | Comments | Value at risk — | Combined Property Damage and Business Interruption Limit | Comments |
Brazil | 26.4 | 3.4 | - | 26.4 | 3.4 | — |
Mexico(1) | 6.1 | 2.9 | - | 6.1 | 2.9 | — |
USA and Germany | 2.0 | 0.5 | Limit increased from US$330 million to US$500 million; | 2.0 | 0.5 | Limit increased from US$330 million to US$500 million |
(1) Includes coverage for acts of terrorism.
Our policies provide coverage for losses that arise from accidents caused by or resulting from fire, explosion and machinery breakdown, among others, and consequential business interruption, with maximum indemnity periods ranging from 12 to 33 months, depending on the plant and/or coverage.
As part of our program, we also have general and products liability insurances for our operations, which cover losses for damages to third parties caused by our operations and products, and include sudden environmental damage caused by pollution. In the United States, Germany and Mexico,products. Braskem has additional coverage for environmental liabilities and remediation activities such as clean-up costs. These policies are capped at US$50 million for Mexico, US$50 million for Brazil and US$25 million for the United States and Germany (coverage is included in the general and umbrella liability policies).
New projects can be covered for Construction/Erection All Risks under the existing Property policies or through a standalone project-specific policy.
We have relevant exposure to operational risks, and our insurance policy requires our insurance coverage to be contracted through a complex insurance program involving multiple insurers and reinsurers in the commercial market, which have limited and variable capacity to offer insurance policies over time. In order to seek alternatives for the composition of hedges, the possibility of transferring operational risks through the mutual insurer “OIL” was identified. OIL is the global leader in the energy sector, including oil and gas, refining, chemical and petrochemicals, electric power and mining, and holds a total of US$3 trillion in insured assets and has a portfolio of selected participants. In addition to providing a stable capacity to Braskem, OIL has a structure instructurein which there is reciprocal cooperation among the insured companies participating in a known risk environment, in addition to a lower administrative cost compared to the commercial insurance market, providing less volatile and potentially more competitive premiums.
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Compliance
We have adopted a Policy on Compliance in Acting Ethically with Integrity and Transparency, and several internal policies designed to guide our management, employees and counterparties and reinforce our principles and rules for ethical behavior and professional conduct. We maintain an Ethics Line managed by a third party available for employees and non-employees. Every whistleblower complaint is investigated and submitted for evaluation by our Ethics Committee.
As of December 31, 2018,2019, we identified a material weaknessin our control environmentas we had an insufficient complement of resources with an appropriate level of knowledge, training, expertise and skills commensurate with our financial reporting requirements in certain areas.requirements. This resulted in a material weakness in our risk assessment as we did not have the necessary resources to effectively implementdesign and executeperform our processes and controls over risk assessment. Additionally, as described below we had a number of ineffective controls that also indicated that we had material weaknesses in our information and communication and monitoring components of internal control over financial reporting. These material weaknesses resulted in or were as a result of the following control deficiencies that were material weaknesses or aggregated to material weaknesses: (i) ineffective design and operation of general information technology controls (GITCs) related to user access and program change-management over allcertain ancillary IT operating systems, databases and applications that support our financial reporting processes, which resulted in business process controls that are dependent on the affected IT systems, in particular the completeness and accuracy of information from such systems, also being considered ineffective because they could have been adversely impacted; (ii)impacted. In addition, there were ineffective designcontrols over reports from our ERP system and lack of controls over spreadsheets used in the purchase of raw materials; (iii) ineffective design of controls over the purchase of and payment for legal services; (iv) ineffective design and operation of controls over the provision for legal contingencies; and (v)certain controls; (ii) ineffective design and operation of controls within the financial reporting process covering theincluding consolidation, analysis of complex and unusual transactions , review of manual journal entries, and the preparation and review of the financial statements, including the technical application of generally accepted accounting principles and applicability of required disclosures. In one instance, we did not fully evaluate an agreement signed withdisclosures; (iii) Ineffective operation of controls over legal contingencies related primarily to completeness of the authorities in Brazil that led to an improper tax deduction underlegal contingences assessment; (iv) ineffective operation of controls over the Plea Agreement signed in 2016 withpurchase of and payment for certain legal services; (v) ineffective controls over the U.S. authorities.quantity of product shipped for sales transactions. See “Item 15. Controls and Procedures”. Our management is actively engaged on the development and implementation of remediation efforts to address the material weaknesses described above.
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In addition, we have implemented and improved procedures and control activities, which allowed us to resolve certaina material weaknesses described in our 20172018 annual report on Form 20-F, including: (i) remediation efforts related to control environment – tone at20-F: in 2019, the top and appointment of Board members; (ii) remediation efforts related to anti-corruption compliance program and controls; (iii) remediation efforts related toFeedstock department implemented new controls related to long-term debt; (iv)oversight of purchases and payment of raw materials. This controls were able to ensure the raw material received from suppliers were adequate, in terms of quantity and quality. These efforts were able to ensure the remediation effortsof the material weakness related to Braskem America; (v)Ineffective design of controls over the purchase of raw materials; (vi) controls over purchases and payments of legal services; (vii) controls over legal contingencies; (viii) controls over the evaluation of significant unusual transactions; and (ix) controls over the preparation and review of the financial statements.materials. We have implemented these remedial steps and successfully tested the related controls. Therefore, as of December 31, 2018,2019, we have concluded that most ofthis material weaknesses described in our annual report on Form 20-F for the year ended December 31, 2017 have2018 has been remediated. See “Item 15. Controls and Procedures.”
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Item 4A. Unresolved Staff Comments
Not Applicable.
Item 5. Operating And Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements as of December 31, 20182019 and 20172018 and for the three years ended December 31, 2018,2019, included in this annual report, as well as with the information presented under “Presentation of Financial and Other Information” and “Item 3. Key Information—Selected Financial and Other Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties.uncertainties, in particular with respect to the recent novel coronavirus (COVID-19) pandemic and related impacts on our historical and future results of operations and financial condition. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement with Respect to Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”
Overview
Our results of operations for the years ended December 31, 2019, 2018 2017 and 20162017 have been influenced, and our results of operations will continue to be influenced, by a variety of factors, including:
· | GDP growth in the regions where we operate, including as follows: |
o | Brazil’s GDP, which expanded 1.1% in 2019, as compared to 1.1% in 2018 and 1.0% in 2017, which affected the demand for our products and, consequently, our sales volume; | |
o | the U.S. GDP, which expanded 2.3% in 2019, as compared to 2.9% in 2018 and 2.5% in 2017, which affected the demand for our products and, consequently, our sales volume; | |
o | Europe’s GDP, which expanded 1.2% in 2019, as compared to 2.2% in 2018 and 2.5% in 2017, which affected the demand for our products and, consequently, our sales volume; | |
o | Mexico’s GDP, which contracted 0.1% in 2019, as compared to a 2.1% expansion in 2018 and a 2.0% expansion in 2017, which affected the demand for our products and, consequently, our sales volume; and | |
o | according to the IMF, because ofthe adverse effects of the novel coronavirus (COVID-19) pandemic on the economy of several countries, the world’s GDP and the GDP of Brazil, the United States, Europe and Mexico is expected to shrink significantly in 2020, leading to an economic contraction and a recession in these countries or regions; |
· | the expansion of global production capacity for the products that we sell and the growth rate of the global economy; |
· | the international market price of naphtha, our principal raw material, expressed in U.S. dollars, which has a significant impact on the cost of producing our products and which has experienced volatility during the three years ended December 31, 2019, fluctuating in a range between US$447 and US$563 per ton during 2019, US$463 and US$676 per ton during 2018, and US$400 and US$571 per ton during 2017; |
·Brazil’s GDP, which expanded 1.1% in 2018, as compared to 1.0% in 2017, and a contraction of 3.6% in 2016, which affects the demand for our products and, consequently, our sales volume;75
·the U.S. GDP, which expanded 2.9% in 2018, as compared to 2.2% in 2017 and 1.6% in 2016, which affects the demand for our products and, consequently, our sales volume;
·Europe’s GDP, which expanded 2.2% in 2018, as compared to 2.5% in 2017 and 1.7% in 2016, which affects the demand for our products and, consequently, our sales volume;
·Mexico’s GDP, which expanded 2.2% in 2018, as compared to 2.0% in 2017 and 2.9% in 2016, which affects the demand for our products and, consequently, our sales volume;
·the expansion of global production capacity for the products that we sell and the growth rate of the global economy;
·the international market price of naphtha, our principal raw material, expressed in U.S. dollars, which has a significant impact on the cost of producing our products and which has experienced volatility during the three years ended December 31, 2018, fluctuating in a range between US$463 and US$676 per ton during 2018, US$400 and US$571 per ton during 2017, and US$293 and US$462 per ton during 2016;
·the average domestic prices of our principal products expressed in U.S. dollars, which fluctuate to a significant extent based on international prices for these products and which also have a high correlation to our raw material costs;
· | the average domestic prices of our principal products expressed in U.S. dollars, which fluctuate to a significant extent based on international prices for these products and which also have a high correlation to our raw material costs; |
| our crackers’ capacity utilization rates, which decreased in 2019 as a result of the: (i) lower utilization rate of the cracker in Bahia resulting from the shutdown of the chlor-alkali and dichloroethane plants in Alagoas; (ii) scheduled turnaround of one of our production lines at the Bahia cracker in the fourth quarter of 2019; (iii) lower utilization rate at the crackers in Rio Grande do Sul, due to logistics problems; and (iv) drop in the marginal profitability of our export of resins; |
· | government industrial policy; |
· | changes in thereal/U.S. dollar exchange rate, including the depreciation of thereal against the U.S. dollar by 4.0% in 2019 and 14.5% in 2018, as compared to an appreciation of 8.3% in 2017; |
· | the level of our outstanding indebtedness, fluctuations in benchmark interest rates in Brazil, which affect our interest expenses on ourreal-denominated floating rate debt and financial income on our cash and cash equivalents, and fluctuations in the LIBOR rate, which affect our interest expenses on our U.S. dollar-denominated floating rate debt; |
· | the inflation rate in Brazil, which was 7.7% in 2019, 7.1% in 2018, and negative 0.4% in 2017, in each case, as measured by the IGP-DI, and the effects of inflation on our operating expenses denominated inreais and ourreal-denominated debt that is indexed to take into account the effects of inflation or bears interest at rates that are partially adjusted for inflation; and |
· | the tax policies and tax obligations. |
·our crackers’ capacity utilization rates, which decreased in 2018 as a result of the truck drivers’ strike that took place in May; the incident involving the chlor-alkali plant in Alagoas; the blackout that affected Brazil’s Northeast plants in March; and lower demand in the fourth quarter of 2018.
·government industrial policy;
·in line with our strategy and capacity to export any surplus not absorbed by Brazil’s domestic market; sales outside Brazil, grew to R$26.2 billion in 2018, compared to R$23.1 billion in 2017 and R$23.0 billion in 2016;
·changes in thereal/U.S. dollar exchange rate, including the depreciation of thereal against the U.S. dollar by 14.5% in 2018, as compared to an appreciation of 8.3% in 2017 and 16.5% in 2016.
·the level of our outstanding indebtedness, fluctuations in benchmark interest rates in Brazil, which affect our interest expenses on ourreal-denominated floating rate debt and financial income on our cash and cash equivalents, and fluctuations in the LIBOR rate, which affect our interest expenses on our U.S. dollar-denominated floating rate debt;
·the inflation rate in Brazil, which was 7.1% in 2018, negative 0.42% in 2017 and 7.2% in 2016, in each case, as measured by the IGP-DI, and the effects of inflation on our operating expenses denominated inreais and ourreal-denominated debt that is indexed to take into account the effects of inflation or bears interest at rates that are partially adjusted for inflation; and
·the tax policies and tax obligations.
Our financial condition and liquidity is influenced by various factors, including:
· | our ability to generate cash flows from our operations and our liquidity; |
· | prevailing Brazilian and international interest rates and movements in exchange rates, which affect our debt service requirements; |
· | our ability to continue to be able to borrow funds from international and Brazilian financial institutions and to sell our debt securities in the international and Brazilian securities markets, which is influenced by a number of factors discussed below, including the adverse effect of the novel coronavirus (COVID-19) on the world economy and our business, financial condition and results of operations; |
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· | the requirement under Brazilian Corporations law and our by-laws that we pay dividends on an annual basis in an amount equal to at least 25% of our adjusted net income, unless our board of directors deems it inconsistent with our financial position and the decision of our board of directors is ratified by our shareholders. |
Recent Developments
Impact of the Novel Coronavirus (COVID-19)
The rapid, worldwide spread of the novel coronavirus (COVID-19) has created global economic disruption and uncertainty, including in our business.
In March 2020, in view of the progression of the novel coronavirus (COVID-19) outbreak, we formed a crisis committee with the aim of establishing global procedures focusing on the health of our team members and the continuity of our operations. We have taken the following measures: (i) recommended that all team members and contractorswork remotely; (ii) established a minimum team in industrial areas to ensure safety and operational continuity matters; (iii) prohibited all national and international business travel, apart from exceptional cases; (iv)determined the self-quarantine of any team member or contractor returning from international travel or high risk areas, whether for business travel or personal reasons; (v) recommended that internal and face-to-face meetings with over 20 people be avoided, and prohibited participation in corporate events with 50 people or more; (vi) recommended that non-routine contractors and suppliers do not visit our facilities, and also prohibited access by visitors or third parties coming from high risk areas to our facilities; (vii) created joint schedules with customers and local communities to optimize the distribution of our products in a way that helps fight the pandemic.
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Also, in line with our core safety value, we started to operate our industrial plants with reduced teams. The reduction of approximately 50% in the number of industrial team members and contractors has allowed us to keep teams safe while maintaining the reliability of our operations.
Utilization rates at our plants will be adjusted considering the market demand and the potential opportunities for exports to other regions that may arise, especially with the resumption of activities in Asia. We have made the following main adjustments so far:
· | Brazil: reduction in ethylene production to approximately 65% of our total capacity, which is 3.6 million tons per year; and |
· | United States: reduction in polypropylene production to approximately 85% of our total capacity, which is 1.6 million tons per year. |
We have also been taking a series of measures to preserve liquidity in order to maintain our financial strength and business resilience, such as:
· | drawdown of our revolving credit facility in the amount of US$1 billion; |
· | reduction of administrative expenses by approximately 10%; |
· | reduction of planned investments for 2020 from US$721 million to US$600 million; |
· | postponement of payment of social contributions in Brazil; and |
· | working capital optimizations. |
We have taken critical actions on four important fronts: (i) actions taken jointly with our customers and business partners to transform plastic resins and chemicals into essential items to combat the novel coronavirus (COVID-19), especially surgical masks, packaging for liquid and gel alcohol, bleach, and 3D printing of rods for protection masks; (ii) donation of LPG to hospitals; (iii) actions to support clients and supply chains, especially small and midsized companies; and (iv) donation of hygiene kits and basic food baskets to affected communities around our plants.
As of March 31, 2020, we had positive net working capital of R$5.8 billion, most of our liabilities come due in the long term and 96.9% of our total debt was denominated in U.S. dollars, pursuant to our financial policy. We are comfortable with such exposure to the U.S. dollar, since a significant part of our revenue to be generated in the coming years that could be used to service our debt is directly or indirectly denominated in U.S. dollars.
During periods in which the Brazilianreal depreciates significantly against the U.S. dollar, we are subject to an adverse effect from exchange variation on our debt, a part of which is recognized in our results for the period and a part of which is incorporated into our equity through the hedge accounting mechanism.
In the first quarter of 2020, the Brazilianreal depreciated 29% against the U.S. dollar. The quarter’s negative exchange variation will produce a cash effect upon maturity of our liabilities, is concentrated in the long term given our debt maturity profile, and does not put at risk our liquidity position in the context of our efforts to contain the effect of the novel coronavirus (COVID-19) pandemic on our business.
Due to the uncertainties arising from the novel coronavirus (COVID-19) pandemic with regard to the global economy, it is impossible to accurately predict the adverse impacts on our equity and financial position and that of our subsidiaries. We are continuously evaluating the effects arising from the pandemic, which could lead us to constitute provisions for asset impairment in the coming quarters.
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Based on our preliminary operating data for May 2020 and the publicly reported expected impact on certain industries in which our customers operate (such as automotive and construction), we believe that the novel coronavirus (COVID-19) pandemic could negatively affect our business in numerous ways, including, but not limited to, reduction of our production capacityvolume, sales volume and researchnet revenue, increase of certain of our costs, and development activities;decrease of our gross margin.
See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Petrochemical Industry—Global or regional health pandemics or epidemics, including the novel coronavirus (COVID-19), could negatively impact our business, financial condition and results of operations.”
Revolving Credit Facility Agreement
In May 2018, we and certain of our subsidiaries entered into a revolving credit facility agreement with several international financial institutions for a principal amount of R$5,426.3 million (US$1,000.0 million), which matures in May 2023. In April 2020, we borrowed the amount of R$5,426.3 million (US$1,000.0 million) on this credit facility. As of the date of this annual report, the amount outstanding under this credit facility was R$5,426.3 million (US$1,000.0 million).
Naphtha Agreements with Petrobras
In June 2020, we entered into new agreements with Petrobras for the supply of petrochemical naphtha to our industrial units in Bahia and Rio Grande do Sul. The agreements, with a term of five years following the expiration of the current agreement with Petrobras, establish the supply of a minimum annual volume of 650 kton and, at the option of Petrobras, an additional volume of up to 2.8 million tons per year, at the price of 100% of the international reference ARA.
In addition, to guarantee access to the naphtha logistics system in Rio Grande do Sul, Braskem also renewed the storage agreement with Petrobras and the transport and storage agreement with Petrobras Transporte S.A.
Other Developments
In January 2020, the amount of R$3.7 billion, which had previously been frozen on June 26, 2019 by a decision of the presiding judge of the Alagoas state court of appeals (Tribunal de Justiça do Estado de Alagoas), was fully reimbursed to the Company. As disclosed in a material fact on January 6, 2020, of the amount of R$3.7 billion, R$1.7 billion was transferred to a bank account controlled by Braskem specifically for funding the financial compensation and relocation program, as set forth in the agreement described below. For additional information, see “Item 8. Financial Information—Legal Proceedings—Alagoas – Mining Activities.”
·On February 14, 2020, the requirement under Brazilian Corporations lawCompany entered into an agreement with the Labor Prosecutors’ Office in the state of Alagoas (Ministério Público do Trabalho do Estado do Alagoas) in the amount of R$40.0 million for the implementation of the Program for Recovery of Business and Promotion of Educational Activities for residents and workers in the districts affected by the geological incident near our by-laws that we pay dividends on an annual basissalt mine in an amount equalthe state of Alagoas. The program consists of support for the construction of daycare centers and schools and for administering professional training programs, as well as support for civil defense initiatives to at least 25% of our adjusted net income, unless our board of directors deems it inconsistent with our financial position andhire skilled professionals to continue monitoring the decision of our board of directors is ratifiedrisk areas in the districts affected by our shareholders.the incident. For additional information, see “Item 8. Financial Information—Legal Proceedings—Alagoas – Mining Activities.”
Financial Presentation and Accounting Policies
Presentation of Financial Statements
We have prepared our audited consolidated financial statements as of December 31, 20182019 and 20172018 and for each of the years ended December 31, 2019, 2018 2017 and 20162017 in accordance with IFRS, as issued by the IASB.
The consolidated financial statements presented in this annual report on Form 20-F are not equivalent to theour statutory financial statements of the Company as issued under the requirements of the Brazilian jurisdiction.laws, regulations and accounting practices. The date of authorization for issuethe issuance of these consolidated financial statements is different from the date when the consolidated financial statements were issued in Brazil, there are differences due to adjusting and non adjustingnon-adjusting events after the reporting period, under IAS 10 – Events after the Reporting Period.
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The statutory financial statements (parent company and consolidated) for the year ended December 31, 20182019 were authorized for issueissuance on March 11, 2019,April 3, 2020, in accordance with the accounting practices adopted in Brazil and the International Financial Reporting Standards (“IFRS”), filed with the Brazilian Securities and Exchange Commission (Comissã(Comissão de Valores Mobiliários –, or “CVM”) on March 13, 2019. April 3, 2020.
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Operating Segments and Presentation of Segment Financial Data
We believe that our organizational structure as of December 31, 20182019 reflected our business activities and corresponded to our principal products and production processes. As of December 31, 2018,2019, we had five production business units and reported our results by five corresponding segments to reflect this organizational structure:
·Chemicals (formerly Basic Petrochemicals)—This segment includes (1) our production and sale of chemicals at the Northeastern Complex, the Southern Complex, the São Paulo Complex and the Rio de Janeiro Complex, and (2) our supply of utilities produced at these complexes to second generation producers, including some producers owned or controlled by us.
·Polyolefins—This segment includes the production in Brazil and sale of polyethylene, including the production of “green polyethylene” from renewable resources, and polypropylene by us.
·USA and Europe—This segment includes the operations of our five polypropylene plants in the United States and the operations of our two polypropylene plants in Germany.
·Mexico—This segment includes the operations of our polyethylene plants in the Mexican state of Veracruz.
·Vinyls—This segment includes our production and sale of PVC and caustic soda.
· | Chemicals (formerly Basic Petrochemicals)—This segment includes (1) our production and sale of chemicals at the Northeastern Complex, the Southern Complex, the São Paulo Complex and the Rio de Janeiro Complex, and (2) our supply of utilities produced at these complexes to second generation producers, including some producers owned or controlled by us. |
· | Polyolefins—This segment includes the production in Brazil and sale of polyethylene, including the production of “green polyethylene” from renewable resources, and polypropylene by us. |
· | Vinyls—This segment includes our production and sale of PVC and caustic soda. |
· | USA and Europe—This segment includes the operations of our five polypropylene plants in the United States and the operations of our two polypropylene plants in Germany. |
· | Mexico—This segment includes the operations of our polyethylene plants in the Mexican state of Veracruz. |
Significant Accounting Policies
The presentation of our financial condition and results of operations in conformity with IFRS requires us to make certain judgments and estimates regarding the effects of matters that are inherently uncertain and that impact the carrying value of our assets and liabilities. Actual results could differ from these estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following significant accounting policies under IFRS:
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As of December 31, 2018 was R$2,058.9 million. The recoverable value2019, assets were grouped according to the following CGUs:
Brazil:
· | CGU Northeastern petrochemical complex (NE): comprises assets of the ethylene and PE plants located in the Northeast region; |
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· | CGU Vinyls: represented by assets of PVC and chloride soda plants located in Brazil; |
· | CGU Southern petrochemical complex (South): comprises assets of the ethylene, propylene, PE and PP plants, located in the South region; |
· | CGU Rio de Janeiro petrochemical complex (RJ): comprises assets of the ethylene, propylene, PE and PP plants, located in the state of Rio de Janeiro; |
· | CGU São Paulo petrochemical complex (SP): comprises assets of the ethylene and PE plants, located in the cities of Santo André and Cubatão, in the state of São Paulo; |
· | CGU Paulínia: comprises assets of the PP plant located in Paulínia, in the state of São Paulo; |
· | CGU ABC greater São Paulo region: comprises assets of the PP plant located in the state of São Paulo; |
United States and Europe:
· | CGU Polypropylene USA: there are five PP plants located in the United States, the assets of each plant represent a CGU; |
· | CGU Polypropylene Europe: there are two PP plants located in Germany, the assets of each plant represent a CGU; |
Mexico:
· | CGU Mexico: comprised of assets of the ethylene and PE plants located in Mexico. |
On December 31, 2019, the Company tested the balances of property, plant and equipment and other noncurrent assets including intangible assets (other than goodwill based on expected future profitability) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable value of goodwill based on expected future profitability is reviewed for impairment on an annual basis. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (1) an asset’s fair value less costs to sell; and (2) its value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash inflows that are cash-generating units (CGU). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Our impairment tests of goodwill consider the operations at (1) the Southern Complex in the Chemicals Unit, (2) the Polyolefins Unit and (3) the Vinyls Unit.
In November 2018, Braskem conducted an impairment test of the goodwill using the value in use method (discounted cash flow) and did not identify any loss, as shown in the table below:below for impairment:
| Allocated | Discounted Cash flow | Book value | CF/Book value |
| (in thousands ofReais) | |||
CGU and operating segments |
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CGU - UNIB - South | 926,854 | 9,628,209 | 2,479,778 | 3.9 |
Operating segment - Polyolefins | 939,667 | 21,750,937 | 8,189,204 | 2.7 |
Operating segment - Vinyls | 192,353 | 4,617,326 | 2,763,882 | 1.7 |
Goodwill | |
(in thousands ofreais) | |
CGU | |
Southern petrochemical complex | 1,390,741 |
Northeastern petrochemical complex | 475,780 |
Vynils unit | 192,353 |
(1) The carrying amount includes, in addition to goodwill, tangible and intangible assets with defined useful lives and working capital, defined as assets (accounts receivable, inventories, prepaid expenses and other receivables) minus liabilities (accounts payable, salaries and payroll charges, advances for customers and other liabilities) from each operating segment.
The determination of value in use involves judgments and assumptions adopted to determine the discounted cash flow areas described in note 3.4(b)3.2.3(b) to our audited consolidated financial statements. The WACC used was 11.72%10.69% p.a. and the inflation rate considered for perpetuity was 3.7%3.5%.
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Given the potential impact on cash flows of the “discount rate” and “perpetuity”, Braskemthe Company conducted a sensitivity analysis based on changes in these variables, with cash flows shownconsidering +0.5% on discount rate and –0.5% on perpetuity. Based on the analyses conducted by our management, there was no need to record impairment losses for the balances of these assets in the table below:year ended December 31, 2019.
| +0.5% on | -0.5% on |
| (In thousands ofReais) | |
CGU and operating segments |
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CGU - UNIB - South | 9,099,954 | 9,249,202 |
Operating segment - Polyolefins | 20,455,434 | 20,798,767 |
Operating segment - Vinyls | 4,351,801 | 4,424,347 |
| +0.5% on | –0.5% on |
| (in thousands ofreais) | |
CGU |
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Southern petrochemical complex | 18,472,786 | 19,091,510 |
Northeastern petrochemical complex | 5,634,385 | 5,795,452 |
Vynils unit | 3,179,141 | 3,302,724 |
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The main assumptions used for projecting cash flows are related to the projection of macroeconomic indicators, international prices and global and local demand in the countries where Braskem has operational production plants.
Macroeconomic indicators are provided by a widely recognized consulting firm and include items such as: exchange, inflation and interest rates, among others.
Prices for key petrochemical products are obtained from projections made by IHS. However, final prices take into consideration meetings of specific internal committees and the knowledge of our experts in preparing the benchmarks for each market. In most cases, for a projected period, the internally projected prices go through a review in relation to those originally projected by [thethe international consulting firm].firm.
Similar to prices, global demand also is contracted from a specific consulting firm and, in the markets where we operate more directly, they consider additional variables for the composition of local demand.
In the Vinyls Unit, whose main product is PVC, the projected cash flow exceeded the book value of assets by 67%. The main variables impacting this business are related to fluctuations in the exchange rate, international spreads (especially those related to the prices of naphtha, PVC and Caustic Soda) and Brazilian demand. Effective deviations of these important variables from our projections could lead to cash flows being lower than the value of the assets.
We did not record any impairment charges in the years ended December 31, 2019, 2018 2017 and 2016.2017. As of December 31, 2018,2019, we do not believe that any of our cash generating units were at risk of impairment.
· | Valuation of derivative instruments. The volatility of the foreign exchange and interest rate markets in Brazil has led to significant changes in future rates and interest rates over short periods of time, prompting significant changes to the market value of swaps and other financial instruments.We use swaps, non-deliverable forwards and other derivative instruments to manage risks from changes in foreign exchange, interest rates and commodities prices. We record these instruments at their estimated fair market value based on market quotations for similar instruments, which take into account reliable market curves for interest rates, foreign exchange rates and commodities prices. |
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· | Provisions and contingencies.We are currently involved in numerous judicial and administrative proceedings, as described under “Item 8. Financial Information—Legal Proceedings,” and in notes |
Provisions are recorded when there is a present obligation (legal or constructive) as a result of a past event, and it is more likely than not that an outflow of resources will be required to settle the | |
Our management, based on its assessment and the opinion of external legal advisors, classifies these proceedings based on the probability of loss, as follows: |
o | probable loss: proceedings for which there is a higher probability of loss than of a favorable outcome; | |
o | possible loss: proceedings for which the possibility of loss is greater than remote and lower than probable. For these claims, we do not recognize a provision and disclose the most significant matters in note 24.2 to our audited consolidated financial statements. |
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The provisions for labor, corporate, civil and tax lawsuits correspond to the value of the claims plus charges in the amount of the estimated value of probable losses. Pursuant to IFRS 3, on the acquisition date in business combination operations, a contingent liability is recorded when it represents a present obligation.
Our management believes that the estimates related to the outcome of the proceedings and the possibility of future disbursements may change in view of the following: (i) higher courts may decide a similar case involving another company, adopting a final interpretation of the matter and, consequently, advancing the termination of the proceeding involving us, without any disbursement or without the need for any financial settlement of the proceeding; and (ii) programs encouraging the payment of the debts in Brazil at the federal and state levels, in favorable conditions that may lead to a disbursement that is lower than the one that is recognized in the provision or lower than the value of the matter.
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·Useful life of long-lived assets. We recognize the depreciation of long-lived assets based on their estimated useful life, which in turn is based on the information of manufacturers of machinery and equipment, level of the plants’ operations, quality of preventive and corrective maintenance and prospects of technological assets obsolescence. However, the actual useful life can vary based on the current state of technologies at each unit. The useful life of the long-lived asset also affects the impairment testing. The determination of such impairment involves judgments and estimates as to whether the asset is providing an adequate return in relation to its book value. We do not believe that there are any indications of material change in the estimates and assumptions used in the calculation or the impairment losses of long-lived assets. However, if the actual results are not consistent with the estimates and assumptions used in the future cash flows estimating the fair value of the assets, we could be exposed to potentially significant losses.
Changes in key accounting policies
IFRS 16 – Leases
This pronouncement replaced the previous standards on leases, including IAS 17 – Leases and the corresponding interpretations, such as IFRIC 4, SIC 15 and SIC 27.
For its transition, the Company adopted the modified retrospective approach, i.e., it applied the requirements of the lease standard to all existing agreements on the initial adoption date, i.e. January 1, 2019. Therefore, information and balances were not restated for comparison purposes.
After the date of the first-time application, on January 1, 2019, leases were recognized as a right-of-use asset and a corresponding liability on the date on which the leased asset becomes available to the Company. For each right-of-use asset measured, an equivalent liability was recorded. The payment is recorded as a reduction of the lease liability. The financial cost of the lease liability is recorded in the profit and loss during the enforceable term of the lease, applying a constant interest rate on the remaining balance of the liability. The right-of-use asset is depreciated using the straight-line method considering the shortest period between the useful life of the asset and the enforceable term of the lease.
Definition of a Lease
Previously, the Company determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 – Determinig whether an Arrengement contains a Lease. The Company now assesses whether a contract is or contains a lease based on the definition of a lease, according to IFRS 16 – Leases.
As a lessee
To determine the enforceable term of the lease, our management considers all facts and circumstances that create an economic incentive for exercising the option of extension or create economic disincentives for not exercising the option of early termination.
When adopting IFRS 16, the Company recognized its lease liabilities in relation to the lease agreements previously classified as “operating leases” under IAS 17. Up to the financial statements for the year endedDecember 31, 2018, the payments of these leases, net of any incentives received from the lessor, were recognized as profit or loss during the lease period.
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For leases previously classified as “financial leases” the Company recognized the lease asset and liability considering the amount immediately prior to the date of first-time adoption.
On the date of adoption, the assets and liabilities from lease agreements were measured at their present value, considering the outstanding payments of each agreement, discounting by the Company´s incremental borrowing rate on January 1, 2019. The weighted average incremental rate applied upon first-time adoption was 5.58% p.a. The lease liability considers the net present value of the following lease payments:
· | fixed payments discounting any incentive received; |
· | variable payments based on rates or indexes; |
· | expected payables to the lessor referring to the guaranteed residual amount; |
· | exercise price of a purchase option, if it is reasonably certain that lessee will exercise such option; and |
· | payment of fines for termination of the lease if the contractual terms provide for lessee’s exercise option. |
| 3,257,982 |
Lease liability recognized on January 1, 2019 | |
Lease commitments discounted at the incremental rate on the date of initial application | 2,177,138 |
(+) Financial leases as of December 31, 2018 | 100,557 |
(–) Short-term leases recognized immediately in | (103,929) |
(–) Low-value contracts recognized immediately in profit or loss | (1,071) |
(+): Extension options reasonably certain to be exercised | 119,770 |
Total | 2,292,465 |
The right-of-use assets were measured by the amount of the lease liabilities, adjusted by any amount of advance payments and provisions for lease payments related to the lease recognized on January 1, 2019. There were no onerous leases that required adjustment to the right-of-use assets on the date of first-time adoption.
Upon first-time adoption, the Company used the following practical expedients permitted under IFRS 16:
· | not to reevaluate whether the contract is or contains any lease on the initial adoption date. Instead, applied the standard to agreements that were previously identified as leases; |
· | ppt not to separate non-lease components from lease components, considering them, therefore, as a single lease component; |
· | not to record contracts, that on the date of the initial adoption date, will end within 12 months; as long as the Company is not reasonably certain to exercise the purchase option at the end of the contract; |
· | not to record low-value agreements (R$30 for companies in Brazil and US$10 for foreign subsidiaries), in accordance with the policy defined by management; |
· | excluded the direct initial costs from measuring the right of use asset on the initial adoption date; |
· | used hindsight, such as determining the term of the lease, if the contract contains options to postpone or terminate the lease, among others; and |
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· | applied a single discount rate to the lease portfolio with reasonably similar characteristics (such as leases with similar remaining lease terms, for a similar class of underlying asset in a similar economic environment and similar financing currencies – “portfolios”). |
Leases classified as finance leases under IAS 17
The Company leases some equipments classified as finance leases under IAS 17. For these finance leases, the carrying amount of the right-of-use asset and the lease liability at 1 January 2019 were determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.
IFRIC 23 – Uncertainty on Income Tax Treatment
The new interpretation establishes requirements for recognition and measurement in situations where the Company has defined, during the process of calculating taxes on net income (income tax and social contribution), the use of tax treatments that could be construed as uncertain and, therefore, could be questioned by tax authorities.
The Company concluded the analyses of the application of this standard and did not identify any impacts on the consolidated financial statements.
New or revised pronouncements that are not yet in effect
New standards and amendments to current standards will come into effect in annual periods starting after January 1, 2020. Although certain of such standards and ammendments may be adopted early, we chose not to early adopt the following new standards and intepretations for preparing our financial statements:
· | changes to references to the conceptual structure of IFRS; |
· | definition of business (changes to IFRS 13); |
· | definition of materiality (amendments to IAS 1 and IAS 8); and |
· | IFRS 17 – Insurance agreements. |
The amended standards and interpretations are not expected to produce a significant impact on our consolidated financial statements.
We adopted “IFRS 15 – Revenue from Contracts with Customers” and “IFRS 9 – Financial Instruments” as of January 1, 2018.
Due to the transition methods chosen by us to apply these accounting standards, the comparative information in our audited consolidated financial statements has not been restated to reflect the requirements of the new standards.
The effects from the adoption of these standards are mainly due to the following:
· | change in the impairment calculation methodology in accordance with IFRS |
· | presentation of the variable considerations (bonuses) deducted directly from sales |
· | change in the classification and measurement of financial |
· | change in the accounting of operations involving dollar put and call options designated for hedge |
IFRS 15 – Revenue from Contracts with Customers
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IFRS 15 introduced a comprehensive framework to determine if and when revenue must be recognized, and how revenue is measured. IFRS 15 replaces the standard IAS 18 – Revenue.
We adopted IFRS 15 using the cumulative effect method, with initial application of the standard on the initial date (i.e., January 1, 2018). As a result, we did not apply the requirements of IFRS 15 to the comparative period reported (2017).
We did not incur significant changes at the time or when measuring its sales revenue for the performance obligations identified, which are:
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·delivery of goods sold – the performance obligation ends when the ownership of the good is transferred to the client. For us, there was no difference between IAS 18 – Revenue and IFRS 15 upon recognition of the revenue associated with this performance obligation; and
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contracting freight to deliver goods – the performance obligation of theour Company to contract freight to deliver the goods sold ends when the service is completed. We did not change the time of recognition, and continue to recognize at the end of the delivery of goods sold. We consider immaterial on its profit and loss any change in the time of recognition the performance obligation associated with freight.
We adopt the practice of contracting with certain clients bonuses for achieving sales targets. For clients that we expect will meet such targets and accordingly will receive a bonus, the amounts due are accrued on a monthly basis.
We consider commercial discounts included on client invoices as part of the fair value of the revenue recognized, according to that established the accounting standard (IAS 18) applicable until December 31, 2017. Therefore, the commercial discounts included on client invoices did not result in any changes as a result of adoption or measurement of its accounting recognition in accordance with IFRS 15.
IFRS 9 – Financial Instruments
IFRS 9 – Financial Instruments established requirements for recognition and measurement of financial assets, liabilities and some contracts to buy or sell non-financial items. This standard replaced IAS 39 – Financial Instruments: Recognition and Measurement.
Classification – Financial Assets
IFRS 9 introduced a new approach for the classification and measurement of financial assets that reflects the business model in which assets are managed and its cash flow characteristics.
IFRS 9 introduced three main classification categories for financial assets: measured at amortized cost (“AC”), at fair value through other comprehensive income (“FVTOCI”) and at fair value through profit and loss (“FVTPL”). The standard eliminates IAS 39 classifications of held-to-maturity, loans and receivables and available-for-sale. IFRS 9 requires the classification of financial assets based on the business model of the entity for managing their financial assets.
Pursuant to IFRS 9, embedded derivatives in contracts where the host is a financial asset under the standard’s scope are never separated. Instead, the hybrid financial instrument is assessed in its entirety for classification.
Based on its assessment, we did not have a relevant impact on the accounting of its financial investments resulting from new requirements of IFRS9. However, because some trade accounts receivables are sold to financial institutions and derecognized before the maturity date (note 7 to our audited consolidated financial statements), we classified part of our trade accounts receivables that could be sold at fair value under FVTOCI.
The following table and corresponding notes explain the original measurement categories, in accordance with IAS 39 and the new categories of measurement in accordance with IFRS 9, for each class of financial asset on January 1, 2018.
The effect from the adoption of IFRS 9 on the accounting balance of financial assets as of January 1, 2018 is related to the following:
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(ii) | calculation of the fair value for receivables that, in accordance with our business model, may be sold before their maturities.
IFRS 9 replaced the “incurred loss” model from IAS 39 with a prospective model of “expected credit losses.” This change requires a relevant judgment regarding the way in which changes in economic factors affect the expected credit losses, which are determined based on weighted probabilities. The new expected losses model will apply to financial assets measured at AC or FVTPL, excluding investments in equity instruments and contractual assets. According to IFRS 9, provisions for expected losses are measured using one of the following bases:
Our assessment indicated that the adoption of the expected credit loss model as required by IFRS 9 on January 1, 2018 had the effect of R$9.4 million, net of taxes. The judgments of how changes in economic factors affect our expected credit losses are determined by stages that can be observed in note 7 to our audited consolidated financial statements. Hedge Accounting IFRS 9 requires that we ensure that hedge accounting relationships are aligned with our risk management objectives and strategies, and that a more qualitative and prospective approach is applied to assess hedge effectiveness. IFRS 9 also introduced new requirements for rebalancing hedge relations and prohibits the voluntary discontinuation of hedge accounting. 86 Upon adopting IFRS 9, we elected to account for changes to fair value of forward points separately, as hedge cost. Therefore, as of January 1, 2018, these changes are recognized in other comprehensive income (loss) and accrued in a hedge cost reserve as a separate component in equity and subsequently accounted for in the same way as the cumulative gains or losses in the cash flow hedge reserve. The types of hedge accounting relations presently designated by us meet the IFRS 9 requirements and are aligned with our risk management objective and strategy.
Transition The changes to accounting policies stemming from the adoption of IFRS 9 were applied prospectively, including:
Principal Factors Affecting Our Results of Operations Growth of Our sales in Brazil represented The following table sets forth the growth rates of Brazilian GDP and domestic apparent consumption for polyethylene, polypropylene and PVC for the periods presented.
Source: Brazilian government and Tendências Consultoria. Brazilian GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that
In 2017Brazilian economic indicators showed signs of a slow recovery. As a result, Brazilian consumption volumes of thermoplastic resins increased by 5.9% for polypropylene and 4.8% for polyethylene.PVC remained vulnerable to the effects of the contraction of the civil construction sectorand consumption volumes declined by 1.9%. In 2018, Brazil experienced a recovery in economic indicators and, as a result of stronger economic activity, Brazilian consumption volumes of thermoplastic resins increased by 1.9% for polypropylene and and by 3.2% for polyethylene. The PVC market grew by 1.4% for the first time after four years of contraction. 87
In 2019, Brazil’s economy continued to recover and, as a result, Brazilian consumption volumes of thermoplastic resins increased by 2.2% for polypropylene and by 2.5% for polyethylene. The PVC market remained stable in relation to 2018. According to the IMF, because ofthe adverse effects of the novel coronavirus (COVID-19) pandemic on the economy of several countries, the world’s GDP and the GDP of Brazil, the United States, Europe and Mexico is expected to shrink significantly in 2020, leading to an economic contraction and a recession in these countries or regions. Brazil’s Macroeconomic Environment The following table shows data inflation, interest rates and the U.S. dollar exchange rate for and as of the periods indicated.
Sources: Fundação Getúlio Vargas, the Central Bank and Bloomberg (1) Brazilian GDP according to Sistema IBGE de Recuperação Automática–SIDRA. (2) Inflation (IGP-M) is the general market price index measured by the Fundação Getúlio Vargas. (3) Inflation (IPCA) is a broad consumer price index measured by the Instituto Brasileiro de Geografia e Estatística. (4) The CDI rate is average of inter-bank overnight rates in Brazil (as of the last date of the respective period). Effects of Fluctuations in Exchange Rates between theReal and the U.S. Dollar Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of thereal against the U.S. dollar because:
Virtually all of our sales are of petrochemical products for which there are international market prices expressed in U.S. dollars. We generally attempt to set prices that take into account (1) the international market prices for our petrochemical products, and (2) in Brazil, variations in thereal/U.S. dollar exchange rate. As a result, although a significant portion of our net Fluctuations in thereal will affect the cost of naphtha and other U.S. dollar-linked or imported raw materials. The price of naphtha is linked to the U.S. dollar. The pricing formula included in the contract with Petrobras under which we purchase naphtha for our basic petrochemical plants in the Northeastern Complex and in the Southern Complex includes a factor that adjusts the price to reflect thereal/U.S. dollar exchange rate. The depreciation of thereal against the U.S. dollar generally increases the production cost for our products and we generally attempt to increase the Brazilian prices for our products inreais (to the extent possible in light of then-prevailing market conditions in Brazil), which may result in reduced sales volumes of our products. To the extent that our price increases are not sufficient to cover the increased costs for raw materials, our operating margin decreases. Conversely, the appreciation of thereal against the U.S. dollar generally decreases 88 Braskem can enter into financial derivatives transactions to mitigate exchange rate risk associated with exposure to costs inreais. Those operations can include call and put options and related strategies. For example, Braskem may apply a hedging strategy referred to as collar, which is composed of the purchase of a put optionassociated with the simultaneous sale of a call option, where both options having the same maturity. In this case, if thereal depreciates and the strike price of the call exceeds the exchange rate of the option’s exercise date, we may incur significant financial losses. However, since those strategies will be implemented only for non-speculative purposes (in accordance with our financial policy), potential losses on derivatives transactions should be offset by more competitive fixed costs inreais.
Our consolidated U.S. dollar-denominated indebtedness represented As a result, when thereal depreciates against the U.S. dollar:
Appreciation of thereal against the U.S. dollar has the converse effects. Export sales and sales by our USA and Europe Unit, which enable us to generate receivables payable in foreign currencies, tend to provide a hedge against a portion of our U.S. dollar-denominated debt service obligations, but they do not fully match them. To further mitigate our exposure to exchange rate risk, we try, where possible, to enter into trade finance loans for our working capital needs, which funding is generally available at a lower cost because it is linked to U.S. dollar exports. Thereal depreciated against the U.S. dollar from mid-2011 to early 2016, and again from early 2018 to 2020. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, therealdepreciated at a rate that was much higher than in previous years, and a similar trend occurred during 2018 and 2019. On March 31, 2020, the real fell to the lowest level since the introduction of the currency, at R$5.1987 per US$1.00. Overall, in 2015, thereal depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, therealfluctuated significantly, primarily as a result of Brazil’s political instability, appreciating 16.5%, to R$3.2591 per US$1.00 on December 31, 2016. In 2017, thereal depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.3080 per US$1.00. In 2018, thereal depreciated 14.6 % against the U.S. dollar, ending the year at an exchange rate of R$3.8748 per US$1.00, primarily as a result of lower interest rates in Brazil, which reduced the volume of foreign currency deposited in Brazil in the “carry trade,” as well as uncertainty regarding the Brazilian presidential elections held in October 2018. As of December 31, 2019, thereal/U.S. dollar exchange rate reported by the Central Bank was R$4.0307 per US$1.00 and, as of May 29, 2020, it was R$5.4263 per US$1.00. There can be no assurance that thereal will not depreciate or appreciate further against the U.S. dollar. Effects of Brazilian Inflation Brazilian inflation affects our financial performance by increasing some of our operating expenses denominated inreais (and not linked to the U.S. dollar). A significant portion of our cost of products sold, however, are denominated in or linked to the U.S. dollar and are not substantially affected by the 89 Effect of Sales outside Brazil on Our Financial Performance We have significant production capacity located outside of Brazil from our plants located in the United States, Germany and Mexico. During the year ended December 31, During the year ended December 31,
According to the IMF, because ofthe adverse effects of the novel coronavirus (COVID-19) pandemic on the economy of several
Cyclicality Affecting the Petrochemical Industry Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased domestic prices and operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining domestic prices and operating margins. We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist, principally due to the continuing impact of four general factors:
In 2020, the novel coronavirus (COVID-19) pandemic has significantly impacted economic activity and markets around the world, and its severity, magnitude and duration are highly uncertain, rapidly changing and difficult to predict.According to the IMF, because ofthe adverse effects of the novel coronavirus (COVID-19) pandemic on the economy of several countries, the world’s GDP and the GDP of Brazil, the United States, Europe and Mexico is expected to shrink significantly in In the long-term, the trend is for the down cycle to soften and eventually revert into an upcycle again, as the In 2019, the world economy slowed to its slowest pace since the financial crisis of 2008. During the year, the impact from the trade war between
In 2018, much of the capacity additions that had been delayed in prior years finally became available in the United States. The new plants benefit from a lower cost due to their use of ethane, and therefore have the ability to produce products at a lower price than most of their peers in the global market, which caused international price references to fall throughout the year. On the other hand, oil and naphtha prices were at high levels for most of theyear, mainly due to OPEC production cuts and United States sanctions on Iran, which caused spreads to decrease. Additionally, trade disputes between the two largest economies in the world, China and the United States forced American companies to find new regions to market their products, therefore increasing the pressure on prices in these regions.
In 2017, the
Effects of Fluctuations in Naphtha, Ethane, Propane and Propylene Prices Fluctuations in the international market price of naphtha have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our first and second generation products. Political instability in the Middle East or similar events that may occur in the future may lead to unpredictable effects on the global economy or the economies of the affected regions. These events have had and may continue to have negative effects on oil production and price volatility, consequently driving naphtha and petrochemical prices higher worldwide. 91 The price of ethane and propane in the Mont Belvieu region in Texas is used as a reference for our costs of feedstock. Any future developments that affect the U.S. supply/demand balance for natural gas may adversely affect the Mont Belvieu price of natural gas (including ethane, propane and butane) and increase our production costs or decrease the price of petrochemical products. External factors and natural disasters such as hurricanes, harsh winters or industry developments, such as shale gas exploration, may disrupt the supply of natural gas, thereby increasing the cost, which may materially adversely affect our cost of products sold and results of operations. Effects on Cost of Products Sold Naphtha is the principal raw material used by our Chemicals Unit and, indirectly, in several of our other business units. Naphtha and condensate accounted for The cost of naphtha varies in accordance with international market prices, which fluctuate depending upon the supply and demand for oil and other refined petroleum products. We purchase naphtha under a long-term supply contract with Petrobras, and we import naphtha from other suppliers through our terminal at Aratú, in the State of Bahia and Petrobras’ terminal at Osório, in the State of Rio Grande do Sul. The prices that we pay for naphtha under these arrangements, other than our supply contract with Petrobras, are based on the Amsterdam-Rotterdam-Antwerp (ARA) market price for naphtha. As a result, fluctuations in the ARA market price for naphtha have had a direct impact on the cost of our first generation products. Our contracts with Petrobras provides for naphtha prices based on ARA quotations. The volatility of the quotation of this product in the international market, thereal/U.S. dollar exchange rate, and the level of carbon disulfide, a contaminant of the naphtha that is delivered, also influence the price of naphtha that we purchase from Petrobras. We believe that these contracts have reduced the exposure of the cost of our first generation products to fluctuations in the ARA market price for naphtha. The international price of naphtha has fluctuated significantly in the past, and we expect that it will continue to do so in the future. Significant increases in the price of naphtha and, consequently, the cost of producing our products, generally reduce our gross margins and our results of operations to the extent that we are unable to passall of these increased costs on to our customers, and may result in reduced sales volumes of our products. Conversely, significant decreases in the price of naphtha and, consequently, the cost of producing our products, generally increase our gross margins and our results of operations and may result in increased sales volumes if this lower cost leads us to lower our prices. In periods of high volatility in the U.S. dollar price of naphtha, there is usually a lag between the time that the U.S. dollar price increases or decreases and the time that we are able to pass on increased, or required to pass on reduced, costs to our customers in Brazil. These pricing discrepancies decrease when the U.S. dollar price of naphtha is less volatile.
We do not currently hedge our exposure to changes in the prices of naphtha because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of naphtha and also because the prices of our polyethylene, polypropylene and PVC products sold in Brazil generally reflect changes in the international market prices of these products. Effects on Prices of Our Products The prices that we charge for many of our basic petrochemical products are determined by reference to the European contract prices for these products. Because European producers of basic petrochemical products primarily use naphtha as a raw material, changes in the European contract prices are strongly influenced by fluctuations in international market prices for naphtha. To the extent that our prices are based on the European contract prices for our products, the prices that we charge for these products are significantly influenced by international market prices for naphtha. We negotiate the prices inreais for part of our products, principally polyethylene, polypropylene and PVC, on a monthly basis with our domestic customers. We attempt to revise our prices to reflect (1) changes in the international market prices of these products, which tend to fluctuate in tandem with naphtha prices, especially for polyethylene, and (2) the appreciation or depreciation of therealagainst the U.S. dollar. However, during periods of high volatility in international market prices or exchange rates, we are sometimes unable to fully reflect these changes in our prices in a prompt manner. 92 The international market prices of our petrochemical products have fluctuated significantly, and we believe that they will continue to do so. Volatility of the price of naphtha and the Significant increases in the international market prices of our petrochemical products and, consequently, the prices that we are able to charge, generally increase our net Capacity Utilization Our operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities. The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the periods presented.
In 2019, average capacity utilization was affected by the: (i) lower ethylene utilization rate of the cracker in Bahia resulting from the shutdown of the chlor-alkali and dichloroethane plants in Alagoas; (ii) scheduled turnaround of one of our ethylene production lines at the Bahia cracker in the fourth quarter of 2019; (iii) lower ethylene utilization rate at the crackers in Rio Grande do Sul, due to logistics problems; and (iv) drop in the marginal profitability of our export of resins. In 2018, average capacity utilization was affected by the truckers’ strike that took place in Brazil in May of 2018; the incident involving the chlor-alkali plant in Alagoas; the blackout that affected Brazil’s Northeast plants in March; and lower demand in the fourth quarter of 2018. In 2017, average capacity utilization was affected by strong operating performance of the crackers, resulting from increased operating efficiency and higher availability of feedstock at the gas-based cracker in Rio de Janeiro.
Effects of Brazilian Industrial Policy The Brazilian government has a significant influence in some sectors of the domestic economy, including the petrochemical sector in which we operate. The Brazilian government has adopted, or is considering adopting, measures to boost the competitiveness of domestic companies, as described below. Reintegra In December 2011, the Brazilian government implemented the “Reintegra” program, which is designed to improve the competitiveness of Brazilian manufacturers in the export markets by refunding the federal taxes levied on their export sales. As a result of this incentive, exports of third generation products by Brazilian companies have increased. The original program ended on December 31, 2013. In August 2014, the 93 Pricing and Tariffs We set prices for ethylene, the principal first generation petrochemical product that we sell to third-party second generation producers, by reference to international market prices. See “Item 4. Information on the Company—Chemicals Unit—Sales and Marketing of Our Chemicals Unit.” Prices paid by second generation producers for imported first generation petrochemical products partly reflect transportation and tariff costs. We establish the prices of ethylene by-products, such as butadiene, by reference to several market factors, including the prices paid by second generation producers for imported products. Prices paid for such imports also reflect transportation and tariff costs. Second generation producers, including us, generally set prices for their petrochemical products by reference to several market factors, including the prices paid by third generation producers for imported products. Prices paid for such imports also reflect transportation and tariff costs. The Brazilian government has used import tariffs to implement economic policies. As a result, import tariffs imposed on petrochemical products have varied in the past and may vary in the future. Tariffs on imports of first generation petrochemical products are between 0% and 4%, and tariffs on polyethylene, polypropylene and PVC resins are 14.0%. Imports and exports within the free trade area in South America (Mercado Comum do Sul), or Mercosur, which is composed of Argentina, Brazil, Paraguay and Uruguay, have not been subject to tariffs since December 2001. Imports of suspension PVC from Bolivia, Chile, Colombia, Cuba, Ecuador, Peru and Venezuela are not subject to tariffs, due to a number of trade agreements. Imports of suspension PVC from Mexico are subject toreduced tariffs of 11.2%, due to a trade agreement. Imports and exports among Mercosur and Colombia, Ecuador e Venezuela are not subject to tariffs due to a trade agreement since 2005.
Additionally, in December 2010, CAMEX imposed an anti-dumping duty of 10.6% on polypropylene imports from the United In 2019, 31% of Brazilian polyethylene, polypropylene and PVC resins were imported products, which reflected an 8.5% annual increase in the volume of resins imported. In 2018, 25% of Brazilian polyethylene, polypropylene and PVC resins were imported products, which reflected a 12.3% annual increase in the volume of resins imported, due to 94 Effect of Level of Indebtedness and Interest Rates As of December 31, Effect of Taxes on Our Income We are subject to a variety of generally applicable federal and state taxes in multiple jurisdictionson our operations and results. We are generally subject to Brazilian federal income tax at 25%, combined with Social Contribution on Net Income (Contribuição Social Sobre o Lucro Líquido We have available certain federal tax exemptions based upon federal law that offers tax incentives to companies that locate their manufacturing operations in the Brazilian states of Bahia and Alagoas. These exemptions
The exemption of 75% of income tax rate combined with CSLL at 9%, entitles us to pay only 44.9% of the 34% standard corporate tax rate on the profits arising from products manufactured at these plants. Income tax loss carryforwards available for offset in Brazil do not expire. However, the annual offset is limited to 30% of our adjusted net profits. This limit also affects the social contribution on net profit, or CSLL.
The consolidated amount includes the impact from the different tax rates in countries where foreign subsidiaries are located, as follows:
Our export sales are currently exempt from (1) PIS (2) COFINS, a federal value-added tax, (3) the Tax on Industrial Products (Imposto sobre Produtos Industrializados), or IPI, a federal value-added tax on industrial products, and (4) ICMS.
Statement of Profit or Loss The discussion of the results of our business units is based upon financial information reported for each of the segments of our business, as presented in the following tables, which set forth the results of each of our segments and the reconciliation of these results of our segments to our consolidated results of operations. This segment information was prepared on the same basis as the information that our senior management uses to allocate resources among segments and evaluate their performance. We evaluate and manage the performance of our segments based on information generated from our accounting records maintained in accordance with IFRS, and reflected in ourauditedconsolidated financial statements.
(1) Includes research and development. (2) Represents income (expenses) of Braskem that are not allocated to any particular segment. (3) Eliminations consist primarily of inter-segment sales, which are made in similar terms as arm’s length transactions.
(1) Includes research and development. (2) Represents income (expenses) of Braskem that are not allocated to any particular segment. (3) Includes the amount of R$501.4 million (R$265.4 million in “net (4) Eliminations consist primarily of
(1) Includes research and development. (2) Represents income (expenses) of Braskem that are not allocated to any particular segment. (3) Eliminations consist primarily of
In the following discussion, references to increases or declines in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates. Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 The following table sets forth ourauditedconsolidated financial information for the years ended December 31, 2019 and 2018.
n.m.: Not meaningful Net revenue Net revenue decreased by 9.8%, or R$5,676.3 million, to R$52,323.5 million in 2019, from R$57,999.9 million in 2018, primarily as a result of (1) a R$3,939.4 million, or 12.7%, decrease in net revenue of our Chemicals Unit, to R$27,172.3 million in 2019, from R$31,111.7 million in 2018, (2) a R$1,292.0million, or5.7%, decrease in net revenue of our Polyolefins Unit, to R$21,191.9 million in 2019, from R$22,483.9 million in 2018, (3) a R$474.6million, or 15.0%, decrease in net revenue of our Vinyls Unit, to R$2,692.8 million in 2019, from R$3,167.4 million in 2018, (4) a R$1,680.5million, or 14.3%, decrease in net revenue of our USA and Europe Unit, to R$10,044.3 million in 2019, from R$11,724.8 million in 2018, and (5) a R$719.1million, or 19.1%, decrease in net revenue of our Mexico Unit, to R$3,051.4 million in 2019, from R$3,770.5 million in 2018. Reclassifications and eliminations of net revenue of our segments in consolidation, primarily reflecting intercompany sales of chemicals by our Chemicals Unit to our other segments, decreased by 18.2%, or R$2,690.8 million, to R$12,125.4 million in 2019, from R$14,816.2 million in 2018. 97 In 2019 and 2018, we did not have any revenue arising from transactions with any single client that was equal to or greater than 10% of our total net revenue. In 2019, the most significant revenue from a single client accounted for 6.5% of our total net revenue. Net Revenue of Chemicals Unit Net revenue of the Chemicals Unit decreased byR$3,939.4 million, or 12.7%,to R$27,172.3 million in 2019, from R$31,111.7 million in 2018. The table below sets forth information regarding the weighted average international prices of main chemicals that are generally used as a reference for our Chemicals Unit for the periods indicated:
___________ (1) Source: External consulting firm (spot price). (2) Average prices weighted based on Braskem’s capacity production: ethylene (20%), butadiene (10%), propylene (10%), cumene (5%), benzene (20%), paraxylene (5%), gasoline (25%) and toluene (5%). Net Revenue Generated by Sales in Brazil In 2019, net revenue of the Chemicals Unit from domestic sales in Brazil decreased by 15.5%, or R$4,137.9 million, to R$22,562.9 million (including R$11,826.9 million from sales to the Polyolefins and Vinyls Units) in 2019, compared to R$26,700.8 million (including R$14,468.7 million from sales to the Polyolefins and Vinyls Units) in 2018, primarily due to lower sales volume of chemicals to third parties and lower main chemicals average prices in the petrochemical sector, which were explained by: (1) the startup of new shale-gas-based ethylene capacity and the good operational performance of propane dehydrogenation, or PDH, plants in the United States, (2) the startup of new refineries in Asia, and (3) weaker demand, mainly from the automobile sector. Sales Volume in Brazil Our Chemicals Unit’s internal transfers decreased by 5.9%, to 3,528.9 ktons in 2019, from 3,749.1 ktons in 2018, and our sales volume in the Brazilian market to third parties decreased by 2.1%, to 2,812.0 ktons in 2019, from 2,871.8 ktons in 2018, primarily due to the lower availability of products since our crackers operated at an average capacity utilization rate of 85%, down 6 p.p. from 2018. The decrease in the capacity utilization rate was mainly explained by: (1) lower utilization rate of our cracker in the state of Bahia, Brazil, resulting from the shutdown of our chlor-alkali and dichloroethane plants in the state of Alagoas, Brazil; (2) scheduled turnaround of one of our production lines at our cracker located in the state of Bahia, Brazil, in the last quarter of 2019; (3) lower utilization rate at our crackers in the state of Rio Grande do Sul, Brazil, due to certain logistics issues; and (4) a drop in the marginal profitability of our resins export business. The table below sets forth our Chemicals Unit’s internal transfers, comprised mainly of ethylene to our Vinyls Unit, and of ethylene and propylene to our Polyolefins Unit, by volume for the periods indicated.
98 The table below sets forth our Chemicals Unit’s sales in Brazil to third parties by volume for the periods indicated:
(1) BTX is defined as benzene, toluene and para-xylene. Net Revenue Generated by Exports Net revenue of the Chemicals Unit from exports increased by 4.5%, or R$198.4 million, to R$4,609.3 million in 2019, compared to R$4,410.9 million in 2018, mainly due to the higher sales volume. Sales Volume from Exports Our Chemicals Unit’s volume of export sales increased by 10.0%, to 627.9 ktons in 2019, from 570.7 ktons in 2018, mostly in ethylene, propylene and BTX, primarily due to lower sales volume in the Brazilian market. The table below sets forth our Chemicals Unit’s export sales by volume for the periods indicated:
(1) BTX is defined as benzene, toluene and para-xylene. Net Revenue of Polyolefins Unit Net revenue of the Polyolefins Unit decreased by 5.7%, or R$1,292.0 million, to R$21,191.9 million in 2019, from R$22,483.9 million in 2018, mainly as a result of the lower average price of polyolefins in the petrochemical sector, which was the result of: (1) a decline in global demand as a result of lower levels of global growth; (2) lower demand of the automobile sector influenced by the end of tax incentives for vehicle purchases in China and to the ongoing adjustment of production lines to meet the new rules for greenhouse gas emissions in Europe and China; and (3) the startup of new shale-gas-based integrated polyethylene capacity in the United States and new polypropylene plants in Asia, mainly in China. The table below sets forth information regarding the weighted average international prices of the polyolefins of our Polyolefins Unit for the periods indicated: 99
___________ (1) Source: External consulting (spot price). Net Revenue Generated by Sales in Brazil Net revenue from domestic sales of the Polyolefins Unit in Brazil decreased by 8.2%, or R$1,317.2 million, to R$14,799.7 million in 2019, from R$16,116.8 million in 2018. Sales Volume in Brazil In 2019, sales volume in Brazil increased by 0.1%, to 2,933.8 ktons in 2019, from 2,931.7 ktons in 2018.
Net Revenue Generated by Exports Our Polyolefins Unit’s net revenue from exports increased by 0.4%, or R$25.2 million, to R$6,392.2 million in 2019, from R$6,367.0 million in 2018, reflecting higher export sales. Sales Volume from Exports Our Polyolefins Unit’s volume of export sales increased by 10.7%, to 1,391.8 kton in 2019, from 1,257.3 kton in 2018, in particular of polypropylene reflecting a higher market share in the South America region. The table below sets forth our Polyolefins Unit’s export sales by volume for the periods indicated:
Net Revenue of Vinyls Unit Net revenue of our Vinyls Unit decreased by15.0%, or R$474.6million, to R$2,692.8 million in 2019, fromR$3,167.4 million in 2018, which was the result of lower caustic soda sales volume as a result of the shutdown of our chlor-alkali and dichloroethane plants in the state of Alagoas, Brazil, and lower PVC and caustic soda prices in the petrochemical sector due to the weakening of: (1) PVC demand in Asia, due to the trade war between the United States and China and India’s anti-dumping policy; and (2) demand for caustic soda in the aluminum and pulp and paper sectors.
___________ (1) External consulting (Spot Price). 100 Net Revenue Generated by Sales in Brazil Net revenue of the Vinyls Unit generated by sales in Brazil decreased by 12.4%, or R$372.1 million, to R$2,633.1 million in 2019, from R$3,005.2 million in 2018. Sales Volume in Brazil Our Vinyls Unit’s volume of sales in Brazil decreased by 12.5%, to 806.7 ktons in 2019, from 921.6 ktons in 2018, which was the result of lower sales volume of caustic soda following the shutdown of our chlor-alkali and dichloroethane plants in the state of Alagoas, Brazil.
Net Revenue Generated by Exports Our Vinyls Unit’s net revenue generated by exports decreased by 63.2%, or R$102.5 million, to R$59.7 million in 2019, from R$162.2 million in 2018. Sales Volume from Exports Our Vinyls Unit’s volume of export sales decreased by 55.2%, to 22.2 kton in 2019, from 49.4 kton in 2018, due to due to the lower availability of PVC volumes to exports.
Net Revenue of USA and Europe Unit Net revenue of our USA and Europe Unit, which includes our polypropylene assets in the United States and Europe, decreased by 14.3%, or R$1,680.5million, to R$10,044.3 million in 2019, from R$11,724.8 million in 2018, primarily as a result of lower availability of polypropylene for sale in Europe caused by lower utilization of the plants due to operational problems affecting the propylene supplier and the consequent shortage of feedstock at one of our plants.
___________ (1) Source: External consulting (spot price). (2) Average prices weighted based on Braskem’s capacity production: PP USA (72%) and PP Europe (28%). Net Revenue of Mexico Unit Net revenue of the Mexico Unit decreased by 19.1%, or R$719.1 million, to R$3,051.4 million in 2019, from R$3,770.5 million in 2018, due to lower polyethylene prices in the petrochemical sector, which was the result of the decline in global demand associated with the startup of new shale-gas-based integrated polyethylene capacity in the United States. 101
__________ (1) Source: External consulting (spot price). Cost of Products Sold and Gross Profit Cost of products sold decreased by 1.5%, or R$697.5 million, to R$45,879.1 million in 2019, from R$46,576.7 million in 2018, primarily as a result of a 7.9% decrease in the cost of products sold by our Chemicals Unit, a 4.2% decrease in the cost of products sold by our Polyolefins Unit, and a 10.0% decrease in the cost of products sold by our USA and Europe Unit. Reclassifications and eliminations of cost of products sold by our Units calculated as part of our consolidation, primarily reflecting the costs of chemicals purchased by our Polyolefins and Vinyls Units from our Chemicals Unit, decreased by 19.3% in 2019. Consolidated gross profit decreased by 43.6%, or R$4,978.8 million, to R$6,444.4 million in 2019, from R$11,423.2 million in 2018. Gross margin (gross profit as a percentage of net revenue) decreased to 12.3% during 2019, from 19.7% during 2018. Cost of Products Sold of Chemicals Unit Cost of products sold of the Chemicals Unit decreased by 7.9%, or R$2,173.8 million, to R$25,349.9 million in 2019, from R$27,523.7 million in 2018, primarily as a result of a decrease in the international prices of the raw materials used by the Chemicals Unit. The lower international prices for naphtha are explained by the lower oil prices as well as by the use of more competitive feedstocks to produce ethylene at flexible petrochemical complexes, mainly in the United States. The lower U.S. ethane and propane prices are explained by the higher supply of these products associated with the startup of new gas fractionators and pipelines for transportation and with the delays in the startup of new petrochemical complexes in the region.
