LyondellBasell Industries N.V.
Item 1A. Risk Factors.
You should carefully consider the following risk factors in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.
Our business, including our results of operations and reputation, could be adversely affected by safety or product liability issues.
Failure to appropriately manage safety, human health, product liability and environmental risks associated with our products, product life cycles and production processes could adversely impact employees, communities, stakeholders, our reputation and our results of operations. Public perception of the risks associated with our products and production processes could impact product acceptance and influence the regulatory environment in which we operate. While we have procedures and controls to manage safety risks, issues could be created by events outside of our control, including natural disasters, severe weather events and acts of sabotage.
Our operations are subject to risks inherent in chemical and refining businesses, and we could be subject to liabilities for which we are not fully insured or that are not otherwise mitigated.
We maintain property, business interruption, product, general liability, casualty and other types of insurance that we believe are appropriate for our business and operations as well as in line with customary industry practices. However, we are not fully insured against all potential hazards incident to our business, including losses resulting from natural disasters, wars or terrorist acts. Changes in insurance market conditions have caused, and may in the future cause, premiums and deductibles for certain insurance policies to increase substantially and, in some instances, for certain insurance to become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, we might not be able to finance the amount of the uninsured liability on terms acceptable to us or at all, and might be obligated to divert a significant portion of our cash flow from normal business operations.
Further, because a part of our business involves licensing polyolefin process technology, our licensees are exposed to similar risks involved in the manufacture and marketing of polyolefins. Hazardous incidents involving our licensees, if they do result or are perceived to result from use of our technologies, may harm our reputation, threaten our relationships with other licensees and/or lead to customer attrition and financial losses. Our policy of covering these risks through contractual limitations of liability and indemnities and through insurance may not always be effective. As a result, our financial condition and results of operation would be adversely affected, and other companies with competing technologies may have the opportunity to secure a competitive advantage.
A sustained decrease in the price of crude oil may adversely impact the results of our operations, primarily in North America.
Energy costs generally follow price trends of crude oil and natural gas. These price trends may be highly volatile and cyclical. In the past, raw material and energy costs have experienced significant fluctuations that adversely affected our business segments’ results of operations. For example, we have benefitted from the favorable ratio of U.S. natural gas prices to crude oil prices in recent years. This advantage was reduced as oil prices declined beginning in 2014. If the price of crude oil remains lower relative to U.S. natural gas prices or if the demand for natural gas and NGLs increases, this may have a negative impact on our results of operations.
Costs and limitations on supply of raw materials and energy may result in increased operating expenses.
The costs of raw materials and energy represent a substantial portion of our operating expenses. Due to the significant competition we face and the commodity nature of many of our products we are not always able to pass on raw material and energy cost increases to our customers. When we do have the ability to pass on the cost increases, we are not always able to do so quickly enough to avoid adverse impacts on our results of operations.
Cost increases for raw materials also may increase working capital needs, which could reduce our liquidity and cash flow. Even if we increase our sales prices to reflect rising raw material and energy costs, demand for products may decrease as customers reduce their consumption or use substitute products, which may have an adverse impact on our results of operations. In addition, producers in natural gas cost-advantaged regions, such as the Middle East and North America, benefit from the lower prices of natural gas and NGLs. Competition from producers in these regions may cause us to reduce exports from Europe and elsewhere. Any such reductions may increase competition for product sales within Europe and other markets, which can result in lower margins in those regions.
For some of our raw materials and utilities there are a limited number of suppliers and, in some cases, the supplies are specific to the particular geographic region in which a facility is located. It is also common in the chemical and refining industries for a facility to have a sole, dedicated source for its utilities, such as steam, electricity and gas. Having a sole or limited number of suppliers may limit our negotiating power, particularly in
the case of rising raw material costs. Any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements.
Additionally, there is growing concern over the reliability of water sources, including around the Texas Gulf Coast where several of our facilities are located. The decreased availability or less favorable pricing for water as a result of population growth, drought or regulation could negatively impact our operations.
If our raw material or utility supplies were disrupted, our businesses may incur increased costs to procure alternative supplies or incur excessive downtime, which would have a direct negative impact on plant operations. Disruptions of supplies may occur as a result of transportation issues including, but not limited to, as a result of natural disasters and water levels that can affect the operations of vessels, barges, rails, trucks and pipeline traffic. These risks are particularly prevalent in the U.S. Gulf Coast area. Additionally, the export of NGLs from the U.S., greater restrictions on hydraulic fracturing or the lifting by the U.S. government of the ban on U.S. crude oil exports could restrict the availability of our raw materials, thereby increasing our costs.
With increased volatility in raw material costs, our suppliers could impose more onerous terms on us, resulting in shorter payment cycles and increasing our working capital requirements.
Our ability to source raw materials may be adversely affected by political instability, civil disturbances or other governmental actions.
We obtain a portion of our principal raw materials from sources in North Africa, the Middle East, and Central and South America that may be less politically stable than other areas in which we conduct business, such as Europe or the U.S. Political instability, civil disturbances and actions by governments in these areas are likely to substantially increase the price and decrease the supply of raw materials necessary for our operations, which will have a material adverse effect on our results of operations.
Increased incidents of civil unrest, including terrorist attacks and demonstrations that have been marked by violence, have occurred in a number of countries in North Africa and the Middle East. Some political regimes in these countries are threatened or have changed as a result of such unrest. Political instability and civil unrest could continue to spread in the region and involve other areas. Such unrest, if it continues to spread or grow in intensity, could lead to civil wars, regional conflicts, or regime changes resulting in governments that are hostile to countries in which we conduct substantial business, such as in Europe, the U.S., or their respective trading partners.
Economic disruptions and downturns in general, and particularly continued global economic uncertainty or economic turmoil in emerging markets, could have a material adverse effect on our business, prospects, operating results, financial condition and cash flows.
Our results of operations can be materially affected by adverse conditions in the financial markets and depressed economic conditions generally. Economic downturns in the businesses and geographic areas in which we sell our products substantially reduce demand for our products and result in decreased sales volumes and increased credit risk. Recessionary environments adversely affect our business because demand for our products is reduced, particularly from our customers in industrial markets generally and the automotive and housing industries specifically, and may result in higher costs of capital. A significant portion of our revenues and earnings are derived from our business in Europe, including southern Europe. In addition, most of our European transactions and assets, including cash reserves and receivables, are denominated in euros.
If a sustained financial crisis in Europe leads to a further significant devaluation of the euro, the value of our financial assets that are denominated in euros would be significantly reduced when translated to U.S. dollars for financial reporting purposes. We also derive significant revenues from our business in emerging markets, particularly the emerging markets in Asia and South America. Any broad-based downturn in these emerging
markets, or in a key market such as China, could require us to reduce export volumes into these markets and could also require us to divert product sales to less profitable markets. Any of these conditions could ultimately harm our overall business, prospects, operating results, financial condition and cash flows.
The cyclicality and volatility of the industries in which we participate may cause significant fluctuations in our operating results.
Our business operations are subject to the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries. Our future operating results are expected to continue to be affected by this cyclicality and volatility. The chemical and refining industries historically have experienced alternating periods of capacity shortages, causing prices and profit margins to increase, followed by periods of excess capacity, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins.
In addition to changes in the supply and demand for products, changes in energy prices and other worldwide economic conditions can cause volatility. These factors result in significant fluctuations in profits and cash flow from period to period and over business cycles.
New capacity additions in Asia, the Middle East and North America may lead to periods of oversupply and lower profitability. A sizable number of expansions have been announced in North America. The timing and extent of any changes to currently prevailing market conditions are uncertain and supply and demand may be unbalanced at any time. As a consequence, we are unable to accurately predict the extent or duration of future industry cycles or their effect on our business, financial condition or results of operations.
We sell products in highly competitive global markets and face significant price pressures.
We sell our products in highly competitive global markets. Due to the commodity nature of many of our products, competition in these markets is based primarily on price and, to a lesser extent, on product performance, product quality, product deliverability, reliability of supply and customer service. Often, we are not able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers due to the significant competition in our business.
In addition, we face increased competition from companies that may have greater financial resources and different cost structures or strategic goals than us. These include large integrated oil companies (some of which also have chemical businesses), government-owned businesses, and companies that receive subsidies or other government incentives to produce certain products in a specified geographic region. Continuing, increased competition from these companies, especially in our olefin and refining businesses, could limit our ability to increase product sales prices in response to raw material and other cost increases, or could cause us to reduce product sales prices to compete effectively, which could reduce our profitability. Competitors with different cost structures or strategic goals than we have may be able to invest significant capital into their businesses, including expenditures for research and development.
In addition, specialty products we produce may become commoditized over time. Increased competition could result in lower prices or lower sales volumes, which would have a negative impact on our results of operations.
Interruptions of operations at our facilities may result in liabilities or lower operating results.
We own and operate large-scale facilities. Our operating results are dependent on the continued operation of our various production facilities and the ability to complete construction and maintenance projects on schedule. Interruptions at our facilities may materially reduce the productivity and profitability of a particular manufacturing facility, or our business as a whole, during and after the period of such operational difficulties. In the past, we had to shut down plants on the U.S. Gulf Coast, including the temporary shutdown of our Houston refinery, as a result of hurricanes striking the Texas coast.
In addition, because the Houston refinery is our only refining operation, an outage at the refinery could have a particularly negative impact on our operating results. Unlike our chemical and polymer production facilities, which may have sufficient excess capacity to mitigate the negative impact of lost production at other facilities, we do not have the ability to increase refining production elsewhere in the U.S.
Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations are subject to hazards inherent in chemical manufacturing and refining and the related storage and transportation of raw materials, products and wastes. These potential hazards include:
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pipeline leaks and ruptures;
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explosions;
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fires;
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severe weather and natural disasters;
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mechanical failure;
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unscheduled downtimes;
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supplier disruptions;
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labor shortages or other labor difficulties;
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transportation interruptions;
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remediation complications;
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increased restrictions on, or the unavailability of, water for use at our manufacturing sites or for the transport of our products or raw materials;
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chemical and oil spills;
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discharges or releases of toxic or hazardous substances or gases;
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shipment of incorrect or off-specification product to customers;
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storage tank leaks;
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other environmental risks; and
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terrorist acts.
Some of these hazards may cause severe damage to or destruction of property and equipment or personal injury and loss of life and may result in suspension of operations or the shutdown of affected facilities.
Large 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 costs and in a timely manner, or if the market conditions assumed in 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 operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to 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:
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denial of or delay in receiving requisite regulatory approvals and/or permits;
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unplanned increases in the cost of construction materials or labor;
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disruptions in transportation of components or construction materials;
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adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers;
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shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; and
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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 were 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.
Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, facilities and services.
Increased global information security threats and more sophisticated, targeted computer crime pose a risk to the confidentiality, availability and integrity of our data, operations and infrastructure. While we attempt to mitigate these risks by employing a number of measures, including security measures, employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, our employees, systems, networks, products, facilities and services remain potentially vulnerable to sophisticated espionage or cyber-assault. Depending on their nature and scope, such threats could potentially lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.
We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations.
We operate internationally and are subject to the risks of doing business on a global level. These risks include fluctuations in currency exchange rates, economic instability and disruptions, restrictions on the transfer of funds and the imposition of duties and tariffs. Additional risks from our multinational business include transportation delays and interruptions, war, terrorist activities, epidemics, pandemics, political instability, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory environments.
We generate revenues from export sales and operations that may be denominated in currencies other than the relevant functional currency. Exchange rates between these currencies and functional currencies in recent years have fluctuated significantly and may do so in the future. It is possible that fluctuations in exchange rates will result in reduced operating results. Additionally, we operate with the objective of having our worldwide cash available in the locations where it is needed, including the United Kingdom for our parent company’s significant cash obligations as a result of dividend and interest payments. It is possible that we may not always be able to provide cash to other jurisdictions when needed or that such transfers of cash could be subject to additional taxes, including withholding taxes.
Our operating results could be negatively affected by the global laws, rules and regulations, as well as political environments, in the jurisdictions in which we operate. There could be reduced demand for our products, decreases in the prices at which we can sell our products and disruptions of production or other operations. Additionally, there may be substantial capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could reduce our operating results.
We obtain a portion of our principal raw materials from international sources that are subject to these same risks. Our compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject could be challenged. Furthermore, these laws may be modified, the result of which may be to prevent or limit subsidiaries from transferring cash to us.
Furthermore, we are subject to certain existing, and may be subject to possible future, laws that limit or may limit our activities while some of our competitors may not be subject to such laws, which may adversely affect our competitiveness.
Changes in tax laws and regulations could affect our tax rate and our results of operations.
We are a tax resident in the United Kingdom and are subject to the United Kingdom corporate income tax system. LyondellBasell N.V. has little or no taxable income of its own because, as a holding company, it does not conduct any operations. Through our subsidiaries, we have substantial operations world-wide. Taxes are primarily paid on the earnings generated in various jurisdictions, including the United States, The Netherlands, Germany, France, and Italy.
A portion of the Company’s interest income from internal financing is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. In September 2016, the UK enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that will impact our internal financing structure. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may also impact our internal financings.
We monitor income tax legislative developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could adversely affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.
Many of our businesses depend on our intellectual property. Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to do so could reduce our ability to maintain our competitiveness and margins.
We have a significant worldwide patent portfolio of issued and pending patents. These patents and patent applications, together with proprietary technical know-how, are significant to our competitive position, particularly with regard to PO, performance chemicals, petrochemicals, and polymers. We rely on the patent, copyright and trade secret laws of the countries in which we operate to protect our investment in research and development, manufacturing and marketing. However, we may be unable to prevent third parties from using our intellectual property without authorization. Proceedings to protect these rights could be costly, and we may not prevail.
The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets or proprietary know-how could result in significantly lower revenues, reduced profit margins and cash flows and/or loss of market share. We also may be subject to claims that our technology, patents or other intellectual property infringes on a third party’s intellectual property rights. Unfavorable resolution of these claims could result in restrictions on our ability to deliver the related service or in a settlement that could be material to us.
Shared control or lack of control of joint ventures may delay decisions or actions regarding the joint ventures.
A portion of our operations are conducted through joint ventures, where control may be exercised by or shared with unaffiliated third parties. We cannot control the actions of our joint venture partners, including any nonperformance, default or bankruptcy of joint venture partners. The joint ventures that we do not control may also lack financial reporting systems to provide adequate and timely information for our reporting purposes.
Our joint venture partners may have different interests or goals than we do and may take actions contrary to our requests, policies or objectives. Differences in views among the joint venture participants also may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn our business and operations. We may develop a dispute with any of our partners over decisions affecting the venture that may result in litigation, arbitration or some other form of dispute resolution. If a joint venture participant acts contrary to our interest, it could harm our brand, business, results of operations and financial condition.
We cannot predict with certainty the extent of future costs under environmental, health and safety and other laws and regulations, and cannot guarantee they will not be material.
We may face liability arising out of the normal course of business, including alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our current or former facilities or chemicals that we manufacture, handle or own. In addition, because our products are components of a variety of other end-use products, we, along with other members of the chemical industry, are subject to potential claims related to those end-use products. Any substantial increase in the success of these types of claims could negatively affect our operating results.
We (together with the industries in which we operate) are subject to extensive national, regional, state and local environmental laws, regulations, directives, rules and ordinances concerning:
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emissions to the air;
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discharges onto land or surface waters or into groundwater; and
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the generation, handling, storage, transportation, treatment, disposal and remediation of hazardous substances and waste materials.
Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require us to meet specific financial responsibility requirements. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.
Although we have compliance programs and other processes intended to ensure compliance with all such regulations, we are subject to the risk that our compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could be material.
Our industry is subject to extensive government regulation, and existing, or future regulations may restrict our operations, increase our costs of operations or require us to make additional capital expenditures.
Compliance with regulatory requirements could result in higher operating costs, such as regulatory requirements relating to emissions, the security of our facilities, and the transportation, export or registration of our products. We generally expect that regulatory controls worldwide will become increasingly more demanding, but cannot accurately predict future developments.
Increasingly strict environmental laws and inspection and enforcement policies, could affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Stricter environmental, safety and health laws, regulations and enforcement policies could result in increased operating costs or capital expenditures to comply with such laws and regulations. Additionally, we are required to have permits for our businesses and are subject to licensing regulations. These permits and licenses are subject to renewal, modification and in some circumstances, revocation. Further, the permits and licenses are often difficult, time consuming and costly to obtain and could contain conditions that limit our operations.
We may incur substantial costs to comply with climate change legislation and related regulatory initiatives.
There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (“GHG”) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve and, while they are likely to be increasingly widespread and stringent, at this stage it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation. Within the framework of the EU emissions trading scheme (“ETS”), we were allocated certain allowances of carbon dioxide for the affected plants of our European sites for the period from 2008 to 2012 (“ETS II period”). The ETS II period did not bring additional cost to us as the allowance allocation was sufficient to cover the actual emissions of the affected plants. We were able to build an allowance surplus during the ETS II period which has been banked to the scheme for the period from 2013 to 2020 (“ETS III period”). We expect to incur additional costs for the ETS III period, despite the allowance surplus accrued over the ETS II period, as allowance allocations have been reduced for the ETS III period and more of our plants are affected by the scheme. We maintain an active hedging strategy to cover these additional costs. We expect to incur additional costs in relation to future carbon or GHG emission trading schemes.
In the U.S., the Environmental Protection Agency (the “EPA”) has promulgated federal GHG regulations under the Clean Air Act affecting certain sources. The EPA has issued mandatory GHG reporting requirements, requirements to obtain GHG permits for certain industrial plants and proposals for GHG performance standards for some facilities. The recent EPA action could be a precursor to further federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in U.S. courts in a manner unfavorable to our industry. In any event, additional regulation may be forthcoming at the U.S. federal or state level with respect to GHG emissions, and such regulation could result in the creation of additional costs in the form of taxes or required acquisition or trading of emission allowances.
Compliance with these or other changes in laws, regulations and obligations that create a GHG emissions trading scheme or GHG reduction policies generally could significantly increase our costs or reduce demand for products we produce. Additionally, compliance with these regulations may result in increased permitting necessary for the operation of our business or for any of our growth plans. Difficulties in obtaining such permits could have an adverse effect on our future growth. Therefore, any future potential regulations and legislation could result in increased compliance costs, additional operating restrictions or delays in implementing growth projects or other capital investments, and could have a material adverse effect on our business and results of operations.
We may be required to record material charges against our earnings due to any number of events that could cause impairments to our assets.
We may be required to reduce production at or idle facilities for extended periods of time or exit certain businesses as a result of the cyclical nature of our industry. Specifically, oversupplies of or lack of demand for particular products or high raw material prices may cause us to reduce production. We may choose to reduce production at certain facilities because we have off-take arrangements at other facilities, which make any reductions or idling unavailable at those facilities. Any decision to permanently close facilities or exit a business likely would result in impairment and other charges to earnings.
Temporary outages at our facilities can last for several quarters and sometimes longer. These outages could cause us to incur significant costs, including the expenses of maintaining and restarting these facilities. In addition, even though we may reduce production at facilities, we may be required to continue to purchase or pay for utilities or raw materials under take-or-pay supply agreements.
Our business is capital intensive and we rely on cash generated from operations and external financing to fund our growth and ongoing capital needs. Limitations on access to external financing could adversely affect our operating results.
We require significant capital to operate our current business and fund our growth strategy. Moreover, interest payments, dividends and the expansion of our business or other business opportunities may require significant amounts of capital. We believe that our cash from operations currently will be sufficient to meet these needs. However, if we need external financing, our access to credit markets and pricing of our capital is dependent upon maintaining sufficient credit ratings from credit rating agencies and the state of the capital markets generally. There can be no assurances that we would be able to incur indebtedness on terms we deem acceptable, and it is possible that the cost of any financings could increase significantly, thereby increasing our expenses and decreasing our net income. If we are unable to generate sufficient cash flow or raise adequate external financing, including as a result of significant disruptions in the global credit markets, we could be forced to restrict our operations and growth opportunities, which could adversely affect our operating results.
We may use our five-year, $2.5 billion revolving credit facility, which backs our commercial paper program, to meet our cash needs, to the extent available. As of December 31, 2016, we had no borrowings or letters of credit outstanding under the facility and $500 million outstanding under our commercial paper program, leaving an unused and available credit capacity of $1,973 million. We may also meet our cash needs by selling receivables under our $900 million U.S. accounts receivable securitization facility. In the event of a default under our credit facility or any of our senior notes, we could be required to immediately repay all outstanding borrowings and make cash deposits as collateral for all obligations the facility supports, which we may not be able to do. Any default under any of our credit arrangements could cause a default under many of our other credit agreements and debt instruments. Without waivers from lenders party to those agreements, any such default could have a material adverse effect on our ability to continue to operate.
Legislation and regulatory initiatives could lead to a decrease in demand for our products.
New or revised governmental regulations and independent studies relating to the effect of our products on health, safety and the environment may affect demand for our products and the cost of producing our products. Initiatives by governments and private interest groups will potentially require increased toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. For example, in the United States, the National Toxicology Program (“NTP”) is a federal interagency program that seeks to identify and select for study chemicals and other substances to evaluate potential human health hazards. In the European Union, the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”) is regulation designed to identify the intrinsic properties of chemical substances, assess hazards and risks of the substances, and identify and implement the risk management measures to protect humans and the environment.
Assessments under NTP, REACH or similar programs or regulations in other jurisdictions may result in heightened concerns about the chemicals we use or produce and may result in additional requirements being placed on the production, handling, labeling or use of those chemicals. Such concerns and additional requirements could also increase the cost incurred by our customers to use our chemical products and otherwise limit the use of these products, which could lead to a decrease in demand for these products. Such a decrease in demand could have an adverse impact on our business and results of operations.
Adverse results of legal proceedings could materially adversely affect us.
We are subject to and may in the future be subject to a variety of legal proceedings and claims that arise out of the ordinary conduct of our business. Results of legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and may cause significant expenditure and diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could materially adversely affect a portion of our business operations or materially and adversely affect our financial position and our results of operations should we fail to prevail in certain matters.
Significant changes in pension fund investment performance or assumptions relating to pension costs may adversely affect the valuation of pension obligations, the funded status of pension plans, and our pension cost.
Our pension cost is materially affected by the discount rates used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rates of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets may result in corresponding increases and decreases in the value of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. Any changes in key actuarial assumptions, such as the discount rate or mortality rate, would impact the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years.
Nearly all of our current pension plans have projected benefit obligations that exceed the fair value of the plan assets. As of December 31, 2016, the aggregate deficit was $942 million. Any declines in the fair values of the pension plans assets could require additional payments by us in order to maintain specified funding levels.
Our pension plans are subject to legislative and regulatory requirements of applicable jurisdictions, which could include, under certain circumstances, local governmental authority to terminate the plan.
Item 1B. Unresolved Staff Comments.
None.
Item 3. Legal Proceedings.
Environmental Matters
From time to time we and our joint ventures receive notices or inquiries from government entities regarding alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that we reasonably believe could exceed $100,000. The matters below are disclosed solely pursuant to that requirement.
In September 2013, the Louisiana Department of Environmental Quality (the “LDEQ”) issued a Compliance Order and Notice of Potential Penalty to Equistar Chemicals, LP pertaining to self-reported deviations arising from our Lake Charles, Louisiana polyolefins plant and relating to certain Clean Air Act Title V permit conditions, limits and other requirements. The matter involves deviations reported by us to the LDEQ in semi-annual reports covering 2007 through June 2011. We reasonably believe that LDEQ may assert an administrative penalty demand in this matter in excess of $100,000.
In September 2013, U.S. Environmental Protection Agency (the “EPA”) Region V issued a Notice and Finding of Violation alleging violations at our Morris, Illinois facility related to flaring activity. The Notice
generally alleges failures to monitor steam usage and improper flare operations. We reasonably believe that EPA Region V may assert a penalty demand in excess of $100,000.
In June 2014, EPA Region V issued a Notice and Finding of Violation alleging violations at our Tuscola, Illinois facility related to flaring activity. The Notice generally alleges failure to conduct a valid performance test and improper flare operations. We reasonably believe that EPA Region V may assert a penalty demand in excess of $100,000.
In July 2015, the Texas Commission on Environmental Quality (the “TCEQ”) issued a proposed Agreed Order to Houston Refining LP pertaining to an emissions event which occurred in August 2014. TCEQ has asserted an administrative penalty demand for this matter of $100,000, which was approved by the Commissioners in January 2016, and has been fully paid.
In February 2016, the TCEQ issued a Notice of Enforcement to Equistar Chemicals, LP following a TCEQ compliance investigation file review. In April 2016, TCEQ issued a proposed Agreed Order, which assesses an administrative penalty of $105,000 and proposes a one-time offer to defer $21,000 of the penalty if Equistar satisfactorily complies with the terms of the order. TCEQ approved the Agreed Order in November 2016 and the penalty has been fully paid.
In April 2016, the EPA issued a Notice of Violation to Houston Refining LP arising from a 2014 inspection. The EPA alleged the production of fuel with excess sulfur and the failure to retire sufficient sulfur credits. We have reached a final settlement which requires Houston Refining to pay a penalty of $434,500 with no additional requirements. This penalty was paid in January 2017.
Litigation and Other Matters
Information regarding our litigation and other legal proceedings can be found in Note 19, Commitments and Contingencies, to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Dividend Information
Our shares were listed on the New York Stock Exchange (“NYSE”) on October 14, 2010 under the symbol “LYB.” The high and low sales prices for our ordinary shares and the cash dividends per share declared for the two most recent fiscal years are shown in the table below.
The payment of dividends or distributions in the future will be subject to the requirements of Dutch law and the discretion of our Management Board and our Supervisory Board. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will depend upon general business conditions, our financial condition, our earnings and cash flow, our capital requirements, financial covenants and other contractual restrictions on the payment of dividends or distributions.
There can be no assurance that any dividends or distributions will be declared or paid in the future.
Holders
As of February 14, 2017, there were approximately 6,000 record holders of our shares, including Cede & Co. as nominee of the Depository Trust Company.
United Kingdom Tax Considerations
In May 2013, we announced the planned migration of the tax domicile of LyondellBasell Industries N.V. from The Netherlands, where LyondellBasell Industries N.V. is incorporated, to the United Kingdom. On August 28, 2013, the Dutch and the United Kingdom competent authorities completed a mutual agreement procedure and issued a ruling that retroactively as of July 1, 2013 LyondellBasell Industries N.V. should be treated solely as a tax resident in the United Kingdom and is subject to the United Kingdom corporate income tax system.
As a result of its United Kingdom tax residency, dividend distributions by LyondellBasell Industries N.V. to its shareholders are not subject to withholding tax, as the United Kingdom currently does not levy a withholding tax on dividend distributions.
Performance Graph
The performance graph and the information contained in this section is not “soliciting material”, is being furnished, not filed, with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.
The graph below shows the relative investment performance of LyondellBasell Industries N.V. shares, the S&P 500 Index and the S&P 500 Chemicals Index since December 31, 2011. The graph assumes that $100 was invested on December 31, 2011 and any dividends paid were reinvested at the date of payment. The graph is presented pursuant to SEC rules and is not meant to be an indication of our future performance.
Issuer Purchases of Equity Securities
On May 13, 2016, we announced a share repurchase program of up to 42,518,980 of our ordinary shares through November 13, 2017. The maximum number of shares that may yet be purchased is not necessarily an indication of the number of shares that will ultimately be purchased.
Item 6. Selected Financial Data.
The following selected financial data was derived from our consolidated financial statements, which were prepared from our books and records. This data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of factors that will enhance an understanding of this data.
(a) Includes pretax, non-cash charges in 2016, 2015 and 2014 of $29 million ($18 million after tax), $548 million ($351 million after tax) and $760 million ($483 million after tax), respectively, related to lower of cost or market (“LCM”) inventory valuation adjustments. Also includes a pre-tax and after-tax gain of $78 million on the sale of our wholly owned Argentine subsidiary and a pre-tax charge of $58 million ($37 million after tax) for a pension settlement in 2016.
(b) Interest expense in 2012 included charges of $294 million for premiums related to the refinancing of notes bearing interest rates of 8% and 11% per annum with lower coupon notes.
(c) Income from continuing operations in 2016 includes $135 million of out of period adjustments related to taxes on our cross currency swaps and deferred liabilities related to some of our consolidated subsidiaries. Income from continuing operations for the year ended December 31, 2013 included a $353 million benefit related to the release of valuation allowances primarily associated with tax losses in our French group. Income from continuing operations for the year ended December 31, 2012 included after-tax charges of $210 million for premiums and charges on the early repayment of debt.
(d) Includes current maturities of long-term debt.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL
This discussion should be read in conjunction with the information contained in our Consolidated Financial Statements, and the accompanying notes elsewhere in this report. When we use the terms “we,” “us,” “our” or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.
OVERVIEW
Earnings for 2016 were good despite a heavy schedule of planned maintenance and the challenges of several operational upsets at our Houston refinery. Our continued strong earnings and cash flow enabled us to increase the amount of our interim dividends and to continue the repurchase of our ordinary shares. During 2016, the global olefins and polyolefins industry benefitted from continued favorable supply and demand balances, while low crude oil and fuel prices negatively impacted margins for refining and oxyfuels and related products. Strong results for our O&P-EAI and Technology segments demonstrate continued global industry strength.
The completion of the expansion and turnaround of our Corpus Christi ethylene facility in the fourth quarter of 2016 marked the final step in our 2 billion pound North American ethylene expansion program. Our completed ethylene expansion program, the start of site preparation for our 1.1 billion pound polyethylene facility and advancements on the design of our new PO/TBA plant, along with the completion of several major plant turnarounds this year position us favorably for the coming years.
Significant items that affected 2016 results include:
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Olefins and Polyolefins-Americas (“O&P-Americas”) results declined on lower olefins results.
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Lower refining margins and lower crude processing rates due primarily to planned and unplanned maintenance at our Houston refinery;
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Lower Intermediates and Derivatives (“I&D”) segment results driven mainly by lower margins for most I&D products; and
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Improved Olefins and Polyolefins-Europe, Asia, International (“O&P-EAI”) segment results on higher European polyolefins margins.
Other noteworthy items during 2016 include the following:
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We increased our interim dividend from $0.78 to $0.85 in May 2016;
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We repurchased approximately 36.6 million of our ordinary shares during 2016;
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We increased our revolving credit facility and commercial paper program from $2,000 million to $2,500 million in June 2016;
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We issued 750 million of 1.875% guaranteed notes due 2022 in March 2016; and
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We sold our wholly owned Argentine subsidiary for $184 million in February 2016, realizing net proceeds of $137 million and an increase in earnings of $78 million.
Results of operations for the periods discussed in these “Results of Operations” are presented in the table below.
RESULTS OF OPERATIONS
Revenues-We had revenues of $29,183 million in 2016, $32,735 million in 2015 and $45,608 million in 2014.
2016 versus 2015-Revenues decreased by $3,552 million, or 11%, in 2016 compared to 2015.
Lower average sales prices driven by decreases in the prices of crude oil and other feedstocks led to revenue declines of 10% in 2016. Lower sales volumes in our Refining segment due to turnaround activities and unplanned outages, which were substantially offset by higher I&D segment sales volumes, led to a 1% volume-driven decline in revenues. The decline in revenues includes a $290 million impact from the sale of our wholly owned Argentine subsidiary.
2015 versus 2014-Revenues decreased $12,873 million, or 28%, in 2015 compared to 2014.
The decline in prices for crude oil and other feedstocks during 2015 was the primary contributing factor for lower average sales prices, which were responsible for 23% of the revenue decline in 2015 versus 2014. Unfavorable translation impacts resulting from a significant decline in the euro/U.S. dollar exchange rate further reduced revenues by 5% during 2015.
Sales volumes during 2015 were relatively unchanged from 2014. A decrease in sales due to lower crude processing rates in our Refining segment was mostly offset by higher sales volumes for U.S. and European polyolefins, oxyfuels and related products and intermediate chemicals. Revenues for each of our business segments are reviewed further in the “Segment Analysis” section below.
Cost of Sales-Cost of sales were $23,191 million in 2016, $25,683 million in 2015 and $38,939 million in 2014.
Fluctuations in our cost of sales are generally driven by changes in feedstock and energy costs, as all other material components remain relatively flat from year to year. Feedstock and energy related costs generally represent approximately 75% to 80% of cost of sales, other variable costs account for approximately 10% of cost
of sales on an annual basis and fixed operating costs, consisting primarily of expenses associated with employee compensation, depreciation and amortization, and maintenance, range from approximately 10% to 15% in each annual period.
2016 versus 2015-Cost of sales decreased by $2,492 million in 2016 compared to 2015.
The decrease in cost of sales in 2016 was primarily due to lower feedstock and energy costs. Raw material costs for crude oil, heavy liquids and natural gas liquids (“NGLs”) and other feedstocks were lower in 2016 compared to 2015. The sale of our wholly owned Argentine subsidiary in 2016 also contributed approximately $230 million to the decline in 2016 cost of sales.
Cost of sales in 2016 and 2015 also included noncash, pre-tax lower of cost or market (“LCM”) inventory valuation charges totaling $29 million and $548 million, respectively. The 2016 adjustment is related to a drop in polypropylene prices in our O&P-Americas segment and the adjustments in 2015 affected all of our segments except Technology. The 2015 adjustments were driven mainly by declines in the prices for crude oil, ethylene, propylene, benzene and ETBE. During 2015, cost of sales also included $35 million of amortization expense associated with the expiration of emission allowance credits in our Refining and I&D segments.
2015 versus 2014-Cost of sales decreased by $13,256 million in 2015 compared to 2014.
The decrease in cost of sales in 2015 was primarily due to lower feedstock and energy costs. In 2015, the raw material costs for crude oil, heavy liquids and natural gas liquids (“NGLs”) and other feedstocks were significantly lower relative to 2014.
Cost of sales in 2015 included the $548 million pretax LCM inventory valuation charge and $35 million of amortization expense discussed above. Cost of sales in 2014 included a $760 million charge related to an LCM inventory valuation adjustment driven by a decline in feedstock prices in our O&P-Americas segment and a $52 million benefit in our O&P-EAI segment associated with a settlement for certain existing and future environmental claims under a 2005 indemnification agreement.
Operating Income-Our operating income was $5,060 million, $6,122 million and $5,736 million in 2016, 2015 and 2014, respectively.
2016 versus 2015-Operating income decreased by $1,062 million in 2016.
Operating income for 2016 reflects the impacts of the LCM inventory valuation adjustment discussed above and a $58 million pension settlement charge. Operating income for 2015 reflects the LCM inventory valuation adjustment and the emission credit allowance amortization discussed above. Including these impacts, 2016 operating income declined relative to 2015 by $863 million, $243 million and $166 million in our O&P-Americas, Refining and I&D segments, respectively. These lower results were partially offset by a $185 million improvement in operating income for our O&P-EAI segment.
2015 versus 2014-Operating income increased by $386 million in 2015, which includes the impact of the LCM inventory valuation adjustments, environmental settlement and emission credit allowances amortization discussed above.
Including these impacts, operating income in 2015 for our O&P-EAI and Refining segments reflect improvements of $425 million and $250 million, respectively. These improvements were offset in part by a $316 million decline in the results of our O&P-Americas segment.
Operating results for each of our business segments are reviewed further in the “Segment Analysis” section below.
Interest Expense-Interest expense was $322 million in 2016, $310 million in 2015 and $352 million in 2014.
2016 versus 2015-Debt issuances of our 1.875% guaranteed notes due 2022 in March 2016 and our 4.625% senior notes due 2055 in March 2015 and reduced benefits from our fixed-for-floating interest rate swaps resulted in $42 million of higher interest expense in 2016. This increase was partially offset by a $22 million increase in capitalized interest and $7 million of lower bank and other fees.
2015 versus 2014-The decrease in interest expense in 2015 relative to 2014 was primarily due to favorable impacts of $85 million related to our fixed-for-floating interest rate swaps and cross-currency swaps. This decrease was offset in part by $46 million of higher interest charges related to the issuance of our 4.875% guaranteed notes due 2044 in February 2014 and our 4.625% senior notes due 2055 in March 2015.
For additional information related to our fixed-for-floating interest rate swaps and cross-currency swaps, see Notes 12, 14 and 15.
Income from Equity Investments-Our income from equity investments was $367 million in 2016, $339 million in 2015 and $257 million in 2014.
2016 versus 2015-The $28 million increase in income from equity investments in 2016 is largely due to improved results for our joint ventures in Mexico, Saudi Arabia, Poland and Thailand.
2015 versus 2014-Our 2015 income from equity investments increased by $82 million over 2014 largely due to improved results from our joint ventures in Poland, Korea and Mexico, offset in part by lower results from our joint ventures in Saudi Arabia.
Income Taxes-Our effective income tax rates of 26.5% in 2016, 27.9% in 2015 and 27.0% in 2014 resulted in tax provisions of $1,386 million, $1,730 million and $1,540 million, respectively. Our 2016 income tax provision includes $135 million of non-cash out of period adjustments from prior years, for further information on these adjustments, please see Footnote 18, Income Taxes. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions. The Company’s exempt income primarily includes interest income and equity earnings of joint ventures. The interest income is earned by certain of our European subsidiaries through intercompany financings and is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. The equity earnings are attributable to our joint ventures and these earnings when paid through dividends to certain European subsidiaries are eligible for participation exemptions, which exempt the dividend payments from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for the interest income and dividends to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The foreign exchange gains/losses have a permanent impact on our effective income tax rate that can cause unpredictable movement in our effective income tax rate. We continue to maintain valuation allowances in various jurisdictions totaling $96 million, which could impact our effective tax rate in the future. We believe our effective income tax rate for 2017 will be approximately 27%.
2016-The 2016 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-6.7%), earnings in various countries (notably in Europe) with lower statutory tax rates (-3.0%), the impact of a change in non-U.S. tax law on our deferred tax liabilities (-1.0%) and the U.S. domestic production activity deduction (-0.8%). These favorable items were partially offset by the effects of non-cash out of period adjustments (2.5%) and U.S. state and local income taxes (0.5%).
2015-The 2015 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-5.1%), earnings in various countries (notably in Europe) with lower statutory tax rates (-2.1%), and the U.S. domestic production activity deduction (-1.4%). These favorable items were partially offset by the effects of U.S. state and local income taxes (1.0%).
2014-The 2014 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-4.8%), the U.S. domestic production activity deduction (-1.9%), foreign exchange losses (-1.5%), and earnings in various countries (notably in Europe) with lower statutory tax rates (-1.1%). These favorable items were partially offset by the effects of U.S. state and local income taxes (1.1%).
For further information related to our income taxes, see Note 18 to the Consolidated Financial Statements.
Comprehensive Income-We had comprehensive income of $3,763 million in 2016, $4,064 million in 2015 and $3,052 million in 2014.
2016 versus 2015-In 2016, comprehensive income decreased on lower net income, the unfavorable impacts of financial derivative adjustments and the increase in actuarial losses related to our defined benefit pension and other postretirement benefit plans recognized in 2016. These decreases were offset in part by the net favorable impact of unrealized net changes in foreign currency translation adjustments.
In 2016, we had a pre-tax gain of $43 million related to the effective portion of the unrealized gains of our financial instruments designated as net investment hedges. The cumulative effect of our derivatives designated as cash flow hedges in 2016 was a loss of $29 million. In 2016, cumulative losses associated with the strengthening of the euro versus the U.S. dollar in the first half of the year resulted in a pre-tax loss of $15 million related to our cross currency swaps. An unrealized loss of $17 million in 2016 related to forward-starting interest rate swaps was driven by decreases in benchmark interest rates during that period.
A pre-tax loss of $63 million related to our cross currency swaps was a reclassification adjustment included in net income in 2016.
In 2016 and 2015, we recognized net actuarial losses of $188 million and $8 million, respectively. The $188 million net loss in 2016 reflects $279 million of losses due to pension and other postretirement benefit discount rate decreases, offset by $79 million of gains related to pension asset experience and $10 million due to favorable postretirement liability experience and other immaterial items. In 2015, the $8 million net loss was primarily attributable to $133 million of actual asset return less than the expected return. This loss was offset by gains due to $73 million of discount rate increases and, $50 million of gains due to favorable liability experience and healthcare assumptions. In 2016, we also recognized a $61 million reclassification adjustment related primarily to a voluntary lump sum program offered to certain former employees in select U.S. pension plans. Total lump sum payments from these plans exceeded annual service and interest cost in 2016 resulting in this loss.
2015 versus 2014-In 2015, Comprehensive income increased on higher net income, the reduction in actuarial losses related to our defined benefit pension and other postretirement benefit plans recognized in 2015, the favorable impact of unrealized net changes in foreign currency translation adjustments and to a lesser extent, the benefit of favorable financial derivative adjustments.
In 2015 and 2014, we recognized net actuarial losses of $8 million and $493 million, respectively. The $493 million net loss in the prior year was caused primarily by pension and other postretirement benefit discount rate decreases and mortality assumption changes. In 2015, the $8 million net loss was primarily attributable to $133 million of actual asset return less than the expected return. This loss was offset by gains due to $73 million of discount rate increases and, $50 million of gains due to favorable liability experience and healthcare assumptions.
The predominant functional currency for our operations outside of the U.S. is the euro. Relative to the U.S. dollar, the value of the euro decreased during 2015 and 2014, resulting in losses as reflected in the Consolidated Statements of Comprehensive Income.
In 2015, the cumulative effect of our derivatives designated as cash flow hedges was a gain of $279 million. Cumulative gains in 2015 associated with the decline in the euro versus the U.S. dollar resulted in a pre-tax gain of $262 million related to our cross currency swaps. A $17 million gain in 2015 related to forward-starting interest rate swaps were driven by increases in benchmark interest rates during that period.
A pre-tax loss of $207 million related to our cross currency swaps was a reclassification adjustment included in net income in 2015.
See “Critical Accounting Policies” below and Note 16 to the Consolidated Financial Statements for additional information on the key assumptions included in calculating the discount rate and expected return on plan assets.
Segment Analysis
We use earnings before interest, income taxes, and depreciation and amortization (“EBITDA”) as our measure of profitability for segment reporting purposes. This measure of segment operating results is used by our chief operating decision maker to assess the performance of and allocate resources to our operating segments. Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” For additional information related to our operating segments, as well as a reconciliation of EBITDA to its nearest generally accepted accounting principles (“GAAP”) measure, Income from continuing operations before income taxes, see Note 22, Segment and Related Information, to our Consolidated Financial Statements.
Our continuing operations are divided into five reportable segments: O&P-Americas; O&P-EAI; I&D; Refining; and Technology. The following tables reflect selected financial information for our reportable segments.
Olefins and Polyolefins-Americas Segment
Overview-In calculating the impact of margin and volume on EBITDA, consistent with industry practice, management offsets revenues and volumes related to ethylene co-products against the cost to produce ethylene. Volume and price impacts of ethylene co-products are reported in margin. Ethylene is a major building block of olefins and polyolefins and as such management assesses the performance of the segment based on ethylene sales volumes and prices and our internal cost of ethylene production.
2016 versus 2015-EBITDA in 2016 reflects lower olefins and polyethylene results, partially offset by improved polypropylene results.
The benefit to 2016 EBITDA from a $57 million gain on the sale of our wholly owned Argentine subsidiary in February 2016 was offset in part by a $29 million non-cash LCM inventory valuation charge recognized in the fourth quarter due primarily to a drop in polypropylene prices. In 2015, volatility in the benchmark prices for heavy liquids and natural gas and certain correlated products, particularly ethylene and propylene, which continued during most of the year, led to net non-cash LCM inventory valuation adjustments totaling $160 million.
2015 versus 2014-Segment results were lower in 2015 primarily due to a decline in olefins results partially offset by improved polyolefin results relative to 2014. Olefins margins in 2015 continued to benefit from low-cost ethylene produced from NGLs in North America, but to a lesser extent than in 2014. The cost advantage for this ethylene, compared to that produced from naphtha and other crude oil-based liquids in the rest of the world, declined due to the lower crude oil prices in 2015.
Prices for heavy liquids, NGLs and olefins declined significantly in the fourth quarter of 2014 to levels that had not been seen in recent years. These declines resulted in the recognition of the non-cash, LCM inventory adjustments totaling $279 million in 2014 discussed below. As discussed above, results for 2015 were also negatively impacted by a $160 million LCM inventory valuation adjustment.
Ethylene Raw Materials-Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of the movement of raw material and energy costs for ethylene and its co-products in the O&P-Americas segment. Ethylene and its co-products are produced from two major raw material groups:
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NGLs, principally ethane and propane, the prices of which are generally affected by natural gas prices; and
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crude oil-based liquids (“liquids” or “heavy liquids”), including naphtha, condensates, and gas oils, the prices of which are generally related to crude oil prices.
Although prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly. In the U.S., we have significant capability to change the mix of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs.
Production economics for the industry have favored NGLs in recent years. Although the decline in oil prices significantly reduced the cost of ethylene produced from heavy liquids in 2015, NGL prices also declined and they have continued to be preferred feedstocks. We produced between 87% and 90% of our U.S. ethylene production NGLs during the past three years.
The following table sets forth selected financial information for the O&P-Americas segment including Income from equity investments, which is a component of EBITDA.
Revenues-Revenues decreased by $887 million, or 9%, in 2016 compared to 2015 and by $3,984 million, or 29%, in 2015 compared to 2014.
2016 versus 2015-Average sales prices for ethylene and polyethylene declined in 2016, consistent with feedstock prices that are correlated to the price of natural gas, which declined relative to 2015. These lower average sales prices led to a revenue decrease of 11% in that period. A 2% revenue increase resulted from the improvement in 2016 product sales volumes as higher olefins sales volume, supported by an increase in the level of purchases for resale during turnaround activities, were only partly offset by lower polyolefins volumes. The sale of our Argentine subsidiary reduced 2016 revenues by $230 million.
2015 versus 2014-Average sales prices declined for most products in 2015 resulting in a 31% revenue decrease compared to 2014. Lower average olefin prices reflect the significant decline in prices for crude oil and correlated products relative to prices in 2014. The decline in average polyethylene and polypropylene sales prices followed the decline in the 2015 prices of their respective feedstocks, ethylene and propylene.
These decreases in revenues were offset in part by an increase in sales volumes, which gave rise to a 2% revenue increase in 2015, compared to 2014. Ethylene sales volumes were higher due to increased production reflecting higher capacity following the completion of the expansion-related turnaround at our La Porte, Texas facility during 2014 and additional production related to less planned and unplanned downtime at our Channelview, Texas facility. Polyethylene sales volumes improved in 2015, due to the completion of an expansion-related turnaround at our Matagorda, Texas facility in the first quarter of 2014 and continued healthy global demand.