___________ (1) Source: External consulting (spot price). Gross profit of the Chemicals Unit decreased by 49.2%, or R$1,765.6 million, to R$1,822.4 million in 2019, from R$3,587.9 million during 2018, and gross margin (gross profit as a percentage of net revenue) decreased to 6.7% during 2019, from 11.5% during 2018.Cost of Products Sold of Polyolefins Unit Cost of products sold of the Polyolefins Unit decreased by 4.2%, or R$801.3 million, to R$18,494.5 million in 2019, from R$19,295.9 million in 2018, explained by the lower ethylene and propylene prices applied by our Chemicals Unit to its internal transfers. Gross profit of the Polyolefins Unit decreased by 15.4%, or R$490.7 million, to R$2,697.3 million during 2019, from R$3,188.0 million during 2018, and gross margin (gross profit as a percentage of net revenue) was 12.7% during 2019, as compared to 14.2% during 2018. Cost of Products Sold of Vinyls Unit Cost of products sold of the Vinyls Unit increased by 5.5%, or R$160.9 million, to R$3,069.3 million in 2019, from R$2,908.4 million in 2018, primarily due to the transition from an integrated business model to a temporary model based on imports of EDC, which has a higher cost than the integrated business model. 102
___________ (1) Source: External consulting (spot price). Our Vinyls Unit presented a gross loss of R$376.5 million during 2019, compared to a gross profit of R$259.0 million during 2018, with a gross margin of 8.2%. Cost of Products Sold of USA and Europe Unit Cost of products sold of the USA and Europe Unit decreased by 10.0%, or R$918.8 million, to R$8,233.1 million in 2019, from R$9,152.8 million in 2018, which was the result of: (1) the increased availability of propylene in the United States due to the high utilization rates of PDH plants and the higher use of natural gas liquids in crackers, and (2) the normalization of logistics constraints on propylene in Europe, which affected the region in the previous year due to low river levels.
___________ (1) Source: External consulting (spot price). (2) Average prices weighted based on Braskem’s capacity production: PP USA (72%) and PP Europe (28%). Gross profit of the USA and Europe Unit decreased by 29.6%, to R$1,811.2 million during 2019, from R$2,571.9 million during 2018, and gross margin (gross profit as a percentage of net revenue) decreased to 18.0% during 2019, from 21.9% during 2018. Cost of Products Sold by Mexico Unit Cost of products sold by the Mexico Unit increased by 7.3%, or R$170.2 million, to R$2,504.0 in 2019, from R$2,333.8 million in 2018, due to the impact of the Brazilianreal depreciation, higher sales volume and higher natural gas prices in the Mexican market, which was partially offset by the drop in U.S. ethane prices due to higher supply associated with the startup of new gas fractionators and pipelines for transportation and with the delays in the startup of new petrochemical complexes in the United States.
__________ (1) Source: External consulting (spot price). During 2019, the Mexico Unit recorded a gross profit of R$547.4 million and gross margin (gross profit as a percentage of net revenue) of 17.9%. During 2018, the Mexico Unit recorded a gross profit of R$1,436.7 million and gross margin of 38.1%. Selling and Distribution Expenses Selling and distribution expenses increased by 5.6%, or R$94.3 million, to R$1,783.5 million in 2019, from R$1,689.2 million in 2018, primarily as a result of: (1) higher exports sales of resins and main chemicals of our Polyolefin and Chemical Unit, (2) higher sales volumes of our USA and Europe Unit, (3) higher exports sales from our Mexico Unit. 103 (Loss) reversals for impairment of accounts receivable (Loss) reversals for impairment of accounts receivable decreased to a loss of R$7.1 million in 2019, from a reversal of R$87.0 million in 2018. For more information related to our (loss) reversals for impairment of accounts receivable, see note 7(i) to our audited consolidated financial statements included elsewhere in this annual report. General and Administrative Expenses General and administrative expenses increased by 24.0%, or R$431.0 million, to R$2,224.2 million in 2019, from R$1,793.2 million in 2018, primarily as a result of higher expenses with: (1) consulting and legal fees to support the external monitorship related to our Global Settlement with certain authorities; (2) auditing firms; and (3) the cooperation with relevant authorities and the local community in relation to the geological event in certain neighborhoods of the city of Maceió, in the state of Alagoas, Brazil, that are located adjacent to and above the area where our salt mining activities were located. Research and Development Expenses Research and development expenses increased by 13.0%, or R$28.5 million, to R$247.7 in 2019, from R$219.3 million in 2018. Research and development expenses as a percentage of net revenue were 0.5% during 2019, as compared to 0.4% during 2018. Results from Equity Investments Results from equity investments increased to an income of R$10.2 million in 2019, from a loss of R$0.9 million in 2018, as a result of an increase in the results of jointly-controlled investments, primarily Refinaria de Petróleo Rio-Grandense S.A., or RPR, and Borealis Brasil S.A., or Borealis. For more information related to our results of equity investments, see note 11(c) to our audited consolidated financial statements included elsewhere in this annual report. Other Income Other income increased by 134.5%, or R$1,381.2 million, to R$2,408.4 million in 2019 from R$1,027.2 million in 2018, which was the result of an increase of R$1,667.8 million in the provision related to the Federal Supreme Court (STF) decision that ICMS tax should not be included in the calculation base of PIS/COFINS. For more information related to the PIS/COFINS exclusion from the ICMS tax basis calculation, see note 10(c) to our audited consolidated financial statements included elsewhere in this annual report. Other Expenses Other expenses increased by R$3,892.2 million, to R$4,446.9 million in 2019 from R$554.7 million in 2018, due to: (1) provisions related to the Financial Compensation and Support for Relocation Program, Business Recovery and Promotion of Educational Activities Program and the actions required to close certain of our salt wells totaling R$3,383.1 million; (2) the provision related to the leniency agreement with the Office of the Federal Controller General (CGU) and the Office of the Attorney General (AGU) (the “CGU/AGU Agreement”) in the amount of R$409.9 million; (3) the provision to permanently close our chlor-alkali production facility located in Camaçari, in the state of Bahia, Brazil, in the amount of R$172.9 million; and (4) an increase of R$52.1 million, or 58.3%, in the provision for remediation of environmental damage. Operating Profit As a result of the foregoing:
104
Financial Results Financial expenses, net increased by 1.7%, or R$81.3 million, to R$4,756.8 million in 2019, from R$4,675.5million in 2018. Financial Expenses Financial expenses increased by 29.1%, or R$875.2 million, to R$3,882.8 million in 2019, from R$3,007.6 million in 2018 due to: (1) the interest linked to the adoption of the new IFRS 16 standard as from January 1, 2019; (2) the adjustment to present value of the leniency agreement as a result of a change in the index of monetary correction applicable to the installments payable to the Federal Public Ministry, from IPCA to Selic, in the amount of R$117.9 million; and (3) the payment of costs related to the full redemption of notes maturing in 2020 and 2021 and the partial redemption of notes maturing in 2022 and 2023. Financial Income Financial income increased by 44.4%, or R$261.5 million, to R$850.6 million in 2019, from R$589.1 million in 2018, mainly due to the recognition of revenue related to PIS and COFINS claims originated in previous years ruled favorably by tax courts. Exchange variations, net Net exchange variations decreased by 23.6%, or R$532.5 million, to R$1,724.5 million in 2019, from R$2,257.0 million in 2018, explained by the effect of a lower Brazilianreal depreciation against the U.S. dollars in the period on the net exposure of the financial result not designated for hedge accounting, and by the expense with the transition to hedge accounting of exports of Braskem and Braskem Idesa, which were previously recorded under shareholders’ equity, in the amount of R$1,652.3 million during 2019, compared to R$1,259.4 million during 2018. Current and deferred Income Tax and Social Contribution Our income tax and social contribution was a benefit of R$1,962.7 million during 2019, as compared to an expense of R$736.6 million during 2018. The effective tax rate applicable to our profit before income tax and social contribution was a negative rate of 42.6% in 2019, as compared to an effective tax rate applicable to our profit before income tax and social contribution of 20.4% in 2018. (Loss) profit for the year As a result of the foregoing, we recorded a loss of R$2,640.4 million during 2019, compared to a profit of R$2,868.2 million, or 4.9% of net revenue, during 2018. 105 Year Ended December 31, 2018 Compared with Year Ended December 31, 2017 The following table sets forth ourauditedconsolidated financial information for the years ended December 31, 2018 and 2017.
n.m.: Not meaningful Net Net In 2018 and 2017, we did not have any revenue arising from transactions with any single client that was equal to or greater than 10% of its total net Net Net Net In 2018, net 106 Sales Volume in Brazil. The table below sets forth our Chemicals Unit’s internal transfers, mainly ethylene to the Vinyls Unit and ethylene and propylene to the Polyolefins Unit, by volume for the periods indicated.
The table below sets forth our Chemicals Unit’s sales in Brazil to third parties by volume for the periods indicated:
(1) BTX is defined as benzene, toluene and para-xylene. Net Net Sales Volume from Exports. Our Chemicals Unit’s volume of export sales decreased 31%, to 570.7 ktons in 2018 from 824.6 ktons in 2017, mostly in propylene and BTX, primarily due to the lower availability of product since Braskem’s crackers operated at an average capacity utilization rate of 91%, down 3 p.p. from 2017. The decrease in the capacity utilization rate was mainly explained by the: (i) truckers’ strike that took place in Brazil in May of 2018; (ii) incident involving the chlor-alkali plant in Alagoas in January of 2018; (iii) blackout that affected Brazil’s Northeast plants in March of 2018; and (iv) lower demand in the fourth quarter of 2018. The table below sets forth our Chemicals Unit’s export sales by volume for the periods indicated:
(1) BTX is defined as benzene, toluene and para-xylene. 107 Net Net Net Net Sales Volume in Brazil. In 2018, sales volume in Brazil decreased 1.0%, to 2,932 ktons in 2018, from the (i) truckers’ strike that took place in Brazil in May of 2018; (ii) blackout that affected Brazil’s Northeast plants in March; and (iii) lower demand in the fourth quarter of 2018.
Net Our Polyolefins Unit’s net Sales Volume from Exports. Our Polyolefins Unit’s volume of export sales decreased 12.6% The table below sets forth our Polyolefins Unit’s export sales by volume for the periods indicated:
Net Net 108 Net Net Sales Volume in Brazil. Our Vinyls Unit’s volume of sales in Brazil decreased 6.8% to 490.1 ktons in 2018 from 525.7 ktons in 2017.
Net Our Vinyls Unit’s net
Sales Volume from Exports. Our Vinyls Unit’s volume of export sales decreased by 44.5%, to 45 kton in 2018 from 82 kton in 2017, despite the lower volume, Braskem continued to export PVC to offset the Brazilian market.
Net Net Net Net Cost of Products Sold and Gross Profit Cost of products sold increased by Consolidated gross profit decreased by 109 Cost of Products Sold of Chemicals Unit Cost of products sold of the Chemicals Unit increased by Gross profit of the Chemicals Unit decreased by Cost of Products Sold of Polyolefins Unit Cost of products sold of the Polyolefins Unit increased by Gross profit of the Polyolefins Unit decreased by Cost of Products Sold of Vinyls Unit Cost of products sold of the Vinyls Unit increased by Gross profit of the Vinyls Unit decreased by
Cost of Products Sold of USA and Europe Unit Cost of products sold of the USA and Europe Unit increased by Gross profit of the USA and Europe Unit increased by Cost of Products Sold by Mexico Unit Cost of products sold by the Mexico Unit increased by 11.3%, or R$ During 2018, the Mexico Unit recorded a gross profit of R$1,436.7 and gross margin of 38.1%. During 2017, the Mexico Unit recorded a gross profit of R$1,503.3 million and gross margin of Selling and Distribution Expenses Selling and distribution expenses increased by (Loss) reversals for impairment of accounts receivable (Loss) reversals for impairment of accounts receivable corresponded to a reversal of R$87.0 million in 2018 due to proceeds received from customers, from a loss of R$13.5 million in 2017 relating to an allowance for doubtful accounts recorded in that year. For more information related to our (loss) reversals for impairment of accounts receivable, see note 7(i) to our audited consolidated financial statements included elsewhere in this annual report. 110 General and Administrative Expenses General and administrative expenses increased by Research and Development Expenses Research and development expenses increased by Results from Equity Investments Results from equity investments decreased to a loss of R$0.9 million in 2018 from a gain of R$40.0 million in 2017, as a result of decrease in the results of jointly-controlled investments, primarily RPR and Borealis. For more information related to our results of equity investments, see note 11 to our audited consolidated financial statements included elsewhere Other Other Other expenses Other expenses decreased by 52.6%, or R$615.1 million, to R$554.7 million in 2018 from R$1,169.8 million in 2017 as a result of lower: (i) expenses from fixed assets; (ii) provision of legal and labor lawsuits; and (iii) provision for repair environmental damage. Operating Profit As a result of the foregoing:
Financial Results Financial expenses, net increased by 18.6%, or R$733.1 million, to R$4,675.5 million in 2018 from R$3,942.4 million in 2017, primarily as a result of our recording of a R$2,257.0 million loss in exchange rate variation, net in 2018 compared to a R$798.8 million loss in exchange rate variation, net in 2017, mainly due to the Brazilianrealdepreciation in the period on the net exposure of the financial result not designated for hedge accounting, and by the expense with the transition to hedge accounting of exports of Braskem and Braskem Idesa, which previously were recorded under shareholders’ equity.
Braskem holds net exposure to the U.S. dollar (i.e., more USD-pegged liabilities than USD-pegged assets). At the end of 2017, this net exposure was formed: (i) in the operations, by 56% of suppliers, which was offset by 66% of accounts receivable; and (ii) in the capital structure, by the higher exposure of net debt to the U.S. dollar. Since
As of December 31, 2017, Braskem held put options in the amount of US$1.4 billion, with an average strike price of 2.96 R$/US$. Braskem also held a total notional value of short options in call option contracts in the amount of US$926 million, with an average strike price of R$4.32. The operations have a maximum term of 18 months. Such operations were designed for the hedge accounting of cash flows as from January 1, 2017, and seek to hedge future exports denominated in USD with maturities in months coinciding with the maturity of the derivatives. Financial Income Financial income decreased by Financial Expenses Financial expenses Current and Income Tax and Social Contribution Our income tax and social contribution expense 112
As a result of the foregoing, we recorded a profit of R$2,868.2 million, or 4.9% of net revenue, during 2018, compared to a profit of R$3,915.8 million, or 7.9% of net Liquidity and Capital Resources Our principal cash requirements for
During
As of December 31, As of December 31, Projected Sources and Uses of Cash Considering our short-term contractual obligations and commitments as of December 31, We have commitments from several financial institutions to provide us with financing in the future, In May 2018, in line with our commitment to maintain financial liquidity, we and several of our subsidiaries entered into an international revolving credit facility with several international financial institutions for a principal amount of US$1,000.0 million, which matures in May 2023. This line of credit may be used without restrictions to improve our credit quality or in the event of a deterioration in the macroeconomic scenario. As of the date of this annual report,we have borrowed the amount of R$5,426.3 million (US$1,000.0 million) on this credit 113 In July 2018, Braskem America entered into a credit facility with Euler Hermes, a German export credit agency, in the aggregate principal amount of up to R$1,220.9 million (US$225.0 million) to finance a portion of the investments in our new PP plant in the United States. As of December 31, 2019, R$973.5 million (US$179.4 million) had been disbursed in principal amount, and the amount outstanding under the credit facility was R$1,011.5 million (US$186.4 million). In December 2018, we entered into a new credit facility with BNDES, in the aggregate principal amount of R$476.0 million, maturing in January 2031, with proceeds used to finance our capital expenditures in Brazil. As of December 31, 2019, the outstanding amount under this facility was R$270.5 million. Cash Flows The following table sets forth certain consolidated cash flow information for the periods indicated:
Cash Flows generated by Operating Activities Net cash provided by operating activities was R$2,265.3 million during 2019, R$9,250.4 million during 2018 and R$2,461.6 million during
During 2019, the effects of these factors were partially offset by the:
During 2019, the effects of these factors were partially offset by the: Net cash provided by operating activities increased by R$6,788.8 million during 2018, as compared to 2017, as a result of:
During 2018 the effects of these factors were partially offset by:
Cash Flows Used in Investing Activities Net cash used in During During
During Cash Flows Used in Financing Activities Net cash provided by financing activities was R$1,636.8 million during 2019, as compared to a net cash used in During 2019:
115
During 2019, we used cash to pay:
In addition, in 2019 we used cash to pay dividends in the aggregate amount of R$ During 2018:
During 2018, we used cash to pay:
During 2017: 116
During 2017, we used cash to pay:
In addition, in 2017 we used cash to pay dividends in the aggregate amount of R$998.9 million.
Unless our board of directors deems it inconsistent with our financial position and the decision of our board of directors is ratified by our shareholders, payment of dividends is mandatory under Brazilian Corporations Law and our by-laws and also is required under agreements with two of our shareholders and, consequently, may give rise to significant cash requirements in future periods.
Contractual Commitments The following table summarizes significant contractual obligations and commitments as of December 31,
In May 2018, we and several of our subsidiaries entered into a revolving credit facility agreement with several international financial institutions for a principal amount of
117
Indebtedness and Financing Strategy As of December 31, Our short-term indebtedness outstanding as of December 31, 2019 was R$1,566.0million, including the current portion of long-term indebtedness (4.0% of our total indebtedness) and the amount of R$744.4 million in connection with thesecureddebt related to our Mexico Complex. Our long-term indebtedness outstanding as of December 31, 2019 was R$37,707.3million (96.0% of our total indebtedness), including the amount of R$9,237.3 million in connection with thesecureddebt related On a consolidated basis, ourreal-denominated indebtedness as of December 31,
The following table presents information relating to our debt maturity profile as of December 31,
Short-Term Indebtedness Our consolidated short-term debt, including current portion of long-term debt, was R$
Long-Term Indebtedness Our long-term indebtedness outstanding as of December 31, 2019 was R$37,707.3million (96.0% of our total indebtedness), including the amount of R$9,237.3 million in connection with thesecureddebt related to our Mexico Complex. 118 Our principal sources of long-term debt are:
Some of these instruments contain other covenants that could restrict, among other things, our and most of our subsidiaries ability to incur liens or merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of our assets. In addition, As of December 31, In October 2019, our finance subsidiary Braskem Netherlands Finance B.V. issued R$8,139.5 million (US$1,500.0 million) in aggregate principal amount of 4.500% notes due 2030 and R$4,069.7 million (US$750.0 million) in aggregate principal amount of 5.875% notes due 2050. The proceeds of the issuance were used primarily to repay certain of our outstanding debt. In November 2019, we issued R$550.0 million in aggregate principal amount of promissory notes due 2024. The proceeds from the promissory notes issuance were used primarily to repay certain of our outstanding debt, including our notes maturing in 2020 and 2021, and for a partial repayment of our notes maturing in 2022 and 2023. As of December 31,
Fixed-Rate Notes Denominated in U.S. Dollars We have issued fixed-rate debt securities in the international market. All of these securities pay interest semi-annually in arrears, except for our perpetual bonds on which interest is payable quarterly in arrears. The table below sets forth our outstanding fixed-rate debt securities, the outstanding
(1) Represents notes issued by Braskem Finance Limited and guaranteed by Braskem. (2) Represents notes issued by Braskem Netherlands Finance and guaranteed by Braskem. (3) Represents notes issued by Braskem America Finance and guaranteed by Braskem. 119
We have
Credit Facilities with Governmental Agencies Denominated in U.S. Dollars In March 2017, we entered into a credit facility secured by NEXI, a Japanese export credit agency, in an aggregate principal amount of R$732.6 million (US$135.0 million). This facility bears interest at a rate equivalent to LIBOR plus 1.61% per year, payable semi-annually to maturity in March 2027. The principal amount is amortized in 20 successive semi-annual installments beginning in September 2017. As of December 31, 2019, the outstanding amount under this facility was R$616.4 million (US$113.6 million). In July 2018, Braskem America entered into a credit facility with Euler Hermes, a German export credit agency, in the aggregate principal amount of up to R$1,220.6 million (US$225.0 million) to finance a portion of the investments in our In November 2018, we entered into a credit facility secured by SACE, an Italian export credit agency, in an aggregate principal amount of US$295.1 million. This facility bears interest at a rate
outstanding amount under this facility was R$1,445.0 million (US$266.3 million). In December 2019, we entered into a credit facility secured by SACE, in an aggregate principal amount of R$813.9 million (US$150.0 million). This facility bears interest at a rate equivalent to LIBOR plus 0.90% per year, payable semi-annually to maturity in December 2029. The principal amount is payable in 20 successive semi-annual installments beginning in June 2020. As of December 31, 2019, the outstanding amount under this facility was R$368.4 million (US$67.9 million).
(1) Amortization on this facility commenced in September 2017. (2) Amortization on this facility will commence in November 2020. (3) Amortization on this facility commenced in May 2019. (4) Amortization on this facility will commence in June 2020. Credit Facilities with
maturity until January2031. The 120 The table below sets forth selected information with respect to our BNDES
(2) Amortization on this facility will commence in February 2021. The credit Revolving Credit Facility In May 2018, we and
On April 8, 2019, we entered into a credit facility with international institutions in the aggregate principal amount of R$436.3 million (US$80.4 million) with a term of seven years. To consummate this facility, certain assets of the Company’s plants were transferred to the financial institutions and, by the maturity date, Braskem has the option to repurchase them for a residual value. In accordance with IFRS15, this transfer is not considered a sale. This facility bears interest at a rate equivalent to LIBOR minus 1.00% per year, payable semi-annually to maturity in April 2026. The principal amount is payable in successive semi-annual installments beginning in September 30, 2019. As of December 31, 2019, the outstanding amount under this facility was R$368.4 million (US$67.9 million). In
Credit Facilities with Banks Denominated in In
121 Indebtedness of Braskem Idesa
In December 2012, Braskem Idesa entered into a common terms agreement with certain financial institutions to finance the development, design, construction and initial operation of the Mexico Complex. The Mexico Complex includes an ethane cracker with annual capacity of 1.05 million tons to produce ethylene, two high density polyethylene plants and a low density polyethylene plant. In connection with the common terms agreement, Braskem Idesa entered into eight separate financing agreements with international and Brazilian financial institutions and development banks in an aggregate principal amount of up to US$3.2 billion, or the Braskem Idesa Financing. All amounts disbursed under these credit facilities are secured by our shares in Braskem Idesa. In addition, as a condition precedent to the initial disbursement and each subsequent disbursement, Braskem Idesa was required to have a maximum debt to base equity ratio of 70 to 30 after giving effect to such disbursement, as calculated pursuant to the common terms agreement. In September 2015, Braskem Idesa received the final disbursement pursuant to the common terms agreement, reaching an aggregate principal amount of On November 25, 2019, Braskem Idesa issued R$4,883.7 million (US$900.0 million) in aggregate principal amount of 7.450% senior secured notes due 2029.The notes are senior secured obligations of Braskem Idesa and rankpari passu with the existing Braskem Idesa project finance debt until the full repayment of the outstanding amount of the Braskem Idesa project finance facility. After the full amortization of the outstanding amount of the Braskem Idesa project finance facility, Braskem Idesa’s notes will convert into senior unsecured notes. Interest on the notes is payable semi-annually, and the principal amount becomes due at maturity. The proceeds of the notes were used to partially refinance Braskem Idesa’s existing secured project finance indebtedness incurred in 2012 to construct a plant in Mexico. Excess proceeds of the issuance were used to prepay certain other indebtedness of Braskem Idesa.
(1) Represents notes issued by Braskem Idesa. Capital Expenditures
Capital Expenditure Budget We plan to invest R$ Of the total investment, R$ 122 Braskem Idesa plans to invest Joint Venture Mexico Complex Braskem and Idesa formed Braskem Idesa in April 2010 to develop, construct and operate the Mexico Complex, located in the Mexican state of Veracruz. The Mexico Complex includes an ethylene cracker that produces 1.05 million tons of ethylene per year from ethane based on technology licensed from Technip Italy S.p.A, or Technip, Braskem Idesa is party to an ethane supply agreement with Pemex TRI dated February 19, 2010, pursuant to which Pemex TRI is obligated to provide, and Braskem Idesa to purchase, 66,000 barrels per day of ethane to the Mexico Complex for a period of 20 years at prices based on U.S. dollar-based international reference price of these feedstocks. Under this agreement, any daily amount rejected by Braskem Idesa must be purchased in installments in subsequent deliveries until the deficit has been resolved. This contract will expire in 2035 and is renewable for three five-year periods, with prior notice by The ethane supply agreement contains a volume delivery long-term performance covenant that requires Pemex TRI to meet a volume delivery of ethane over a six-month period averaging 70% of the agreed-upon volume under the ethane supply agreement (the “Long-Term Performance Test”). As of January
In February 2010, we and Idesa entered into the Braskem Idesa shareholders’ agreement to govern our relationship with respect to Braskem Idesa, which was amended in November 2012, December 2012, April 2015, and April 2017. The Braskem Idesa shareholders’ agreement, as amended, sets forth the understanding of the parties regarding the implementation of this project and the relationship of Braskem and Idesa as shareholders of Braskem Idesa. Under the Braskem Idesa shareholders’ agreement, as amended:
123
The Braskem Idesa shareholders’ agreement also contains rights of first refusal, tag along rights and drag along rights in connection with the disposition of Braskem Idesa shares. The original estimated total cost of the Mexico Complex of US$4.5 billion, including financial costs during construction and initial working capital requirements, was revised in 2015 to US$5.2 billion primarily as a result of (1) a change in the scope of the power generating unit in order to ensure the self-sufficiency of the complex and improve the reliability of energy supply, with the possibility of selling any surplus energy to the grid; and (2) additional costs arising from infrastructure and local services. We and Idesa contributed an aggregate of 38% of the total costs as equity in proportion to our ownership interests in Braskem Idesa, and the remainder was borrowed by Braskem Idesa under project finance facilities secured by the assets of this project, with multilateral credit agencies, export credit agencies, development banks and private banks. Construction of the Mexico Complex began in 2012 and it commenced operations with the production of the first batch of polyethylene in April 2016. Although our Mexico Complex is fully operational and Braskem Idesa has satisfied and continues to satisfy its debt service requirements and all other payment obligations under its On November 25, 2019,Braskem Idesa
Equity Support Agreement Relating to the Mexico Complex In December 2012, we, Braskem Idesa, Etileno XXI, S.A. de C.V., and Idesa entered into an equity support agreement pursuant to which Braskem Idesa’s shareholders agreed to make and guarantee payment of certain equity contributions to Braskem Idesa. This contract was amended and restated in April 2015. Pursuant to the amended and restated equity support agreement, the parties assumed a base equity commitment of US$2.0 billion in proportion to their percentage ownership, direct or indirect, in Braskem Idesa (Braskem 75% and Idesa 25%), which has been fully contributed into Braskem Idesa. The shareholders have also assumed the obligation of making certain contingent equity contributions to cover any additional amounts necessary to complete the project. To develop our Mexico Complex, Braskem Idesa required significant capital expenditure and incurred significant debt. The ability of Braskem Idesa’s shareholders to comply with the obligation to make certaincontingent equity contributions to cover additional amounts necessary to complete the project, as agreed in the equity support agreement in connection with the project finance facility,could affect the operation of the Mexican Complex. See “Risk Factors—Risks Relating to Us and the Petrochemical Industry—We may face unforeseen challenges in the operation of our Mexico Complex, which could result in this business unit failing to provide expected benefits to us.” 124 Amendments to Braskem Idesa Shareholders’ Agreement Relating to Project Ethylene XXI In February 2010, Braskem and Idesa entered into a shareholders’ agreement, which we refer to as the Braskem Idesa shareholders’ agreement, to govern our relationship with respect to Braskem Idesa. In November 2012, Braskem and Idesa entered into the first amendment to the Braskem Idesa shareholders’ agreement, under which our ownership interest in Braskem Idesa was increased to 75% minus one share of the equity interest in Braskem Idesa and Idesa’s ownership interest in Braskem Idesa was reduced to 25% plus one share of the equity interest. In December 2012, we and Idesa entered into the second amendment to the Braskem Idesa shareholders’ agreement to include the commitment of both Sponsors to fund certain primary and secondary contingent equity to the project. In April 2015, we and Idesa entered into the third amendment to the Braskem Idesa shareholders’ agreement to include additional base equity contribution and reaffirm the new commitments of contingent equity, under which we agreed to fund up to 100% of the contingent equity commitment under the equity support agreement up to start-up date. The primary contingent equity commitment is US$208 million. Finally, in April 2017, we and Idesa amended and restated the Braskem Idesa shareholders’ agreement to update the terms to reflect the progress of the enterprise since the original signing in 2010 and to reflect the understanding among the shareholders as to the shareholders’ rights and obligations in connection with the payment of fees and interest by Idesa related to any funding by Braskem of Idesa’s portion of contingent equity or the working capital needs of Braskem Idesa, and the eventual dilution of Idesa’s equity interests in Braskem Idesa as a result of the same. Other Investments UTEC® Project Our new production line of ultra-high molecular weight polyethylene (UHMWPE), commercially known as UTEC® began its operation in January 2017. Located in the city of La Porte, state of Texas, in the United States, the production from this plant The main market for the production of the La Porte UTEC® plant is the North-American market, but we Raw material flexibility project in Bahia Aligned with our strategy, which looks for alternatives sources of raw materials to increase its global competitiveness, in November 2017, the flexibilization for production of up to 15% of ethylene using ethane as raw material began in the petrochemical complex in Bahia.
For the raw material supply, we signed an agreement for the purchase of ethane from the United States from an affiliated company of Enterprise Products. The term of the agreement is of 10 the years, and the price is based on the international reference of Mont Belvieu. R$380 million have been invested in the technological adaptation of the Chemicals Unit in Camaçari, in the pipeline and in the adaptation of the logistics infrastructure of the Dock-Terminal of Aratu, in Candeias.
New PP plant in the United States Aligned with the strategy to diversify the raw materials matrix and geographic expansion in the Americas, reinforcing the leadership in the PP production in the United States, our Board of Directors approved, on June 125 With an approved investment of up to US$
Braskem America entered into a credit facility in the amount of up to Energy efficiency project in our cracker at the São Paulo Complex To improve energy efficiency and competitiveness of the cracker at the São Paulo Complex, Braskem and Siemens will invest approximately R$600 million to improve the thermoelectric system of the unit at the complex by replacing some of the steam-powered turbines with high-efficiency electric engines supported by a new co-generation plant that will consume the residual gas from the unit’s own production process. To enable the investment by Siemens in the new co-generation plant, Braskem signed an agreement with Siemens for a term of 15 years under a build, own and operate model. With startup expected in 2021, the project will not only reduce the site’s energy consumption, but also reduces the cracker’s water consumption by 11.4% and its greenhouse gas emissions by 6.3%. As of the date of this annual report, R$72.2 million (US$13.3 million) was already invested and the project was approximately 11% complete. Technology change at our chlor-alkali facility in Alagoas We are investing R$59.3 million in a project at our chlor-alkali facility located in the district of Pontal da Barra, in Maceió, in the state of Alagoas, which aims to change the raw material processing from brine to sea salt. With this project, we will be able to resume operations of our chlor-alkali and dichloroethane plants in the region that have been suspended since May 2019 following the developments stemming from the publication of Report no. 1 by the Brazilian Geological Service (CPRM). See “Item 3. Key Information—Risk Factors—Our business and operations are inherently subject to environmental, health and safety hazards. As a result, our business is also subject to stringent environmental and other regulations.” The new technology consists of sourcing salt from third parties. Salt could be sourced from the Northeast region of Brazil by road or imported from other regions using the port of Maceió, which is located near the chlor-alkali facility. Salt sourced from third parties would be initially stored, dissolved into water to produce brine, treated and then sent to be processed in the chlor-alkali facility. As of the date of this annual report, R$115.0 million (US$21.2 million) had already been invested. Fast-Track Solution to import ethane for the Braskem Idesa facility in Mexico Braskem Idesa is investing in logistics infrastructure to import ethane from the United States to increase the capacity utilization rate of its cracker. With regard to ethane supply, Braskem Idesa is currently negotiating and may enter into a long-term agreement, or opt to acquire ethane in the spot market. To ensure the feasibility of the Fast-Track Solution, Braskem Idesa executed agreements with Smart Pass, a logistics operator, and with Enestas, a company specializing in cryogenic gas transportation. Smart Pass will be responsible for receiving liquid ethane at the docks of the Port of Coatzacoalcos and unloading it from the vessels in cryogenic tanks. Enestas will transport the ethane by truck to the Braskem Idesa petrochemical complex, where the ethane will be stored in existing tanks and regasified for use in the production process. 126 With an approximate investment of R$22 million (US$4 million), this complementary solution for acquiring feedstock will make it possible to import up to 12,800 barrels per day of ethane to the Petrochemical Complex in Mexico, which represents 19% of its ethane needs. In February 2020, Braskem Idesa imported its first shipment of ethane. In addition, Braskem Idesa continues to assess a complementary solution for larger-scale ethane imports whose scope consists of building a terminal for importing ethane and a pipeline to transport it to its petrochemical complex. For additional information, particularly relating to the risks associated with this project, please see “Item 3. Key Information—Risk Factors—Risks Relating to Mexico—If we fail to develop an alternative source of ethane, it may have a negative impact on our business because we cannot operate our Mexico Complex at full capacity.”. Off-Balance Sheet Arrangements We do not currently have any transactions involving off-balance sheet arrangements. Item 6. Directors, Senior Management and Employees Directors and Senior Management Our board of directors (conselho de administração) and our board of executive officers (diretoria) are responsible for operating our business. Board of Directors of Braskem Our by-laws provide for a board of directors of eleven members and eleven alternate members. During periods of absence or temporary unavailability of a regular member of our board of directors, the corresponding alternate member substitutes for the absent or unavailable regular member. Our board of directors is a decision-making body responsible for, among other things, determining policies and guidelines for our business and ourwholly-owned subsidiaries and controlled companies. Our board of directors also supervises our board of executive officers and monitors its implementation of the policies and guidelines that are established from time to time by the board of directors. Under the Brazilian Corporations Law, our board of directors is also responsible for hiring independent accountants.
The members of our board of directors are elected at general meetings of shareholders for two-year terms and are eligible for reelection. The terms of all current members expire at our annual shareholders’ meeting scheduled for 2020. Members of our board of directors are subject to removal at any time with or without cause at a general shareholders’ meeting. Our by-laws do not contain any citizenship or residency requirements for members of our board of directors and the members of our board of directors need not to be our shareholder. Our board of directors is presided over by the Our board of directors ordinarily meets eleven times a year and extraordinarily whenever necessary and called by the chairman, the vice-chairman or any two other members of our board of directors. Decisions of our board of directors require a quorum of a majority of the directors and are taken by majority vote, other than certain actions which require the consensus of the nominees of Odebrecht and Petrobras under the Braskem S.A. Shareholders’ Agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders’ Agreements—Braskem S.A. Shareholders’ Agreement.” The following table sets forth certain information with respect to the current members of our board of directors and their alternates as of the date of this annual report:
(1) Independent director. 127 The following is a summary of the business experience, areas of expertise and principal outside business interests of our current directors and their alternates. Directors
João Cox Neto.Mr. Neto was elected as a member of our Board of Directors after nominated by the shareholder Petróleo Brasileiro – Petrobras. Currently, he serves as Chairman of the Board of Vivara S.A. and as a member of the Board of Directors of Embraer S.A., Petrobras S.A.
Roberto Lopes Pontes Simões.Mr. Simões Gesner José de Oliveira Filho.Mr. Oliveira Filhois an independent director and was appointed to our board of directorsby Odebrecht. Mr. Oliveira is certified by the Brazilian Institute of Cooperative Governance. He is currently a member of the board of directors of TIM, chairman of Estre, member of the board of directors of Iguá and Instituto Iguá, a member of the Self-regulation Council of FEBRABAN, member of the Advisory Board of ETCO, CIEE and the Muktistakeholder Council of the Less Loss, Less Water Movement. Partner of GO Associados, Professor at EAESP/FGV, Coordinator of the Economics Group of Infrastructure & Environmental Solutions of FGV. Between 2007 and 2010, he was the President of Sabesp – Sanitation Company of the State of São Paulo. He has also acted as a Consultant in a project for the World Bank, for institutional analysis of a sanitation company in Dhaka, Bangladesh, in 2012. Mr. Gesner Oliveira graduated with a degree in Economics from the School of Economics and Administration of Universidade de São Paulo – FEA/USP, with a Master’s degree in Economics from the Economics Institute of Universidade Estadual de Campinas (UNICAMP) and Ph.D. in Economics from University of California, Berkeley. Pedro Oliva Marcilio de Sousa Roberto Faldini.Mr. Faldini was elected
João Pinheiro Nogueira Batista. Mr. Batista was elected to our board of directors as a nominee of Odebrecht. He has served for more than ten years on Boards of Directors of companies in Brazil. In the Odebrecht Group, he was an independent member of the Boards of Directors of Odebrecht Engenharia e Construção since June 2017 and Ocyan since April 2018, where he remained until January 2019, and joined the Board of Directors of Odebrecht S.A. in November 2018. In addition, currently he is a CEO of Evoltz
Julio Soares de Moura Neto
Andrea da Motta Chamma. Ms. Chama was elected as a member of our board of directors as a nominee of our shareholder Petróleo Brasileiro S. A. – Petrobras. Currently, she is a member of the board of directors and head of the People Committee of Fleury Group and an advisor and member of the advisory board specializing in fintech and blockchain startups at 3C Advisors. Previously, she served as Vice-Chairman and Head of Equity Sales of Bank of America Merrill Lynch and Executive Officer of Brokerage and Equity Sales at ABN Amro. Ms. Chamma holds a B.A. in business administration from the Alternate Directors
André Amaro da Silveira.Mr. Silveira was elected as an alternate member of our board of directors as a nominee of Odebrecht. He worked with Odebrecht Group from 1989 to 2018. Currently, he is a member of the boards of directors of Marcelo Rossini de Oliveira.Mr. Oliveira was elected as an alternate a member of our board of directors as a nominee of Odebrecht. Mr. Oliveira currently serves as the Treasury and IR Officer of Odebrecht S.A. From 2005 to 2018, he worked as a financial analyst, Capital Market and Operations Structure Manager and 130
Marcelo Mancini Stella.Mr. Mancini was elected as an alternate member of our board of directors as a nominee of Odebrecht. He has served as the Vice-President of Marketing and Sales of Ethanol, Sugar and Energy, Logistics, Supply and Business Development at Atvos since 2010. Previously, he held several positions at Braskem from 2002 to 2010, leading the Business Directorships of Polyethylene, Vinyls and Polypropylene. He worked for Pilkington Brasil Ltd. as Sales and Marketing Director from 1990 to 2002. Mr. Mancini holds a bachelor’s degree in production engineering from the Polytechnic School of the University of São Paulo and an MBA degree from the University of São Paulo - FIA. He also participated in the INSEAD Finance Program and the Marketing Program at Cranfield University.
José Marcelo Lima Pontes. Mr. Pontes was elected as an alternate member of our board of directors as a nominee of Odebrecht. Mr. Pontes is a professional journalist, with 34 years of experience at some of the main media outlets in Brazil, and 21 years of experience in corporate communication, six of which at Odebrecht. Guilherme Duarte Abud.Mr. Abud was appointed as an alternate member of our board of directors as a nominee of Odebrecht S.A. He is currenly a lawyer at Odebrecht S.A. Previously, he served as Chief Legal & Corporate Governance Officer at Enseada Industria Naval S.A. from 2012 to 2019 and as a lawyer at Construtora Norberto Odebrecht S.A. from 2008 to 2012 and at the law firm Machado Meyer Advogados from 2002 to 2008. Mr. Abud holds a degree in law from the Pontifical Catholic University of São Paulo (2006) and an LL.M. in corporate law from Insper (2008). Guilherme Simões de Abreu.Mr. Abreu was appointed as an alternate member of our board of directors as a nominee of Odebrecht S.A. He has served as Chief People, Communication & Organization Officer at Odebrecht S.A. since January 2020. From June 2018 to December 2019, he was executive secretary to the board of directors of Odebrecht S.A. From 2013 to March 2017, he held the position of People & Organization Manager at Odebrecht S.A. Board of Executive Officers of Braskem Our board of executive officers is our executive management body. Our executive officers are our legal representatives and are responsible for our internal organization and day-to-day operations and the implementation of the general policies and guidelines established from time to time by our board of directors. Our by-laws require that the board of executive officers consist of a chief executive officer and between three and nine additional members, each responsible for business areas that our board of directors assigns to them. The members of our board of executive officers, other than our chief executive officer and the general counsel, have no formal titles (other than the title of executive officer or “Director”) but have the informal titles set forth in the table below.
The members of our board of executive officers are elected by our board of directors for three-year terms and are eligible for reelection. The current term of all of our executive officers ends at the first board of directors meeting held immediately after our annual shareholders’ meeting to be held in 2021. Our board of directors may remove any executive officer from office at any time with or without cause. According to the Brazilian Corporations Law, executive officers must be residents of Brazil but need not to be our shareholders. Our board of executive officers holds meetings when called by our chief executive officer. 131 The following table lists the current members of our board of executive officers as of the date of this annual report:
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of our current executive officers:
Pedro Van Langendonck Teixeira de Freitas.Mr. Freitas is currently our chief financial officer, investor relations and external affairs officer. He previously served in our strategic planning area from 2011 to 2016. Prior to this, he was a strategy consultant, having participated in the construction of business strategies and mergers and acquisitions projects in various industries, including petrochemicals, agribusiness, consumer goods and pharmaceuticals. Mr. Freitas holds a degree in production engineering from the Polytechnic School of the University of São Paulo and an MBA degree from Insead. Cristiana Lapa.Ms. Lapa is currently our General Counsel and Corporate Governance officer. Ms. Lapa joined Edison Terra Filho. Mr. Terra is currently our head of polyolefins South America and Europe Unit. Mr. Terra joined Braskem in 2002 and has held positions in several areas, including marketing, supply chain and export and as leader of Small Enterprise Polyethylene, UNIB and quantiQ. Previously, he served in several positions at Rhodia from 1993 to 2002. Mr. Terra holds a bachelor’s degree in production engineering from Escola Politécnica da USP and a master’s degree in business administration from EAESP-FGV/SP.He also completed extension courses in Global Leadership at Wharton Business School and in Disruptive Technologies at Singularity University.
Marcelo Arantes de Carvalho.Mr. Carvalho is currently our head of people, communication, marketing and sustainable development. He has implemented organizational and human resources training programs, cultural change and leadership development programs and developed and implemented global strategies in the areas of human resources, information technology and procurement. Previously, Mr. Carvalho worked in global companies such as ABB, Unilever, Fiat Chrysler Automotive and Braskem. He has over 28 years of experience in the human resources, information technology and procurement areas in industries such as metallurgy, automation and power technology, telecommunications,automotive, consumer goods and petrochemical/chemical industries. Mr. Carvalho holds a degree in business administration, with specialization in business management, from Fundação Dom Cabral and a degree in global leadership from Wharton. Marcelo de Oliveira Cerqueira. Mr. Cerqueira is currently the head of the Chemicals and Vinyl Business. Mr. Cerqueira previously served as head of our Vinyls Unit from 2010 until October 2013, as industrial vinyls director from 2009 until 2010 and as production manager of our PVC production unit in the State of Bahia from 2003 until 2008. Previously he worked at Trikem in various capacities, including production manager of the PVC production unit in the State of Alagoas from 1997 until 2002. At Companhia Petroquímica Camaçari, he worked with the production logistics, health, safety and the environment and procurement engineering areas from 1989 until 1996. He began his career at Companhia Alcoolquímica Nacional and COPERBO (now Lanxess), where 132 Luiz Eduardo Valente Moreira.Mr. Moreira is currently our head of Investments & Portfolio. Mr. Moreira has 38 years of experience at Petrobras, in the following positions: Industrial Executive Manager from April 2018 to March 2019; Safety, Environment and Health Executive Manager from 2015 to 2018; Director of the Comperj Petrochemical Project from 2013 to 2015; Gas and Gas Chemical Energy and Liquefaction Manager (GE-GQL) from 2009 to 2013; General Manager of the Bahia Nitrogen Fertilizers Plant (FAFEN-BA) from 2008 to 2009; General Manager of the Henrique Lage Refinery (REVAP) from 2005 to 2008; General Manager of Refining Technology for Supply (AB-RE/TR) from 2001 to 2005; and Superintendent of the Presidente Getúlio Vargas Refinery (REPAR) from 1999 to 2000. Mr. Moreira holds a bachelor’s degree in chemical engineering from the Federal University of Rio de Janeiro (UFRJ) and a graduate degree in Petroleum Processes Engineering from the same university, as well as an Executive MBA degree from COPPEAD (UFRJ). Fiscal Council The Brazilian Corporations Law requires us to establish a permanent or non-permanent fiscal council (conselho fiscal). Our by-laws provide for a permanent fiscal council composed of five members and their respective alternate members. The fiscal council is a separate corporate body, independent of our management and our independent accountants. The members of our fiscal council are elected by our shareholders at the annual general shareholders’ meeting for one-year terms and are eligible for reelection. The terms of the members of our fiscal council expire at the next annual general shareholders’ meeting, which will be held in 2019. Under the Brazilian Corporations Law, the fiscal council may not contain members who are members of our board of directors or our board of executive officers or are employees or spouses or relatives of any member of our management. To be eligible to serve on our fiscal council, a person must be a resident of Brazil and either be a university graduate or have been an officer or fiscal council member of another Brazilian company for at least three years prior to election to our fiscal council. Holders of (1) preferred shares without voting rights and (2) non-controlling common shareholders that together hold at least 10.0% of our voting share capital are each entitled to elect one member and his or her respective alternate to the fiscal council. The responsibilities of a fiscal council are established by the Brazilian Corporations Law. In accordance with the Brazilian Corporations Law, our fiscal council has the right and obligation to, among other things:
As described in “Item 16D. Exemptions from the Listing Standards for Audit Committees,” we are relying on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3) under the Exchange Act.In order to comply with the requirements of this exemption, our board of directors has delegated to our fiscal council certain additional responsibilities and our fiscal council adopted rules under which our fiscal council has the duties and responsibilities of a U.S. audit committee to the extent permitted under Brazilian Corporations Law. Because Brazilian Corporations Law does not permit the board of directors to delegate responsibility for the appointment, retention and compensation of the external auditors and does not provide our board of directors or fiscal council with the authority to resolve disagreements between management and our external auditors regarding financial reporting, our fiscal council cannot fulfill these functions. Our fiscal council may only make recommendations to our board of directors and shareholders with respect to the appointment, retention and compensation of the external auditors, and with regard to resolution of disagreements between management and the external auditors, our fiscal council may only make recommendations to our board of directors and shareholders. Under the rules governing our fiscal council, our fiscal council has the following rights and obligations, among others, in addition to those established by the Brazilian Corporations Law:
The following table lists the current members of our fiscal council and their alternates: 134
The following is a summary of the business experience, areas of expertise and principal outside business interests of the current members of our fiscal council and their alternates. Members of Fiscal Council Ismael Campos de Abreu.Mr. Abreuwas elected a member of our fiscal council as representative of Odebrecht in 2003. He served in the period of April 2011 until May 2017, as director of Kieppe Participações and Administration Ltda., and as Controller of Odebrecht S.A., between 1995 and March 2011. Served as the manager of the tax Consulting Division of PricewaterhouseCoopers from 1978 to 1985, as controller of Corrêa Ribeiro S.A. Comércio e Indústria from 1986 to 1988, as manager of the consulting area of Arthur Andersen from 1989 to 1991 and as partner of Performance Auditoria e Consultoria from 1992 to 1995. Previously, he served as a member of the fiscal council of Petroflex Indústria e Comércio S.A. until the sale of our interest in Petroflex in April 2008. Between March 2006 and March 2008, he served as member of the fiscal council of Companhia Petroquímica do Sul. Mr. Abreu holds a degree in accounting from Fundação Visconde de Cairú and a graduate degree in economic engineering from the Inter-American Development Center. Gilberto
Carlos Alberto Rechelo Neto.Mr. Neto was elected as a member of our fiscal council by the shareholder Petróleo Brasileiro – Petrobras. Mr. Neto joined Petrobras in 2007, starting his career in the risk management of Oil & Energy assets and businesses. As Executive Manager for three years, he led the corporate risk management structuring process at Petrobras S.A and coordinated, as head of the Governance team, the corporate efforts to adjust internal policies and procedures in accordance with Federal Law 13,303/2016, which enabled Petrobras to obtain the highest score in the Governance Highlight certification process of the B3. Currently he is the Chief Financial Officer at Transportadora Brasileira Gasoduto Bolívia Brasil S.A. and Executive Officer at Petrobras Europe Limited (Petrobras’ trading company in London). Mr. Rechelo Neto holds a B.Sc. in Engineering, completed a non-degree program in Portfolio Management from Wharton, and received a master’s degree in Energy
135 Heloisa Belotti Bedicks. Ms. Bedicks was elected a member of our fiscal council by our non-controlling shareholders. She is Alternate Members of Fiscal Council Ivan Tatiana Macedo
136 Board Committees On August 8, 2018 our board of directors approved its internal operating rules, as well as the board committees bylaws. An English translation of the internal operating rules of our board of directors and its committees is available on our investor relations website atwww.braskem-ri.com.br. Under these rules, our board of directors has established four permanent committees and has the power to establish ad-hoc committees. Permanent committees must have no fewer than three and no more than five members. Ad-hoc committees may be convened for a limited period to consider temporary issues and are dissolved when their purpose has been achieved or when the term established upon the creation of such committees expires. The number of members of the ad-hoc committees is defined upon the creation of such committees.
In May 2016, our board of directors approved the constitution of a compliance committee, or the Compliance Committee, to monitor internal controls and risk exposure and to supervise the preparation of financial reports, without prejudice to the legal duties designated to our fiscal council. We currently have the following four permanent committees: (1) the Finance and Investments Committee, (2) the Personnel and Organization Issues Committee, (3) the Strategy and Communication Committee, and (4) the Compliance Committee. The duties of each permanent committee are established in their respective bylaws, all approved by our board of directors. The coordinators and the members of each permanent committee are appointed by the chairman of the board and approved by our board of directors, solely from among its members and alternate members. Our board of directors does not delegate the power to take actions on behalf of our 137 Finance and Investments Committee Our Finance and Investments Committee meets quarterly and has the following duties: (1) to evaluate new policies relating to financial management, insurance and guarantees and analyze existing policies, (2) to evaluate new risk management policies and analyze existing policies, (3) to analyze opportunities related to financing and investment transactions that may improve our capital structure, (4) to propose to the chairman the criteria for the annual assessment of the board and its support committees, and of the board secretariat and (5) to analyze guidelines and protocols for our business planning execution cycle. Our Finance and Investments Committee is currently composed of João Pinheiro Nogueira Batista Personnel and Organization Issues Committee Our Personnel and Organization Issues Committee conducts work meetings at least five times per year and has the following duties: (1) to evaluate new policies and review existing policies relating to personnel matters and organizational issues, (2) to analyze processes relating to identification, training, development and succession ofexecutives for or in strategic positions, (3) to analyze processes relating to the determination of fixed and variable compensation for executives in strategic positions, and (4) to evaluate new policies and review existing policies relating the maintenance and strengthening of our corporate culture. Our Personnel and Organization Issues Committee is currently composed of
Strategy and Communication Committee Our Strategy and Communication Committee meets quarterly and has the following duties: (1) to evaluate determinations relating to the foundation of our business plan, (2) to evaluate the business direction being pursued to achieve objectives defined by our board of directors, (3) to evaluate new policies and review existing policies relating to the capital markets and social responsibility, (4) to evaluate our image projected to and perceived in the market and make recommendations to our board of directors to maintain or to redefine our social communications programs, and (5) to analyze guidelines and protocols for our business planning and execution cycle. Our Strategy and Communication Committee is currently composed of Roberto Simões Compliance Committee
Our chief compliance officer, or CCO, reports directly to the coordinator of the Compliance Committee, and exercises independent judgment. Our CCO is responsible for developing a compliance system, assist the CEO in implementing the compliance system and continually monitor developments in this respect. The following is a summary of the business experience, areas of expertise and principal outside business interests of our CCO. Everson Bassinello. Mr. Bassinello has served as our CCO since August 2016 and has led our global initiatives related to risk management, internal controls, compliance and internal audit. He served in leadership positions at Companies of the Votorantim Group, including VCP and Fibria between June 2000 and July 2016. Mr. Bassinello holds a degree in mechanical engineering from Universidade Federal de Itajubá (UNIFEI), a graduate degree in business administration from Fundação Getúlio Vargas (FGV), an MBA degree from the Business School São Paulo (BSP) and a specialization degree in corporate governance from the Kellogg School of Management. Ethics Committee Our Ethics Committee supports our Compliance Committee with matters involving the violation of the commitment to Ethics, Compliance and Transparency. Our Ethics Committee is formed by our Chief 138 Compensation According to our by-laws, our shareholders are responsible for establishing the aggregate compensation we pay to the members of our board of directors, our board of executive officers and our fiscal council. Our shareholders determine this aggregate compensation at the general shareholders’ meeting each year. Once aggregate compensation is established, the members of the board of directors are responsible for distributing suchaggregate compensation individually to the members of our board of directors, our board of executive officers and our fiscal council in compliance with our by-laws.
Compensation and Benefits The aggregate compensation paid by us to all members of our board of directors, board of executive officers and our fiscal council for services in all capacities was R$63.3 million in 2019, R$53.8 million in 2018 and R$47.6 million in 2017. On The members of the board of directors receive a fixed monthly compensation, which is not affected by the numbers of meetings that take place each month. The coordinators and members of the committees, according to the responsibilities and participation in each committee receive differentiates monthly fees. The members of the fiscal council receive a fixed monthly compensation, which is not affected by the numbers of meetings that take place each month. The alternate members of the board of directors and of the fiscal council do not receive any compensation. Our executive officers receive a fixed monthly, an annual variable compensation and the same benefits generally provided to our employees, such as medical (including dental) assistance, private pension plan and meal vouchers. Members of our board of directors and fiscal council are not entitled to these benefits. Members of our board of directors, board of executive officers and fiscal council are not parties to contracts providing for benefits upon the termination of employment other than, in the case of executive officers, the benefits described above. Long-Term Incentive Plan At an extraordinary general meeting held on March 21, 2018, or the March 21 Meeting, our shareholders approved the Restricted Share Award Plan, or the Incentive Plan. The Incentive Plan establishes the general terms and conditions for the granting of certain restricted shares in our Eligibility Persons who are legally employed by us or the companies controlled by us, including officers and professionals of any kind approved by our board of directors, may participate in the Incentive Plan upon execution of an award agreement (such persons, the “participants”). Administration Our board of directors administers the Incentive Plan. Our board of directors has, subject to the general conditions of the Incentive Plan and the yearly programs that may be created, approved and / or cancelled by our board of directors and by the governing bodies of the companies controlled by us, as applicable, in observance of the terms and conditions of the Incentive Plan (such programs, the “Programs”), and the guidelines fixed by the March 21 Meeting, and to the extent fully permitted by law and under our by-laws, full powers to take all measures required and convenient for management of the Incentive Plan and such Programs, including (i) approving the eligible persons, and authorizing the grant of Restricted Shares on such persons’ behalf on the 139 Restricted Shares The grant of Restricted Shares will be made upon and subject to the execution of award agreements pursuant to the Incentive Plan. Participants may receive shares and/or depositary receipts representing shares issued by usnegotiated abroad, representing at most one and a half percent (1.5%) of our entire share capital on the date of the Incentive Plan, subject to adjustment as set forth in the Incentive Plan.
The grant of Restricted Shares is contingent upon the (i) voluntary acquisition by the participants of shares or depositary receipts issued by us (the “Owned Shares”) at the participants’ own expense, from the stock exchanges where such shares are traded within a period of time set out in the applicable award agreements for the acquisition of such Owned Shares and (ii) participants’ continuous employment with us for three years and maintaining uninterrupted ownership of Owned Shares during such time (such three year period, the “Waiting Period”). The minimum investment amount is 10% of the planned gross amount of participants’ short-term income pursuant to our annual profit sharing program, and the maximum investment amount is 20% of such amount. The goal of the Incentive Plan is to award for each one (1) Owned Share two (2) Restricted Shares. However, our board of directors may define, in an exceptional and justified manner as set forth in the Incentive Plan and pursuant to the terms and conditions of the applicable award agreements, for each Program, a different number of Restricted Shares to be delivered for each Owned Share, in compliance with the minimum of one (1) Restricted Share and the maximum of three (3) Restricted Shares for each one (1) Owned Share, based on an analysis by our board of directors in its sole discretion. Change of Control In the event of (i) a Change of Control of Vesting Under the Incentive Plan, full vesting of the Restricted Shares is contingent upon participants continuously remaining employed by us and maintaining uninterrupted ownership of Owned Shares, in each case, during the Waiting Period. Termination from the Company In the event of a termination of a participant for (i) dismissal by us and / or by the companies controlled by us without cause, (ii) removal from the manager position without violation of their duties and responsibilities, or (iii) transfer of the participant to occupy a position in a company in the same group as ours, which is not a participant in the Incentive Plan, the participant will be entitled to receive (a) the vested Restricted Shares, and (b) a pro rata number of unvested Restricted Shares, calculated based on the number of complete months in which such participant worked for us or a company controlled thereby relative to the number of months in the Waiting Period, with the remaining Restricted Shares being automatically terminated on such participant’s termination date, by operation of law, regardless of prior notice or warning, and with no right whatsoever of indemnification to such participant. In the event of a termination of a participant (i) upon dismissal for cause or removal from office due to a violation of the duties and responsibilities of a manager, (ii) upon request from such participant 140 In the event of a termination of a participant by reason of a retirement mutually agreed by such participant and us or companies controlled by us, such participant will be entitled to receive (a) the vested Restricted Shares; and (b) the entirety of the unvested Restricted Shares. The delivery of the Restricted Shares to such participant will be made on the original delivery dates (unless delivered earlier in our exclusive direction to the extent permitted under the applicable award agreement).
In the event of a termination of a participant due to (i) death or (ii) permanent disability, the legal heirs or successors or the legal representative will be entitled to receive, within sixty (60) days from such event: (a) the vested Restricted Shares of such participant; and (b) all unvested Restricted Shares. Adjustments of Awards In the event of change to the number, nature or class of our shares as a result of bonus, splitting, reverse split, or conversion of shares into other nature or class, or conversion of other securities issued by us into shares, our board of directors will assess the need to make adjustments to the Incentive Plan, the applicable and the award agreements in connection therewith, so that the relationship between the parties remains balanced without any material windfall or detriment to the participants. Amendments and Termination Our board of directors may propose any amendments to the Incentive Plan and, in case necessary, submit such amendments for approval in an extraordinary general meeting. The Incentive Plan will remain in force until the delivery of the Restricted Shares granted pursuant to award agreements under the Incentive Plan that are executed in the fifth year of the Incentive Plan. The right to receive the Restricted Shares under the Incentive Plan and applicable program and award agreement in connection therewith will automatically terminate with no right to indemnification, ceasing all effects, if we are wound up, liquidated or adjudicated bankrupt. Corporate Governance Practices The significant differences between our corporate governance practices and the standards of the NYSE are described in “Item 16G. Corporate Governance.” Share Ownership of Directors and Officers As of the date of this annual report, no member of Braskem’s board of directors or executive officer owned more than 0.1% of Braskem’s share capital. All shares owned by our directors and executive officers were purchased at market prices through the B3. Employees The following table sets forth the number of our employees by geographic location at the
141 We do not employ a material number of temporary employees. In March 2020, in view of the progression of the novel coronavirus (COVID-19) outbreak, we formed a crisis committee with the aim of establishing global procedures focusing on the health of our team members and the continuity of our operations. We have taken the following measures, among others: (i) recommended that all team members and contractorswork remotely; (ii) established a minimum team in industrial areas to ensure safety and operational continuity matters; and (iii) prohibited all national and international business travel, apart from exceptional cases. Employees in Brazil In Brazil, both employees and employers have the right to organize unions. Employees belonging to a specific “professional category” and employers constituting a specific “economic category” may each be represented by a single union in a particular geographic area. Individual unions generally belong to state-wide union federations, which in turn belong to nationwide union confederations. We are a member of thePetrochemicals and Synthetic Resins Industries Union of the States of Bahia, Alagoas, Rio Grande do Sul and São Paulo, and our employees belong to the Petrochemicals Industries Workers’ Unions in each of these states. As of December 31,
We maintain good relations with our employees and the unions that represent them. We have not experienced a strike in Brazil since Trikem was privatized in 1995. The current collective bargaining agreements with our unions have one-year to two year terms and are subject to annual renegotiation. We have traditionally applied the terms of bargaining agreements entered into with the unions equally to unionized and non-unionized employees. Post-Employment Benefits Vexty Defined Contribution Plan The majority of our employees Other Benefits in Brazil Our employees in Brazil and their dependents receive medical and dental assistance through a network of accredited doctors in an insurance company. We pay most of the costs for these services, with a small monthly portion being paid by our employees. A small fee is also charged to our employees according to the use of some medical services (copayment system). In Employees in the United States The employees of Braskem America are not represented by any union, other than employees of Braskem America Neal, West Virginia plant. As of December 31, Post-Employment Benefits in the United States Braskem America administers a closed defined benefit pension plan that, as of December 31, 142 We offer a 401(k) savings plan, Other Benefits in the United States Braskem America offers its employees the ability to participate in a variety of health and welfare benefit plans, including medical, dental vision, life and disability coverage. Employees in Germany Employees of Braskem Europe GmbH in Germany are not represented by any union. However, they are represented by local works councils (Betriebsrat). Post-Employment Benefits in Germany Pension Plan Germany In October 2011, the obligations of Dow under German pension plans were assumed by Braskem Europe as a result of the Dow Polypropylene Acquisition. In 2013, Braskem Europe implemented a new defined contribution pension plan. As of the date of this annual report, we have
Other Benefits in Germany Braskem GmbH offers its employees the ability to participate in benefit plans, including pension, life and disability coverage. Pension plan Netherlands In the Netherlands, Braskem started a pension plan in 2009 with Delta Lloyd in a defined contribution scheme. Participation is mandatory for locals that reside in NL. As of the date of this annual report, we have Other Benefits in Netherlands Braskem BV offers its employees the ability to participate in benefit plans, including pension, life and disability coverage, health insurance (by reimbursement). Employees in Mexico Post-Employment Benefits in Mexico Braskem Idesa employees are granted a government retirement benefit plan when they retire or reach retirement age. On December 31, Other Benefits in Mexico Braskem Performance-Based Employee Compensation Plan We have adopted and applied a personnel management philosophy which emphasizes a performance related pay structure and a decentralized management structure. Employees in each of our business units participate in setting and achieving their business unit’s annual objectives. As a result, employees in those business units that meet or exceed their goals share in our financial performance through performance-based employee compensation plans. During 143 Item 7. Major Shareholders and Related Party Transactions Major Shareholders As of Generally, only our common shares have voting rights. Our preferred shares have voting rights only in exceptional circumstances. As permitted by the Brazilian Corporations Law, our by-laws specify that 25% of our adjusted net profits for each fiscal year must be distributed to shareholders as dividends or interest attributable to shareholders’ equity. Under our by-laws, our preferred shareholders are entitled to
Our class B preferred shareholders are not entitled to receive any additional dividend amounts after they have received the Minimum Preferred Dividend. If the Minimum Preferred Dividend is not paid for a period of three years, holders of preferred shares will be entitled to full voting rights. The following table sets forth information concerning the ownership of our common shares and class A preferred shares as of
We currently have no management or employee option plans or management or employee options outstanding, we have only the Long-Term Incentive Plan described above. See “Item 6. Directors, Senior Management and Employees—Compensation—Long-Term Incentive Plan.” 144 Shareholders’ Agreements Braskem S.A. Shareholders’ Agreement Odebrecht, OSP Inv., Petrobras and Petroquisa, with Braskem and BRK as intervening parties, entered into the Braskem S.A. Shareholders’ Agreement, effective February 8, 2010, which has a term of 35 years. The Braskem S.A. shareholders’ agreement superseded the Shareholders’ Agreement that formerly governed the relationship between Petrobras, Petroquisa, Odebrecht and Norquisa regarding our shares. Under the Braskem S.A. Shareholders’ Agreement Petrobras has the right to designate:
For so long as Petrobras has the right to designate three or four members of our board of directors, one of these designees will serve as vice president of our board of directors. Under the Braskem S.A. Shareholders’ Agreement, Odebrecht is entitled to nominate our chief executive officer. Our chief executive officer must choose our chief financial officer from among three nominees submitted by Odebrecht and the executive officer responsible for our investment and portfolio area from among three nominees submitted by Petrobras. Our chief executive officer has the power to nominate the other members of our board of executive officers. After these nominations, the officers will be elected at a board of directors’ meeting. Under the Braskem S.A. Shareholders’ Agreement, Odebrecht has the sole power to approve our business plan. However, for so long as Petrobras owns, directly or indirectly, an aggregate of less than 30% and more than 18% of our voting share capital, we are prohibited from taking certain strategic actions unless a consensus regarding those actions is reached between Odebrecht and Petrobras, including, among others:
Under the Braskem S.A. Shareholders’ Agreement, we have agreed that investments that we make to increase our capacity must be supported by an evaluation demonstrating profitability under standards such as net present value or internal rate of return. Petrobras has granted a right of first refusal to us with respect to development of any petrochemical project that Petrobras proposes to pursue. In the event that we decide not to participate in any such proposed project, Petrobras has agreed that we will have the right to market the products produced by the proposed project on conditions satisfactory to us and Petrobras. 145 Under the Braskem S.A. Shareholders’ Agreement, Petrobras has the right to sell a pro rata portion of their common shares of us in connection with any direct or indirect sale of our common shares by the Odebrecht Group to a third party. Under the Braskem S.A. Shareholders’ Agreement, each of the parties has agreed:
In 2016, OSP Inv. entered into agreements with certain financial institutions, through which OSP Inv. granted all shares issued by Braskem and held thereby in guarantee. On July 18, 2017, our shareholders, Petrobras and Odebrecht, have entered into negotiations to revise the terms and conditions of the Braskem S.A. Shareholders’ Agreement to improve our corporate governance and the ownership relationship among the parties, with the goal of creating value for all our shareholders. On May 25, 2018, we became aware that OSP Inv. gave all of the shares issued by Braskem and held by it as a guarantee in connection with financing operations, by means of a fiduciary assignment (alienação fiduciária). On October 24, 2018, we were informed by OSP Inv. about the execution of an amendment to the shareholders’ agreement of February 8, 2010, to extend tag along rights pursuant to clause 7.12 of such agreement to preferred shares held by Petrobras S.A. On January 31, 2019, we were informed by Odebrecht S.A., our indirect controlling shareholder, of the corporate reorganization approved by the Odebrecht Group on December 31, 2018, with the main purpose of segregating its businesses, whereby all common and preferred shares issued by Braskem and held by OSP Inv., and all liabilities (comprised of the purchase and Sale agreement of debentures no. 16.2.0023.1, entered into on March 16, 2016 between BNDES Participações S.A. – BNDESPAR and OSP Inv., and other intervening parties, as amended) and the other operating activities of OSP Inv. have been merged into OSP Investimentos S.A. Considering that the corporate reorganization took place within the Odebrecht Group, Odebrecht S.A. continues to be Braskem’s indirect controlling shareholder. Termination of BNDESPAR Shareholders’ Agreement In February 2016, we received a letter from BNDESPAR informing us of its sale of preferred shares of our capital stock on the B3. As a result of these sales, BNDESPAR held preferred shares and total share capital of 6.61% and 2.86%, respectively. The shareholders’ agreement to which BNDESPAR was a party automatically terminated as a result of BNDESPAR holding less than 5.0% of our total share capital. Related Party Transactions As provided for in our bylaws, our board of directors has the exclusive power to decide on any contract with related parties that exceeds the amount of R$20 million per transaction or R$60 million in the aggregate, per fiscal year. This is valid for contracts between Braskem and its subsidiaries and: (i) direct or indirect subsidiaries of Braskem in whose capital an interest is held by the controlling shareholder, by any direct or any of their 146 Pursuant to the Brazilian Corporations Law, officers and directors are prohibited from: (i) entering into any transaction using the As part of our controls to identify related parties, we require key personnel to annually inform whether they, or their close relatives, hold full or shared control of any company. Under the Brazilian Corporations Law, each of our directors, their alternates and our executive officers cannot vote on any matter in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties. In addition, pursuant to our Policy on Ethics, Compliance and Transparency none of our shareholders or any other individual with authority over our activities may participate in the negotiation and decision-making process of a transaction in which they have a conflict of interest. We have engaged in extensive transactions with our principal shareholders and their affiliates and we expect to continue to do so in the future. We also have commercial relationships with some of our affiliates and, as a result, record trade accounts receivable and current and long-term liabilities mainly from purchases and sales of goods and services at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. In addition, we have entered into financial and other transactions with our principalshareholders and their affiliates, including, among others, as a party to three shareholders’ agreements or memoranda of understanding with our shareholders. See “—Major Shareholders—Shareholders’ Agreements.”