EBITDA-EBITDA decreased by $784 million, or 21%, in 2016 compared to 2015 and by $250 million, or 6%, in 2015 compared to 2014.
2016 versus 2015-Lower olefin and polyethylene margins in 2016 were partially offset by higher polypropylene margins. The decline in olefins margins reflected a 2 cents per pound decrease in average ethylene sales prices and an approximate 4 cents per pound increase in the cost of ethylene production driven by lower co-product prices and an increase in the cost of NGL feedstocks. Polyethylene margins declined 4 cents per pound from very high levels in 2015 as average polyethylene sales prices caught up with the overall decline in the cost of ethylene feedstock, after lagging feedstock cost declines in 2015. A 4 cent per pound improvement in 2016 polypropylene margins reflects the benefits of lower propylene feedstock costs and tight market conditions. These olefin and polyethylene margin impacts led to a 17% decrease in EBITDA during 2016. An additional 10% decline in 2016 EBITDA is attributed to the impact of lower volumes related to lower ethylene production during the turnaround and expansion-related activities at our Corpus Christi, Texas ethylene facility and a site-wide outage related to turnaround activities at our Morris, Illinois site.
These negative impacts were partially offset by a 6% increase in 2016 EBITDA primarily due to a $131 million reduction in the unfavorable LCM adjustment recognized in 2016 versus 2015 and to the $57 million gain on the 2016 sale of our Argentine subsidiary.
2015 versus 2014-The 6% decrease in EBITDA reflected a 24% net margin decline as lower olefin margins were partly offset by higher polyethylene and polypropylene margins. This decrease in margins was
offset in part by a 14% increase related to higher volumes and a 3% increase related to the $119 million decline in the non-cash charges related to the LCM inventory valuation adjustments discussed above. Improvements in our income from equity investments accounts for the remaining 1% increase in EBITDA during 2015.
Olefin margins declined in 2015 as a 19 cent per pound drop in the average sales price for ethylene outpaced the decrease in our cost of ethylene production. Lower NGL and heavy liquids feedstock prices in 2015 outpaced the decline in selling prices of our co-products, which resulted in the decrease of our cost of ethylene production compared to the prior year.
Polyethylene margins reflected a 5 cent per pound improvement in 2015 as demand remained strong and decreases in the cost of ethylene feedstock outpaced lower average sales prices relative to 2014. Polypropylene margins, which increased by 7 cents per pound in 2015, benefited from lower propylene feedstock costs, which in part reflected the decline in crude oil prices, and higher average sales prices relative to propylene, driven by industry operating issues and increased demand.
Sales volumes in 2015 increased as compared to the prior year as a result of downtime and expansion-related activities in 2014 and the increased demand discussed above.
Olefins and Polyolefins-Europe, Asia, International Segment
Overview-In calculating the impact of margin and volume on EBITDA, consistent with industry practice, management offsets revenues and volumes related to ethylene co-products against the cost to produce ethylene. Volume and price impacts of ethylene co-products are reported in margin. Ethylene is a major building block of our olefins and polyolefins and as such management assesses the performance of the segment based on ethylene sales volumes and prices and our internal cost of ethylene production.
2016 versus 2015-Higher operating results in 2016 were largely the result of higher polyolefin margins, offset in part by lower olefins results and reductions in polyolefins volumes due to turnaround activity and unplanned downtime.
EBITDA in 2016 reflects the benefit of a $21 million gain from the sale of our wholly owned Argentine subsidiary and $11 million of gains from the sales of our joint venture in Japan and idled assets in Australia. EBITDA in 2015 included a $30 million non-cash LCM inventory valuation adjustment driven by a decline in the prices of naphtha and polyolefins.
2015 versus 2014-Operating results in 2015 reflect improved results for our European polyolefins and, to a lesser extent, higher results for olefins and better results for our joint ventures that are accounted for using the equity method.
At the end of the fourth quarter of 2015, lower feedstock and product prices resulted in market prices that were lower than the carrying value of our related inventories. Accordingly, we recorded a $30 million non-cash, LCM inventory valuation charge related to olefins and polyolefins. This compares to the $44 million non-cash, LCM inventory valuation charge related to olefins that was recognized in the fourth quarter of 2014 as a result of the declining price of naphtha.
Ethylene Raw Materials-In Europe, heavy liquids are the primary raw materials for our ethylene production. In recent years, we have sourced increased amounts of advantaged NGLs when the opportunity has arisen. In 2016, we continued to process advantaged feedstocks as market opportunities allowed.
The following table sets forth selected financial information for the O&P-EAI segment including Income from equity investments, which is a component of EBITDA.
Revenues-Revenues in 2016 decreased by $997 million, or 9%, compared to 2015 and by $3,627 million, or 24%, in 2015 compared to 2014.
2016 versus 2015-The decline in 2016 revenues comprises a 7% decrease related to lower average sales prices, and a 2% reduction of sales volumes stemming from turnaround activities and unplanned outages.
In 2016, average sales prices for olefins and polyolefins fell following feedstock prices that declined in conjunction with the price of crude oil.
2015 versus 2014-The decline in 2015 revenues reflects decreases of 14% and 12% related to lower average sales prices and currency translation impacts, respectively. An increase in polyolefins volumes resulting from increased demand and higher operating rates, which was substantially offset by a decline in olefins volumes stemming from turnaround activities at our Münchsmünster, Germany facility and unplanned outages, was responsible for a 2% revenue increase in 2015.
In 2015, lower average sales prices for polypropylene were partially offset by higher average polyethylene prices. Decreases in feedstock costs in 2015 led to the decline in polypropylene sales prices compared to 2014. The increase in polyethylene prices in 2015 reflect strong spread increases over ethylene, primarily in Europe.
EBITDA-EBITDA increased by $242 million, or 13%, in 2016 compared to 2015 and by $459 million, or 34%, in 2015 compared to 2014.
versus 2015-In 2016, higher European polyolefins margins stemming from declining ethylene and propylene feedstock costs outpaced falling product prices and led to an 11% increase in EBITDA. This margin improvement in 2016 was partially offset by a 2% decrease in EBITDA due largely to lower polyolefin volumes.
A 3% increase in 2016 EBITDA is attributed to gains associated with the sales of a joint venture, idled assets and our wholly owned Argentine subsidiary, as well as the absence of the 2015 LCM inventory valuation adjustment discussed above. Income from our equity investments also led to a 1% increase in EBITDA in 2016 due to higher polyolefin margins in our European joint venture and strong operating rates in our Saudi joint ventures.
2015 versus 2014-Improved margins in all major product groups and the increase in polyolefins volumes described above contributed 42% and 4%, respectively, to EBITDA in 2015. Polyolefins margins improved due to supply constraints as a result of several industry outages. Olefins margins improved in 2015 as the lower cost of ethylene production, which was driven by lower feedstock prices, outpaced the decline in olefin product prices.
A 4% increase in EBITDA associated with an improvement in Income from equity investments in 2015, was mainly driven by improved margins relative to 2014 in certain joint ventures as a result of favorable market prices during 2015 and strong operating rates.
These increases were partially offset by a 13% decrease due to the translation of a weaker euro and a 3% decrease related to a net charge of $38 million discussed below. In 2015, EBITDA included a $30 million charge related to the LCM adjustment previously discussed. In 2014, EBITDA included a $52 million benefit associated
with a settlement for certain existing and future environmental claims under a 2005 indemnification agreement from an insurance settlement, which was offset in part by the $44 million LCM inventory valuation charge discussed above.
Intermediates and Derivatives Segment
Overview
2016 versus 2015-Operating results for 2016 were lower than in 2015, as margin compression for most products related to declining energy prices, higher industry production rates and additional industry capacity was only partly offset by the impact of higher volumes.
EBITDA in 2015 was negatively impacted by the recognition of $181 million of LCM inventory valuation adjustments driven by the continued decline in prices for feedstocks, certain oxyfuels and related products, and intermediate chemical products to levels that were lower than the carrying value of our related inventories at reporting dates throughout the year.
2015 versus 2014-Results in 2015 improved as higher margins in intermediate chemicals benefited from the favorable impact of product pricing and declining feedstock costs. This improvement was substantially offset by a decline in 2015 oxyfuels and related products results indicative of a decrease in energy prices compared to unusually high margins in 2014.
Our 2015 results were also unfavorably impacted by the non-cash, LCM inventory valuation adjustment discussed above, which reflects an $88 million increase over the LCM inventory valuation adjustment recognized in the fourth quarter of 2014.
The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA.
Revenues-Revenues for 2016 decreased by $546 million, or 7%, compared to 2015 and by $2,358 million, or 23%, in 2015 compared to 2014.
2016 versus 2015-Lower average sales prices in 2016 reflect the impacts of lower crude oil, lower gasoline prices and the decline in various feedstock prices. Additional industry supply also negatively impacted the average sales prices for certain products during 2016. These lower sales prices in 2016 were responsible for an 11% revenue decrease.
This price driven decrease was offset in part by a 4% volume-related revenue increase in 2016 resulting from fewer planned and unplanned production outages relative to 2015.
2015 versus 2014-In 2015, the significant decline in crude oil and key feedstocks prices was the primary driver behind the overall decrease in average sales prices across most products. This decline in prices was offset in part by improved octane blend premiums for oxyfuels and related products and gasoline price spreads over crude oil that were strong in 2015. These lower average sales prices and the impact of currency translation impacts led to revenue decreases of 23% and 6%, respectively.
Higher sales volumes for oxyfuels and related products and intermediate chemicals were largely responsible for a 6% volume driven revenue increase. Sales volumes for oxyfuels and related products increased due to strong octane and gasoline demand. Intermediate chemicals volumes increased due to increased feedstock supply and improved operating rates at our acetyls facilities.
EBITDA-EBITDA decreased by $142 million, or 10%, in 2016 compared to 2015 and increased by $16 million, or 1%, in 2015 compared to 2014.
2016 versus 2015-Lower margins in most I&D products in 2016 resulted in a 30% decrease in EBITDA. Weaker gasoline markets drove oxyfuels and related product values lower relative to butane feedstock costs, and lower product prices in propylene oxide and derivatives and intermediate chemicals were driven largely by increased industry supply. Lower income from our equity investments in 2016 also resulted in a 1% decrease in EBITDA during that period.
An EBITDA increase in 2016 of 9% related to the higher volumes discussed above, partially offset the negative margin impact. EBITDA in 2016 also reflected an increase of 12% related to the absence of the LCM inventory valuation adjustment recognized in the 2015 comparison period.
2015 versus 2014-EBITDA increased by $16 million, or 1%, in 2015 compared to 2014. Higher sales volumes in 2015 as discussed above led to a volume-driven increase of 7% in EBITDA.
Lower oxyfuels and related products margins, substantially offset by an improvement in intermediate chemicals margins resulted in a 1% decrease in 2015 EBITDA. Oxyfuels and related products margins were lower in 2015 due to a significant decline in crude oil prices offset in part by strong gasoline price spreads over crude oil and octane blending value. Margins for intermediate chemicals improved as styrene margins were favorably impacted by tight supply resulting from industry outages and feedstock prices that declined more rapidly than average sales prices.
EBITDA was further reduced by 6% as a result of the $88 million incremental increase in the non-cash LCM inventory valuation adjustment recognized in 2015 over 2014. The remaining change in 2015 EBITDA is attributable to a small improvement in income from our equity investments.
Refining Segment
Overview
2016 versus 2015-Lower margins and reduced production due to planned and unplanned outages in 2016 as described below resulted in significantly lower results for our Refining segment in 2016 as compared to 2015. EBITDA in 2015 included charges totaling $177 million related to non-cash charges associated with LCM inventory valuation adjustments driven by a decline of nearly $20 per barrel in crude oil prices and corresponding reductions in refined product prices.
2015 versus 2014-The results of our Refining segment in 2015 were impacted by non-cash charges totaling $177 million related to LCM inventory valuation adjustments described above which were $167 million less than the LCM inventory valuation adjustment recorded in 2014.
Fourth quarter 2015 results declined significantly compared to the results in the prior three quarters of 2015 as refinery operating rates were significantly lower due to unplanned maintenance outages. The recognition of a $127 million non-cash, LCM inventory valuation adjustment resulted in a loss for the fourth quarter. Operating results were higher in 2015 relative to 2014 as a result of improvements in refining margins and the favorable impact of the lower LCM adjustment recognized in 2015.
The following table sets forth selected financial information and heavy crude processing rates for the Refining segment and the U.S. refining market margins for the applicable periods. “LLS” is a light crude oil, while “Maya” is a heavy crude oil.
Revenues-Revenues decreased by $1,422 million, or 22% in 2016 compared to 2015 and by $5,153 million, or 44%, in 2015 compared to 2014.
2016 versus 2015-Major refined product prices declined due to lower crude oil prices and to weakness relative to crude oil. The average per barrel price of benchmark Maya crude oil declined $7.59 in 2016 compared to 2015. A 16% price-related revenue decline in 2016 versus 2015 reflected per barrel price declines of approximately $10.51 and $10.77 for gasoline and distillates, respectively.
The remaining 6% revenue decrease in 2016 is attributed to reduced processing rates. Processing declines resulted from several unplanned outages, including a coker unit fire, downtime at crude units with reduced processing and several utility interruptions. Planned turnaround activity on a crude unit and a coker unit processing train early in 2016 also contributed to lower throughput during 2016.
versus 2014-Total revenues decreased on significantly lower product prices due to the drop in crude oil prices and a reduction in sales volumes due to production limitations. The average crude oil price in 2015 declined by slightly over $40 per barrel compared to 2014 leading to lower product pricing. This decline in product pricing caused a 38% decrease in revenues compared to 2014. Processing rates in 2015 reflect an 8% decrease from 2014 rates, driven by processing limits which were negatively impacted primarily by unplanned maintenance in the fourth quarter of 2015. This decline contributed to a 6% decrease in 2015 revenues.
EBITDA-EBITDA decreased by $270 million, or 79%, in 2016 compared to 2015 and decreased by $277 million, or 426%, in 2015 compared to 2014.
2016 versus 2015-A decline in refining margins in 2016 led to a 90% decrease in EBITDA. The Maya 2-1-1 benchmark refining spread declined in 2016 by approximately $3.10 per barrel relative to 2015. This decrease was driven by per barrel declines of approximately $3.15 and $3.40 in gasoline and diesel spreads, respectively, and an approximate $1.00 reduction in the price differential between Brent and Maya crude oils. The operating issues that drove lower crude throughput in 2016 also negatively impacted margins due to a less favorably priced crude oil mix and higher variable costs per barrel.
Lower production stemming from a reduction in average heavy crude oil processing rates relative to 2015 led to a decrease in EBITDA in 2016 of 41%. This reduction in rates was attributable to the unplanned outages, crude unit operating limitations and planned turnaround activities discussed above.
The absence of the $177 million LCM inventory valuation adjustment recognized in 2015 resulted in an EBITDA increase of 52% in 2016 as compared to 2015.
2015 versus 2014-LCM inventory valuation adjustments of $177 million and $344 million were recognized in 2015 and 2014, respectively. This change in the 2015 LCM inventory valuation adjustment resulted in a 257% increase in EBITDA. Results improved by an additional 283% in 2015 due to an increase in refining margins. These improvements were offset in part by a 114% decline in EBITDA due to lower processing rates.
The increase in refining margins in 2015 relative to 2014 was generated by improved by-product price spreads to crude oil and a 14% increase in purchases of crude oil at advantaged prices relative to the Maya crude price benchmark. By-product spreads improved due to the decline in 2015 of the average per barrel price of crude oil relative to 2014. These factors more than offset the $2.13 per barrel decline in the Maya 2-1-1 benchmark margin in 2015 versus 2014.
Crude processing rates in 2015 reflect an 8% decline relative to 2014. This decline is mainly due to a number of unplanned outages for maintenance that began in the latter part of the third quarter and extended into early December. The average crude processing rate for the fourth quarter of 2015 was 206 thousands of barrels per day. Processing rates returned to near full capacity by mid-December 2015.
Technology Segment
Overview-The Technology segment recognizes revenues related to the sale of polyolefin catalysts and the licensing of chemical and polyolefin process technologies. These revenues are offset in part by the costs incurred in the production of catalysts, licensing and services activities and research and development (“R&D”) activities. In 2016 and 2015, our Technology segment incurred approximately 55% of all R&D costs while in 2014, it incurred approximately 65% of our R&D costs.
2016 versus 2015-EBITDA in 2016 improved with higher catalyst margins. A small increase in licensing and services revenue was mostly offset by slightly lower catalyst sales volumes.
2015 versus 2014-EBITDA in 2015 was relatively unchanged compared to 2014, reflecting improved catalyst results and lower R&D expenses, offset by lower licensing and services revenues.
The following table sets forth selected financial information for the Technology segment.
Revenues-Revenues increased by $14 million, or 3%, in 2016 compared to 2015 and decreased by $32 million, or 6%, in 2015 compared to 2014.
2016 versus 2015-Higher average catalyst sales prices and higher revenues recognized on process licenses each led to a 2% increase in 2016 revenues. These increases were partly offset by a 1% revenue decrease resulting from lower catalyst sales volumes.
2015 versus 2014-The unfavorable currency translation impacts due to the significantly weaker euro versus the U.S. dollar and a decline in licensing and services revenues contributed 12% and 7% to the decrease in 2015 revenues. These declines were offset in part by revenue increases of 12% and 1%, respectively, related to higher catalyst sales volumes and higher average catalyst sales prices in 2015.
EBITDA-EBITDA in 2016 increased by $19 million, or 8%, compared to 2015 and by $11 million, or 5%, in 2015 compared to 2014.
2016 versus 2015-A 10% improvement in EBITDA during 2016 due to higher catalyst margins and an increase in licensing and services revenue was partly offset by a 2% decrease in EBITDA resulting from lower catalyst volumes.
2015 versus 2014-EBITDA increased by $11 million, or 5%, in 2015 compared to 2014. Improved catalyst volumes and margins, partly offset by unfavorable currency translation impacts, and lower R& D expenses were responsible for increases in EBITDA of 7% and 9%, respectively. These increases were partly offset by an 11% decrease in EBITDA due to lower licensing and services revenues.
FINANCIAL CONDITION
Operating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:
Operating Activities-Cash of $5,606 million generated in 2016 primarily reflected earnings adjusted for non-cash items and cash generated by the main components of working capital-accounts receivable, inventories and accounts payable. The non-cash items in 2016 included a $78 million gain related to the sale of our wholly owned Argentine subsidiary with adjustments for related working capital and gains totaling $11 million related to sales of our joint venture in Japan and idled assets in Australia.
The main components of working capital generated cash of $123 million in 2016. Higher product sales prices in the fourth quarter of 2016 across all segments combined with the impact of higher fourth quarter 2016 sales volumes in our O&P-Americas, Refining and I&D segments led to an increase in accounts receivable. This increase in accounts receivable was offset by higher accounts payable, which was driven by the higher cost of crude oil and other feedstocks. The level of inventories fell in our O&P-Americas segment following the completion of turnaround activities in the fourth quarter of 2016 and in our Refining segment, which had higher crude oil inventories at the end of 2015 due to operational issues during the fourth quarter.
Cash of $5,842 million generated in 2015 primarily reflected earnings adjusted for non-cash items and cash used by the main components of working capital. The main components of working capital consumed cash of $246 million in 2015. The lower cost of crude oil and other feedstocks in 2015 led to a decline in accounts payable. Preparation for the turnaround in 2016 at our Corpus Christi, Texas facility and the unplanned maintenance outage at our Houston refinery, which resulted in higher levels of U.S. olefins and crude oil inventories at year end, led to the increase in consolidated inventories in 2015. Accounts receivable decreased on lower average product sales prices, reflective of the drop in 2015 crude oil prices.
Cash of $6,048 million generated in 2014 primarily reflected earnings adjusted for non-cash items and refunds totaling $232 million for value added taxes related to prior periods that were received from Italian tax authorities in 2014. These cash inflows were offset in part by cash used by the main components of working capital.
The increase in 2014 inventories primarily reflected higher olefins raw material inventories, offset in part by lower ethylene and propylene inventories due to turnaround activities at our La Porte, Texas facility, and higher levels of inventory for crude oil and work-in-process in our Refining segment. Lower feedstock costs led to the decrease in 2014 accounts payable. The decrease in accounts receivable primarily reflected lower ethylene prices in our O&P-EAI segment, lower prices for oxyfuels and related products in our I&D segment, lower average sales prices and year end volumes in North American polyolefins and lower prices for refining products. Also contributing to the decline was a larger than usual accounts receivable balance at the end of 2013 attributable to customer remittance timing.
Investing Activities-We invested cash of $2,297 million, $1,051 million and $3,531 million in 2016, 2015 and 2014, respectively.
We invest in investment-grade and other high-quality instruments that provide adequate flexibility to redeploy funds as needed to meet our cash flow requirements while maximizing yield. In 2016, 2015 and 2014, we invested $764 million, $2,073 million and $3,439 million, respectively, in securities that are classified as Short-term investments. The majority of these investments are deemed available-for-sale; however, beginning in the third quarter of 2016, we invested in additional securities deemed held-to-maturity. We also invested $674 million, $397 million and $425 million in tri-party repurchase agreements in 2016, 2015 and 2014, respectively. These investments are classified as short-term loans receivable except for a $101 million investment which was classified as a long-term loan receivable in 2015. We received proceeds upon the sale and maturity of certain of our available-for-sale securities and repurchase agreements of $674 million and $685 million, respectively, in 2016; $2,489 million and $350 million, respectively, in 2015; and $1,751 million and $75 million, respectively, in 2014. See Note 14 to the Consolidated Financial Statements for additional information regarding these investments.
The following table summarizes our capital expenditures for continuing operations for the periods from 2014 through 2016:
In 2017, we expect to spend approximately $2 billion, which includes contributions to our PO joint venture assets. Capital spending is projected to be lower in 2017 relative to 2016, which included the ethylene expansion and related turnaround of our Corpus Christi, Texas facility and turnaround activities at other facilities.
In 2016 and 2015, capital expenditures included debottlenecks of certain assets to enhance production, turnaround activities and expansion projects at several sites, as well as other plant improvement projects and railcar purchases. The increased levels of capital expenditures in 2016 versus 2015 for our O&P-Americas, O&P-EAI and Refining segments were largely due to debottleneck and turnaround activities.
Financing Activities-Financing activities used cash of $3,349 million, $4,850 million and $5,907 million in 2016, 2015 and 2014, respectively.
We made payments totaling $2,938 million, $4,656 million and $5,788 million in 2016, 2015 and 2014, respectively, to acquire a portion of our outstanding ordinary shares. We also made dividend payments totaling $1,395 million, $1,410 million and $1,403 million to our shareholders in 2016, 2015 and 2014, respectively. For additional information related to these share repurchases and dividend payments, see Note 20 to the Consolidated Financial Statements.
We received net proceeds of $177 million, $61 million and $262 million in 2016, 2015 and 2014, respectively, through the issuance and repurchase of commercial paper instruments under our commercial paper program.
In March 2016, we issued 750 million of 1.875% guaranteed notes due 2022 and received net proceeds of $812 million. In March 2015, we issued $1,000 million of 4.625% senior notes due 2055 and received net proceeds of $984 million. In February 2014, we issued $1,000 million of 4.875% guaranteed notes due 2044 and received net proceeds of $988 million.
Additional information related to our commercial paper program and the issuance of debt can be found in the Liquidity and Capital Resources section below and in Note 12 to the Consolidated Financial Statements.
Liquidity and Capital Resources-As of December 31, 2016, we had $2,022 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments. We also held $369 million of tri-party repurchase agreements classified as Prepaid expenses and other current assets at December 31, 2016. For additional information related to our purchases of marketable securities, which currently include time deposits, certificates of deposit, commercial paper, bonds and limited partnership investments, and our investments in tri-party repurchase agreements, see “Investing Activities” above and Note 14 to the Consolidated Financial Statements.
At December 31, 2016, we held $556 million of cash in jurisdictions outside the U.S., principally in the United Kingdom. There are currently no material legal or economic restrictions that would impede our transfers of cash.
We also had total unused availability under our credit facilities of $2,710 million at December 31, 2016, which included the following:
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$1,973 million under our $2,500 million revolving credit facility, which backs our $2,500 million commercial paper program. Availability under this facility is net of outstanding borrowings, outstanding letters of credit provided under the facility and notes issued under our commercial paper program. A small portion of our availability under this facility is impacted by changes in the euro/U.S. dollar exchange rate. At December 31, 2016, we had $500 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the facility; and
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$737 million under our $900 million U.S. accounts receivable securitization facility. Availability under this facility is subject to a borrowing base of eligible receivables, which is reduced by outstanding borrowings and letters of credit, if any. This facility had no outstanding borrowings or letters of credit at December 31, 2016.
See Note 12 to the Consolidated Financial Statements for additional information related to our credit facilities.
In accordance with our current interest rate risk management strategy and subject to management’s evaluation of market conditions and the availability of favorable interest rates among other factors, we may from time to time enter into interest rate swap agreements to economically convert a portion of our fixed rate debt to variable rate debt or convert a portion of variable rate debt to fixed rate debt.
We have $451 million of outstanding letters of credit and bank guarantees issued under uncommitted credit facilities at December 31, 2016. At December 31, 2016, we had total debt, including current maturities, of $8,981 million.
In June 2016, the term of our existing $2,000 million revolving credit facility was extended for one year to June 2021 pursuant to a consent agreement. We also amended the revolving credit facility in June 2016 to increase its size from $2,000 million to $2,500 million. All other material terms of the agreement remained unchanged. The letters of credit sublimit of our senior revolving credit facility was reduced from $700 million to $500 million by agreement in September 2015.
In connection with the increase of our revolving credit facility, in June 2016 we increased the size of our 2014 commercial paper program to permit the issuance of privately placed, unsecured short-term promissory notes (“commercial paper”) in an aggregate amount not to exceed $2,500 million. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividend payments and share repurchases. At December 31, 2016, we had $500 million of commercial paper outstanding.
In March 2016, our direct, 100% owned subsidiary, LYB International Finance II B.V., issued 750 million of 1.875% guaranteed notes due 2022 at a discounted price of 99.607%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance II’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.
In August 2015, we amended our U.S. accounts receivable securitization facility, which, among other things, decreased the purchase limit from $1,000 million to $900 million, added a $300 million uncommitted accordion feature and extended the term of the facility to August 2018.
In March 2015, we issued $1,000 million of 4.625% Notes due 2055 at a discounted price of 98.353%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes rank equally in right of payment to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.
In February 2014, our direct, 100% owned subsidiary, LYB International Finance B.V., issued $1,000 million of 4.875% Notes due 2044 at a discounted price of 98.831%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB International Finance B.V.’s existing and future unsecured indebtedness and to all of LyondellBasell’s existing and future unsubordinated indebtedness.
See Note 12 to the Consolidated Financial Statements, for additional information related to our credit facilities and Notes discussed above, including terms of redemption.
In May 2016, our shareholders approved a proposal to authorize us to repurchase up to an additional 10%, or approximately 42.5 million, of our shares outstanding over the following eighteen months. Our share repurchase program does not have a stated dollar amount, and purchases may be made through open market purchases, private market transactions or other structured transactions. Repurchased shares could be retired or used for general corporate purposes, including for various employee benefit and compensation plans. As of December 31, 2016, we have purchased 21.3 million shares under this program for approximately $1,688 million. As of February 14, 2017, we had approximately 20 million shares remaining under the current authorization. The timing and amount of additional shares repurchased will be determined by our Management Board based on its evaluation of market conditions and other factors. For additional information related to our share repurchase programs, see Note 20 to the Consolidated Financial Statements.
In September 2016, we received proceeds of $72 million from the sale of our joint venture in Japan. We also purchased a net additional 7.41% interest in our joint venture in Korea for $36 million in September 2016. In February 2016, we received net proceeds of $137 million from the sale of our wholly owned Argentine subsidiary.
We engaged an investment bank in 2016 to assist in testing the value of our Houston refinery as part of our regular review of our asset portfolio and as a result of indications of interest in the refinery by third parties. Following a thorough process, we have elected to retain the refinery in our asset portfolio.
We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash on hand, cash from operating activities, proceeds from the issuance of debt, proceeds from asset divestitures, or a combination thereof. In connection with any repayment or redemption of our debt, we may incur cash and non-cash charges, which could be material in the period in which they are incurred. We currently intend to refinance certain outstanding debt, subject to market conditions, in the first quarter of 2017. Our current analyses indicate that the refinancing may result in charges of approximately $125 million based on current market conditions. The actual costs will depend on several factors, including interest rates and market conditions if and when the refinancing occurs.
We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Cash on hand, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the repurchase of shares under our share repurchase program.
We intend to continue to declare and pay quarterly dividends, with the goal of increasing the dividend over time, after giving consideration to our cash balances and expected results from operations.
We believe that our cash on hand, cash from operating activities and proceeds from our credit facilities provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due.
Contractual and Other Obligations-The following table summarizes, as of December 31, 2016, our minimum payments for long-term debt, including current maturities, short-term debt, and contractual and other obligations for the next five years and thereafter:
Total Debt-Our debt includes unsecured senior notes, guaranteed notes and various other U.S. and non-U.S. loans. See Note 12 to the Consolidated Financial Statements for a discussion of covenant requirements under the credit facilities and indentures and additional information regarding our debt facilities.
Interest on Total Debt-Our debt and related party debt agreements contain provisions for the payment of monthly, quarterly or semi-annual interest at a stated rate of interest over the term of the debt.
Pension and other Postretirement Benefits-We maintain several defined benefit pension plans, as described in Note 16 to the Consolidated Financial Statements. Many of our U.S. and non-U.S. plans are subject to minimum funding requirements; however, the amounts of required future contributions for all our plans are not fixed and can vary significantly due to changes in economic assumptions, liability experience and investment return on plan assets. As a result, we have excluded pension and other postretirement benefit obligations from the Contractual and Other Obligations table above. Our annual contributions may include amounts in excess of minimum required funding levels. Contributions to our non-U.S. plans in years beyond 2017 are not expected to be materially different than the expected 2017 contributions disclosed in Note 16 to the Consolidated Financial Statements. At December 31, 2016, the projected benefit obligation for our pension plans exceeded the fair value of plan assets by $942 million. Subject to future actuarial gains and losses, as well as future asset earnings, we, together with our consolidated subsidiaries, will be required to fund the discounted obligation of $942 million in future years. We contributed $114 million, $107 million and $94 million to our pension plans in 2016, 2015 and 2014, respectively. We provide other postretirement benefits, primarily medical benefits to eligible participants, as described in Note 16 to the Consolidated Financial Statements. We pay other unfunded postretirement benefits as incurred.
Advances from Customers-We are obligated to deliver products in connection with long-term sales agreements under which advances from customers were received in prior years. These advances are treated as deferred revenue and will be amortized to earnings as product is delivered over the remaining terms of the respective contracts, which range predominantly from 2 to 8 years. The unamortized long-term portion of such advances totaled $47 million as of December 31, 2016.
Other-Other primarily consists of accruals for environmental remediation costs, obligations under deferred compensation arrangements, and anticipated asset retirement obligations. See “Critical Accounting Policies” below for a discussion of obligations for environmental remediation costs.
Deferred Income Taxes-The scheduled settlement of the deferred tax liabilities shown in the table is based on the scheduled reversal of the underlying temporary differences. Actual cash tax payments will vary depending upon future taxable income. See Note 18 to the Consolidated Financial Statements for additional information related to our deferred tax liabilities.
Purchase Obligations-We are party to various obligations to purchase products and services, principally for raw materials, utilities and industrial gases. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. The commitments are segregated into take-or-pay contracts and other contracts. Under the take-or-pay contracts, we are obligated to make minimum payments whether or not we take the product or service. Other contracts include contracts that specify minimum quantities; however, in the event that we do not take the contractual minimum, we are only obligated for any resulting economic loss suffered by the vendor. The payments shown for the other contracts assume that minimum quantities are purchased. For contracts with variable pricing terms, the minimum payments reflect the contract price at December 31, 2016.
Operating Leases-We lease various facilities and equipment under noncancelable lease arrangements for various periods. See Note 13 to the Consolidated Financial Statements for related lease disclosures.
CURRENT BUSINESS OUTLOOK
In the past several months, the industry outlook for 2017 has steadily improved. Healthy U.S. and global economic activity and ethylene project delays have led to an improved forecast for industry supply and demand dynamics. Crude oil prices and NGL supply have stabilized at more favorable levels than during much of 2016. The U.S. regulatory landscape may change in ways that are generally favorable to our industry. While we will continue to watch these developments, we believe our significant investment in our 2016 maintenance programs favorably positions us for 2017.
RELATED PARTY TRANSACTIONS
We have related party transactions with our joint venture partners. We believe that such transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See Note 4 to the Consolidated Financial Statements for additional related party disclosures.
CRITICAL ACCOUNTING POLICIES
Management applies those accounting policies that it believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. (see Note 2 to the Consolidated Financial Statements). Our more critical accounting policies include those related to the valuation of inventory, long-lived assets, the valuation of goodwill, accruals for long-term employee benefit costs such as pension and other postretirement costs, and accruals for taxes based on income. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment.
Inventory-We account for our inventory using the last-in, first-out (“LIFO”) method of accounting.
The cost of raw materials, which represents a substantial portion of our operating expenses, and energy costs generally follow price trends for crude oil and/or natural gas. Crude oil and natural gas prices are subject to many factors, including changes in economic conditions.
Since our inventory consists of manufactured products derived from crude oil, natural gas, natural gas liquids and correlated materials, as well as the associated feedstocks and intermediate chemicals, our inventory market values are generally influenced by changes in benchmark crude oil and heavy liquid values and prices for manufactured finished goods. The degree of influence of a particular benchmark may vary from period to period, as the composition of the dollar value LIFO pools change. Due to natural inventory composition changes, variation in pricing from period to period does not necessarily result in a linear LCM impact. Additionally, an LCM condition may arise due to a volumetric decline in a particular material that had previously provided a positive impact within a pool. As a result, market valuations and LCM conditions are dependent upon the composition and mix of materials on hand at the balance sheet date. In the measurement of an LCM adjustment, the numeric input value for determining the crude oil market price includes pricing that is weighted by volume of inventories held at a point in time, including WTI, Brent and Maya crude oils.
As indicated above, fluctuation in the prices of crude oil, natural gas and correlated products from period to period may result in the recognition of charges to adjust the value of inventory to the lower of cost or market in periods of falling prices and the reversal of those charges in subsequent interim periods as market prices recover. Accordingly, our cost of sales and results of operations may be affected by such fluctuations.
On May 1, 2010, upon emergence from bankruptcy, we recorded our inventory, which is primarily crude oil and correlated products derived therefrom, at fair value in accordance with the requirements of fresh-start accounting. The per barrel benchmark price of WTI crude oil at that date was $86.15.
During 2014, we recorded LCM inventory valuation adjustments totaling $760 million driven primarily by the decline in the price of crude oil and related declines in the prices of heavy liquids and other correlated products. A $45 million charge was taken in the third quarter of 2014 which marked the beginning of a downward price trend. An additional $715 million of LCM inventory valuation adjustment was recognized in the fourth quarter of 2014 to reflect decreases of approximately 50% in the price indices for crude oil and other correlated products as compared to the third quarter of 2014. At December 31, 2014, representative prices for crude oil and heavy liquids were $47.59 per barrel and $45.20 per barrel, respectively. These price inputs were calculated using a weighted average of the materials held in inventory on that date.
The trend of falling hydrocarbon prices continued in 2015, leading to further LCM inventory valuation adjustments. In 2015, the cumulative charge related to LCM inventory valuation adjustments, which was driven by declines in crude oil, ethylene, propylene, benzene and ETBE, was $548 million. Representative prices used in the calculation of the cumulative LCM inventory adjustments recognized in 2015 were $30.22 per barrel for crude oil, 20 cents per pound for ethylene, 32 cents per pound for propylene, $2.14 per gallon for benzene and $1.66 per gallon for ETBE.
A drop in polypropylene prices led to the recognition of a $29 million LCM adjustment in the fourth quarter of 2016.
Further sustained price declines in our finished goods and raw materials could result in additional LCM inventory valuation charges during 2017. Several of our LIFO inventory pools are “at-risk” for further adjustment as each impacted LIFO pool is at, or close to, the calculated market value at the last balance sheet measurement date. “At-risk” inventory accounts for $2.2 billion of our total inventory carrying value of $3.8 billion as of December 31, 2016. The extent to which further adjustment may occur is dependent on pool specific product prices and composition within each individual dollar value LIFO pool at the balance sheet date.
Long-Lived Assets-With respect to long-lived assets, which primarily include property, plant and equipment and intangible assets, key assumptions included estimates of useful lives and the recoverability of carrying values of fixed assets and other intangible assets, as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the European, U.S. and other world economies, the cyclical nature of the chemical and refining industries, and uncertainties associated with regulatory governmental actions.
When events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, we evaluate definite lived intangible assets for impairment. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for us is generally at the plant group level (or, at times individual plants in certain circumstances where we have isolated production units with separately identifiable cash flows). When it is probable that the undiscounted cash flows of a tangible asset or asset group will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value. In-process research and development projects are impaired when abandoned.
The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of capitalized plant turnaround costs, under the straight-line method over their estimated useful lives totaled $1,064 million in 2016. The useful lives of assets are assessed periodically and if determined to be shorter than originally estimated, depreciation and amortization charges would be accelerated over the revised useful life.
Goodwill-Goodwill of $528 million at December 31, 2016 represents the tax effect of the differences between the tax and book bases of our assets and liabilities resulting from the revaluation of those assets and liabilities to fair value in connection with the Company’s emergence from bankruptcy and adoption of fresh-start accounting. We evaluate the recoverability of the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable.
We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required.
We also have the option to proceed directly to the two-step quantitative impairment test. Under the two-step impairment test, the fair value of each reporting unit is compared to its carrying value, including goodwill. For step one of the impairment test, the fair value of the reporting unit is calculated using a discounted cash-flow model. Such a model inherently utilizes a significant number of estimates and assumptions, including operating margins, tax rates, discount rates, capital expenditures and working capital changes. Step two of the impairment test would be performed should management conclude that the carrying value of a reporting unit, including goodwill, is in excess of its fair value. In step two of the impairment test, the carrying amount of a reporting unit’s goodwill is compared to the implied fair value of its goodwill. Valuation experts may be used in such an assessment. If the carrying value of goodwill exceeds its implied fair value, an impairment charge equal to the excess would be recognized.
For 2016 and 2015, management performed a qualitative impairment assessment of our reporting units which indicated that the fair value of our reporting units was greater than their carrying value. Accordingly, a quantitative two-step goodwill impairment test was not required. Accordingly, no goodwill impairment was recognized in 2016 or 2015.
Long-Term Employee Benefit Costs-Our costs for long-term employee benefits, particularly pension and other postretirement medical and life insurance benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent its best estimates of the future effects of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.
The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Our assumed discount rate is based on yield information for high-quality corporate bonds with durations comparable to the expected cash settlement of our obligations. For the purpose of measuring the benefit obligations at December 31, 2016, we used a weighted average discount rate of 4.20% for the U.S. plans which reflects the different terms of the related benefit obligations. The weighted average discount rate used to measure obligations for non-U.S. plans at December 31, 2016 was 1.52%, reflecting market interest rates. The discount rates in effect at December 31, 2016 will be used to measure net periodic benefit cost during 2017.
The benefit obligation and the periodic cost of other postretirement medical benefits are also measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2016, the assumed rate of increase for our U.S. plans was 7.0%, decreasing to 4.5% in 2038 and
thereafter. A one percentage point change in the health care cost trend rate assumption as of December 31, 2016 would have resulted in a $21 million increase or $14 million decrease in the accumulated other postretirement benefit liability for our non-U.S. plans and would have resulted in an increase or decrease of less than $1 million for U.S. plans. Due to limits on our maximum contribution level under the medical plan, there would have been no significant effect on either our benefit liability or net periodic cost.
The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected long-term rate of return on plan assets applied to a market-related value of plan assets which, for us, is defined as the market value of assets. The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions.
The weighted average expected long-term rate of return on assets in our U.S. plans of 8.00% is based on the average level of earnings that our independent pension investment advisor had advised could be expected to be earned over time and 3.37%, for our non-U.S. plan assets is based on an expectation and asset allocation that varies by region. The asset allocations are summarized in Note 16 to the Consolidated Financial Statements. The actual returns in 2016 were gains of 7.22% and 15.81% for our U.S. and non-U.S. plan assets, respectively.
The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility.
Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. Along with other gains and losses, this unrecognized amount, to the extent it cumulatively exceeds 10% of the projected benefit obligation for the respective plan, is recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan.
The following table reflects the sensitivity of the benefit obligations and the net periodic benefit costs of our pension plans to changes in the actuarial assumptions:
The sensitivity of our postretirement benefit plans obligations and net periodic benefit costs to changes in actuarial assumptions are reflected in the following table:
Additional information on the key assumptions underlying these benefit costs appears in Note 16 to the Consolidated Financial Statements.
Accruals for Taxes Based on Income-The determination of our provision for income taxes and the calculation of our tax benefits and liabilities is subject to management’s estimates and judgments due to the complexity of the tax laws and regulations in the tax jurisdictions in which we operate. Uncertainties exist with respect to interpretation of these complex laws and regulations.
Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
We recognize future tax benefits to the extent that the realization of these benefits is more likely than not. Our current provision for income taxes is impacted by the recognition and release of valuation allowances related to net deferred assets in certain non-U.S. jurisdictions. Further changes to these valuation allowances may impact our future provision for income taxes, which will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.
We recognize the financial statement benefits with respect to an uncertain income tax position that we have taken or may take on an income tax return when we believe it is more likely than not that the position will be sustained with the tax authorities. For a position that is likely to be sustained, the benefit recognized in the financial statements is measured at the largest cumulative amount that is greater than 50 percent likely of being realized.
For further information related to our income taxes, see Note 18 to the Consolidated Financial Statements.
ACCOUNTING AND REPORTING CHANGES
For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note 2 to the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See Note 14 to the Consolidated Financial Statements for discussion of LyondellBasell Industries N.V.’s management of commodity price risk, foreign currency exposure and interest rate risk through its use of derivative instruments and hedging activities.
Commodity Price Risk
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. These include provisions in sales contracts allowing us to pass on higher raw material costs through timely price increases, formula price contracts to transfer or share commodity price risk, and increasing the depth and breadth of our product portfolio.
In addition, we use commodity swap and futures contracts with various terms to manage a small portion of the volatility related to raw materials and product purchases and sales. Such contracts are generally limited to durations of one year or less. Hedge accounting has not been elected for most of our commodity contracts in the periods presented. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are considered by management prior to execution and monitored daily.
The estimated fair value and notional amounts of our open commodity futures contracts and swap contracts are shown in the table below:
We use value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes.
VAR estimates the maximum potential loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels.
Using sensitivity analysis and hypothetical changes in market prices ranging from 14% to 17%, which represent a three month volatility range of the underlying products noted in the table above, the effect on our pretax income would be less than $1 million. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions.
Foreign Exchange Risk
We manufacture and market our products in a number of countries throughout the world and, as a result, are exposed to changes in foreign currency exchange rates. We enter into transactions in currencies other than the applicable functional currency.
A significant portion of our reporting entities use the euro as their functional currency. Our reporting currency is the U.S. dollar. The translation gains or losses that result from the process of translating the euro denominated financial statements to U.S. dollars are deferred in accumulated other comprehensive income (“AOCI”) until such time as those entities may be liquidated or sold. Changes in the value of the U.S. dollar relative to the euro can therefore have a significant impact on comprehensive income.
We have entered into hedging arrangements designated as net investment hedges to reduce the volatility from foreign currency fluctuation associated with our net investments in foreign operations and investments in foreign subsidiaries.
The table below illustrates the impact on Other comprehensive loss of a 10% fluctuation in the foreign currency rate associated with each net investment hedge and the EURIBOR and LIBOR rates associated with basis swaps at December 31, 2016.
Some of our operations enter into transactions that are not denominated in their functional currency. This results in exposure to foreign currency risk for financial instruments, including, but not limited to third party and intercompany receivables and payables and intercompany loans.
We maintain risk management control practices to monitor the foreign currency risk attributable to our inter-company and third party outstanding foreign currency balances. These practices involve the centralization of our exposure to underlying currencies that are not subject to central bank and/or country specific restrictions. By centralizing most of our foreign currency exposure into one subsidiary, we are able to take advantage of any natural offsets thereby reducing the overall impact of changes in foreign currency rates on our earnings. At December 31, 2016, a 10% fluctuation compared to the U.S. dollar in the underlying currencies that have no central bank or other currency restrictions related to non-hedged monetary net assets would have had a resulting additional impact to earnings of less than $1 million.
Our policy is to maintain an approximately balanced position in foreign currencies to minimize exchange gains and losses arising from changes in exchange rates. To minimize the effects of our net currency exchange exposures, we enter into foreign currency spot and forward contracts and, in some cases, cross-currency swaps.
We also engage in short-term foreign exchange swaps in order to roll certain hedge positions and to make funds available for intercompany financing. Our net position in foreign currencies is monitored daily.
We have entered into $2,300 million of non-cancellable cross-currency swaps, which we designated as foreign currency cash flow hedges, to reduce the variability in the functional currency equivalent cash flows of certain foreign currency denominated intercompany notes. For a summary of the estimated fair value and notional amounts for our cross-currency swaps outstanding at December 31, 2016, see Note 14 to the Consolidated Financial Statements.
For 2016, 2015, and 2014, Other income, net in the Consolidated Statements of Income reflected losses of $4 million and $7 million and a gain of $15 million, respectively, in net exchange rate gains and losses. For forward contracts, including swap transactions, that economically hedge recognized monetary assets and liabilities in foreign currencies, no hedge accounting is applied. Changes in the fair value of foreign currency forward contracts are reported in the Consolidated Statements of Income and offset the currency exchange results recognized on the assets and liabilities.
Interest Rate Risk
We are exposed to interest rate risk with respect to our fixed and variable rate debt. Fluctuations in interest rates impact the fair value of fixed-rate debt as well as pretax earnings stemming from interest expense on variable-rate debt.
Fixed-rate debt-We entered into interest rate swaps as part of our interest rate risk management strategy. At December 31, 2016, the total notional amounts of forward-starting interest rate swaps designated as cash flow hedges and interest rate swaps designated as fair value hedges were $1,000 million and $2,600 million, respectively.
At December 31, 2016, after giving consideration to the $2,600 million of fixed-rate debt that we have effectively converted to floating through these U.S. dollar fixed-for-floating interest rate swaps, approximately 66% of our debt portfolio, on a gross basis, incurred interest at a fixed-rate and the remaining 34% of the portfolio incurred interest at a variable-rate. We estimate that a 10% change in market interest rates as of December 31, 2016 would change the fair value of our interest rate swaps outstanding and would have had a resulting impact on our pretax income of approximately $12 million.