The following summarizes the material transactions that we have engaged in with our principal shareholders and their affiliates since January 1, 2018. The Odebrecht Group Alliance Agreement In May 2014, we entered into an alliance agreement with CNO, or the Alliance Agreement, The aggregate amount of services we purchased under the Alliance Agreement was R$ The Alliance Agreement was terminated in May 2018. Specific activity agreements entered into until this date will continue to produce effects until the fulfillment of their scope. Sublease In August 2013, we entered in a R$226 million sublease agreement with CNO and Abiatar SPE Empreendimentos Imobiliários (as intervening party) for the floors in the building where the offices of Braskem are located in São Paulo. In January 2014, this contract was updated by IPCA/IBGE to a new amount of R$239 million. This agreement expires on December 31, 2028. This agreement would have expired on December 31, 2028, but was terminated in May 2019. The aggregate amount we paid under this agreement was R$ 147 Industrial Maintenance, Operation and Loads Machines Maintenance Services In December 2017, we signed an industrial maintenance services agreement with CNO that encompassed boilers and the welding of tubing and static equipment, as well as operational and maintenance services on cargo machinery to be performed at the Braskem Units located in Rio Grande do Sul. The agreement has an estimated maximum amount of R$120 million and is valid through December 2021. The aggregate amount of services purchased under this agreement was R$ Movement and Storage Services In May 2018, we entered into an agreement for caustic soda movement and storage services with Liquiport Vila Velha S.A., which was a wholly owned subsidiary of Odebrecht Transport S.A. until August 9, 2019. The agreement has an estimated maximum value of R$93 million and is valid for 10 years. Furnaces, Boilers and Tanks MaintenanceIn 2019, we conducted a bid process that selected TENENGE as a non-exclusive provider of maintenance services and efficiency enhancement projects for furnaces, boilers and tanks at each of our industrial plants. Such agreement was unanimously approved by our board of directors in December 2019. Services to be provided under this agreement were contracted through pre-defined maintenance scopes and a list of unit prices per activity. TENENGE’s compensation for the execution of the services under the agreement is capped at R$669.0 million. The agreement became effective in February 2020 and is valid until January 2027. Acquisition of Cetrel In October 2012, we entered into an agreement with Cetrel for the purchase of 4 million cubic meters per year of recycled water by sites located in the Industrial Pole of Camaçari. The agreement expires in April 2028 and has a total value of R$120.0 million. In July 2016, we entered into a services agreement with Cetrel under which we appointed Cetrel as an exclusive service provider for the treatment of liquid effluents produced in our industrial units located at the Camaçari petrochemical complex. The agreement has a cap of R$77 million and expires in December 2019. The aggregate amount of services we purchased under this agreement was R$
In December 2017, we entered into a services agreement with Cetrel as a service provider for incineration of hazardous industrial waste produced in our industrial units located at the Camaçari/BA petrochemical complex. Service expenses under the agreement are capped at R$61 million, and the agreement expires in December 2020. The aggregate amount of services we purchased under this agreement in On January 27, 2017, our board of directors authorized the execution of a purchase agreement with Odebrecht Utilities S.A., through which Braskem undertook to purchase all shares held by the seller in Cetrel S.A., which represented 63.7% of its voting capital, for the aggregate amount of R$610 million, to be paid upon the consummation of the transaction. The acquisition was approved by relevant shareholders, in accordance with Article 256 of Brazilian Corporations Law in the meeting held on September 29, 2017. This acquisition closed on October 2, 2017, when Braskem acquired 1,269,290 shares, or 63.7%, of the voting capital stock of Cetrel S.A.
In March 2017, we entered into an agreement for supply of hydrous ethanol with UCP and USL. Ethanol is the feedstock consumed by Braskem to produce green ethylene. The agreement was guaranteed by Atvos and Rio Claro. The agreement also provided for a commercial discount and other flexibilities in the process of Braskem’s acquisition of the product. It also included an advance of R$150.0 million, to be restated at market rates. The advance was guaranteed by a pledge of the sugarcane crop, its products and subproducts at net market value in anamount greater than the value of the advance, with the pledged asset insured through a policy contracted from a premium insurer and with a provision for subrogation. The agreement was valid through April 30, 2018. 148 In December 2017, we entered into an amendment to the agreement for supply of hydrous ethanol with UCP and USL that changed the billing for raw material acquisitions to future delivery, so as to bring forward the billing of the volume of the goods to be delivered between January 2018 and March 2018 in the aggregate amount of R$50.0 million. The amendment determines that the price practiced at time of delivery is the lesser of the ceiling established in the amendment and the reference established in the original contract. The agreement was valid In December 2017, an agreement was entered into with Agro Energia Santa Luzia S.A. – USL, Usina Conquista do Pontal S.A. – UCP, Atvos and Brenco Companhia Brasileira de Energia Renovável, with the purpose of ensuring the supply of hydrous ethanol volumes, which included a commercial discount on the supply and established contractual flexibilities for acquisition. The contract
Petrobras Commercial Transactions with Petrobras We have entered into the following supply contracts with Petrobras:
149
150
We purchased raw materials, finished goods services and utilities from Petrobras and its subsidiaries in the aggregate amount of R$ Other Related Party Transactions Our Jointly Controlled Company Refinaria de Petróleo Rio-grandense S.A. (“RPR”) The revenue of gasoil, gasoline and Fábrica Carioca de Catalisadores S.A. (“FCC”) On August 1, 2019, Braskem and FCC entered into an agreement for the sale of caustic soda for a period of two years. The aggregate amount throughout the term of the agreement is approximately R$50.0 million. Our Associated Companies
We sell polypropylene and polyethylene to Borealis, in which we have a 20.0% interest. We recorded revenue to Borealis of R$193.6 million in 2017, Additionally, on March 1, 2018, Braskem and Borealis entered in an agreement for the rendering by Braskem of certain services related to the set up and management of Borealis’ energy portfolio. This agreement was subsequently amended on November 1, 2019 to extend it until February 28, 2021. The aggregate amount of the services to be provided under the agreement is R$230.4 thousand. Non-controlling shareholders of Braskem Idesa As of December 31, 2019, we had R$2,395.9 million in outstanding indebtendess relating to a loan payable to the non-controlling shareholder of Braskem Idesa, maturing in December 2029 and accruing interest at 7% p.a., whose proceeds were used by Braskem Idesa to fund its construction project. Related Party Transactions Policy In December 2018, we adopted a related party transactions policy, or the Related Party Transactions Policy, which is revised periodically and lays out the procedures for approving transactions with our controlling shareholder, controlled entities and certain other parties. Pursuant to our bylaws and the Related Party Transactions Policy, (i) our Board of Directors is responsible for approving certain related party transactions and revisions to 151 Consolidated Statements and Other Financial Information Reference is made to Item 19 for a list of all financial statements filed as part of this annual report. Legal Proceedings We are, and may be in the future, involved in numerous tax, civil and labor disputes, among others, involving monetary claims. If any of these legal proceedings were decided adversely to us, we do not believe that our results of operations or financial condition would be materially and adversely affected. For some of these lawsuits, we have not established any provision on our balance sheet nor have we established provisions only for part of the amounts claimed, based on our judgments as to the outcomes of these lawsuits. Tax Proceedings We are engaged in several legal proceedings with Brazilian tax authorities for which we have established provisions in an aggregate amount of R$
IR/CSLL Tax Assessment Notices In 2013, 2014 and 2017, we received tax assessment notices from the Federal Brazilian Revenue Service claiming that the amortization of the goodwill recorded in 2001 and 2002 in connection with the purchase of shares of certain companies related to the formation of Braskem was not deductible for purposes of calculating our income tax and social contribution. The amount claimed is R$
In 2009, 2013 and 2017, we received deficiency notices from the Brazilian federal tax authority claiming that the tax losses offset in the taxable year were in excess of the limitation of 30% of the taxable profits of a given year, as imposed by Brazilian tax law. The amount under discussion is R$348 million, including interest and fines. We challenged these assessment notices because we believe that the 30% limitation is not applicable in the event of the merger of the taxpayer and that the statute of limitations for one of these claims has expired. We received a tax assessment notice from the Federal Brazilian Revenue Service claiming income tax and social contribution debts due to the following: (i) commissions paid by Braskem in 2011 were not considered deductible for purposes of calculating income tax and social contribution; (ii) commissions paid by Braskem INC in 2013 and 2014 were also not considered deductible for purposes of calculating income tax and social contribution; (iii) we did not withhold the income tax over the payments of the 152 In December 2017, we received a tax assessment notice from the Federal Brazilian Revenue Service claiming unpaid income tax and social contribution in connection with exchange variation losses recorded by Braskem in the elapsed time between the due date of naphtha import invoices and their payments. The Federal Brazilian Revenue Service considered that these losses, recorded in 2012, were not deductible for purposes of calculating income tax and social contribution which resulted in the recalculation of our tax losses and social contribution negative tax base. The amount claimed is R$ We are discussing, at the administrative level, the rejection by the Federal Brazilian Revenue Service of Clearing Statements that aimed at the discharge of federal taxes with credits arising from negative balance of In November 2018, we received a tax assessment notice from the Federal Brazilian Revenue Service demanding the payment of income tax on exports made by Braskem Qpar S.A. to Braskem Incorporated Limited, due to resale of goods abroad. According to the Federal Brazilian Revenue Service, Braskem Incorporated Limited omitted revenue when making resales abroad for an amount greater than that recorded. This supposedly omitted revenue was attributed directly to Braskem, as successor of Braskem Qpar. Based on this premise, the inspection department issued a second tax assessment notice to impose a fine. As of December 31, 2019, the aggregate amount of these tax assessment notices was approximately R$75.0 million. We believe that a loss of this claim is possible and our external legal counsel expect that the case will be resolved by 2023. There are no deposits or guarantees related to these assessments.
IOF We are involved in judicial and administrative proceedings due to tax assessment notices issued by the Federal Brazilian Revenue Service claiming that the following operations are subject to Financial Operations Tax (IOF): (i) the transfers of financial resources under cash pooling and current account agreements made between Quattor Participações S/A, Quattor Química S/A and Braskem and between Braskem and CPN Incorporated and (ii) the advances for future capital increases made by Quattor Participações S/A and Quattor Química S/A. The amount claimed is R$ ICMS Tax Assessment Notice From 1999 to 153 In 2009, tax assessment notices were issued by the internal revenue department of the State of São Paulo against Braskem Qpar claiming unpaid ICMS taxes and related fines in connection with several alleged violations of certain provisions of the ICMS tax legislation, including: (1)Inappropriately claiming ICMS credits: (i) in the amount of R$53.5 million from (2)A fine of 100% of the taxes assessed was imposed in all cases (3)Error in the issuance of invoices under CFOP code 6.905 without the circulation of goods – a fine of 30% of the amount of the invoices (R$480.4 million) was (4)Fine assessed due to the default in answering to notification of tax authorities to present documents to a tax audit. The administrative proceedings were closed in the administrative court in 2015, and the remaining debt is under discussion in the
PIS and COFINS Non-Cumulative Tax Assessment Notice We received assessment notices from the federal internal revenue department alleging that we had inappropriately claimed certain PIS and COFINS credits in relation to: (1) wastewater The Federal Brazilian Revenue Service did not recognize the compensation of PIS and COFINS
154 A loss PIS and COFINS Tax Assessment Notice Braskem is involved in several judicial and administrative proceedings related to the payment of PIS and COFINS, including (1) unpaid COFINS from March 1999 to December 2000, February 2001 to March 2002, May 2002 to July 2002 and during September 2002, (2) inappropriately claimed credits due to the additional 1% in the COFINS rate and PIS Decree-Law In 2014, we received a tax assessment notice from the Federal Brazilian Revenue Service claiming that the tax losses and social contribution negative tax base used to pay debts under the MP No. 470/2009 installments program, as well as interest, and fines exoneration afforded in installments of the MP No.470/09 are taxable.
We and our affiliates are involved in several other judicial and administrative proceedings related to the alleged undue compensation of PIS and COFINS debts with the following credits: (1) Corporate Income tax; (2) FINSOCIAL; (3) We are involved in lawsuits related to the payment of PIS and COFINS offsetting with Cide-Combustíveis credits, as authorized by Law No. 10,336/2001. As of December 31, 2019, the aggregate amount of these cases was R$144 million. We believe that a loss of this claim is possible and our external legal counsel expect that the discussion will end in 2030. We constituted a guarantee in the amount under discussion. Isolated Fine Tax Assessment Notices From 2016 to IPI and Import Duty Tax Assessment Notice In 2002, the merged company Ipiranga Petroquímica received a tax assessment notice from the Federal Brazilian Revenue Service due to the contracting of two separate companies, one to supply the parts and technology and 155 SUDENE – Income Tax Reduction Since 2015, we have obtained favorable decisions in administrative proceedings and lawsuits claiming the reduction of 75% of IR on income from the following industrial units: (i) PVC and chlor-alkali (cloro soda) units, established in the state of Alagoas; and (ii) Chemicals, PE, PVC and chlor-alkali units, established in the city of Camaçari (BA). The realization period is 10 years. In PRODESIN – ICMS Tax Incentive Braskem has ICMS tax incentives by the state of Alagoas, through the state of Alagoas Integrated Development Program, or PRODESIN, which aimed at implementing and expanding a plant in that state. This incentive is considered an offsetting entry to sales taxes. In REIQ – PIS/COFINS Tax Incentive The Brazilian chemical and petrochemical sector enjoyed an important achievement in 2013. The government, in response to one of the proposals elaborated by the Chemical Industry Competitiveness Council, approved the PIS and COFINS tax rates relief on raw material purchases by first and second generation producers, which serve various sectors of the economy. The measure aimed to restore some of the industry’s competitiveness, which was weakened by factors related to infrastructure, productivity, feedstock and energy costs and the exchange rate that pressured the chemical industry’s trade deficit, according to ABIQUIM, which ended On May 30, 2018, the Brazilian government issued Provisional Measure No. 836/18, which revoked the tax rebate of 3.65%, beginning on September 1, 2018. However, in early October, 2018, the Provisional Measure failed to be converted into law, which kept the rebate of PIS and COFINS on the acquisition of petrochemical raw materials unchanged at 3.65%.
Social Security Contributions – We Our external legal level as possible. Our external legal 2020. There are no deposits or any other type of guarantee for such procedures, since they are still being discussed at the administrative level. Social Security Contributions – Harmful Agents We are involved in several judicial and administrative proceedings related to the payment of social security contributions in which the following issues are discussed: (i) the collection through tax assessments of the additional Workplace Accident Risk (“RAT”) for the costing of special retirement, due to the alleged exposure of workers to harmful agents, in addition to a fine for non-disclosure of this information in GFIP (in the period from April 1999 to February 2006); and (ii) the requirement, in terms of tax enforcement, of additional RAT (in the period from November 2000 to January 2001, and from November 2001 to June 2002). The aggregate amount of these claims, as of December 31, 2019, was approximately R$47 million. Our external legal counsel expect that the discussions at the administrative level will be concluded in 2021 and in 2027 at the judicial level. There is no deposit or other type of guarantee for the proceedings that are still under administrative discussion and the only one that is under judicial discussion is guaranteed by bond in the amount of R$3.7 million. 156 Class Action Proceedings In July 2015, two putative class action lawsuits were filed against us and certain of our then-current and former officers and directors, or the Defendants, in the United States District Court for the Southern District of New York. The lawsuits were subsequently consolidated under the caption In re Braskem, S.A. Securities Litigation, No. 15-cv-5132. In November 2015, Boilermaker-Blacksmith National Pension Trust, or the Lead Plaintiff, filed a consolidated class action complaint, which asserted claims under Section 10(b) and Section 20(a) of the Exchange Act, on behalf of a putative class of purchasers of our ADSs, from June 1, 2010 to March 11, 2015. In the operative complaint, the Lead Plaintiff alleges that the Defendants made misrepresentations or omissions that inflated the price of our stock in violation of U.S. securities laws. We filed a motion to dismiss on July 6, 2016. On March 31, 2017, the court ruled on the motion to dismiss, granting it in part and denying it in part. The parties have signed a proposed settlement agreement on September 14, 2017 and the U.S. court granted final approval to the settlement and entered a judgment to dismiss the action and discharge the claims of the class members on February 21, 2018. Under the terms of the settlement, we paid US$10 million to resolve all claims of the settlement class consisting of purchasers of our Global Settlement In the context of allegations of improper payments in connection with the so-called Operation Car Wash (Operação Lava Jato) in Brazil, we engaged independent expert firms to conduct an investigation into such allegations (the “Investigation”) and report their findings. We have cooperated with governmental authorities in several jurisdictions, including the U.S. Department of Justice, or the DoJ, the U.S. Securities and Exchange Commission, or the SEC, Brazil’s Federal Prosecutor’s Office (Ministério Público Federal), or the MPF, and Switzerland’s Office of the Attorney General, or the OAG. On December 14, 2016, we entered into a leniency agreement with the MPF, or the Leniency Agreement, which was ratified by the competent Brazilian court on June 6, 2017. On December, 21, 2016, we filed a plea agreement in the United States District Court for the Eastern District of New York under which we agreed to plead guilty to a one-count criminal information charging us with conspiracy to violate the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act, or the FCPA. On the same date, we consented to the entry of a final judgment in a civil action brought by the SEC based on civil violations of the anti-bribery, books and records and internal accounting controls provisions of the FCPA. The competent federal courts in the United States approved the DoJ and SEC resolutions on January 26, 2017 and February 28, 2017, respectively. In addition, on December 21, 2016, the OAG closed its investigation of these matters. We refer to these actions as the Global Settlement. Under the Global Settlement, we agreed to pay to the governmental authorities in these jurisdictions an aggregate amount of US$957 million (equivalent to R$3.1 billion), based on the exchange rate of R$3.27 per U.S. Dollar, applicable at the time of the negotiation.
The MPF will distribute the majority of the amount it receives as restitution to third parties for damages caused by the misconduct. Pursuant to the Global Settlement, the MPF agreed to communicate with other public authorities or entities, as well as stated-owned companies and mixed-capital companies with which Braskem enters into discussions to address the facts under the Global Settlement and avoid making duplicate restitution payments. In this context, as announced to the market on July 10, 2018 and disclosed in a material fact on May 27, 2019, we have cooperated and engaged in negotiations with the Ministry of Transparency and Controllership (CGU) and the Office of the Attorney General (AGU) in Brazil, and our Board of Directors approved the signing of a leniency agreement with the CGU and the AGU (the "CGU/AGU Agreement"). The CGU/AGU Agreement, in the amount of R$2.9 billion, to be adjusted by the SELIC rate, addresses the same facts that are the object of the Global Settlement executed in December 2016 with the Brazilian Federal Prosecution Office (MPF), the U.S. Department of Justice (DoJ), the U.S. Securities and Exchange Commission (SEC) and the Swiss Office of the Attorney General ("Global Settlement"). Of this amount, R$2.5 billion will be offset by the amount that Company already had undertaken to pay under the scope of the Global Settlement, resulting in an additional disbursement of R$410 million. As of the date of this annual report, we have paid R$
The outstanding amount of R$
The Global Settlement does not prevent Braskem from responding to any legitimate third party, which may seek indemnification against us from damages for the facts subject to the Global Settlement. As a result, we cannot assure you that the aggregate amount disbursed as a requirement pursuant to the agreement will be sufficient to cover indemnification claims of all of the victims. We may be required to make additional disbursements to cover such claims.
Other authorities with jurisdiction over us may seek to impose monetary sanctions or fines on, or to initiate investigative proceedings against, Braskem. As a result of entering into the Global Settlement, Braskem may be prevented from entering into certain agreements with government entities and may be subject to increased operating costs for being under the obligation to improve its governance and anti-corruption practices and procedures, including the cost of external monitorships. Under the terms of the Global Settlement, we On May 13, 2020, the We believe we are fully in compliance with our 158 In connection with the execution of the CGU/AGU Agreement, Braskem originally took a tax deduction in its 2019 quarterly financial statements for the full amount of the payments to be paid under the CGU/AGU Agreement, as under Brazilian tax law the execution of such agreement provides a right to take a tax deduction on the compensation amount that is due to be paid in Brazil under this type of agreement. The plea agreement entered into with the DoJ as part of the Global Settlement prohibits Braskem from seeking tax deduction in connection with the payment of any part of the aggregate amount of the total criminal penalty contained in the plea agreement, which includes a credit for a portion of the payments to be made in Brazil. After further consideration, in light of the language in the plea agreement, Braskem voluntarily decided to reverse such tax deduction so that no part of the prior tax deduction would be inconsistent with the plea agreement entered into with DoJ. Under the Plea Agreement, it is the DoJ´s sole discretion to determine whether
Labor Proceedings Employment and Occupational Health and Safety Proceedings We have provisioned R$ Social Security As of December 31, Civil Proceedings Caustic soda transportation We are the defendant in civil lawsuits filed by the owner of a former distributor of caustic soda and by the shipping company that provided services to this former distributor, which, as of December 31,
Excess weight A civil class action was filed by the Federal Prosecutor’s Office in Brasilia seeking to hold us liable for damages caused to federal roads by trucks carrying excess weight. The action claims damages to the federal government arising from material damages and collective pain and suffering, in the amount of R$ Resale of solvents In January 2017, we became the defendant in a civil lawsuit filed by a former reseller of solvents, claiming alleged breach of a distribution agreement. Redress proceeding 159 A compensatory lawsuit was filed by the insurer of one of our customers. The insurer seeks the reimbursement of the amount paid to a customer pursuant to an insurance agreement entered into with the customer. As of December 31, Civil Claim for Recovery of Overpaid Amounts Related to CIDE Contributions A lawsuit was filed by a customer of ours claiming (i) the repayment of the amount allegedly withheld by Braskem for the payment of CIDE’s share due for fuel supply and (ii) compensation for damages arising from the misuse of said amount. The lawsuit was dismissed at a lower court and the decision was confirmed by Corporate Related Proceedings As of December 31, We are also currently subject to the liquidation of an award related to a lawsuit filed in 1988, which ordered Polialden Petroquímica S.A., which merged into Braskem on May 31, 2006, to pay to its non-controlling preferred shareholders certain remaining profits. The purpose of the liquidation proceeding is to determine the value of the award calculated in accordance with the judicial order issued on April 15, 2016, which will occur through an arbitration procedure, as determined by the court, and was appealed. The procedure is awaiting the beginning of the expert analysis.
Based on the Reverse Logistic System Braskem is directly or indirectly (through Hashimoto Civil Action A civil class action was filed in June 2018 by the Public Prosecutor’s Office of the State of São Paulo against us and other companies that operate in the Capuava Petrochemical Complex, seeking the reparation and/or remediation of environmental damages supposedly arising from the emission of air pollutants, as well as a 160 Alagoas
In April 2019, the Alagoas State Attorney’s Office (Ministério Público do Estado de Alagoas) and the State Public Defender’s Office (Defensoria Pública do Estado de Alagoas) filed a lawsuit seeking to freeze our assets in an amount of up to R$6.7 billion to secure funds allegedly required to ensure remediation and compensation for environmental, property and personal damages potentially resulting from a geological incident related to our mining actitivies in the city of Maceió. A preliminary decision ordered the freezing of R$100 million in our banks accounts. In addition, the Alagoas state court of appeals On May 8, 2019, we became aware of the Report No. 1, prepared by the Mineral Resources Research Company (Companhia de Pesquisa de Recursos Minerais), or CPRM, an entity of the Brazilian Energy and Mining Ministry (Ministério de Minas e Energia), on the geological events that occurred in the city of Maceió. Such report indicated the occurrence of (i) destabilization of caverns resulting from sodium chloride, or salt, extraction, which created a dynamic situation that reactivated pre-existing geological structures and deformations in the districts of Pinheiro, Mutange and Bebedouro; and (ii) instability in the Pinheiro district, which was aggravated by the erosive effects caused by an increase in the infiltration of stormwater runoff in pre-existing fractures in extremely erodible soil and accelerated due to the lack of an effective stormwater runoff drainage network and of adequate basic sanitation, among other factors. In this context, due to the developments from the publication of Report No. 1 by CPRM, in accordance with applicable safety standards, on May 9, 2019, we suspended all salt extraction and, consequently, the operations of the chlor-alkali and dichloroethane plants located in the district of Pontal da Barra in Maceió, state of Alagoas and also reducing production in the Camaçari Petrochemical Complex in the state of Bahia, since they are integrated into the production chain. Given that, Braskem put in place a non-integrated business model according to which the Company will import: (i) caustic soda to supply the Brazilian market using its logistics structure and terminals along the Brazilian coast; (ii) EDC to continue to operate its PVC plants in the states of Alagoas and Bahia, in Brazil; and (iii) sea salt to supply the Chlorine Soda plant in the state of Bahia.We have continuously cooperated with relevant authorities and the local community. On July 25, 2019, we were informed of another civil lawsuit filed against us by the Labor Prosecutor’s Office of the State of Alagoas, or MPT-AL, requesting injunctive relief to freeze the amount of R$2.5 billion to guarantee payment of any actual damages that workers affected by the geological event may suffer. In that lawsuit, MPT-AL further requested the payment of compensation to workers for pain and suffering. On October 10, 2019, the trial court denied the injunctive relief request. On August 19, 2019, we became aware of the filing of another civil lawsuit by the Federal Prosecutor’s Office (Ministério Público Federal) against us and other parties, requesting the following injunctive reliefs: (i) the set-up of a fund of R$3.1 billion for the benefit of social and environmental programs and emergency measures to be carried out, and the maintenance in said fund of working capital in the amount of at least R$2.0 billion or, aftera financial schedule is approved for such fund, an amount equivalent to 100% of the expenses projected for the subsequent 12 months; (ii) the posting of bonds in the amount of R$20.5 billion; (iii) prohibition on us to encumber or dispose of any of our fixed assets and to distribute profits, in the form of dividends, interest 161
On January 3, 2020, we entered into an agreement with the Alagoas State Public Defender’s Office (Defensoria Pública do Estado de Alagoas), the Federal Prosecutor’s Office (Ministério Público Federal), the State of Based on such agreeement, the plaintiffs agreed to: (i) release the amount of R$3.7 billion that had been
162 Dividends and Dividend Policy Payment of Dividends Our dividend distribution policy has historically included the distribution of periodic dividends, based on annual balance sheets approved by our board of directors. When we pay dividends on an annual basis, they are declared at our annual shareholders’ meeting, which we are required by the Brazilian Corporations Law and our by-laws to hold by April 30 of each year. When we declare dividends, we are generally required to pay them within 60 days of declaring them unless the shareholders’ resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year for which they are declared. Any holder of record of shares at the time that a dividend is declared is entitled to receive dividends. Our payment of annual dividends is based on our audited financial statements prepared for our preceding fiscal year. Our Finance and Investments Committee will review, prior to the review by our board of directors, any management proposal regarding the distribution of dividends or interest on capital stock. Our board of directors may declare interim dividends based on the accrued profits recorded or the realized profits in our annual or semi-annual financial statements approved by our common shareholders. In addition, we may pay dividends from net income based on our unaudited quarterly financial statements. These quarterly interim dividends may not exceed the amounts included in our capital reserve accounts. We may set off any payment of interim dividends against the amount of the mandatory distributable amount for the year in which the interim dividends were paid. The following table sets forth the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares, class “A” preferred shares and “class B” preferred shares since January 1,
The following discussion summarizes the principal provisions of the Brazilian Corporations Law and our by-laws relating to the distribution of dividends, including interest attributable to shareholders’ equity. Calculation of Adjusted Net Profits At each annual shareholders’ meeting, our board of directors is required to recommend how to allocate our net profits for the preceding fiscal year, which recommendation our board of executive officers initially submits to our board of directors for approval. This allocation is subject to approval by our common shareholders. The Brazilian Corporations Law defines “net profits” for any fiscal year as our net income after income taxes for thatfiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ participation in our net profits in that fiscal year. Under the Brazilian Corporations Law, our adjusted net profits available for distribution are equal to our net profits in any fiscal year, reduced by amounts allocated to our legal reserve and other applicable reserves, and increased by any reversals of reserves that we constituted in prior years.
Reserve Accounts Under the Brazilian Corporations Law and our by-laws, we are required to maintain a legal reserve. In addition, we are permitted by the Brazilian Corporations Law to establish the following discretionary reserves:
Allocations to each of these reserves (other than the legal reserve) are subject to approval by our common shareholders voting at our annual shareholders’ meeting. Legal Reserve Account Under the Brazilian Corporations Law and our by-laws, we must allocate 5% of our net profits for each fiscal year to our legal reserve until the aggregate amount of our legal reserve equals 20% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in a fiscal year in which our legal reserve, when added to our other reserves, exceeds 30% of our shareholders’ equity. As of December 31, Dividend Preference of Preferred Shares Under our by-laws, our preferred shareholders are entitled to a Minimum Preferred Dividend, equal to 6% of the book value of such shares, before dividends may be paid to our common shareholders. Distributions of dividends in any year are made:
Our class B preferred shareholders are not entitled to receive any additional dividend amounts after they have received the preferential dividend. If the Minimum Preferred Dividend is not paid for a period of three years, holders of preferred shares will be entitled to full voting rights. Mandatory Distributions As permitted by the Brazilian Corporations Law, our by-laws specify that 25% of our adjusted net profits for each fiscal year must be distributed to shareholders as dividends or interest attributable to shareholders’ equity. We refer to this amount as the mandatory distributable amount.
Under the Brazilian Corporations Law, the amount by which the mandatory distributable amount exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized profit reserve, and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which our net income exceeds the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain associated companies, and (2) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized profit reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization. The Brazilian Corporations Law permits us to suspend the mandatory distribution if our board of directors reports to our annual shareholders’ meeting that the distribution would be incompatible with our financial condition at that time, provided that this does not affect the payment of the Minimum Preferred Dividend. Our fiscal council must opine on any suspension of the mandatory distribution. In addition, our management must report the reasons of any suspension of the mandatory distribution to the CVM. We must allocate net profits not distributed by us as a result of a suspension to a special reserve and, if not absorbed by subsequent losses, we must distribute these amounts as soon as our financial condition permits. In case our profits reserves, as defined in 164 Interest Attributable to Shareholders’ Equity Brazilian companies, including us, are permitted to pay interest attributable to shareholders’ equity as an alternative form of payment of dividends to our shareholders. These payments may be deducted when calculating Brazilian income tax and social contribution tax. The interest rate applied to these distributions generally cannot exceed the TLP for the applicable period. The amount of interest paid that we can deduct for tax purposes cannot exceed the greater of:
Any payment of interest attributable to shareholders’ equity to holders of common shares, preferred shares or ADSs, whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding tax rate applies if the recipient is a resident of a tax haven jurisdiction. A tax haven jurisdiction is a country (1) that does not impose income tax or whose income tax rate is lower than 20% or (2) which does not permit disclosure of the identity of shareholders of entities organized under its jurisdiction. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations.” Under our by-laws, we may include the amount distributed as interest attributable to shareholders’ equity, net of any withholding tax, as part of the mandatory distributable amount. Significant Changes Other than as disclosed in this annual report, no significant change has occurred since the date of the audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing Markets for Our Equity Securities The principal trading market for our common shares, class A preferred shares and class B preferred shares is the B3, where they are traded under the symbols “BRKM3,” “BRKM5” and “BRKM6,” respectively. Our common shares and class A preferred shares began trading on the B3 (formerly the BM&FBOVESPA) on November 11, 1980, and our class B preferred shares began trading on the B3 on August 19, 1983. On December 21, 1998, ADSs representing our class A preferred shares began trading on the NYSE. Our ADSs are traded under the symbol “BAK.” As On October 8, 2003, we listed our class A preferred shares on the LATIBEX, a stock market for Latin American issuers that is quoted in Regulation of Brazilian Securities Markets The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and the securities markets generally, the National Monetary Council and the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by (1) Law No. 6,385, as amended and supplemented, which is the principal law governing the Brazilian securities markets and which we refer to as the Brazilian Securities Law; (2) the Brazilian Corporations Law; and (3) the regulations issued by the CVM, the National Monetary Council and the Central Bank. Trading on the B3 Overview of the B3 In 2000, theBolsa de Valores de São Paulo S.A. – BVSP (the São Paulo Stock Exchange), or BOVESPA was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges. Following this reorganization, the BOVESPA was a non-profit entity owned by its member brokerage firms and trading on the BOVESPA was limited to these member brokerage firms and a limited number of authorized nonmembers. Under the memoranda, all securities are now traded only on the BOVESPA, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange. In August 2007, the BOVESPA underwent a corporate restructuring that resulted in the creation of BOVESPA Holding S.A., a public corporation, whose wholly owned subsidiaries were (1) the BOVESPA, which is responsible for the operations of the stock exchange and the organized over-the-counter markets, and (2) the Brazilian Settlement and Custodial Company (Companhia Brasileira de Liquidação e Custódia), or CBLC, which is responsible for settlement, clearing and depositary services. In the corporate restructuring, all holders of membership certificates of the BOVESPA and of shares of CBLC became shareholders of BOVESPA Holding S.A. As a result of the corporate restructuring, access to the trading and other services rendered by the BOVESPA is not conditioned on stock ownership in BOVESPA Holding S.A. In May 2008, the BOVESPA merged with the Commodities and Futures Exchange (Bolsa de Mercadorias & Futuros) to form the BM&FBOVESPA. In November 2008, the CBLC merged with the BM&FBOVESPA. As a result, the BM&FBOVESPA performed its own settlement, clearing and depositary services. On March 30, 2017, the BM&FBOVESPA merged with CETIP, a provider of financial services for the organized over-the-counter market, to form the B3 – Brasil Bolsa Balcão S.A., or B3.
Regulation of Foreign Investments Trading on the B3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on the B3 only in accordance with the requirements of Resolution No. 4,373 of the National Monetary Council. Resolution No. 4,373 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions that are authorized by the Central Bank and the CVM. In addition, Resolution No. 4,373 requires non-Brazilian holders to restrict their securities trading to transactions on the B3 or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 4,373 to other non-Brazilian holders through private transactions. See “Item 10. Additional Information—Exchange Controls” for further information about Resolution 4,373, and “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains in Brazil” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 4,373. 166 Item 10. Additional Information Description of Our By-laws The following is a summary of the material provisions of our by-laws and of the Brazilian Corporations Law. In Brazil, a company’s by-laws (estatuto social) is the principal governing document of a corporation (sociedade por ações). Corporate Purposes Article 2 of our by-laws establishes our corporate purposes to include:
Board of Directors Under the Brazilian Corporations Law, any matters subject to the approval of our board of directors can be approved by a simple majority of votes of the members present at a duly convened meeting, unless our by-laws otherwise specify. Under our by-laws, our board of directors may only deliberate if a majority of its members are present at a duly convened meeting. Any resolutions of our board of directors may be approved by the affirmative vote of a majority of the members present at the meeting; provided, however, that certain matters may only beapproved by mutual agreement between the parties under the Braskem S.A. Shareholders’ Agreement. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders Agreements—Braskem S.A. Shareholders’ Agreement.” The majority of the members of our board of directors are elected by the Odebrecht Group. However, at least 20% of the members of our board of directors must be independent directors. In addition, any director appointed by a shareholder pursuant to a shareholders agreement is bound by the terms of such agreement. See “Item 7. Major Shareholders and Related Party Transactions— 167
Compliance Our by-laws provide for a Compliance Committee comprised of at least three independent members of our board of directors, which members are appointed by our board of directors. In addition, our compliance department, led by our Chief Compliance Officer, reports directly to the Compliance Committee and is not subordinated or connected to any other department or officer of our Share Capital Under the Brazilian Corporations Law and under our by-laws, the number of issued and outstanding non-voting shares or shares with limited voting rights, such as our class A preferred shares and class B preferred shares, may Shareholders’ Meetings Under the Brazilian Corporations Law, we must hold an annual shareholders’ meeting by April 30 of each year in order to:
In addition to the annual shareholders’ meetings, holders of our common shares have the power to determine any matters related to changes in our corporate purposes and to pass any resolutions they deem necessary to protect and enhance our development whenever our interests so require, by means of extraordinary shareholders’ meetings.
Under the Brazilian Corporations Law, the holders of our common shares have the power, among other powers, to vote at shareholders’ meetings to:
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We convene our shareholders’ meetings, including our annual shareholders’ meeting, by publishing a notice in theDiário Oficial do Estado da Bahia,in at least one additional newspaper designated by our shareholders with general circulation in Bahia, where we maintain our registered office. On the first call of any meeting, the notice must be published no fewer than three times, beginning at least 15 calendar days prior to the scheduled meeting date. Companies that have issued ADSs with voting rights must publish the notice of a shareholders’ meeting to resolve on matters with regard to which ADS holders have voting rights at least 30 days prior to the scheduled meeting date. The notice must contain the meeting’s place, date, time, agenda and, in the case of a proposed amendment to our by-laws, a description of the subject matter of the proposed amendment. In order for a valid action to be taken at a shareholders’ meeting, shareholders representing at least 25% of our issued and outstanding voting share capital must be present on first call. However, shareholders representing at least two-thirds of our issued and outstanding voting share capital must be present at a shareholders’ meeting called to amend our by-laws. If a quorum is not present, our board of directors may issue a second call by publishing a notice as described above at least eight calendar days prior to the scheduled meeting. The quorum requirements do not apply to a meeting held on the second call, and the shareholders’ meetings may be convened with the presence of shareholders representing any number of shares (subject to the voting requirements for certain matters described below). A shareholder without a right to vote may attend a shareholders’ meeting and take part in the discussion of matters submitted for consideration.
Voting Rights Under the Brazilian Corporations Law and our by-laws, each of our common shares entitles its holder to one vote at our shareholders’ meetings. Our preferred shares generally do not confer voting rights, except in the limited circumstances. We may not restrain or deny any voting rights without the consent of the majority of the shares affected. Whenever the shares of any class of share capital are entitled to vote, each share is entitled to one vote. 169 Preemptive Rights Under the Brazilian Corporations Law, each of our common and class A preferred shareholders has a general preemptive right to subscribe for our shares or securities convertible into our shares in any capital increase, in proportion to the number of our shares held by such shareholder. In accordance with the applicable legislation and our by-laws, the class B preferred shares (which are special shares paid up with resources provided for in certain tax incentive legislation), the holders of such class B preferred shares do not have preemptive rights in case of any capital increase. In the event of a capital increase that would maintain or increase the proportion of our capital represented by our class A preferred shares, holders of our class A preferred shares would have preemptive rights to subscribe to newly issued class A preferred shares only. In the event of a capital increase that would reduce the proportion of our capital represented by our class A preferred shares, holders of such preferred shares would have preemptive rights to subscribe to any new class A preferred shares in proportion to the number of our shares that they hold, and to our common shares only to the extent necessary to prevent dilution of their interests in our total capital. Under our by-laws, except when issuing voting shares or securities convertible into voting shares, our board of directors or our shareholders, as the case may be, may decide to reduce the term of preemptive rights or not to extend preemptive rights to our shareholders with respect to any issuance of our non-voting shares, debentures convertible into our shares or warrants made in connection with a public exchange made to acquire control of another company or in connection with a public offering or through a stock exchange. The preemptive rights are transferable and must be exercised within a period of at least 30 days following the publication of notice of the issuance of shares or securities convertible into our shares. Holders of the ADSs may not be able to exercise the preemptive rights relating to our class A preferred shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of the ADSs, and we may not file any such registration statement. Redemption, Amortization, Tender Offers and Rights of Withdrawal Our by-laws or our shareholders at a shareholders’ meeting may authorize us to use our profits or reserves to redeem or amortize our shares in accordance with conditions and procedures established for such redemption or amortization. The Brazilian Corporations Law defines “redemption” (resgate de ações) as the payment of the value of the shares in order to permanently remove such shares from circulation, with or without a corresponding reduction of our share capital. The Brazilian Corporations Law defines “amortization” (amortização) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they would otherwise receive if we were liquidated. If an amortization distribution has been paid prior to our liquidation, then upon our liquidation, the shareholders who did not receive an amortization distribution will have a preference equal to the amount of the amortization distribution in the distribution of our capital. The Brazilian Corporations Law authorizes us, by means of a decision made at our shareholders’ meeting, to redeem shares not held by our controlling shareholders, if, after a tender offer effected as a consequence of delisting or a substantial reduction in the liquidity of our shares, our controlling shareholders increase their participation in our total share capital to more than 95%. The redemption price in such case would be the same price paid for our shares in any such tender offer. Rights of Withdrawal The Brazilian Corporations Law provides that, in certain limited circumstances, a dissenting shareholder may withdraw its equity interest from our
This right of withdrawal may be exercised by the holders of the adversely affected common or preferred shares if we decide:
In addition, holders of our common and preferred shares may exercise their right of withdrawal if we decide to undertake any of the following actions:
Only shareholders who own shares on the date of publication of the first notice convening the relevant shareholders’ meeting or the press release concerning the relevant shareholders’ meeting is published, whichever is earlier, will be entitled to withdrawal rights. Shareholders will not be entitled to this right of withdrawal if the shares of the entity resulting from a merger, incorporation, consolidation of our The redemption of shares arising out of the exercise of any withdrawal rights would be made at book value per share, determined on the basis of their most recent audited balance sheet approved by our dissenting shareholders. However, if the shareholders’ meeting approving the action that gave rise to withdrawal rights occurred more than 60 days after the date of the most recent approved audited balance sheet, a shareholder may demand that its shares be valued on the basis of a balance sheet prepared specifically for this purpose. The right of withdrawal lapses 30 days after the date of publication of the minutes of the shareholders’ meeting that approved one of the matters described above. Our shareholders may reconsider any resolution giving rise to withdrawal rights within 10 days following the expiration date for such rights if we believe that the withdrawal of shares of dissenting shareholders would jeopardize our financial stability. Disclosures of Share Ownership Brazilian regulations require that (1) each of our controlling shareholders, directly or indirectly, (2) shareholders who have elected members of our board of directors, and (3) any person or group of persons representing a person that has directly or indirectly acquired or sold an interest that exceeds upwards or downwards, the threshold of 5%, 10%, 15%, and so on, of the total number of our shares of any type or class to disclose its or their share ownership or divestment to the CVM and to the B3.
Form and Transfer Our preferred shares and common shares are in book-entry form, registered in the name of each shareholder or its nominee. The transfer of our shares is governed by Article 35 of the Brazilian Corporations Law, which provides that a transfer of shares is effected by our transfer agent, Banco Itaú S.A., by an entry made by the transfer agent in its books, upon presentation of valid written share transfer instructions to us by a transferor or its representative. When preferred shares or common shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of our transfer agent by a representative of a brokerage firm or the stock exchange’s clearing system. The transfer agent also performs all the services of safe-keeping of our shares. Transfers of our shares by a non-Brazilian investor are made in the same manner and are executed on 171 The B3 operates a central clearing system. A holder of our shares may choose, at its discretion, to participate in this system, and all shares that such shareholder elects to be put into the clearing system are deposited in custody with the clearing and settlement chamber of the B3 (through a Brazilian institution that is duly authorized to operate by the Central Bank and maintains a clearing account with the clearing and settlement chamber of the B3). Shares subject to the custody of the clearing and settlement chamber of the B3 are noted as such in our registry of shareholders. Each participating shareholder will, in turn, be registered in the register of the clearing and settlement chamber of the B3 and will be treated in the same manner as shareholders registered in our books. Material Contracts We have not entered into any material contracts, other than those described elsewhere in this annual report or entered into in the ordinary course of business. For additional information about material agreements that we have recently entered into, please see “Item 5. Operating and Financial Review and Prospects––Recent Developments” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.” Exchange Controls There are no restrictions on ownership or voting of our capital stock by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments, interest on shareholders’ equity payments and proceeds from the sale of our share capital into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions under foreign investment legislation and foreign exchange regulations, which generally require, among other things, the registration of the relevant investment with the Central Bank and/or the CVM, as the case may be. Investments in our class A preferred shares by (1) a holder not deemed to be domiciled in Brazil for Brazilian tax purposes, (2) a non-Brazilian holder who is registered with the CVM under Annex I of Resolution No. 4,373, or a 4,373 Holder, or (3) the depositary, are eligible for registration with the Central Bank. This registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of our class A preferred shares. Depositary Receipts (Annex II of Resolution No. 4,373) Annex II of Resolution No. 4,373 of the National Monetary Council, as amended, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADS program was approved by the Central Bank and the CVM prior to the issuance of the ADSs. Accordingly, as a general rule, the proceeds from the sale of ADSs by non-Brazilian resident holders of ADSs outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs who are not domiciled in a favorable tax haven jurisdiction are entitled to favorable tax treatment. See “—Taxation—Brazilian Tax Considerations.” We pay dividends and other cash distributions with respect to our class A preferred shares in reais. We have obtained an electronic certificate of foreign capital registration from the Central Bank in the name of the depositary with respect to our ADSs to be maintained by the custodian. Pursuant to this registration, the custodian is able to convert dividends and other distributions with respect to our class A preferred shares represented by ADSs into foreign currency and remit the proceeds outside Brazil to the depositary so that the depositary may distribute these proceeds to the holders of record of the ADSs.
Foreign Direct Investment and Portfolio Investment Investors (individuals, legal entities, mutual funds and other collective investment entities) domiciled, residing or headquartered outside Brazil may register their investments in our capital stock as foreign portfolio investments under Annex I of Resolution No. 4,373 (described below) or as foreign direct investments under Law No. 4,131 (described below). Registration under Annex I of Resolution No. 4,373 or Law No. 4,131 generally enables the conversion of dividends, other distributions and sales proceeds received in connection with registered investments into foreign currency and the remittance of such amounts outside Brazil. 172 Registration under Annex I of Resolution No. 4,373 affords favorable tax treatment to non-Brazilian portfolio investors who are not resident in favorable tax jurisdictions (países com tributação favorecida) pursuant to articles 24, 24-A and 24-B of Law no. 9,430/96. See “—Taxation—Brazilian Tax Considerations.” Annex I of Resolution No. 4,373 All investments made by a non-Brazilian investor under Annex I of Resolution No. 4,373 are subject to electronic registration with the Brazilian Central Bank. Such registration permits the conversion of dividend payments, payments of interest on shareholders’ equity and proceeds from the sale of our capital stock into foreign currency and the remission of such amounts outside Brazil. Under Annex I of Resolution No. 4,373, non-Brazilian investors registered with the CVM may invest in almost all financial assets and engage in almost all transactions available to Brazilian investors in the Brazilian financial and capital markets without obtaining a separate Central Bank registration for each transaction, provided that certain requirements are fulfilled. Under Annex I of Resolution No. 4,373, the definition of a non-Brazilian investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered outside Brazil. Pursuant to Annex I of Resolution No. 4,373, non-Brazilian investors must:
The securities and other financial assets held by a non-Brazilian investor pursuant to Annex I of Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM, as applicable, or be registered on registration, clearing and custody systems authorized by the Central Bank or by the CVM, as applicable. Subject to limited exceptions provided in the CVM regulation or previous CVM authorization, the trading of securities held under Annex I of Resolution No. 4,373 is restricted to transactions carried out on stock exchanges or through organized over-the-counter markets licensed by the CVM. The offshore transfer or assignment of the securities or other financial assets held by non-Brazilian investors pursuant to Annex I of Resolution No. 4,373 are prohibited, except for transfers (1) resulting from consolidation, spin-off, merger or merger of shares or occurring upon the death of an investor by operation of law or will; (2) resulting from a corporate reorganization effected abroad, as long as the final beneficiaries and the amount of the assets remain the same, or (3) authorized by the CVM.
Law No. 4,131 Foreign direct investors under Law No. 4,131 may sell their shares in both private and open market transactions, but these investors will generally be subject to less favorable tax treatment on gains with respect to our class A preferred shares. See “—Taxation—Brazilian Tax Considerations.” To obtain a certificate of foreign capital registration from the Brazilian Central Bank under Law No. 4,131, a foreign direct investor must:
Foreign investors must be registered with the Federal Brazilian Revenue Service pursuant to Normative Instruction 1,683, dated as of December 27, 2016. This registration process is undertaken by the investor’s legal representative in Brazil. Investors that are foreign legal entities are required to report their final individual beneficiaries. Some exceptions apply (e.g., publicly listed corporations). Taxation The following summary contains a description of the material Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of class A preferred shares and ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase any such securities. There is at present no income tax treaty between Brazil and the United States. The description below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of class A preferred shares or ADSs. Prospective purchasers of our class A preferred shares or ADSs are advised to consult their own tax advisors in respect of the consequences that the purchase, ownership or disposition of our class A preferred shares or ADSs might trigger under the laws of Brazil, the United States or any other jurisdiction in light of their particular investment circumstances. Brazilian Tax Considerations The following topics summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of class A preferred shares or ADSs by an individual, entity, trust or organization that is not domiciled or resident in Brazil for purposes of Brazilian taxation and, in the case of a holder of class A preferred shares, which has registered its investment with the Central Bank, or a non-resident holder. The following information is based on the tax laws of Brazil as in effect on the date of this annual report, which are subject to change, with possible retroactive effect, and to differing interpretation. Furthermore, the following discussion does not specifically address all of the Brazilian tax considerations applicable to any particular non-resident holder, and each non- resident holder should consult his or her own tax advisor concerning the Brazilian tax consequences of an investment in any of such securities. Acquisition of ADSs or Class A Preferred Shares The acquisition of ADSs or class A preferred shares by non- resident holders is not a taxable event in Brazil. See “—Taxation of Gains
Taxation of Dividends Dividends paid by a Brazilian corporation with respect to profits generated as of January 1, 1996, including dividends paid in kind to the depositary in respect of our class A preferred shares underlying the ADSs or to a non- resident holder in respect of class A preferred shares, are not subject to withholding income tax in Brazil. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at variable rates, according to the tax legislation applicable to each corresponding year. 174 Interest on Shareholders’ Equity Distributions of interest on our shareholders’ equity in respect of our class A preferred shares or the ADSs are generally subject to Brazilian withholding tax at the rate of 15%. However, the rate of 25% is applicable in case the non-resident holder is domiciled in a country or location or other jurisdiction (1) that does not impose income tax; (2) where the maximum income tax rate is lower than 20%; or (3) where its legislation Since 1997 and in accordance with Laws Nos. 9,249/95 and 9,430/96, we have been permitted to deduct these distributions for purposes of calculating the CSLL and the corporate income taxes that we owe, provided that such distribution is approved by our shareholders in a general meeting and complies with the limits established by Brazilian tax legislation. Payments of interest on shareholders’ equity may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on shareholders’ equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax plus the amount of declared dividends, is at least equal to the mandatory dividend. Taxation of Gains According to Brazilian Law No. 10,833/03, gains realized on the disposition or sale of assets located in Brazil are subject to income tax in Brazil, regardless of whether the sale or the disposition is made by the non-resident holder to a Brazilian resident or to another non-resident of Brazil, as follows: “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquiror is resident or domiciled abroad, shall be responsible to withhold and pay the income tax applicable to capital gains under Article 18 of Law 9,249 of December 26, 1995 earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.” Holders of the ADSs outside of Brazil may have grounds to assert that Brazilian Law No. 10,833/03 does not apply to sales or other dispositions of ADSs as ADSs are not assets located in Brazil. However, the sale or other disposition of class A preferred shares abroad may be subject to the provisions of Brazilian Law No. 10,833/03. Any capital gains arising from sales or other dispositions outside Brazil would be subject to Brazilian income tax at the rate of 15% or 25% if the investor is located in a tax favorable jurisdiction. Brazilian Law No. 10,833/03 requires the purchaser of our class A preferred shares outside Brazil or its attorney-in-fact in Brazil to withhold the income tax. A disposition of class A preferred shares can only occur abroad if any investor decides to cancel its investment in ADSs and register the underlying class A preferred shares as a direct foreign investment under Law No. 4,131/62. Taxation of Gains in Brazil The exchange of ADSs for class A preferred shares is not subject to Brazilian tax. Upon receipt of the underlying class A preferred shares in exchange of ADSs, a non-resident investor will be entitled to register with the Central Bank the U.S. dollar value of such shares as a foreign portfolio investment under Resolution No.4,373/14. See “—Exchange Controls” and “—Tax on Foreign Exchange and on Bonds and Securities Transactions—Registered Capital.” The sale or disposition of class A preferred shares on a Brazilian stock exchange is exempt from capital gains tax, provided that such shares are held by a non-resident holder that (1) has registered its investment in Brazil with the Central Bank under the rules of Resolution No.4,373/14, and (2) is not resident or domiciled in a tax favorable jurisdiction. Upon receipt of the underlying class A preferred shares, a non-resident holder is also entitled to register with the Central Bank the U.S. dollar value of such shares as aforeign direct investment under Law 4,131/62. See “—Exchange Controls” and “—Tax on Foreign Exchange and on Bonds and Securities Transactions—Registered Capital.” A 15% capital gains tax is applicable to the sale or other disposition of
If the sale or other disposition of such shares is carried out on a Brazilian stock exchange, the capital gains on the sale or disposition will be taxed at a rate of 15%. This 15% rate applies to all transactions carried out on 175 The deposit of class A preferred shares in exchange for ADSs is not subject to Brazilian tax, provided that these shares are held by the non-resident holder as a foreign portfolio investment under Resolution No. 4,373/14. In the event our class A preferred shares are held by the non-resident holder as a foreign direct investment under Law No. 4,131/62, the deposit of these shares in exchange for ADSs is subject to payment of Brazilian capital gains tax at the rate of 15% (25% in the case of a non-resident holder located in a tax favorable jurisdiction). The current preferential treatment for non-resident holders of ADSs and non-resident holders of class A preferred shares under Resolution No. 4,373/14 may not continue in the future. Any exercise of preemptive rights relating to our class A preferred shares will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to our class A preferred shares by the depositary may be subject to Brazilian taxation. Tax authorities may attempt to tax such gains even when the sale or assignment of such rights takes place outside Brazil, based on the provisions of Law No. 10,833/03. These authorities may allege that the preemptive rights relate to assets located in Brazil (the class A preferred shares) and require payment of capital gains tax at the rate of 15% (or 25% if the beneficiary of the payments is resident of a tax favorable jurisdiction). If the preemptive rights are assigned or sold in Brazil, capital gains tax will apply at a rate of 15% (or 25% in the case of a non-resident holder located in a tax favorable jurisdiction). Sales or assignments of preemptive rights effected on Brazilian stock exchanges are exempt from income tax, provided that such preemptive rights relate to shares registered as a foreign portfolio investment under Resolution No. 4,373 and the non-resident holder is not a resident of or domiciled in a tax favorable jurisdiction. As of January 2017, Law No. 13,259 established new progressive income tax rates applicable to capital gains derived from the disposition of assets by Brazilian individuals. Law No. 13,259 established new rates that range from 15% to 22.5%, depending on the amount of the gain recognized by the Brazilian individual, as follows: (i) 15% on gains not exceeding R$5,000,000.00; (ii) 17.5% on gains that exceed R$5,000,000.00 and do not exceed R$10,000,000.00; (iii) 20% on gains that exceed R$10,000,000.00 and do not exceed R$30,000,000.00; and (iv) 22.5% on gains exceeding R$30,000,000.00. Pursuant to Other Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of class A preferred shares or ADSs by a non-resident holder except for gift and inheritance taxes imposed by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled inBrazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of class A preferred shares or ADSs. 176
Tax on Foreign Exchange and on Bonds and Securities Transactions Foreign Exchange Transactions Pursuant to Decree 6,306/07, the conversion of Brazilian currency into foreign currency and the conversion of foreign currency into Brazilian currency may be subject to the IOF/Exchange Tax. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38%. This is the rate applicable to the inflow and outflow of foreign direct investments for companies in Brazil according to Law 4,131/62 (other than trading portfolio investments in securities under Resolution 4,373/14). The IOF/Exchange Tax levies at 0% on the following capital inflows and outflows realized by non-residents: (1) investments for the constitution of an initial or additional security guarantee margin required by Brazilian stock exchange, futures and commodities exchanges; (2) investments in Brazilian stocks using funds derived from the cancelation of “depositary receipts”; (3) investments in the Brazilian financial and capital markets; (4) return of the investments realized in the Brazilian financial and capital markets to the non-resident; and (5) conversion of foreign direct investments in stocks under Law 4,131/62 into foreign investment in stocks under Resolution 4,373/14. The remittance abroad of dividends and interest on equity to non-Brazilian residents is subject to 0% IOF/Exchange tax. Additionally, the transfers of shares traded on the stock exchange with the purpose of enabling the issuance of ADSs are subject to the IOF/Bonds Tax at a rate of 1.5%, which is aimed at correcting an asymmetry created by the IOF/Exchange Tax. The Brazilian government may increase the rate of the IOF/Exchange Tax to a maximum of 25% of the amount of the foreign exchange transaction at any time, but such an increase would only apply to future foreign exchange transactions. The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our Registered Capital The amount of an investment in class A preferred shares held by a non-Brazilian holder as a foreign direct investment under Law No. 4,131/62 or a foreign portfolio investment under Resolution No. 4,373/14 or in ADSs held by the depositary representing such holder, as the case may be, is eligible for registration with the Central Bank; such registration (the amount so registered is referred to as “registered capital”) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized with respect to disposition of, such class A preferred shares. The registered capital for class A preferred shares purchased in the form of ADSs, or purchased in Brazil and deposited with the depositary in exchange for an ADS, is equal to their purchase price in U.S. dollars paid by the purchaser. The registered capital for class A preferred shares that are withdrawn upon surrender of ADSs is the U.S. dollar equivalent of (1) the average price of our class A preferred shares on the Brazilian stock exchange on which the greatest number of such class A preferred shares was sold on the day of withdrawal, or (2) if no class A preferred shares were sold on such day, the average price of class A preferred shares that were sold in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar value of our class A preferred shares is determined on the basis of the average commercial market rates quoted by the Central Bank on such date (or, if the average price of class A preferred shares is determined under clause (2) of the preceding sentence, the average of such average quoted rates on the same fifteen dates used to determine the average price of our class A preferred shares). A non-Brazilian holder of class A preferred shares may experience delays in effecting the registration of registered capital, which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder. See “—Exchange Controls” and “Item 3. Key Information—Risk Factors—Risks Relating to Our
U.S. Federal Income Tax Considerations The following is a discussion of the material U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of our class A preferred shares or ADSs, which are 177 This description does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of our class A preferred shares or ADSs. In addition, this description does not address the consequences of any U.S. federal tax other than income tax, including but not limited to the U.S. federal estate and gift taxes. This description is based on (1) the Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date of this annual report and (2), in part, on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below. As used below, a “U.S. holder” is a beneficial owner of a class A preferred share or ADS that is, for U.S. federal income tax purposes, (1) an individual citizen or resident of the United States, (2) a corporation organized under the laws of the United States, any state thereof or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (4) a trust if (i) a court within the United States is able to exercise primary supervision over its administration and (ii) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds class A preferred shares or ADSs, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. A partnership or its partners should consult their tax advisor as to its tax consequences. The class A preferred shares will be treated as equity for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a holder of an Taxation of Dividends Subject to the discussion under “—Passive Foreign Investment Company Rules,” in general, the gross amount of a distribution made with respect to a class A preferred share or ADS (which for this purpose shall include distributions of interest attributable to shareholders’ equity before any reduction for any Brazilian taxes withheld therefrom) will, to the extent made from the current or accumulated earnings and profits of our 178
A dividend paid inreais will be includible in the income of a U.S. holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. holder in the case of our class A preferred shares or, in the case of a dividend received in respect of ADSs, on the date the dividend is received by the depositary, whether or not the dividend is converted into U.S. dollars. Assuming the payment is not converted at that time, the U.S. holder will have a tax basis inreais equal to that U.S. dollar amount, which will be used to measure gain or loss from subsequent changes in exchange rates. Any gain or loss realized by a U.S. holder that subsequently sells or otherwise disposes ofreais, which gain or loss is attributable to currency fluctuations after the date of receipt of the dividend, will be U.S. source ordinary gain or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a class A preferred share or ADS will be subject to U.S. federal income taxation as foreign source dividend income, which may be relevant in calculating a U.S. holder’s foreign tax credit limitation. Subject to limitations under U.S. federal income tax law concerning credits or deductions for foreign taxes and certain exceptions for short-term and hedged positions, any Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’s election, may be deducted in computing taxable income if the U.S. holder has elected to deduct all foreign income taxes for the taxable year). The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific “baskets” of income. For this purpose, the dividends should generally constitute “passive category income,” or in the case of certain U.S. holders, “general category income.” The rules with respect to foreign tax credits are complex, and U.S. holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances. Sale, Exchange or Other Disposition of Class A Preferred Shares or ADSs A deposit or withdrawal of class A preferred shares by a holder in exchange for an ADS that represents such shares will not result in the realization of gain or loss for U.S. federal income tax purposes. 179
The initial tax basis of class A preferred shares With respect to the sale, exchange or Passive Foreign Investment Company Rules A Based on certain estimates of its gross income and gross assets and the nature of its business, our If we were a PFIC, a U.S. holder of class A preferred shares or ADSs If a U.S. holder owns our class A preferred shares or ADSs during any year in which we were a PFIC, the U.S. holder generally must file IRS Form 8621 with respect to our
Medicare Tax on “Net Investment Income” Certain U.S. 180 Foreign Asset Reporting Certain U.S. holders who are individuals are required to report information relating to an interest in our class A preferred shares or ADSs, subject to certain exceptions (including an exception for shares or ADSs held in custodial accounts maintained with a financial institution). U.S. holders of the class A preferred shares or ADSs are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our class A preferred shares or ADSs. Information Reporting and Backup Withholding U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of shares. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or Backup withholding is not an additional tax. Holders generally will be entitled to a credit for any amounts withheld under the backup withholding rules against their U.S. federal income tax liability or a refund of the amounts withheld, provided the required information is furnished to the The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of class A preferred shares or ADSs. Prospective purchasers should consult their own tax advisors concerning the tax consequences of their particular situations. Documents on Display Statements contained in this annual report regarding the contents of any contract or other document filed as an exhibit to this annual report summarize their material terms, but are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document. We are subject to the periodic reporting and other informational requirements of the Exchange Act applicable to a foreign private issuer. Accordingly, we are required to file with or furnish to the SEC, reports and other information, including annual reports on Form 20-F and reports on Form 6-K. As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and members of our board of directors and board of executive officers and our principal shareholders are exempt from reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, as a foreign private issuer, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. You may inspect and copy reports and other information that we file with or furnish to the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. Copies of these materials may be obtained by mail from the SEC’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, the SEC maintains an internet website atwww.sec.gov from which you can electronically access these materials.
We also file financial statements and other periodic reports with the CVM, which are available for investor inspection at the CVM’s offices located at Rua Sete de Setembro, 111, 2nd floor, Rio de Janeiro, RJ, and Rua Cincinato Braga, 340, 2nd, 3rd and 4th floors, São Paulo, SP. The telephone numbers of the CVM in Rio de Janeiro and São Paulo are +55-21-3554-8686 and +55-11-2146- 2097, respectively. 181 Copies of our annual report on Form 20-F and documents referred to in this annual report and our by-laws, as well as certain other documents that we are required to file with, or make availabe to, the SEC and the CVM, are available for inspection upon request at our headquarters at Rua Lemos Monteiro, 120 – 24° andar, Butantã—São Paulo—SP, CEP 05501-050, Brazil. Our filings are also available to the public through the internet on our website atwww.braskem-ri.com.br. The information included on our website or that might be accessed through our website is not included in this annual report and is not incorporated into this annual report by reference. Item 11. Quantitative and Qualitative Disclosures About Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices. We are exposed to market risks arising from our normal business activities. These risks are beyond our control and consist, principally, in the possibility that changes in interest rates, exchange rates or commodity prices will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. In order to mitigate the market risks to which we are exposed, we have used, and we may use, foreign currency, interest rate and commodity derivative instruments, as well as cash and receivables. As of December 31, We assess the potential and consolidated impact of market risks and seek to mitigate assessed risks in accordance with our risk management policy. Our current risk management policy, adopted on March 30, 2017 by our board of directors and We do not enter into derivative transactions with speculative purposes. As of December 31, Interest Rate Risk Our variable interest rate exposure is primarily subject to the variations of the LIBOR rate and, forreal-denominated borrowings and short-term cash investments, variations of the TLP rate, CDI rate and IPCA rate. With respect to Brazilian interest rates:
182 The table below provides information about our significant interest-rate sensitive instruments:
(1) Represents the net present value of the future cash flows from the obligations converted intoreais at fair market value as of December 31, In the event that the average interest rate applicable to our financial assets and debt in Foreign Currency Exchange Rate Risk Our liabilities that are exposed to foreign currency exchange rate risk are primarily denominated in U.S. dollars. To partially offset our risk of any devaluation of thereal against the U.S. dollar, we currently maintain available liquid assets denominated in U.S. dollars and enter into derivative contracts. Additionally, in order to provide a better representation of the actual exchange rate risk related to future exports, we designated part of 183 The table below provides information about our significant foreign currency exposures:
(1) Represents the net present value of the future cash flows from the obligations converted intoreais at fair market value as of December 31, Our foreign currency exposures give rise to market risks associated with exchange rate movements of thereal against the U.S. dollar. Foreign currency-denominated liabilities as of December 31, Our cash and funds available in U.S. dollars partially protect us against exposure arising from the U.S. dollar-denominated debt. Similarly, revenue from future sales and exports partially offsets this foreign currency exposure for U.S. dollar-denominated debt, and we therefore adopted hedge accounting treatment to provide a better representation of our actual exposure. Since 2016, Braskem has recognized the exchange rate variation, held on “Other Comprehensive Income”, to the income statement, following the future sales and exports designation schedule (for further information, see note 17 to ourauditedconsolidated financial statements elsewhere in this annual report). In the event that thereal depreciated by 10% against the U.S. dollar during Commodity Prices We do not currently hedge our main exposure to changes in prices of naphtha, our principal raw material, which are linked to international market prices denominated in U.S. dollars of naphtha and other petroleum derivatives. We do not hedge this main exposure, in part, because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of these commodities denominated in U.S. dollars and, in part, because the prices of our polyethylene, polypropylene and PVC products sold in domestic markets generally reflect changes in the international market prices of these products denominated in U.S. dollars, converted intoreais. In periods of high volatility in the U.S. dollar price of naphtha or thereal/U.S. dollar exchange rate, there is usually a lag between the time that the U.S. dollar price of naphtha increases or the U.S. dollar appreciates and the time that we can effectively pass on the resulting increased cost inreais to our customers in Brazil. Accordingly, if the U.S. dollar price of naphtha increases precipitously or thereal 184
Item 12. Description of Securities Other than Equity Securities The Bank of New York Mellon, which was designated our depositary in December 2016, collects its fees for the delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs or from intermediaries acting for them. The depositary also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. Persons depositing or withdrawing shares must pay:
During the year ended December 31, 185
PART II Item 13. Defaults, Dividend Arrearages and Delinquencies Not applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable. 186 Item 15. Controls and Procedures Disclosure Controls and Procedures Our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management, with the participation of the CEO and CFO, under the oversight of the Board of Directors, assessed the effectiveness of our internal control over financial reporting as of December 31, Material Weaknesses in Internal Control over Financial Reporting We identified a material weaknessin our control environmentas we had 187
Our independent registered public accounting firm, KPMG Auditores Independentes, has issued an adverse audit opinion on the effectiveness of our internal control over financial reporting as of December 31, Remediation Actions Addressing Material Weaknesses Reported in Management has taken several actions to improve the control environment and continues to monitor the maturity and operating effectiveness of controls designed and implemented. In order to remediate the material weaknesses, we, led by our Chief Executive Officer and the Chief Financial Officer, are implementing and monitoring the following specific actions: Regarding the material weaknesses related to ourcontrol environment and risk assessment, we are focused on ensuring we have adequate The
188
Remediation Actions Addressing Material Weaknesses Reported in 2018 We have implemented improved procedures and control activities, which allowed us to remediate certain material weaknesses described in our 2018 annual report on Form 20-F. Regarding the material weaknesses related to ourcontrol environment and risk assessment, we have implemented several actions to address the complete mitigation of risksassociated with our financial statements, however we believe we will be able fully cover all the components and principles of internal control framework over financial reporting only during 2020. Ineffective design and operation of GITCs:
Ineffective operation of controls over the provision for legal contingencies: In 2019, our Legal department has reviewed the legal contingencies process and significantly improved the controls, including thereconciliation of litigation process analysis and the
2020.