Variable-rate debt-Our variable rate debt consists of our $2,500 million Senior Revolving Credit Facility, our $900 million U.S. Receivables Securitization Facility and $500 million outstanding at December 31, 2016 under our Commercial Paper Program. At December 31, 2016, there were no outstanding borrowings under our Senior Revolving Credit Facility and U.S. Receivables Securitization facility. We estimate that a 10% change in interest rates would have had less than a $1 million impact on earnings.
Item 8. Financial Statements and Supplementary Data.
Index to the Consolidated Financial Statements
Page
LYONDELLBASELL INDUSTRIES N.V.
Management’s Report On Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to the Consolidated Financial Statements
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, 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 Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, 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. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) 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 financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Supervisory Board of Directors and Stockholders of LyondellBasell Industries N.V.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of LyondellBasell Industries N.V. and its subsidiaries at December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 17, 2017
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF INCOME
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS-Continued
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See Notes to the Consolidated Financial Statements.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
1.
Description of Company and Operations
2.
Summary of Significant Accounting Policies
Discontinued Operations and Dispositions
4.
Related Party Transactions
5.
Accounts Receivable
6.
Inventories
7.
Property, Plant and Equipment, Goodwill and Intangible Assets
8.
Investment in PO Joint Ventures
9.
Equity Investments
10.
Prepaid Expenses and Other Current Assets and Other Assets
11.
Accrued Liabilities
12.
Debt
13.
Lease Commitments
14.
Financial Instruments
15.
Fair Value Measurement
16.
Pension and Other Postretirement Benefits
17.
Incentive and Share-Based Compensation
18.
Income Taxes
19.
Commitments and Contingencies
20.
Stockholders’ Equity
21.
Per Share Data
22.
Segment and Related Information
23.
Unaudited Quarterly Results
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company and Operations
LyondellBasell Industries N.V. is a limited liability company (Naamloze Vennootschap) incorporated under Dutch law by deed of incorporation dated October 15, 2009. Unless otherwise indicated, the “Company,” “we,” “us,” “our” or similar words are used to refer to LyondellBasell Industries N.V. together with its consolidated subsidiaries (“LyondellBasell N.V.”).
LyondellBasell N.V. is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for the production of polymers.
2. Summary of Significant Accounting Policies
The following significant accounting policies were applied in the preparation of these Consolidated Financial Statements:
Basis of Preparation and Consolidation
The accompanying Consolidated Financial Statements have been prepared from the books and records of LyondellBasell N.V. under accounting principles generally accepted in the U.S. (“U.S. GAAP”). Subsidiaries are defined as being those companies over which we, either directly or indirectly, have control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases. All intercompany transactions and balances have been eliminated in consolidation.
The Consolidated Financial Statements have been prepared under the historical cost convention, as modified for the accounting of certain financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. Consolidated financial information, including subsidiaries, equity investments, has been prepared using uniform accounting policies for similar transactions and other events in similar circumstances.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents exclude restricted cash. Our cash equivalents are placed in certificates of deposit, high-quality commercial paper and money market accounts with major international banks and financial institutions.
Although, we have no current requirements for compensating balances in a specific amount at a specific point in time, we maintain compensating balances at our discretion for some of our banking services and products.
Short-Term Investments
We also have investments in marketable securities classified as available-for-sale and held-to-maturity. These securities, which are included in Short-term investments on the Consolidated Balance Sheets, are carried at estimated fair value with unrealized gains and losses recorded as a component of Accumulated other comprehensive income (“AOCI”). We periodically review our available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.
Trade Receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business.
We calculate provisions for doubtful accounts receivable based on our estimates of amounts that we believe are unlikely to be collected. Collectability of receivables is reviewed and the provision calculated for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers. Provisions for doubtful accounts are included in Selling, general and administrative expenses.
Inventories
Inventories are carried at the lower of current market value or cost. Cost is determined using the last-in, first-out (“LIFO”) method for raw materials, work in progress (“WIP”) and finished goods, and the moving average cost method for materials and supplies.
Inventory exchange transactions, which involve fungible commodities, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory, with cost determined using the LIFO method.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Costs may also include borrowing costs incurred on debt during construction or major projects exceeding one year, costs of major maintenance arising from turnarounds of major units relating to betterments and committed decommission costs. Routine maintenance costs are expensed as incurred. Land is not depreciated. Depreciation is computed using the straight-line method over the estimated useful asset lives to their residual values.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which, for us, is generally at the plant group level (or, at times, individual plants in certain circumstances where we have isolated production units with separately identifiable cash flows). When it is probable that an asset or asset group’s undiscounted future cash flows will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value.
Upon retirement or sale, we remove the cost of the asset and the related accumulated depreciation from the accounts and reflect any resulting gain or loss in the Consolidated Statements of Income.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Equity Investments
We account for equity investments using the equity method of accounting if we have the ability to exercise significant influence over, but not control of, an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting rights. Under the equity method of accounting, investments are stated initially at cost and are adjusted for subsequent additional investments and our proportionate share of profit or losses and distributions.
We record our share of the profits or losses of the equity method investments, net of income taxes, in the Consolidated Statements of Income. When our share of losses in an equity investment equals or exceeds our interest in the equity investment, including any other unsecured receivables, we do not recognize further losses, unless we have incurred obligations or made payments on behalf of the equity investment.
We evaluate our equity method investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of investment to the carrying value of investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other-than temporary, the excess of the carrying value over the estimated fair value is recognized in the Consolidated Financial Statements as an impairment.
Goodwill
We recorded goodwill upon our application of fresh-start accounting on May 1, 2010. Goodwill is not amortized, but is tested annually for impairment. We assess the recoverability of the carrying value of goodwill during the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required.
In 2016 and 2015, management performed qualitative impairment assessments of our reporting units which indicated that the fair value of our reporting units was greater than their carrying value. Accordingly, a quantitative two-step goodwill impairment test was not required and no goodwill impairment was recognized.
Intangible Assets
Intangible Assets-Intangible assets primarily consist of emission allowances, various contracts, in-process research and development and software costs. These assets are amortized using the straight-line method over their estimated useful lives or over the term of the related agreement, if shorter. We evaluate definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Research and Development-Research and development (“R&D”) costs are expensed when incurred. Subsidies for research and development are included in Other income (expense), net. Depreciation expense related to R&D assets is included as a cost of R&D.
Income Taxes
The income tax for the period comprises current and deferred tax. Income tax is recognized in the Consolidated Statements of Income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In these cases, the applicable tax amount is recognized in other comprehensive income or directly in equity, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the net tax effects of net operating loss carryforwards. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We recognize uncertain income tax positions in our financial statements when we believe it is more likely than not, based on the technical merits, that the position or a portion thereof will be sustained upon examination.
Employee Benefits
Pension Plans-We have both defined benefit (funded and unfunded) and defined contribution plans. For the defined benefit plans, a projected benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Pension costs primarily represent the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of expected return on plan assets.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity and are reflected in Accumulated other comprehensive income in the period in which they arise.
Other Post-Employment Obligations-Certain employees are entitled to postretirement medical benefits upon retirement. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment applying the same accounting methodology used for defined benefit plans.
Termination Benefits-Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan or statutory law. A liability is recognized for one time termination benefits when we are committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.
Other Provisions
Environmental Remediation Costs-Environmental remediation liabilities include liabilities related to sites we currently own, sites we no longer own, as well as sites where we have operated that belong to other parties. Liabilities for anticipated expenditures related to investigation and remediation of contaminated sites are accrued
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when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated. Only ongoing operating and monitoring costs, the timing of which can be determined with reasonable certainty, are discounted to present value. Future legal costs associated with such matters, which generally are not estimable, are not included in these liabilities.
Asset Retirement Obligations-At some sites, we are contractually obligated to decommission our plants upon site exit. Asset retirement obligations are recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred. That cost, which is capitalized as part of the related long-lived asset, is depreciated on a straight-line basis over the remaining useful life of the related asset. Accretion expense in connection with the discounted liability is also recognized over the remaining useful life of the related asset. Such depreciation and accretion expenses are included in Cost of sales.
Foreign Currency Translation
Functional and Reporting Currency-Items included in the financial information of each of LyondellBasell N.V.’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”) and then translated to the U.S. dollar reporting currency through Other comprehensive income.
Transactions and Balances-Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated Statements of Income.
In the Consolidated Financial Statements, the results and financial position of all subsidiaries that have a functional currency different from the presentation currency are translated into the reporting currency as follows:
1. Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
2. Income and expenses for each income statement are translated at average exchange rates; and
3. All resulting exchange differences are recognized as a separate component within Other comprehensive income (foreign currency translation).
Revenue Recognition
Substantially all of the Company’s revenue is derived from product sales. Revenues are recognized when sales are realized or realizable, and the earnings process is complete. Revenue from product sales is recognized when the price is fixed or determinable, collectability is reasonably assured, and the customer has an obligation to pay at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if we retain the risk of loss during shipment.
Share-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period upon employees meeting certain service criteria. The fair value of equity instruments issued to employees is measured on the grant date and is recognized over the vesting period.
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Contingent share awards are recognized ratably over the vesting period as a liability and re-measured, at fair value, at the balance sheet date.
Leases
We lease land and other assets for use in our operations. All lease agreements are evaluated and classified as either an operating lease or a capital lease. A lease is classified as a capital lease if any of the following criteria are met: transfer of ownership to the lessee by the end of the lease term; the lease contains a bargain purchase option; the lease term is equal to 75% or greater of the asset’s useful economic life; or the present value of the future minimum lease payments is equal to or greater than 90% of the asset’s fair market value. Capital leases are recorded at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with our normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Operating lease expense is recognized ratably over the entire lease term.
Derivative Financial Instruments and Hedging Activities
We selectively enter into derivative transactions to manage market risk volatility associated with changes in commodity pricing, currency exchange rates and interest rates. We categorize assets and liabilities, measured at fair value, into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or our assumptions about pricing by market participants. For a discussion related to financial instruments and derivatives policies, see Note 14.
Non-Controlling Interests
Non-controlling interests primarily represent the interests of a subsidiary owning an equity investment in Al-Waha Petrochemicals Ltd.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Adopted Guidance
Compensation-In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. Under this new guidance, entities are required to treat performance targets that affect vesting and could be achieved after the requisite service period as a performance condition. The amendments in this ASU were effective for annual and interim periods beginning after December 15, 2015. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
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Consolidation-In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends and changes the consolidation analysis currently required under U.S. GAAP. This ASU modifies the process used to evaluate whether limited partnerships and similar entities are variable interest entities (“VIEs”) or voting interest entities; affects the analysis performed by reporting entities regarding VIEs, particularly those with fee arrangements and related party relationships; and provides a scope exception for certain investment funds. The amendments in this update were effective for annual and interim periods beginning after December 15, 2015. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Consolidation: Interests Held through Related Parties That Are under Common Control-In October, 2016, the FASB issued ASU 2016-17, which amends the consolidation requirements that apply to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity (VIE). Entities that already have adopted the amendments in ASU 2015-02 are required to apply amendments in this ASU retrospectively to all relevant periods beginning with the fiscal year in which ASU 2015-02 initially was applied. The application of this amendment did not have a material impact on our Consolidated Financial Statements.
Going Concern-In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under this new guidance, management is required to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued (or available to be issued when applicable). Additionally, the entity must provide certain disclosures if conditions or events raise substantial doubt about its ability to continue as a going concern. The amendments in this update are effective for annual periods ending after December 15, 2016 and interim periods thereafter. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Derivatives and Hedging-In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to apply only the four-step decision sequence as described in the amended guidance. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Investments-In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the recognition and reporting requirements for investments that become qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this ASU are effective for all entities for annual and interim periods beginning after December 15, 2016. Prospective application is required. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Accounting Guidance Issued But Not Adopted as of December 31, 2016
Revenue Recognition-In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in Accounting Standard Codification (“ASC”) 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. In August 2015,
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the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the original effective date for one year to annual and interim periods beginning after December 15, 2017. Retrospective and modified retrospective application is allowed.
Amendments to Revenue Recognition-In 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, contains amendments that clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance Obligations and Licensing clarifies the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. The FASB also issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which further clarifies the new revenue guidance primarily in the areas of collectability, noncash consideration, presentation of sales tax, and transition. The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, which provides numerous improvements related to the Topic 606. All amendments are effective with the same date as ASU 2014-09.
Management is currently assessing the effects of applying the new standard and has preliminarily determined that there will not be a material impact on our Consolidated Financial Statements. We expect to use a modified retrospective transition method.
Inventories-In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim periods beginning after December 15, 2016. The application of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
Financial Instruments-In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance in this ASU includes a requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Prospective application of this ASU is required for public entities for annual and interim periods beginning on or after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Leases-In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes the existing guidance for lease accounting in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months a lessee should recognize a liability for lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Topic 842 retains a classification distinction between finance leases and operating leases, with the classification affecting the pattern of expense recognition in the income statement. This ASU also requires enhanced disclosures. A modified retrospective transition approach is required for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements via an extensive review of numerous existing lease contracts and other purchase obligations that contain embedded lease features, both classified as operating leases under the existing guidance.
Compensation-In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
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awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2016. Various transition methods are prescribed depending on the aspect of accounting impacted by the amended guidance. Adoption of the amendments in this guidance will result in a reclassification of approximately $8 million and $52 million in 2016 and 2015, respectively, from cash flows from operating activities to cash flows from financing activities on our Consolidated Statement of Cash Flows.
Financial Instruments-In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, resulting in the use of a current expected credit loss (“CECL”) model when measuring an impairment of financial instruments. Credit losses related to available-for-sale securities should be recorded in the consolidated income statement through an allowance for credit losses. Estimated credit losses utilizing the CECL model are based on reasonable use of historical experience, current conditions and forecasts that affect the collectability of reported financial assets. This ASU also modifies the impairment model for available-for-sale debt securities by eliminating the concept of “other than temporary” as well as providing a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance will be effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the amendments in this guidance on our Consolidated Financial Statements.
Statement of Cash Flows-In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include but are not limited to debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method of investments. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory-In October, 2016, the FASB issued Accounting Standards Update 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU is aimed at reducing complexity in accounting standards. Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory, and a reporting entity would recognize tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will be effective for public entities for annual periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Statement of Cash Flows: Restricted Cash-In November 2016, the FASB issued ASU 2016-18. The ASU requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU will become effective for public entities for annual periods beginning after December 15, 2017. The adoption of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
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Business Combinations: Clarifying the Definition of a Business-In January 2017, the FASB issued ASU 2017-01. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Simplifying the Test for Goodwill Impairment: Intangibles-Goodwill and Other-In January, 2017, the FASB issued ASU 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The amendments will be effective for public entities for annual and interim goodwill impairment tests in periods beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. We do not believe the adoption of this new guidance will have a material impact on our Consolidated Financial Statements.
3. Discontinued Operations and Dispositions
Discontinued Operations-We began reporting the Berre refinery as a discontinued operation in the second quarter of 2012. The impact of this discontinued operation is immaterial to our consolidated results.
Future cash outflows will occur for exit or disposal activities and for payments made to severed employees. Exit and disposal costs are expected to be incurred through the end of 2017. Payments to the affected employees are expected to be substantially complete by 2019.
In May 2016, we received a notice pertaining to the final closure of our Berre refinery from the Prefect of Bouches du Rhone. This notice outlines the requirements to dismantle the refinery facilities. At this time, the estimated cost and associated cash flows to fulfill these requirements are not deemed to be material.
Dispositions-Upon the sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A. in February 2016, we received net proceeds of $137 million, which is reflected in Cash flows from investing activities in the Consolidated Statement of Cash Flows. In connection with the sale, we recognized a pretax and after tax gain of $78 million, which is reflected in Other Income, net in the Consolidated Income Statements.
4. Related Party Transactions
We have related party transactions with affiliates of one of our major shareholders, Access Industries (“Access”) and with the Company’s joint venture partners (see Notes 8 and 9).
Access-In December 2010, we entered into a tax cooperation agreement with Access which terminated on December 31, 2014. The tax cooperation agreement allowed either party to provide the other with information and support in connection with tax return preparation and audits on a time and materials basis through 2014. No payments were made to or received from Access under this agreement during 2014.
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In December 2010, one of our subsidiaries received demand letters from affiliates of Access demanding (i) indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit and (ii) payment of (a) $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF and (b) other unspecified amounts related to advice purportedly given in connection with financing and other strategic transactions. For additional information related to this matter, see Note 19.
Joint Venture Partners-We have related party transactions with our equity investees. These related party transactions include the sales and purchases of goods in the normal course of business as well as certain financing arrangements. In addition, under contractual arrangements with certain of our equity investees, we receive certain services, utilities and materials at some of our manufacturing sites and we provide certain services to our equity investees.
We have guaranteed $18 million of the indebtedness of one of our joint ventures as of December 31, 2016. In 2015, we received a $19 million payment for a loan made to our joint venture, Al-Waha Petrochemicals Ltd. in 2010.
Related party transactions are summarized as follows:
5. Accounts Receivable
We sell our products primarily to other industrial concerns in the petrochemicals and refining industries. We perform ongoing credit evaluations of our customers’ financial conditions and, in certain circumstances, require letters of credit or corporate guarantees from them. Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, was $16 million and $24 million at December 31, 2016 and 2015, respectively. We recorded provisions for doubtful accounts receivable, which are reflected in the Consolidated Statements of Income, of less than $1 million in 2016 and 2015, and $1 million in 2014, respectively. In 2014, we wrote off approximately $10 million of accounts receivable reserved in prior years.
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6. Inventories
Inventories consisted of the following components at December 31:
At December 31, 2016 and 2015, approximately 85% and 87%, respectively, of our inventories were valued using the last in, first out (“LIFO”) method and the remaining inventory, consisting primarily of materials and supplies, was valued at the moving average cost method. At December 31, 2016 and 2015, our LIFO cost exceeded current replacement cost under the first-in first-out method. The excess of our inventories at estimated net realizable value over LIFO cost after lower of cost or market charges was approximately $499 million and $73 million at December 31, 2016 and 2015, respectively.
For information related to lower of cost or market (“LCM”) inventory valuation charges recognized during 2016, 2015 and 2014, see Note 22.
7. Property, Plant and Equipment, Goodwill and Intangible Assets
Property, Plant and Equipment-The components of property, plant and equipment, at cost, and the related accumulated depreciation are as follows at December 31:
Capitalized Interest-We capitalize interest costs incurred on funds used to construct property, plant and equipment. In 2016, 2015 and 2014, we capitalized interest of $33 million, $11 million and $25 million, respectively.
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Intangible Assets-The components of identifiable intangible assets, at cost, and the related accumulated amortization are as follows at December 31:
Amortization of these identifiable intangible assets for the next five years is expected to be $103 million in 2017, $98 million in 2018, $97 million in 2019, $85 million in 2020 and $32 million in 2021.
Depreciation and Amortization Expense-Depreciation and amortization expense is summarized as follows:
Asset Retirement Obligations-In certain cases, we are contractually obligated to decommission our plants upon site exit. In such cases, we have accrued the net present value of the estimated costs. The majority of our asset retirement obligations are related to facilities in Europe. The changes in our asset retirement obligations are as follows:
Although, we may have asset retirement obligations associated with some of our other facilities, the present value of those obligations is not material in the context of an indefinite expected life of the facilities. We continually review the optimal future alternatives for our facilities. Any decision to retire one or more facilities may result in an increase in the present value of such obligations.
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Goodwill-Goodwill was $528 million at December 31, 2016 and $536 million at December 31, 2015. All movements were due to foreign exchange impacts.
8. Investment in PO Joint Ventures
We, together with Covestro PO LLC, a subsidiary of Covestro AG (collectively “Covestro”), share ownership in a U.S. propylene oxide (“PO”) manufacturing joint venture (the “U.S. PO joint venture”). The U.S. PO joint venture owns a PO/styrene monomer (“SM” or “styrene”) and a PO tertiary butyl alcohol (“TBA”) manufacturing facility. Covestro’s ownership interest represents an undivided interest in certain U.S. PO joint venture assets with correlative PO capacity reservation that resulted in ownership of annual in-kind cost-based PO production of approximately 1.5 billion pounds in 2016 and 2015. We take in kind the remaining cost-based PO and co-product production.
In addition, we and Covestro each have a 50% interest in a separate manufacturing joint venture (the “European PO joint venture”), which owns a PO/SM plant at Maasvlakte near Rotterdam, The Netherlands. In substance, each partner’s ownership interest represents an undivided interest in all of the European PO joint venture assets with correlative capacity reservation that resulted in ownership of annual in-kind cost-based PO and SM production.
We and Covestro do not share marketing or product sales under the U.S. PO joint venture. We operate the U.S. PO joint venture’s and the European PO joint venture’s (collectively the “PO joint ventures”) plants and arrange and coordinate the logistics of product delivery. The partners share in the cost of production and logistics is based on their product offtake.
We account for both the U.S. PO joint venture and the European PO joint venture using the equity method. We report the cost of our product offtake as inventory and equity loss as cost of sales in our Consolidated Financial Statements. Related production cash flows are reported in the operating cash flow section of the Consolidated Statements of Cash Flows.
Our equity investment in the PO joint ventures represents our share of the manufacturing plants and is decreased by recognition of our share of equity loss, which is equal to the depreciation and amortization of the assets of the PO joint ventures. Other changes in the investment balance are principally due to our additional capital contributions to the PO joint ventures to fund capital expenditures. Such contributions are reported in the investing cash flow section of the Consolidated Statements of Cash Flows.
Our product offtake was 6,024 million, 6,270 million and 5,878 million pounds of PO and its co-products for the years ended December 31, 2016, 2015 and 2014, respectively.
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Changes in our investments in the U.S. and European PO joint ventures for 2016 and 2015 are summarized below:
In 2015, we reclassified a total of $57 million related to cash contributions in prior years associated with turnaround and other investment activities that were previously classified in property, plant and equipment.
9. Equity Investments
Our PO joint ventures, which are also accounted for using the equity method of accounting, are discussed in Note 8 to the accompanying Consolidated Financial Statements and are, therefore, not included in the following discussion.
Our remaining principal direct and indirect equity investments are as follows at December 31:
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The changes in our equity investments are as follows:
In September 2016, we received proceeds of $72 million from the sale of our ownership interest in SunAllomer Ltd., our joint venture in Japan. Also in September 2016, we purchased a net additional 7.41% interest in Polymirae Co. Ltd., our joint venture in Korea, for $36 million.
The subsidiary that holds the Company’s equity interest in Al-Waha Petrochemicals Ltd. has a minority shareholder, which holds 16.21% of its equity. The equity interest held by the minority shareholder can be called by the Company or can be put to the Company by the minority interest shareholder at any time. The price of the call option is the nominal value of the shares (initial $18 million investment) plus accrued interest based on LIBOR plus 40 basis points, less paid dividends. The price of the put option is 1 plus the minority shareholder’s undistributed pro-rata earnings. On November 9, 2016, Basell International Holdings, B.V. notified the minority shareholder of its intention to exercise the option to purchase all of the minority shareholders shares. The effective date of transfer is scheduled for April 2017 at an Option price of $21 million, which is based on the option valuation as of June 30, 2016.