Ineffective design of In 2019, the Feedstock department implemented new controls related to oversight of purchases and payment of raw materials. This controls were able to ensure the raw material received from suppliers were adequate, in
Changes in Internal Control over Financial Reporting Other than certain of the 189 Item 16A. Audit Committee Financial Expert Our fiscal council currently includes an “audit committee financial expert” within the meaning of this Item 16A. Our fiscal council has determined that Ismael Campos de Abreu is our fiscal council financial expert. Mr. Abreu’s biographical information is included in “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Fiscal Council.” Given that our board has not made a formal determination as to Mr. Abreu’s independence, as that term is defined in Rule 303A.02 of the New York Stock Exchange’s Listed Company Manual, he is not considered independent under that standard. However, he meets the standards of independence for fiscal council members under Brazilian Corporations Law. See “Item 6. Directors, Senior Management and Employees—Directors and Senior Management—Fiscal Council” for more information. We have adopted a code of conduct that applies to members of our board of directors, fiscal council and board of executive officers, as well as to our other employees. Our current code of conduct was approved by our board of directors in April 2018 and amended in September 2018. A copy of our code of conduct may be found on our website atwww.braskem.com.br. The information included on our website or that might be accessed through our website is not included in this annual report and is not incorporated into this annual report by reference. Item 16C. Principal Accountant Fees and Services Audit and Non-Audit Fees The following table sets forth the fees billed to us by our independent registered public accounting
(1) Audit fees consist of the aggregate fees billed (2) Audit-related fees refer to services provided in connection with prior debt offerings. (3) Tax fees consist of the aggregate fees billed Pre-Approval Policies and Procedures Our fiscal council and board of directors have approved an Audit and Non-Audit Services Pre-Approval Policy that sets forth the procedures and the conditions pursuant to which services proposed to be performed by our independent auditors may be pre-approved. This policy is designed to (1) provide both general pre-approval of certain types of services through the use of an annually established schedule setting forth the types of services that have already been pre-approved for a certain year and, with respect to services not included in an annual schedule, special pre-approval of services on a case by case basis by our fiscal council and our independent auditors, and (2) assess compliance with the pre-approval policies and procedures. Our management periodically reports to our fiscal council the nature and scope of audit and non-audit services rendered by our independent auditors and is also required to report to our fiscal council any breach of this policy of which our management is aware. 190
Item 16D. Exemptions From the Listing Standards for Audit Committees We are relying on the general exemption from the listing standards relating to audit committees contained in Rule 10A-3(c)(3) under the Exchange Act for the following reasons:
We do not believe that our reliance on this general exemption will materially adversely affect the ability of our fiscal council to act independently and to satisfy the other requirements of the listing standards relating to audit committees contained in Rule 10A-3 under the Exchange Act. Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On August 13, 2012, our board of directors authorized a share repurchase program under which we are authorized to repurchase up to 13,376,161 “class A” preferred shares at market prices over the B3 at any time and from time to time prior to August 28, 2013. In 2012, we repurchased 262,300 shares under this program. In 2013 and 2014, we did not repurchase any shares.
On February 11, 2015, our board of directors approved the fifth program for the repurchase of shares effective for the period between February 19, 2015 and February 18, 2016, through which we may acquire up 3,500,000 “class A” preferred shares at market price. In April 20, 2015, we had repurchased 80,000 “class A” preferred shares for an aggregate of R$0.9 million. 191 Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance On November 4, 2003, the SEC approved the final corporate governance rules established by the NYSE. According to these rules, foreign private issuers that are listed on the NYSE, such as Braskem, are subject to a more limited set of corporate governance requirements than those imposed on U.S. domestic issuers. As a foreign private issuer, Braskem must comply with the following four requirements imposed by the NYSE:
Significant Differences The significant differences between Braskem’s corporate governance practices and the NYSE’s corporate governance standards are mainly due to the differences between the U.S. and Brazilian legal systems. Braskem must comply with the corporate governance standards set forth under the Brazilian Corporations Law, the rules of the CVM and the applicable rules of the B3, as well as those set forth in Braskem’s by-laws. The significant differences between Braskem’s corporate governance practices and the NYSE’s corporate governance standards are set forth below. Independence of Directors and Independence Tests In general, the NYSE corporate governance standards require listed companies to have a majority of independent directors and set forth the principles by which a listed company can determine whether a director is independent. However, under the NYSE corporate governance standards, a listed company (whether U.S. or foreign) of which more than 50% of the voting power is held by another company (a “controlled company”), need not comply with the following NYSE corporate governance standards:
Because a majority of the voting power of Braskem’s capital stock is directly controlled by Odebrecht, Braskem is a controlled company, and would therefore not be required to have a majority of independent directors if it were a U.S. domestic issuer. Although Brazilian Corporations Law and Braskem’s by-laws establish rules in relation to certain qualification requirements of its directors, neither Brazilian Corporations Law nor Braskem’s by-laws require that Braskem have a majority of independent directors nor require Braskem’s board of directors or management to 192 Executive Sessions The NYSE corporate governance standards require non-management directors of a listed company to meet at regularly scheduled executive sessions without management. According to the Brazilian Corporations Law, up to Nominating/Corporate Governance and Compensation Committees The NYSE corporate governance standards require that a listed company have a nomination/corporate governance committee and a compensation committee, each composed entirely of independent directors and eachwith a written charter that addresses certain duties. However, as a controlled company, Braskem would not be required to comply with these requirements if it were a U.S. domestic company.
Braskem is not required under Brazilian law to have, and accordingly does not have, a nominating/corporate governance committee. Currently, all of Braskem’s directors are nominated by certain of its shareholders, including Odebrecht, pursuant to shareholders agreements and Braskem’s by-laws. Braskem is not required under Brazilian law to have a compensation committee. However, Braskem has a personnel and organization committee, which is a subcommittee of its board of directors which is responsible for, among other things, analyzing proposals and making recommendations to Braskem’s board of directors with respect to the total compensation paid to Braskem’s management, including Braskem’s chief executive officer. This committee contributes, along with the board of directors, to the annual evaluation of the chief executive officer performance, based on the goals and objectives previously defined and approved by the board of directors, and analyzes the results of the chief executive officer´s annual evaluation of the team members directly associated with him, which results shall be submitted to the board of directors. Under Brazilian Corporations Law, Braskem’s shareholders establish the aggregate compensation of its directors and executive officers, including benefits and allowances, at a general shareholder’s meeting based on the recommendation of Braskem’s board of directors. Audit Committee and Audit Committee Additional Requirements The NYSE corporate governance standards require that a listed company have an audit committee with a written charter that addresses certain specified duties and that is composed of at least three members, all of whom satisfy the independence requirements of Rule 10A-3 under the Exchange Act and Section 303A.02 of the NYSE’s Listed Company Manual. As a foreign private issuer that qualifies for the general exemption from the listing standards relating to audit committees set forth in Section 10A-3(c)(3) under the Exchange Act, Braskem is not subject to the independence requirements of the NYSE corporate governance standards. See “Item 16D. Exemptions From the Listing Standards for Audit Committees.” Shareholder Approval of Equity Compensation Plans The NYSE corporate governance standards require that shareholders of a listed company must be given the opportunity to vote on all equity compensation plans and material revisions thereto, subject to certain exceptions. Under CVM’s Resolution No. 567, shareholder pre-approval is required for the adoption and revision of any equity compensation plans. 193 Corporate Governance Guidelines The NYSE corporate governance standards require that a listed company must adopt and disclose corporate governance guidelines that address certain minimum specified standards which include: (1) director qualification standards; (2) director responsibilities; (3) director access to management and independent advisors; (4) director compensation; (5) director orientation and continuing education; (6) management succession; and (7) annual performance evaluation of the board of directors. Braskem has adopted the B3 corporate governance rules for Level 1 companies and must also comply with certain corporate governance standards set forth under Brazilian Corporations Law. See “Item 9. The Offer and Listing—Trading on the B3.” The Level 1 rules do not require Braskem to adopt and disclose corporate governance guidelines covering the matters set forth in the NYSE’s corporate governance standards. However, certain provisions of Brazilian Corporations Law that are applicable to Braskem address certain aspects of director qualifications standards and director responsibilities. Code of Business Conduct and Ethics The NYSE corporate governance standards require that a listed company must adopt and disclose a code ofbusiness conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or officers. Each code of business conduct and ethics should address the following matters: (1) conflicts of interest; (2) corporate opportunities; (3) confidentiality; (4) fair dealing; (5) protection and proper use of company assets; (6) compliance with laws, rules and regulations (including insider trading laws); and (7) encouraging the reporting of any illegal or unethical behavior.
Braskem has adopted a code of business conduct applicable to its directors, officers and employees, which addresses each of the items listed above. Braskem’s code of business conduct is available on Braskem’s website atwww.braskem.com.br. The information included on our website or that might be accessed through our website is not included in this annual report and is not incorporated into this annual report by reference. No waivers of the provisions of the code of business conduct are permitted, except that the restrictions on outside activities do not apply to Braskem’s directors and members of its fiscal council. Item 16H. Mine Safety Disclosure The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and this Item is included inexhibit 99.01. 194
PART III We have responded to Item 18 in lieu of responding to this item. Reference is made to Item 19 for a list of all financial statements filed as part of this annual report. (a) Financial Statements
(b) List of Exhibits
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: June 12, 2020
196
INDEX TO FINANCIAL STATEMENTS
197
198
Braskem S.A.
and Independent Auditors' Report
Report of Independent Registered Public Accounting FirmTo the Shareholders and Board of Directors Opinion on We have audited We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated A material weakness is a deficiency, or a combination of deficiencies, in Basis for Opinion
F-1
We conducted our Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. KPMG Auditores Independentes São Paulo, Brazil F-2 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Braskem S.A.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statement of financial position of Braskem S.A. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of profit or loss, comprehensive income, changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 12, 2020, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. Changes in Accounting Principles As discussed in Note 2.3 to the consolidated financial statements, the Company has changed its method of accounting for lease arrangements as of January 1, 2019 due to the adoption of IFRS 16 “Leases”. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our F-3 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of impairment of cash generating units that contain goodwill As discussed in notes 3.2.3 and 13 (a) to the consolidated financial statements, the balance of goodwill was R$ 2,058,873 thousand as of December 31, 2019. To evaluate the impairment of goodwill, the Company identifies its cash generating units (“CGU”), estimates the recoverable amount of each CGU, and compares this with its carrying value. The estimate of the recoverable value of the CGUs requires significant judgment on the part of the Company to make certain assumptions including those related to: the discount rate; the growth rates for the next 10 years; the inflation rate, which is used for cash flows to perpetuity; and, where the recoverable value is based on fair value less costs of disposal, future capital expenditure and its associated impact on costs. We identified the evaluation of impairment of CGUs that contain goodwill as a critical audit matter. The assessment of certain assumptions used in the estimates of recoverable values, specifically the discount rate, the growth rates for the next 10 years, the inflation rate and future capital expenditure, including its associated impact on costs, was complex and involved a high degree of subjectivity which required the application of greater auditor judgment. The primary procedures we performed to address this critical audit matter included the following: - We tested certain internal controls over the Company’s goodwill impairment assessment process, including the Company’s review of the calculation of the recoverable value for each CGU and the underlying assumptions, such as the discount rate, the growth rate for the next 10 years and the inflation rate. - We involved corporate finance professionals with specialized skills and knowledge, who assisted in: ·evaluating the discount rate used by the Company by comparing to a discount rate developed using an independent methodology; ·evaluating the growth rates for the next 10 years used by the Company by comparing to historic growth rates and market projections; ·evaluating the inflation rate used by the Company by comparing with market information; ·evaluating the future capital expenditure and its associated impact on costs by comparing to historic information; and ·performing sensitivity analyses on the interest rate and discount rate to assess their impact on the estimation of the recoverable value of each CGU. We compared the projected cash flows for 2019 made by the Company in the prior year with the Company’s actual cash flows for that year to assess the Company’s ability to accurately forecast. Evaluation of the provision and disclosures related to the salt mining activities in Alagoas As discussed in notes 3.2.5, 24.2 and 26 to the consolidated financial statements the Company has recorded a provision related to the geological phenomenon in the vicinity of the Company’s salt mining wells in the state of Alagoas of R$ 3,383,067 thousand as of December 31, 2019 and made disclosures in relation to civil lawsuits, related to the same geological phenomenon, to which it is a party. The provision is for the estimated future outflows of resources required to honor the Company’s commitments under an agreement signed with the Brazilian government authorities following the occurrence of the geological phenomenon. These commitments include taking measures to close and stabilize the salt mines as well as relocating and compensating residents and businesses in the region. The Company has determined that it is possible, but not probable, that it will be required to make payments under the civil lawsuits and therefore made disclosures but recorded no provisions as of December 31, 2019. F-4 We identified the evaluation of the provision and disclosures related to the salt mining activities in Alagoas as a critical audit matter. The evaluation of the estimates and assumptions used by the Company to determine the provision amount required challenging auditor judgment and the use of specialized skills and knowledge. Specifically, the key estimates and assumptions related to the extent and cost of the remediation actions required to stabilize and close the wells, the market value of the properties of residents and businesses in the region and the other costs to relocate and compensate the residents and business owners. In addition, subjective auditor judgment was required to assess the likelihood of an outflow of resources occurring as a result of the civil lawsuits. The primary procedures we performed to address this critical audit matter included the following: We tested certain internal controls over the Company’s litigation process, including controls related to the evaluation of information from external and internal legal counsel, as well as controls over the financial statement disclosures. We evaluated the expertise, objectivity and professional experience of the external legal counsel who assisted the Company in evaluating the likelihood of an outflow of economic resources as a result of the civil lawsuits and estimating the amounts involved. In addition, we obtained legal confirmation, directly from the Company’s legal counsel, that included an evaluation of the likelihood of loss and an estimation of the amounts involved, and compared these evaluations and estimates to those of the Company and with the disclosure made. We involved fixed asset and infrastructure valuation professionals, with specialized skills and knowledge, who assisted in: ·evaluating the technical appraisal reports regarding the stability of the salt mining wells and the required remediation actions to stabilize and close the wells, the remediation plans established by the Company and the Company’s estimate of the significant costs to implement these plans; ·evaluating the assumptions used by the Company to estimate the market value of properties and the significant components of the other costs to relocate and compensate the residents and business owners impacted by the geological phenomenon, by comparing them to internal and external information, as applicable, including publicly available information on real estate values in the region and property sizes, contracts with third party service providers and estimates received from external legal advisors; and ·performing a sensitivity analysis of certain of the assumptions used by the Company to estimate the market value of properties and the significant components of the other costs to relocate and compensate the residents and business owners impacted by the geological phenomenon. KPMG Auditores Independentes We have served as the Company’s auditor since 2018. São Paulo, Brazil F-5 Report ofIndependent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Braskem S.A. Opinion on the Financial Statements We have audited the consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows of Braskem S.A. and its subsidiaries (the “Company”) for the year ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2017 in conformity with the International Financial Reporting Standards as issued by the International Accounting Standards Board. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Auditores Independentes Salvador, Bahia, Brazil October
We served as the Company's auditor from 2002 to 2019.
F-6
Braskem S.A.
Statement of financial position at December 31 All amounts in thousands of reais
The notes are an integral part of the consolidated financial statements.
The notes are an integral part of the consolidated financial statements.
F-8
Braskem S.A.
Statement of profit or loss Years ended December 31 All amounts in thousands of reais, except earnings (loss) per share
The notes are an integral part of the consolidated financial statements.
Braskem S.A.
Statement of comprehensive income Years ended December 31 All amounts in thousands of reais
The notes are an integral part of the consolidated financial statements.
The notes are an integral part of theconsolidated financial statements. F-11
Braskem S.A.
Statement of changes in equity All amounts in thousands of reais
The notes are an integral part of theconsolidated financial statements.
Braskem S.A.
Statement of cash flows Years ended December 31 All amounts in thousands of reais
The notes are an integral part of the consolidated financial statements. F-13
Operations Braskem S.A. is a public corporation headquartered in Camaçari, Bahia (“BA”), which, jointly with its subsidiaries (hereinafter referred to as “Braskem” or “Company”), is controlled by Odebrecht S.A. (“Odebrecht”), which directly and indirectly holds interests of 50.11% and 38.32% in its voting and total capital, respectively. The Company Braskem also is Accounting policies Except for the changes that occurred with the adoption of the new standards (Note Basis of preparation and presentation of the consolidated financial statements The consolidated financial statements have been prepared under the historical cost convention and were adjusted, when required, to reflect the fair value of assets and liabilities. The consolidated financial statements presented in this 20-F are not equivalent to the statutory financial statements of the Company as issued under the requirements of the Brazilian jurisdiction. The date of authorization for issue of these consolidated financial statements is different from the date when the consolidated financial statements were issued in Brazil, there are differences due to adjusting and non adjusting events after the reporting period, under IAS 10 – Events after the Reporting Period. The statutory financial statements (parent company and consolidated) for the year ended December 31, The preparation of financial statements requires the use of certain estimates. It also requires Management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Consolidated financial statements The consolidated financial statements were prepared and presented in accordance with
The consolidated financial statements
The functional currency of the Company is the real. The presentation currency is also
Transactions in foreign currencies are translated into the respective functional currency of the Braskem’s entities at the exchange rates on the transaction dates. Monetary assets and liabilities denominated and measured in foreign currency on the reporting date are re-translated into the functional currency at the exchange rate on said date. Non-monetary assets and liabilities measured at fair value in foreign currency are re-translated into the functional currency at the exchange rate on the date on which the fair value was determined. Non-monetary items that are measured based on the historical cost in foreign currencies are translated at the exchange rate on the date of the transaction. The differences in foreign currencies resulting from conversion are generally recognized in the profit or loss.
The subsidiaries
The effects from exchange variation on the Company’s transactions are mainly due to the
In July 2018, the International Accounting Standards Board (IASB) issued a report updating the list of countries with hyperinflationary economies in
Business combinations are recognized using the acquisition method when control is transferred to the Company. The consideration transferred generally is measured at fair value, as also is the identifiable net assets acquired. Any goodwill arising from the transaction is tested annually for impairment loss. Gains on bargain purchase are immediately recognized in the profit or loss. Transaction costs are recognized into the result as incurred, except any costs associated with issuances of debt or equity instruments. Any contingent consideration payable is measured at its fair value on the acquisition date. If the contingent consideration is classified as an equity instruments, it is not remeasured and the settlement is recognized in equity. Other contingent considerations are remeasured at fair value on each reporting date and subsequent changes to fair value are recognized in the income statement for the fiscal year.
The Company
Investments in entities with accounting treatment using the equity method The Transactions eliminated in consolidation Intragroup balances and transactions and any unrealized revenues or expenses arising from intragroup transactions are eliminated. Unrealized gains originating from transactions with investees recorded using the equity method are eliminated against the investment proportionately to the Employee benefits Short-term benefits for employees The Share-based payment agreement The
After the date of the first-time application, on January 1, 2019, leases were recognized as a right-of-use asset and a corresponding liability on the date on which the leased asset becomes available to the Company. For each right-of-use asset measured, an equivalent liability was recorded.The payment is recorded as a reduction of the lease liability. The financial cost of the lease liability is recorded in the profit and loss during the enforceable term of the lease, applying a constant interest rate on the remaining balance of the liability. The right-of-use asset is depreciated using the straight-line method considering the shortest period between the useful life of the asset and the enforceable term of the lease.
Previously, the Company determined at contract inception whether an arrangement was or contained a lease under IFRIC 4Determinig whether an Arrengement contains a Lease. The Company now assesses whether a contract is or contains a lease based on the definition of a lease, according to IFRS 16 Leases As a lessee To determine the enforceable term of the lease, the management considers all facts and circumstances that create an economic incentive for exercising the option of extension or create economic disincentives for not exercising the option of early termination. When adopting IFRS 16, the Company recognized its lease liabilities in relation to the lease agreements previously classified as “operating leases” under IAS 17. Up to the financial statements for 2018, the payments of these leases, net of any incentives received from the lessor, were recognized as profit or loss during the lease period. For leases previously classified as “financial leases” the Company recognized the lease asset and liability considering the amount immediately prior to the date of first-time adoption. F-19
The right-of-use assets were measured by the amount of the
The Company leases some equipments classified as finance leases under IAS 17. For these finance leases, the carrying amount of the right-of-use asset and the lease liability at
The new interpretation
The Company concluded
New standards and amendments of - Changes to references to the conceptual structure of IFRS; - Definition of business (changes to IFRS 13); - Definition of materiality (amendments to IAS 1 and IAS 8); - IFRS 17 – Insurance agreements. The amended standards and interpretations are not expected to produce a significant impact on the consolidated financial statements.
In the year ended December 31, 2019, the Company changed the classification of the profit sharing expenses in order to report the effects of this expense by function for better presentation of the consolidated financial statements. The Company has reclassified the prior year financial statements to conform to the current year presentation. In the year ended December 31, 2018, the amounts related to this item were reclassified from “Other expenses” (R$375,360) to “cost of goods sold” (R$145,437, “selling and distribution expenses” (R$50,306), “general and administrative expenses” (R$160,182) and research and development (R$19,435). For the year ended December 31, 2017 the effect of the reclassification was not material. F-21
Critical estimates and judgments are those that require the most difficult, subjective or complex judgments by management, usually as a result of the need to make estimates that affect issues that are inherently uncertain. Estimates and judgments are continually reassessed and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results can differ from planned results due to differences in the variables, assumptions or conditions used in making estimates.
Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognized in the consolidated financial statements include the following:
Information about assumptions and
The recognition and the amount of deferred taxes assets depend on the generation of future taxable income, which requires the use of an estimate related to the Company’s future performance. These estimates are included in the business plan, which is annually prepared by the Executive Board and submitted to the Board of Directors for approval. This plan uses as main variables projections for the price of the products manufactured by the Company, price of inputs, growth of the gross domestic product of each country where the Company operates, exchange variation, interest rate, inflation rate and fluctuations in the supply and demand of inputs and finished products.
Information on deferred income tax and social contribution is presented in Note
The Company recognizes the depreciation, amortization and depletion of its tangible and intangible assets with estimated useful life approved by the Company’s technicians with experience in the management of Braskem’s plants. The useful lives of assets are reviewed at the end of every year by the Company’s technicians in order to check whether they need to be changed. The main factors that are taken into consideration in the definition of the useful life of the assets that compose the Company’s industrial plants are the information of manufacturers of machinery and equipment, level of the plants’ operations, quality of preventive and corrective maintenance and the prospects of technological obsolescence of assets. F-22
The Company’s management also decided that (i) depreciation should cover all assets value because when the equipment and installations are no longer operational, the sales amount is close to the residual value; and (ii) land is not depreciated because it has an indefinite useful life. The useful lives applied to the assets determined the following average (%) depreciation, amortization and depletion rates:
Information on property, plant and equipment is presented in Note 12.
Annually, or whenever there is any indication that the value of the asset could be impaire, the Company conducts an analysis to determine the existence of any indication that the book balance of tangible and intangible assets with definite useful lives may not be recoverable. This analysis is conducted to assess the existence of scenarios that could adversely affect its cash flow and, consequently, its ability to recover the investment in such assets. These scenarios arise from issues of a macroeconomic, legal, competitive or technological nature. Some significant and notable aspects considered by the Company in this analysis include: (i) the possibility of an oversupply of products manufactured by the Company or of a significant reduction in demand due to adverse economic factors; (ii) the prospects of material fluctuations in the prices of products and inputs; (iii) the likelihood of the development of new technologies or raw materials that could materially reduce production costs and consequently impact sales prices, ultimately leading to the full or partial obsolescence of the industrial facilities of the Company; and (iv) changes in the general regulatory environment that make the production process of Braskem infeasible or that significantly impact the sale of its products. For this analysis, the Company maintains an in-house team with a strategic vision of the business. If the aforementioned variables indicate any material risk to cash flows, the Management of Braskem conducts impairment tests in accordance with Note 3.2.3(b). For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs (“Cash Generating Units”). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. The fair value less costs of disposal is estimated using discounted cash flows and discount rate in an orderly transaction between market participants at the measurement date under current market conditions, less incremental costs directly attributable to the disposal. F-23
Impairment loss is recognized in profit or loss if the book value of the asset or CGU exceeds its recoverable value. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (or group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. When identifying whether cash inflows from an asset (or group of assets) are largely independent of cash inflows from other assets (or groups of assets), the Company considers several factors, such as: product lines, individual locations and the way Management monitors and makes decisions about the continuity of the entity's operations. At December 31, 2019, assets are grouped according to the following CGUs:
Mexico:
The balances of goodwill arising from business combinations are tested for impairment once a year. Goodwill from business combination is allocated to the CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. These tests are based on the projected cash flow in each CGU or groups of CGUs, which are extracted from the business plan of the Company for a five-year period, mentioned in Note 3.2.1, and the Management plan for a period greater than 5 years to reflect industry cycle patterns, in a total projection period of 10 years. Perpetuity is also calculated based on the long-term vision and excluding real growth. Cash flows and perpetuity are adjusted to present value at a discount rate based on the Weighted Average Cost of Capital (“WACC”). Goodwill and results of impairment tests are presented in Note 13(a) and (b). F-24
Provisions are recorded when there is a present obligation (legal or constructive) as a result of a past event, and it is more likely than not that an outflow of resources will be required to settle the obligation. Contingent liabilities are mainly related to discussions in the judicial and administrative spheres arising from primarily labor, corporate claims, civil and tax lawsuits. The Management of Braskem, based on its assessment and of its external legal advisors, classifies these proceedings in terms of probability of loss as follows:
The provision for labor, corporate claims, civil and tax lawsuits correspond to the value of The Company’s management believes that the estimates related to the outcome of the proceedings and The Company’s contingencies are presented in Note 24.
The provision arises from actions and security measures based on studies and dealings with the competent authorities as of the Term of Agreement to Support the Realocation of People in Risk Areas (“Term”), disclosed in Note 26.1 (i). The actions for closure and monitoring wells and support the evacuation of residents of the protection area involve various estimates in determining the future expenses for implementation of these measures. Therefore, factors such as the time taken to execute the action plans, results of future studies experts, changes in the structure of the wells, the outcome of ongoing legal actions, among others, may result in a material impact on the amount of the provision. F-25
The Company evaluates the derivative financial instruments at their fair value and the main sources of information are the stock exchanges, commodities and futures markets, disclosures of the Central Bank of Brazil and quotation services like Bloomberg and Reuters. Nevertheless, the volatility of the foreign exchange and interest rate markets in Brazil has been causing significant changes in future rates and interest rates over short periods of time, leading to significant changes in the market value of swaps and other financial instruments.
The fair values of non-derivative, quoted financial instruments are based on current bid prices. If the market for a financial asset and for unlisted securities is not active, the Company establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models that make maximum use of market inputs and rely as little as possible on information provided by the Company’s Management.
Information on derivative and non-derivative financial instruments is presented in Note
Hedge accounting 2018 2017 Buildings and improvements 3.42 3.36 Machinery, equipment and installations 8.04 8.34 Mines and wells 8.84 8.84 Furniture and fixtures 10.03 10.13 IT equipment 20.13 20.09 Lab equipment 9.53 9.56 Security equipment 9.72 9.77 Vehicles 17.83 17.51 Other 18.82 18.17 The Company designated non-derivate financial liabilities in foreign currency to hedge the future cash flows generated by its exports. This decision was based on two important concepts and judgments: (i) the performance of exports according to its business plan, which are inherent to the market and business where it operates, and (ii) the ability of the Company to refinance its liabilities in U.S. dollar, since the priority financing in U.S. dollar is part of the Company’s guidelines and strategy and the maintenance of a minimum level of net liabilities in U.S. dollar is envisaged in the Financial Policy of the Company. The subsidiary Braskem Idesa designated all of the financing it obtained from financial institutions for the construction of its industrial plant to protect part of its sales to be made in the same currency as said financing, the U.S. dollar. The sales estimate is included in the project that was presented to the banks/lenders, which, due to the consistency of the projection, granted Braskem Idesa a financing line should be paid exclusively using thecash generated by these sales. All the commercial considerations of the project were based on market studies conducted by expert consulting firms during the feasibility-analysis
All hedge transactions conducted by the Company are in compliance with the accounting procedures and practices adopted by Braskem, and effectiveness tests are conducted for each transaction every quarter, which prove the effectiveness of its hedge strategy.
The Company determined that hedged items for the Braskem S.A. and the subsidiary Braskem Idesa will be characterized by the first sales in U.S. dollars in each quarter until the amount designated for each period is reached
According to the Financial Policy, the Company may contract derivatives (swaps, NDFs, options, etc.) to hedge against the volatility of the foreign exchange and interest
Braskem is exposed to market risks arising from variations in commodity prices, foreign exchange rates and interest rates, credit risks of its counterparties in cash equivalents, financial investments and trade accounts receivable, and liquidity risks to meet its obligations from financial liabilities.
Braskem adopts procedures for managing market and credit risks that are in conformity with its Financial Policy, which is periodically reviewed by the Board of Directors. The purpose of risk management is to protect the Company’s cash flows and reduce the threats to the financing of its operating working capital and investment programs.
Market risks
Braskem prepares a sensitivity analysis for foreign exchange rate and interest rate risks to which it is exposed, which is presented in Note
Exposure to commodity risks
Most of Braskem’s feedstocks (naphtha, ethane, propane and propylene) and main products (PE, PP and PVC) are commodities quoted on international markets. A series of factors determine the dynamics of these quotes which directly impacts Braskem’s results and cash generation. Nevertheless, the Company believes such risk is inherent to the petrochemical business and, therefore, in general, it does not seek financial instruments to hedge against commodity price fluctuations.
Exposure to foreign exchange risk
Considering the dynamics of the international petrochemical market, where prices are mostly pegged to international dollar-denominated references, even Braskem’s sales in Brazil are strongly correlated to the U.S. currency. Therefore, with the goal of partially mitigating the long-term exchange risk, as of September 2016, the Company started to contract financial derivatives to compose a Long-Term Foreign Exchange Hedge Program.The Program mainly aims to mitigate dollar call and put option contracts, hedging expected flows over a 24-month horizon, as described in greater detail in Note
In addition to the Hedge Program, to balance the composition between dollar-denominated assets and liabilities, Braskem’s Financial Policy requires the Company to maintain a percentage of at least 70% of the dollar-denominated portion of net debt. If convenient, the company may maintain a percentage of more than 70%, although subject to a sensitivity analysis of key financial indicators and proof of the inexistence of significant risk of deterioration of these indicators.
On December 31,
Exposure to interest rate risk
Braskem is exposed to the risk that a variation in floating interest rates causes an increase in its financial expense due to payments of future interest. Debt denominated in foreign currency subject to floating rates is mainly subject to fluctuations in Libor. Debt denominated in local currency is mainly subject to the variation in the Interbank Certificate of Deposit (“CDI”) rate.
In F-27
On December 31,
Exposure to credit risk
The transactions that subject Braskem to the concentration of credit risks are mainly in
On December 31,
With respect to the credit risk of customers, Braskem protects itself by performing a rigorous analysis before granting credit and obtaining secured and unsecured guarantees when considered necessary, including credit insurance.
The maximum exposure to credit risk of non-derivative financial instruments on the reporting date is the sum of their carrying amounts less any provisions for impairment losses. On December 31,
Liquidity risk Braskem has a calculation methodology to determine a minimum cash “monthly vision” (30-day horizon) and a minimum cash “yearly vision” (up to 12-month horizon) for the purpose of, respectively: (i) ensuring the liquidity needed to comply with obligations of the following month; and (ii) ensuring that the Company maintains liquidity during potential crises. The amounts to determine the minimum cash “yearly vision” are calculated mainly based on the projected operating cash generation, less short-term debts and working capital needs. The amounts used for determining the minimum cash “monthly vision” consider the projected operating cash disbursement, debt service and contributions to projects, as well as the planned disbursement for derivatives maturing in the period, among other items. The Company uses as minimum cash in its financial policy the greater of these two references. In May 2018, the Company, in keeping with its commitment to maintain its financial liquidity, contracted an international revolving credit facility in the amount of US$1 billion, which expires in 2023.This line may be used without restrictions to improve the Company’s credit quality or in the event of deterioration in the macroeconomic scenario. As of December 31,
Capital management
The ideal capital structure, according to Braskem’s Management, considers the balance between own capital and the sum of all payables less the amount of cash and cash equivalents and financial investments. This composition meets the Company’s objectives of perpetuity and of offering an adequate return to shareholders and other stakeholders. This structure also permits borrowing costs to remain at adequate levels to maximize shareholder remuneration.
Due to the impact of the U.S. dollar on the Company’s operations, the Management of Braskem believes that the own capital used for capital management purposes should be measured in this currency and on a historical basis. Moreover, the Company may temporarily maintain a capital structure that is different from this ideal. This occurs, for example, during periods of growth, when the Company may finance a large portion of its projects through borrowings, provided that this option maximizes return for shareholders once the financed projects start operating. In order to adjust and maintain the capital structure, the Management of Braskem may also consider the sale of non-strategic assets, the issue of new shares or even adjustments to dividend payments.
As is
Cash and cash equivalents
This item includes cash, bank deposits and highly liquid financial investments available for redemption within three F-29
Cash equivalents in Brazil are mainly represented by fixed-income instruments and time deposits held by the funds FIM Jupiter and FIM Netuno. Cash equivalents abroad mainly comprise fixed–income instruments
Financial investments 2018 2017 2019 2018 Amortized cost Amortized cost Amortized cost Time deposit investments (i) 49,630 440,616 Time deposit investments 38,759 49,630 Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss Time deposit investments 15,764 Letras financeiras do tesouro - LFT´s and Letras Financeiras - LF´s (ii) 2,247,272 1,816,889 LFT´s and LF´s (i) 1,588,426 2,247,272 Restricted funds investments (iii) 9,998 12,404 Restricted funds investments (ii) 9,708 9,998 Other 60,711 27,335 Other 60,319 60,711 Total Total 2,367,611 2,313,008 Total 1,697,212 2,367,611 Current assets Current assets 2,357,613 2,302,672 Current assets 1,687,504 2,357,613 Non-current assets Non-current assets 9,998 10,336 Non-current assets 9,708 9,998 Total Total 2,367,611 2,313,008 Total 1,697,212 2,367,611
Trade accounts receivable
The Company’s billing period is generally 30 days; therefore, the amount of the trade accounts receivable corresponds to their fair value. The Company realizes part of its trade accounts receivable through the sale of trade notes to funds and financial institutions that acquire receivables. These operations are not entitled to recourse and the risks and benefits over the receivables are substantially transferred, for which reason the trade notes are
Stage 1 – when the securities are still performing
Stage 2 – when there is deterioration in the credit risk of the customer since the initial recognition;
Stage 3 – includes financial assets that have objective evidence of impairment; the trigger for evidence of impairment is an unprecedented delay of more than 90 days.
The following table shows the Company’s expected credit loss for each stage:
The changes in the allowance for doubtful accounts are presented below:
The breakdown of trade accounts receivable by maturity is as follows:
Inventories
Inventories of finished products are stated at average cost of purchase or production or the estimated price of sale or acquisition, excluding taxes, whichever is
The value of finished products includes raw materials, ancillary and maintenance materials used, depreciation of industrial facilities, expenses with Company’s and third-party personnel involved in industrial production and maintenance, and logistics expenses with the transfer of these products from the plants to the sale terminals.
Finished goods are measured at the lower of cost and net realizable value and, when necessary, a provision is recorded. For this estimate, the Company considers the sale price,
The effect of
F-33
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated
New and/or renewed agreements with related companies
As provided for in the Company’s bylaws, the Board of Directors has the exclusive power to decide on any contract with related parties that exceed R$20,000 per
Pursuant to Federal Law 6,404/76, officers and directors are prohibited from:(i) performing any acts of liberality with the use of the Company’s assets and in its detriment; (ii) intervening in any operations in which these officers and directors have a conflict of interest with the Company or in resolutions in which they participate; and (iii) receiving, based on their position, any type of personal advantage from third parties, directly or indirectly, without an authorization under the Bylaws or by the shareholders’ meeting.
As part of its control to identify related parties, Key Personnel annually inform whether they, or their close relatives, hold full or shared control of any company. All companies that conducted transactions with Braskem and its subsidiaries are provided in this Note.
The related parties that have significant relationship with the Company are as follows:
Odebrecht and its direct and indirect subsidiaries:
Petrobras and its direct and indirect subsidiaries:
Joint ventures of Braskem: Refinaria de Petróleo Riograndense S.A (“RPR”). Associate of Braskem: Borealis Brasil S.A (“Borealis”). Etileno XXI, S.A. de CV. Grupo Idesa, S.A. de CV. During 2019 and 2018, the main transactions between the Company and related parties In May 2018, Braskem entered into an agreement for caustic soda movement and storage services with Liquiport Vila Velha S.A., a wholly owned subsidiary of Odebrecht Transport S.A. The agreement has an estimated maximum value of R$93,000 and is valid for 10 years. In August 2019, the companyOdebrecht Transport S.A. sold Liquiport to the company Terminal Portuário de Espírito Santo. The payments made during the year to the date of sale amounted to R$5,633 (R$5,844 in 2018).
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated
Key management personnel
ICMS – normal operations
Accumulated ICMS credits over the past few years arises mainly from domestic sales subject to deferred taxation and export sales.
The Management of the Company has been prioritizing a series of actions to maximize the use of these credits and currently does not expect losses on the realization of cumulative balances.
REINTEGRA Program The REINTEGRA program aims to refund to exporters the federal taxes levied on the production chain for goods sold abroad. The amount to be refunded is equivalent to the following percentages of all export revenue, in accordance with Federal Law 13,043/14 and Executive Order 8,543/15: 3%, between October 1, 2014 and February 28, 2015; 1%, between March 1, 2015 and November 30, 2015; 0.1% between December 1, 2015 and December 31, 2016; 2% between January 1, 2017 and May 31, 2018; and F-37
Such credits may be realized in two ways: (i) by offsetting own debits overdue or undue related to taxes levied by the Federal Revenue Service; or (ii) by a cash reimbursement.
The balance on December 31, 2019 is R$2,350,817 (current assets of R$783,199 and non current assets of R$1,567,618).
F-38
|
Interest in total and | Net profit (loss) | |||||||||||||||
voting capital (%) - 2018 | for the year | Equity | ||||||||||||||
Direct and indirect | 2018 | 2017 | 2016 | 2018 | 2017 | |||||||||||
Jointly-controlled investment |
|
|
|
|
| |||||||||||
RPR | 33.20 | 6,358 | 106,109 | 86,682 | 99,672 | 201,038 | ||||||||||
Odebrecht Comercializadora de Energia S.A. ("OCE") | (i) |
| (48) | (543) | (5,720) |
| 5,178 | |||||||||
|
|
|
|
| ||||||||||||
Associates |
|
|
|
|
| |||||||||||
Borealis | 20.00 | (2,900) | 17,752 | 10,538 | 163,884 | 166,630 |
(i)Terminated in June, 2018.
Equity in results | |||||||||||
Dividends | of investees | Equity | |||||||||
Balance at | and interest | Effect | Goodwill | valuation | Balance at | ||||||
2017 | on equity | of results | amortization | adjustments | 2018 | ||||||
Domestic associate | |||||||||||
Borealis | 33,325 |
| (549) |
|
| 32,776 | |||||
OCE | 1,036 |
| (9) | (1,027) |
|
| |||||
RPR | 66,752 | (32,060) | 2,106 |
| (3,704) | 33,094 | |||||
Other | 145 |
|
| (61) |
| 84 | |||||
101,258 | (32,060) | 1,548 | (1,088) | (3,704) | 65,954 |
F - 38
Braskem S.A.
Notes to the financial statements
at December 31, 2018
All amounts in thousands, except as otherwise stated
(c) | Impact on the consolidation of Braskem Idesa |
In compliance with IFRS 12, the Company is presenting the financial informationstatements of the subsidiary in which there is interest held bythe non-controlling shareholder withholds interest, and the material effects inon the Company’s consolidated statements.
Balance sheet |
| Consolidated Braskem |
|
|
|
|
|
| |||||||||
|
|
| without the effect of |
| Braskem Idesa consolidated (i) |
| Eliminations |
| Consolidated | ||||||||
|
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Curent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Cash and cash equivalents |
| 5,786,645 |
| 4,584,280 |
| 1,017,235 |
| 963,357 |
|
|
| 6,803,880 |
| 5,547,637 | ||
| Financial investments |
| 1,687,504 |
| 2,357,613 |
|
|
|
|
|
| 1,687,504 |
| 2,357,613 | |||
| Trade accounts receivable |
| 1,973,414 |
| 2,574,791 |
| 331,838 |
| 627,879 |
| (19,502) |
| (127,452) |
| 2,285,750 |
| 3,075,218 |
| Inventories |
| 7,028,641 |
| 7,907,429 |
| 596,443 |
| 579,148 |
|
|
| 7,625,084 |
| 8,486,577 | ||
| Taxes recoverable |
| 1,084,055 |
| 313,499 |
| 153,956 |
| 109,689 |
|
|
| 1,238,011 |
| 423,188 | ||
| Income tax and social contribution |
| 439,933 |
| 423,900 |
|
|
|
|
|
|
| 439,933 |
| 423,900 | ||
| Derivatives |
| 4,712 |
| 6,714 |
|
| 21,000 |
|
|
| 4,712 |
| 27,714 | |||
| Judicial deposits |
| 2,571,683 |
|
|
|
|
|
|
| 2,571,683 |
| |||||
| Other receivables |
| 393,593 |
| 372,846 |
| 339,404 |
| 319,122 |
|
|
| 732,997 |
| 691,968 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20,970,180 |
| 18,541,072 |
| 2,438,876 |
| 2,620,195 |
| (19,502) |
| (127,452) |
| 23,389,554 |
| 21,033,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Taxes recoverable |
| 2,257,652 |
| 1,332,730 |
| 66 |
| 61 |
|
|
| 2,257,718 |
| 1,332,791 | ||
| Income tax and social contribution |
| 239,847 |
| 241,788 |
|
|
|
|
|
| 239,847 |
| 241,788 | |||
| Deferred tax |
| 1,713,837 |
| 114,000 |
| 948,759 |
| 990,158 |
|
|
| 2,662,596 |
| 1,104,158 | ||
| Related parties |
| 6,729,486 |
| 6,137,206 |
|
|
| (ii) | (6,729,486) |
| (6,137,206) |
|
|
|
| |
| Derivatives |
| 17,877 |
|
|
| 46,664 |
|
|
| 17,877 |
| 46,664 | ||||
| Judicial deposits |
| 1,508,880 |
| 169,536 |
|
|
|
|
|
| 1,508,880 |
| 169,536 | |||
| Other receivables |
| 369,137 |
| 377,356 |
| 505 |
| 553 |
|
|
| 369,642 |
| 377,909 | ||
| Property, plant and equipment |
| 20,488,870 |
| 20,102,981 |
| 12,537,615 |
| 12,365,063 | (iii) | (711,304) |
| (708,154) |
| 32,315,181 |
| 31,759,890 |
| Intangible |
| 2,568,347 |
| 2,562,722 |
| 193,741 |
| 178,260 |
|
|
| 2,762,088 |
| 2,740,982 | ||
| Right of use of assets |
| 2,309,506 |
|
| 296,148 |
|
|
|
|
| 2,605,654 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 38,203,439 |
| 31,038,319 |
| 13,976,834 |
| 13,580,759 |
| (7,440,790) |
| (6,845,360) |
| 44,739,483 |
| 37,773,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| 59,173,619 |
| 49,579,391 |
| 16,415,710 |
| 16,200,954 |
| (7,460,292) |
| (6,972,812) |
| 68,129,037 |
| 58,807,533 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Trade payables |
| 8,903,168 |
| 8,099,755 |
| 233,323 |
| 368,949 |
| (19,502) |
| (127,452) |
| 9,116,989 |
| 8,341,252 |
| Borrowings |
| 774,924 |
| 737,436 |
|
|
|
|
|
| 774,924 |
| 737,436 | |||
| Debentures |
| 46,666 |
| 27,732 |
|
|
|
|
|
| 46,666 |
| 27,732 | |||
| Braskem Idesa Borrowings |
|
|
| 744,408 |
| 10,504,592 |
|
|
| 744,408 |
| 10,504,592 | ||||
| Payroll and related charges |
| 598,147 |
| 617,079 |
| 25,576 |
| 28,317 |
|
|
| 623,723 |
| 645,396 | ||
| Taxes payable |
| 306,453 |
| 419,204 |
| 16,433 |
| 12,801 |
|
|
| 322,886 |
| 432,005 | ||
| Income tax and social contribution |
| 34,856 |
| 69,268 |
|
|
|
|
|
| 34,856 |
| 69,268 | |||
| Lease |
| 619,217 |
| 9,767 |
| 57,074 |
|
|
|
|
| 676,291 |
| 9,767 | ||
| Provision - geological event in Alagoas |
| 1,450,476 |
|
|
|
|
|
|
| 1,450,476 |
|
| ||||
| Other financial liabilities |
| 516,933 |
|
|
|
|
|
|
| 516,933 |
|
| ||||
| Other payables |
| 1,798,865 |
| 1,922,781 |
| 109,143 |
| 75,849 |
|
|
| 1,908,008 |
| 1,998,630 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 15,049,705 |
| 11,903,022 |
| 1,185,957 |
| 10,990,508 |
| (19,502) |
| (127,452) |
| 16,216,160 |
| 22,766,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Loan agreements |
| 28,242,052 |
| 24,160,720 |
|
|
|
|
|
| 28,242,052 |
| 24,160,720 | |||
| Braskem Idesa Borrowings |
|
|
| 9,237,318 |
|
|
|
|
| 9,237,318 |
| |||||
| Debentures |
| 227,901 |
| 266,777 |
|
|
|
|
|
| 227,901 |
| 266,777 | |||
| Accounts payable to related parties |
|
|
| 6,714,236 |
| 6,147,768 | (ii) | (6,714,236) |
| (6,147,768) |
|
| ||||
| Loan to non-controlling shareholders of Braskem Idesa |
|
| (v) | 2,395,887 |
| 2,183,830 |
|
|
| 2,395,887 |
| 2,183,830 | ||||
| Deferred income tax and social contribution |
| 273,036 |
| 381,582 |
|
|
|
|
|
| 273,036 |
| 381,582 | |||
| Provision for losses on subsidiaries |
| 3,082,173 |
| 2,871,819 |
|
|
| (iv) | (3,082,173) |
| (2,871,819) |
|
|
| ||
| Lease |
| 1,767,314 |
| 90,790 |
| 233,291 |
|
|
|
|
| 2,000,605 |
| 90,790 | ||
| Provision - geological event in Alagoas |
| 1,932,591 |
|
|
|
|
|
|
| 1,932,591 |
|
| ||||
| Other payables |
| 3,625,695 |
| 3,292,738 |
| 33,086 |
| 10,348 |
|
|
| 3,658,781 |
| 3,303,086 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 39,150,762 |
| 31,064,426 |
| 18,613,818 |
| 8,341,946 |
| (9,796,409) |
| (9,019,587) |
| 47,968,171 |
| 30,386,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Attributable to the Company's shareholders |
| 4,886,089 |
| 6,531,070 |
| (3,384,065) |
| (3,131,500) |
| 3,383,274 |
| 3,131,500 |
| 4,885,298 |
| 6,531,070 |
| Non-controlling interest in subsidiaries |
| 87,063 |
| 80,873 |
|
|
|
| (1,027,655) |
| (957,273) |
| (940,592) |
| (876,400) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,973,152 |
| 6,611,943 |
| (3,384,065) |
| (3,131,500) |
| 2,355,619 |
| 2,174,227 |
| 3,944,706 |
| 5,654,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| 59,173,619 |
| 49,579,391 |
| 16,415,710 |
| 16,200,954 |
| (7,460,292) |
| (6,972,812) |
| 68,129,037 |
| 58,807,533 |
Balance sheet | Consolidated Braskem | ||||||||||||||||
without the effect of | Braskem Idesa consolidated (i) | Eliminations | Consolidated | ||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||
Assets |
|
|
| ||||||||||||||
Curent | |||||||||||||||||
Cash and cash equivalents | 4,584,280 | 3,480,407 | 963,357 | 294,686 | 5,547,637 | 3,775,093 | |||||||||||
Financial investments | 2,357,613 | 2,302,672 | 2,357,613 | 2,302,672 | |||||||||||||
Trade accounts receivable | 2,574,791 | 2,809,034 | 627,879 | 620,531 | (127,452) | (148,369) | 3,075,218 | 3,281,196 | |||||||||
Inventories | 7,907,429 | 6,293,324 | 579,148 | 346,725 | 8,486,577 | 6,640,049 | |||||||||||
Taxes recoverable | 737,399 | 919,600 | 109,689 | 63,029 | 847,088 | 982,629 | |||||||||||
Other receivables | 379,560 | 392,750 | 340,122 | 44,630 | 719,682 | 437,380 | |||||||||||
|
|
|
|
|
|
|
| ||||||||||
18,541,072 | 16,197,787 | 2,620,195 | 1,369,601 | (127,452) | (148,369) | 21,033,815 | 17,419,019 | ||||||||||
Non-current | (ii) | ||||||||||||||||
Taxes recoverable | 1,574,518 | 987,184 | 61 | 52 | 1,574,579 | 987,236 | |||||||||||
Deferred tax | 114,000 | 129,469 | 990,158 | 1,036,257 | 1,104,158 | 1,165,726 | |||||||||||
Related parties | 6,137,206 | 5,051,706 | (ii) | (6,137,206) | (5,051,706) | ||||||||||||
Other receivables | 546,892 | 637,549 | 47,217 | 33,207 | 594,109 | 670,756 | |||||||||||
Property, plant and equipment | 20,102,981 | 19,180,263 | 12,365,063 | 11,228,346 | (iii) | (708,154) | (646,999) | 31,759,890 | 29,761,610 | ||||||||
Intangible | 2,562,722 | 2,575,567 | 178,260 | 151,930 | 2,740,982 | 2,727,497 | |||||||||||
|
|
|
|
|
|
|
| ||||||||||
31,038,319 | 28,561,738 | 13,580,759 | 12,449,792 | (6,845,360) | (5,698,705) | 37,773,718 | 35,312,825 | ||||||||||
Total assets | 49,579,391 | 44,759,525 | 16,200,954 | 13,819,393 | (6,972,812) | (5,847,074) | 58,807,533 | 52,731,844 | |||||||||
Liabilities and shareholders' equity | |||||||||||||||||
Current | |||||||||||||||||
Trade payables | 8,099,755 | 5,047,293 | 368,949 | 159,872 | (127,452) | (148,369) | 8,341,252 | 5,058,796 | |||||||||
Borrowings | 737,436 | 1,184,781 | 737,436 | 1,184,781 | |||||||||||||
Debentures | 27,732 | 27,183 | 27,732 | 27,183 | |||||||||||||
Braskem Idesa Borrowings | 10,504,592 | 9,691,450 | 10,504,592 | 9,691,450 | |||||||||||||
Payroll and related charges | 617,079 | 609,883 | 28,317 | 20,634 | 645,396 | 630,517 | |||||||||||
Taxes payable | 488,472 | 881,702 | 12,801 | 13,067 | 501,273 | 894,769 | |||||||||||
Other payables | 1,932,548 | 1,019,346 | 75,849 | 57,581 | 2,008,397 | 1,076,927 | |||||||||||
|
|
|
|
|
|
|
| ||||||||||
11,903,022 | 8,770,188 | 10,990,508 | 9,942,604 | (127,452) | (148,369) | 22,766,078 | 18,564,423 | ||||||||||
Non-current |
| ||||||||||||||||
Loan agreements | 24,160,720 | 22,176,640 | 24,160,720 | 22,176,640 | |||||||||||||
Braskem Idesa Borrowings | 266,777 | 286,141 | 266,777 | 286,141 | |||||||||||||
Accounts payable to related parties | 6,147,768 | 5,065,971 | (ii) | (6,147,768) | (5,065,971) | ||||||||||||
Loan to non-controlling shareholders of Braskem Idesa | (v) | 2,183,830 | 1,756,600 | 2,183,830 | 1,756,600 | ||||||||||||
Provision for losses on subsidiaries | 2,871,819 | 2,689,769 | (iv) | (2,871,819) | (2,689,769) | ||||||||||||
Other payables | 3,765,110 | 4,467,398 | 10,348 | 7,842 | 3,775,458 | 4,475,240 | |||||||||||
|
|
|
|
|
|
|
| ||||||||||
31,064,426 | 29,619,948 | 8,341,946 | 6,830,413 | (9,019,587) | (7,755,740) | 30,386,785 | 28,694,621 | ||||||||||
Shareholders' equity | |||||||||||||||||
Attributable to the Company's shareholders | 6,531,070 | 6,300,300 | (3,131,500) | (2,953,624) | 3,131,500 | 2,953,625 | 6,531,070 | 6,300,301 | |||||||||
Non-controlling interest om subsidiaries | 80,873 | 69,089 | (957,273) | (896,590) | (876,400) | (827,501) | |||||||||||
|
|
|
|
|
|
|
| ||||||||||
6,611,943 | 6,369,389 | (3,131,500) | (2,953,624) | 2,174,227 | 2,057,035 | 5,654,670 | 5,472,800 | ||||||||||
Total liabilities and shareholders' equity | 49,579,391 | 44,759,525 | 16,200,954 | 13,819,393 | (6,972,812) | (5,847,074) | 58,807,533 | 52,731,844 |
(i)Consolidation of Braskem Idesa with its direct subsidiary Braskem Idesa Serviços.
(ii)Loan from Braskem Holanda as part of shareholders’ contribution to the Braskem Idesa project.
(iii)Adjustment corresponding to the capitalization of a portion of financial charges of the abovementioned loan.
(iv)Provision recorded in the subsidiary Braskem Holanda for the negative shareholders' equity of Braskem Idesa.
(v)Loan owed to the non-controlling shareholder as part of shareholders’ contribution to the project.
(i) | Consolidation of Braskem Idesa with its direct subsidiary Braskem Idesa Serviços. | |
(ii) | Loan from Braskem Holanda as part of shareholders’ contribution to the Braskem Idesa project. | |
(iii) | Adjustment corresponding to the capitalization of a portion of financial charges of the abovementioned loan. | |
(iv) | Provision recorded in the subsidiary Braskem Holanda for the negative shareholders' equity of Braskem Idesa. | |
(v) | Loan payable, maturing December 2029 and 7% p.a., to the non-controlling shareholder. These proceeds were used by Braskem Idesa to fund its construction project. |
F - 39F-39
Braskem S.A.
Notes to the financial statements
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise statedat December 31, 2018
Statement of profit or loss | Statement of profit or loss | Statement of profit or loss |
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| Consolidated Braskem |
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| |||||||||||||||||||||||||||||||||||
Consolidated Braskem |
|
| Ex consolidated Braskem Idesa |
| Braskem Idesa consolidated |
| Eliminations |
| Consolidated | |||||||||||||||||||||||||||||||||||||||||
Ex consolidated Braskem Idesa | Braskem Idesa consolidated | Eliminations | Consolidated |
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 | ||||||||||||||||||||||
2018 | 2017 |
| 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 |
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| Restated |
|
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| Restated |
|
| |||||||||||||
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| ||||||||||||||||||||||||||
Net revenue | Net revenue | 54,851,243 | 46,207,109 | 46,343,171 | 3,766,371 | 3,656,801 | 1,495,018 | (617,748) | (603,316) | (174,201) | 57,999,866 | 49,260,594 | 47,663,988 | Net revenue |
| 49,961,286 |
| 54,851,243 |
| 46,207,109 |
| 3,050,420 |
| 3,766,371 |
| 3,656,801 |
| (688,181) |
| (617,748) |
| (603,316) |
| 52,323,525 |
| 57,999,866 |
| 49,260,594 | ||||||||||||
Cost of products sold | (44,783,284) | (34,675,494) | (34,040,770) | (2,314,998) | (2,125,031) | (1,109,020) | 667,062 | 623,117 | 164,221 | (46,431,220) | (36,177,408) | (34,985,569) | Cost of products sold |
| (44,111,980) |
| (44,928,721) |
| (34,675,494) |
| (2,509,060) |
| (2,314,998) |
| (2,125,031) |
| 741,922 |
| 667,062 |
| 623,117 |
| (45,879,118) |
| (46,576,657) |
| (36,177,408) | |||||||||||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
10,067,959 | 11,531,615 | 12,302,401 | 1,451,373 | 1,531,770 | 385,998 | 49,314 | 19,801 | (9,980) | 11,568,646 | 13,083,186 | 12,678,419 |
|
| 5,849,306 |
| 9,922,522 |
| 11,531,615 |
| 541,360 |
| 1,451,373 |
| 1,531,770 |
| 53,741 |
| 49,314 |
| 19,801 |
| 6,444,407 |
| 11,423,209 |
| 13,083,186 | ||||||||||||||
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| ||||||||||||||||||||||||||
Income (expenses) | Income (expenses) | Income (expenses) |
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|
| ||||||||||||||||||||||||
Selling and distribution | (1,355,986) | (1,287,817) | (1,286,558) | (189,582) | (171,791) | (117,115) |
|
|
| (1,545,568) | (1,459,608) | (1,403,673) | Selling and distribution |
| (1,582,794) |
| (1,495,507) |
| (1,274,362) |
| (200,661) |
| (193,672) |
| (171,791) |
|
|
|
|
|
|
| (1,783,455) |
| (1,689,179) |
| (1,446,153) | |||||||||||||
General and administrative | (1,524,480) | (1,336,072) | (1,201,489) | (108,191) | (122,043) | (123,855) | (332) | 23,843 | 39,731 | (1,633,003) | (1,434,272) | (1,285,613) | (Loss) reversals for impairment |
| (4,772) |
| 87,008 |
| (13,455) |
| (2,297) |
|
|
|
|
|
|
|
|
|
|
| (7,069) |
| 87,008 |
| (13,455) | |||||||||||||
Research and development | (199,821) | (167,456) | (162,010) |
|
|
|
|
|
| (199,821) | (167,456) | (162,010) | General and administrative |
| (2,082,002) |
| (1,669,277) |
| (1,336,072) |
| (141,269) |
| (123,576) |
| (122,043) |
| (909) |
| (332) |
| 23,843 |
| (2,224,180) |
| (1,793,185) |
| (1,434,272) | |||||||||||||
Results from equity investments | 76,821 | 191,949 | (923,096) |
|
|
| (77,709) | (151,993) | 953,174 | (888) | 39,956 | 30,078 | Research and development |
| (247,730) |
| (219,256) |
| (167,456) |
|
|
|
|
|
|
|
|
|
|
|
|
| (247,730) |
| (219,256) |
| (167,456) | |||||||||||||
Other income (expenses), net |
| (208,252) | (887,185) | (3,913,567) | 299,104 | 32,305 | 7,613 |
|
|
| 90,852 | (854,880) | (3,905,954) | Results from equity investments |
| (326,427) |
| 76,821 |
| 191,949 |
|
|
|
|
|
|
| 336,645 |
| (77,709) |
| (151,993) |
| 10,218 |
| (888) |
| 39,956 | ||||||||||||
Other income |
| 2,102,684 |
| 656,725 |
| 282,629 |
| 305,750 |
| 370,497 |
| 32,305 |
|
|
|
|
|
|
| 2,408,434 |
| 1,027,222 |
| 314,934 | ||||||||||||||||||||||||||
6,856,241 | 8,045,034 | 4,815,681 | 1,452,704 | 1,270,241 | 152,641 | (28,727) | (108,349) | 982,925 | 8,280,218 | 9,206,926 | 5,951,247 | Other expenses |
| (4,466,450) |
| (502,795) |
| (1,169,814) |
| 19,508 |
| (51,918) |
|
|
|
|
|
|
|
|
| (4,446,942) |
| (554,713) |
| (1,169,814) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
| (758,185) |
| 6,856,241 |
| 8,045,034 |
| 522,391 |
| 1,452,704 |
| 1,270,241 |
| 389,477 |
| (28,727) |
| (108,349) |
| 153,683 |
| 8,280,218 |
| 9,206,926 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Financial results | Financial results | Financial results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Financial expenses | (2,227,544) | (3,044,668) | (3,054,334) | (1,090,019) | (973,952) | (688,868) | 310,012 | 271,403 | 172,240 | (3,007,551) | (3,747,217) | (3,570,962) | Financial expenses |
| (3,009,471) |
| (2,227,544) |
| (3,044,668) |
| (1,205,412) |
| (1,090,019) |
| (973,952) |
| 332,098 |
| 310,012 |
| 271,403 |
| (3,882,785) |
| (3,007,551) |
| (3,747,217) | |||||||||||||
Financial income | 867,185 | 850,367 | 955,423 | 31,879 | 24,666 | 3,193 | (310,012) | (271,403) | (268,494) | 589,052 | 603,630 | 690,122 | Financial income |
| 1,135,118 |
| 867,185 |
| 850,367 |
| 47,534 |
| 31,879 |
| 24,666 |
| (332,098) |
| (310,012) |
| (271,403) |
| 850,554 |
| 589,052 |
| 603,630 | |||||||||||||
Exchange rate variations, net | (2,014,205) | (936,804) | (2,115,993) | (232,064) | 132,186 | (1,094,424) | (10,714) | 5,856 |
| (2,256,983) | (798,762) | (3,210,417) | Exchange rate variations, net |
| (1,768,850) |
| (2,014,205) |
| (936,804) |
| 75,610 |
| (232,064) |
| 132,186 |
| (31,280) |
| (10,714) |
| 5,856 |
| (1,724,520) |
| (2,256,983) |
| (798,762) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
(3,374,564) | (3,131,105) | (4,214,904) | (1,290,204) | (817,100) | (1,780,099) | (10,714) | 5,856 | (96,254) | (4,675,482) | (3,942,349) | (6,091,257) |
|
| (3,643,203) |
| (3,374,564) |
| (3,131,105) |
| (1,082,268) |
| (1,290,204) |
| (817,100) |
| (31,280) |
| (10,714) |
| 5,856 |
| (4,756,751) |
| (4,675,482) |
| (3,942,349) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Profit before income tax | ||||||||||||||||||||||||||||||||||||||||||||||||||
Profit (loss) before income tax | Profit (loss) before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
and social contribution | and social contribution | 3,481,677 | 4,913,929 | 600,777 | 162,500 | 453,141 | (1,627,458) | (39,441) | (102,493) | 886,671 | 3,604,736 | 5,264,577 | (140,010) | and social contribution |
| (4,401,388) |
| 3,481,677 |
| 4,913,929 |
| (559,877) |
| 162,500 |
| 453,141 |
| 358,197 |
| (39,441) |
| (102,493) |
| (4,603,068) |
| 3,604,736 |
| 5,264,577 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
IR and CSL - current and deferred | (639,394) | (1,057,699) | (1,039,107) | (97,157) | (299,983) | 423,061 |
|
|
| (736,551) | (1,357,682) | (616,046) | IR and CSL - current and deferred |
| 1,873,207 |
| (639,394) |
| (1,057,699) |
| 89,463 |
| (97,157) |
| (299,983) |
|
|
|
|
|
|
| 1,962,670 |
| (736,551) |
| (1,357,682) | |||||||||||||
(639,394) | (1,057,699) | (1,039,107) | (97,157) | (299,983) | 423,061 |
|
|
| (736,551) | (1,357,682) | (616,046) |
|
| 1,873,207 |
| (639,394) |
| (1,057,699) |
| 89,463 |
| (97,157) |
| (299,983) |
|
|
|
|
|
|
| 1,962,670 |
| (736,551) |
| (1,357,682) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Profit (loss) for the year of continued operations | 2,842,283 | 3,856,230 | (438,330) | 65,343 | 153,158 | (1,204,397) | (39,441) | (102,493) | 886,671 | 2,868,185 | 3,906,895 | (756,056) | ||||||||||||||||||||||||||||||||||||||
Profit (loss)for the year | Profit (loss)for the year |
| (2,528,181) |
| 2,842,283 |
| 3,856,230 |
| (470,414) |
| 65,343 |
| 153,158 |
| 358,197 |
| (39,441) |
| (102,493) |
| (2,640,398) |
| 2,868,185 |
| 3,906,895 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Discontinued operations results | Discontinued operations results | Discontinued operations results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Profit from discontinued operations |
| 13,499 | 40,760 |
|
|
|
|
|
|
| 13,499 | 40,760 | Profit (loss) from discontinued operations |
|
|
|
|
| 13,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 13,499 | |||||||||||||
IR and CSL - current and deferred |
| (4,623) | (13,901) |
|
|
|
|
|
|
| (4,623) | (13,901) | IR and CSL - current and deferred |
|
|
|
|
| (4,623) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4,623) | |||||||||||||
| 8,876 | 26,859 |
|
|
|
|
|
|
| 8,876 | 26,859 |
|
|
|
|
|
| 8,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,876 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Profit (loss) for the year | Profit (loss) for the year | 2,842,283 | 3,865,106 | (411,471) | 65,343 | 153,158 | (1,204,397) | (39,441) | (102,493) | 886,671 | 2,868,185 | 3,915,771 | (729,197) | Profit (loss) for the year |
| (2,528,181) |
| 2,842,283 |
| 3,865,106 |
| (470,414) |
| 65,343 |
| 153,158 |
| 358,197 |
| (39,441) |
| (102,493) |
| (2,640,398) |
| 2,868,185 |
| 3,915,771 |
F - 40F-40
Braskem S.A.
Notes to the financial statements
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise statedat December 31, 2018
Statement of cash flows |
| Consolidated Braskem |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
| Ex consolidated Braskem Idesa |
| Braskem Idesa consolidated |
| Eliminations |
| Consolidated | ||||||||||||||||
|
|
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) before income tax and social contribution |
| (4,401,388) |
| 3,481,677 |
| 4,913,929 |
| (559,877) |
| 162,500 | �� | 453,141 |
| 358,197 |
| (39,441) |
| (102,493) |
| (4,603,068) |
| 3,604,736 |
| 5,264,577 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for reconciliation of profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Depreciation, amortization and depletion |
| 2,732,181 |
| 2,228,978 |
| 2,230,466 |
| 952,916 |
| 810,581 |
| 742,033 |
| (52,832) |
| (48,982) |
| (43,644) |
| 3,632,265 |
| 2,990,577 |
| 2,928,855 |
| Results from equity investments |
| 326,427 |
| (76,821) |
| (191,949) |
|
|
|
|
|
|
| (336,645) |
| 77,709 |
| 151,993 |
| (10,218) |
| 888 |
| (39,956) |
| Interest and monetary and exchange variations, net |
| 3,050,987 |
| 4,658,342 |
| 2,900,745 |
| 1,062,843 |
| 1,344,888 |
| 802,825 |
| 31,280 |
| 10,714 |
| (5,856) |
| 4,145,110 |
| 6,013,944 |
| 3,697,714 |
| Gain from divestment in subsidiary |
|
|
|
|
| (276,816) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (276,816) |
| Reversal of provisions |
| 320,439 |
| 23,725 |
| (223,340) |
|
|
|
|
|
|
|
|
|
|
|
|
| 320,439 |
| 23,725 |
| (223,340) |
| Provisions - Leniency agreement |
|
|
|
|
| 375,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 375,476 |
| Provision - geological event in Alagoas |
| 3,383,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,383,067 |
|
|
|
|
| PIS and COFINS credits - exclusion of ICMS from the calculation basis |
| (1,904,206) |
| (519,830) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,904,206) |
| (519,830) |
|
|
| Loss (reversals) for impairment of trade accounts receivable |
| 7,069 |
| (87,008) |
| 13,455 |
|
|
|
|
|
|
|
|
|
|
|
|
| 7,069 |
| (87,008) |
| 13,455 |
| Provision for losses and write-offs of long-lived assets |
| 224,825 |
| 69,270 |
| 212,759 |
| 379 |
| 3,200 |
| 425 |
|
|
|
|
|
|
| 225,204 |
| 72,470 |
| 213,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,739,401 |
| 9,778,333 |
| 9,954,725 |
| 1,456,261 |
| 2,321,169 |
| 1,998,424 |
|
|
|
|
|
|
| 5,195,662 |
| 12,099,502 |
| 11,953,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Other financial assets |
| (3,680,460) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,680,460) |
|
|
|
|
| Financial investments |
| 797,445 |
| 98,349 |
| (953,228) |
|
|
|
|
|
|
|
|
|
|
|
|
| 797,445 |
| 98,349 |
| (953,228) |
| Trade accounts receivable |
| 677,176 |
| 251,683 |
| (1,317,929) |
| 325,820 |
| (7,348) |
| (373,066) |
| (107,950) |
| (20,917) |
| 79,148 |
| 895,046 |
| 223,418 |
| (1,611,847) |
| Inventories |
| 825,236 |
| (1,337,618) |
| (1,387,696) |
| 42,581 |
| (199,672) |
| 36,668 |
|
|
|
|
|
|
| 867,817 |
| (1,537,290) |
| (1,351,028) |
| Taxes recoverable |
| 1,216,225 |
| 1,068,637 |
| 415,923 |
| (20,798) |
| (46,395) |
| 53,370 |
|
|
|
|
|
|
| 1,195,427 |
| 1,022,242 |
| 469,293 |
| Prepaid expenses |
| 85,549 |
| (67,051) |
| (21,732) |
| 117,183 |
| (38,112) |
| (8,789) |
|
|
|
|
|
|
| 202,732 |
| (105,163) |
| (30,521) |
| Other receivables |
| (242,727) |
| (12,596) |
| 34,500 |
| (30,938) |
| (236,392) |
| (8,698) |
|
|
|
|
|
|
| (273,665) |
| (248,988) |
| 25,802 |
| Trade payables |
| 330,633 |
| 1,113,381 |
| (1,444,468) |
| (156,138) |
| 209,077 |
| (119,033) |
| 107,950 |
| 20,917 |
| (79,148) |
| 282,445 |
| 1,343,375 |
| (1,642,649) |
| Taxes payable |
| (485,309) |
| (828,222) |
| (132,697) |
| (84,484) |
| (149,026) |
| (82,817) |
|
|
|
|
|
|
| (569,793) |
| (977,248) |
| (215,514) |
| Advances from customers |
| 176,189 |
| (218,623) |
| (3,089) |
| 21,776 |
| 18,665 |
| (10,423) |
|
|
|
|
|
|
| 197,965 |
| (199,958) |
| (13,512) |
| Leniency agreement |
| (341,605) |
| (330,006) |
| (1,343,803) |
|
|
|
|
|
|
|
|
|
|
|
|
| (341,605) |
| (330,006) |
| (1,343,803) |
| Sundry provisions |
| (226,519) |
| (116,458) |
| 194,596 |
| 10,971 |
|
|
|
|
|
|
|
|
|
|
| (215,548) |
| (116,458) |
| 194,596 |
| Other payables |
| 348,916 |
| 415,468 |
| (70,546) |
| 13,287 |
| 417,759 |
| 126,087 |
|
|
|
|
|
|
| 362,203 |
| 833,227 |
| 55,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash generated (used) from operations |
| 3,220,150 |
| 9,815,277 |
| 3,924,556 |
| 1,695,521 |
| 2,289,725 |
| 1,611,723 |
|
|
|
|
|
|
| 4,915,671 |
| 12,105,002 |
| 5,536,279 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest paid |
| (1,576,526) |
| (1,328,420) |
| (1,648,971) |
| (661,919) |
| (588,381) |
| (505,082) |
|
|
|
|
|
|
| (2,238,445) |
| (1,916,801) |
| (2,154,053) |
| Income tax and social contribution paid |
| (403,614) |
| (937,557) |
| (919,236) |
| (8,337) |
| (274) |
| (1,370) |
|
|
|
|
|
|
| (411,951) |
| (937,831) |
| (920,606) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated (used) by operating activities |
| 1,240,010 |
| 7,549,300 |
| 1,356,349 |
| 1,025,265 |
| 1,701,070 |
| 1,105,271 |
|
|
|
|
|
|
| 2,265,275 |
| 9,250,370 |
| 2,461,620 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of fixed assets and intangible assets |
| 12,590 |
| 95,133 |
| 39,660 |
|
|
|
|
|
|
|
|
|
|
|
|
| 12,590 |
| 95,133 |
| 39,660 | |
Proceeds from the sale of investments |
|
|
| 81,000 |
| 450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 81,000 |
| 450,000 | |
Funds received in the investments' capital reduction |
|
|
| 2,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,254 |
|
| |
Dividends received |
| 3,513 |
| 41,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,513 |
| 41,791 |
|
| |
Additions to investments in subsidiaries |
|
|
|
|
| (608,181) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (608,181) | |
Acquisitions to property, plant and equipment and intangible assets |
| (2,578,558) |
| (2,635,906) |
| (2,185,567) |
| (103,964) |
| (70,422) |
| (87,630) |
|
|
|
|
|
|
| (2,682,522) |
| (2,706,328) |
| (2,273,197) | |
Other investments |
|
|
| (2,167) |
| (14,683) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,167) |
| (14,683) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
| (2,562,455) |
| (2,417,895) |
| (2,318,771) |
| (103,964) |
| (70,422) |
| (87,630) |
|
|
|
|
|
|
| (2,666,419) |
| (2,488,317) |
| (2,406,401) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term and long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Acquired |
| 20,586,103 |
| 4,301,626 |
| 8,492,341 |
|
|
|
|
|
|
|
|
|
|
|
|
| 20,586,103 |
| 4,301,626 |
| 8,492,341 |
| Payments |
| (17,425,409) |
| (6,592,197) |
| (8,779,091) |
|
|
|
|
|
|
|
|
|
|
|
|
| (17,425,409) |
| (6,592,197) |
| (8,779,091) |
Derivative transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Payments |
|
|
|
|
| (810,279) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (810,279) |
Braskem Idesa borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
| |
| Acquired |
|
|
|
|
|
|
| 3,497,622 |
|
|
| 187,959 |
|
|
|
|
|
|
| 3,497,622 |
|
|
| 187,959 |
| Payments |
|
|
|
|
|
|
| (4,398,453) |
| (812,929) |
| (1,080,502) |
|
|
|
|
|
|
| (4,398,453) |
| (812,929) |
| (1,080,502) |
Related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Acquired loans (payment of loans ) |
|
|
| 72,880 |
| 20,637 |
|
|
| (72,880) |
| (20,637) |
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
| (407,320) |
|
|
|
|
| (46,870) |
|
|
|
|
|
|
|
|
|
|
| (454,190) |
|
|
|
| |
Dividends paid |
| (668,904) |
| (1,499,900) |
| (998,893) |
|
|
|
|
|
|
|
|
|
|
|
|
| (668,904) |
| (1,499,900) |
| (998,893) | |
Other financial liabilities |
| 499,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 499,999 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash generated (used) in financing activities |
| 2,584,469 |
| (3,717,591) |
| (2,075,285) |
| (947,701) |
| (885,809) |
| (913,180) |
|
|
|
|
|
|
| 1,636,768 |
| (4,603,400) |
| (2,988,465) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange variation on cash of foreign subsidiaries |
| (59,659) |
| (309,941) |
| 17,849 |
| 80,278 |
| (76,168) |
| (11,374) |
|
|
|
|
|
|
| 20,619 |
| (386,109) |
| 6,475 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
| 1,202,365 |
| 1,103,873 |
| (3,019,858) |
| 53,878 |
| 668,671 |
| 93,087 |
|
|
|
|
|
|
| 1,256,243 |
| 1,772,544 |
| (2,926,771) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Represented by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Cash and cash equivalents at the beginning for the year |
| 4,584,280 |
| 3,480,407 |
| 6,500,265 |
| 963,357 |
| 294,686 |
| 201,599 |
|
|
|
|
|
|
| 5,547,637 |
| 3,775,093 |
| 6,701,864 |
| Cash and cash equivalents at the end for the year |
| 5,786,645 |
| 4,584,280 |
| 3,480,407 |
| 1,017,235 |
| 963,357 |
| 294,686 |
|
|
|
|
|
|
| 6,803,880 |
| 5,547,637 |
| 3,775,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
| 1,202,365 |
| 1,103,873 |
| (3,019,858) |
| 53,878 |
| 668,671 |
| 93,087 |
|
|
|
|
|
|
| 1,256,243 |
| 1,772,544 |
| (2,926,771) |
Statement of cash flows | Consolidated Braskem | ||||||||||||||||||||||||
Ex consolidated Braskem Idesa | Braskem Idesa consolidated | Eliminations | Consolidated | ||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||
Profit (loss) before income tax and social contribution and | 3,481,677 | 4,913,929 | 641,537 | 162,500 | 453,141 | (1,627,458) | (39,441) | (102,493) | 886,671 | 3,604,736 | 5,264,577 | (99,250) | |||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
Adjustments for reconciliation of profit (loss) |
|
|
|
|
|
| |||||||||||||||||||
Depreciation, amortization and depletion | 2,228,978 | 2,230,466 | 2,381,160 | 810,581 | 742,033 | 331,691 | (48,982) | (43,644) | (29,751) | 2,990,577 | 2,928,855 | 2,683,100 | |||||||||||||
Results from equity investments | (76,821) | (191,949) | 923,096 |
|
|
| 77,709 | 151,993 | (953,174) | 888 | (39,956) | (30,078) | |||||||||||||
Interest and monetary and exchange variations, net | 4,658,342 | 2,900,745 | 1,851,033 | 1,344,888 | 802,825 | 1,229,219 | 10,714 | (5,856) | (54,244) | 6,013,944 | 3,697,714 | 3,026,008 | |||||||||||||
Gain on sale of investment in subsidiary |
| (276,816) |
|
|
|
|
|
|
|
| (276,816) |
| |||||||||||||
Leniency agreement |
| 375,476 | 2,853,230 |
|
|
|
|
|
|
| 375,476 | 2,853,230 | |||||||||||||
Reversal of provisions | 23,725 | (223,340) |
| 23,725 | (223,340) | ||||||||||||||||||||
PIS and COFINS credits - exclusion of ICMS from the calculation basis | (519,830) |
|
| (519,830) | |||||||||||||||||||||
Provision for losses and write-offs of long-lived assets | 69,270 | 212,759 | 40,530 | 3,200 | 425 | 486 |
|
|
| 72,470 | 213,184 | 41,016 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
9,865,341 | 9,941,270 | 8,690,586 | 2,321,169 | 1,998,424 | (66,062) |
|
| (150,498) | 12,186,510 | 11,939,694 | 8,474,026 | ||||||||||||||
Changes in operating working capital |
| ||||||||||||||||||||||||
Financial investments | 98,349 | (953,228) | (649,535) |
|
|
|
|
|
| 98,349 | (953,228) | (649,535) | |||||||||||||
Trade accounts receivable | 158,378 | (1,304,474) | 1,083,117 | (7,348) | (373,066) | (126,617) | (20,917) | 79,148 | 51,375 | 130,113 | (1,598,392) | 1,007,875 | |||||||||||||
Inventories | (1,337,618) | (1,387,696) | 966,974 | (199,672) | 36,668 | (104,636) |
|
| (1,537,290) | (1,351,028) | 862,338 | ||||||||||||||
Taxes recoverable | 1,068,637 | 415,923 | 976,770 | (46,395) | 53,370 | 81,334 |
|
|
| 1,022,242 | 469,293 | 1,058,104 | |||||||||||||
Prepaid expenses | (67,051) | (21,732) | 64,029 | (38,112) | (8,789) |
|
|
|
| (105,163) | (30,521) | 64,029 | |||||||||||||
Other receivables | (6,299) | 34,500 | 332,673 | (236,392) | (8,698) | 21,308 |
|
|
| (242,691) | 25,802 | 353,981 | |||||||||||||
Trade payables | 1,113,381 | (1,444,468) | (4,052,705) | 209,077 | (119,033) | (150,495) | 20,917 | (79,148) | (51,375) | 1,343,375 | (1,642,649) | (4,254,575) | |||||||||||||
Taxes payable | (828,222) | (132,697) | (674,466) | (149,026) | (82,817) | 382,335 |
|
| (977,248) | (215,514) | (292,131) | ||||||||||||||
Advances from customers | (218,623) | (3,089) | 207,020 | 18,665 | (10,423) | 9,830 |
|
|
| (199,958) | (13,512) | 216,850 | |||||||||||||
Leniency agreement | (330,006) | (1,343,803) |
|
|
|
|
|
|
| (330,006) | (1,343,803) |
| |||||||||||||
Other payables | 299,010 | 124,050 | 430,714 | 417,759 | 126,087 | 165,981 |
|
|
| 716,769 | 250,137 | 596,695 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Cash from operations | 9,815,277 | 3,924,556 | 7,375,177 | 2,289,725 | 1,611,723 | 212,978 |
|
| (150,498) | 12,105,002 | 5,536,279 | 7,437,657 | |||||||||||||
Interest paid | (1,328,420) | (1,648,971) | (1,611,718) | (588,381) | (505,082) | (215,224) |
|
|
| (1,916,801) | (2,154,053) | (1,826,942) | |||||||||||||
Income tax and social contribution paid | (937,557) | (919,236) | (1,152,847) | (274) | (1,370) |
|
|
|
| (937,831) | (920,606) | (1,152,847) | |||||||||||||
Net cash generated by operating activities | 7,549,300 | 1,356,349 | 4,610,612 | 1,701,070 | 1,105,271 | (2,246) |
|
| (150,498) | 9,250,370 | 2,461,620 | 4,457,868 | |||||||||||||
Proceeds from the sale of fixed assets and intangible assets | 95,133 |
|
|
|
|
|
|
|
| 95,133 |
|
| |||||||||||||
Proceeds from the sale of investments | 81,000 | 450,000 |
|
|
|
|
| 81,000 | 450,000 | ||||||||||||||||
Funds received in the investments´ capital reduction | 2,254 |
|
|
|
|
|
| 2,254 |
| ||||||||||||||||
Dividends received | 41,791 |
|
| 41,791 | |||||||||||||||||||||
Additions to investments in subsidiaries |
| (608,181) |
|
|
|
|
|
|
|
| (608,181) |
| |||||||||||||
Acquisitions to property, plant and equipment and intangible assets | (2,635,906) | (2,185,567) | (1,844,510) | (70,422) | (87,630) | (892,499) |
|
| 150,498 | (2,706,328) | (2,273,197) | (2,586,511) | |||||||||||||
Other investments | (2,167) | 24,977 | 34,061 |
|
|
|
|
| (2,167) | 24,977 | 34,061 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net cash used in investing activities | (2,417,895) | (2,318,771) | (1,810,449) | (70,422) | (87,630) | (892,499) |
|
| 150,498 | (2,488,317) | (2,406,401) | (2,552,450) | |||||||||||||
Short-term and long-term debt | |||||||||||||||||||||||||
Acquired | 4,301,626 | 8,492,341 | 4,107,626 |
|
|
|
|
|
| 4,301,626 | 8,492,341 | 4,107,626 | |||||||||||||
Payments | (6,592,197) | (8,779,091) | (4,901,593) |
|
|
|
|
|
| (6,592,197) | (8,779,091) | (4,901,593) | |||||||||||||
Derivative transactions - payments |
| (810,279) |
|
|
|
|
|
|
|
| (810,279) |
| |||||||||||||
Braskem Idesa borrowings |
|
|
|
| |||||||||||||||||||||
Acquired |
|
|
|
| 187,959 | 503,921 |
|
|
|
| 187,959 | 503,921 | |||||||||||||
Payments |
|
|
| (812,929) | (1,080,502) | (469,282) |
|
|
| (812,929) | (1,080,502) | (469,282) | |||||||||||||
Related parties |
|
|
|
| |||||||||||||||||||||
Acquired loans (payment of loans) | 72,880 | 20,637 | (882,158) | (72,880) | (20,637) | 882,158 |
|
|
|
|
|
| |||||||||||||
Dividends paid | (1,499,900) | (998,893) | (1,997,984) |
|
|
|
|
|
| (1,499,900) | (998,893) | (1,997,984) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net provided (used) in financing activities | (3,717,591) | (2,075,285) | (3,674,109) | (885,809) | (913,180) | 916,797 |
|
|
| (4,603,400) | (2,988,465) | (2,757,312) | |||||||||||||
Exchange variation on cash of foreign subsidiaries | (309,941) | 17,849 | 541,734 | (76,168) | (11,374) | 44,908 |
|
|
| (386,109) | 6,475 | 586,642 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Increase (decrease) in cash and cash equivalents | 1,103,873 | (3,019,858) | (332,212) | 668,671 | 93,087 | 66,960 |
|
|
| 1,772,544 | (2,926,771) | (265,252) | |||||||||||||
Represented by | |||||||||||||||||||||||||
Cash and cash equivalents at the beginning of the year | 3,480,407 | 6,500,265 | 6,908,623 | 294,686 | 201,599 | 134,639 |
|
|
| 3,775,093 | 6,701,864 | 7,043,262 | |||||||||||||
Cash and cash equivalents at the end of the year | 4,584,280 | 3,480,407 | 6,576,411 | 963,357 | 294,686 | 201,599 |
|
|
| 5,547,637 | 3,775,093 | 6,778,010 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Increase (decrease) in cash and cash equivalents | 1,103,873 | (3,019,858) | (332,212) | 668,671 | 93,087 | 66,960 |
|
|
| 1,772,544 | (2,926,771) | (265,252) |
F - 41
Braskem S.A.
Notes to the financial statements
at December 31, 2018
All amounts in thousands, except as otherwise stated
12Property, plant and equipment
(a)Change
Land | Buildings and Improvements | Machinery, Equipment and Facilities | Projects and Stoppage in Progress (i) | Other | Total | |||||||
Cost | 471,655 | 5,530,714 | 36,804,409 | 3,495,965 | 1,404,759 | 47,707,502 | ||||||
Accumulated depreciation/depletion | (1,111,642) | (16,595,497) | (663,653) | (18,370,792) | ||||||||
Balance as of December 31, 2016 | 471,655 | 4,419,072 | 20,208,912 | 3,495,965 | 741,106 | 29,336,710 | ||||||
Acquisitions | 149,018 | 2,090,157 | 6,066 | 2,245,241 | ||||||||
Additions for acquisition of subsidiary | 14,937 | 122,846 | 63,081 | 46,833 | 92,052 | 339,749 | ||||||
Capitalized financial charges | 130,272 | 130,272 | ||||||||||
Foreign currency translation adjustment | 5,600 | 168,554 | 387,757 | 56,425 | 4,877 | 623,213 | ||||||
Transfers by concluded projects | 29,703 | 145,622 | 2,216,704 | (2,539,041) | 147,012 | |||||||
Disposals | (21,249) | (5,149) | (166,585) | (5,946) | (12,342) | (211,271) | ||||||
Cost | (21,249) | (7,444) | (525,724) | (5,946) | (21,368) | (581,731) | ||||||
Depletion | 2,295 | 359,139 | 9,026 | 370,460 | ||||||||
Depreciation / depletion | (280,448) | (2,275,788) | (146,068) | (2,702,304) | ||||||||
Net book value | 500,646 | 4,570,497 | 20,583,099 | 3,274,665 | 832,703 | 29,761,610 | ||||||
Cost | 500,646 | 6,058,259 | 39,211,042 | 3,274,665 | 1,755,092 | 50,799,704 | ||||||
Accumulated depreciation/depletion | (1,487,762) | (18,627,943) | (922,389) | (21,038,094) | ||||||||
Balance as of December 31, 2017 | 500,646 | 4,570,497 | 20,583,099 | 3,274,665 | 832,703 | 29,761,610 | ||||||
Cost - previously disclosed | 500,646 | 6,058,259 | 39,211,042 | 3,274,665 | 1,755,092 | 50,799,704 | ||||||
Cost - reclassification | 68,902 | (70,296) | 1,038,042 | 186,606 | (92,650) | 1,130,604 | ||||||
Cost - reclassified | 569,548 | 5,987,963 | 40,249,084 | 3,461,271 | 1,662,442 | 51,930,308 | ||||||
Accumulated depreciation/depletion - previously disclosed | (1,487,762) |
| (18,627,943) |
| (922,389) |
| (21,038,094) | |||||
Accumulated depreciation/depletion - reclassification | (88,244) | (964,517) | (77,843) | (1,130,604) | ||||||||
Accumulated depreciation/depletion - reclassified | (1,576,006) | (19,592,460) | (1,000,232) | (22,168,698) | ||||||||
Balance as of January 1, 2018 | 569,548 | 4,411,957 | 20,656,624 | 3,461,271 | 662,210 | 29,761,610 | ||||||
Acquisitions | 372 | 201,492 | 2,439,286 | 13,199 | 2,654,349 | |||||||
Capitalized financial charges | 178,055 | 178,055 | ||||||||||
Foreign currency translation adjustment | 32,751 | 593,228 | 1,433,855 | 137,551 | 30,411 | 2,227,796 | ||||||
Cost | 32,751 | 674,720 | 1,727,164 | 137,551 | 52,242 | 2,624,428 | ||||||
Depletion | (81,492) | (293,309) | (21,831) | (396,632) | ||||||||
Transfers by concluded projects | 16,477 | 1,022,560 | (1,106,975) | 67,938 | ||||||||
Cost | 16,477 | 1,022,560 | (1,106,975) | 67,938 | ||||||||
Depletion | ||||||||||||
Transfers to intangible | (2,922) | (1,539) | (4,461) | |||||||||
Cost | (2,922) | (1,539) | (4,461) | |||||||||
Depreciation | ||||||||||||
Other | (2,009) | (40,503) | (3,873) | (1,675) | (48,060) | |||||||
Depreciation / depletion | (370,035) | (2,487,820) | (151,544) | (3,009,399) | ||||||||
Net book value | 602,299 | 4,649,990 | 20,786,208 | 5,102,393 | 619,000 | 31,759,890 | ||||||
Cost | 602,299 | 6,676,549 | 43,024,738 | 5,102,393 | 1,784,807 | 57,190,786 | ||||||
Accumulated depreciation/depletion | (2,026,559) | (22,238,530) | (1,165,807) | (25,430,896) | ||||||||
Balance as of December 31, 2018 | 602,299 | 4,649,990 | 20,786,208 | 5,102,393 | 619,000 | 31,759,890 |
(i)On December 31, 2018, the main amounts recorded under this item corresponded to expenses with scheduled maintenance shutdowns in Brazil and at overseas plants that are either in the preparation phase or ongoing (R$975,509), capitalized financial charges (R$293,697), inventories of spare parts (R$441,133), strategic projects in Brazil (R$125,541) and the strategic projects of Braskem America (R$1,547,870). The remainder corresponds mainly to various operational projects for maintaining the production capacity of plants.
F - 42F-41
Braskem S.A.
Notes to the financial statements
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise statedat December 31, 2018
12 | Property, plant and equipment |
(a) | Change |
Land | Buildings and Improvements | Machinery, Equipment and Facilities | Projects and Stoppage in Progress (i) | Other | Total | |||||||
Balance as of December 31, 2017 | 500,646 | 4,570,497 | 20,583,099 | 3,274,665 | 832,703 | 29,761,610 | ||||||
Cost - previously disclosed | 500,646 | 6,058,259 | 39,211,042 | 3,274,665 | 1,755,092 | 50,799,704 | ||||||
Cost - reclassification | 68,902 | (70,296) | 1,038,042 | 186,606 | (92,650) | 1,130,604 | ||||||
Cost - reclassified | 569,548 | 5,987,963 | 40,249,084 | 3,461,271 | 1,662,442 | 51,930,308 | ||||||
Accumulated depreciation/depletion - previously disclosed |
| (1,487,762) | (18,627,943) |
| (922,389) | (21,038,094) | ||||||
Accumulated depreciation/depletion - reclassification |
| (88,244) | (964,517) |
| (77,843) | (1,130,604) | ||||||
Accumulated depreciation/depletion - reclassified |
| (1,576,006) | (19,592,460) |
| (1,000,232) | (22,168,698) | ||||||
Balance as of January 1, 2018 | 569,548 | 4,411,957 | 20,656,624 | 3,461,271 | 662,210 | 29,761,610 | ||||||
Acquisitions |
|
|
| 372 |
| 201,492 |
| 2,439,286 |
| 13,199 | 2,654,349 | |
Capitalized financial charges |
|
|
|
|
|
|
| 178,055 |
|
| 178,055 | |
Foreign currency translation adjustment |
| 32,751 |
| 593,228 |
| 1,433,855 |
| 137,551 |
| 30,411 | 2,227,796 | |
Cost | 32,751 |
| 674,720 |
| 1,727,164 |
| 137,551 |
| 52,242 | 2,624,428 | ||
Depreciation, amortization and depletion |
|
| (81,492) |
| (293,309) |
|
|
| (21,831) | (396,632) | ||
Transfers by concluded projects |
|
| 16,477 |
| 1,022,560 |
| (1,106,975) |
| 67,938 |
| ||
Transfers to intangible |
|
|
|
|
|
| (2,922) |
| (1,539) | (4,461) | ||
Disposals |
|
|
| (2,009) |
| (40,503) |
| (3,873) |
| (1,675) | (48,060) | |
Cost |
|
|
| (2,983) |
| (175,562) |
| (3,873) |
| (9,475) | (191,893) | |
Depreciation, amortization and depletion |
|
|
| 974 |
| 135,059 |
|
|
| 7,800 | 143,833 | |
Depreciation, amortization and depletion |
|
|
| (370,035) |
| (2,487,820) |
|
|
| (151,544) | (3,009,399) | |
Net book value |
| 602,299 | 4,649,990 | 20,786,208 | 5,102,393 | 619,000 | 31,759,890 | |||||
Cost |
| 602,299 |
| 6,676,549 |
| 43,024,738 |
| 5,102,393 |
| 1,784,807 | 57,190,786 | |
Accumulated depreciation, amortization and depletion |
|
|
| (2,026,559) |
| (22,238,530) |
|
|
| (1,165,807) | (25,430,896) | |
Balance as of December 31, 2018 |
| 602,299 | 4,649,990 | 20,786,208 | 5,102,393 | 619,000 | 31,759,890 | |||||
Acquisitions |
|
| 1,280 |
| 61,213 |
| 2,658,070 |
| 3,701 | 2,724,264 | ||
Capitalized financial charges |
|
|
|
|
|
| 198,201 |
|
| 198,201 | ||
Foreign currency translation adjustment | 11,508 |
| 289,118 |
| 675,400 |
| 105,701 |
| 3,536 | 1,085,263 | ||
Cost | 11,508 |
| 366,939 |
| 860,672 |
| 105,701 |
| 10,109 | 1,354,929 | ||
Depreciation, amortization and depletion |
|
| (77,821) |
| (185,272) |
|
|
| (6,573) | (269,666) | ||
Transfers by concluded projects |
|
| 21,382 |
| 884,606 |
| (993,024) |
| 87,036 |
| ||
Transfers to inventory |
|
|
|
|
|
| (47,696) |
| (2,866) | (50,562) | ||
Transfers to intangible |
|
|
|
|
|
| (6,433) |
|
| (6,433) | ||
Cost |
|
|
|
|
|
| (6,433) |
|
| (6,433) | ||
Disposals |
|
| (634) |
| (223,514) |
| (7,739) |
| (3,659) | (235,546) | ||
Cost |
|
| (1,178) |
| (392,033) |
| (7,739) |
| (31,264) | (432,214) | ||
Depreciation, amortization and depletion |
|
| 544 |
| 168,519 |
|
|
| 27,605 | 196,668 | ||
Depreciation, amortization and depletion |
|
| (388,869) |
| (2,534,637) |
|
|
| (138,395) | (3,061,901) | ||
Transfers to right of use of assets |
|
|
|
|
|
|
|
| (97,995) | (97,995) | ||
Cost |
|
|
|
|
|
|
|
| (125,497) | (125,497) | ||
Amortization |
|
|
|
|
|
|
|
| 27,502 | 27,502 | ||
Net book value | 11,508 | (77,723) | (1,136,932) | 1,763,008 | 473,224 | 32,315,181 | ||||||
Cost | 613,807 |
| 7,064,972 |
| 44,439,196 |
| 7,009,473 |
| 1,726,026 | 60,853,474 | ||
Accumulated depreciation, amortization and depletion |
|
| (2,492,705) |
| (24,789,920) |
|
|
| (1,255,668) | (28,538,293) | ||
Balance as of December 31, 2019 | 613,807 | 4,572,267 | 19,649,276 | 7,009,473 | 470,358 | 32,315,181 |
(i) | On December 31, 2019, the main amounts recorded under this item corresponded to expenses with scheduled maintenance shutdowns in Brazil and at overseas plants that are either in the preparation phase or ongoing (R$1,400,667), capitalized financial charges (R$419,244), inventories of spare parts (R$430,418), strategic projects ongoing in Brazil (R$98,879) and in Braskem America (R$2,611,034). The remainder corresponds mainly to various projects for maintaining the production capacity of plants. |
The machinery, equipment and facilities of the Company require inspections, replacement of components and maintenance in regular intervals. The Company makes shutdowns in regular intervals that vary from two to six years to perform these activities. These shutdowns can involve the plant as a whole, a part of it, or even only relevant pieces of equipment, such as industrial boilers, turbines and tanks. Shutdowns that take place every six years, for example, are usually made for the maintenance of industrial plants as a whole. Expenses with each scheduled shutdown are included in property, plant and equipment items that were the subject matter of the stoppage and are fully depreciated until the beginning of the following related stoppage. The expenditures with personnel, the consumption of small materials, maintenance and the related services from third parties arerecorded, when incurred, as production costs. Property, plant and equipment items are depreciated on a straight-line basis. Projects in progress are not depreciated. Depreciation begins when the assets are available for use.
F-42
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated |
Based on the analysis cited in Note 3.4(a)3.2.3(a), the Management of Braskem believes that the plants will operate at their full capacity, or close to it, within the projected period, therefore additional impairment tests of these assets were not necessary. The prices of products manufactured by the Company are quoted in international markets, in the short or medium term, and adjust to the prices of raw materials to preserve the historical margins of the business.
Financial charges are capitalized on the balance of ongoing projects, of Braskem and its subsidiaries, using: (i) the average rate of allthe financings; and (ii) the exchange variation portion that corresponds to any positive difference between the average rate of financing in the domestic market and the rate cited in item (i).
In 2018,2019, charges amounting to R$198,201 (R$178,055 (R$130,272 in 2017)2018) were capitalized. The average rate of these charges in the year was 8.78%6.47% p.a. (7.78%(8.78% p.a. in 2017)2018).
(b)Property,In compliance with IFRS 7.43, at December 31, 2019, acquisition of property, plant and equipment by countrywith payment installments is R$ 103,315.
2018 | 2017 | |||
Brazil | 16,278,608 | 16,665,988 | ||
Mexico | 11,656,910 | 10,581,347 | ||
United States of America | 3,539,495 | 2,275,987 | ||
Germany | 273,987 | 229,328 | ||
Other | 10,890 | 8,960 | ||
31,759,890 | 29,761,610 |
(b) | Property, plant and equipment by country |
2019 | 2018 | ||
Brazil | 15,682,081 | 16,278,608 | |
Mexico | 11,826,309 | 11,656,910 | |
United States of America | 4,545,974 | 3,539,495 | |
Germany | 258,291 | 273,987 | |
Other | 2,526 | 10,890 | |
32,315,181 | 31,759,890 |
F - 43F-43
Braskem S.A.
Notes to the financial statements
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise statedat December 31, 2018
Intangible assets13 Intangible assets
Goodwill | Customers | |||||||||||||||||
based on | Customers | Brands | Software | and Suppliers | ||||||||||||||
expected future | Brands | Software | and Suppliers | Goodwill | and Patents | licenses | Agreements | Total | ||||||||||
Balance as of December 31, 2017 | 2,058,874 | 230,087 | 192,140 | 246,396 | 2,727,497 | |||||||||||||
profitability | and Patents | licenses | Agreements | Total | ||||||||||||||
Cost | 3,187,722 | 339,512 | 566,673 | 772,888 | 4,866,795 | |||||||||||||
Accumulated amortization | (1,128,848) | (110,880) | (364,336) | (453,644) | (2,057,708) | |||||||||||||
Balance as of December 31, 2016 | 2,058,874 | 228,632 | 202,337 | 319,244 | 2,809,087 | |||||||||||||
Cost - previously disclosed | 3,187,722 | 349,316 | 607,528 | 772,253 | 4,916,819 | |||||||||||||
Cost - reclassification | (44) | 58,515 | 117,743 | 121,861 | 298,075 | |||||||||||||
Cost - reclassified | 3,187,678 | 407,831 | 725,271 | 894,114 | 5,214,894 | |||||||||||||
Accumulated amortization - previously disclosed | (1,128,848) | (119,229) | (415,388) | (525,857) | (2,189,322) | |||||||||||||
Accumulated amortization - reclassification | 44 | (61,252) | (108,644) | (128,223) | (298,075) | |||||||||||||
Accumulated amortization - reclassified | (1,128,804) | (180,481) | (524,032) | (654,080) | (2,487,397) | |||||||||||||
Balance as of January 1, 2018 | 2,058,874 | 227,350 | 201,239 | 240,034 | 2,727,497 | |||||||||||||
Acquisitions | 340 | 27,319 | 297 | 27,956 |
|
| 51,707 | 272 | 51,979 | |||||||||
Additions through acquisition on subsidiary |
|
| 1,316 | 402 | 1,718 | |||||||||||||
Foreign currency translation adjustment | 8,357 | 4,759 | (932) | 12,184 |
| 23,966 | 10,037 | (185) | 33,818 | |||||||||
Other | 1,107 | (124) |
| 983 | ||||||||||||||
Cost |
| 27,021 | 21,053 | 94,351 | 142,425 | |||||||||||||
Amortization |
| (3,055) | (11,016) | (94,536) | (108,607) | |||||||||||||
Transfers by projects and stoppage in progress |
| 2,532 | 1,929 |
| 4,461 | |||||||||||||
Disposals |
|
|
| (1,003) | (1,003) | |||||||||||||
Cost | 1,107 | 269 |
| 1,376 |
|
|
| (596,557) | (596,557) | |||||||||
Amortization |
| (393) |
| (393) |
|
|
| 595,554 | 595,554 | |||||||||
Amortization | (8,349) | (43,467) | (72,615) | (124,431) |
| (7,551) | (30,780) | (37,439) | (75,770) | |||||||||
Net book value | 2,058,874 | 230,087 | 192,140 | 246,396 | 2,727,497 | 2,058,874 | 246,297 | 234,132 | 201,679 | 2,740,982 | ||||||||
Cost | 3,187,722 | 349,316 | 607,528 | 772,253 | 4,916,819 | 3,187,678 | 437,384 | 799,960 | 392,180 | 4,817,202 | ||||||||
Accumulated amortization | (1,128,848) | (119,229) | (415,388) | (525,857) | (2,189,322) | (1,128,804) | (191,087) | (565,828) | (190,501) | (2,076,220) | ||||||||
Balance as of December 31, 2017 | 2,058,874 | 230,087 | 192,140 | 246,396 | 2,727,497 | |||||||||||||
Cost - reclassification | (44) | 58,515 | 117,743 | 121,861 | 298,075 | |||||||||||||
Cost - reclassified | 3,187,678 | 407,831 | 725,271 | 894,114 | 5,214,894 | |||||||||||||
Accumulated amortization - reclassification | 44 | (61,252) | (108,644) | (128,223) | (298,075) | |||||||||||||
Accumulated amortization - reclassified | (1,128,804) | (180,481) | (524,032) | (654,080) | (2,487,397) | |||||||||||||
Balance as of January 1, 2018 | 2,058,874 | 227,350 | 201,239 | 240,034 | 2,727,497 | |||||||||||||
Balance as of December 31, 2018 | 2,058,874 | 246,297 | 234,132 | 201,679 | 2,740,982 | |||||||||||||
Acquisitions |
| 51,707 | 272 | 51,979 |
| 112 | 61,414 |
| 61,526 | |||||||||
Foreign currency translation adjustment | 23,966 | 10,037 | (185) | 33,818 |
| 12,957 | 2,704 |
| 15,661 | |||||||||
Cost | 27,021 | 21,053 | 94,351 | 142,425 |
| 13,919 | 6,356 |
| 20,275 | |||||||||
Amortization | (3,055) | (11,016) | (94,536) | (108,607) |
| (962) | (3,652) |
| (4,614) | |||||||||
Transfers from property, plant and equipment | - | 2,532 | 1,929 |
| 4,461 |
|
| 6,433 |
| 6,433 | ||||||||
Other |
|
| (1,003) | (1,003) |
|
|
|
|
| |||||||||
Cost |
|
| (596,557) | (596,557) |
|
| (4) |
| (4) | |||||||||
Amortization |
|
| 595,554 | 595,554 |
|
| 4 |
| 4 | |||||||||
Amortization | (7,551) | (30,780) | (37,439) | (75,770) |
| (7,751) | (32,747) | (22,016) | (62,514) | |||||||||
Net book value | 2,058,874 | 246,297 | 234,132 | 201,679 | 2,740,982 | 2,058,874 | 251,615 | 271,936 | 179,663 | 2,762,088 | ||||||||
Cost | 3,187,678 | 437,384 | 799,960 | 392,180 | 4,817,202 | 3,187,678 | 451,415 | 874,159 | 392,180 | 4,905,432 | ||||||||
Accumulated amortization | (1,128,804) | (191,087) | (565,828) | (190,501) | (2,076,220) | (1,128,804) | (199,800) | (602,223) | (212,517) | (2,143,344) | ||||||||
Balance as of December 31, 2018 | 2,058,874 | 246,297 | 234,132 | 201,679 | 2,740,982 | |||||||||||||
Balance as of December 31, 2019 | 2,058,874 | 251,615 | 271,936 | 179,663 | 2,762,088 | |||||||||||||
Average annual rates of amortization | 4.96% | 11.71% | 6.00% | 4.96% | 12.40% | 6.00% |
The Company adopts the following accounting practice for each class of intangible assets:
F - 44
Goodwill The existing goodwill was determined in accordance with the criteria established by the accounting practices adopted in Brazil before the adoption of the IASB pronouncements and represent the excess of the amount paid over the amount of equity of the companies acquired. Such goodwill was F-44Braskem S.A.(a) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(a)Goodwill based on future profitabilitysystematically amortized until December 2008. As from 2009, it has been subject to annual impairment tests. In November 2018, Braskem conducted an impairment test
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated |
On December 31, 2019, the Company tested the balances of the goodwill using the value in use method (discounted cash flow) and did not identify any loss, as shown in the table below: below for impairment:
Book value | ||||||||
Allocated | Cash flow | (with goodwill | ||||||
goodwill | (CF) | and work capital) | CF/Book value | |||||
CGU and operating segments | ||||||||
CGU - Chemicals South | 926,854 | 9,628,209 | 2,479,778 | 3.9 | ||||
Operating segment - Polyolefins | 939,667 | 21,750,937 | 8,189,204 | 2.7 | ||||
Operating segment - Vinyls | 192,353 | 4,617,326 | 2,763,882 | 1.7 |
Goodwill | ||
CGU | ||
Southern petrochemical complex | 1,390,741 | |
Northeastern petrochemical complex | 475,780 | |
Vinyls unity | 192,353 |
(i)The carrying amount includes, in addition to goodwill, tangible and intangible assets with defined useful lives and working capital from each operating segment.
The determination of value in use involves judgements and assumptions adopted to determine the discounted cash flow areas described in Note 3.4(b)3.2.3(b). The WACC used was 11.72%10.69% p.a. The inflation rate considered for perpetuity was 3.7%3.5%.
The recoverable amount is based on the fair value less cost of disposal, future capital expenditure and its associated costs, based on the discounted cash flow consistent with a market participant perspective, less incremental costs directly attributable to the disposal. The main assumptions consider a post-tax discount rate under current market conditions and an average growth rate of 2% p.a.
Given the potential impact on cash flows of the “discount rate” and “perpetuity”, Braskemthe Company conducted a sensitivity analysis based on changes in these variables with cash flows shownconsidering +0.5% on discount rate and -0.5% on perpetuity. Based on the analyses conducted by Management, there was no need to record impairment losses for the balances of these assets in the table below:year ended December 31, 2019.
+0.5% on | -0.5% on | |||||||
discount rate | perpetuity | |||||||
CGU and operating segments | ||||||||
CGU - Chemicals South | 9,099,954 | 9,249,202 | ||||||
Operating segment - Polyolefins | 20,455,434 | 20,798,767 | ||||||
Operating segment - Vinyls | 4,351,801 | 4,424,347 |
The main assumptions used for projecting cash flows are related to the projection of macroeconomic indicators, international prices and global and local demand in the countries where Braskem has operational production plants.
Macroeconomic indicators are provided by a widely recognized consulting firm and include items such as: exchange, inflation and interest rates, among others.
Prices for key petrochemical products are obtained from projections madeproduced by an internationalspecialized third party consulting firm. However,firm, which are reviewed and supplemented based on Management´s experience. Also, final prices take into consideration meetings of specific internal committees and the knowledge of the Company’s experts in preparing the benchmarks for each market. In most cases, for the projected period, the internally projected prices have gone through a new revision compared to those originally projected by the internationalspecialized third party consulting firm.
Similar to for prices, global demand also is contracted from a specific consulting firm and, in the markets where the Company operates more directly, they consider additional variables for the composition of local demand.
In the Vinyls segment, whose main product is PVC, the projected cash flow exceeded the book value of assets by 67%. The main variables impacting this business are related to fluctuations in the exchange rate, internationalspreads (especially those related to the prices of naphtha, PVC and Caustic Soda) and Brazilian demand. Effective deviations of these important variables from the Company’s projections could lead to cash flows being lower than the value of the assets.
F - 45F-45
Braskem S.A.
Notes to the financial statements
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise statedat December 31, 2018
(b) | Intangible assets with definite useful lives |
(b.1) | Trademarks and patents |
(b)Intangible assets with defined useful lives
(b.1) Trademarks and patents
The technologies acquired from third parties, including those acquired through business combination, are recorded at the cost of acquisition and/or fair value and other directly attributed costs, net of accumulated amortization and provision for impairment, when applicable. Technologies that have defineddefinite useful lives and are amortized using the straight-line method based on the term of the purchase agreement (between 10 and 20 years). Expenditures with research and development are accounted for in profit andor loss as they are incurred.incurred, and development expenses are capitalized when projects are viable.
(b.2) | Contractual customer and supplier relationships |
(b.2) Contractual customer and supplier relationships
Contractual customer and supplier relationships arising from a business combination were recognized at fair value at the respective acquisition dates. These contractual customer and supplier relationships have a finitedefinite useful life and are amortized using the straight-line method over the term of the respective purchase or sale agreement (between 14 and 28 years).
(b.3) | Software |
(b.3) Software
All software booked has defineddefinite useful life estimated between 35 and 10 years and is amortized using the straight-line method. Costs associated with maintaining computer software programs are recognized in profit andor loss as incurred.
Intangible assets by country(c)(c)
2019 | 2018 | ||
Brazil | 2,521,941 | 2,510,503 | |
Mexico | 193,741 | 178,261 | |
United States of America | 24,313 | 26,791 | |
Germany | 22,077 | 25,373 | |
Other | 16 | 54 | |
2,762,088 | 2,740,982 |
14 | Right-of-use assets and Lease Liability |
(a) | Right-of-use assets |
The Company leases various offices, railars, vessels, pieces of equipment and vehicles. Such leases are negotiated individually and are subject to various terms and conditions.
The right-of-use asset is measured at the cost composed of:
· | Amount initially measured of the lease liabilities; | |
· | Any payment made up to the start of the lease, deducting any incentive received; | |
· | Any initial direct cost; and | |
· | Renovation costs. |
F-46
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated |
Changes in right-of-use assets in 2019:
Transfer of | Initial Adoption | Foreign currency | ||||||||||||||
2018 | fixed assets | 01/01/2019 | Addition | Depreciation | Disposal | translation adjustment | 2019 | |||||||||
Buildings and constructions |
|
| 207,524 | 153,771 | (27,759) | (122,488) | 1,122 | 212,170 | ||||||||
Computer equipment and goods |
| 2,726 | 4,932 | 6,179 | (1,446) |
| 132 | 12,523 | ||||||||
Machinery and equipment |
| 7,956 | 526,318 | 344,928 | (136,615) |
| 661 | 743,248 | ||||||||
Ships |
|
| 906,495 | 150,670 | (191,778) |
|
| 865,387 | ||||||||
Rail cars |
| 87,313 | 633,492 | 103,169 | (132,728) |
| 54,794 | 746,040 | ||||||||
Vehicles |
|
| 35,479 | 1,073 | (10,493) |
| 227 | 26,286 | ||||||||
Total |
| 97,995 | 2,314,240 | 759,790 | (500,819) | (122,488) | 56,936 | 2,605,654 |
The expense for the short-term leases recognized in the 12-month period ended December 31, 2019 was R$103,929.
The expense related to low-value leases recognized in the 12-month period ended December 31, 2019 was R$1,070.
To optimize lease costs during the lease term, the Company must provide guaranteed residual amounts for the leased asset. For certain lease agreements for freight cars, which were classified until December 31, 2018 as financial leases, the Company guaranteed any difference between the flow of contractual payments and the fair value of these assets upon the end of the enforceable term, limited to R$50,622 (US$12,559) as of December 31, 2019 and R$48,664 (US$12,559) as of December 31, 2018.
(b) | Lease Liability |
The lease payments are deducted using the interest rate of the agreement. If this rate cannot be determined, the Company’s incremental borrowing rate, which corresponds to the rate the Company would pay to take out any loan with similar term and guarantee, for obtaining a similar asset in a similar economic environment and conditions.
Extension Options
Some leases contains extension options exercisable by the Company. The extension options held are exercisable only by the Company and not by the lessors. The Company assesses at lease commencement date whether it is reasonably certain to exercise the options if there is a significant event or significant changes in circumstances within its control.
F-47
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated |
Changes in lease liability
2019 | |
Balance at December 31, 2018 | 100,557 |
Initial adoption IFRS 16 | 2,191,908 |
Balance at January 01, 2019 | 2,292,465 |
Acquired | 911,619 |
Disposals | (122,488) |
Interests and monetary and exchange variations, net | 121,061 |
Currancy translation adjustments | 56,805 |
Payments | (454,190) |
Interest paid | (128,376) |
Balance at December 31, 2019 | 2,676,896 |
Current liability | 676,291 |
Non-current liability | 2,000,605 |
Total | 2,676,896 |
Payment Schedule
2018 | 2017 | |||
Brazil | 2,510,503 | 2,502,231 | ||
Mexico | 178,261 | 151,930 | ||
United States of America | 26,791 | 47,357 | ||
Germany | 25,373 | 25,948 | ||
Other | 54 | 31 | ||
2,740,982 | 2,727,497 |
2019 | |
2021 | 484,956 |
2022 | 421,163 |
2023 | 316,218 |
2024 | 293,363 |
2025 | 177,118 |
2026 thereafter | 307,787 |
Total | 2,000,605 |
(c) | Non-cash investing and financing activity transactions: |
Net effect of additions/acquired and disposals of leasing that not affect the cash flow in 2019, in compliance with IFRS 16, is R$ 580,055.