Summarized balance sheet information of the Company’s investments accounted for under the equity method are as follows at December 31:
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Summarized income statement information of the Company’s investments accounted for under the equity method are set forth below:
The difference between our carrying value and the underlying equity in the net assets of our equity investments are assigned to the investment’s assets and liabilities based on an analysis of the factors giving rise to the basis difference. The amortization of the basis difference is included in Income from equity investments in the Consolidated Statements of Income.
10. Prepaid Expenses and Other Current Assets and Other Assets
The components of Prepaid expenses and other current assets were as follows at December 31:
For information related to our repurchase agreements, see Note 14. The renewable identification numbers reflected above represent a U.S. government established credit used to show compliance in meeting the Environmental Protection Agency’s Renewable Fuel Standard.
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The components of Other assets were as follows at December 31:
11. Accrued Liabilities
Accrued liabilities consisted of the following components at December 31:
For information related to the increase in income taxes, see Note 18. For information related to share repurchases, see Note 20.
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12. Debt
Long-term loans, notes and other long-term debt net of unamortized discount and debt issuance cost consisted of the following as of December 31:
Our 5% Senior Notes due 2019 include gains of $42 million and $35 million for the years ended December 31, 2016 and 2015, respectively, related to adjustments for our fixed-for-floating interest rate swaps, which are recognized in Interest expense in the Consolidated Statements of Income. Since inception in 2014, we have recognized net gains of $84 million related to adjustments for these fixed-for-floating interest rate swaps. Our 6% Senior Notes due 2021 also includes a $3 million gain related to our fixed-for-floating interest rate swaps. This gain is also recognized in interest expense.
Short-term loans, notes and other short-term debt consisted of the following:
Aggregate maturities of debt during the next five years are $596 million in 2017, $1 million in 2018, $2,001 million in 2019, $1,000 million in 2021 and $5,593 million thereafter. There are no scheduled maturities of debt in 2020.
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Long-Term Debt
Guaranteed Notes due 2022-In March 2016, LYB International Finance II B.V. (“LYB Finance II”), a direct, 100% owned finance subsidiary of LyondellBasell Industries N.V., as defined in Rule 3-10(b) of Regulation S-X, issued 750 million of 1.875% guaranteed notes due 2022 at a discounted price of 99.607%.
These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance II’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede LyondellBasell N.V., as guarantor, from obtaining funds by dividend or loan from its subsidiaries.
The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.
The notes may be redeemed before the date that is three months prior to the scheduled maturity date at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed and the sum of the present values of the remaining scheduled payments of principal and interest (discounted at the applicable Comparable Government Bond Rate plus 35 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is three months prior to the scheduled maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. The notes are also redeemable upon certain tax events.
Senior Notes due 2055-In March 2015, we issued $1,000 million of 4.625% Notes due 2055 at a discounted price of 98.353%.
These unsecured notes rank equally in right of payment to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.
The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.
The notes may be redeemed before the date that is six months prior to the scheduled maturity date at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed and the sum of the present values of the remaining scheduled payments of principal and interest (discounted at the applicable Treasury Yield plus 35 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is six months prior to the final maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Guaranteed Notes due 2044-In February 2014, LYB International Finance B.V. (“LYB Finance”), a direct, 100% owned finance subsidiary of LyondellBasell Industries N.V., as defined in Rule 3-10(b) of Regulation S-X, issued $1,000 million of 4.875% guaranteed notes due 2044 at a discounted price of 98.831%.
These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance’s existing and future unsecured indebtedness and to all of LyondellBasell’s existing and future unsubordinated indebtedness. There are no significant restrictions that
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would impede the Guarantor from obtaining funds by dividend or loan from its subsidiaries. Subsidiaries are generally prohibited from entering into arrangements that would limit their ability to make dividends to or enter into loans with the Guarantor.
The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.
The notes may be redeemed before the date that is six months prior to the scheduled maturity date at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed and the sum of the present values of the remaining scheduled payments of principal and interest (discounted at the applicable Treasury Yield plus 20 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is six months prior to the final maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Guaranteed Notes due 2023 and 2043-In July 2013, LYB Finance issued $750 million of 4% guaranteed notes due 2023 and $750 million of 5.25% Notes due 2043 at discounted prices of 98.678% and 97.004%, respectively.
These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance’s existing and future unsecured indebtedness and to all of LyondellBasell’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede the Guarantor from obtaining funds by dividend or loan from its subsidiaries. Subsidiaries are generally prohibited from entering into arrangements that would limit their ability to make dividends to or enter into loans with the Guarantor.
The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.
The notes may be redeemed and repaid, in whole or in part, at any time and from time to time prior to maturity at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed, and the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed. Such interest will be discounted to the date of redemption on a semi-annual basis at the applicable Treasury Yield plus 25 basis points in the case of the 4% Notes due 2023 and plus 30 basis points in the case of the 5.25% Notes due 2043.
Senior Notes due 2019, 2021 and 2024-In April 2012, we issued $2,000 million aggregate principal amount of 5% senior notes due 2019 and $1,000 million aggregate principal amount of 5.75% senior notes due 2024, each at an issue price of 100%. In November 2011, we issued $1,000 million of 6% senior notes due 2021.
The indentures governing the 5%, 5.75% and 6% Senior Notes contain limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by any property or assets, enter into certain sale and lease-back transactions with respect to any assets or enter into consolidations, mergers or sales of all or substantially all of our assets.
These notes may be redeemed and repaid, in whole or in part, at any time and from time to time prior to the date that is 90 days prior to the scheduled maturity date of the notes at a redemption price equal to 100% of the
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principal amount of the notes redeemed plus a premium for each note redeemed equal to the greater of 1.00% of the then outstanding principal amount of the note and the excess of: (a) the present value at such redemption date of (i) the principal amount of the note at maturity plus (ii) all required interest payments due on the note through maturity (excluding accrued but unpaid interest), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over (b) the outstanding principal amount of the note. These notes may also be redeemed, in whole or in part, at any time on or after the date which is 90 days prior to the final maturity date of the notes, at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Guaranteed Notes due 2027-We have outstanding $300 million aggregate principal amount of 8.1% Guaranteed Notes due 2027. These notes, which are guaranteed by LyondellBasell Industries Holdings B.V., a subsidiary of LyondellBasell N.V., contain certain restrictions with respect to the level of maximum debt that can be incurred and security that can be granted by certain operating companies that are direct or indirect wholly owned subsidiaries of LyondellBasell Industries Holdings B.V.
The 2027 Notes contain customary provisions for default, including, among others, the non-payment of principal and interest, certain failures to perform or observe obligations under the Agreement on the notes the occurrence of certain defaults under other indebtedness, failure to pay certain indebtedness and the insolvency or bankruptcy of certain LyondellBasell N.V. subsidiaries.
Short-Term Debt
Senior Revolving Credit Facility-In June 2016, the term of our revolving credit facility was extended for one year to June 2021 pursuant to a consent agreement. We also amended the revolving credit facility in June 2016 to increase its size to $2,500 million. All other material terms of the revolving credit facility remained unchanged.
The revolving credit facility may be used for dollar and euro denominated borrowings, has a $500 million sublimit for dollar and euro denominated letters of credit, a $1,000 million uncommitted accordion feature, and supports our commercial paper program. The aggregate balance of outstanding borrowings and letters of credit under the facility may not exceed $2,500 million at any given time. Borrowings under the facility bear interest at a Base Rate or LIBOR, plus an applicable margin. Additional fees are incurred for the average daily unused commitments.
The facility contains customary covenants and warranties, including specified restrictions on indebtedness and liens. In addition, we are required to maintain a leverage ratio at the end of every quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. We are in compliance with these covenants as of December 31, 2016.
At December 31, 2016, we had $500 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the facility.
Commercial Paper Program-In June 2016, in connection with the increase of our revolving credit facility, we increased the size of our commercial paper program to $2,500 million. We may issue up to $2,500 million of privately placed, unsecured, short-term promissory notes (“commercial paper”) under this program, which is backed by our $2,500 million Senior Revolving Credit Facility. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividends and share repurchases. Interest rates on the commercial paper outstanding at December 31, 2016 are based on the term of the notes and range from 75 to 100 basis points.
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U.S. Receivables Securitization Facility-Our $900 million U.S. accounts receivable securitization facility, which expires in 2018, has a purchase limit of $900 million and a $300 million uncommitted accordion feature. This facility provides liquidity through the sale or contribution of trade receivables by certain of our U.S. subsidiaries to a wholly owned, bankruptcy-remote subsidiary on an ongoing basis and without recourse. The bankruptcy-remote subsidiary may then, at its option and subject to a borrowing base of eligible receivables, sell undivided interests in the pool of trade receivables to financial institutions participating in the facility. In the event of liquidation, the bankruptcy-remote subsidiary’s assets will be used to satisfy the claims of its creditors prior to any assets or value in the bankruptcy-remote subsidiary becoming available to us. We are responsible for servicing the receivables. This facility also provides for the issuance of letters of credit up to $200 million. The term of the securitization facility may be extended in accordance with the provisions of the agreement.
The facility is also subject to customary warranties and covenants, including limits and reserves and the maintenance of specified financial ratios. We are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. Performance obligations under the facility are guaranteed by our parent company.
At December 31, there were no borrowings or letters of credit outstanding under the facility.
European Receivables Securitization Facility-Our 450 million European receivables securitization facility expired in April 2016.
Precious Metal Financings-We enter into lease agreements for precious metals which are used in our production processes. All precious metal borrowings are classified as Short-term debt.
Weighted Average Interest Rate-At December 31, 2016 and 2015, our weighted average interest rates on outstanding short-term debt were 0.9% and 0.7%, respectively.
Debt Discount and Issuance Costs-Amortization of debt discount and debt issuance costs resulted in amortization expense of $16 million for each year ended December 31, 2016 and 2015, and $20 million for the year ended December 31, 2014, which is included in Interest expense in the Consolidated Statements of Income.
Other Information-On December 28, 2016, LYB International Finance III, LLC was formed as a private company with limited liability in Delaware. LYB International Finance III, LLC is a direct, 100% owned finance subsidiary of LyondellBasell N.V., as defined in Rule 3-10(b) of Regulation S-X. Any debt securities issued by LYB International Finance III, LLC will be fully and unconditionally guaranteed by LyondellBasell N.V.
13. Lease Commitments
We lease office facilities, railcars, vehicles, and other equipment under operating leases. Some leases contain renewal provisions, purchase options and escalation clauses.
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The aggregate future estimated payments under these commitments are:
Rental expense for the years ended December 31, 2016, 2015 and 2014 was $426 million, $422 million and $412 million, respectively.
14. Financial Instruments
Cash Concentration-Our cash equivalents are placed in high-quality commercial paper, money market funds, marketable securities with maturities less than three months and time deposits with major international banks and financial institutions.
Market Risks-We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our risk management policies. Derivative instruments are recorded at fair value on the balance sheet. Gains and losses related to changes in the fair value of derivative instruments not designated as hedges are recorded in earnings. For derivatives that have been designated as fair value hedges, the gains and losses of the derivatives and hedged instruments are recorded in earnings. For derivatives designated as cash flow and net investment hedges, the effective portion of the gains and losses is recorded in Other comprehensive income (loss). The ineffective portion of cash flow and net investment hedges is recorded in earnings.
Marketable Securities-We invest cash in investment-grade securities for periods generally not exceeding three years. Investments in securities with original maturities of three months or less are classified as Cash and cash equivalents. At December 31, 2016 and 2015, we had marketable securities classified as Cash and cash equivalents of $351 million and $575 million, respectively.
We also have investments in marketable securities classified as available-for-sale and held-to-maturity. These securities are included in Short-term investments on the Consolidated Balance Sheets. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of Accumulated other comprehensive income (“AOCI”). Investments classified as held-to-maturity are carried at amortized cost. We periodically review our available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.
Repurchase Agreements-We invest in tri-party repurchase agreements. Under these agreements, we make cash purchases of securities according to a pre-agreed profile from our counterparties. The counterparties have an obligation to repurchase, and we have an obligation to sell, the same or substantially the same securities at a pre-defined date for a price equal to the purchase price plus interest. These securities, which pursuant to our
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internal policies are held by a third-party custodian and must generally have a minimum collateral value of 102%, secure the counterparty’s obligation to repurchase the securities. Depending upon maturity, these tri-party repurchase agreements are treated as short-term loans receivable and are reflected in Prepaid expenses and other current assets or as long-term loans receivable reflected in Other investments and long-term receivables on our Consolidated Balance Sheets. The balance of our investment at December 31, 2016 and 2015 was $369 million and $387 million, respectively.
Commodity Prices-We are exposed to commodity price volatility related to purchases of natural gas liquids, crude oil and other raw materials and sales of our products. We selectively use over-the-counter commodity swaps, options and exchange traded futures contracts with various terms to manage the volatility related to these risks. In addition, we are exposed to volatility on the prices of precious metals to the extent that we have obligations, classified as embedded derivatives, tied to the price of precious metals associated with secured borrowings. At December 31, 2016, the outstanding commodity derivatives designated as cash-flow hedges mature from January 2017 to December 2019.
Foreign Currency Rates-We have significant worldwide operations. The functional currencies of our consolidated subsidiaries through which we operate are primarily the U.S. dollar and the euro. We enter into transactions denominated in currencies other than our designated functional currencies. As a result, we are exposed to foreign currency risk on receivables and payables. We maintain risk management control policies intended to monitor foreign currency risk attributable to our outstanding foreign currency balances. These control policies involve the centralization of foreign currency exposure management, the offsetting of exposures and the estimating of expected impacts of changes in foreign currency rates on our earnings. We enter into foreign currency forward contracts to reduce the effects of our net currency exchange exposures. At December 31, 2016, foreign currency forward contracts in the notional amount of $39 million, maturing in January 2017 to March 2017, were outstanding.
For forward contracts that economically hedge recognized monetary assets and liabilities in foreign currencies and that are not designated as net investment hedges, hedge accounting is not applied. Changes in the fair value of foreign currency forward contracts, which are reported in the Consolidated Statements of Income, are offset in part by the currency translation results recognized on the assets and liabilities.
Foreign Currency Gain (Loss)-Other income, net, in the Consolidated Statements of Income reflected losses of $4 million and $7 million in 2016 and 2015, respectively, and a gain of $15 million in 2014.
Basis Swaps-In September 2015, we entered into 850 million of cross-currency floating-to-floating interest rate swaps (“basis swaps”) to reduce the volatility in stockholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S. dollar. Under the terms of these contracts, which have been designated as net investment hedges, we will make interest payments in euros at 3 Month EURIBOR plus basis and will receive interest in U.S. dollars at 3 Month LIBOR. Upon the maturities of these contracts, we will pay the principal amount in euros and receive U.S. dollars from our counterparties.
We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis of our basis swap contracts at least on a quarterly basis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the forward method to measure ineffectiveness.
The effective portion of the unrealized gains and losses on these basis swap contracts is reported within Foreign currency translation adjustments in Accumulated other comprehensive loss and reclassified to earnings only
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when realized upon the sale or upon complete or substantially complete liquidation of the investment in the foreign entity. Cash flows from basis swaps are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.
In September 2016, 450 million of our basis swaps expired. Upon settlement of these basis swap contracts, which had a notional value of $500 million, we paid 450 million ($506 million at the expiry spot rate) to our counterparties and received $500 million from our counterparties. The $6 million loss is reflected in foreign currency translation adjustments in Accumulated other comprehensive loss. Cash flows from the settlement of these basis swap contracts are reported in Cash flows from investing activities in the Consolidated Statements of Cash Flows.
There was no ineffectiveness recorded during the years ended December 31, 2016 and 2015 related to these basis swaps.
The following table summarizes the notional and fair value of our basis swaps outstanding:
Forward Exchange Contracts-In October 2016, we entered into forward exchange contracts with an aggregate notional value of 275 million ($299 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. Dollar exchange rate related to our investments in foreign subsidiaries. There was no ineffectiveness recorded during the year ended December 31, 2016 related to these forward exchange contracts.
We use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the Euro notes and the spot rate change in the designated net investment. We use the hypothetical derivative method to measure hedge ineffectiveness.
In December 2015, we entered into forward exchange contracts with an aggregate notional value of 750 million ($795 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. Dollar exchange rate related to our investments in foreign subsidiaries. We elected to designate these forward exchange contracts as net investment hedges. The effective portion of the gains or losses was recorded within foreign currency translations adjustments in Accumulated other comprehensive income (loss). In periods where the hedging relationship was deemed ineffective, changes in the fair value were recorded directly to Other income, net in the Consolidated Statements of Income. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.
On March 31, 2016, the forward exchange contracts entered into in December 2015 expired. Upon settlement of these contracts, we paid 750 million ($850 million at the expiry spot rate) to our counterparties and received $795 million from our counterparties. The $55 million difference, which includes a $30 million loss in the first quarter of 2016, is reflected within foreign currency translations adjustments in Accumulated other comprehensive loss. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows. There was no ineffectiveness recorded for this hedging relationship in 2016. In 2015, we recognized a $1 million loss related to ineffectiveness.
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Guaranteed Euro Notes Due 2022-In 2016, we issued euro denominated notes payable due 2022 (“Euro notes”) with notional amounts totaling 750 million. To mitigate the risk to our investments in foreign subsidiaries associated with fluctuations in the euro to U.S. dollar exchange rate, we designated these Euro notes as a net investment hedge.
We use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the Euro notes and the spot rate change in the designated net investment. We use the hypothetical derivative method to measure hedge ineffectiveness.
The effective portion of the gain or loss is recorded within foreign currency translation adjustments in Accumulated other comprehensive loss and will be reclassified to earnings only when realized upon the sale of or the complete or substantially complete liquidation of the investment in the foreign entity. In periods where the hedging relationship is deemed ineffective, changes in remeasurement of the Euro notes due to changes in the spot exchange rate will be recorded directly to Other income, net in the Consolidated Statements of Income. Cash flows related to our Euro notes are reported in Cash flows from financing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows.
There was no ineffectiveness recorded for this hedging relationship in the year ended December 31, 2016.
Cross-Currency Swaps-We have cross-currency swap contracts that reduce our exposure to the foreign currency exchange risk associated with certain intercompany loans. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros and receive interest in U.S. dollars. Upon the maturities of these contracts, we will pay the principal amount of the loans in euros and receive U.S. dollars from our counterparties.
We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.
The effective portion of the unrealized gains and losses on these cross-currency swap contracts is reported in Accumulated other comprehensive loss and reclassified to earnings over the period that the hedged intercompany loans affect earnings based on changes in spot rates. The ineffective portion of the unrealized gains and losses is recorded directly to Other income, net in the Consolidated Statements of Income. In addition, the swaps are marked-to-market each reporting period with the euro notional values measured based on the current foreign exchange spot rate. There was no ineffectiveness recorded during the years ended December 31, 2016, 2015 and 2014.
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The following table summarizes our cross-currency swaps outstanding:
Forward-Starting Interest Rate Swaps-In March 2015, we entered into forward-starting interest rate swaps to mitigate the risk of adverse changes in the benchmark interest rates on the anticipated refinancing of our senior notes due 2019. These interest rate swaps will be terminated upon debt issuance. The total notional amount of these forward-starting interest rate swaps was $1,000 million at December 31, 2015. The ineffectiveness recorded for this hedging relationship was less than $1 million during each of the years ended December 31, 2016 and 2015.
In January 2015, we entered into forward-starting interest rate swaps with a total notional value of $750 million to mitigate the risk of adverse changes in the benchmark interest rates on the Company’s planned issuance of fixed-rate debt in 2015. These forward-starting interest rate swaps were terminated upon issuance of the $1,000 million senior notes due 2055 in March 2015. The ineffectiveness recorded for this hedging relationship was less than $1 million during the year ended December 31, 2015.
In February 2014, we entered into forward-starting interest rate swaps with a total notional value of $500 million to hedge the risk of adverse changes in the benchmark interest rates for anticipated fixed-rate debt issuances in 2014. The swap was terminated upon issuance of the $1,000 million of guaranteed notes due 2044.
We elected to designate these forward-starting interest rate swaps as cash flow hedges. The effective portion of the gains or losses is recorded in Accumulated other comprehensive loss. In periods where the hedging relationship is deemed ineffective, the ineffective portion of the changes in the fair value will be recorded as Interest expense in the Consolidated Statements of Income. The related deferred gains and losses recognized in Accumulated other comprehensive loss are amortized to interest expense over the original term of the related swaps using the effective interest method.
We use a regression analysis approach under the hypothetical derivative method to assess both prospective and retrospective hedge effectiveness. We use the dollar-offset method under the hypothetical derivative method to measure hedge ineffectiveness.
In 2016, there was no settlement of our forward-starting swap agreements. In 2015 and 2014, we recognized a gain of $15 million and a loss of $17 million, respectively, in Accumulated other comprehensive loss related to the settlement of our forward-starting interest rate swap agreements.
As of December 31, 2016, less than $1 million (on a pretax basis) is scheduled to be reclassified as an increase to interest expense over the next twelve months.
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Commodity swaps designated as cash-flow hedges-We have commodity swaps designated as cash-flow hedges to manage the volatility of the commodity price related to anticipated purchases of raw materials. We enter into over-the-counter commodity swaps with one or more counterparties whereby these commodity swaps require us to pay a predetermined fixed price and receive a price based on the average monthly forward rate of a specified index for the specified nominated volumes.
We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis monthly. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.
The effective portion of the unrealized gains and losses on these commodity swaps designated as cash-flow hedges is reported in Accumulated other comprehensive loss and reclassified to earnings in the same period or periods that the hedged forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses is recorded directly to Other income, net in the Consolidated Statements of Income. There was no ineffectiveness recorded during the year ended December 31, 2016.
As of December 31, 2016, less than $1 million (on a pretax basis) is scheduled to be reclassified as an increase to cost of sales over the next twelve months.
Fixed-for-Floating Interest Rate Swaps-In 2016, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $1,000 million 6% senior notes due 2021 associated with the risk of variability in the 1 Month USD LIBOR rate (the benchmark interest rate).
In 2014, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $2,000 million 5% senior notes due 2019 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate).
These interest rate swaps are used as part of our current interest rate risk management strategy to achieve a desired proportion of variable versus fixed rate debt.
Under these arrangements, we exchange fixed-rate for floating-rate interest payments to effectively convert our fixed-rate debt to floating-rate debt. The fixed and variable cash payments related to the interest rate swaps related to our 5% senior notes due 2019 are net settled semi-annually. The fixed and variable payments for the interest rate swaps related to our 6% senior notes due 2021 are settled semi-annually and monthly, respectively. These payments are classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows.
We elected to designate these fixed-for-floating interest rate swaps as fair value hedges. We use the long-haul method to assess hedge effectiveness using a regression analysis approach. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method to measure ineffectiveness.
Changes in the fair value of the derivatives and changes in the value of the hedged items based on changes in the benchmark interest rate are recorded as Interest expense in our Consolidated Statements of Income. We evaluate the effectiveness of the hedging relationship quarterly and calculate the changes in the fair value of the derivatives and the underlying hedged items separately. During the years ended December 31, 2016, 2015 and 2014, we recognized net gains of $32 million, $44 million and $17 million, respectively, related to the ineffectiveness of our hedging relationships.
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At December 31, 2016, we had outstanding interest rate swap agreements with notional amounts of totaling $600 million, maturing on November 15, 2021, and notional amounts of $2,000 million, maturing on April 15, 2019.