14Trade account payables
F-48
2018 | 2017 | ||||
Trade payables: | |||||
Domestic market | 1,551,554 | 2,287,767 | |||
Foreign market | (i) | 6,934,598 | 2,817,917 | ||
Present value adjustment - foreign market | (107,648) | (46,888) | |||
8,378,504 | 5,058,796 | ||||
Current liabilities | 8,341,252 | 5,058,796 | |||
Non-current liabilities | 37,252 |
| |||
8,378,504 | 5,058,796 |
Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Trade account payables Note 2019 2018 Trade payables: Domestic market Third parties 1,081,076 1,374,379 Related parties 9 155,980 177,175 1,237,056 1,551,554 Foreign market Third parties (i) 7,964,536 6,934,598 Present value adjustment - foreign market (ii) (80,766) (107,648) 9,120,826 8,378,504 Current liabilities 9,116,989 8,341,252 Non-current liabilities 3,837 37,252 9,120,826 8,378,504 Considers R$6.5 billion (R$5.6 billion in 2018) in raw material purchases due in up to 360 days for which the Company provides letters of credit issued by financial institutions that indicate the suppliers as beneficiaries. The rate for calculating the Present Value Adjustment applied to the external market payments with terms equal to or longer than 90 day is calculated based on the average rate for lengthening the term of trade payables. F-49 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Borrowings Borrowings (i) Annual financial charges 2019 2018 Foreign currency Bonds Note 16 (b) 24,583,325 21,930,575 Export prepayment Note 16 (c) 863,293 810,542 Working capital Argentine Peso exchange variation 48 Investments Note 16 (d) 751,376 620,160 Other Note 16 (e) 1,952,667 1,147,397 Transactions costs (499,194) (346,921) 27,651,467 24,161,801 Current liabilities 676,831 610,922 Non-current liabilities 26,974,636 23,550,879 Total 27,651,467 24,161,801 Local currency Export credit notes 100.00 of CDI + 0.70 405,642 406,258 Commercial notes 100.00 of CDI + 0.85 554,307 BNDES 4.00 19,998 52,081 BNDES IPCA + 6.04 270,520 BNB/ FINEP/ FUNDES/FINISA/FINAME 6.01 78,776 239,969 FINAME TLP + 6.00 324 555 BNB-FNE (Fundo Constitucional de Financiamentos do Nordeste) IPCA + interest between 2.39 and 2.78 5,582 Fundo de Desenvolvimento do Nordeste (FDNE) 6.50 32,152 37,099 Other 19.14 237 426 Transactions costs (2,029) (33) 1,365,509 736,355 Current liabilities 98,093 126,514 Non-current liabilities 1,267,416 609,841 Total 1,365,509 736,355 Foreign currency and local currency Current liabilities 774,924 737,436 Non-current liabilities 28,242,052 24,160,720 Total 29,016,976 24,898,156 At December 31, 2109, the Company complied with all covenants. F-50 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Bonds Issue amount Interest Issue date US$ Maturity (% per year) 2019 2018 May-2010 (i) 400,000 May-2020 7.00 81,434 May-2010 (i) 350,000 May-2020 7.00 1,370,156 October-2010 450,000 no maturity date 7.38 1,025,428 985,767 April-2011 (i) 750,000 April-2021 5.75 2,676,195 July-2011 500,000 July-2041 7.13 2,078,372 1,997,984 February-2012 (i) 250,000 April-2021 5.75 980,304 February-2012 250,000 no maturity date 7.38 1,025,428 985,767 May-2012 (ii) 500,000 May-2022 5.38 1,175,799 1,954,177 July-2012 250,000 July-2041 7.13 1,039,186 998,992 February-2014 500,000 February-2024 6.45 2,068,790 1,988,773 May-2014 250,000 February-2024 6.45 1,034,395 994,387 October-2017 (iii) 500,000 January-2023 3.50 847,715 1,969,609 October-2017 1,250,000 January-2028 4.50 5,145,440 4,947,030 November-2019 (iv) 1,500,000 January-2030 4.50 6,090,640 November-2019 (v) 750,000 January-2050 5.88 3,052,132 Total 8,450,000 24,583,325 21,930,575 Prepaid. Partially prepaid (US$210,735). Partially prepaid (US$293,105). The effective interest rate including transaction costs is 4.70% p.a. The effective interest rate including transaction costs is 5.95% p.a. The Company and its subsidiaries may, from time to time, acquire in the secondary marketbonds issued by the Company and/or its subsidiaries. Export pre-payment Initial amount of the transaction Issue date (US$ thousand) Maturity Charges (% per year) 2019 2018 January-2013 (i) 200,000 November-2022 US dollar exchange variation + semiannual Libor + 1.10 311,082 September-2017 135,000 March-2027 US dollar exchange variation + semiannual Libor + 1.61 457,712 499,460 October-2019 100,000 October-2024 US dollar exchange variation + semiannual Libor + 1.75 405,581 Total 435,000 863,293 810,542 Prepaid in November 2019. Annual financial charges 2018 2017 Foreign currency Bonds Note 15 (b) 21,930,575 20,082,588 Export prepayment Note 15 (c) 810,542 781,573 Export credit notes Exchange variation + 7.30 (i) 679,895 Working capital US dollar exchange variation + 3.15% 883,181 Working capital Argentine Peso exchange variation 48 Investments Note 15 (d) 620,160 Other - SACE Note 15 (e) 1,147,397 Transactions costs (346,921) (285,657) 24,161,801 22,141,580 Current liabilities 610,922 985,639 Non-current liabilities 23,550,879 21,155,941 Total 24,161,801 22,141,580 Local currency Export credit notes 100.00 of CDI + 0.70 406,258 Export credit notes 105.00 and 108.00 of CDI (i) 508,146 BNDES TJLP + interest between 0.00 and 2.62 (i) 31,347 BNDES SELIC + 2.32 (i) 22,039 BNDES Interest between 3.50 and 4.00 (ii) 52,081 132,020 BNB/ FINEP/ FUNDES/FINISA/FINAME 5.83% (iii) 239,969 486,227 FINAME TJLP + 6.00 555 2,293 Fundo de Desenvolvimento do Nordeste (FDNE) 6.5% 37,099 42,045 Other 19.14% 426 655 Transactions costs (33) (4,931) 736,355 1,219,841 Current liabilities 126,514 199,142 Non-current liabilities 609,841 1,020,699 Total 736,355 1,219,841 Foreign currency and local currency Current liabilities 737,436 1,184,781 Non-current liabilities 24,160,720 22,176,640 Total 24,898,156 23,361,421 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Capital raised for construction of new plant in United States Issue amount Interest Issue date US$ Maturity (% per year) 2018 2017 June-2008 500,000 June-2018 7.25 440,274 May-2010 400,000 May-2020 7.00 81,434 159,341 May-2010 350,000 May-2020 7.00 1,370,156 1,169,732 October-2010 (i) 450,000 no maturity date 7.38 985,767 1,514,826 April-2011 750,000 April-2021 5.75 2,676,195 2,502,351 July-2011 500,000 July-2041 7.13 1,997,984 1,705,722 February-2012 250,000 April-2021 5.75 980,304 836,907 February-2012 250,000 no maturity date 7.38 985,767 841,570 May-2012 500,000 May-2022 5.38 1,954,177 1,668,323 July-2012 250,000 July-2041 7.13 998,992 852,861 February-2014 500,000 February-2024 6.45 1,988,773 1,697,859 May-2014 250,000 February-2024 6.45 994,387 848,929 October-2017 500,000 January-2023 3.50 1,969,609 1,667,025 October-2017 1,250,000 January-2028 4.50 4,947,030 4,176,868 Total 6,700,000 21,930,575 20,082,588 Initial amount of the transaction Issue date (US$ thousand) Maturity Charges (% per year) 2018 2017 January-2013 200,000 November-2022 US dollar exchange variation + semiannual Libor + 1.10 311,082 331,701 September-2017 135,000 March-2017 US dollar exchange variation + semiannual Libor + 1.61 499,460 449,872 Total 335,000 810,542 781,573 The subsidiary Braskem America contracted a credit facility in the amount of up to US$225 million (R$ 900 million) that is secured by Euler Hermes, a German export credit agency, which will be used to finance a portion of the investment in the new PP plant located in La Porte, Initial amount Initial amount of the transaction of the transaction Issue date (US$) Maturity Charges (% per year) 2018 2017 (US$) Maturity Charges (% per year) 2019 2018 July-2018 (i) 158,150 December-2028 Us dollar exchange variation + semianual Libor + 0.65 620,160 (i) 179,398 December-2028 Us dollar exchange variation + semianual Libor + 0.65 751,376 620,160 Total 158,150 620,160 179,398 751,376 620,160 US$130,650 released in July 2018, US$13,677 in September 2018, US$13,823 in December 2018, US$7,688 in March 2019, US$6,231 in June 2019, US$4,549 in September 2019 and US$2,780 in December 2019. Others Initial amount of the transaction Identification Issue date (US$) Maturity Charges (% per year) 2019 2018 SACE (i) November-2018 295,125 November-2028 Us dollar exchange variation + semianual Libor + 0.90 1,073,526 1,147,397 SACE (i) December-2019 150,000 December-2029 Us dollar exchange variation + semianual Libor + 0.90 605,448 MONFORTE (ii) April-2019 72,345 April-2026 Us dollar exchange variation + semianual Libor + 1.00 273,693 Total 517,470 1,952,667 1,147,397 Initial amount of the transaction Issue date (US$) Maturity Charges (% per year) 2018 2017 November-2018 295,125 November-2028 Us dollar exchange variation + semianual Libor + 0.90 1,147,397 Total 295,125 1,147,397 Credit facility contracted by the subsidiary Braskem Netherlands B.V. with guarantee from SACE Covered Facility Agreement, an Italian export credit agency. Credit facility contracted by Braskem S.A. with a term of 7 years. To consummate this facility, certain assets of the Company’s plants were pledged to the financial institution in amount higher than financing. Payment schedule The maturity profile of the long-term amounts is as follows: 2018 2017 2019 2018 2019 1,245,895 2020 1,748,531 2,199,869 1,748,531 2021 3,933,857 3,655,465 380,324 3,933,857 2022 2,256,444 1,801,844 1,549,976 2,256,444 2023 2,355,549 1,709,587 1,416,730 2,355,549 2024 3,336,032 2,539,216 4,418,409 3,336,032 2025 234,270 45,994 369,725 234,270 2026 234,296 44,239 350,320 234,296 2027 205,157 17,586 297,382 205,157 2028 and thereafter 9,856,584 8,916,945 2028 5,314,976 5,028,265 2029 71,326 2030 and thereafter 14,072,884 4,828,319 Total 24,160,720 22,176,640 28,242,052 24,160,720 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Guarantees Braskem gave collateral for part of its borrowings as follows: Total Total Total Total Loans Maturity debt 2018 guaranteed Guarantees Maturity debt 2019 guaranteed Guarantees BNB December-2022 88,909 88,909 Mortgage of plants, pledge of machinery and equipment March-2023 24,542 24,542 Bank surety BNB March-2023 32,093 32,093 Bank surety BNDES January-2021 52,081 52,081 Mortgage of plants, land and property, pledge of machinery and equipment January-2021 19,998 19,998 Mortgage of plants, land and property, pledge of machinery and equipment FUNDES June-2020 47,929 47,929 Mortgage of plants, land and property, pledge of machinery and equipment June-2020 15,976 15,976 Mortgage of plants, land and property, pledge of machinery and equipment FINEP July-2024 61,725 61,725 Bank surety July-2024 33,783 33,783 Bank surety FINEP December-2019 2,872 2,872 Bank surety, pledge of equipment and current account lockout (restricted fund). FINAME April-2021 1,496 1,496 Pledge of equipment April-2021 324 324 Pledge of equipment FINISA December-2023 5,500 5,500 Bank surety December-2023 4,475 4,475 Bank surety OTHER July-2021 424 424 Pledge of equipment BNB-FNE December-2027 5,582 5,582 Bank surety and pledge of reserve liquidity fund. Other July-2021 237 237 Pledge of equipment Total 293,029 293,029 104,917 104,917 Braskem S.A. has fully and unconditionally guaranteed the debt securities issued by Braskem Finance, Braskem America Finance and Braskem Netherlands Finance B.V. 100-percent-owned subsidiaries of Braskem. There are no significant restrictions on the ability of Braskem to obtain funds from these subsidiaries. Braskem Idesa financing Principal amount US$ Identification Maturity Charges (% per year) 2019 2018 Project finance Project finance I 700,000 February-2027 US dollar exchange variation + quarterly Libor + 3.25 (i) 2,149,002 2,335,825 Project finance II 210,000 February-2027 US dollar exchange variation + 6.17 608,260 657,689 Project finance III 600,000 February-2029 US dollar exchange variation + 4.33 (ii) 1,849,896 1,983,113 Project finance IV 660,000 February-2029 US dollar exchange variation + quarterly Libor + 3.88 (iii) 2,078,545 2,225,042 Project finance V 400,000 February-2029 US dollar exchange variation + quarterly Libor + 4.65 (iv) 1,326,901 Project finance VI 89,994 February-2029 US dollar exchange variation + quarterly Libor + 2.73 (iv) 297,158 Project finance VII 533,095 February-2029 US dollar exchange variation + quarterly Libor + 4.64 (iv) 1,768,389 Total under current liabilities 3,193,089 6,685,703 10,594,117 Bond 900,000 November-2029 US dollar exchange variation + 7.45 3,640,381 Transactions costs (344,358) (89,525) Total 9,981,726 10,504,592 Current liabilities 744,408 10,504,592 Non-current liabilities 9,237,318 Total 9,981,726 10,504,592 Partial prepayment of US$10,344. Partial prepayment of US$8,866. Partial prepayment of US$12,856. Prepaid. On December 2, 2019, Braskem Idesa issued US$900 million in bonds (R$3,796 million) with maturity in November 2029 and interest rate of 7.45% p.a. The issue was priced at 99.65% of face value, which represents a yield of 7.5% p.a. The transaction costs associated with the bond issue, in the amount of approximately US$71 million (R$299 million) were registered initially as a reduction in liabilities, so the debt is amortized over the term of the agreement by its effective interest rate (8.24% p.a.). F-53 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Initial value of operation Identification US$ Maturity Charges (% per year) 2018 2017 Project finance (i) Project finance I 700,000 February-2027 Us dollar exchange variation + quarterly Libor + 3.25 2,335,825 2,179,981 Project finance II 210,000 February-2027 Us dollar exchange variation + 6.17 657,689 621,140 Project finance III 600,000 February-2029 Us dollar exchange variation + 4.33 1,983,113 1,827,811 Project finance IV 660,000 February-2029 Us dollar exchange variation + quarterly Libor + 3.88 2,225,042 2,032,093 Project finance V 400,000 February-2029 Us dollar exchange variation + quarterly Libor + 4.65 1,326,901 1,221,997 Project finance VI 89,994 February-2029 Us dollar exchange variation + quarterly Libor + 2.73 297,158 273,887 Project finance VII 533,095 February-2029 Us dollar exchange variation + quarterly Libor + 4.64 1,768,389 1,627,479 Transactions costs (89,525) (92,938) Total 3,193,089 10,504,592 9,691,450 Current liabilities 10,504,592 9,691,450 Total 10,504,592 9,691,450 In On the reporting date of the consolidated financial statements as of December 31, 2018, certain non-monetary obligations established in the In accordance with the aforementioned accounting standards, reclassification is required in situations in which the breach of certain contractual obligations entitles creditors to request from Braskem Idesa the prepayment of obligations in the short term. In this context, note that none of the creditors requested said prepayment of obligations and that Braskem Idesa has been settling its debt service obligations in accordance with their original maturity schedule. The following amortization schedule presents the original long-term maturities 2019 2018 2020 1,016,916 2021 800,752 1,161,108 2022 699,090 968,519 2023 892,568 1,280,154 2024 978,479 1,385,087 2025 883,333 1,381,192 2026 743,566 1,194,964 2027 329,718 582,393 2028 257,117 482,038 2029 and thereafter 3,652,695 102,105 Total 9,237,318 9,554,476 F-54 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Debentures Issue date Issuer Series Maturity Annual financial charges (%) 2019 2018 March-2013 DAC Single March-2025 IPCA + 6% 202,992 210,506 September-2013 Cetrel Single September-2025 126.5% of CDI 71,575 84,003 274,567 294,509 Current liabilities 46,666 27,732 Non-current liabilities 227,901 266,777 Total 274,567 294,509 Payment schedule The maturity profile of the long-term debentures is as follows: 2019 2018 2020 44,811 2021 52,078 50,722 2022 52,100 50,745 2023 52,125 50,769 2024 52,153 50,796 2025 19,445 18,934 Total 227,901 266,777 Guarantees The issuers entered into agreements for the fiduciary sale of credit rights, in which attached accounts are maintained to cover debt service for the three months of the installments coming due, under the terms of the instruments of assignment. F-55 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated 2018 2017 2019 748,071 2020 1,016,916 877,450 2021 1,161,108 1,002,270 2022 968,519 835,009 2023 1,280,154 1,105,295 2024 1,385,087 1,195,682 2025 1,381,192 1,195,096 2026 1,194,964 1,052,156 2027 582,393 474,438 2028 and thereafter 584,143 422,266 Total 9,554,476 8,907,733 Reconciliation of borrowing activities in the statement of cash flow Current and non-current Borrowings, debentures and Braskem Idesa financing Total borrowings Braskem Idesa Other financial Borrowings Debentures and debentures financing Lease Dividends liabilities Balance at December 31, 2018 24,898,156 294,509 25,192,665 10,504,592 100,557 672,395 Acquired 20,586,103 20,586,103 3,497,622 499,999 Payments (17,402,284) (23,125) (17,425,409) (4,398,453) (454,190) (668,904) Cash used in financing activities 3,183,819 (23,125) 3,160,694 (900,831) (454,190) (668,904) 499,999 Other changes Interest paid (1,440,754) (22,488) (1,463,242) (646,827) (128,376) Interest and monetary and exchange variations, net 2,292,120 25,671 2,317,791 203,450 121,061 16,934 Initial adoption on January 1, 2019 2,191,908 Acquired 911,619 Disposal (122,488) Currency translation adjustments 83,635 83,635 821,342 56,805 Additional dividends of subsidiary 5,125 Prescribed dividends (2,009) Other (105) 935,001 3,183 938,184 377,965 3,030,529 3,011 16,934 Balance at December 31, 2019 29,016,976 274,567 29,291,543 9,981,726 2,676,896 6,502 516,933 Issue date Series Maturity Annual financial charges (%) 2018 2017 March-2013 Single March-2025 IPCA + 6% 210,506 216,968 September-2013 Single September-2025 126,5% of CDI 84,003 96,356 294,509 313,324 Current liabilities 27,732 27,183 Non-current liabilities 266,777 286,141 Total 294,509 313,324 2018 2017 2019 26,629 2020 44,811 43,674 2021 50,722 49,326 2022 50,745 49,326 2023 50,769 49,326 2024 50,796 49,326 2025 18,934 18,534 Total 266,777 286,141 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Financial instruments Recognition and initial measurement The Company Classification and subsequent measurement On initial recognition, a financial asset is classified as measured at: amortised cost; fair value through other comprehensive income (FVOCI) – debt investment; FVOCI – equity investment; or fair value through profit or loss (FVTPL). The standard eliminates the following categories that exist under IAS 39: held to maturity, held for trading, loans and receivables and available for sale. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: It is held within a business model whose objective is to hold assets to collect contractual cash flows; and Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. For subsequent measurement purposes, financial assets are classified into four categories: Financial assets at amortized cost (debt instruments); Financial assets at fair value through other comprehensive income with reclassification of accumulated gains and losses (debt instruments); Financial assets designated at fair value through other comprehensive income, without reclassification of gains and losses accumulated at the time of derecognition (equity instruments); and Financial assets at fair value through profit or loss. Financial liabilities - Classification, subsequent measurement and gains and losses Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss. F-57 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Derecognition Financial Asset The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of The Company enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets. In these cases, the transferred assets are not derecognised. Financial Liabilities The Company derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. The Company also derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognised at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognised in profit or loss. Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Deratives financial instruments and hedge accounting The Company holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the host contract is not a financial asset and certain criteria are met. Derivatives are initially measured at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in profit or loss. The Company designates certain derivatives as hedging instruments to hedge the variability in cash flows associated with highly probable forecast transactions arising from changes in foreign exchange rates and interest rates and certain derivatives and non-derivative financial liabilities as hedges of foreign exchange risk on a net investment in a foreign operation. At inception of designated hedging relationships, the Company documents the risk management objective and strategy for undertaking the hedge. The Company also documents the economic relationship between the hedged item and the hedging instrument, including whether the changes in cash flows of the hedged item and hedging instrument are expected to offset each other. F-58 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Cash flow hedge When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in OCI and accumulated in the hedging reserve. The effective portion of changes in the fair value of the derivative that is recognised in OCI is limited to the cumulative change in fair value of the hedged item, determined on a present value basis, from inception of the hedge. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold, expires, is terminated or is exercised, then hedge accounting is discontinued prospectively. When hedge accounting for cash flow hedges is discontinued, the amount that has been accumulated in the hedging reserve remains in equity until, for a hedge of a transaction resulting in the recognition of a non-financial item, it is included in the non-financial item’s cost on its initial recognition or, for other cash flow hedges, it is reclassified to profit or loss in the same period or periods as the hedged expected future cash flows affect profit or loss. If the hedged future cash flows are no longer expected to occur, then the amounts that have been accumulated in the hedging reserve and the cost of hedging reserve are immediately reclassified to profit or loss. Current and non-current Borrowings, debentures and Braskem Idesa financing Braskem Idesa Borrowings Debentures and debentures financing Total Dividends Balance at December 31, 2017 23,361,421 313,324 23,674,745 9,691,450 33,366,195 3,850 Acquired 4,301,626 4,301,626 4,301,626 Payments (6,569,073) (23,124) (6,592,197) (812,929) (7,405,126) (1,499,900) Cash used in financing activities (2,267,447) (23,124) (2,290,571) (812,929) (3,103,500) (1,499,900) Other changes Interest paid (1,304,811) (23,609) (1,328,420) (588,381) (1,916,801) Interest and monetary and exchange variations, net 3,703,892 27,918 3,731,810 604,837 4,336,647 Currency translation adjustments 1,405,101 1,405,101 1,609,615 3,014,716 Additional dividends approved in the boar meeting 1,500,000 Mandatory minimum dividends 667,419 Prescribed dividends / other 1,026 3,804,182 4,309 3,808,491 1,626,071 5,434,562 2,168,445 Balance at December 31, 2018 24,898,156 294,509 25,192,665 10,504,592 35,697,257 672,395 Fair Value Fair value calculation The fair value of financial assets and liabilities is estimated as the amount for which a financial instrument could be exchanged in an arm’s length transaction and not in a forced sale or settlement. The following methods and assumptions were used to estimate the fair value: Trade accounts receivable and trade payables, mostly classified as amortized cost, corresponds to their respective carrying amounts due to the short-term maturity of these instruments. When purchase or sale prices include material financial charges, the securities are adjusted to their present value. The fair value of borrowings is estimated by discounting future contractual cash flows at the market interest rate, which is available to Braskem in similar financial instruments. The fair value of bonds is based on prices negotiated in financial markets, plus the respective carrying amount of interests. The fair values of the remaining assets and liabilities correspond to their carrying amount. F-59 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Fair value hierarchy The Company adopts IFRS 7 to measure the fair value of financial instruments recorded in the balance sheet; this requires disclosure in accordance with the following fair value measurement hierarchy: Level 1 – fair value obtained through prices quoted (without adjustments) in active markets for identical assets or liabilities, such as the stock exchange; and Level 2 – fair value obtained from financial models using directly observable market data, such as discounted cash flow, when the instrument is a forward purchase/sale or a swap contract, or such as the Black-Scholes model, when the instrument has the characteristics of an option. To measure the credit risk of the parties involved in derivative instruments, Braskem uses CVA (Credit Valuation Adjustment) or DVA (Debt Valuation Adjustment) models, applied flow by flow on the mark-to-market value of each instrument. The Company adopts the ratingsof the other parties for positive flows and its own rating for negative flows, both available in the market and disclosed by renowned rating agencies, as a necessary assumption to define the probability of default. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Non-derivative financial instruments and other liabilities Fair value Book value Fair value Note Classification by category hierarchy 2019 2018 2019 2018 Cash and cash equivalents 5 Cash and banks Amortized cost 2,303,231 2,228,964 2,303,231 2,228,964 Financial investments in Brazil Fair value through profit or loss Level 2 1,963,185 1,754,561 1,963,185 1,754,561 Financial investments abroad Fair value through profit or loss Level 2 2,537,464 1,564,112 2,537,464 1,564,112 6,803,880 5,547,637 6,803,880 5,547,637 Financial investments 6 LFT´s and LF´s Fair value through profit or loss Level 2 1,588,426 2,247,272 1,588,426 2,247,272 Time deposit investments Amortized cost Level 2 38,759 49,630 38,759 49,630 Other Fair value through profit or loss Level 2 70,027 70,709 70,027 70,709 1,697,212 2,367,611 1,697,212 2,367,611 Trade accounts receivable 7 Amortized cost 2,246,248 3,045,463 2,246,248 3,045,463 Trade accounts receivable 7 Fair value through profit or loss Level 2 60,403 47,540 60,403 47,540 Trade payables 15 Amortized cost 9,120,826 8,378,504 9,120,826 8,378,504 Borrowings 16 Amortized cost Foreign currency - Bond Level 1 24,583,325 21,930,575 25,790,532 22,028,040 Foreign currency - other borrowings Level 2 3,567,336 2,578,147 3,218,410 2,277,069 Local currency Level 2 1,367,538 736,388 1,075,803 598,926 29,518,199 25,245,110 30,084,745 24,904,035 Braskem Idesa borrowings 17 Amortized cost Project Finance Level 2 6,685,703 10,594,117 6,116,434 9,367,878 Bond Level 1 3,640,381 3,892,878 - 10,326,084 10,594,117 10,009,312 9,367,878 Debentures 18 Amortized cost Level 2 274,567 294,509 293,282 239,976 Loan to non-controlling 9 Amortized cost 2,395,887 2,183,830 2,395,887 2,183,830 Leniency agreement 25 Amortized cost 1,742,268 1,842,518 1,742,268 1,842,518 Provision - geological event in Alagoas 26 Amortized cost 3,383,067 3,383,067 Other financial liabilities 28 Amortized cost 516,933 516,933 Fair value Book value Fair value Note Classification by category hierarchy 2018 2017 2018 2017 Cash and cash equivalents 5 Cash and banks Amortized cost 2,228,964 1,428,766 2,228,964 1,428,766 Financial investments in Brazil Fair value through profit or loss Level 2 1,754,561 1,706,784 1,754,561 1,706,784 Financial investments abroad Fair value through profit or loss Level 2 1,564,112 639,543 1,564,112 639,543 5,547,637 3,775,093 5,547,637 3,775,093 Financial investments 6 Letras financeiras do tesouro - LFT Fair value through profit or loss Level 2 2,247,272 1,816,889 2,247,272 1,816,889 Time deposit investments Amortized cost Level 2 49,630 440,616 49,630 440,616 Time deposit investments Fair value through profit or loss Level 2 15,764 15,764 Other Fair value through profit or loss Level 2 70,709 39,739 70,709 39,739 2,367,611 2,313,008 2,367,611 2,313,008 Trade accounts receivable 6 Amortized cost 3,045,463 3,244,851 3,045,463 3,244,851 Trade accounts receivable 6 Fair value through profit or loss Level 2 47,540 73,841 47,540 73,240 Trade payables 14 Amortized cost 8,378,504 5,058,796 8,378,504 5,058,796 Borrowings 15 Amortized cost Foreign currency - Bond Level 1 21,930,575 20,082,588 22,028,040 21,230,567 Foreign currency - other borrowings Level 2 2,578,147 2,344,649 2,277,069 2,228,608 Local currency Level 2 736,388 1,224,772 598,926 1,039,873 25,245,110 23,652,009 24,904,035 24,499,048 Braskem Idesa borrowings 16 Amortized cost Level 2 10,594,117 9,784,388 9,367,878 8,675,711 Debentures 17 Amortized cost Level 2 294,509 313,324 239,976 214,815 Loan ton non-controlling shareholder of Braskem Idesa Amortized cost 2,183,830 1,756,600 2,183,830 1,756,600 Leniency agreement 23.3 Amortized cost 1,842,518 2,004,590 1,842,518 2,004,590 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Derivative financial instruments Changes Net Net Net Net Operation characteristics (Asset)/ (Asset)/ Operation characteristics (Asset)/ (Asset)/ Fair value Principal exposure Accumulated Liability Change in Financial Liability Fair value Principal exposure Accumulated Liability Change in Financial Liability Identification Note hierarchy Derivatives OCI (equity) 2017 fair value settlement 2018 Note hierarchy Derivatives OCI (equity) 2018 fair value settlement 2019 Non-hedge accounting transactions Exchange swap Level 2 Argentine peso Dollar 752 (235) 517 Level 2 Argentine peso Dollar 517 172 (393) 296 NCE swap Level 2 Real Dollar 5,231 5,231 Level 2 Real Dollar 5,231 14,484 5,889 25,604 5,983 (235) 5,748 5,748 14,656 5,496 25,900 Hedge accounting transactions Dollar put option 19.3.1 (a.i) Level 2 Real Dollar (40,338) (3,793) 39,932 36,139 (a.i) Level 2 Real Dollar 2,297 36,139 (38,437) (2,298) Dollar swap 19.3.1 (a.ii) Level 2 CDI Dollar+Interests (183,808) 183,398 183,398 (a.ii) Level 2 Real Dollar+Fixed rates (38,620) 183,398 (64,133) (80,645) 38,620 Interest rate swaps 19.3.1 (a.iii) Level 2 Libor Fixed rates (209,067) (25,791) (41,590) (283) (67,664) (a.iii) Level 2 Libor Fixed rates (234,372) (67,664) 77,998 16,373 26,707 Dollar swap CDI (a.ii) Level 2 Real Dollar+Fixed rates (107,246) 107,246 107,246 (433,213) (29,584) 181,740 (283) 151,873 (377,941) 151,873 82,674 (64,272) 170,275 Derivatives Current assets (3,793) (27,714) (27,714) (4,712) Non-current assets (32,666) (46,664) (46,664) (17,877) Current liabilities 6,875 70,305 70,305 49,251 Non-current liabilities 161,694 161,694 169,513 (29,584) 157,621 157,621 196,175 The counterparties in these contracts are constantly monitored based on the analysis of their respective ratings and Credit Default Swaps – CDS. Braskem has many bilateral risk mitigators in its derivative contracts, such as the possibility of depositing or requesting deposits of a guarantee margin from the counterparties it deems convenient. Derivative financial instruments designated for hedge accounting are presented in the balance sheet at their fair value in an asset or liability account depending on whether the fair value represents a positive or a negative balance to Braskem, All hedge financial instruments held at December 31, Braskem’s Financial Policy provides for the active management and continued protection against undesired fluctuations in currencies and rates arising from its operations and financial items, with the possibility of contracting derivative instruments (swaps, NDFs, options, etc.). The other market risks are addressed on a case-by-case basis for each transaction. In general, Braskem assesses the need for hedging in the analysis of prospective transactions and seeks to customize the hedge and keeps it in place for the same period of the hedged transaction. Braskem may elect derivatives for the application of hedge accounting in accordance with IFRS 9. The hedge designation is not mandatory. In general, Braskem will elect to designate financial instruments as hedges when the application is expected to provide a significant improvement in the presentation of the offsetting effect on the changes in the hedged items. The effective portion of the changes in the fair value of hedge derivatives and of the exchange variation of financial liabilities designated and qualified as sales flow hedge is recognized in equity, under “Other comprehensive income”. These amounts are transferred to profit and loss for the periods in which the hedgeditem affects the financial results. The ineffective portion is recognized immediately in profit and loss as “Financial result.” Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated When a hedge instrument matures or is sold or when it no longer meets the criteria for hedge accounting, it is prospectively discontinued and any cumulative gain or loss in equity remains in equity and is recognized in financial result when the hedged item or transaction affects profit and loss. If the hedged item or transaction is settled in advance, discontinued or is not expected to occur, the cumulative gain or loss in equity is immediately transferred to financial result. Hedge accounting transactions Dollar call and put option On December 31, Dollar Swap Hedge operation by the subsidiary Braskem Idesa related to Project Finance Interest rate swap linked to Libor Identification Nominal value Hedge Maturity Fair value Nominal value Hedge Maturity Fair value, net US$ (interest rate per year) 2018 2017 US$ (interest rate per year) 2019 2018 Swap Libor I to VI 1,312,892 1.9825% May-2025 (67,664) (25,791) 761,153 1.9825% Aug-2025 26,707 (67,664) Total 1,312,892 (67,664) (25,791) 761,153 26,707 (67,664) Derivatives Current assets (21,000) (21,000) Non-Current assets (46,664) (32,666) (46,664) Current liabilities 6,875 5,768 Non-Current liabilities 20,939 Total (67,664) (25,791) 26,707 (67,664) Braskem Idesa contracted swap operations with the purpose of offsetting part of the Libor variation arising from the financings mentioned in Note 16. This hedge operation shares the same guarantees with the Project F-63 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Non-derivative financial liabilities designated to hedge accounting Future exports in U.S. dollars On May 1, 2013, Braskem S.A. designated non-derivative financial instrument liabilities, denominated in U.S. dollars, as hedge for the flow of its highly probable future exports. Thus, the impact of exchange rates on future cash flows in dollars derived from these exports is offset by the foreign exchange variation on the designated liabilities, partly eliminating the volatility of results. The exchange rate on the date of the designation was February 2, 2019: Designation of US$0.2 billion of future sales with maturity in 2025 (hedged exchange rate of US$1: R$3.6694). May 2, 2019: Designation of US$0.2 billion of future sales with maturity in 2025 (hedged exchange rate of US$1: R$3.9650). November 1, 2019: Discontinuation of hedge accounting of U$$1.6 billion of flows between 2021 and 2023 (discontinuation rate of US$1: R$3.9786). November 1, 2019: Designation of US$1.8 billion of future sales with maturity between 2030 and 2032 (hedged exchange rate of US$1: R$3.9786). Therefore, on December 31, Total nominal value Total nominal value US$ US$ 2019 733,980 2020 723,999 724,000 2021 716,000 336,000 2022 719,000 2023 718,372 200,000 2024 688,854 688,854 2025 400,000 2028 1,250,000 1,250,000 2030 800,000 2031 800,000 2032 200,000 5,550,205 5,398,854 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The following table shows the changes in financial instruments designated for this hedge in the US$ Hedge 2018 discontinued Designations 2019 Designated balance 5,550,205 (2,351,351) 2,200,00 5,398,854 The Company considers these exports in the selected period In recent years, Braskem S.A. exported an average US$3.1 billion per year, which represents around 3 to 4 times the annual exports of the hedged exports. Hedged exports represent between 20% and 30% of the export flows planned by the Company. The exports of the Company are not sporadic or occasional, but constitute an integral part of its strategy and of the petrochemical business, in which competition is global. On December 31, Total nominal value Total nominal value US$ US$ 2019 733,980 2020 723,999 724,000 2021 716,000 336,000 2022 719,000 2023 718,372 200,000 2024 688,854 688,854 2025 400,000 2028 1,250,000 1,250,000 2030 800,000 2031 800,000 2032 200,000 5,550,205 5,398,854 The following table provides the balance of discontinued hedge accounting in the year ended December 31, 2019 (US$1,617,371), which is recorded in Braskem Idesa’s shareholders’ equity under “Other comprehensive income” and will be transferred to financial income (expenses) in accordance with the schedule of future hedged sales: Conversion rate Total nominal at Inception Closing rate Gross nominal value US$ R$/US$ R$/US$ value Hedge descontinued - Fourth quarter 2019 1,617,371 2.0017 3.9786 3,197,381 1,617,371 3,197,381 F-65 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated To ensure the continuity of the hedging relationship, the Company plans to refinance and/or The following table provides the balances of exchange variation recognized in the Company’s net financial income (expenses) due to the realization of exports designated, for this hedge in the 12-month period ended December 31, Conversion rate Conversion rate Total nominal at Inception Closing rate Gross nominal Total nominal at Inception Closing rate Gross nominal value US$ R$/US$ R$/US$ value value US$ R$/US$ R$/US$ value First quarter 189,325 2.0017 3.3082 247,353 150,000 2.0017 3.7448 261,465 Second quarter 208,405 2.0017 3.2769 265,758 183,495 2.0017 3.9043 349,118 Third quarter 193,190 2.0017 3.3080 252,364 183,495 2.0017 3.7734 325,098 Fourth quarter 196,973 2.0017 3.3080 257,307 216,990 2.0017 4.0729 449,430 787,893 1,022,782 733,980 1,385,111 The changes in foreign exchange variation and Income Tax and Social Contribution under “Other comprehensive income” of this hedge are as follows: Exchange Net variation IR and CSL effect At December 31, 2017 (6,814,142) 2,316,808 (4,497,334) Exchange variation recorded in the period on OCI / IR and CSL (3,145,857) 1,069,591 (2,076,266) Exchange variation transferred to profit or loss / IR and CSL 1,022,782 (347,746) 675,036 At December 31, 2018 (8,937,217) 3,038,653 (5,898,564) Exchange Income tax and Net variation social contribution effect At December 31, 2018 (8,937,217) 3,038,653 (5,898,564) Exchange variation recorded in the period on OCI / Income tax and social contribution (856,068) 291,063 (565,005) Exchange variation transferred to profit or loss / Income tax and social contribution 1,385,121 (470,941) 914,180 At December 31, 2019 (8,408,164) 2,858,775 (5,549,389) The Total nominal value US$ First quarter 181,000 Second quarter 181,000 Third quarter 181,000 Fourth quarter 181,000 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Liabilities related to the Project Finance of future sales in U.S. dollar On October 1, 2014, the subsidiary Braskem Idesa designated its liabilities in the amount of R$2,878,936 related to Project Finance, denominated in U.S. dollar, as hedge instruments to protect highly probably future sales flows. Due to the disbursements by the project's The Management of Braskem Idesa believes these future sales are highly probable, based on the following: In Mexico, domestic sales can be made in U.S. dollar. In 2016, the company began to operate and sell products, including sales in U.S. dollar in the domestic and international markets. The hedged flow corresponds to less than 35% of the planned revenue flow of the project over the designated period. The current amount of sales already meets the volume of designated hedge, which confirms the highly probably nature of the designated cash flow. The financing was obtained through a Project Finance structure and will be repaid exclusively through the cash generation of the project (Note 17). Therefore, the existence of the debit is directly associated with the highly probable nature of the future sales in U.S. dollar. As of December 31, Nominal value Nominal value US$ US$ 2019 229,270 2020 266,690 179,982 2021 303,392 208,901 2022 253,204 183,300 2023 333,093 230,967 2024 359,559 251,869 2025 357,903 227,716 2026 309,240 192,592 2027 �� 152,103 89,963 2028 124,654 71,898 2029 31,164 15,219 2030 225,000 2031 225,000 2032 225,000 2033 225,000 2,720,272 2,552,407 F-67 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The following table shows the changes in financial instruments designated for this hedge in the year: US$ Sales in Hedge 2017 the year discontinued 2018 Designated balance 2,930,246 (221,790) 400 2,708,856 US$ Discontinued Realization of the New 2018 hedge discontinued hedge designations 2019 Designated balance 2,708,856 (1,056,869) 420 900,000 2,552,407 In Nominal value Nominal value US$ US$ 2019 228,850 2020 266,187 179,982 2021 302,816 208,901 2022 252,723 183,300 2023 332,458 230,967 2024 358,873 251,869 2025 357,221 227,716 2026 308,650 192,592 2027 150,419 89,963 2028 124,347 71,898 2029 26,312 15,219 2030 225,000 2031 225,000 2032 225,000 2033 225,000 2,708,856 2,552,407 The following table provides the amounts of hedge accounting discontinued in the year ended December 31, Conversion rate Total nominal at Inception Closing rate Total nominal Gross nominal value US$ MXN/US$ MXN/US$ value MXN value Hedge descontinued 11,416 13.4541 17.9915 51,799 8,707 51,799 8,707 Conversion rate Total nominal at Inception Closing rate Total nominal Gross nominal value US$ MXN/US$ MXN/US$ value MXN value Hedge discontinued in May-2016 10,996 13.4541 17.9915 49,893 10,647 Hedge discontinued in Dec-2019 795,533 13.6663 19.6113 4,729,441 1,009,263 Hedge discontinued in Dec-2019 32,066 13.4541 19.3247 188,247 40,172 838,595 4,967,581 1,060,082 F-68 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The following table provides the balances of exchange variation recognized in Braskem Idesa’s financial income (expenses) due to the realization of sales designated for this hedge in the year ended December 31, Conversion rate Conversion rate Total nominal at Inception Closing rate Total nominal Gross nominal Total nominal at Inception Closing rate Total nominal Gross nominal value US$ MXN/US$ MXN/US$ value MXN value value US$ MXN/US$ MXN/US$ value MXN value First quarter 53,889 13.6649 18.6631 269,348 46,934 56,383 13.6544 19.2153 313,540 60,811 Second quarter 55,136 13.6560 19.4484 319,370 59,371 56,383 13.6544 19.0768 305,731 63,995 Third quarter 56,383 13.6536 18.8320 291,974 60,810 57,629 13.6547 19.6178 343,647 70,181 Fourth quarter 56,382 13.6537 20.2473 371,757 69,455 58,875 13.6549 19.3564 335,676 72,159 221,790 1,252,449 236,570 229,270 1,298,594 267,146 The changes in foreign exchange variation and Income Tax and Social Contribution under “Other comprehensive income” are as follows: Exchange Net variation IR effect At December 31, 2017 (3,545,639) 1,064,426 (2,481,213) Exchange variation recorded in the period on OCI / IR 16,681 (5,004) 11,677 Exchange variation transferred to profit or loss / IR 236,570 (70,971) 165,599 At December 31, 2018 (3,292,388) 988,451 (2,303,937) Exchange Net variation Income tax effect At December 31, 2018 (3,292,388) 988,451 (2,303,937) Exchange variation recorded in the period on OCI / Income tax 464,806 (139,442) 325,364 Exchange variation transferred to profit or loss / Income tax 267,146 (80,144) 187,002 At December 31, 2019 (2,560,436) 768,865 (1,791,571) Effectiveness tests were conducted as set forth in IFRS 9 and all operations were deemed effective in reducing the dispersion of revenue from sales designated for hedge, when evaluated in Pesos. The Nominal value US$ First quarter Second quarter Third quarter Fourth quarter Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Credit quality of financial assets Trade accounts receivable Virtually none of On December 31, 2019 and 2018, considering the stages 1, 2 and 3 of expected credit losses, the percentage of trade accounts receivable by risk ratings (%) (%) 2018 2019 2018 1 Minimum risk 67.50 Minimal Risk 74.23 67.50 2 Low risk 18.60 Low Risk 14.89 18.60 3 Moderate risk 7.61 Medium Risk 7.82 7.61 4 High risk 5.02 High Risk 1.06 5.02 5 Very high risk (i) 1.27 Very High Risk (i) 1.99 1.27 (%) 2017 1 Minimum risk 18.84 2 Low risk 50.84 3 Moderate risk 13.33 4 High risk 13.40 5 Very high risk (i) 3.59 (i) Most clients in this group are inactive and the respective accounts are in the process of collection actions in the courts. Clients in this group that are still active buy from Braskem and pay in advance. Default indicators: Last 12 months Last 12 months Domestic market Export market Domestic External market market December 31, 2019 0.05% 0.17% December 31, 2018 0.08% 0.45% 0.08% 0.45% December 31, 2017 0.08% 0.19% 0.08% 0.19% December 31, 2016 0.18% 0.04% This calculation considers the amount of accounts Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Other financial assets In order to determine the credit ratings of counterparties of financial assets classified under cash and cash equivalents, and financial investments, 2018 2017 2019 2018 Financial assets with risk assessment AAA 4,294,100 3,569,392 5,475,075 4,294,100 AA+ 1,175,098 27,094 109,933 1,175,098 AA 79,136 8,047 79,136 AA- 1,076 209,389 1,458,424 1,076 A+ 1,103,647 1,465,107 159,848 1,103,647 A 165,899 349,823 121,132 165,899 A- 169,580 1,171,746 169,580 BBB+ 917,541 453,367 917,541 BB+ 252 252 BB- 29 29 7,906,358 6,082,219 8,496,158 7,906,358 Financial assets without risk assessment Other financial assets with no risk assessment (i) 8,890 5,882 (i) 4,934 8,890 8,890 5,882 4,934 8,890 Total 7,915,248 6,088,101 8,501,092 7,915,248 Investments approved by the Management of the Company, in accordance with the financial policy. Sensitivity analysis Financial instruments, including derivatives, may be subject to changes in their fair value as a result of the variation in commodity prices, foreign exchange rates, interest rates, shares and share indexes, price indexes and other variables. The sensitivity of the derivative and non-derivative financial instruments to these variables are presented below: Selection of risks On December 31, U.S. dollar/Brazilian real exchange rate; Mexican peso/Brazilian real exchange rate; Euro/Brazilian real exchange rate; U.S. dollar/Euro exchange rate; Libor floating interest rate; Selic interest rate; CDI interest rate; TJLP interest rate; and IPCA interest rate. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated For the purposes of the risk sensitivity analysis, Value at risk The value at risk of the derivatives held by Selection of scenarios Probable scenario TheFocus Market Readout published by the Central Bank of Brazil on was used to create the probable scenario for the U.S. dollar/Brazilian real exchange rate, the Selic interest rate and the CDI interest rate, based on December The probable scenario for the TJLP is Since the Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Possible and extreme adverse scenario The sensitivity values in the table below are the changes in the value of the financial instruments in each scenario. Gain (losses) Possible adverse Extreme adverse Instrument / Sensitivity Probable (25%) (50%) Brazilian real/U.S. dollar exchange rate Bonds 418,995 (5,426,211) (10,852,422) Braskem Idesa borrowings 204,511 (2,648,529) (5,297,058) Export prepayments 15,647 (202,635) (405,271) Investments 11,972 (155,040) (310,080) Sace 22,150 (286,849) (573,699) Dollar put option 31,532 (708,357) (2,000,912) Dollar swap 38,308 (353,647) (717,505) Swap NCE 7,865 (101,872) (203,747) Financial investments abroad 70,689 (915,461) (1,830,922) Libor floating interest rate Export prepayments (5,133) (25,665) (51,330) Swaps 13,747 67,773 133,197 Braskem Idesa borrowings (82,386) (411,928) (823,857) CDI interest rate Export credit notes (884) (21,986) (58,762) Debentures 9,416 232 (10,035) Financial investments in local currency 26,228 67,665 135,371 IPCA interest rate Debentures (5,879) (21,556) (44,125) TJLP interest rate FINAME (5) (15) (31) Gain (losses) Possible adverse Extreme adverse Instrument / Sensitivity Probable (25%) (50%) Brazilian real/U.S. dollar exchange rate Bonds (345,206) (7,055,927) (14,111,853) Braskem Idesa borrowings (81,773) (1,671,426) (3,342,851) Export prepayments (10,559) (215,823) (431,647) Investments (9,190) (187,844) (375,688) SACE (20,536) (419,744) (839,487) Dollar put option (9,931) (478,958) (1,685,285) Dollar swap (4,033) (82,372) (164,742) Swap NCE (5,271) (107,743) (215,486) Dollar swap x CDI (16,809) (345,832) (691,949) Financial investments abroad (45,323) (926,395) (1,852,791) Libor floating interest rate Export prepayments (7,625) (38,124) (76,248) Swaps (5,730) 37,283 73,854 Braskem Idesa borrowings (89,189) (445,944) (891,887) CDI interest rate Export credit notes 12,982 (20,906) (41,331) Debentures 5,778 (6,495) (13,154) Financial investments in local currency 41,830 83,679 IPCA interest rate Debentures 11,644 (18,569) (37,943) TLP interest rate FINAME (4) (7) Selic interest rate Leniency agreement (53,042) (106,946) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Taxes payable 2019 2018 Brazil IPI 58,945 64,672 ICMS 184,728 239,126 PIS and COFINS 150,664 145,090 Other 37,857 36,454 Other countries Value-added tax 11,933 7,482 Other 8,112 25,085 Total 452,239 517,909 Current liabilities 322,886 432,005 Non-current liabilities 129,353 85,904 Total 452,239 517,909 2018 2017 Brazil IPI 64,672 60,917 IR and CSL 57,664 405,567 ICMS 239,126 257,720 PIS and COFINS 145,090 82,140 Other 36,454 52,926 Other countries IR 11,604 66,059 Value-added tax 7,482 22,242 Other 25,085 Total 587,177 947,571 Current liabilities 501,273 894,769 Non-current liabilities 85,904 52,802 Total 587,177 947,571 Income tax (“IR”) and social contribution (“CSL”) Reconciliation of the effects of income tax and social contribution on profit and loss 2018 2017 2016 2019 2018 2017 Income before IR and CSL and after discontinued operations 3,604,736 5,264,577 (140,010) Income (loss) before IR and CSL (4,603,068) 3,604,736 5,264,577 IR and CSL at the rate of 34% (1,225,610) (1,789,956) 47,603 1,565,043 (1,225,610) (1,789,956) Permanent adjustments to the IR and CSL calculation basis IR and CSL on equity in results of investees (302) 2,201 10,227 3,469 (302) 2,201 IR and CSL accrued in previous years (46,460) Thin capitalization (221,337) Deferred tax losses and negative base 39,092 39,092 Tax benefits (Sudene and PAT) 87,186 87,186 Difference of rate applicable to each country (i) 468,129 250,130 81,638 (i) 293,647 468,129 250,130 Fine in leniency agreement (117,140) (692,299) (25,390) (117,140) Other permanent adjustments 21,232 170,805 (16,755) 347,238 21,232 170,805 Effect of IR and CSL on results of operations (736,551) (1,357,682) (616,046) 1,962,670 (736,551) (1,357,682) Breakdown of IR and CSL: Current IR and CSL (509,774) (869,493) (898,845) Deferred IR and CSL (226,777) (488,189) 282,799 Current IR and CSL expense Current year (251,641) (512,951) (869,493) Changes in estimates related to prior years 22,696 3,177 (228,945) (509,774) (869,493) Deferred IR and CSL expense Origination and reversal of temporary differences 2,062,501 (369,546) (488,189) Tax losses (IR) and negative base (CSL) 129,114 142,769 2,191,615 (226,777) (488,189) Total (736,551) (1,357,682) (616,046) 1,962,670 (736,551) (1,357,682) Effective rate 42.6% 20.4% 25.8% Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Includes the impact from the difference between IR/CSL tax rate in Brazil (34%) used for the preparation of this note and the tax rates in countries where the subsidiaries abroad are located, as follows: Official rate - % Headquarters (Country) Braskem Alemanha Germany 31.18 Braskem America e Braskem America Finance USA 21.00 Braskem Argentina Argentina 30.00 Braskem Chile Chile 27.00 Braskem Holanda, Braskem Holanda Finance and Braskem Holanda Inc Netherlands 25.00 Braskem Idesa, Braskem Idesa Serviços, Braskem México Braskem México Serviços and Braskem México Proyectos Mexico 30.00 Deferred income tax and social contribution Changes in balances of deferred tax assets and liabilities Assets As of December Impact on the Impact on the As of December Impact on the Other Other As of December Tax losses (IR) and negative base (CSL) 1,878,809 142,769 2,021,578 129,114 2,150,692 Goodwill amortized 59,335 (20,053) 39,282 (17,605) 21,677 Exchange variations 388,293 (348,334) 39,959 1,092,392 1,132,351 Temporary adjustments (i) 155,540 646,630 802,170 1,555,097 2,357,267 Business combination 183,785 (24,213) 159,572 (74,033) 85,539 Tax credits 176,290 176,290 110,080 (236,537) 49,833 Other 62,288 62,288 2,665,762 573,089 3,238,851 2,857,333 (236,537) 5,859,647 Liabilities Amortization of goodwill based on future profitability 712,873 10,463 723,336 (651) 722,685 Tax depreciation 960,202 49,710 1,009,912 893,115 1,903,027 Exchange variations Temporary adjustments 231,822 44,878 276,700 155,887 432,587 Business combination 9,664 (8,362) 1,302 1,302 Present value adjustment and amortized cost 67,072 (9,905) 57,167 (45,891) 11,276 Hedge accounting 700,351 (700,351) (419,269) 419,269 Amortization of fair value adjustments on 519,623 (75,548) 444,075 (50,302) 393,773 Long term incentive plan - LTI (2,072) 2,072 (5,843) 5,843 Health care 43,734 (43,734) Other 4,273 90,351 (90,841) 3,783 94,938 (93,284) 5,437 2,505,529 799,866 (789,120) 2,516,275 665,718 288,094 3,470,087 Net 160,233 (226,777) 789,120 722,576 2,191,615 (288,094) (236,537) 2,389,560 Presentation in the balance sheet: Non-current assets 1,165,726 1,104,158 2,662,596 (-) Non-current liabilities 1,005,493 381,582 273,036 Temporary adjustments refers to the provision for geological events in Alagoas, contingencies, impairment of assets, among other provisions. F-75 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Offset for the purpose of presentation in the balance sheet Assets As of December 31, 2016 Impact on the P&L Impact on the equity Cetrel consolidated As of December 31, 2017 Impact on the P&L Impact on the equity As of December 31, 2018 Tax losses (IR) and negative base (CSL) 2,420,376 (590,037) 48,470 1,878,809 142,769 2,021,578 Goodwill amortized 4,624 (708) 55,419 59,335 (20,053) 39,282 Exchange variations 464,947 (76,654) 388,293 (348,334) 39,959 Temporary adjustments 717,868 (564,239) (7,946) 9,857 155,540 646,630 802,170 Business combination 191,250 (7,465) 183,785 (24,213) 159,572 Tax credits 176,290 176,290 3,799,065 (1,239,103) (7,946) 113,746 2,665,762 573,089 3,238,851 Liabilities Amortization of goodwill based on future profitability 767,277 (54,404) 712,873 10,463 723,336 Tax depreciation 867,922 92,280 960,202 49,710 1,009,912 Temporary adjustments 316,991 (85,169) 231,822 44,878 276,700 Business combination 198,381 (197,079) 8,362 9,664 (8,362) 1,302 Additional indexation PP&E 118,202 (51,130) 67,072 (9,905) 57,167 Hedge accounting (606,877) 606,877 700,351 (700,351) Deferred on health plans 15,269 (15,269) Amortization of fair value adjustments on 263,808 255,815 519,623 (75,548) 444,075 Long term incentive plan - LTI (2,072) 2,072 Other 123,892 (104,350) (15,269) 4,273 90,351 (90,841) 3,783 2,656,473 (750,914) 591,608 8,362 2,505,529 799,866 (789,120) 2,516,275 Net 1,142,592 (488,189) (599,554) 105,384 160,233 (226,777) 789,120 722,576 Presentation in the balance sheet: Non-current assets 1,653,115 1,165,726 1,104,158 (-) Non-current liabilities 510,523 1,005,493 381,582 2019 Headquarters IR and CSL (Country) Tax calculation Offsetting Balance Assets Braskem S.A. Brazil 3,679,547 (2,072,130) 1,607,417 Braskem Argentina Argentina 1,010 1,010 Braskem Alemanha Germany 28,176 28,176 Braskem Chile Chile 162 (162) - Braskem Idesa Mexico 2,056,723 (1,117,641) 939,082 Braskem México Serviços Mexico 9,677 9,677 Cetrel Brazil 24,313 (5,846) 18,467 DAC Brazil 60,039 (1,272) 58,767 5,859,647 (3,197,051) 2,662,596 Liabilities Braskem S.A Brazil 2,072,130 (2,072,130) Braskem America USA 271,285 271,285 Braskem Chile Chile 1,913 (162) 1,751 Braskem Idesa Mexico 1,117,641 (1,117,641) Cetrel Brazil 5,846 (5,846) DAC Brazil 1,272 (1,272) 3,470,087 (3,197,051) 273,036 2018 Headquarters IR and CSL (Country) Tax calculation Offsetting Balance Assets Braskem S.A. Brazil 2,126,658 (2,126,658) Braskem Argentina Argentina 11,337 11,337 Braskem Alemanha Germany 11,251 11,251 Braskem Chile Chile 308 (268) 40 Braskem Idesa Mexico 980,762 980,762 Braskem México Serviços Mexico 9,409 9,409 Cetrel Brazil 26,478 (6,645) 19,833 DAC Brazil 72,648 (1,122) 71,526 3,238,851 (2,134,693) 1,104,158 Liabilities Braskem S.A Brazil 2,239,727 (2,126,658) 113,069 Braskem America USA 268,513 268,513 Braskem Chile Chile 268 (268) Cetrel Brazil 6,645 (6,645) DAC Brazil 1,122 (1,122) 2,516,275 (2,134,693) 381,582 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Realization of deferred income tax and social contribution 2018 Headquarters IR and CSL (Country) Tax calculation Compensation Balance Assets Braskem S.A. Brazil 2,126,658 (2,126,658) Braskem Argentina Argentina 11,337 11,337 Braskem Alemanha Germany 11,251 11,251 Braskem Chile Chile 308 (268) 40 Braskem Idesa Mexico 980,762 980,762 Braskem México Serviços Mexico 9,409 9,409 Cetrel Brazil 26,478 (6,645) 19,833 DAC Brazil 72,648 (1,122) 71,526 3,238,851 (2,134,693) 1,104,158 Liabilities Braskem S.A Brazil 2,239,727 (2,126,658) 113,069 Braskem America USA 268,513 268,513 Braskem Petroquímica Chile Chile 268 (268) Cetrel Brazil 6,645 (6,645) DAC Brazil 1,122 (1,122) 2,516,275 (2,134,693) 381,582 2017 Headquarters IR and CSL (Country) Tax calculation Compesation Balance Assets Braskem S.A. Brazil 1,491,423 (1,491,423) Braskem Argentina Argentina 3,398 3,398 Braskem Alemanha Germany 19,353 19,353 Braskem Chile Chile 251 (251) Braskem Idesa Mexico 1,036,257 1,036,257 Braskem México Serviços Mexico 1,334 1,334 Cetrel Brazil 29,268 (7,454) 21,814 DAC Brazil 84,478 (908) 83,570 2,665,762 (1,500,036) 1,165,726 Liabilities Braskem S.A Brazil 2,272,775 (1,491,423) 781,352 Braskem America USA 223,635 223,635 Braskem Chile Chile 757 (251) 506 Cetrel Brazil 7,454 (7,454) DAC Brazil 908 (908) 2,505,529 (1,500,036) 1,005,493 Balance at Realization December 31, 2025 2028 Assets Note 2019 2020 2021 2022 2023 2024 to 2027 thereafter Tax losses (IR) and negative base (CSL) (i) 2,150,692 166,865 287,200 200,515 219,314 449,772 818,425 8,601 Goodwill amortized 21,677 2,223 2,223 2,223 2,223 2,223 2,224 8,338 Exchange variations (ii) 1,132,351 107,843 107,843 107,843 107,843 166,325 387,626 147,028 Temporary adjustments (iii) 2,357,267 536,934 660,491 113,454 66,930 495,380 484,078 Business combination (iv) 85,539 28,510 28,510 28,510 9 Tax credits (v) 49,833 35,746 14,087 Other 62,288 62,288 5,859,647 878,121 1,100,354 452,545 396,310 1,113,700 1,692,353 226,264 Liabilities Amortization of goodwill based on future profitability (vi) 722,685 722,685 Tax depreciation (vii) 1,911,214 135,128 135,128 135,128 135,128 135,128 135,128 1,100,446 Business combination (ix) 1,302 1,302 Present value adjustment and amortized cost (x) 11,276 6,959 4,317 Amortization of fair value adjustments on the assets from the acquisiton of Braskem Qpar 393,773 44,825 44,825 44,825 44,825 44,825 44,825 124,823 Other 5,437 5,437 3,470,087 283,581 303,184 200,379 192,003 269,141 267,106 1,954,693 Net 2,389,560 594,540 797,170 252,166 204,307 844,559 1,425,247 (1,728,429) Balance at Realization December 31, 2024 Assets Note 2018 2019 2020 2021 2022 2023 thereafter Tax losses (IR) and negative base (CSL) (i) 2,021,578 95,076 122,790 307,069 505,880 990,763 Goodwill amortized 39,282 3,654 3,654 3,654 3,654 3,655 21,011 Exchange variations (ii) 39,959 39,959 Temporary adjustments (iii) 802,170 135,622 72,550 33,556 12,882 11,331 536,229 Business combination (iv) 159,572 33,666 33,666 33,666 29,287 29,287 Tax credits (v) 176,290 176,290 Total assets 3,238,851 444,308 232,660 377,945 551,703 1,035,036 597,199 Liabilities Amortization of goodwill based on future profitability (vi) 723,336 717,529 Tax depreciation (vii) 1,009,912 213,070 326,919 445,962 23,961 Temporary differences (viii) 276,700 65,560 23,374 10,811 4,150 3,651 169,154 Business combination (ix) 1,302 187 187 187 187 187 6,174 Additional indexation PP&E (x) 57,167 4,573 4,573 4,573 4,573 4,573 34,302 Amortization of fair value adjustments on 444,075 35,526 35,526 35,526 35,526 35,526 266,445 Other 3,783 3,783 Total liabilities 2,516,275 318,916 390,579 497,059 68,397 43,937 1,197,387 Net 722,576 125,392 (157,919) (119,114) 483,306 991,099 (600,188) Basis for constitution and realization: In Brazil, the use of tax In Brazil, the Company opted to tax exchange variation of assets and liabilities denominated in foreign currency under the cash method. Thus, this variation will be realized as assets and liabilities are received/paid. For accounting purposes, exchange variation is recognized under the accrual basis, Accounting expenses not yet deductible for calculating income tax and social contribution, whose recognition for tax purposes occurs in subsequent periods. For 2019, the provisioning of expenses with contingencies and damages in Alagoas produced a material impact. Refers to: tax-related goodwill and contingencies recognized from business combinations. Tax realization of goodwill Tax credits arising from the balance of tax paid on profit Goodwill for the future profitability of the merged companies is not amortized since the adoption of Law 11,638/07. Tax realization is associated with the write-off of goodwill due to impairment or upon divestment. For calculation of IR and CSL, assets are depreciated at rates higher than those used for accounting purposes. As tax depreciation is exhausted, these deferred IR and CSL start to be realized. Fair value adjustments on property, plant and equipment and intangible assets identified in business combinations, whose tax realization is based on the depreciation and amortization of these assets. Additional adjustment, upon adoption of Law 11,638/07, of property, plant and equipment, whose tax realization is based on the depreciation of Annually, the Company revises its projection of taxable income based on its Business Plan (Note Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Sundry provisions Note 2018 2017 2019 2018 Provision for customers rebates Provision for customers rebates (a) 88,026 87,913 84,110 88,026 Provision for recovery of environmental damages (b) 307,546 300,249 Provision for environmental damages 365,155 307,546 Other 28,970 25,510 55,941 28,970 Total 424,542 413,672 505,206 424,542 Current liabilities 191,536 178,676 203,134 191,536 Non-current liabilities Non-current liabilities 233,006 234,996 302,072 233,006 Total 424,542 413,672 505,206 424,542 Client bonus Some sales agreements of Braskem provide for a rebate, in products, should Provision for environmental damages Braskem has a provision for Changes in provisions Recovery of Recovery of environmental environmental Bonus damage Other Total Bonus damage Other Total December 31, 2017 87,913 300,249 25,510 413,672 87,913 300,249 25,510 413,672 Additions, inflation adjustments and exchange variation, net 104,431 89,395 8,593 202,419 104,431 89,395 8,593 202,419 Write-offs through usage and payments (104,318) (82,098) (5,133) (191,549) (104,318) (82,098) (5,133) (191,549) December 31, 2018 88,026 307,546 28,970 424,542 88,026 307,546 28,970 424,542 Additions, inflation adjustments and exchange variation, net 74,299 144,617 34,194 253,110 Write-offs through usage and payments (78,215) (87,008) (7,223) (172,446) December 31, 2019 84,110 365,155 55,941 505,206 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Contingencies Braskem is a defendant in lawsuits and administrative proceedings arising from the normal course of its business. These claims are of a tax, labor and social security, civil and corporate nature. Proceedings assessed as having a probable chance of loss are provisioned for, as described in Note In addition, Braskem also is a plaintiff to several lawsuits. In these cases, Any changes in the court’s understanding of the position could cause future impacts on the consolidated financial statements of the Company due to such proceedings. Claims with probable chance of loss and contingent liabilities arising from business combinations 2019 2018 Labor claims (a) 315,437 177,751 Tax claims (b) Normal operations IR and CSL 22,284 20,717 PIS and COFINS (i) 196,356 156,796 ICMS 70,645 64,468 Other tax claims 18,475 23,237 307,760 265,218 Business Combination IR and CSL 3,581 1,500 PIS and COFINS (ii) 63,291 59,739 ICMS - interstate purchases (iii) 297,456 280,622 364,328 341,861 Corporate claims (c) 118,485 111,049 Civil claims and other 45,514 69,438 1,151,524 965,317 Labor claims 2018 2017 Labor claims (a) 177,751 250,075 Tax claims (b) Normal operations IR and CSL 20,717 17,313 PIS and COFINS (i) 156,796 155,681 ICMS (ii) 64,468 76,342 Other tax claims 23,237 13,117 265,218 262,453 Business Combination IR and CSL 1,500 50,051 PIS and COFINS (iii) 59,739 56,135 ICMS - interstate purchases (iv) 280,622 263,538 341,861 369,724 Corporate claims (c) 111,049 135,779 Civil claims and other 69,438 74,614 965,317 1,092,645 The provision on December 31, Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Tax claims On December 31, Non-cumulative PIS and COFINS The Company is charged amounts arising from the compensation of Non-Cumulative PIS and COFINS tax credits that were not approved by the Federal Revenue Service of Brazil (“RFB”) · Offsetting Statements (“DCOMPs”), with credits in amounts that exceeded those declared in the respective Statement of Calculation of Social Contributions (“DACONs”); · freight expenses: not associated with sales operations and/or operations without proven association and contracted in the country, but concerning imported products; · credits arising from the acquisition of property, plant and equipment mostly related to acquired companies, whose documentation was not found; · taxation of taxable revenues incorrectly classified as tax exempt, subject to zero tax rate or not taxed. On December 31, The There are no deposits or any other type of guarantee for these procedures, since they are still being discussed at the administrative level. PIS and COFINS taxes The Company is assessed for the payment of these taxes in many claims, such as: · Insufficient payment of COFINS for the period from March 1999 to December 2000, from February 2001 to March 2002, from May to July 2002 and September 2002 due to alleged calculation errors, and non-compliance with the widening the tax calculation base and increasing the contribution rate envisaged in Law 9,718/98; · Offset of the COFINS dues relating to September and October 1999 using the credit resulting from the addition of 1% to the COFINS rate; · Rejection of the offset of PIS and COFINS dues relating to the period from February to April 2002 using the PIS credits under Decree-Laws 2,445 and 2,449, calculated between June 1990 and October 1995, under the argument that the time period for using said credits had expired; and · Alleged non-taxation of revenue from foreign exchange variations, determined as a result of successive reductions in the capital of the associated company. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The Guarantees were offered for these claims in the form of bank guarantee and finished products, which, together, cover the amount of court claims. ICMS - interstate purchases In 2009, the merged company Braskem Qpar was assessed by the Finance Department of the State of São Paulo for the payment, at the administrative level, of ICMS in view of allegedly committing the following violations: · Undue use of ICMS tax credits (i) in the amount of R$53,478, in the periods from February 2004 to August 2005, November 2005 to February 2006, and September 2006 to January 2008, due to the recording of credits indicated on the invoices for the sale of “acrylonitrile,” issued by Acrinor Acrilonitrila do Nordeste S/A; (ii) in the amount of R$1,581, in the period from December 2004 to August 2005, arising from the undue recording of credits on invoices for the sale of methyl acrylate, issued by Proquigel Química S/A; and (iii) in the amount of R$3,105, in the period from August 2004 to November 2005, arising from the undue recording of credits in invoices for the sale of methyl methacrylate, issued by Proquigel Química S/A, since the products were to be exported, and therefore were exempt from payment of ICMS tax; · The fine for the abovementioned tax offense corresponds to 100% of the principal value recorded, as per Article 527, item II, sub-item “j” jointly with paragraphs 1 and 10 of RICMS/SP; · Fine in the amount of 30% on R$480,389, which corresponds to the sum of the amounts indicated in tax documents whose outflow of goods was not identified by the tax authority, entered based on the provisions of Article 527, item IV, sub-item “b” jointly with paragraphs 1 and 10 of RICMS/SP; and · Fine due to lack of presentation of tax documents requested under a specific deficiency notice, as per Article 527, item IV, sub-item “j” jointly with paragraphs 8 and 10 of RICMS/SP. Discussions in the administrative sphere were ended in On December 31, 2019, the balance of this provision was R$297,456 (R$280,622 in 2018). The Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Corporate claims On December 31, Once the time-barred. However, the Alagoas State Court of Appeals reviewed the decision and considered that amounts On December 31, 2019, Braskem recognized a provision of R$64,305. Changes in claims with probable chance of loss Corporate Civil claims Labor claims Tax claims claims and other Total December 31, 2017 250,075 632,177 135,779 74,614 1,092,645 Additions, inflation adjustments and exchange variation 80,685 77,236 8,676 5,001 171,598 Payments (70,553) (40,768) (31,680) (173) (143,174) Reversals (82,456) (61,566) (1,726) (10,004) (155,752) December 31, 2018 177,751 607,079 111,049 69,438 965,317 Additions, inflation adjustments and exchange variation 322,102 98,618 7,436 11,465 439,621 Payments (83,189) (6,348) (3,918) (93,455) Reversals (101,227) (27,261) (31,471) (159,959) December 31, 2019 315,437 672,088 118,485 45,514 1,151,524 F-82 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Claims with possible chance of loss Note 2019 2018 Civil claims - Alagoas 26 33,973,320 Civil claims - Other (a) 769,126 691,636 Tax claims (b) 6,199,283 7,125,071 Labor claims 642,229 860,061 Other lawsuits (c) 546,743 643,982 Total 42,130,701 9,320,750 Civil Excess weight Corporate Civil claims Labor claims Tax claims claims and other Total December 31, 2017 250,075 632,177 135,779 74,614 1,092,645 Additions, inflation adjustments and exchange variation 80,685 77,236 8,676 5,001 171,598 Payments (70,553) (40,768) (31,680) (173) (143,174) Reversals (82,456) (61,566) (1,726) (10,004) (155,752) December 31, 2018 177,751 607,079 111,049 69,438 965,317 2018 2017 Tax claims 6,082,336 6,048,462 Labor claims 992,205 812,400 Civil claims 579,145 693,188 Social security tax claims 125,338 91,824 Other lawsuits 535,802 285,944 Total 8,314,826 7,931,818 Public-Interest Civil Action filed by the Federal Prosecution Office in Brasilia, with the objective of holding the company liable for damages caused to federal roads by trucks carrying excess Caustic soda transportation The Company is the defendant in civil lawsuits filed by the owner of a former distributor of caustic soda and by the shipping company that provided services to this former distributor, which, at December 31, Management's evaluation, supported by the opinion of its external legal advisors who are responsible for the cases, is that the lawsuits will possibly be dismissed within a period of 8 years. No judicial deposit or other form of guarantee was accrued for these lawsuits. Resale of solvents In January 2017, the Company became defendant in a civil lawsuit filed by former reseller of solvents, claiming alleged breach of a tacit distribution agreement. On December 31, No judicial deposit or other form of security was made for these suits. F-83 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Hashimoto Public-Interest Civil Action The Public-Interest Civil Action was filed in June 2018 by the São Paulo State Public Prosecutor’s Office against the Company and other firms that operate in the Capuava Petrochemical Complex, claiming the reparation and/or remediation of environmental damages supposedly arising from the emission of pollutants into the air, as well as the joint judgement of companies that comprise said complex seeking environmental moral damages in the inflation-adjusted amount of R$ Based on the opinion of the external legal counsel handling the case, the Management believes that the lawsuit possibly will be dismissed within a period of eight years. No judicial deposit or other form of security was accrued for the case. Recourse action of insurer The Tax PIS, COFINS, IR and CSL: taxation of tax losses and reductions in debits in connection with the installment payment program under MP 470/09 The Company was assessed for not recording as taxable the amounts of the credits from tax losses and social contribution tax loss carryforwards used to settle tax debits paid in installments under Provisional Presidential Decree 470/09. In the specific case of PIS and COFINS taxes, the assessment also includes the reductions applied to fines and interest arising from the adoption of the installment payment plan. Said tax credits and reductions of debits were not taxed, given the understanding of the Company that they did not represent taxable income. In November 2018, the tax-deficiency notice related to In August 2019, part of the notification related to PIS/COFINS taxes was denied in a final and unappealable decision issued by CARF. On December 31, The F-84 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated There are no deposits or any other type of guarantee for IR and CSL – Charges with goodwill amortization The Company was served by the In May 2018 On December 31, The assessment of The There are no deposits or any other type of guarantee for these procedures, since they are still being Non-cumulative PIS and COFINS taxes The Company received a deficiency notice from the RFB due to the use of non-cumulative PIS and COFINS tax credits in the acquisition of certain goods and services consumed in its production process. The matters whose chance of loss is deemed as possible are mainly related to the following: (i) effluent treatment services; (ii) charges on transmission of electricity; (iii) freight for storage of finished products; 2016. On December 31, The There Income Tax (IR) and Social Contribution (CSL) – Unlimited offsetting In December 2009, December 2013 and March 2017, the Company received tax deficiency notices claiming that the methodology used to offset tax losses and tax loss carryforwards that failed to observe the limit of 30% of the Taxable Profit and Social Contribution calculation base when offsetting such liabilities with Corporate Income Tax and Social Contribution liabilities in merger operations, respectively, in November F-85 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated In April 2019, one of the notices was dismissed in full by a final and unappealable decision issued by CARF, which resulted in a reduction of this contingency by R$407 million. On December 31, The Company’s external legal advisors estimate that the administrative proceedings should be concluded by 2020. The only proceeding currently under litigation is expected to be concluded in 2027. There are no deposits or any other type of guarantee for these procedures, since they are still being discussed at the administrative level and the only one being disputed in court has had its payment suspended by a preliminary injunction, confirmed by a court decision. ICMS The Company is involved in many ICMS collection claims drawn up in the States of São Paulo, Rio de Janeiro, Rio Grande do Sul, Bahia, Pernambuco and Alagoas. On December 31, · ICMS credit on the acquisition of assets that are considered by the Revenue Services as being of use and consumption. The Revenue Service understands that the asset has to be a physically integral part of the final product to give rise to a credit. Most of the inputs questioned do not physically compose the final product. However, the Judicial branch has a precedent that says that the input must be an integral part of the product or be consumed in the production process. · ICMS credit arising from the acquisition of assets to be used in property, plant and equipment, which is considered by the Revenue Services as not being related to the production activity, such as laboratory equipment, material for the construction of warehouses, security equipment, etc. · internal transfer of finished products for an amount lower than the production cost; · omission of the entry or shipment of goods based on physical count of inventories; · lack of evidence that the Company exported goods so that the shipment of the goods is presumably taxed for the domestic market; · non-payment of ICMS on the sale of products subject to tax substitution and credit from acquisitions of products subject to tax substitution; · fines for the failure to register invoices; · nonpayment of ICMS tax on charges related to the use of the electricity transmission system in operations conducted in the Free Market (ACL) of the Electric Power Trading Chamber (CCEE); and · usage of ICMS tax base below the level envisaged in legislation for internal transfers to another unit in the State of Alagoas of DCE (dichloroethane), between January 2013 and May 2016, which is a product that is not subject to deferral in such transactions. The payment represents 30% of the total contingency. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The The Company offered IOF The Company is a party to claims for the collection of IOF tax debits in administrative proceedings and lawsuits, which claim: (i) non-payment of IOF on operations relating to Advances for Future Capital Increase (AFAC) and checking accounts conducted by the merged companies Quattor Participações S.A. and Quattor Química S.A., which were considered loans by tax authorities; and (ii) requirement to pay IOF/credit on international fund transfers between the Company and CPN Incorporated through a checking account contract and single cash management related to the period from May 2002 to April 2004. The current value of these notices on December 31, The Company’s external legal advisors estimate that the claims in the judicial sphere will be concluded by PIS and COFINS sundry The Company is involved in collection actions related to PIS and COFINS assessments in the administrative and judicial courts, which discuss the alleged undue offsetting of credits arising from other administrative proceedings and lawsuits, including: (i) Income Tax prepayments; (ii) FINSOCIAL; (iii) tax on net income (ILL); (iv) The The Company offered assets in guarantee, IRRF, IR and CSL – Commission expenses In December 2017, the Company received a tax deficiency notice from the RFB arising from: (i) the disallowance of commission expenses paid by Braskem in 2011; (ii) the disallowance of commission expenses paid by Braskem Inc. in 2013 and 2014; (iii) lack of payment of withholding income tax (IRRF) on the payments referred to in the previous item; and (iv) the disallowance of advertising expenses incurred in 2013. On December 31, F-87 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The assessment of success in this claim is based on the following: (i) the expenses incurred in 2011 already are subject to the statute of limitations. Furthermore, the tax credit recognized by the Tax Authority considered the sum of the disallowances disputed in other administrative proceedings that are pending a final decision, which do not belong in the claim in question; (ii) the expenses incurred by Braskem INC already were paid by the Company itself, which led only to the reduction of its tax loss backlog, without the need to pay additional taxes; (iii) the IRRF claimed by the Tax Authority aims to reach a taxpayer located abroad, which as such is not subject to Brazilian tax law; and (iv) the disallowed advertising expenses are related to the Company’s business activities. The Company’s external legal advisors estimate that the administrative proceeding should be concluded in 2022. There are no judicial deposits or any other type of guarantee for this procedure, since it is still being discussed at the administrative level. IR and CSL – Exchange variation on naphtha imports In December 2017, the Company received a tax deficiency notice related to the disallowance of exchange variation expenses between the due date of commercial invoices and the effective payment of obligations related to naphtha imports. The Company disallowed expenses in calendar year 2012, since they were considered unnecessary, which caused adjustments in the tax loss and in social contribution tax loss carryforwards. On December 31, The Company’s external legal advisors estimate that the administrative proceeding should be concluded in 2022. There are no deposits or any other type of guarantee for these procedures, since they are still being discussed at the administrative level. Isolated fine – failure to ratify DCOMPS In 2016 through The matter is assessed as having a possible chance of loss due to favorable court precedents on the matter. On December 31, The Company’s external legal counsels estimate that the conclusion in the administrative level will occur in No deposit or other form of security was accrued for most of these claims, as they are still being discussed administratively. F-88 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated IRPJ/CSLL – Negative Balance – Offset The Company claims, at the administrative level, that RFB denies On December 31, The Company’s external legal advisors estimate that the administrative proceeding should be concluded by There are no deposits or any other type of guarantee for this proceeding, since it is still being disputed at the administrative level. IPI and II – Customs difference In October 2002, the merged company Ipiranga Petroquímica received a tax-deficiency notice from RFB for contracting two different companies, one to provide parts and technology and the other to provide specialized labor for technical support, on the occasion of the construction of an industrial plant in Rio Grande do Sul, which, according to RFB, was allegedly conducted only to reduce the price of parts and technology used and, consequently, decrease the IPI and II payable. On December 31, The Company’s external legal advisors estimate that the PIS and COFINS – DCide-Fuels Tax Offset The Company is a party to lawsuits claiming PIS and COFINS tax liabilities arising from their offset using Cide-Fuels tax credits, as authorized under Federal Law 10,336/2001. On December 31, 2019, the adjusted value of these cases was R$144 million. The Company’s legal advisors estimate that these lawsuits will be concluded by 2030. The Company offered property in guarantee of all liabilities related to this matter. Exports – Customs Fine – Fraudulent Interposition – IRPJ/CSLL – Income Not Reported In November 2018, the Company received a tax deficiency notice claiming corporate income tax (IRPJ) and social contribution on profits (CSLL) on products exported by Braskem Qpar S/A to Braskem Incorporated Limited, which resold such products abroad. The Federal Revenue Service understands that Braskem Incorporated Limited failed to report revenue when it made sales to clients abroad in an amount above that recorded in its accounting records. This allegedly unreported revenue was attributed directly to the Company, as the successor by merger of Braskem Qpar. Subsequently, based on this premise of income not reported, the tax authorities issued a second tax deficiency notice to impose a fine arising from the interposition of exports. F-89 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated On December 31, 2019, the adjusted value of these deficiency notices was R$75 million. The external legal advisors of the Company estimate that the administrative proceedings should be concluded by 2023. No deposit or Corporate The Company currently is subject to a settlement of The The plaintiffs filed interlocutory appeal, which has not yet been tried, given the decision ordering an expert examination. The parties are currently awaiting the expert examination in the principal lawsuit. The Management of Braskem, based on its assessment and of its external legal advisors, the amount of provision on December 31, Other lawsuits Social Security Contributions – Withholding of 11% The Company was assessed by the RFB for allegedly withholding social security at the rate of 11% on the gross amount of invoices, bills or trade notes related to services executed through assigned labor, in the period from February 1999 to June 2002, amounting to approximately R$ The Company’s external legal advisors estimate that the administrative proceeding should be concluded still in Social security – hazardous agents The Company is a party to other administrative proceedings and lawsuits, which claim: (i) payments related to tax-deficiency notices for additional contribution for Occupational Accident Risk (“RAT”) to fund the special retirement plan due to the alleged exposure of workers to hazardous agents; as well as financial penalty for not disclosing it in GFIP (from April 1999 to February 2006); and (ii) the claim in a tax foreclosure, of said additional payment for RAT (periods from November 2000 to January 2001 and from November 2001 to June 2002). The total approximate amount involved in these proceedings, as of December 31, 2019, is R$47 million. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The external legal advisors of the Company estimate that these administrative proceedings should be concluded by 2022, and the only lawsuit should be concluded by 2027. No deposit or any other type of guarantee for the proceedings still pending in the administrative instance have been made, and the only lawsuit is secured by aguarantee insurance in the amount of R$3.7 million. Leniency agreement In the context of In December 2016, the Company entered into The agreement with the U.S. Department of Justice (“DoJ”) was confirmed by a U.S. court ruling on January 26, 2017 (“Plea Agreement”). The agreement with the Securities and Exchange Commission (“SEC”) was confirmed on February 28, 2017. The agreement with the Swiss authorities did not require ratification to produce effects; on December 21, 2016, the OAG concluded its investigations and issued an order to conclude the case based on the Company’s collaboration. US$94,894 (R$296,591) to the DoJ, paid on February 8, 2017; US$65,000 (R$206,460) to the SEC, paid on April 27, 2017; CHF30,240 (R$104,307) to the Swiss Office of the Attorney General, paid on June 27, 2017; R$736,445 to the MPF, paid on July 6, 2017; R$267,985 to the MPF, related to the first of six annual installments due by 2023, paid on January 30, 2018; CHF16,065 (R$62,021) to the Swiss Office of the Attorney General, related to the first of four annual installments due by 2021, paid on June 28, 2018; R$278,034 to the MPF, related to the second of six annual installments payable until 2023, paid on January 30, 2019; and CHF16,065 (R$58,034) to the Swiss Office of the Attorney General, related to the second of four annual installments payable until 2021, paid on June 27, 2019. R$257,256 paid on January 30, 2020 to the Federal Government corresponding to the annual installment of the leniency agreements entered into with the MPF and with the CGU and AGU, as described above. F-91 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated In this The CGU/AGU Agreement addresses the same facts that are the subject of the Global Settlement entered into in December 2016 and provides for an additional disbursement of approximately R$410 million The additional disbursement of approximately R$410 million will be paid in two annual installments at the end of the payment schedule of the MPF Agreement, in 2024 and 2025. The AGU, CGU and MPF agreed to allocate most of the amounts received under the Agreements to the reparation of victims of the wrongdoings, including other public authorities and agencies, and to adopt monitoring measures of such third parties with which Braskem comes to start negotiations in connection with the matters under the Agreements, seeking to avoid the duplication of compensation. The amount of outstanding installments, after the CGU/AGU Agreement, CHF32,130 (R$ 133,428) to the Swiss Office of the Attorney General, Approximately R$ R$409,876 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The Company is in compliance with all of its obligations under the Agreements. Geological phenomenon - Alagoas The Company operated, unti May 2019, salt mining wells located in the city of Maceió, state of Alagoas, with the purpose of supplying raw material to its chlor-alkali and dichloroethane plant. Right after a geological phenomenon in the region in March 2018, the Company started studies through independent specialist institutions to identify the causes of the geological phenomenon and measures to be taken. In May 2019, the Brazilian Geological Service (CRPM) issued a report on the phenomenon claiming its causes were related to Braskem’s salt mining operations. This geological phenomenon of unknown causes is being investigated, which requires a series of studies. Given the soil instability in the districts of Pinheiro, Mutange, Bebedouro and Bom Parto and the risk for residents in the region, on May 9, 2019, Braskem decided to suspend its salt mining activities and the operation of its chlor-alkali and dichloroethane plant. With support from independent institutions and nationally and internationally renowned specialists, the Company conducted and has been conducting studies focusing on (i) identifying the causes of the geological phenomenon; and (ii) analyzing the situation of the wells. The studies have been shared with the National Mining Agency (ANM), with which the Company has been maintaining constant dialogue. On November 14, 2019, Braskem presented to the ANM measures for definitively shutting down its salt mining activities in Maceió, with the closure of its wells, and proposed the creation of a protective area surrounding certain wells as a precautionary measure to ensure public safety. These measures are based on a study conducted by the Institute of Geomechanics of Leipzig (IFG), in Germany, an international reference in the geomechanics of salt wells, and are being adopted in coordination with the Brazilian Civil Defense and other authorities. On December 31, 2019, based on its assessment and on that of its external legal advisors, and considering the existing information, the dialogue with authorities and the best estimate of expenses with the various safety measures for residents, the Company recorded a provision of R$3,383.067, of which R$1,450.476 is under current liabilities and R$1,932,591 is under non-current liabilities. Due to the inherent change in the assumptions related to the provisions arising from new facts and circumstances, execution time and extent of the action plans, the findings of future studies conducted by experts and the outcome of pending lawsuits, the provision may be adjusted over time to reflect new developments. The aggregate amount of this provision could vary in accordance with the current phase of ongoing negotiations with the authorities for reaching a potential environmental agreement involving especially a solution for stabilizing the salt wells located in the region affected by the geological phenomena. For Braskem, the goal of a potential agreement is to afford greater legal security for its plan involving the actions being studied, with the suspension and/or termination of the processes currently in place for this material. The potential agreement isstill highly uncertain and subject to the conclusion of ongoing negotiations and to approval by the Company and the F-93 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The main factors of the provision result from: Support for relocating and compensation for the residents of the Risk Areas, under the Agreement entered into with the State Prosecution Office (MPE), the State Public Defender’s Office (DPE), the Federal Prosecution Office (MPF) and the Federal Public Defender’s Office (DPU), see details of the Agreement entered into in item (i) below, as well as of the Protection Area, which was demarcated based on the extension of the radius of the wells with anomalies that were identified using sonar. The provision in the amount of R$1,687,700 encompasses expenses with actions such as: Reallocation, rent allowance, household goods transportation and furniture storage; Negotiation of individual settlements for compensation of the residents affected. Actions for closing and monitoring the salt wells: based on the findings of sonars and geomechanics studies, Braskem has planned stabilization and monitoring actions for all 35 existing salt mining wells: · For four of them, the recommendation is that they be filled with solid material, a process that should take three years; · For the other 31 wells, the recommended actions are conventional closure, confirmation of the status of natural filling and monitoring; · For 15 wells, including the four to be filled with solid material, the recommendation is that a protection area be created in the surrounding area and that they be monitored. The total expenses estimated for implementation of these measures in the 35 wells is R$1,011,695, calculated based on the existing techniques and possible solutions for the current conditions of the wells, which could change in the future based on new studies and natural alterations in the structure of the wells over time; Other measures not covered by the Agreement are (i) actions related to the Technical Cooperation Agreements entered into with the Civil Defense; (ii) agreement with the Labor Prosecution Office (MPT) in the amount of R$40 million (note 26.1 (ii)); (iii) matters classified as a present obligation for the Company, even if not yet formalized; and (iv) expenses with engaging external advisors and experts to conduct studies for understanding the geological phenomenon and supporting the execution of the actions recommended by the studies. The expenses estimated and included in the accounting provision related to these additional measures amount to R$683,672 and are subject to changes as the studies and actions in the region advance. F-94 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Under the terms of the The Company Lawsuits pending In the context of this event, the following lawsuits were filed against the Company: Public-Interest Civil Action (ACP) filed by the Alagoas State Prosecution Office (MPE) and the Alagoas State Public Defender’s Office (DPE) – Reparation for residents This action sought a preliminary injunction for the freezing of R$3.7 billion and the award of damages for losses caused to 2018 2017 2016 Health care 162,338 140,553 139,412 Private pension 84,525 67,008 61,593 Transport 64,714 58,825 55,223 Feeding 33,537 30,916 28,874 Training 27,463 18,285 20,589 Other 18,271 16,173 13,237 390,848 331,760 318,928 Unfreezing of R$3.7 billion (*) previously frozen from the cash balance of Braskem in the context of the Public-Interest Civil Action, Substitution of theguarantee insurance already offered by the Company to the Court, in the amount of approximately R$6.4 billion, by twoguarantee insurance in the aggregate amount of approximately R$3 billion, of which R$2 billion is to secure the Public-Interest Civil Action filed by the DPE and MPE and R$1 billion is to secure the Public-Interest Civil Action filed by the MPF; Elimination of the risk of another freezing of accounts in connection with the Public-Interest Civil Action; Dismissal of the action in part with regard to the residents of the area envisaged in the Agreement who opt to enter into individual settlements with the Company to receive financial compensation for relocating from the area. (*) The unfreezing took place in January 2020. On December 31, 2019, the updated amount is presented in the caption judicial deposits in current assets in the amount of R$2,571,683 and in non-current assets in the amount of R$1,174,424 corresponding to the long-term portion of the payment schedule. F-95 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The Agreement aims to regulate cooperative actions for the relocation of residents from the risk areas and for ensuring their safety without any recognition of fault or causal connection between the geological phenomenon and the activities of the Company. The Agreement area encompasses approximately 4,500 real properties and 17,000 residents, who will be benefited by the Financial Compensation and Support for Relocation Program (“Program”) previously implemented by Braskem only for residents affected by the implementation of the protection area. The Program provides for relocation allowance, rent allowance, household goods transportation, costs with real estate agency, furniture storage costs and assistance from psychologists and social workers. A Residents Center was created with a structure dedicated exclusively to serving and supporting the residents of the districts located in the risk area. Three Technical Cooperation Agreements were entered into with the Municipal Government of Maceió and the Civil Defense with the aim of establishing a mutual cooperation between the parties for activities to mitigate risks and to ensure public safety. The agreements encompass the execution of studies to understand the phenomenon (high-resolution seismic survey, analysis and seismic survey of the lake, airborne gravimetry, etc.), structure of the monitoring network in the districts and region of the salt wells, installation of a meteorological station, donation of equipment to the Municipal Civil Defense, among other things. To implement the actions envisaged in the Agreement, the Company undertook to maintain R$1.7 billion in a checking account, with minimum working capital of R$100 million, whose transactions will be verified by an external audit company. Public-Interest Civil Action filed by the Alagoas State Labor Prosecution Office (MPT-AL) – Reparation for workers Public-Interest Civil Action with a preliminary injunction to freeze a total of R$2.5 billion to guarantee any indemnification for material damages to workers affected by the geological phenomenon. In said lawsuit, the MPT-AL also claims indemnification of the workers for moral damages of R$1 billion and other obligations in the amount of R$125 million, totaling the value of R$3.6 billion. On October 10, 2019, the tenured judge of the lawsuit denied the injunction sought by the MPT-AL. On February 14, 2020, the Company entered into an agreement with the Labor Prosecution Office (MPT) in the amount of R$40 million for implementation of the Program for Recovery of Business and Promotion of Educational Activities for residents and workers from the districts affected by the geological phenomenon. The program consists of support for the construction of daycare centers and schools and for administering professional training programs, as well as support for the Civil Defense to hire skilled professionals to continue monitoring the risk areas in the districts affected. With the agreement, the MPT agreed to end the public-interest civil action, releasing Braskem from all claims after the Company makes a judicial deposit of R$40 million, which will be done within 10 business days as from ratification of the agreement by the judge, what occurred on March 3, 2020. F-96 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Public-Interest Civil Action filed by the Alagoas State Federal Prosecution Office (MPF-AL) – Social-environmental reparation Public-Interest Civil Action against Braskem and other defendants seeking approximately R$28.7 billion for social, environmental and property damages, as well as various other corrective and environmental compliance measures, safety plans and the suspension of the Company’s government benefits. In the preliminary injunction phase, the following main claims were made: (i) the accrual of an own private fund in the initial amount of R$3.1 billion for the execution of social and environmental programs and of emergency measures, and the maintenance in said fund of working capital in the amount of R$2 billion or, after the financial schedule is approved, an amount equivalent to 100% of the expenses projected for the subsequent 12-month period; (ii) the presentation of guarantees in the amount of R$R$20,5 billion; (iii) a prohibition on the encumbrance or divestment of any of the Company’s fixed assets and on the distribution of profits; (iv) a court-ordered freeze of any profits not distributed as of the date hereof; and (v) a suspension of financing with the Brazilian Development Bank (BNDES) and of government incentives, as well as on the prepayment of financial transactions with the BNDES. In January 2020, the judge of the 3rd Federal Court of Alagoas denied the preliminary requests of the Alagoas State Federal Prosecution Office against the Company stated above. The Management, supported by the opinion of the external legal advisors, classifies the probability of loss in this case as possible. Action for Damages – Pinheiro District Property Action for Damages filed by Construtora H. Lobo (under court-supervised reorganization), a Contractor that claimed it suffered damages and loss of profits due to an agreement to purchase from Braskem a property in the District of Pinheiro. Said agreement was terminated by Braskem due to lack of payment by the Contractor. Nevertheless, the Contractor claims that Braskem omitted information on the existence of structural problems in the deactivated salt mining wells located on said property. The plaintiff is claiming damages of R$141 million. The Management, supported by the opinion of the external legal advisors, classifies the probability of loss in this case as possible. Other expenses Due to the shutting down of its salt mining activities, the Company written-off the property, plant and equipment related to the wells in the amount of R$35,078. Industrial activity F-97 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Benefits offered to team members Short-term benefits 2019 2018 2017 Health care 181,466 162,338 140,553 Private pension 90,687 84,525 67,008 Transport 67,761 64,714 58,825 Feeding 35,677 33,537 30,916 Life insurance 7,997 5,964 Training 26,261 27,463 18,285 Other 12,164 12,307 16,173 422,013 390,848 331,760 Long-term incentive plan (“ILP Plan”) On March 21, 2018, the Extraordinary Shareholders' Meeting approved the ILP Plan, which aims to align the interests of its participants with those of the Company’s shareholders and to encourage participants’ retention at the Company by offering eligible participants an opportunity to receive restricted shares in the Company by voluntarily investing own funds and holding such shares through the end of the three-year vesting period. On March The fair value of the Company’s matching contribution is calculated in accordance with the The fair value, net of taxes, recorded on equity at December 31, Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Post-employment benefits Retirement plans and health plans For each of the below plans, Braskem America The subsidiary Braskem America is the sponsor of Novamont, which is a defined benefit plan of the employees of the plant located in the State of West Virginia. BraskemAlemanha (“Germany”) The Braskem Holanda (“Netherlands”) The subsidiary Braskem Holanda is the sponsor of the defined contribution plans of its employees. At December 31, 2019, the plan has 8 participants (6 in 2018) and no contributions were made by Braskem Holanda in 2019 and 2018. The participants made no contributions in 2019 and 2018. Braskem Idesa Health plan According to Brazilian laws, the type of health plan offered by the Company, named contributory plan, ensures to the participant who retires or is dismissed without cause the right to remain in the plan with the same assistance coverage conditions they had during the employment term, provided they assume the full payment of the plan (company’s part + participant’s part). 2018 2017 2016 Balance at beginning of year 240,190 201,516 216,632 Health care 7,446 11,334 2,203 Current service cost 5,842 5,058 4,576 Interest cost 4,906 4,139 3,983 Benefits paid (3,845) (3,399) (3,156) Change plan 1,391 Actuarial losses (gain) (3,713) 9,661 3,590 Exchange variation 22,071 11,881 (26,312) Balance at the end of the year 274,288 240,190 201,516 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Amounts in balance sheet 2019 2018 Defined benefit Novamont Braskem America 80,593 68,904 Braskem Idesa 11,408 Braskem Alemanha and Netherlands 153,564 114,705 245,565 183,609 Health care Bradesco saúde 224,852 90,679 Total obligations 470,417 274,288 Fair value of plan assets Novamont Braskem America (79,784) (66,073) Braskem Alemanha (1,558) (1,842) (81,342) (67,915) Consolidated net balance (non-current liabilities) 389,075 206,373 Change in obligations 2019 2018 2017 Balance at beginning of year 274,366 240,190 201,516 Health care 5,817 7,446 11,334 Current service cost 8,233 5,842 5,058 Interest cost 14,796 4,906 4,139 Benefits paid (4,677) (3,845) (3,399) Change plan 4,948 1,391 Actuarial losses (gain) 161,250 (3,713) 9,661 Exchange variation 5,684 22,149 11,881 Balance at the end of the year 470,417 274,366 240,190 Change in fair value plan assets 2019 2018 2017 Balance at beginning of year 67,993 46,415 39,380 Actual return on plan assets 14,329 (3,200) 5,115 Employer contributions 285 20,544 4,069 Benefits paid (3,966) (3,712) (2,915) Exchange variation 2,701 7,868 766 Balance at the end of the year 81,342 67,915 46,415 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Amounts recognized in profit and loss 2018 2017 2016 Balance at beginning of year 46,415 39,380 46,395 Actual return on plan assets (3,200) 5,115 221 Employer contributions 20,544 4,069 3,569 Benefits paid (3,712) (2,915) (3,087) Exchange variation 7,868 766 (7,718) Balance at the end of the year 67,915 46,415 39,380 2019 2018 2017 Health care 5,817 7,446 11,334 Current service cost 8,233 5,842 5,058 Interest cost 14,796 4,906 4,139 Actuarial losses 2,077 6,041 28,846 20,271 26,572 2018 2017 2016 Health care 7,446 11,334 2,203 Current service cost 5,842 5,058 4,576 Interest cost 4,906 4,139 3,983 Expected return on plan assets (28) (31) Actuarial losses 2,077 6,069 2,472 20,271 26,572 13,203 (%) (%) 2018 2017 2016 2019 2018 2017 Health United Health United Health United Health United Health United Health United insurance States Germany Netherlands insurance States Germany Netherlands insurance States Germany Netherlands insurance States Mexico Germany Netherlands insurance States Germany Netherlands insurance States Germany Netherlands Discount rate 5.03 4.45 2.00 2.00 5.45 3.70 2.00 2.00 4.18 4.35 2.00 n/a 3.60 3.35 7.25 2.00 2.00 5.03 4.45 2.00 2.00 5.45 3.70 2.00 2.00 Inflation rate 4.50 n/a 2.00 2.00 4.50 n/a n/a n/a 6.00 n/a 2.00 n/a 4.00 n/a 4.00 2.00 2.00 4.50 n/a 2.00 2.00 4.50 n/a n/a n/a Expected return on plan assets Expected return on plan assets n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Rate of increase in future salary levels Rate of increase in future salary levels n/a n/a 3.00 3.00 n/a n/a 2.50 2.50 n/a n/a 3.00 n/a n/a n/a 5.00 3.00 3.00 n/a n/a 3.00 3.00 n/a n/a 2.50 2.50 Rate of increase in future pension plan Rate of increase in future pension plan n/a n/a 1.75 1.75 n/a n/a 1.75 1.75 n/a n/a 1.75 n/a n/a n/a n/a 1.75 1.75 n/a n/a 1.75 1.75 n/a n/a 1.75 1.75 Aging factor 2.50 n/a n/a n/a 2.50 n/a n/a n/a 2.50 n/a n/a n/a 2.50 n/a n/a n/a n/a 2.50 n/a n/a n/a 2.50 n/a n/a n/a Medical inflation 3.50 n/a n/a n/a 3.50 n/a n/a n/a 3.50 n/a n/a n/a 3.50 n/a n/a n/a n/a 3.50 n/a n/a n/a 3.50 n/a n/a n/a Duration 19.66 n/a n/a n/a 18.84 n/a n/a n/a 29.24 n/a n/a n/a 15.32 n/a n/a n/a n/a 19.66 n/a n/a n/a 18.84 n/a n/a n/a Fair value of assets hierarchy On December 31, Sensitivity analysis Impact on the defined benefit obligation Premise change Premise increase Premise reduction Health United Health United Health United insurance States Mexico Germany Netherlands insurance States Mexico Germany Netherlands insurance States Mexico Germany Netherlands Discount rate 1.0% 1.0% 1.0% 0.5% 0.5% 27,923 8,999 1,040 15,037 766 (34,866) (11,012) (1,246) (16,701) (852) Real medical inflation n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Rate of increase in future salary levels n/a n/a n/a 0.5% 0.5% n/a n/a n/a 9,033 460 n/a n/a n/a (8,519) (434) Rate of increase in future pension plan 1% n/a n/a 0.25% 0.25% (5,559) n/a n/a 4,452 227 5,559 n/a n/a (4,320) (220) Life expectancy 1% n/a n/a 1 year 1 year 42,480 n/a n/a 3,819 195 (33,494) n/a n/a (3,986) (203) Mortality rate n/a 10% n/a n/a n/a n/a 2,554 n/a n/a n/a n/a (2,814) n/a n/a n/a Health insurance - Impact on cost of services and interests costs Premise change Premise increase Premise reduction Cost of Iterests Cost of Iterests Cost of Iterests services costs services costs services costs Discount rate 1.0% 1.0% 739 157 (967) (41) Life expectancy 1.0% 1.0% 614 3,290 (511) (2,594) Rate of increase in future pension plan 1.0% 1.0% 116 430 (116) (430) Retirement plan - defined contribution The Braskem S.A. Impact on the defined benefit obligation Premise change Premise increase Premise reduction Health United Health United Health United insurance States Germany Netherlands insurance States Germany Netherlands insurance States Germany Netherlands Discount rate 1.0% 1.0% 0.5% 0.5% 10,428 7,261 10,802 563 (12,868) (8,802) (11,971) (626) Real medical inflation n/a n/a n/a n/a 15,698 n/a n/a n/a (12,454) n/a n/a n/a Rate of increase in future salary levels n/a n/a 1% 1% n/a n/a 6,256 336 n/a n/a (5,934) (318) Rate of increase in future pension plan 1% n/a 0% 0% n/a n/a 3,087 166 n/a n/a (3,006) (161) Life expectancy 1% n/a 1 year 1 year n/a n/a 2,848 144 n/a n/a (2,973) (150) Mortality rate n/a 10% n/a n/a n/a 1,984 n/a n/a n/a (2,164) n/a n/a Health insurance - Impact on cost of services and interests costs Premise change Premise increase Premise reduction Cost of Iterests Cost of Iterests Cost of Iterests services costs services costs services costs Discount rate 1.0% 1.0% 381 198 (488) (193) Real medical inflation 1.0% 1.0% 344 1,532 (288) (1,215) Rate of increase in future pension plan 1.0% 1.0% 66 216 (67) (221) F-101 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated At December 31, Other financial liabilities The Company received, in June 2019, R$499,999 from the assignment of an agreement for the supply of ethylene to a client. The product must be supplied from January to December 2020, and such supply is considered “highly probable” given the ongoing relationship with the client in terms of volumes higher than the supply flow of such agreement. The Company is not responsible for the solvency of the client. The assignment of this agreement has no recourse or co-obligation for the Company, which is not responsible for repaying to the assignee, a financial agent, the amount received for the assignment if it complies with its obligation to supply ethylene. Equity Capital On December 31, Amount of shares Amount of shares Preferred Preferred Preferred Preferred Common shares shares Common shares shares shares % class A % class B % Total % shares % class A % class B % Total % Odebrecht 226,334,623 50.11 79,182,498 22.95 305,517,121 38.32 226,334,623 50.11 79,182,498 22.95 305,517,121 38.33 Petrobras 212,426,952 47.03 75,761,739 21.96 288,188,691 36.15 212,426,952 47.03 75,761,739 21.96 288,188,691 36.15 ADR (i) 48,780,072 14.14 48,780,072 6.12 (i) 33,984,766 9.85 33,984,766 4.26 Alaska 21,898,500 6.35 21,898,500 2.75 Other 12,907,077 2.86 140,090,605 40.59 500,230 100.00 153,497,912 19.26 12,907,077 2.86 132,995,570 38.53 500,230 100.00 146,402,877 18.36 Total 451,668,652 100.00 343,814,914 99.64 500,230 100.00 795,983,796 99.85 451,668,652 100.00 343,823,073 99.64 500,230 100.00 795,991,955 99.85 Treasury shares 1,234,758 0.36 1,234,758 0.15 1,226,599 0.36 1,226,599 0.15 Total 451,668,652 100.00 345,049,672 100.00 500,230 100.00 797,218,554 100.00 451,668,652 100.00 345,049,672 100.00 500,230 100.00 797,218,554 100.00 American Depositary Receipts traded on the New York Stock Exchange (USA). Capital reserves This reserve includes part of the Profit reserve Legal reserve Under Brazilian Corporation Law, companies must transfer 5% of net profit for the year to a legal reserve until this reserve is equivalent to 20% of the paid-up capital. The legal reserve can be used for capital increase or absorption of losses. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Profit retention Under Brazilian Corporation Law, portions of the net income of the year not allocated for distribution to the shareholders or other reserve accounts must be allocated to the income retention account. At the end of the year 2019, the Company used R$2,767,965 of the balance of this reserve to absorb the adjusted loss in the period of 2019.On December 31, 2019, the balance of this reserve was R$1,174,301. Share rights Preferred shares carry no voting rights but they ensure priority, non-cumulative annual dividend of 6% of their unit value, according to profits available for distribution. The unit value of the shares is obtained through the division of capital by the total number of outstanding shares. In the Profit allocation and dividends proposed to fiscal year 2018 Annual Shareholders Meeting approved (i) Notes to the Other comprehensive income Attributed to shareholders' interest Deemed cost Fair value Defined Foreign and additional adjustments of Gain (loss) Foreign benefit currency Total indexation of trade accounts on interest sales Fair value plans actuarial translation Braskem Non-controlling PP&E receivable in subsidiary hedge of hedge Gain (loss) adjustment shareholders' interest in (ii) (iii) (i) (iv) (iv) (v) (vi) interest Braskem Idesa Total On December 31, 2016 206,703 (9,404) (7,105,377) (539,518) (43,351) 1,169,088 (6,321,859) (548,601) (6,870,460) Additional indexation Realization by depreciation or write-off assets (40,678) (40,678) (40,678) Income tax and social contribution 13,831 13,831 13,831 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,459) (1,459) (1,459) Income tax and social contribution 496 496 496 Foreign sales hedge Exchange rate (42,507) (42,507) 118,179 75,672 Transfer to result 1,145,602 1,145,602 40,924 1,186,526 Income tax and social contribution (355,960) (355,960) (47,731) (403,691) Fair value of Cash flow hedge Change in fair value 876,636 876,636 6,513 883,149 Transfer to result (287,576) (287,576) 9,632 (277,944) Income tax and social contribution (198,343) (198,343) (4,844) (203,187) Fair value of cash flow hedge from jointly-controlled 3,534 3,534 3,534 Actuarial loss with post-employment benefits, net of taxes (8,654) (8,654) (8,654) Goodwill on the acquisition of a subsidiary under common control - Foreign currency translation adjustment 51,445 51,445 (52,047) (602) On December 31, 2017 178,893 (9,404) (6,358,242) (145,267) (52,005) 1,220,533 (5,165,492) (477,975) (5,643,467) Additional indexation Realization by depreciation or write-off assets (40,481) (40,481) (40,481) Income tax and social contribution 13,764 13,764 13,764 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,458) (1,458) (1,458) Income tax and social contribution 496 496 496 Fair value adjustments Accounts receivable (449) (449) (449) Foreign sales hedge Exchange rate (3,133,346) (3,133,346) 4,170 (3,129,176) Transfer to result 1,200,209 1,200,209 59,143 1,259,352 Income tax and social contribution 664,864 664,864 (18,994) 645,870 Fair value of Cash flow hedge Change in fair value (196,790) (196,790) 7,722 (189,068) Transfer to result 26,964 26,964 10,386 37,350 Income tax and social contribution 59,914 59,914 (5,433) 54,481 Fair value of cash flow hedge from jointly-controlled (RPR) (2,329) (2,329) (2,329) Actuarial loss with post-employment benefits, net of taxes (1,569) (1,569) (1,569) ILP PLan fair value Change in fair value 9,297 9,297 133 9,430 Income tax and social contribution (2,891) (2,891) (2,891) Foreign currency translation adjustment 946,342 946,342 (145,119) 801,223 (Loss) gain from investments (65) (65) 65 On December 31, 2018 151,214 5,957 (9,469) (7,626,515) (257,508) (53,574) 2,166,875 (5,623,020) (565,902) (6,188,922) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Attributed to shareholders' interest Deemed cost Fair value Defined Foreign and additional adjustments of Gain (loss) Foreign benefit currency Total indexation of trade accounts on interest sales Fair value plans actuarial translation Braskem Non-controlling PP&E receivable in subsidiary hedge of hedge Gain (loss) adjustment shareholders' interest in (ii) (iii) (i) (iv) (iv) (v) (vi) interest Braskem Idesa Total On December 31, 2018 151,214 5,957 (9,469) (7,626,515) (257,508) (53,574) 2,166,875 (5,623,020) (565,902) (6,188,922) Additional indexation Realization by depreciation or write-off assets (40,481) (40,481) (40,481) Income tax and social contribution 13,764 13,764 13,764 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,338) (1,338) (1,338) Income tax and social contribution 455 455 455 Fair value adjustments Accounts receivable 15 15 15 Foreign sales hedge Exchange rate (507,464) (507,464) 116,202 (391,262) Transfer to result 1,585,480 1,585,480 66,787 1,652,267 Income tax and social contribution (344,567) (344,567) (54,897) (399,464) Fair value of Cash flow hedge Change in fair value 7,150 7,150 (23,078) (15,928) Transfer to result 54,450 54,450 16,752 71,202 Income tax and social contribution (21,703) (21,703) 1,898 (19,805) Fair value of cash flow hedge from jointly-controlled (RPR) (978) (978) (978) Actuarial loss with post-employment benefits, net of taxes (109,492) (109,492) (109,492) ILP PLan fair value Change in fair value 19,415 19,415 348 19,763 Income tax and social contribution (5,842) (5,842) (5,842) Foreign currency translation adjustment 220,228 220,228 (83,506) 136,722 Loss on interest in subsidiary (50) (50) (34) (84) Effect of CPC 42 / IAS 29 - hyperinflation (3,561) (3,561) (3,561) On December 31, 2019 123,614 19,545 (9,469) (6,893,066) (218,589) (163,066) 2,383,492 (4,757,539) (525,430) (5,282,969) (i) Transfer to the income statement when divestment or transfer of control of subsidiary. (ii) Transfer to retained earnings as the asset is depreciated or written-off/sold. (iii) For receivables classified as fair value through other comprehensive income, transfer to the income statement when attainment of jurisdiction or early liquidation. For the ILP Plan, Transfer to retained earnings according to the grace period of the plan. (iv) Transfer to the income statement when maturity, prepayment or loss of efficacy for hedge accounting. (v) Transfer to retained earnings when the extinction of the plan. (vi) Transfer to the income statement when write-off of subsidiary abroad. Attributed to shareholders' interest Deemed cost Fair value Defined Foreign and additional adjustments of Gain (loss) Foreign benefit currency Total indexation of trade accounts on interest sales Fair value plans actuarial translation Braskem Non-controlling PP&E receivable in subsidiary hedge of hedge Gain (loss) adjustment shareholders' interest in (ii) (iii) (i) (iv) (iv) (v) (vi) interest Braskem Idesa Total On December 31, 2015 234,904 (9,404) (9,666,973) (685,396) (39,232) 1,105,391 (9,060,710) (476,708) (9,537,418) Additional indexation Realization by depreciation or write-off assets (41,268) (41,268) (41,268) Income tax and social contribution 14,032 14,032 14,032 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,461) (1,461) (1,461) Income tax and social contribution 496 496 496 Foreign sales hedge Exchange rate 2,625,551 2,625,551 (498,767) 2,126,784 Transfer to result 1,342,785 1,342,785 14,959 1,357,744 Income tax and social contribution (1,406,740) (1,406,740) 145,326 (1,261,414) Fair value of Cash flow hedge Change in fair value 247,815 247,815 (736) 247,079 Transfer to result (19,434) (19,434) (12,135) (31,569) Income tax and social contribution (79,194) (79,194) 3,861 (75,333) Fair value of cash flow hedge from jointly-controlled (3,309) (3,309) (3,309) Actuarial loss with post-employment benefits, net of taxes (4,119) (4,119) (4,119) Foreign currency translation adjustment 63,697 63,697 275,599 339,296 On December 31, 2016 206,703 (9,404) (7,105,377) (539,518) (43,351) 1,169,088 (6,321,859) (548,601) (6,870,460) Additional indexation Realization by depreciation or write-off assets (40,678) (40,678) (40,678) Income tax and social contribution 13,831 13,831 13,831 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,459) (1,459) (1,459) Income tax and social contribution 496 496 496 Foreign sales hedge Exchange rate (42,507) (42,507) 118,179 75,672 Transfer to result 1,145,602 1,145,602 40,924 1,186,526 Income tax and social contribution (355,960) (355,960) (47,731) (403,691) Fair value of Cash flow hedge Change in fair value 876,636 876,636 6,513 883,149 Transfer to result (287,576) (287,576) 9,632 (277,944) Income tax and social contribution (198,343) (198,343) (4,844) (203,187) Fair value of cash flow hedge from jointly-controlled 3,534 3,534 3,534 Actuarial loss with post-employment benefits, net of taxes (8,654) (8,654) (8,654) Foreign currency translation adjustment 51,445 51,445 (52,047) (602) On December 31, 2017 178,893 (9,404) (6,358,242) (145,267) (52,005) 1,220,533 (5,165,492) (477,975) (5,643,467) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Attributed to shareholders' interest Deemed cost and additional indexation of PP&E (ii) Fair value adjustments of trade accounts receivable (iii) Gain (loss) on interest in subsidiary (i) Foreign sales hedge (iv) Fair value of hedge (iv) Defined benefit plans actuarial Gain (loss) (v) Foreign currency translation adjustment (vi) Total Braskem shareholders' interest Non-controlling interest in Braskem Idesa Total On December 31, 2017 178,893 (9,404) (6,358,242) (145,267) (52,005) 1,220,533 (5,165,492) (477,975) (5,643,467) Additional indexation Realization by depreciation or write-off assets (40,481) (40,481) (40,481) Income tax and social contribution 13,764 13,764 13,764 Deemed cost of jointly-controlled investment Realization by depreciation or write-off assets (1,458) (1,458) (1,458) Income tax and social contribution 496 496 496 Fair value adjustments Accounts receivable (449) (449) Foreign sales hedge Exchange rate (3,133,346) (3,133,346) 4,170 (3,129,176) Transfer to result 1,200,209 1,200,209 59,143 1,259,352 Income tax and social contribution 664,864 664,864 (18,994) 645,870 Fair value of Cash flow hedge Change in fair value (449) (196,790) (196,790) 7,722 (189,068) Transfer to result 26,964 26,964 10,386 37,350 Income tax and social contribution 59,914 59,914 (5,433) 54,481 Fair value of cash flow hedge from jointly-controlled (2,329) (2,329) (2,329) Actuarial loss with post-employment benefits, net of taxes (1,569) (1,569) (1,569) ILP PLan fair value Change in fair value 9,297 9,297 133 9,430 Income tax and social contribution (2,891) (2,891) (2,891) Foreign currency translation adjustment 946,342 946,342 (145,119) 801,223 (Loss) investment gains (65) (65) 65 On December 31, 2018 151,214 5,957 (9,469) (7,626,515) (257,508) (53,574) 2,166,875 (5,623,020) (565,902) (6,188,922) (i) Transfer to the income statement when divestment or transfer of control of subsidiary. (ii) Transfer to retained earnings as the asset is depreciated or written-off/sold. (iii) For receivables classified as fair value through other comprehensive income, transfer to the income statement when attainment of jurisdiction or early liquidation. For the ILP Plan, Transfer to retained earnings according to the grace period of the plan. (iv) Transfer to the income statement when maturity, prepayment or loss of efficacy for hedge accounting. (v) Transfer to retained earnings when the extinction of the plan. (vi) Transfer to the income statement when write-off of subsidiary abroad. Earnings per share Basic and diluted earnings (loss) per share is calculated by means of the division of adjusted profit for the year attributable to the Company’s common and preferred shareholders by the weighted average number of these shares held by shareholders, excluding those held in treasury and following the rules for the distribution of dividends provided for in the Company’s bylaws, as described in Note Class Diluted and basic earnings (losses) per share are equal when there is profit in the year, since Braskem has not issued convertible financial instruments. As required by IAS 33, the table below show the reconciliation of profit (loss) for the period adjusted to the amounts used to calculate basic and diluted earnings (loss) per share. Basic and diluted 2018 2017 2016 Profit (loss) for the year attributed to Company's shareholders of continued operations 2,827,650 3,856,564 (442,430) Distribution of priority dividends attributable to: Preferred shares class "A" 208,450 208,416 Preferred shares class "B" 303 351 208,753 208,767 Distribution of 6% of unit value of common shares 273,840 273,827 Distribution of plus income, by class: Common shares 1,331,513 1,915,805 Preferred shares class "A" 1,013,544 1,458,165 2,345,057 3,373,970 Reconciliation of income available for distribution, by class (numerator): Common shares 1,605,353 2,189,632 (251,222) Preferred shares class "A" 1,221,994 1,666,581 (191,208) Preferred shares class "B" 303 351 2,827,650 3,856,564 (442,430) Weighted average number of shares, by class (denominator): Common shares 451,668,652 451,668,652 451,668,652 Preferred shares class "A" 343,808,699 343,775,864 343,771,165 Preferred shares class "B" 512,660 578,330 795,990,011 796,022,846 795,439,817 Profit (loss) per share (in R$) Common shares 3.5543 4.8479 (0.5562) Preferred shares class "A" 3.5543 4.8479 (0.5562) Preferred shares class "B" 0.5910 0.6069 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The table below shows the reconciliation of profit or loss for the period adjusted for the amounts used to calculate basic and diluted earnings (loss) per share. Basic and diluted 2019 2018 2017 (Loss) profit for the year attributed to Company's shareholders of continued operations (2,540,995) 2,827,650 3,856,564 Distribution of priority dividends attributable to: Preferred shares class "A" 208,450 208,416 Preferred shares class "B" 303 351 208,753 208,767 Distribution of 6% ??of unit price of common shares 273,840 273,827 Distribution of excess profits, by class: Common shares 1,331,513 1,915,805 Preferred shares class "A" 1,013,544 1,458,165 2,345,057 3,373,970 Reconciliation of income available for distribution, by class (numerator): Common shares (1,441,839) 1,605,353 2,189,632 Preferred shares class "A" (1,097,559) 1,221,994 1,666,581 Preferred shares class "B" (1,597) 303 351 (2,540,995) 2,827,650 3,856,564 Weighted average number of shares, by class (denominator): Common shares 451,668,652 451,668,652 451,668,652 Preferred shares class "A" 343,820,162 343,808,699 343,775,864 Preferred shares class "B" 500,230 512,660 578,330 795,989,044 795,990,011 796,022,846 (Loss) earnings per share (in R$) Common shares (3.1922) 3.5543 4.8479 Preferred shares class "A" (3.1922) 3.5543 4.8479 Preferred shares class "B" (3.1922) 0.5910 0.6069 F-107 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated 2018 Preferred shares Class "A" Class "B" Outstanding Weighted Outstanding Weighted shares average shares average Amount at beginning of year 343,775,864 343,775,864 578,330 578,330 Conversion of preferred shares class "B" to "A" 39,050 32,835 (78,100) (65,670) Amount at the end of the year 343,814,914 343,808,699 500,230 512,660 2016 Preferred shares Preferred shares Class "A" Outstanding Weighted shares average Amount at beginning of year 343,768,220 343,768,220 Conversion of preferred shares class "B" to "A" 7,644 2,945 Amount at the end of the year 343,775,864 343,771,165 2018 2017 2016 Sales revenue Domestic market Revenue 42,189,365 34,983,265 32,293,042 Rebates (45,290) (35,538) (25,400) 42,144,075 34,947,727 32,267,642 Foreign market Revenue 26,577,433 23,297,304 23,084,703 Rebates (58,188) (60,990) (23,820) 26,519,245 23,236,314 23,060,883 68,663,320 58,184,041 55,328,525 Sales and services deductions Taxes Domestic market (10,219,138) (8,663,707) (7,316,325) Foreign market (36,562) (33,798) (102,831) Sales returns Domestic market (148,918) (125,153) (168,625) Foreign market (258,836) (100,789) (76,756) (10,663,454) (8,923,447) (7,664,537) Net sales and services revenue 57,999,866 49,260,594 47,663,988 2019 Preferred shares Class "A" Outstanding Weighted shares average Amount at beginning of year 343,814,914 343,814,914 Incentive long term plan payments with treasury shares 8,159 5,248 Amount at the end of the year 343,823,073 343,820,162 2018 Preferred shares Class "A" Class "B" Outstanding Weighted Outstanding Weighted shares average shares average Amount at beginning of year 343,775,864 343,775,864 578,330 578,330 Conversion of preferred shares class "B" to "A" 39,050 32,835 (78,100) (65,670) Amount at the end of the year 343,814,914 343,808,699 500,230 512,660 Net revenues 2019 2018 2017 Sales revenue Domestic market Revenue 38,391,132 42,189,365 34,983,265 Rebates (57,315) (45,290) (35,538) 38,333,817 42,144,075 34,947,727 Foreign market Revenue 23,998,067 26,577,433 23,297,304 Rebates (47,723) (58,188) (60,990) 23,950,344 26,519,245 23,236,314 62,284,161 68,663,320 58,184,041 Sales and services deductions Taxes Domestic market (9,704,712) (10,219,138) (8,663,707) Foreign market (31,427) (36,562) (33,798) Sales returns Domestic market (138,749) (148,918) (125,153) Foreign market (85,748) (258,836) (100,789) (9,960,636) (10,663,454) (8,923,447) Net sales and services revenue 52,323,525 57,999,866 49,260,594 Sales revenues represent the fair value of the amount received or receivable from the sale of products and services during the normal course of the Company’s activities. Revenues from sales of products are recognized when (i) the amount of sales can be reliably measured and the Company does not have control over the products sold; (ii) it is probable that the Company will received theeconomic benefits; and (iii) risks and benefits of product ownership are substantially transferred to the client. The Company does not make sales with continued management involvement. Most of Braskem’s sales are made to industrial customers and, in a lower volume, to resellers. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated The moment when the legal right, as well as the risks and benefits, are substantially transferred to the client is determined as follows: for agreements under which the freight and insurance are a responsibility of the client, risks and benefits are transferred as soon as the products are delivered to the client’s carrier; and for contracts under which product delivery involves the use of pipelines, especially basic petrochemicals, the risks and benefits are transferred immediately after the Company’s official markers, which is the point of delivery of the products and transfer of their ownership. The cost of freight services related to sales, transfers to storage facilities and finished product transfers between Braskem establishments are included in cost of sales. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Net revenue by country 2019 2018 2017 Brazil 28,523,327 31,801,222 26,147,559 United States 9,416,558 9,887,701 8,539,972 Mexico 2,335,198 4,168,140 3,408,385 Singapore 1,162,432 756,069 542,866 Germany 1,157,431 1,385,482 1,192,287 Argentina 1,104,044 1,166,191 1,336,440 Switzerland 759,189 315,254 415,729 Italy 690,422 650,605 604,546 Chile 610,454 686,646 554,237 Peru 551,967 540,495 493,654 China 542,209 884,233 692,558 Luxembourg 526,768 546,524 247,007 Netherlands 516,409 293,315 333,134 United Kingdom 359,937 366,328 202,830 Uruguay 359,049 155,571 122,251 Spain 344,433 329,458 282,854 Sweden 296,601 270,062 256,911 South Korea 279,900 314,517 339,430 Japan 240,579 245,208 126,956 Bolivia 231,848 250,048 163,862 France 225,986 135,094 166,314 Canada 201,635 290,453 235,612 Poland 200,563 260,449 231,716 Colombia 200,370 363,497 340,396 Paraguay 194,859 214,959 174,783 Taiwan 191,593 274,566 301,692 Belgium 179,648 122,230 324,222 Ecuador 119,070 313,857 316,134 Other 801,046 1,011,692 1,166,258 52,323,525 57,999,866 49,260,594 2018 2017 2016 Brazil 31,801,222 26,147,559 24,640,077 United States 9,887,701 8,539,972 7,965,209 Argentina 1,166,191 1,336,440 1,244,267 United Kingdom 366,328 202,830 589,725 Germany 1,385,482 1,192,287 1,198,760 Mexico 4,168,140 3,408,385 2,075,695 Italy 650,605 604,546 667,265 Netherlands 293,315 333,134 262,289 Singapore 756,069 542,866 1,101,156 Switzerland 315,254 415,729 227,504 Colombia 363,497 340,396 369,359 Spain 329,458 282,854 342,154 Chile 686,646 554,237 522,796 Peru 540,495 493,654 397,186 Uruguay 155,571 122,251 122,783 Japan 245,208 126,956 1,631,564 Poland 260,449 231,716 252,508 Paraguay 214,959 174,783 185,432 France 135,094 166,314 236,727 Bolivia 250,048 163,862 211,382 Canada 290,453 235,612 242,492 South Korea 314,517 339,430 254,512 Other 3,423,164 3,304,781 2,923,146 57,999,866 49,260,594 47,663,988 2018 2017 2016 PE/PP 37,979,148 33,105,714 30,790,364 Ethylene, Propylene 4,283,709 3,351,805 2,906,796 Naphtha, condensate and crude oil 248,313 135,165 2,582,257 Benzene, toluene and xylene 2,785,400 2,683,406 2,411,031 PVC/Caustic Soda/EDC 3,167,390 3,066,879 3,016,390 ETBE/Gasoline 2,928,993 2,433,360 2,058,952 Butadiene 2,023,465 1,819,387 1,315,892 Cumene 909,409 578,482 501,958 Solvents 476,311 401,455 379,745 Other 3,197,729 1,684,941 1,700,603 57,999,866 49,260,594 47,663,988 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Net revenue by product 2019 2018 2017 PE/PP 34,287,597 37,979,148 33,105,714 Ethylene, Propylene 3,743,581 4,283,709 3,351,805 PVC/Caustic Soda/EDC 2,692,778 3,167,390 3,066,879 Benzene, toluene and xylene 2,503,667 2,785,400 2,683,406 ETBE/Gasoline 2,319,253 2,928,993 2,433,360 Butadiene 1,609,264 2,023,465 1,819,387 Cumene 723,469 909,409 578,482 Naphtha, condensate and crude oil 505,804 476,311 135,165 Solvents 676,044 248,313 401,455 Other 3,262,068 3,197,728 1,684,941 52,323,525 57,999,866 49,260,594 Main clients The Company does not have any revenue arising from transactions with only one client that is equal to or higher than 10% of its total net revenue. In Tax incentives Income Tax Since 2015, the Company obtained grant in lawsuits claiming the reduction of 75% of IR on income from the following industrial units: (i) PVC and Chlor-Alkali (Cloro Soda), established in the state of Alagoas; and (ii) Chemicals, PE, PVC and Chlor-Alkali units, established in the city of Camaçari (BA). The realization period is 10 years. In PRODESIN - ICMS The Company has ICMS tax incentives granted by the state of Alagoas, through the state of Alagoas Integrated Development Program – PRODESIN, which are aimed at implementing and expanding a plant in that state.This incentive is considered an offsetting entry to sales taxes. In Note 2018 2017 2016 Bonus to employees (375,360) (399,828) (361,796) Expenses from fixed assets (40,061) (205,929) (53,774) Allowance for judicial and labor claims (83,280) (119,919) (169,973) Fine on supply contract of raw material, net (i) 336,533 PIS and COFINS credits - exclusion of ICMS from the calculation basis 10(c) 235,919 Capital gain - sale of Quantiq 276,816 Recovery of environmental damages (89,395) (102,466) (182,600) Leniency agreement 23.3(a) (375,476) (2,860,402) Other 106,496 71,922 (277,409) 90,852 (854,880) (3,905,954) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Other income (expenses), net Note 2019 2018 2017 2.7 Restated Other income PIS and COFINS credits - exclusion of ICMS from the calculation basis 10(c) 1,904,206 235,919 Fine on supply contract of raw material, net (i) 375,020 386,020 Insurance indemnity 18,286 100,876 Fixed assets disposal results 11,140 93,814 Tax Credits recovery 3,094 46,179 Capital gain - sale of Quantiq 276,816 Other 96,688 164,414 38,118 2,408,434 1,027,222 314,934 Other expenses Provision - geological event in Alagoas 26 (3,383,067) Leniency agreement 25 (375,476) Provision for losses on the fixed asset (158,320) (44,420) (205,929) Recovery of environmental damage (141,536) (89,396) (102,466) Allowance for judicial claims (136,135) (83,280) (119,919) Programmed stop in plants (108,192) (91,380) Fine on sales contracts (104,179) (49,487) Other (415,513) (196,750) (366,024) (4,446,942) (554,713) (1,169,814) The contractual penalty charged from a supplier for failing to supply feedstock to the subsidiary Braskem Idesa is R$335,281 (R$338,125 in 2018). 2018 2017 2016 Financial income 530,007 512,051 646,727 59,045 91,579 43,395 589,052 603,630 690,122 Financial expenses (2,084,780) (2,219,503) (2,447,481) Monetary variations on fiscal debts (33,429) (191,101) (249,578) Customer discounts granted (141,223) (137,389) (108,606) Loans transaction costs (89,982) (64,771) (56,020) Adjustment to present value (296,065) (284,992) (507,744) (362,072) (849,461) (201,533) (3,007,551) (3,747,217) (3,570,962) Exchange rate variations, net On financial assets 1,268,741 216,381 (1,139,676) On financial liabilities (3,525,724) (1,015,143) (2,070,741) (2,256,983) (798,762) (3,210,417) (4,675,482) (3,942,349) (6,091,257) 2018 2017 2016 Classification by nature: Raw materials other inputs (38,889,949) (29,364,996) (28,197,875) Personnel expenses (2,412,118) (2,173,640) (2,576,107) Outsourced services (2,306,048) (2,120,001) (2,135,412) Depreciation, amortization and depletion (2,990,577) (2,928,855) (2,677,672) Freights (2,275,375) (2,058,574) (1,918,973) Costs of idle industrial plants (138,242) (67,593) (60,944) Other income (expenses), net (706,451) (1,379,965) (4,175,836) Total (49,718,760) (40,093,624) (41,742,819) Classification by function: Cost of products sold (46,431,220) (36,177,408) (34,985,569) Selling and distribution (1,545,568) (1,459,608) (1,403,673) General and administrative (1,633,003) (1,434,272) (1,285,613) Research and development (199,821) (167,456) (162,010) Other income (expenses), net 90,852 (854,880) (3,905,954) Total (49,718,760) (40,093,624) (41,742,819) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Financial results 2019 2018 2017 Financial income Interest income 708,542 530,007 512,051 Other 142,012 59,045 91,579 850,554 589,052 603,630 Financial expenses Interest expenses (2,191,765) (2,084,780) (2,219,503) Monetary variations on fiscal debts (232,612) (33,429) (191,101) Discounts granted (80,404) (141,223) (137,389) Loans transaction costs - amortization (465,000) (89,982) (64,771) Adjustment to present value - appropriation (348,930) (296,065) (284,992) Interest expense on leases (137,903) Other (426,171) (362,072) (849,461) (3,882,785) (3,007,551) (3,747,217) Exchange rate variations, net On financial assets (31,137) 1,268,741 216,381 On financial liabilities (1,693,383) (3,525,724) (1,015,143) (1,724,520) (2,256,983) (798,762) Total (4,756,751) (4,675,482) (3,942,349) Expenses by nature and function 2019 2018 2017 Restated Classification by nature: Raw materials other inputs (37,380,310) (38,889,949) (29,364,996) Personnel expenses (3,004,762) (2,412,118) (2,173,640) Outsourced services (3,242,373) (2,306,048) (2,120,001) Depreciation, amortization and depletion (3,632,265) (2,990,577) (2,928,855) Freights (2,204,453) (2,275,375) (2,058,574) Costs of idle industrial plants (309,742) (138,242) (67,593) Provision - geological event in Alagoas (3,383,067) PIS and COFINS credits - exclusion of ICMS from the calculation basis 1,904,206 Leniency agreement (375,476) Other general and administrative expenses (927,294) (706,451) (1,004,489) Total (52,180,060) (49,718,760) (40,093,624) Classification by function: Cost of products sold (45,879,118) (46,576,657) (36,177,408) Selling and distribution (1,783,455) (1,689,179) (1,446,153) (Loss) reversals for impairment of trade accounts receivable (7,069) 87,008 (13,455) General and administrative (2,224,180) (1,793,185) (1,434,272) Research and development (247,730) (219,256) (167,456) Other income 2,408,434 1,027,222 314,934 Other expenses (4,446,942) (554,713) (1,169,814) Total (52,180,060) (49,718,760) (40,093,624) Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Segment information Braskem’s organizational structure was formed by the following segments: · Chemicals: comprises the activities related to the production ofethylene, propylene butadiene, toluene, xylene, cumene and benzene, as well as gasoline, diesel and LPG (Liquefied Petroleum Gas), and other petroleum derivatives and the supply of electric energy, steam, compressed air and other inputs to second-generation producers located in the Camaçari, Triunfo, São Paulo and Rio de Janeiro petrochemical complexes. · Polyolefins: comprises the activities related to the production of PE and PP in Brazil. · Vinyls: comprises the activities related to the production of PVC, caustic soda and chloride in Brazil. · United States and Europe:operations related to PP production in the United States and Europe, through the subsidiaries Braskem America and Braskem Alemanha, respectively. · Mexico:comprises the activities relation to the production of PE in Mexico, through the subsidiary Braskem Idesa. Presentation, measurement and reconciliation of segment results Information by segment is generated in accounting records, which are reflected in the consolidated financial statements. The eliminations stated in the operating segment information, when compared with the consolidated balances, are represented by transfers of inputs between segments that are measured as arm’s length sales. The operating segments are stated based on the results of operations, which does not include financial results, and current and deferred income tax and social contribution expenses. The Company does not disclose assets by segment since this information is not presented to its Chief Operating Decision Maker (“CODM”). F-114 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Results by segment 2018 2019 Operating expenses Operating expenses Net Cost of Selling, general Results from Other operating Net Cost of Selling, general Results from Other operating sales products Gross and distribuition equity income Operating sales products Gross and distribuition equity income Consolidated revenue sold profit expenses investments (expenses), net profit (loss) revenue sold profit expenses investments (expenses), net Reporting segments Reporting segments Reporting segments Chemicals 31,111,650 (27,464,046) 3,647,604 (756,719) (139,393) 2,751,492 Chemicals 27,172,288 (25,349,921) 1,822,367 (1,069,867) (269,363) 483,137 Vinyls 3,167,390 (2,889,519) 277,871 (169,377) (18,416) 90,078 Vinyls 2,692,778 (3,069,301) (376,523) (437,153) (3,673,139) (4,486,815) Polyolefins 22,483,866 (19,255,377) 3,228,489 (1,310,080) (93,465) 1,824,944 Polyolefins 21,191,851 (18,494,520) 2,697,331 (1,439,229) (151,351) 1,106,751 USA and Europe 11,724,776 (9,126,392) 2,598,384 (610,384) 10,656 1,998,656 USA and Europe 10,044,306 (8,233,079) 1,811,227 (786,096) 9,215 1,034,346 Mexico 3,770,506 (2,333,849) 1,436,657 (296,391) 305,457 1,445,723 Mexico 3,051,440 (2,504,012) 547,428 (351,199) 324,682 520,911 Total Total 72,258,188 (61,069,183) 11,189,005 (3,142,951) 64,839 8,110,893 Total 64,152,663 (57,650,833) 6,501,830 (4,083,544) (3,759,956) (1,341,670) Other segments Other segments 292,435 (173,608) 118,827 (34,819) (103) 83,905 Other segments 296,286 (188,335) 107,951 (44,548) 3,364 66,767 Corporate unit Corporate unit 265,438 (i) 265,438 (200,622) (888) 26,116 (i) 90,044 Corporate unit (217,958) 10,218 1,775,246 (i) 1,567,506 Braskem consolidated before Braskem consolidated before 72,816,061 (61,242,791) 11,573,270 (3,378,392) (888) 90,852 8,284,842 Braskem consolidated before 64,448,949 (57,839,168) 6,609,781 (4,346,050) 10,218 (1,981,346) 292,603 Eliminations and reclassifications Eliminations and reclassifications (14,816,195) 14,811,571 (4,624) (4,624) Eliminations and reclassifications (12,125,424) 11,960,050 (165,374) 83,616 (57,162) (138,920) Total Total 57,999,866 (46,431,220) 11,568,646 (3,378,392) (888) 90,852 8,280,218 Total 52,323,525 (45,879,118) 6,444,407 (4,262,434) 10,218 (2,038,508) 153,683 2017 2018 Operating expenses Operating expenses Net Cost of Selling, general Results from Other operating Net Cost of Selling, general Results from Other operating sales products Gross and distribuition equity income Operating sales products Gross and distribuition equity income Consolidated revenue sold profit expenses investments (expenses), net profit (loss) revenue sold profit expenses investments (expenses), net Reporting segments Reporting segments Reporting segments Restated Chemicals 25,179,288 (20,478,914) 4,700,374 (773,396) (197,275) 3,729,703 Chemicals 31,111,650 (27,523,702) 3,587,948 (784,450) (52,006) 2,751,492 Vinyls 3,066,879 (2,572,774) 494,105 (162,989) (163,374) 167,742 Vinyls 3,167,390 (2,908,371) 259,019 (177,344) 8,403 90,078 Polyolefins 19,650,398 (15,432,179) 4,218,219 (1,321,575) (177,518) 2,719,126 Polyolefins 22,483,866 (19,295,855) 3,188,011 (1,328,047) (35,020) 1,824,944 USA and Europe 9,854,496 (7,419,261) 2,435,235 (582,672) (21,279) 1,831,284 USA and Europe 11,724,776 (9,152,847) 2,571,929 (642,006) 68,733 1,998,656 Mexico 3,600,820 (2,097,471) 1,503,349 (283,318) 27,914 1,247,945 Mexico 3,770,506 (2,333,845) 1,436,661 (313,526) 322,588 1,445,723 Total Total 61,351,881 (48,000,599) 13,351,282 (3,123,950) (531,532) 9,695,800 Total 72,258,188 (61,214,620) 11,043,568 (3,245,373) 312,698 8,110,893 Other segments Other segments 83,720 (65,743) 17,977 (13,391) (2,430) 2,156 Other segments 292,435 (173,608) 118,827 (34,819) (103) 83,905 Corporate unit Corporate unit (61,384) 39,956 (320,918) (ii) (342,346) Corporate unit 265,438 265,438 (334,420) (888) 159,914 90,044 Braskem consolidated before Braskem consolidated before 61,435,601 (48,066,342) 13,369,259 (3,198,725) 39,956 (854,880) 9,355,610 Braskem consolidated before 72,816,061 (61,388,228) 11,427,833 (3,614,612) (888) 472,509 8,284,842 Eliminations and reclassifications Eliminations and reclassifications (12,175,007) 11,888,934 (286,073) 137,389 (148,684) Eliminations and reclassifications (14,816,195) 14,811,571 (4,624) (4,624) Total Total 49,260,594 (36,177,408) 13,083,186 (3,061,336) 39,956 (854,880) 9,206,926 Total 57,999,866 (46,576,657) 11,423,209 (3,614,612) (888) 472,509 8,280,218 2016 2017 Operating expenses Operating expenses Net Cost of Selling, general Results from Other operating Net Cost of Selling, general Results from Other operating sales products Gross and distribuition equity income Operating sales products Gross and distribuition equity income Operating revenue sold profit expenses investments (expenses), net profit (loss) revenue sold profit expenses investments (expenses), net Consolidated Reporting segments Reporting segments Reporting segments Chemicals 25,062,602 (20,248,175) 4,814,427 (680,083) (409,920) 3,724,424 Chemicals 25,179,288 (20,478,914) 4,700,374 (773,396) (197,275) 3,729,703 Vinyls 3,016,390 (2,815,184) 201,206 (236,771) (71,880) (107,445) Vinyls 3,066,879 (2,572,774) 494,105 (162,989) (163,374) 167,742 Polyolefins 20,307,367 (15,980,935) 4,326,432 (1,284,665) (199,098) 2,842,669 Polyolefins 19,650,398 (15,432,179) 4,218,219 (1,321,575) (177,518) 2,719,126 USA and Europe 8,896,071 (6,080,722) 2,815,349 (497,810) (71,000) 2,246,539 USA and Europe 9,854,496 (7,419,261) 2,435,235 (582,672) (21,279) 1,831,284 Mexico 1,586,927 (1,152,047) 434,880 (231,795) (4,805) 198,280 Mexico 3,600,820 (2,097,471) 1,503,349 (283,318) 27,914 1,247,945 Total Total 58,869,357 (46,277,063) 12,592,294 (2,931,124) (756,703) 8,904,467 Total 61,351,881 (48,000,599) 13,351,282 (3,123,950) (531,532) 9,695,800 Other segments Other segments 12,202 (14,760) (2,558) (1,876) (20,864) (25,298) Other segments 83,720 (65,743) 17,977 (13,391) (2,430) 2,156 Corporate unit Corporate unit (33,582) 30,078 (3,128,387) (iii) (3,131,891) Corporate unit (61,384) 39,956 (320,918) (ii) (342,346) Braskem consolidated before Braskem consolidated before 58,881,559 (46,291,823) 12,589,736 (2,966,582) 30,078 (3,905,954) 5,747,278 Braskem consolidated before 61,435,601 (48,066,342) 13,369,259 (3,198,725) 39,956 (854,880) 9,355,610 Eliminations and reclassifications Eliminations and reclassifications (11,217,571) 11,306,254 88,683 115,286 203,969 Eliminations and reclassifications (12,175,007) 11,888,934 (286,073) 137,389 (148,684) Total Total 47,663,988 (34,985,569) 12,678,419 (2,851,296) 30,078 (3,905,954) 5,951,247 Total 49,260,594 (36,177,408) 13,083,186 (3,061,336) 39,956 (854,880) 9,206,926 Includes the amount of R$1,904,206 related to PIS and COFINS tax credits – exclusion of ICMS from the calculation base (Nota 10(c)). Includes gain from sale of “Chemicals distribution” segment in the amount of R$276,816. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Property, plant and equipment and intangible assets by segment 2019 2018 Reporting segments Chemicals 10,410,524 10,916,874 Polyolefins 5,077,335 4,985,337 Vinyls 2,121,085 2,334,270 USA and Europe 4,852,760 3,875,566 Mexico 12,020,051 11,835,170 Total 34,481,755 33,947,217 Unallocated amounts 595,514 553,655 Total 35,077,269 34,500,872 2018 2017 Reporting segments Chemicals 10,916,874 11,136,125 Polyolefins 4,985,337 5,072,162 Vinyls 2,334,270 2,433,882 USA and Europe 3,875,566 2,587,302 Mexico 11,835,170 10,733,277 Total 33,947,217 31,962,748 Unallocated amounts 553,655 526,359 Total 34,500,872 32,489,107 Insurance coverage Braskem contracts insurance policies to cover the domestic and international operations of its plants, as detailed below. In addition, also contracts other insurance policies, including general civil liability, the civil liability of directors and offices (D&O) The Insurance Program maintained by the Company is consistent with the standards adopted by petrochemical companies operating globally. The All Risks Program provides coverage for material damages and consequent loss of profit of all Braskem plants through an “All Risks” program. The program is divided into three different policies that ensure coverage of the operations in Brazil, Mexico and the United States/Germany and Mexico, which are valid through The following table presents additional information on the policies in force. Each has maximum indemnity limits (“MIL”) per event to cover possible claims in view of the nature of the Company’s activities and benchmarks, as well estimated maximum loss studies prepared by external advisors. Maximum indemnity limit Amount insured Maturity US$ million R$ million US$ million R$ million Units in Brazil April 10, 2020 3,375 13,077 26,406 102,318 Units in United States and Germany April 10, 2020 500 1,937 2,037 7,893 Units in Mexico April 10, 2020 2,936 11,376 6,068 23,512 Total 34,511 133,723 Maximum indemnity limit Amount insured Maturity US$ million R$ million US$ million R$ million Units in Brazil October8, 2021 3,500 18,195 27,962 145,364 Units in United States and Germany October8, 2021 480 2,495 2,189 11,381 Units in Mexico October8, 2021 2,642 13,735 5,679 29,524 Total 35,830 186,269 The risk assumptions adopted are not part of the audit scope and, therefore, were not subject to F-116 Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated These policies provide coverage for material losses arising from accidents related to fire, explosion and machinery breakdown, etc., and consequential loss of profit, with maximum indemnity periods ranging from 12 and 33 months, depending on the plant and/or coverage. Braskem also carries an insurance policy against general civil liability that guarantees any damages caused to third parties from its operations and products, including any losses caused by sudden pollution. The Company’s new projects are covered by specific Engineering Risk policies and/or construction and assembly clauses included in Subsequent events As disclosed in note 26.1(i), in January 2020 there was the unfreezing of R$3.7 billion previously frozen from the cash balance of Braskem, and in note 26.1(ii), on February 14, 2020, the Company entered into an agreement with the Labor Prosecution Office (MPT) in the amount of R$40 million for implementation of the Program for Recovery of Business and Promotion of Educational Activities for residents and workers from the districts affected by the geological phenomenon. The program consists of support for the construction of daycare centers and schools and for administering professional training programs, as well as support for the Civil Defense to hire skilled professionals to continue monitoring the risk areas in the districts affected. On March 19, 2020, the Board of Directors approved a new program, the “ILP Plan 2020,” in accordance with the terms and conditions of the ILP Plan, which includes the list of eligible persons, the deadline for acquiring own shares by participants and the number of restricted shares to be delivered to participants as matching contribution for each own share acquired. The maximum number of shares the Company expects to deliver to the participants of the ILP Program 2020, after the vesting period and subject to compliance with all necessary requirements, is approximately 1,548,000 shares. The program’s grant date is April 1, 2020. The shares to be delivered by the Company to participants are those currently held in treasury or acquired through repurchase programs, and in the event said shares cannot be delivered, the Company will pay participants in cash the amount corresponding to the shares, based on the quote on the stock exchange on the second business day immediately prior to the respective payment date. Braskem has been closely monitoring the impacts from the COVID-19 pandemic on its business and surrounding communities. As disclosed in the Notice to the Market dated March 20, 2020, Braskem has formed a crisis committee to establish global procedures focusing mainly on the health of people and the continuity of its operations. Some of the measures taken by the Company follow: Recommending that all team members and contractors work from home; Reducing by around 50% the number of team members and contractors working on its industrial assets, with operations using the smallest possible teams, while considering all rules for ensuring personal safety and maintaining operational reliability; Recommending the suspension of visits by non-routine third parties and suppliers to Braskem’s facilities, and banning access to Braskem’s facilities by visitors or third parties returning from high risk areas; Creating an agenda with clients and local communities to verify the products in its portfolio with a view to support the fight against the pandemic. Braskem S.A. Notes to the consolidated financial statements at December 31, 2019 All amounts in thousands, except as otherwise stated Brazil: ethylene production reduced to approximately 65% of the total annual capacity of 3.6 million tons; United States: polypropylene production reduced to approximately 85% of the total annual capacity of 1.6 million tons. In this context, the Company has been adopting a series of cash-preservation measures to ensure the financial Drawing down the Revolving Credit Facility in the amount of US$1 billion (R$5.2 billion on March 31, 2020), which is due in 2023; Reducing fixed costs by around 10%; Paring back the investments planned for 2020 from US$721 million (R$3.7 billion) to approximately US$600 million (R$3.1 billion); Postponing the payment of social contribution charges in Brazil; and Optimizing working capital. The Company Naphtha Agreements with Petrobras In June 2020, Braskem entered into new agreements with Petrobras for the supply of petrochemical naphtha to Braskem's industrial units in Bahia and F-118(i)Considers R$5.6 billion in purchases of raw material maturing in up to 360 days, for which the Company provides letters of credit issued by financial institutions, where suppliers are the beneficiaries.15 F - 46(i) (ii) 16 (a) (i) (b) (i) (ii) (iii) (iv) (v) (c) (i) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated15Borrowings(a)Borrowings (i)Contracts with advanced settlement.(ii)Contracts partially settled in advance in the amount of R$32.287.(iii)Contracts partially settled in advance in the amount of R$138.230.F - 47F-51Braskem S.A.Notes to the financial statementsat December 31, 2018(d) (b)Bonds (i)Part of the contracts settled in the amount of R$825,720.(c)Export pre-payment (d)Capital raised for investmentsTexas, United States.Texas. The funds will be released in accordance with the progress of the project’s construction and the total amount funded is expected to be disbursed by December 30, 2020. (i)US$130,650 released in July 2018, US$13,677 released in September 2018 and US$13,823 released in December 2018.F - 48(i) Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(e) (e)Others - SACEThe subsidiary Braskem Netherlands B.V. secured a financing facility of US$295 million guaranteed by SACE Covered Facility Agreement, the Italian export credit agency. (i) (ii) (f)Payment schedule(f) (g)F-52Guarantees(g) F - 4917 (i) (ii) (iii) (iv) Braskem S.A.Notes to the financial statementsat December 31, 201816The proceeds from the issue were used to fully settle or to partially prepay of installments of the Project Finance debt contracted for the capital expenditures in the Braskem Idesa Financingpetrochemical complex. keepingline with the Company’s Financial Policy, the investment in the Braskem Idesa petrochemical complex has beenwas financed under a Project Finance structure, inmodel, under which the construction loan must be repaidis paid exclusively using exclusively the cash generated by Braskem Ideathe company itself and with the shareholders pledgingprovide limited guarantees. Accordingly, thisThis financing structure includes the guarantees typical to Project Finance transactions, of this kind, such as assets, receivables, cash generation and other rights of Braskem Idesa.Project Finance borrowings include The financing also contains various contractual obligations (covenants) that areother covenants typical into contracts of this kind.company remains in breach of part of its non-financial contractual obligations.contracts remained unfulfilled. As a result, remains the reclassificationCompany continued to theclassify to current liabilityliabilities the entire balance of the non-current portion of the loan, outstanding, in the amount of R$9,554,476, in accordancecompliance with IAS 1 (Presentation of Financial Statements).As described in note 35.l, onOn October 9, 2019, a Waivers & Consent package was approved by the Intercreditor Agend on behalf of the Lenders, thus extending the dates for achieving the Guaranteed Physical Completion Date from November 30, 2016 to December 31, 2020 and the Guaranteed Financial Completion Date from December 31, 2016 to December 31, 2020. The approval of the Waivers & Consent package allows Braskem Idesa obtainedto reclassify the waiver for such breaches with its creditors, therefore the long term debt will be reclassifiedSenior Debt from current liabilities back to non-current liabilities inaccording to the next annual financial statementsoriginal maturity.excludingon December 31, 2019. In 2018, part of the reclassification todebt was presented in current liabilities, with early maturities arising from the aforementioned breach of contractual obligations.obligations: 18 F - 50 (a) (b) Braskem S.A.Notes to the financial statementsat December 31, 2018 19 17Debentures (a)Payment scheduleThe amount of debentures with long-term maturities, is as follows: F - 51F-56Braskem S.A.Notes to the financial statementsat December 31, 201820 (a) (b)Guaranteesentered into agreements foradopted IFRS 9 - Financial Instruments to replace IAS 39 - Financial Instruments: Recognition and Measurement on January 1, 2018. The changes made to the fiduciary assignment of receivables, withCompany's accounting policies are described below, as well as their impacts on the maintenance of collection accounts in order to meet the debt service equivalent for up to three months of future installments, in accordance with the respective assignment agreements.consolidated financial statements.(b) 18Financial Assets(i) (ii) (i) ReconciliationFinancial assets – Subsequent measurement and gains and losses(i) (ii) (iii) (iv) (c) financing activitiesthe risks and rewards of ownership of the financial asset are transferred or in which the Company neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.(d) (e) Totalborrowings 20.1 (a) 19Financial instruments19.1Fair Value(a)Fair value calculation(i) (i)Financial assets classified as fair value through profit and loss or as fair value through other comprehensive income are measured in accordance with the fair value hierarchy (Level 1 and Level 2), with inputs used in the measurement processes obtained from sources that reflect the most recent observable market prices.(ii)Trade accounts receivable and trade payables, mostly classified as amortized cost, corresponds to their respective carrying amounts due to the short-term maturity of these instruments. When purchase or sale prices include material financial charges, the securities are adjusted to their present value.(iii)The fair value of borrowings is estimated by discounting future contractual cash flows at the market interest rate, which is available to Braskem in similar financial instruments.(iv)The fair value of bonds is based on prices negotiated in financial markets, plus the respective carrying amount of interests.(ii) (iii) (iv) F - 52Braskem S.A.Notes to the financial statementsat December 31, 2018(b) (b)Fair value hierarchyF - 53F-60Braskem S.A.Notes to the financial statementsat December 31, 201820.2 19.2Non-derivative financial instruments and leniency agreement (Note 23.3)