Investments in marketable securities-The following table summarizes our investments in marketable securities at December 31:
The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of our available-for-sale and held-to-maturity securities that are outstanding as of December 31, 2016 and 2015. Refer to Note 15 for additional information regarding the fair value of these available-for-sale and held-to-maturity securities.
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Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days. The fair value of these funds is estimated using the net asset value (“NAV”) per share of the respective pooled fund investment.
No losses related to other-than-temporary impairments of our available-for-sale and held-to-maturity investments have been recorded in Accumulated other comprehensive loss during the years ended December 31, 2016, 2015 and 2014.
As of December 31, 2016, our available-for-sale securities had the following maturities: commercial paper securities held by the Company had maturities between one and six months; bonds had maturities between one and thirty eight months; certificates of deposit mature between one and fifteen months; and limited partnership investments mature between one and three months. Our time deposits classified as held-to-maturity securities had maturities between three and six months.
The proceeds from maturities and sales of our available-for-sale securities during the years ended December 31, 2016, 2015 and 2014 are summarized in the following table:
No gain or loss was realized in connection with the sales of our available-for-sale securities during the year ended December 31, 2016. We recognized realized gains of less than $1 million in connection with the sale of securities during the years ended December 31, 2015 and 2014.
The specific identification method was used to identify the cost of the securities sold and the amounts reclassified out of Accumulated other comprehensive loss into earnings.
During the year ended December 31, 2016, we had no sales or maturities of our held-to-maturity securities and no transfers of investments classified as held-to-maturity to available-for-sale.
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The following table summarizes the fair value and unrealized losses related to available-for-sale and held-to-maturity securities that were in a continuous unrealized loss position for less than and greater than twelve months as of December 31, 2016 and 2015.
Financial Instruments-The following table summarizes financial instruments outstanding as of December 31, 2016 and 2015 that are measured at fair value on a recurring basis. Refer to Note 15, Fair Value Measurement, for additional information regarding the fair value of financial instruments.
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The following table summarizes the pretax effect of derivative instruments and non-derivative instruments designated as net investment hedges charged directly to income:
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For the years ended December 31, 2016, 2015 and 2014, the pretax effect of additional gain (loss) recognized in income for the fixed-for-floating interest rate swaps includes the net value for accrued interest of $21 million, $29 million and $6 million, respectively.
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15. Fair Value Measurement
The following table presents the financial instruments outstanding as of December 31, 2016 and 2015 that are measured at fair value on a recurring basis.
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* In accordance with Fair Measurement Topic 820, Subtopic 10, certain investments measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The amounts presented in this table are intended to facilitate reconciliation to the Consolidated Balance Sheets.
The fair value of the commodities assets classified as Level 2 is associated with our commodity swaps designated as cash-flow hedges. The fair values of the commodities assets and liabilities classified as Level 1 are associated with our commodity derivatives not designated as hedges.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2016 and 2015.
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The following table presents the carrying value and estimated fair value of our financial instruments that are not measured at fair value on a recurring basis as of December 31, 2016 and 2015. Short-term and long-term loans receivable, which represent our repurchase agreements, and short-term and long-term debt are recorded at amortized cost in the Consolidated Balance Sheets. The carrying and fair values of short-term and long-term debt exclude capital leases.
The fair value of all non-derivative financial instruments included in Current assets described below, Current liabilities, including Short-term debt excluding precious metal financings, and Accounts payable, approximates the applicable carrying value due to the short maturity of those instruments. Current assets include Cash and cash equivalents, Restricted cash, held-to-maturity time deposits and Accounts receivable.
We use the following inputs and valuation techniques to estimate the fair value of our financial instruments:
Basis Swaps-The fair value of our basis swap contracts is calculated using the present value of future cash flows discounted using observable inputs such as known notional value amounts, yield curves, and spot and forward exchange rates.
Cross-Currency Swaps-The fair value of our cross-currency swaps is calculated using the present value of future cash flows discounted using observable inputs with the foreign currency leg revalued using published spot and future exchange rates on the valuation date.
Forward-Starting Interest Rate Swaps-The fair value of our forward-starting interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as benchmark interest rates.
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Fixed-for-Floating Interest Rate Swaps-The fair value of our fixed-for-floating interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as interest rates and market yield curves.
Commodity and Embedded Derivatives-The fair values of our commodity derivatives classified as Level 1 and embedded derivatives are measured using closing market prices at the end of the reporting period obtained from the New York Mercantile Exchange and from third-party broker quotes and pricing providers.
The fair value of our commodity swaps classified as Level 2 in 2015 is determined using a combination of observable and unobservable inputs. The observable inputs consist of future market values of various crude and heavy fuel oils, which are readily available through public data sources. The unobservable input, which is the estimated discount or premium used in the market pricing, is calculated using an internally-developed, multi-linear regression model based on the observable prices of the known components and their relationships to historical prices. A significant change in this unobservable input would not have a material impact on the fair value measurement of our Level 2 commodity swaps.
Foreign Currency Derivatives and Forward Exchange Contracts-The fair value of our foreign currency derivatives is based on forward market rates.
Available-for-Sale Securities-Fair value is calculated using observable market data for similar securities and broker quotes from recognized purveyors of market data or the net asset value for limited partnership investments provided by the fund administrator.
Performance Share Awards-Fair value is determined using the quoted market price of our stock.
Short-Term and Long-Term Loans Receivable-Valuations are based on discounted cash flows, which consider prevailing market rates for the respective instrument maturity in addition to corroborative support from the minimum underlying collateral requirements.
Short-Term Debt-Fair values of short-term borrowings related to precious metal financing arrangements are determined based on the current market price of the associated precious metal.
Long-Term Debt-Fair value is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.
16. Pension and Other Postretirement Benefits
We have defined benefit pension plans which cover employees in the U.S. and various non-U.S. countries. We also sponsor postretirement benefit plans other than pensions that provide medical benefits to certain of our U.S., Canadian, and French employees. In addition, we provide other postemployment benefits such as early retirement and deferred compensation severance benefits to employees of certain non-U.S. countries. We use a measurement date of December 31 for all of our benefit plans.
For 2016, the actual returns on the assets of our U.S. and non-U.S. defined benefit pension plans were a gain of 7.22% and 15.81%, respectively.
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The following table provides a reconciliation of projected benefit obligations, plan assets and the funded status of our U.S. and non-U.S. defined benefit pension plans:
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The following additional information is presented for our U.S. and non-U.S. pension plans as of December 31:
Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:
Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:
The following table provides the components of net periodic pension costs:
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Lump sum benefit payments of $288 million were made from existing plan assets in 2016. These payments in total exceeded annual service and interest cost, resulting in pension settlement expense of $58 million. A significant portion of the lump sum payments were due to a voluntary lump sum program to certain former employees in select U.S. pension plans.
Our goal is to manage pension investments over the longer term to achieve optimal returns with an acceptable level of risk and volatility. The assets are externally managed by professional investment firms and performance is evaluated continuously against specific benchmarks.
The actual and target asset allocations for our plans are as follows:
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We estimate the following contributions to our pension plans in 2017:
As of December 31, 2016, future expected benefit payments by our pension plans which reflect expected future service, as appropriate, are as follows:
The following tables set forth the principal assumptions on discount rates, projected rates of compensation increase and expected rates of return on plan assets, where applicable. These assumptions vary for the different plans, as they are determined in consideration of local conditions.
The assumptions used in determining the net benefit liabilities for our pension plans were as follows at December 31:
The assumptions used in determining net benefit costs for our pension plans were as follows:
The discount rate assumptions reflect the rates at which the benefit obligations could be effectively settled, based on the yields of high quality long-term bonds where the term closely matches the term of the benefit obligations. At the beginning of 2017, we will change the approach used to measure service and interest costs for pension and other postretirement benefits under significant U.S. plans. For 2016, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2017, we will measure service and interest costs by applying the specific spot rates along that
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same yield curve to the plans’ projected cash flows. We believe the new approach provides a more precise measurement of service and interest costs. This change does not affect the measurement of our plan obligations. We will account for this change as a change in accounting estimate and, accordingly, will account for it on a prospective basis. The weighted average expected long-term rate of return on assets in our U.S. plans of 8.00% is based on the average level of earnings that our independent pension investment advisor had advised could be expected to be earned over a fifteen to twenty year time period consistent with the plans’ target asset allocation, historical capital market performance, historical plan performance (since the 1997 inception of the U.S. Master Trust) and a forecast of expected future asset returns. The weighted average expected long-term rate of return on assets in our non-U.S. plans of 3.37% is based on expectations and asset allocations that vary by region. We review these long-term assumptions on a periodic basis.
In the U.S. plans, the expected rate of return was derived based on the target asset allocation of 32.5% equity securities (8.8% expected return), 37.5% fixed income securities (4.9% expected return), and 30% alternative investments (8.1% expected return). In the non-U.S. plans, the investments consist primarily of fixed income securities whose expected rates of return range from 2.45% to 5.75%.
The following table reflects the actual annualized total returns for the periods ended December 31, 2016:
Actual rates of return may differ from the expected rate due to the volatility normally experienced in capital markets. The goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility in order to meet the benefit obligations of the plans as they come due.
Our pension plans have not directly invested in securities of LyondellBasell N.V., and there have been no significant transactions between any of the pension plans and the Company or related parties thereof.
In accordance with ASC 820, Fair Value Measurements and Disclosures, fair value measurements are classified using the following hierarchy:
Level 1-Quoted prices for identical instruments in active markets.
Level 2-Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
Level 3-Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
When available, quoted market prices are used to determine fair value and such measurements are classified within Level 1. In some cases where market prices are not available, observable market-based inputs are used to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.
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Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
Changes in fair value levels-Management reviews the disclosures regarding fair value measurements annually at year end. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified as Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is reclassified as Level 3.
The major classes of the pension assets are measured at fair value using the following valuation methodologies:
Common and preferred stock-Valued at the closing price reported on the market on which the individual securities are traded.
Fixed income securities-Certain securities that are not traded on an exchange are valued at the closing price reported by pricing services. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Commingled funds-Valued based upon the unit values of such collective trust funds held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund derived from inputs principally from, or corroborated by, observable market data by correlation or other means.
Real estate-Valued on the basis of a discounted cash flow approach, which includes the future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.
Hedge funds-Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund.
Private equity-Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund. Certain securities held in the fund are valued at the closing price reported on the exchange or other established quotation service for over-the-counter securities. Other assets held in the fund are valued based on the most recent financial statements prepared by the fund manager.
Convertible securities-Valued at the quoted prices for similar assets or liabilities in active markets.
U.S. government securities-Certain securities are valued at the closing price reported on the active market on which the individual securities are traded. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Cash and cash equivalents-Valued at the quoted prices for similar assets or liabilities in active markets.
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The pension investments that are measured at fair value as of December 31, 2016 and 2015 are summarized below:
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* In accordance with Fair Value Measurement Topic 820, Subtopic 10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The fair value measurements of the investments in certain entities that calculate net asset value per share as of December 31, 2016 are as follows:
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The fair value measurements of the investments in certain entities that calculate net asset value per share as of December 31, 2015 are as follows:
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The redemption frequency may be subject to market conditions and/or contractual obligations. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Multi-employer Plan-The Company participates in a multi-employer arrangement with Pensionskasse der BASF WaG V.VaG (Pensionskasse) which provides for benefits to the majority of our employees in Germany. Up to a certain salary level, the benefit obligations are covered by contributions of the Company and the employees to the plan. Contributions made to the multi-employer plan are expensed as incurred.
The following table provides disclosure related to the Company’s multi-employer plan:
(a) The Company-specific plan information for the Pensionskasse is not publicly available and the plan is not subject to a collective-bargaining agreement. The plan provides fixed, monthly retirement payments on the basis of the credits earned by the participating employees. To the extent that the Pensionskasse is
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underfunded, the future contributions to the plan may increase and may be used to fund retirement benefits for employees related to other employers. The Pensionskasse financial statements for the years ended December 31, 2015 and 2014 indicated total assets of $7,560 million and $7,485 million, respectively; total actuarial present value of accumulated plan benefits of $7,232 million and $7,146 million, respectively; and total contributions for all participating employers of $244 million and $245 million, respectively. Our plan contributions did not exceed 5 percent of the total contributions in 2016, 2015 or 2014.
Other Postretirement Benefits-We sponsor unfunded health care and life insurance plans covering certain eligible retired employees and their eligible dependents. Generally, the medical plans pay a stated percentage of medical expenses reduced by deductibles and other coverage. Life insurance benefits are generally provided by insurance contracts. We retain the right, subject to existing agreements, to modify or eliminate these benefits.
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The following table provides a reconciliation of benefit obligations of our unfunded other postretirement benefit plans:
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The following table provides the components of net periodic other postretirement benefit costs:
The following table sets forth the assumed health care cost trend rates:
The health care cost trend rate assumption does not typically have a significant effect on the amounts reported due to limits on maximum contribution levels to the medical plans. However, changing the assumed health care cost trend rates by one percentage point in each year would increase or decrease the accumulated other postretirement benefit liability as of December 31, 2016 by $21 million and $14 million, respectively, for non-U.S. plans and by less than $1 million for U.S. plans and would not have a material effect on the aggregate service and interest cost components of the net periodic other postretirement benefit cost for the year then ended.
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The assumptions used in determining the net benefit liabilities for our other postretirement benefit plans were as follows:
The assumptions used in determining the net benefit costs for our other postretirement benefit plans were as follows:
As of December 31, 2016, future expected benefit payments by our other postretirement benefit plans, which reflect expected future service, as appropriate, were as follows:
Accumulated Other Comprehensive Loss-The following pretax amounts were recognized in Accumulated other comprehensive loss as of and for the years ended December 31, 2016 and 2015:
In 2016, $186 million of pension benefits actuarial loss primarily reflects $265 million of losses due to changes in discount rate assumption offset by $79 million of gains due to asset experience (actual asset return compared
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to expected return). There were $2 million of other postretirement benefits actuarial losses primarily due to $14 million of discount rate assumption changes, offset by a gain of $10 million of changes due to favorable liability experience, and other immaterial items. In 2015, $71 million of actuarial losses primarily reflect $62 million of gains due to changes in discount rate assumption offset by $133 million of losses due to asset experience (actual asset return compared to expected return) and other immaterial liability experience gains and losses. There were $63 million of other postretirement benefit actuarial gains due to $11 million of discount rate assumption changes, $37 million of changes due to favorable liability experience, $13 million due to healthcare assumptions, and other immaterial items.
Deferred income taxes related to amounts in Accumulated other comprehensive income (loss) include provisions of $237 million and $216 million as of December 31, 2016 and 2015, respectively.
At December 31, 2016, Accumulated other comprehensive income (loss) of $14 million represents net actuarial and investment losses related to non-U.S. pension plans that are expected to be recognized as a component of net periodic benefit cost in 2017. There are $22 million of net actuarial and investment losses in AOCI at December 31, 2016 for U.S. pension plans expected to be recognized in net periodic benefit cost in 2017. At December 31, 2016, AOCI included $3 million of net actuarial loss related to non-U.S. other postretirement benefits that is expected to be recognized in net periodic benefit cost in 2017.
Defined Contribution Plans-Most employees in the U.S. and certain non-U.S. countries are eligible to participate in defined contribution plans by contributing a portion of their compensation. We also make employer contributions, such as matching contributions, to certain of these plans. The Company has a nonqualified deferred compensation plan that covers senior management in the U.S. The plan was amended in April, 2013 to provide for company contributions on behalf of certain eligible employees who earn base pay above the IRS annual compensation limit. We recognized less than $1 million of compensation expense related to the plan amendment in 2014.
The following table provides the company contributions to the Employee Savings Plans:
17. Incentive and Share-Based Compensation
We are authorized to grant restricted stock units, stock options, performance share units, and other cash and stock awards under our Long-Term Incentive Plan (“LTIP”). The Compensation Committee determines the recipients of the equity awards, the type of awards, the required performance measures, and the timing and duration of each grant. The maximum number of shares of our common stock reserved for issuance under the LTIP is 22,000,000. As of December 31, 2016, there were 6,487,524 shares remaining available for issuance assuming maximum payout for PSUs. Upon share exercise or payment, shares are issued from our treasury shares.
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Total share-based compensation expense and the associated tax benefits are as follows for the years ended December 31:
Restricted Stock Unit Awards (“RSUs”)-RSUs generally entitle the recipient to be paid out an equal number of ordinary shares on the third anniversary of the grant date. RSUs, which are subject to customary accelerated vesting or forfeiture in the event of certain termination events, are accounted for as an equity award with compensation cost recognized in the income statement ratably over the vesting period.
In 2015, 190,399 RSUs were granted to the Chief Executive Officer (“CEO”) and three other executive officers. These RSUs vest in annual tranches with 10% vested after one year and an additional 15% vested after two years and the remaining vesting in equal tranches after each of the third, fourth, and fifth years. Compensation cost for these awards is recognized using the graded vesting method.
The holders of all RSUs are entitled to dividend equivalents to be settled no later than March 15, following the year in which dividends are paid, as long as the participant is in full employment at the time of the dividend payment. See the “Dividend Distribution” section of Note 20 for the per share amount of dividend equivalent payments made to the holders of RSUs during 2016, 2015 and 2014. Total dividend equivalent payments were $1 million, $2 million and $4 million for 2016, 2015 and 2014, respectively.
RSUs are valued at the market price of the underlying stock on the date of grant. The weighted average grant date fair value for RSUs granted during the years ended December 31, 2016, 2015 and 2014 was $79.77, $83.31 and $91.66, respectively. The total fair value of RSUs vested during 2016, 2015 and 2014 was $16 million, $120 million and $30 million, respectively.
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The following table summarizes RSU activity for the year ended December 31, 2016:
As of December 31, 2016, the unrecognized compensation cost related to RSUs was $11 million, which is expected to be recognized over a weighted average period of two years.
Stock Options-Stock options are granted with an exercise price equal to the market price of our ordinary shares at the date of grant. The awards generally have a three year vesting period that vests in equal increments on the first, second, and third anniversary of the grant date. The awards have a contractual term of ten years, subject to customary accelerated vesting or forfeiture in the event of certain termination events. The stock options are accounted for as equity awards with compensation cost recognized using the graded vesting method. Outstanding stock options have exercise prices ranging from $12.61 to $113.03.
In 2015, 457,555 stock options were granted to the Chief Executive Officer and three other executive officers. These stock options vest in annual tranches with 10% vested after one year and an additional 15% vested after two years and the remaining vesting in equal tranches after each of the third, fourth, and fifth years.
The fair value of each stock option award is estimated, based on several assumptions, on the date of grant using the Black-Scholes option valuation model. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on our historical stock price volatility over the expected term); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of a United States Treasury zero coupon bond with a maturity equal to the expected life of the option).
The expected term of all options granted is estimated based on a simplified approach. In 2010, when the majority of our options were granted, we determined that the simplified method was appropriate because of the life of LyondellBasell N.V. and its relative stage of development. Similarly, we did not possess exercise patterns similar to our situation. The option grants that have been made since 2010 have been limited in number and have occurred during periods of substantial share price volatility.
Weighted average fair values of stock options granted in each respective year and the assumptions used in estimating those fair values are as follows:
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The following table summarizes stock option activity for the year ended December 31, 2016 for the non-qualified stock options:
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $1 million, $280 million and $98 million, respectively.
As of December 31, 2016, the unrecognized compensation cost related to non-qualified stock options was $6 million, which is expected to be recognized over a one-year period. During 2016, cash received from the exercise of stock options was $6 million. There was no tax benefit associated with these exercises.
Performance Share Units (“PSUs”), Qualified Performance Awards (“QPAs”), Medium-Term Incentive Program (“MTI”)-Shares issued in satisfaction of PSU and QPA awards are granted under our LTIP. PSU and QPA awards are similar. The target number of share awards is established at the beginning of a three-calendar year performance period. Each unit is equivalent to one share of our common stock. The final number of shares payable is determined at the end of the three-calendar year performance period by the Compensation Committee. Since the service-inception date precedes the grant date, these share awards are treated as a liability award until the grant date and compensation expense during the three-calendar year performance period is accrued on a straight-line basis subject to fair value adjustments. These share awards are subject to customary accelerated vesting and forfeiture in the event of certain termination events.
Beginning January 1, 2016, the holders of PSUs are entitled to accrue dividend equivalent units. These dividend equivalent units will be converted to shares upon payment at the end of the three-year performance cycle based on the overall payout percentage as determined by the Compensation Committee. PSUs and associated dividend equivalent units are classified in Accrued and Other liabilities on the Consolidated Balance Sheets. For the fair value of the share awards, see Note 15.
PSUs are valued at the market price of the underlying stock on the date of payment. As of December 31, 2016, the unrecognized compensation cost related to PSUs and dividend equivalents assuming target payout was $26 million, which is expected to be recognized over a weighted average period of two years.
For grants made in 2012 and 2013, eligible employees other than executive officers could elect to receive share-based awards (QPAs) or cash-based awards (MTI) while executive officers were only eligible for the share-based awards (QPAs). Awards under the MTI are accounted for as a liability and classified in Other liabilities on the Consolidated Balance Sheets. We recorded compensation expense for cash MTI awards of $1 million, $10 million and $9 million for the years ended December 31, 2016, 2015 and 2014, respectively, based on the expected achievement of performance results.
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The weighted average grant date fair value for QPAs granted during the years ended December 31, 2016 and 2015 was $77.93 and $89.94, respectively. The total fair value of QPAs vested during 2016 and 2015 was $20 million and $33 million, respectively.
Employee Stock Purchase Plan
We have an Employee Share Purchase Plan (“ESPP”) which includes a 10% discount and a look-back provision. These provisions allow participants to purchase our stock at a discount on the lower of the fair market value at the beginning or end of the purchase period. As a result of the 10% discount and the look-back provision, the ESPP is considered a compensatory plan under generally accepted accounting principles.
18. Income Taxes
LyondellBasell N.V. is tax resident in the United Kingdom pursuant to a mutual agreement procedure determination ruling between the Dutch and United Kingdom competent authorities and therefore subject solely to the United Kingdom corporate income tax system.
Through our subsidiaries, we have substantial operations world-wide and in recent years have earned significant income in the United States. Taxes are primarily paid on the earnings generated in various jurisdictions, including the United States, The Netherlands, Germany, France, Italy and other countries. LyondellBasell N.V. has little or no taxable income of its own because, as a holding company, it does not conduct any operations. Instead, the subsidiaries through which we operate incur tax obligations in the jurisdictions in which they operate.
We monitor income tax developments (including, for example, the U.S. tax reform proposal and the European Union’s state aid investigations) in countries where we conduct business. In September 2016, the UK enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that will impact our internal financing structure. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may also impact our internal financings. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development (“OECD”) with respect to base erosion and profit shifting. Such attention may result in legislative changes that could affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.
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The significant components of the provision for income taxes are as follows:
Since the proportion of U.S. revenues, assets, operating income and associated tax provisions is significantly greater than any other single taxing jurisdiction within the worldwide group, the reconciliation of the differences between the provision for income taxes and the statutory rate is presented on the basis of the U.S. statutory federal income tax rate of 35% as opposed to the United Kingdom statutory rate of 20% to provide a more meaningful insight into those differences. Our effective tax rate for the year ended December 31, 2016 is 26.5%. This summary is shown below:
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Our 2016 income tax provision includes a charge of $135 million for non-cash out of period adjustments from prior years which is reflected in Other, net in the table above. $74 million of the charge relates to a correction for the tax effects on our cross currency swaps with the remainder relating primarily to adjustments for deferred tax liabilities associated with some of our consolidated subsidiaries. Management has concluded that these adjustments were immaterial to all periods presented.