shareholder of Braskem Idesa F - 54F-61Braskem S.A.Notes to the financial statementsat December 31, 201820.3 20.3.1 19.3Derivative financial instruments19.3.1Changes respectively, and are necessarily classified as "fair value through profit and loss".20182019 were contracted on Over the Counter - OTC markets with large financial counterparties under global derivative contracts in Brazil or abroad.F - 55F-62Braskem S.A.Notes to the financial statementsat December 31, 2018(a) (a.i) (a)Hedge accounting transactions(a.i) Dollar call and put option2018,2019, Braskem held a total notional amount of put options of R$2.21.9 billion, with an average strike price of 3.293.55 R$/US$. Simultaneously, the Company also held a total notional amount of call options of R$1.61.4 billion, with an average strike price of R$/US$4.61.4.88. The operations have a maximum term of 24 months. Dollar-denominated future sales in Brazilian real were designated for hedge accounting, with the months of revenue recognition always coinciding with the months of the options.According to IFRS 9, the accounting standard in force as from January 1, 2018, the amount of the mark-to-market (“MtM”) adjustment, as well as the amount of the premium of the operation, is recognized as “Other comprehensive income” (“OCI”) under shareholders' equity. The fair value of the options is composed of the notional value of the operations multiplied by the sum of the intrinsic value, which refers to the amount by which the option exceeded the exercise price at the time of evaluation, and the time value of the derivative until its maturity. From the beginning of operations and their respective designations as hedge accounting, the Company began to recognize in OCI all possible premiums paid on the options purchased, in the form of hedge costs. On December 31, 2018, the amount recorded in OCI as cost of hedge is R$4.1 million.(a.ii) (a.ii)Dollar SwapTo remain aligned with its risk management strategy,In 2018, the Company contracted foreign exchange derivative operations (“swaps”) in the aggregate amount of R$1.3 billion, with annual maturities over the following 5 years starting January 30, 2019. The amount payable in January 2020 will be subject to the variation in the IPCA index. The remaining maturities are subject to the variation in the CDI. These operations were designated to cash flow hedge accounting, where the hedging instruments are foreign exchange derivatives and the hedged objects are highly probable future revenues in the domestic market subject to fluctuations in Brazilian real/U.S. dollar price. Accordingly, the mark-to-market adjustment of the effective portion of the hedge will be recognized under shareholders equity in the line “Other comprehensive income” and will be recognized in the financial result only upon the maturity of each installment.(a.iii) F - 56Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(a.iii)Hedge operation by Braskem Idesa related to Project finance finance.Finance.19.420.4 Non-derivative financial liabilities designated to hedge accounting(a.i) Future exports in U.S. dollars(a.i)
US$ 1: R$2.0017. In addition to this hedge accounting, on October 10, 2017, Braskem S.A. designated new financial instruments for the hedging of future sales, which mature in 2028. The hedged exchange rate was US$1: R$3.1688. The main actions carried out in 2019 are detailed below:· · · · 2018,2019, exports that were designated not yet realized and not discontinued are shown below: There were noF-64period ended December 31, 2018.year:F - 57Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated (2019/2028)(2020/2032) as highly probable, based on the following factors:In recent years, Braskem S.A. exported an average US$3.1 billion per year, which represents around 3 to 4 times the annual exports of the hedged exports.Hedged exports represent between 20% and 30% of the export flows planned by the Company.· · 2018,2019, the maturities of financial liabilities designated, within the scope of the consolidated balance sheet, were as follows: substitutereplace these hedge instruments to adjust them to the schedule and value of the hedged exports. The rollover or replacement of the hedge instrument are provided for in IFRS 9. This explains the fact that liabilities designated for hedge are not necessarily equivalent to the exports designated in the year.2018:2019: F - 58Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated realizationsrealization expected for 20192020 will occur through the payments of financial instruments in conformity with exports made, and the exchange variation recorded in “Other comprehensive income” will be written offrecycled to the financial results. For all quarters of the year, realizationsrealization will be made at the discounted cash flow rates. The quarterly schedule of hedged exports in 2019the next quarter of 2020 follows: 150,000183,495183,495216,990 733,980724,000(a.ii) Liabilities related to the Project finance of future sales in U.S. dollarF-66(a.ii) financierslenders in 2015, Braskem Idesa designated new amounts in April and September 2015, of US$290,545 and US$23,608, respectively, for hedge accounting. Therefore, the impact of exchange variation on future flows of sales in U.S. dollar derived from these sales in dollar will be offset by the exchange variation on the designated liabilities, partially eliminating the volatility in the results of the subsidiary.· The hedged flow corresponds to less than 35% of the planned revenue flow of the project over the designated period. The current amount of sales already meets the volume of designated hedge, which confirms the highly probably nature of the designated cash flow.The financing was obtained through a Project Finance structure and will be repaid exclusively through the cash generation of the project (Note 16). Therefore, the existence of the debit is directly associated with the highly probable nature of the future sales in U.S. dollar.· · F - 59Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated2018,2019, designated and unrealized sales were as follows: 2018,2019, the maturities of designated financial liabilities to hedge future sales were distributed as follows: F - 60Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated20182019 (US$11,416)838,596), which is recorded in Braskem Idesa’s shareholders’ equity under “Other comprehensive income” and will be transferred to financial income (expenses) according to the schedule of future hedged sales as they occur: 2018:2019: F - 61Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise statedrealizationsrealization expected for 20192020 will occur in accordance with the payments under the project finance, and the exchange variation recorded in “Other comprehensive income” will be written off to the financial results. Below is the quarterly schedule of hedged sales in U.S. dollars in 2019:2020: 56,38261,369 56,38365,612 57,62969,855 58,87669,855 229,270266,69119.5F-69Credit quality of financial assets(a)20.5 Trade accounts receivable(a) Braskem’sCompany’s clients have risk ratings assigned by credit rating agencies. For this reason, Braskemthe Company developed its own credit rating system for all accounts receivable from clients in Brazil and abroad.for the domestic and foreign market werewas as follows:On December 31, 2017, the credit ratings for the domestic market were as follows:receivablesreceivable overdue more than 5 days for the domestic market and 30 days, for the international market, divided by consolidated gross revenue in the last 12 months.F - 62F-70Braskem S.A.Notes to the financial statementsat December 31, 2018(b) (b)Other financial assetsBraskemthe Company uses the risk rating of agencies Standard & Poor’s, Moody’s and Fitch Ratings, within the limits established in its financial policy approved by the Board of Directors. (i) (i)Investments approved by the Management of the Company, in accordance with the financial policy.19.620.6 Sensitivity analysis(a) (a)Selection of risks2018,2019, the main risks that can affect the value of Braskem’sCompany’s financial instruments are:· · · · · · · · · ·Brazilian U.S. dollar/real exchange rate;·Mexican peso/Brazilian real exchange rate;F-71·Euro/Brazilian real exchange rate;·Libor floating interest rate;·Selic interest rate;·CDI interest rate;·TJLP interest rate; and·IPCA interest rate.Braskemthe Company presents the exposures to currencies as if they were independent, that is, without reflecting in the exposure to a foreign exchange rate the risks of the variation in other foreign exchange rates that could be directly influenced by it.F - 63Braskem S.A.(b) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(b)Value at riskBraskemthe Company which is defined as the loss that could result in one month as from December 31, 2018,2019, with a probability of 5%, and under normal market conditions, was estimated by the Company at US$8,27915,885 for put options and call options (Note 19.3.120.3.1 (a.i)), US$38,5734,456 for the swap of Libor related to Braskem Idesa project, US$27,75632,646 for Dollar swap (Note 19.3.1(a.ii)20.3.1(a.ii)) and US$8,5038,226 for NCE swap.(c) Selection of scenarios(c.1) (c.1) 28, 2018.31, 2019. According to the Market Readout, at the end of 2019,2020, the U.S. dollar will depreciate by 1.93% against the year-end PTAX exchange rate on December 31, 2018,remain at approximately R$4.08, while the Selic rate will reach 7.13%should remain at 4.50% p.a. The Selic rate is used as benchmark for sensitivity analysis of the CDI rate.an increase of 0.63 percentage point fromremaining at the current ratelevel of 7.06%, i.e., considering5.09%. same pace of decrease in the Selic basic interest rate. The Market Readout survey does not publishinclude consensus forecasts for the Libor interest rate. Therefore, to determinerate, the probable scenario, Braskem considered a 5% increase.average projection of the U.S. Federal Reserve for the Federal Funds rate was used, published in December 2019, plus the historical difference between such rate and Libor. For adverse scenarios, Braskem consideredincreases of 25% and 50% increases onfrom current market levels.levels were adopted.F - 64F-72Braskem S.A.Notes to the financial statementsat December 31, 2018(c.2) (c.2) Possible and extreme adverse scenario F - 65F-73Braskem S.A.Notes to the financial statementsat December 31, 201821 20Taxes payable 22 (a) 21Income tax (“IR”) and social contribution (“CSL”)21.1Reconciliation of the effects of income tax and social contribution on profit and loss (i)Includes the impact from the difference between IR/CSL tax rate in Brazil (34%) used for the preparation of this note and the tax rates in countries where the subsidiaries abroad are located, as follows:F - 66F-74Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(i) 20182019 (i) (i)In fiscal year 2018, the rate was changed from 35.00% to 21.00%.(b) 21.2Deferred income tax and social contributionThe income tax (“IR”) and social contribution (“CSL”) recorded in the year are determined on the current and deferred tax basis. These taxes are calculated on the basis of the tax laws enacted at the balance sheet date in the countries where the Company operates and are recognized in the statement of profit or loss,operations, except to the extent they relate to items directly recorded in equity.(b.i)
31, 2017
P&L
equity
31, 2018
P&L
comprehensive
income
31, 2019
the assets from the acquisiton of Braskem Qpar F - 67(i) Braskem S.A.Notes to the financial statementsat December 31, 2018(b.ii) (a) Movement in deferred tax balance
the assets from the acquisiton of Quattor F - 68F-76Braskem S.A.Notes to the financial statementsat December 31, 2018(c) (b) Offset for the purpose of presentation in the balance sheet F - 69Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated (c)Realization of deferred income tax and social contribution
the assets from the acquisiton of Quattor (i) loss has limitlosses is limited to 30% of 30% to the amount of taxable incomeprofit for the year, butyear; however, the balance does not expire. InMeanwhile, in Mexico there is no limit foron the year,amount that can be used in the year; however, the tax loss expireslosses expire in 10 years. The realization of Tax Losses consider the taxable profit expected by the company over a 10-year horizon.(ii)(ii) reason why it is recordedwhich results in the recognition of deferred IR and CSL.(iii)(iii) (iv) will occuroccurs upon the merger of the investments and contingencies arising from write-offs due to the settlement or reversal of the processes involved.(v)(v) abroad.abroad and the worker’s food program.(vi)(vi) (vii)(vii) (viii) Accounting provisionsProvisions whose taxation will occur in subsequent periods.(ix)(ix) (x) assets.assets, as well as adjustment to present value of assets and liabilities overdue more than 89 days.3.1)3.2.1). If this projection indicates that the taxable income will not be sufficient to absorb the deferred taxes, the amount corresponding to portion of the assetdeferred tax that will not be recovered is written off.F - 70F-77Braskem S.A.Notes to the financial statementsat December 31, 201823 22Sundry provisions (a)Client bonus(a) somecertain sales volumes be achieved within the year, six-month period or three-month period, depending on the agreement. The bonus is recognized monthly in a provision, assuming that the minimum contractual amount will be achieved. As it is recognized based on contracts, the provision is not subject to significant uncertainties with respect to their amount or settlement.(b) Recovery of environmental damages future expenses for the recovery of environmental damages in some of its industrial plants. The amount provisioned corresponds to the best estimate of the expenses required to repair the damages.(c) Changes in provisions 23F-78Contingencies24 3.5.3.2.4. Proceedings assessed as having a possible chance of loss are not provisioned for, except in relevantfor.involving business combinations. the Company discloses the contingent asset when the receipt of economic benefits is probable, see note 10.c. However, when the realization of the benefit is virtually certain, the related asset no longer constitutes a contingent asset, and as such amount is recognized.24.1 F - 71Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated 23.1(a) Claims with probable chance of loss and claims arising from business combinations with possible loss (a) Labor claims20182019 is related to 477604 labor claims, including occupational health and security cases (599(477 in 2017)2018). The Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimate that the term for the termination of these types of claims in Brazil exceeds five years. The estimates related to the outcome of proceedings and the possibility of future disbursement may change in view of new decisions in higher courts.(b) Tax claimsF-79(b) 2018,2019, the main claims are the following:(i) Non-cumulative PIS and COFINS in Offsetting Statements (“DCOMPs”), with credits in amounts that exceeded those declared in the respective Statement of Calculation of Social Contributions (“DACONs”).In October 2017, through the federal tax amnesty program (PERT), the itemsmainly related to non-acceptance of the credits were settled, due to the following reasons: (i) differences between the amounts reported in the DACONs and those in the electronic files of tax invoices; (ii) amounts not recorded in the interim balance sheets, acquisitions not taxed for contributions, recording of a credit on a portion of IPI, failure to submit tax documents; and (iii) nonpayment of amounts stated as due in tax documents. Said amounts were provisioned for.topics:F - 72Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated2018,2019, the balance of this provision was R$154,673.193,139 (R$154,673 in 2018).Company’sManagement of Braskem, based on its assessment and of its external legal advisors, after considering the precedents on the matters at the Administrative Council of Tax Appeals (“CARF”), assessed that the disputes related to such matters have a probable likelihood of loss and estimated the conclusion of administrative procedures in 2020.2022.(ii) (ii)ICMS – Decree 38,394/2000The main claims provisioned in 2018 is related to the tax deficiency notice received by the Company in 2017 from the Tax Authority of the State of Alagoas, for the administrative collection by an ICMS tax that allegedly was paid below the amount due, in the period from August 2012 to April 2016, in accordance with Article 9 of Decree 38.394/2000.On December 31, 2018, the balance of this provision was R$45,027.The Company’s external legal advisors, considering the behavior of the administrative bodies judging the case, assessed that the disputes related to the highlighted matters have a probable likelihood of loss and estimated the conclusion of administrative proceedings in 2021.There are no deposits or any other type of guarantee for these procedures, since they are still being discussed at the administrative level.(iii)PIS and COFINSInsufficient payment of COFINS for the period from March 1999 to December 2000, from February 2001 to March 2002, from May to July 2002 and September 2002 due to alleged calculation errors, and non-compliance with the widening the tax calculation base and increasing the contribution rate envisaged in Law 9,718/98;·Offset of the COFINS dues relating to September and October 1999 using the credit resulting from the addition of 1% to the COFINS rate;F-80·RejectionOn December 31, 2019, the balance of the offset of PIS and COFINS dues relating to the period from February to April 2002 using the PIS credits under Decree-Laws 2,445 and 2,449, calculated between June 1990 and October 1995, under the argument that the time period for using said credits had expired; and·Alleged non-taxation of revenue from foreign exchange variations, determined as a result of successive reductionsthis provision was R$63,291 (R$59,739 in the capital of the associated company.2018).Company’sManagement of Braskem, based on its assessment and of its external legal advisors, assessed that the disputes related to the highlighted matters have a possible likelihood of loss andgreater than 50%, estimated the conclusion of administrative proceedings in 2020.2023 and of court decisions in 2030.F - 73Braskem S.A.(iii) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(iv)ICMS - interstate purchasesUndue use of ICMS tax credits (i) in the amount of R$53,478, in the periods from February 2004 to August 2005, November 2005 to February 2006, and September 2006 to January 2008, due to the recording of credits indicated on the invoices for the sale of “acrylonitrile,” issued by Acrinor Acrilonitrila do Nordeste S/A; (ii) in the amount of R$1,581, in the period from December 2004 to August 2005, arising from the undue recording of credits on invoices for the sale of methyl acrylate, issued by Proquigel Química S/A; and (iii) in the amount of R$3,105, in the period from August 2004 to November 2005, arising from the undue recording of credits in invoices for the sale of methyl methacrylate, issued by Proquigel Química S/A, since the products were to be exported, and therefore were exempt from payment of ICMS tax;·The fine for the abovementioned tax offense corresponds to 100% of the principal value recorded, as per Article 527, item II, sub-item “j” jointly with paragraphs 1 and 10 of RICMS/SP;·Fine in the amount of 30% on R$480,389, which corresponds to the sum of the amounts indicated in tax documents whose outflow of goods was not identified by the tax authority, entered based on the provisions of Article 527, item IV, sub-item “b” jointly with paragraphs 1 and 10 of RICMS/SP; and·Fine due to lack of presentation of tax documents requested under a specific deficiency notice, as per Article 527, item IV, sub-item “j” jointly with paragraphs 8 and 10 of RICMS/SP.2016,2015, with the Company proposing lawsuits. Due to the favorable injunctions granted to the Company: (i) in one of the claims, the São Paulo Treasury Department rectified the amount of the debt to apply interest for late payment and inflation adjustment limited to the SELIC basic interest rate, which resulted in the debitdebt being reduced by 20% and (ii) in the other claim, the tax liability was suspended.Company’sManagement of Braskem, based on its assessment and of its external legal advisors, have assessed that the disputes related to the highlighted matters remain withhave a possible likelihood of loss greater than 50% and estimateestimated the conclusion of legal proceedings in 2025. A performance bond was offered asThese lawsuits are secured by a guarantee for these claims.insurance.(c) Corporate claimsF-81(c) 2018,2019, the main claim is related to an ordinary collection claim combined with a request for damages for losses, requesting the payment of dividends and a share bonus arising from theclass "A" preferred shares of the terminateddissolved companySalgema Indústrias Químicas S.A.claim wasclaims were granted, the amount effectively owed by Braskem began to be calculated. During this phase, the judge recognized that dividends and bonus related to fiscalthe years prior to 1987 had become time-barred and were no longer owed by Braskem.priorrelated to such period also were owed.owed by Braskem. Against the decision, Braskem filed a Special Appeal with the Superior Court of Justice (“STJ”), which was partially granted, so that the possibility that the statute of limitation will be recognized in a procedure of liquidation of the award will be submitted to the STJ. In April 2019, the case was distributed and held by the Judge-Rapporteur under advisement.F - 74(d) Braskem S.A.Notes to the financial statementsat December 31, 201824.2 On December 31, 2018, the balance of this provision is R$59,577 and there is no guarantee related to this claim.(a) (i) (d) Changes in claims with probable chance of loss 23.2Claims with possible chance of loss (a)Civil(i)Excess weightweight.weight, involving the amount of R$61.2 million. The action claims damagesseeks to indemnify the country for materialcollective pecuniary damages and collective pain and suffering,suffering. A decision was rendered in the amountprincipal case denying all claims made by the Federal Prosecution Office (MPF). Against such decision, the MPF filed a civil appeal, which was dismissed by majority of R$71 million, on December 31, 2018.the Fifth Panel of the Regional Federal Appellate Court – 1st Region. Therefore, under Article 942 of the Brazilian Code of Civil Procedure, the record was referred to the 5th Extended Panel, which also, by majority vote, dismissed the MPF’s appeal and upheld the decision. The actionMPF filed special appeal, which was denieddismissed. Against such decision, the MPF filed interlocutory appeal in special appeal, which was received by the lower court.STJ and registered as AREsp 1614987/DF. Since November 18, 2019, the case has been held by the Chief Justice of the STJ under advisement.(ii) (ii)Caustic soda transportation2018,2019, totaled R$99.265.8 million. The claimants seek indemnity for damages related to the alleged non-performance of the distribution agreement by the Company.(iii) F - 75Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(iii)Resale of solvents2018,2019, the damages claimed in the lawsuit amounted to R$185.6204.6 million.BasedThe Management of Braskem, based on the opinionits assessment and of its external legal counsel accompanying the case, the Managementadvisors, believes that the lawsuit has a possible risk of loss within an eight-year period.(iv)Hashimoto Public-Interest Civil Action(iv) 107.6126.5 million. The term for filing an answer has not yet begun, which will happen only after all defendants have been summoned.(v) (v)Redress proceedingCompensation actionAction for indemnity filed by the insurer of a client of the Company. The insurer seeks, in return, therecourse, reimbursement offor the amount paid to the customer due toclient under the insurance contractagreement entered into with the client, whose amount up toadjusted as of December 31, 20182019 is R$73.877.7 million. According to the insurer,Insurer, the losses incurredsustained by the customer, for which it wasclient, reimbursed would have beenby the insurer, allegedly were caused by the supplyproducts supplied by Braskem outside of off specification products by Braskem.specifications.Management's evaluation, based onManagement believes, supported by the opinion of the external legal counselcounsels responsible for conductinghandling the cases, is that the lawsuits maypossibly will be dismissed inwithin a period of up to 8eight years.There is noNo judicial deposit or any other type of guarantee has been made for the process.this case. (b) (b)Tax(i) PIS and COFINS: taxation of tax losses and reductions in debits in connection with the installment payment program under MP 470/09F - 76Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise statedIR/IRPJ/CSL was fully denied in a final and unappealedunappealable decision issued by CARF.2018,2019, the inflation-adjusted amountupdated value of taxes recorded and tax effects of disallowances of income tax losses and social contribution tax loss carryforwards through said tax deficiency notices isthe assessment amounted R$842883 million. Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimateestimates that the administrative proceeding should be concluded by 2020.these procedures,this procedure, since they areit is still being discussed at the administrative level.(ii) Income Tax (“IR”) and Social Contribution (“CSL”) – Charges with goodwill amortizationBrazilian Federal Revenue Service (“RFB”)RFB for deducting amortization charges, from 2007 to 2013, relating to goodwill originated from acquisitions of shareholding interests in 2002. In that year, several business groups divested their petrochemical assets, which were consolidated to enable the consequent foundation of Braskem. oneand November 2019, two of the proceedings was deemed validpartially invalid in a final and unappealedunappealable decision issued by CARF, which reduced liabilities by R$166403 million.2018,2019, the updated value of the taxes recorded in said tax deficiency notices amounted to R$1.21 billion.riskpossible loss in these claims is based on the following: (i) the equity interests were acquired with effective payment, business purpose and the participation of independent parties; and (ii) the real economic nature of the transactions that resulted in the recording of interest and exchange variation expenses.Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimateestimates that the administrative proceeding should be concluded by 2022.discussed.discussed at the administrative level.(iii) Non-cumulative PIS and COFINS taxesand (iv) extemporaneous credits from acquisitions ofvarious acquisitions; and (v) property, plant and equipment. These matters have already been contested at the administrative level and comprise the period from 2006 to 2011.2018,2019, the amount under discussion of these notices is R$1.2 billion.million.Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimateestimates that: (i) the administrative proceedings should be concluded by 2022;2024, while the lawsuits should be concluded by 2030; and (ii) in the event of an adverse ruling for the Company, which is not expected, these contingenciescould be settled for up to 50% of the amounts in dispute. These estimates are based on the probability of loss of the Company's defense thesis, based on previous administrative and court precedents.F - 77Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise statedareis no depositsdeposit or any other type of guarantee for these procedures, since theyproceedings that are still being discussed atpending in the administrative level.(iv)IRinstance, and CSL – Unlimited offsettingthe only lawsuit is secured by a guarantee insurance in the amount of R$30 million.(iv) 2007,2017, September 2008and August 2013.2018,2019, the restatedupdated value of the taxes recordedremainingtax deficiency notices amounted to R$348 million.(v) (v)ICMS2018,2019, the adjusted amounts of these claims total R$644740 million and the claims include the following matters:ICMS credit on the acquisition of assets that are considered by the Revenue Services as being of use and consumption. The Revenue Service understands that the asset has to be a physically integral part of the final product to give rise to a credit. Most of the inputs questioned do not physically compose the final product. However, the Judicial branch has a precedent that says that the input must be an integral part of the product or be consumed in the production process.·ICMS credit arising from the acquisition of assets to be used in property, plant and equipment, which is considered by the Revenue Services as not being related to the production activity, such as laboratory equipment, material for the construction of warehouses, security equipment, etc.·internal transfer of finished products for an amount lower than the production cost;·omission of the entry or shipment of goods based on physical count of inventories;·lack of evidence that the Company exported goods so that the shipment of the goods is presumably taxed for the domestic market;F - 78F-86Braskem S.A.Notes to the financial statementsat December 31, 2018·non-payment of ICMS on the sale of products subject to tax substitution and credit from acquisitions of products subject to tax substitution;·fines for the failure to register invoices;·nonpayment of ICMS tax on charges related to the use of the electricity transmission system in operations conducted in the Free Market (ACL) of the Electric Power Trading Chamber (CCEE); and·usage of ICMS tax base below the level envisaged in legislation for internal transfers to another unit in the State of Alagoas of DCE (dichloroethane), between January 2013 and May 2016, which is a product that is not subject to deferral in such transactions. The payment represents 30% of the total contingency.Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimateestimates that: (i) these judicial proceedings are expected to be terminated in 2023, and (ii) in the event of an unfavorable decision to the Company, which is not expected, these contingencies could be settled for up to 50% of the amounts in dispute. This estimate is based on the probability of loss of the Company’s defense theory taking into consideration the case law at the administrative and judicial levels.assets for pledgeguarantee insurance in the amount of R$62148 million, supporting exclusively the amounts involved in the lawsuits.(vi) (vi)IOF2018, is2019, was R$175167 million. The Company offered a guarantee of R$59 million.2022.2024.The Company offered a guarantee of R$59 million, which supports the amount involved exclusively in the claims.(vii) PIS and COFINS sundryPIS-Decrees;PIS-Decrees – Federal Laws 2,445 and 2,449; and (v) the COFINS tax arising from the undue payment or payment in excess.The current valueOn December 31, 2019, the adjusted amounts involved of these notices on December 31, 2018, isassessments total R$144148 million.Company’sManagement of Braskem, based on its assessment and of its external legal advisors, estimateestimates that: (i) these judicial proceedings are expected to be terminated in 2022;2024; and (ii) in the event of an unfavorable decision to the Company, which is not expected, these contingencies could be settled for up to 50% of the amounts in dispute. This estimate is based on theprobability of loss of the Company’s defense theory taking into consideration the case law at the administrative and judicial levels.F - 79Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise statedin the amount of R$144 million, that cover the entire amount ofexclusively involved in the claims.claim.(viii) (viii)IRRF, IR and CSL – Commission expenses2018,2019, the restated amount of taxes and tax effects from disallowances of income tax losses and social contribution tax loss carryforwards through said tax deficiency notice is R$122133 million.(ix) (ix)IR and CSL – Exchange variation on naphtha imports2018,2019, the restated value of this deficiency notice amounted to R$104103 million.F - 80Braskem S.A.(x) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(x)Isolated fine – failure to ratify DCOMPS2018,2019, the Company was notifiedreceived notifications of isolatedindividual fines correspondingimposed due to 50%the use of non-cumulative COFINS tax credits:credits from: i) non-cumulative PIS/COFINS;COFINS taxes; ii) Negative Balancenegative balances of IR/CSL;IRPJ/CSLL taxes; iii) REINTEGRA credits; and iv) other credits, which were offset with federal taxes andfor offsets not approved by the RFB.Brazilian Federal Revenue.2018,2019, the restated value of these deficiency notices amounted to R$215289 million.2022.2024.(xi)IR/CSL – Negative Balance – Offset(xi) Offset Statementsoffsets seeking to settle federal taxes with credits arising from negative balance of IRIRPJ and CSL.CSLL.2018,2019, the restated value of the taxes whose offset was not approved amounted to R$182196 million.2022.2024.(xii) (xii) IPI and II – Customs differenceF - 81Braskem S.A.Notes toAfter the financial statementsat December 31, 2018All amountsadministrative proceeding was concluded with an unfavorable decision for the Company, the case was filed in thousands, except as otherwise statedthe courts.2018,2019, the restated value of the taxestax credit under discussion recorded amounted to R$6882 million.administrative proceedinglawsuit should be concluded by 2022.2030.There are no judicial depositsThe Company offered to the Court a guarantee insurance that secures the entire amount in dispute.(xiii) (xiv) any other type of guarantee for this procedure,these proceedings have been made, since it isthey are still being discussed atpending in the administrative level.instance.(c) (c)Corporatejudgementjudgment related to ana lawsuit filed in 1988, which sentenced Polialden Petroquímica S.A., merged into Braskem, to pay its non-controlling preferred shareholders the distribution of the remaining profits of the company.purposeliquidation aims to assess the amount of the liquidation is to determine the value of the award, calculated in accordance with the sentence, which will occur through an arbitration procedure, as determined by the court, and was appealed against by the judgment winner, which is pending trial. The procedure is awaiting the beginning of the expert analysis. court.20182019 is R$1615,345 million. The amount in dispute with a possible likelihood of loss is R$186 million.(d) (d) Other lawsuits(i) (i)Social Security Contributions – Withholding of 11%5253 million, on December 31, 2018.2019.The Company's legal advisors,This loss is deemed as possible in the administrative court, in view of prior decisions by the Administrative Council of Tax Appeals (CARF) and the evidence provided by the Company, assess as possible the chances of loss at the administrative level. The conclusion is supported, among other things, by the following: (i) the nullity and time-barring of the debits; (ii) the mismatch between the service provided and the tax substitution system under Article 31 of Federal Law 8,212/1991; (iii) the lack of the requirements to characterize assignment of labor, and other matters that would have to be evidenced through a tax diligence.Company.2019.2020.(ii) F - 82F-90Braskem S.A.Notes to the financial statementsat December 31, 201825 23.3Leniency Agreement(a) Global Settlement with authorities the allegations of undue payments in connection with Operation Car Wash in Brazil, the Company has engagedhired external experts in internal investigationsinvestigation to conduct an independent investigation into such allegations (“Investigation”) and to report their findings. The Company has cooperated and continues to cooperate with government authorities infrom various jurisdictions, including the U.S. Department of Justice of the United States (DoJ), the U.S. Securities and Exchange Commission of the United States (SEC), the Federal Prosecution Office of Brazil (MPF) and the Swiss Office of the Attorney General in Switzerland (OAG).a Leniency Agreement (“Agreement”)Agreements with the Federal Prosecution Office (“MPF Agreement”) and with theU.S. and Swiss authorities in the United States and Switzerland (“Global Settlement”), in the approximate valueamount of US$957 million (approximately R$3.1 billion, at the time), which were approvedofficially ratified as follows:1. 1.In Brazil, the MPF Agreement was ratified by the 5th Coordination and Review Chamber of the MPF on December 15, 2016, with ratification by the 13th Federal Court of Curitiba on June 6, 2017.2.The agreement with the U.S. Department of Justice (“DoJ”) was confirmed by a U.S. court ruling on January 26, 2017.3.The agreement with the Securities and Exchange Commission (“SEC”) was confirmed on February 28, 2017.4.The agreement with Swiss authorities did not require ratification to produce effect. On December 21, 2016, the OAG concluded its investigations and issued an order to close the case based on the Company's collaboration.2. 3. 4. The MPF agreed to allocate mostOf the aggregate amount of the amounts received under the MPF Agreement to reparation of the victims of the wrongdoings, including other authorities and government agencies, and to coordinate with these third parties with which Braskem can begin negotiations related to the facts described in the Global Settlement, with the goal of avoiding duplicate payment of reparations.Company already has paid approximately R$2.2 billion, as follows:1. 2. 3. 4. 5. 6. 7. 8. 9. respect,sense, as per the noticeinformed to the market datedon July 10, 2018 and as per the material fact notice datedon May 27, 2019, the Company engaged in a process of cooperation and negotiation process with the Ministry of Transparency and the Office of theOf The Federal Controller General (“CGU”) and the Office of the Attorney General Counsel for the Federal Government (“AGU”), which culminated in the signingexecution of athe leniency agreement with saidsuch authorities on May 31, 2019 (“CGU/AGU Agreement” and, jointly with the Global Settlement, “Agreements”). (net effect of present value recorded at December 31, 2018 is R$ 399.5 million) due to the calculations and parameters adopted by CGU/AGU. In response to a request by the Company and the MPF, the Federal Courts ratified the allocation of funds under the MPF Agreement to the payment of the CGU/AGU Agreement, with theAgreement. The outstanding installments of the MPF Agreement will benefit from CGU/AGU Agreement and will now be restated by the variation ofin the SELIC basic interest rate as of the execution of the CGU/AGU Agreement.jointly withdiscounting the Global Settlement are referred to as the “Agreements.”Until December 31, 2018 of the aggregate amount of the Global Settlement, the Company already has paid approximately R$2.0 billion, as follows:1.US$94,894 (R$296,591) to the DoJ, paid on February 8, 2017;2.US$65,000 (R$206,460) to the SEC, paid on April 27, 2017;3.CHF30,240 (R$104,307) to the Swiss Office of the Attorney General, paid on June 27, 2017;4.R$736,445 to the MPF, paid on July 6, 2017;5.R$267,985 to the MPF, related to the first of six annual installments due by 2023,installment paid on January 30, 2018;6.CHF16,065 (R$62,021) to the Swiss Office of the Attorney General, related to the first of four annual installments due by 2021, paid on June 28, 2018;F - 83Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated7.R$278,034 to the MPF, related to the second of six annual installments due by 2023, paid on January 30, 2019; and8.CHF 16,065 (R$58,034) to the Swiss Office of the Attorney General, related to the second of four annual installments due by 2021, paid on June 27, 2019.The outstanding amount on the date of issuance of these financial statements, of2020, is approximately R$1.61.5 billion and will be paid as follows:1. relatedcorresponding to three remainingfour outstanding annual installments of CHF16,065 (R$ 66,714) due on June 30 of each year as from 2020;2. 1 billion as a result of900 million under the MPF Agreement and the CGU/AGU Agreement, in fourthree annual, equal annual and successive installments adjusted by the variation in the SELIC duerate , payable on January 30 of each year as from 2020.2021. To guarantee payment of the installments of these installments coming due, Braskem gave as collateral assets from its property, plant and equipment corresponding to one annual installment;and3. as a result ofunder the CGU/AGU Agreements,Agreement, adjusted by the variation in the SELIC rate as from the execution date of such agreement, with the first installment of R$284,665 duepayable on January 30, 2024 and the second, installment of R$125,211, duepayable on January 30, 2025.Braskem has been complyingThe Company also began negotiations with its obligations provided forthe Bahia State Prosecution Office, which also adhered to the MPF Agreement. The Company also began negotiations with the Rio Grande do Sul State Prosecution Office, which also adhered to the MPF Agreement. No additional payment is expected to be made by the Company to both offices. The Company concluded the process of adherence of authorities to the MPF Agreement. It will continue to collaborate with the competent authorities, while observing the confidentiality requirement established in the Global Settlement and collaborating with authorities.said agreements.(b) ReimbursementThe Agreements do not exempt the company from other third parties, with legitimate interest, seeking indemnity for damages and other considerationsA significant portion of the total of R$2.2 billion of the Agreement entered into with MPF will be allocated to paying redress to third parties for damages incurred due tocaused by the facts that arecovered by the subject-matter of the Agreement. Under the Agreement, the MPF undertook to coordinate actions withAgreements, including other authorities or government agencies, as well as state-owned companies and state-controlled companies with which Braskem comes to negotiate for entering into agreements based on the subject-matter of the collaboration.Furthermore, other authorities with jurisdiction over the Company maythat seek to impose additional monetarynew pecuniary sanctions or fines or commenceinitiate new investigations againstinto the Braskem. Finally, as a result of the Global Settlement,Company. Therefore, even if the Company maydoes not anticipate the need for any additional payment, it cannot guarantee that the total amount agreed will be subject to increased operating costs in connection with its obligations to improve its governance and anti-corruption practices. In this context, as communicated to the market on July 10, 2018, the Company is currently negotiating with the Ministrysufficient for full reparation of Transparency, Supervision and Controller General (CGU) and with the Office of the General Counsel of the Federal Government (AGU) to enter into a similar agreement with regard to the object of the Global Settlement.all victims.Under the Global Settlement, theThe Company will continue to cooperate with the competent public authorities, and to implement improvements towhile improving its compliance practices and efforts to combat corruption. The Company is subject to external monitorship for a period of three years, two of which already have transpired, during which period the monitors will verify compliance with the Global Settlement, including the efficacy of controls, policies and internal procedures to reduce the risk of any breach of anticorruption law. The monitorship period could end earlier or be extended for another year, at the discretion of the authorities, depending on the progress made by the Company in its compliance with the Global Settlement.anti-corruption practices.It is not possible to predict the impacts on Braskem of others investigations or any decision or action taken by authorities involving its largest shareholders, namely Odebrecht S.A. and Petróleo Brasileiro S.A. – Petrobras, or any of their subsidiaries.In connection with the execution of the CGU/AGU Agreement, Braskem originally took a tax deduction in its 2019 quarterly financial statements for the full amount of the payments to be paid under the CGU/AGU Agreement, as under Brazilian tax law the execution of such agreement provides a right to take a tax deduction on the compensation amount that is due to be paid in Brazil under this type of agreement. The plea agreement entered into with the DoJ as part of the Global Settlement prohibits Braskem from seeking tax deduction in connection with the payment of any part of the aggregate amount of the total criminal penalty contained in the plea agreement, which includes a credit for a portion of the payments to be made in Brazil. After further consideration, in light of the language in the plea agreement, Braskem voluntarily decided to reverse such tax deduction so that no part of the prior tax deduction would be inconsistent with the plea agreement entered into with DOJ. Under the Plea Agreement, it is the DoJ´s sole discretion to determine whether the Company has breached the Plea Agreement and to determine the consequences of such breach. Currently, based on the advice of its counsel, the Company believes that it is unlikely that it will incur in losses as a result of this matter.F - 84F-92Braskem S.A.Notes to the financial statementsat December 31, 2018(c) Class actionOn July 1, 2015, a putative class action lawsuit was filed inIn March 2020, based on the United States District Court forcertification report issued by the Southern Districtindependent monitors, the MPF confirmed the end of New York against the Company and certain of its then-current and former officers and directors. Inmonitorship, the current lawsuit, entitledIn Re Braskem Securities Litigation, the Lead Plaintiff, Boilermaker-Blacksmith National Pension Trust, alleges that the Defendants made misrepresentations or omissions that inflated the priceeffectiveness of the Company’s stock in violationcompliance program and the fulfillment of U.S. securities laws.the obligations under the MPF Agreement.AfterSubsequently, on May 13, 2020, the decisionDoJ and the SEC confirmed the conclusion of the monitorship established under the agreements signed on December 21, 2016 (“Agreements”) with said authorities. As per the motion to dismiss filedMaterial Fact notice disclosed by the Company partially grantingat the time, “the decision of the DoJ and SEC was based on a final report by the independent monitors that attested to the implementation, by the Company, of all the recommendations for structuring and executing its arguments,compliance program and that found said program in compliance with the standards established in the Agreements.26 Lead Plaintiff signedcompetent Authorities. Therefore, the proposed settlementprovisions recognized in these consolidated financial statements do not include the result of this potential agreement, (“Proposed Settlement”), which was ratified bysince it is not possible to reliably estimate the applicable Court, which issued a final decision ending all claims from all membersamount or to ensure that the ongoing negotiations will be successful. The estimate of the classeconomic impact of Investors (as defined below).the potential agreement will depend on (i) any agreement on the environmental recovery plan and a detailed assessment of the estimates of the amounts to be disbursed, (ii) an analysis of the detailed scope of this plan to determine its correspondence to the initiatives and amounts for which provisions already have been accrued; and (iii) the moment of the execution of the plan and expenditures, which will impact the present value of obligations. All accounting impacts, if any, will be recognized in the period in which such agreement is executed.a. · · b. c. Proposed Settlement, Braskem paid US$10 million (approximately R$31,680) to resolve all claims arising outAgreement, after the transfer of or relating to the subject matterownership of the class action ofproperties, the Company undertakes to hire a settlement class consisting of all persons who purchased or otherwise acquired a legal or beneficial ownership interestthird party specialized in Braskem American Depositary Receipts (“ADRs”) between July 15, 2010private surveillance for the care and March 11, 2015 (“Investors”), inclusive. The amountsafety of the agreement was depositedarea and to adopt necessary measures to prevent proliferation of vectors of diseases to people and animals. The definition of the necessary measures for the recovery of areas potentially impacted by Braskem insalt mining activities depends on diagnosis of the account designated byarea and further discussion between the judge (“Escrow Account”) on October 2, 2017.Company and the competent authorities (including ANM).On February 21, 2018, a hearing was held in which a decision was handed down forAll obligations assumed under the final approvalAgreement do not constitute the recognition of the agreement regarding the entire class of investors and the dismissal of the case. Said decision became final and unappealable. The individual distribution of the amount of the agreement is the responsibility of the manager of the Escrow Account, as determined by the Court and in accordance with the ratified allocation plan.The Proposed Settlement was signed solely to avoid the risk, uncertainty, and expense of further litigation and does represent the admission of any wrongdoingculpability or liability by Braskem.the Company for the relocation of the people from the risk areas. Braskem will continue to collaborate with the authorities, with the support of independent experts, to identify the causes of the geological events and the implementation of actions to ensure the safety of the communities in the affected districts.may be named as a defendant in other legal actions. The Company may be required, in accordanceis negotiating with any applicable legal and regulatory limits, to indemnify directors, officers and employees thatits insurers the coverage of its insurance policies. These negotiations are defendants in this securities class action and any other related actions that may arise in the future.early stages. Therefore, the payment of compensation will depend on an assessment of the insurance coverage under these policies. Given the uncertainties regarding the matter, no payment of compensation was recognized in the consolidated financial statements of the Company.26.1 24Benefits offered(i) team membersthe residents of the districts of Pinheiro, Mutange and Bebedouro, which was estimated by Plaintiffs at R$7.1 billion.24.1On January 3, 2020, the court ratified the Agreement to Support the Relocation of People in Risk Areas (“Agreement”), entered into by Braskem and the State Prosecution Office (“MPE”), the State Public Defender’s Office (“DPE”), the Federal Prosecution Office (“MPF”) and the Federal Public Defender’s Office (“DPU”). The Agreement was ratified by the Federal Judge of the 3rd Court of the State of Alagoas and produced the following effects:Short-term benefits (i) (ii) (iii) (iv) F - 85(ii) (iii) (iv) 26.2 26.3 NotesSince the shutdown of its salt mining activities, the Company has been working to adapt its chlor-alkali plant to operate with solid salt to be acquired in the financial statementsdomestic market and/or imported from other regions. The Company expects to resume its industrial activities during the first half of 2020.at December 31, 201827 27.1. (a)28, 2018,13, 2019, the Board of Directors approved a new program, the “ILP Plan 2018,2019,” in accordance with the terms and conditions of the ILP Plan, which includes the list of eligible persons, the deadline for acquiring own shares by participants and the number of restricted shares to be delivered to participants as matching contribution for each own share acquired. The maximum number of shares the Company expects to deliver to the participants of the ILP Program 2018,2019, after the vesting period and subject to compliance with all necessary requirements, is 727,688approximately 573,000 shares. The program’s grant date is April 6, 2018.March 19, 2019. The shares to be delivered by the Company to participants of the ILP Program 2018 are those currently held in treasury or acquired through repurchase programs, and in the event said shares cannot be delivered, the Company will pay participants in cash the amount corresponding to the shares, based on the quote on the stock exchange on the second business day immediately prior to the respective payment date.market priceorigin of the equity instruments quoted on the grant date.agreement. For eligible persons of the Company,Braskem S.A., the fair value is based on the quoted price of the class “A” preferred shares (R$46.62)53.75). For eligible persons of subsidiaries abroad, the fair value is based on the quoted price of the American Depository Receipts - ADR (US$27.56).14.80) at December 31, 2019.2018,2019, is R$6,406.13,573 (R$6,406 at December 31, 2018).24.2Post-employment benefitsF-9824.2.1Retirement plans - defined benefit plans and health plants27.2. 27.2.1. based on the expertsCompany engaged a specialized company to prepare an actuarial report the Company measuresfor measuring its future obligations. The assumptions adopted arecomply in full compliance with IAS 19.(a) (a)Braskem AmericaAtOn December 31, 2018,2019, the plan hashad 38 active participants and 171 assisted participants (38 active participants and 172 assisted participants (39 active participants and 166 assisted participants in 2017)2018). The contributions by Braskem America, indue to the year amountcurrent financing level of the pension plan, was not required to R$20,544 (R$4,069 in 2017). The participants madecontribute during 2019. Therefore, there were no contributions in 2019 (R$20,544 in 2018). During 2019 and 2018, and 2017.there were no contributions from participants.(b)Braskem Alemanha and Braskem Holanda(b) subsidiariessubsidiary Braskem Alemanha and Braskem Holanda areis the sponsor of the defined benefit plans and defined contribution plans of its employees. At December 31, 2018,2019, the plan has 158 participants (139(152 in 2017)2018) and no contributions were made by Braskem Alemanha in 2019 and Braskem Holanda in 2018 and 2017.2018. The participants made no contributions in 20182019 and 2017.2018.(c) (d) (c)The subsidiary Braskem Idesa ServiciosBraskem Idesa employees are granted a government retirementis the sponsor of defined benefit plan when they retire or reach retirement age.for its team members. On December 31, 2018, all 812 employees2019, the plan was composed of 823 active participants (821 in 2018).The contributions Braskem Idesa made in the year amounted to R$2,056 (R$2,343 in 2018).During 2019 and 2018, there were active participants in this government retirement plan. On May 2018, Braskem Idesa implemented a private pension plan (defined benefit obligation); by the end of that year we had the participation of 339 employees out of 812.no contributions from participants.F - 86Braskem S.A.(e) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(d)Health plan(i)Amounts in balance sheet Consolidated 2018 2017 Defined benefit Novamont Braskem America 68,904 62,963 Braskem Alemanha and Netherlands 114,705 93,994 183,609 156,957 Health care Bradesco saúde 90,679 83,233 Total obligations 274,288 240,190 Fair value of plan assets Novamont Braskem America (66,073) (44,823) Braskem Alemanha (1,842) (1,592) (67,915) (46,415) Consolidated net balance (non-current liabilities) 206,373 193,775 (ii)Change in obligations F - 87F-99(i) (ii) (iii) Notes to the financial statementsF-100at December 31, 2018(iv) (iii)Change in fair value plan assets (iv)Amounts recognized in profit and loss (v)Actuarial assumptions (v) (vi)Hierarchy of fair value assets2018,2019, the balance of the fair value of assets is represented by the assets of the Novamont defined benefit plan, which has a level-1 fair value hierarchy.(vi) 27.2.2. F - 88Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(vii)Sensitivity analysis 24.2.2Retirement plan - defined contributionThe Company and the subsidiaries in Brazil sponsor a defined contribution plan for its team members managed by ODEPREV,Vexty, a private pension plan entity. ODEPREVVexty offers its participants, which are employees of the sponsoring companies, an optional defined contribution plan in which monthly and additional participant contributions and monthly and annual sponsor contributions are made to individual pension savings accounts. For this plan, the sponsors pay contributions to private pension plan on contractual or voluntary bases. As soon as the contributions are paid, the sponsors do not have any further obligations related to additional payments.2018,2019, the number of active participants in ODEPREVVexty totals 5,725 (5,2805,550 (5,725 in 2017)2018) and the contributions made by the sponsors in the year amount to R$49,866 (R$50,610 (R$38,332 in 2017)2018) and the contributions made by the participants amounted to R$72,970 (R$69,058 (R$60,038 in 2017)2018).28 25Equity(a)Capital29 (a) 2018,2019, the Company's subscribed and paid up capital stock amounted to R$8,043,222 and comprised 797,218,554 shares with no par value, distributed as follows: (i) (i)American Depositary Receipts traded on(b) New York Stock Exchange (USA);(c) (i) F - 89Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(b)Legal reserve(c)F-102Share rights(ii) (d) OnlyAs common shares, only class “A” preferred shares will have the same claim on the remaining profit as common sharesthat exceed the minimum mandatory dividend of 6% and will be entitled to dividends only after the priority dividend is paid to preferred shareholders. Only class “A” preferred shares also have the same claim as common shares on the distribution of shares resulting from capitalization of other reserves. Only classClass “A” preferred shares can be converted into common shares upon resolution of majority voting shareholders present at a General Meeting. Class “B” preferred shares can be converted into class “A” preferred shares at any time, at the ratio of two class “B” preferred shares for one class “A” preferred share, upon a simple written request to the Company, provided that the non-transferability period provided for in specific legislation that allowed for the issue and payment of such shares with tax incentive funds has elapsed.In 2018, 78,100 class “B" preferred shares were converted into 39,050 class “A" preferred shares.event of liquidation ofperiod, 8,159 treasury shares were delivered as payment for the Company, class “A” and “B” preferred shares will have priority inLTI Program for employees who left the reimbursement of capital.Company.Shareholders are entitled to receive a mandatory minimum dividend of 25% on profit for the year, adjusted under Federal Law 6,404/76.(d)(e) Profit allocation and payment of dividendsUnderOn October 3, 2019, the Company’s bylaws, profit for the year, adjusted according to Federal Law 6,404/76, is appropriated as follows:5% to a legal reserve;(ii)25% to pay for mandatory, non-cumulative dividends, provided that the legal and statutory advantages of the Class “A” and “B” preferred shares are observed. When the amount of the priority dividend paid to class “A” and “B” preferred shares is equal to or higher than 25% of profit for the year calculated under Article 202 of Federal Law 6,404/76, it is the full payment of the mandatory dividend.Any surplus remaining after the payment of the priority dividend will be used to:minimum mandatory dividends regarding the net profit assessed for the year 2018, in the amount of R$667,419, paid on December 30, 2019; (ii) the capital budget for 2019; and (iii) the retention of R$2,002,255, under Article 196 of Brazilian Corporation Law.·pay dividends to common shareholders up to the limit of the priority dividends of preferred shares; and·if there still is any surplus, distribute additional dividends to common shareholders and class “A” preferred shareholders so that the same amount of dividends is paid for each common share or class “A” preferred share.F - 90F-103Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(d.1) Profit allocation and dividends proposed 2018Braskem S.A.Net income foryear of Company's shareholdersconsolidated financial statements2,866,675at December 31, 2019Amounts recorded directly to retained earningsAll amounts in thousands, except as otherwise statedLegal reserves distribution (143,334)Tax incentive reserve distribution(81,863)Realization of additional property, plant and equipment 27,679Prescribed dividends / other 5172,669,674Allocations:Minimum dividends - 25% adjusted net income (667,419)Additional dividends proposed (2,002,255) (2,669,674)(f) Per-share dividend of R$3.35565826658 per common and class “A” preferred share and R$0.60628536320 per class “B” preferred share. (d.2) Additional dividends related to fiscal year 2017The Annual Shareholders’ Meeting held on April 30, 2018 approved the declaration of additional dividends on profit related to fiscal year 2017 in the amount of R$ 1,500,000, the payment of which commenced on May 10, 2018, of which R$851,729 was paid to holders of common shares and R$648,271 to holders of class “A” preferred shares.F - 91F-104Braskem S.A.Notes to the financial statementsat December 31, 2018(e)Other comprehensive income F - 92F-105Braskem S.A.Notes to the financial statementsat December 31, 2018 F - 93Braskem S.A.30 Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated26Earnings per share25(d)29(e), particularly in relation to the limited rights enjoyed by class “B” preferred shares.In view of these limited rights, this class of share does not participate in losses. In this case, the diluted result takes into account the conversion of two class "B" preferred shares into one class “A” preferred share, as provided for in the bylaws of the Company.“A”A preferred shares participate in dividends with common shares after the mandatory dividends has been attributed in accordance with the formula provided for in the Company’s bylaws, as described in Note 25(c)29(d) and there is no highest limit for their participation. F - 94F-106 Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated 27Net revenuesWeighing of shares 31 F - 95F-108Braskem S.A.Notes to the financial statementsat December 31, 2018(i) (i)for contracts under which the Company is responsible for the freight and insurance, the legal right and the risks and benefits are transferred to the client as soon as the risk of the goods is responsible for the freight and insurance, the legal right and the risks and benefits are transferred to the client as soon as the risk of the goods are delivered at the destination established in the contract;(ii)for agreements under which the freight and insurance are a responsibility of the client, risks and benefits are transferred as soon as the products are delivered to the client’s carrier; and(iii)for contracts under which product delivery involves the use of pipelines, especially basic petrochemicals, the risks and benefits are transferred immediately after the Company’s official markers, which is the point of delivery of the products and transfer of their ownership.(ii) (iii) F - 96F-109(a) Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise stated(a)Net revenue by country (b)Net revenue by product F - 97F-110Braskem S.A.Notes to the financial statementsat December 31, 2018(b) (c)Main clients(c) 2018,2019, the most significant revenue from a single client amounts to approximately 2.4% of total net revenues of the Company and refers to the Chemical segment.segment2832 Tax incentives(a) Income Tax2018,2019, the operations in Brazil recorded tax loss, therefore it is not possible to make any deductions as a tax incentive.(b) PRODESIN - ICMSfiscal year 2018,2019, the amount was R$67,796 (R$81,863 (R$95,704 in 2017).Since 2018, through Complementary Law 160/2017, the amount recorded is now allocated to reserve the tax incentives in stockholders' equity,in accordance with Article 195-A of Federal Law 6,404/762018).29Other income (expenses), net (i)The contractual penalty for failing to supply feedstock to the subsidiary Braskem Idesa is R$338,125.F - 98F-111Braskem S.A.Notes to the financial statementsat December 31, 201833 30Financial results(i) Interest income Other 31Expenses by nature and function F - 99F-11234 35 Notes to the financial statementsF-113at December 31, 201836 32Segment informationChemicals: comprises the activities related to the production ofethylene, propylene butadiene, toluene, xylene, cumene and benzene, as well as gasoline, diesel and LPG (Liquefied Petroleum Gas), and other petroleum derivatives and the supply of electric energy, steam, compressed air and other inputs to second-generation producers located in the Camaçari, Triunfo, São Paulo and Rio de Janeiro petrochemical complexes.·Polyolefins: comprises the activities related to the production of PE and PP in Brazil.·Vinyls: comprises the activities related to the production of PVC, caustic soda and chloride in Brazil.·United States and Europe:operations related to PP production in the United States and Europe, through the subsidiaries Braskem America and Braskem Alemanha, respectively.·Mexico:comprises the activities relation to the production of PE in Mexico, through the subsidiary Braskem Idesa.(a)Presentation, measurement and reconciliation of segment results(a) F - 100Braskem S.A.Notes to the financial statementsat December 31, 2018(b) Results by segment
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eliminations and reclassifications (i) (ii) (i) Includes the amount of R$501.357 (R$265,438 in “Net revenue" and R$235,919 in “Other operating income (expenses), net”) related to PIS and COFINS tax credits – exclusion of ICMS from the calculation basis (note 10(c)).(ii) Includes gain from sale of “Chemicals distribution” segment in the amount of R$276,816.(iii) Inclusion of the provision for the Leniency Agreement in the amount of R$2,860,402.F - 101F-115Braskem S.A.Notes to the financial statementsat December 31, 2018(c) (c)Property, plant and equipment and intangible assets by segment 37 33Insurance coverage, and Environmental Civil Liability, domestic and international charter operations, charter's liability, etc.April 2020.October 2021. reviewaudit by our independent accountants.auditors.F - 102Braskem S.A.Notes to the financial statementsat December 31, 2018All amounts in thousands, except as otherwise statedtheboth Operational Risks policies.34Information related to guaranteed securities issued by subsidiariesBraskem S.A. has fully and unconditionally guaranteed the debt securities issued by Braskem Finance, Braskem America FinanceEnvironmental and Braskem Holanda Finance 100-percent-owned subsidiaries of Braskem. There are no significant restrictions on the ability of Braskem to obtain funds from these subsidiaries.General Civil Liability policies.38 35Subsequent events(a) (b) (c) (i) (ii) (iii) (iv) (a)On January 30, 2019, Braskem receivedMoreover, in line with its primary value, Safety, the first installment of R$266 million relatedCompany started operating its industrial assets with minimal teams. Capacity utilization rates in Brazil and the United States were temporarily reduced to adjust for the onlending transactionweaker demand and the destocking trends in the petrochemical and plastics production chains. The capacityutilization rates will accompany market demand and any new export opportunities that arise in other regions, especially with the BNDESrestart of economies in the aggregate amount of R$476 million at an interest rate of 11.57% p.a. and with maturity on January 15, 2031, which was taken out on December 26, 2018.Asia. The Company will receive the remaining amounts by the end of fiscal year 2019.(b)In2019 the courts issued a final and unappealable decisions on the lawsuit brought by Braskem S.A. and of merged companies, which determines the exclusion of ICMS tax from the calculation base of PIS/COFINS taxes and earliest period of the tax credit of these lawsuits is retroactive to the year 1991. Themain effects of these decisions were assessed by the Company which recognized in the first half of 2019 the amount of R$2,038,938 related to PIS and COFINS taxes of which R$1,850,965 was recorded under “Other income (expenses)” and R$187,973 under “Financial income”.were:(c)On March 13, 2019, the Board of Directors approved the Long-Term Share Incentive Plan, in accordance with the terms and conditions of the ILP Plan approved by the Extraordinary Shareholders Meeting held at March 21, 2018, which includes the list of eligible persons, the deadline for acquiring own shares by participants and the number of restricted shares to be delivered to participants as matching contribution for each own share acquired.The maximum number of shares the Company expects to deliver to the participants of the ILP Program 2019, after the vesting period and subject to compliance with all necessary requirements, is 573,345 shares. The shares to be delivered by the Company to participants of the ILP Program 2019 are those currently held in treasury or acquired through repurchase programs, and in the event said shares cannot be delivered, the Company will pay participants in cash the amount corresponding to the shares, based on the quote on the stock exchange on the second business day immediately prior to the respective payment date.This plan will be accounted for in accordance with CPC 10 – Share-Based Payment and its corresponding standard IFRS 2, which requires the Company to calculate the value of equity instruments granted based on the fair value thereof on the grant date. The corresponding expense will be recognized by the accrual method over the vesting period for exercising the instruments.(d)InApril 2019, the public-interest civil action was filed by the Alagoas State Prosecution Office and the Alagoas State Public Defender’s Office seeking the freezing of Braskem's assets to ensure the payment of any environmental and collective damages the Company may be ordered to pay due to its past mining activities in the city of Maceió.F - 103F-117· · statementsat December 31, 2018All amounts in thousands, except as otherwise statedThe plaintiffs requested a provisional remedy to freeze Braskem’s assets in the amountsolidity and resilience of R$6.7 billion. The court’s A preliminary decision ordered the freezing of R$100 million in the Braskem’s bank accounts,its business, which already has been carried out.include:After both parties filed Interlocutory Appeals, the Alagoas State Court of Appeals granted the appeal filed by the State Prosecution Office, ordering the suspension of the distribution of dividends to shareholders, under penalty of freezing R$2.7 billion. The decision was revised by a Suspension of Injunction and Order, through a decision of the presiding judge of the Superior Court of Justice (STJ), which authorized the decision involving the distribution of dividends conditioned to Braskem effectively issuing an insurance guarantee.On June 26, 2019, the Alagoas State Prosecution Office and the Alagoas State Public Defender’s Office amended the action to change the boundaries of the claim, which involved excluding the alleged environmental damages and reducing the request for immediate freeze of assets to R$3.7 billion, which would correspond to the sum of the pecuniary damages caused to the residents of the districts affected by the geological event. Immediately thereafter, the presiding judge of the Alagoas State Court of Appeals issued, during a courthouse vacation, a decision ordering the freezing of R$3.7 billion.On August 9, 2019, the decision of the presiding judge of the STJ lifted the freezing of cash, conditioned upon the effective presentation of a new insurance guarantee in the same amount by Braskem to the court.· · · · · continuesalso highlights the actions carried out jointly with its clients and partner companies to collaborate withtransform chemicals and plastic resins into items that are essential for combatting COVID-19, which include surgical masks, packaging for liquid and gel alcohol, bleach and 3D printing of bands for protective face shields; donations of LPG to field hospitals; actions to support the authoritieschain of clients and suppliers, particularly small and midsized companies; and donations of hygiene kits and food staples to identify the environmental causes of damages, with the support of independent experts, and is committed to implementing solutions.local communities.(e)As perIn the notice dated July 25, 2019, Braskem was informedfirst quarter of 2020, the Brazilian real depreciated 29% against the U.S. dollar. The negative exchange variation will produce a cash effect upon maturity of the Public-Interest Civil Action filed against it byCompany’s liabilities, and as such is concentrated in the Labor Public Prosecutorlong term given the debt maturity profile and does not put at risk the liquidity position in context of the State of Alagoas ("MPT-AL"), with an injunctionefforts to freezecontain the amount of R$2.5 billion to guarantee payment of any pecuniary damages to workers affected by the geological phenomenon observed in Maceió. In said action, MPT-AL further claims the compensation of workers for pain and suffering.COVID-19 pandemic.On October 10, 2019,Due to the Judgeuncertainties arising from the COVID-19 pandemic with regard to the global economy, it is not possible to accurately predict the adverse impacts on the equity and financial position of the 7th Labor Court of Maceió deny the preliminary injunctions filed by the MPT-AL.The Company informs will keep the market informed of any material developments in the matter.(f)As per the notice dated August 19, 2019, Braskem was informed that, in connection with the geological events in the State of Alagoas, the Company is aware of the filing of a Public-Interest Civil Action by the Federal Prosecution Office ("MPF") against the Company and other plaintiffs, withits subsidiaries after the reporting date. The following main claims for interlocutory relief: (i)areas are more susceptible to impacts resulting from COVID-19 pandemic given the accrual of an own private fundsignificant changes in the initial amount of R$3.075 billionrisks to which the company is exposed, among others: accounting estimates for the executionrealization of socialassets, including the estimates for losses on trade accounts receivables, inventory impairment loss, deferred tax assets and environmental programsother assets, or those related to the provision for liabilities.(d) of emergency measures, and the maintenance in said fund of working capital in the amount of R$2 billion or,Rio Grande do Sul. The agreements, which term is around five years after the financial schedule is approved,expiration date of the current agreement, establish the supply of a minimum annual volume of 650 kton and, at the option of Petrobras, an amount equivalentadditional volume of up to 2.8 million tons per year, at the price of 100% of the expenses projected for the subsequent 12-month period; (ii) the presentation of guarantees in the amount of R$20.5 billion; (iii) a prohibition on the encumbrance or divestment of any of the Company's fixed assets and on the distribution of profits, whether in dividends, interest on equity or any other form; (iv) a court-ordered freeze of any profits not distributed; and (v) a suspension on financing from BNDES (state-owned bank) and government incentives, as well as acceleration of existing debts with BNDES.So far, there is no decision about the injunction requested.The Company informs that it has taken all applicable measures within the legal periods and will keep the market informed of any relevant development in this matter.F - 104Braskem S.A.NotesIn addition, to guarantee access to the financial statementsat December 31, 2018All amountsnaphtha logistics system in thousands, except as otherwise stated(g)SinceRio Grande do Sul, Braskem also renewed the Company was not able to file Form 20-F, for the year ended December 31, 2017, until the date granted by SEC and no further extensions have been granted pursuant to Section 802.01E of the NYSE Listed Company Manual, on May 13, 2019, the New York Stock Exchange suspended trading of the Registrant's American Depositary Shares and had initiated delisting procedures.The Company appealed the decision, whichis scheduled by the NYSE for October 17, 2019.On October 7, 2019 the Company filed Form 20-F for the year ended December 31, 2017.(h)As per the Material Fact notice dated June 4, 2019, Braskem was informed by Odebrecht of its decision taken jointlystorage agreement with LyondellBasell to terminate negotiations for a potential transaction involving the transfer to LyondellBasell of the entire interest held by Odebrecht in the capital of Braskem. Those negotiations were started on June 15, 2018.(i)As per the Material Fact notice dated June 18, 2019, Braskem was informed that in view of the court-supervised reorganization filed by Odebrecht S.A. and other companies of the Odebrecht Group, including the controlling shareholder of the Company, OSP Investimentos S.A., the Company was informed that there has been no change whatsoever in the controlling interest held in Braskem, with the totality of the common and preferred shares in the Company held by OSP Investimentos S.A. in fiduciary assignment agreement to the creditors of Odebrecht.The Company further informs that it has no relevant amounts receivable from Odebrecht and that the court-supervised reorganization does not trigger the early termination of any of its liabilities.(j)In 2019, the Company reversed the provision for a controversial portion of the 2015 and 2016 CDE (energy development account) quota based on two consumer-friendly injunctions issued in 2018 and 2019 in the amount of R$223,340.(k)OnOctober 3, 2019, the Extraordinary General Meeting approved: (i) the payment of the mandatory dividend, in the amount of R$667 million, to be paid until December 31, 2019; (ii) the capital budget for the fiscal year of 2019; and (iii) withheld by the Company, the remaining amount of the net profit, of R$2,002 million, pursuant to article 196 of the Brazilian Corporation Law.(l)As of October 9, 2019, a Waivers & Consent package was approved by the Intercreditor Agent on behalf of the Lenders, thus extending the dates for achieving the Guaranteed Physical Completion Date of Braskem Idesa from November 30, 2016 to December 31, 2020Petrobras and the Guaranteed Financial Completion Date from December 31, 2016 to December 31, 2020.transport and storage agreement with Petrobras Transporte S.A.The approval of the Waivers & Consent package allows Braskem Idesa to reclassify the Senior Debt from current to non-current liabilities.F - 105