The deferred tax effects of tax loss and credit carryforwards (“tax attributes”) and the tax effects of temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements, reduced by a valuation allowance where appropriate, are presented below:
At December 31, 2016 and 2015, we had total tax attributes available in the amount of $968 million and $1,082 million, respectively, for which a deferred tax asset was recognized at December 31, 2016 and 2015 of $255 million and $322 million, respectively.
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The scheduled expiration of the tax attributes and the related deferred tax assets, before valuation allowance, as of December 31, 2016 are as follows:
The tax attributes are primarily related to operations in France, Canada, the United Kingdom, Spain, The Netherlands and the United States. The related deferred tax assets by primary jurisdictions are shown below:
In order to fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the countries where these tax attributes exist during the periods in which the attributes can be utilized. Based upon projections of future taxable income over the periods in which the attributes can be utilized and/or temporary differences can be reversed, management believes it is more likely than not that only $160 million of these deferred tax assets at December 31, 2016 will be realized.
Prior to the close of each reporting period, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdictions’ net deferred tax assets. We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets. We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law, as well as available prudent and feasible tax planning strategies that would, if necessary, be implemented to ensure realization of the net deferred tax asset.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A summary of the valuation allowances by primary jurisdiction is shown below, reflecting the valuation allowances for all the net deferred tax assets, including deferred tax assets for tax attributes and other temporary differences.
During 2016, we released $19 million of our valuation allowance related to Spanish net deferred tax assets associated with operating losses, as Spanish operations are no longer in a three-year cumulative loss position and our projections indicate and management now expects the operating losses will be fully utilized within the next nine years.
During 2015, the reduction in our valuation allowances was primarily attributable to currency translation adjustments.
During 2014, the change in our valuation allowances primarily related to the expiration of $99 million of Canadian tax loss carryforwards for which a full valuation allowance had been provided on the associated deferred tax asset of $26 million. Additionally, our valuation allowances were impacted by adjustments related to activity in 2014.
French tax law provides for an indefinite carryforward of tax losses; however, losses allowed in any particular year may not exceed fifty percent of taxable income. With respect to our French operations, we have a total net deferred tax asset of $116 million, against which we retain a valuation allowance of $22 million for losses that the Company does not expect to realize a future benefit due to limitations imposed by French tax law. The remaining portion of the net deferred tax asset of $94 million, primarily related to French tax losses, is expected to be fully realized.
We continue to maintain a full valuation allowance against the net deferred tax asset in Canada. Given our operational structure in Canada and the relevant Canadian loss utilization rules, the Company does not expect to realize a future benefit related to the net deferred tax asset.
Deferred taxes on the unremitted earnings of certain equity joint ventures and subsidiaries of $47 million and $51 million at December 31, 2016 and 2015, respectively, have been provided.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Tax benefits totaling $491 million, $464 million and $475 million relating to uncertain tax positions, which are reflected in Other liabilities, were unrecognized as of December 31, 2016, 2015 and 2014, respectively. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
The majority of the 2016, 2015 and 2014 balances, if recognized, will affect the effective tax rate. We operate in multiple jurisdictions throughout the world, and our tax returns are periodically audited or subjected to review by tax authorities. We are no longer subject to any significant income tax examinations by tax authorities for the years prior to 2015 in the Netherlands, prior to 2010 in Italy, prior to 2010 in Germany, prior to 2009 in France, prior to 2015 in the United Kingdom, and prior to 2011 in the U.S., our principal tax jurisdictions. The Company is currently under examination in a number of tax jurisdictions. It is reasonably possible that some of these examinations may be resolved during the next twelve months. We do not expect any significant changes in the amounts of unrecognized tax benefits during the next 12 months.
We recognize interest accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2016, 2015 and 2014, we recognized approximately $16 million, $5 million and $15 million, respectively, for interest and penalties. We had accrued approximately $47 million, $31 million and $26 million for interest and penalties as of December 31, 2016, 2015 and 2014, respectively.
19. Commitments and Contingencies
Commitments-We have various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for our businesses and at prevailing market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. Our capital expenditure commitments at December 31, 2016 were in the normal course of business.
Financial Assurance Instruments-We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Considering the frequency of claims made against the financial instruments we use to support our obligations, and the magnitude of those financial instruments in light of our current financial position, management does not expect that any claims against or draws on these instruments would have a material adverse effect on our Consolidated Financial Statements. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations.
Environmental Remediation-Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $95 million and $106 million as of December 31, 2016 and 2015, respectively. At December 31, 2016, the accrued liabilities for individual sites range from less than $1 million to $16 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
recorded may have been incurred. However, we cannot estimate any amount or range of such possible additional losses. New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.
The following table summarizes the activity in our accrued environmental liability included in “Accrued liabilities” and “Other liabilities:”
Access Indemnity Demand-In December 2010, one of our subsidiaries received demand letters from affiliates of Access Industries (collectively, “Access Entities”), a more than five percent shareholder of the Company, demanding indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit styled Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Leonard Blavatnik, et al., Adversary Proceeding No. 09-1375 (REG), in the United States Bankruptcy Court, Southern District of New York. In the Weisfelner lawsuit, the plaintiffs seek to recover from Access the return of all amounts earned by the Access Entities related to their purchase of shares of Lyondell Chemical Company (“Lyondell Chemical”) prior to its acquisition by Basell AF S.C.A.; distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical; and management and transaction fees and expenses. A trial was held in October 2016 and post-trial briefings are being completed by the parties at this time. The Court held closing arguments in February 2017.
The Access Entities have also demanded $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF, as well as other unspecified amounts relating to advice purportedly given in connection with financing and other strategic transactions. In June 2009, an Access affiliate filed a proof of claim in Bankruptcy Court against LyondellBasell AF seeking “no less than” $723 thousand for amounts allegedly owed under the 2007 management agreement. In April 2011, Lyondell Chemical filed an objection to the claim and brought a declaratory judgment action for a determination that the demands are not valid. The declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.
We do not believe that the 2007 management agreement is in effect or that the Company or any Company-affiliated entity owes any obligations under the management agreement, including for management fees or for indemnification. We intend to vigorously defend our position in any proceedings and against any claims or demands that may be asserted.
We cannot at this time estimate the reasonably possible loss or range of loss that may be incurred in the Weisfelner lawsuit; therefore, we cannot estimate the loss that may be sought by way of indemnity.
409A Matter-Certain of the Company’s current and former executives are being audited by the Internal Revenue Service for the 2012 tax year. The IRS has issued proposed assessments of additional taxes to these individuals for wages and penalties under Section 409A of the Internal Revenue Code. The IRS has argued that stock options awarded to the individuals in 2010 in connection with the Company’s emergence from bankruptcy
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
should not have used the exercise price set under the bankruptcy court approved plan of reorganization but instead should have used an exercise price based on pre-emergence trading by parties not controlled by the Company. If the individuals are unsuccessful in their defenses against these audits, or any audits for subsequent tax years, the Company believes it is reasonably possible that it may be liable to the individual executive taxpayers for the additional amounts they may owe to the IRS as a result of the stock options allegedly not meeting the exemption from Section 409A. Any amount that may be owed by the Company is dependent on the ultimate resolution of the IRS audits, but the Company believes that such amount could range from no liability to up to $170 million. The Company intends to vigorously defend its compensation practices.
Indemnification-We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation and dissolution of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of December 31, 2016, we had not accrued any significant amounts for our indemnification obligations, and we are not aware of other circumstances that would likely lead to significant future indemnification obligations. We cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.
As part of our technology licensing contracts, we give indemnifications to our licensees for liabilities arising from possible patent infringement claims with respect to certain proprietary licensed technologies. Such indemnifications have a stated maximum amount and generally cover a period of five to ten years.
20. Stockholders’ Equity
Dividend Distribution-The following table summarizes the dividends paid in the periods presented:
Share Repurchase Program-We completed the repurchase of shares under share repurchase programs authorized by our shareholders in May 2015 (“May 2015 Share Repurchase Program), April 2014 (“April 2014 Share Repurchase Program”) and May 2013 (“May 2013 Share Repurchase Program”) in 2016, 2015 and 2014,
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
respectively. We were authorized to purchase up to 10% of our outstanding shares under each of these programs. In May 2016, our shareholders approved a proposal to authorize us to repurchase up to an additional 10% of our outstanding ordinary shares through November 2017 (“May 2016 Share Repurchase Program”). These repurchases, which are determined at the discretion of our Management Board, may be executed from time to time through open market or privately negotiated transactions. The repurchased shares, which are recorded at cost, are classified as Treasury stock and may be retired or used for general corporate purposes, including for various employee benefit and compensation plans.
The following table summarizes our share repurchase activity for the periods presented:
Due to the timing of settlements, total cash paid for share repurchases for the years ended December 31, 2016, 2015 and 2014 was $2,938 million, $4,656 million and $5,788 million, respectively.
Ordinary Shares-The changes in the outstanding amounts of ordinary shares are as follows:
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Treasury Shares-The changes in the amounts of treasury shares held by the Company are as follows:
Accumulated Other Comprehensive Loss-The components of, and after-tax changes in, Accumulated other comprehensive loss as of and for the years ended December 31, 2016 and 2015 are presented in the following table:
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The amounts reclassified out of each component of Accumulated other comprehensive loss are as follows:
Amortization of prior service cost and actuarial loss are included in the computation of net periodic pension and other postretirement benefit costs (see Note 16).
Non-Controlling Interests-In June 2015, we received $24 million from a holder of a minority interest in one of our consolidated partnerships to exit the partnership. Accordingly, our interest in this partnership increased resulting in an impact to equity of a $4 million reduction of Non-controlling interests and a $20 million increase in Additional paid-in capital.
21. Per Share Data
Basic earnings per share are based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share includes the effect of certain stock options awards and other equity-based compensation awards. We have unvested restricted stock units that are considered participating securities for earnings per share.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Earnings per share data and dividends declared per share of common stock are as follows:
22. Segment and Related Information
Our operations are managed through five operating segments, as shown below. We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting. Each of the operating segments is managed by a senior executive reporting directly to our Chief Executive Officer, the chief operating decision maker. Discrete financial information is available for each of the segments, and our Chief Executive Officer uses the operating results of each of the operating segments for performance evaluation and resource allocation. The activities of each of our segments from which they earn revenues and incur expenses are described below:
•
Olefins and Polyolefins-Americas (“O&P-Americas”). Our O&P-Americas segment produces and markets olefins and co-products, polyethylene and polypropylene.
•
Olefins and Polyolefins-Europe, Asia, and International (“O&P-EAI”). Our O&P-EAI segment produces and markets olefins and co-products, polyethylene, and polypropylene, including polypropylene compounds.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
•
Intermediates and Derivatives (“I&D”). Our I&D segment produces and markets propylene oxide and its derivatives; oxyfuels and related products and intermediate chemicals such as styrene monomer, acetyls, ethylene oxide and ethylene glycol.
•
Refining. Our Refining segment refines heavy, high-sulfur crude oil and other crude oils of varied types and sources available on the U.S. Gulf Coast into refined products, including gasoline and distillates.
•
Technology. Our Technology segment develops and licenses chemical and polyolefin process technologies and manufactures and sells polyolefin catalysts.
Our chief operating decision maker uses EBITDA as the primary measure for reviewing our segments’ profitability and therefore, in accordance with ASC 280, Segment Reporting, we have presented EBITDA for all segments. We define EBITDA as earnings before interest, taxes and depreciation and amortization.
Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” Sales between segments are made primarily at prices approximating prevailing market prices.
Summarized financial information concerning reportable segments is shown in the following table for the periods presented:
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
In 2016, operating results for our O&P-Americas segment includes a non-cash, LCM inventory valuation charge of $29 million due mainly to the drop in polypropylene prices. Our O&P-Americas and O&P-EAI segments’ results benefited from gains of $57 million and $21 million, respectively, related to the sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A. in 2016.
In 2015, operating results for the O&P-Americas, O&P-EAI, I&D and Refining segments included non-cash charges of $160 million, $30 million, $181 million and $177 million, respectively, related to LCM inventory valuation adjustments. Declines in the prices of ethylene, propylene and other products correlated with crude oil were the primary drivers of the LCM inventory valuation adjustment for the O&P-Americas segment while the LCM inventory valuation adjustment recognized by our O&P-EAI segment is mainly related to polyolefins. Declines in the prices of various chemicals, notably benzene and ETBE, within our I&D segment’s inventory pools led to the LCM inventory valuation adjustment recognized by the I&D segment in 2015. The LCM inventory valuation adjustment recognized by the Refining segment in 2015 was driven primarily by declines in the price of crude oil.
In 2014, operating results for the O&P-Americas, O&P-EAI, I&D and Refining segments included non-cash charges of $279 million, $44 million, $93 million and $344 million, respectively, related to lower of cost or market inventory valuation adjustments, primarily driven by a decline in the price of crude oil and a related decline in the prices of heavy liquids and other correlated products. The O&P-EAI segment operating results for 2014 included a $52 million benefit from a settlement under a 2005 indemnification agreement for certain existing and future environmental liabilities.
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A reconciliation of EBITDA to Income from continuing operations before income taxes is shown in the following table for each of the periods presented:
Long-lived assets of continuing operations, including goodwill, are summarized and reconciled to consolidated totals in the following table:
The following geographic data for revenues are based upon the location of the customer and for long-lived assets, the location of the assets:
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Long-lived assets include Property, plant and equipment, net, Intangible assets, net, Equity investments, and Investments in PO joint ventures (see Notes 7, 8 and 9).
Revenues by key product are summarized in the following table:
23. Unaudited Quarterly Results
The following table presents selected financial data for the quarterly periods in 2016 and 2015:
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(a) Represents Sales and other operating revenues less Cost of sales.
(b) Includes charges in the three months ended March 31 2016 and June 30, 2016 of $40 million and $21 million, respectively, related to out of period adjustments for deferred tax liabilities associated with some of our subsidiaries, and a $61 million charge in the three months ended December 31, 2016 for out of period tax corrections related to tax effects on our cross currency swaps. Includes a pretax LCM inventory valuation charge of $68 million ($47 million after tax) in the three months ended March 31, 2016 which was reversed in the three months ended June 30, 2016. A pretax LCM inventory valuation charge of $29 million ($18 million after tax) and a pension settlement charge of $58 million ($37 million after tax) were also recognized in the three months ended December 31, 2016. The three months ended March 31, 2016 also includes a pretax and after tax gain of $78 million on the sale of our wholly owned Argentine subsidiary. Includes charges related to the pretax LCM inventory valuation adjustments of $92 million ($58 million after tax) in the three months ended March 31, 2015; $181 million ($114 million after tax) in the three months ended September 30, 2015; and $284 million ($185 million after tax) in the three months ended December 31, 2015. The three months ended June 30, 2015 includes a pretax benefit of $9 million ($6 million after tax) related to the partial reversal of the LCM inventory valuation adjustment recognized in the three months ended March 31, 2015. For additional information related to these adjustments, see Note 22.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Effectiveness of Controls and Procedures
Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to management (including the principal executive and financial officers) as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of December 31, 2016, the end of the period covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on our internal control over financial reporting can be found in Item 8, Financial Statements and Supplementary Data, of this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in our fourth fiscal quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have a Code of Conduct for all employees and directors, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. We also have a Financial Code of Ethics specifically for our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. We have posted copies of these codes on the “Corporate Governance” section of our website at www.lyb.com (within the Investor Relations section). Any waivers of the codes must be approved, in advance, by our Supervisory Board. Any amendments to, or waivers from, the codes that apply to our executive officers and directors will be posted on the “Corporate Governance” section of our website.
Information regarding our executive officers is reported under the caption “Executive Officers of the Registrant” in Part I of this report, which is incorporated herein by reference.
All other information required by this Item will be included in our Proxy Statement relating to our 2017 Annual General Meeting of Shareholders and is incorporated herein by reference.*
Item 11. Executive Compensation.
All information required by this Item will be included in our Proxy Statement relating to our 2017 Annual General Meeting of Shareholders and is incorporated herein by reference.*
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
All information required by this Item will be included in our Proxy Statement relating to our 2017 Annual General Meeting of Shareholders and is incorporated herein by reference.*
Item 13. Certain Relationships and Related Transactions, and Director Independence.
All information required by this Item will be included in our Proxy Statement relating to our 2017 Annual General Meeting of Shareholders and is incorporated herein by reference.*
Item 14. Principal Accounting Fees and Services.
All information required by this Item will be included in our Proxy Statement relating to our 2017 Annual General Meeting of Shareholders and is incorporated herein by reference.*
* Except for information or data specifically incorporated herein by reference under Items 10 through 14, other information and data appearing in our 2017 Proxy Statement are not deemed to be a part of this Annual Report on Form 10-K or deemed to be filed with the Commission as a part of this report.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) (1) Consolidated Financial Statements:
The financial statements and supplementary information listed in the Index to Financial Statements, which appears on page 61, are filed as part of this annual report.
(a) (2) Consolidated Financial Statement Schedules:
Schedules are omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.
(b) Exhibits:
The exhibit list required by this Item is incorporated by reference to the Exhibit Index filed as part of this report.
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LYONDELLBASELL INDUSTRIES N.V.
Date: February 17, 2017
/S/ BHAVESH V. PATEL
Name:
Bhavesh V. Patel
Title:
Chairman of the Management Board
Signature
Title
Date
/S/ BHAVESH V. PATEL
Bhavesh V. Patel
Chief Executive Officer and
Chairman of the Management
Board (Principal Executive Officer)
February 17, 2017
/S/ THOMAS AEBISCHER
Thomas Aebischer
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
February 17, 2017
/S/ MICHAEL W. SUMRULD
Michael W. Sumruld
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
February 17, 2017
/S/ JACQUES AIGRAIN
Jacques Aigrain
Director
February 17, 2017
/S/ LINCOLN BENET
Lincoln Benet
Director
February 17, 2017
/S/ JAGJEET S. BINDRA
Jagjeet S. Bindra
Director
February 17, 2017
/S/ ROBIN BUCHANAN
Robin Buchanan
Director
February 17, 2017
/S/ STEPHEN F. COOPER
Stephen F. Cooper
Director
February 17, 2017
/S/ NANCE K. DICCIANI
Nance K. Dicciani
Director
February 17, 2017
/S/ CLAIRE S. FARLEY
Claire S. Farley
Director
February 17, 2017
/S/ BELLA D. GOREN
Bella D. Goren
Director
February 17, 2017
/S/ ROBERT G. GWIN
Robert G. Gwin
Chairman of the Supervisory
Board and Director
February 17, 2017
Signature
Title
Date
/S/ BRUCE A. SMITH
Bruce A. Smith
Director
February 17, 2017
/S/ RUDY M.J. VAN DER MEER
Rudy M.J. van der Meer
Director
February 17, 2017
Exhibit Index
Exhibit
Number
Description
Amended and Restated Articles of Association of LyondellBasell Industries N.V., dated as of May 22, 2013 (incorporated by reference to Exhibit 3 to Form 8-K filed with the SEC on May 29, 2013)
4.1
Specimen certificate for Class A ordinary shares, par value 0.04 per share, of LyondellBasell Industries N.V. (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K filed with the SEC on February 16, 2016)
4.2
Registration Rights Agreement by and among LyondellBasell Industries N.V. and the Holders (as defined therein), dated as of April 30, 2010 (incorporated by reference to Exhibit 4.7 to Amendment No. 2 to Form 10 filed with the SEC on July 26, 2010)
4.3
Amended and Restated Nomination Agreement dated March 10, 2015 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 16, 2015)
4.4
Indenture relating to 6.0% Senior Notes due 2021, among the Company, as issuer, each of the Guarantors named therein, as guarantors, Wells Fargo National Association, as trustee, registrar and paying agent, dated as of November 14, 2011 (including form of 6.0% Senior Note due 2021 (incorporated by reference to Exhibit 4.1 to Form 8-K filed with the SEC on November 17, 2011)
4.5
First Supplemental Indenture, dated as of December 10, 2015, to Indenture dated as of November 14, 2011, between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on December 12, 2015)
4.6
Indenture relating to 5% Senior Notes due 2019 and 5.75% Senior Notes due 2024, among LyondellBasell Industries N.V., as issuer, each of the Guarantors named therein, as guarantors, Wells Fargo Bank, National Association, as trustee, registrar and paying agent, dated as of April 9, 2012 (including form of 5.000% Senior Note due 2019 and form of 5.750% Senior Note due 2024) (incorporated by reference to Exhibit 4.3 to Form 8-K filed with the SEC on April 10, 2012)
4.7
First Supplemental Indenture, dated as of December 10, 2015, to Indenture dated as of April 9, 2012, between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on December 12, 2015)
4.8
Indenture, among LYB International Finance B.V., as issuer, LyondellBasell Industries N.V., as guarantor, and Wells Fargo Bank, National Association, as trustee, dated as of July 16, 2013 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on July 16, 2013)
4.9
Indenture, among LYB International Finance II B.V., as Issuer, LyondellBasell Industries N.V., as Guarantor, and Deutsche Bank Trust Company Americas, as Trustee, dated as of March 2, 2016 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 2, 2016)
4.10
Officer’s Certificate of LYB International Finance II B.V. relating to the Notes, dated as of March 2, 2016 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on March 2, 2016)
4.11
Form of LYB International Finance II B.V.’s 1.875% Guaranteed Notes due 2022 (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed with the SEC on March 2, 2016 and included in Exhibit 4.2 thereto)
Exhibit
Number
Description
10.1+
Employment Agreement by and amount Bhavesh V. Patel, Lyondell Chemical Company and LyondellBasell Industries, N.V., dated as of December 18, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on December 22, 2014)
10.2+
Employment Agreement dated November 6, 2015, between Basell Service Company, B.V. and Thomas Aebischer (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 9, 2015).
10.3+
Letter Agreement dated November 6, 2015 between Thomas Aebischer and Lyondell Chemical Company (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on November 9, 2015)
10.4+
Employment Agreement by and among Kevin Brown, Lyondell Chemical Company and LyondellBasell AFGP, dated as of March 19, 2010 (incorporated by reference to Exhibit 10.4 to our Form 10 filed with the SEC on April 28, 2010)
10.5+
First Amendment to Employment Agreement by and among Kevin Brown, Lyondell Chemical Company and LyondellBasell Industries N.V., dated as of January 22, 2015 (incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K filed with the SEC on February 17, 2015)
10.6+
LyondellBasell Industries Amended and Restated 2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to our definitive proxy statement filed with the SEC on March 29, 2012)
10.7+
LyondellBasell U.S. Senior Management Deferral Plan dated March 1, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2012)
10.8+
First Amendment to the LyondellBasell U.S. Senior Management Deferral Plan filed with the SEC on April 29, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 30, 2013)
10.9+
LyondellBasell Executive Severance Plan, Amended & Restated, Effective as of June 1, 2015 and Form of Participation Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC June 5, 2015)
10.10+
Form of Officer and Director Indemnification Agreement (incorporated by reference to Exhibit 10.14 to Amendment No. 2 to our Form 10 filed with the SEC on July 26, 2010)
10.11+
Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K filed with the SEC on February 12, 2013)
10.12+
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K filed with the SEC on February 12, 2013)
10.14+
Form of Qualified Performance Award Agreement (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K filed with the SEC on February 29, 2012)
10.15+
Form of Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K filed with the SEC on February 16, 2016)
10.16
Amended and Restated Credit Agreement, filed with the SEC on June 5, 2014, among LyondellBasell Industries N.V. and LYB Americas Finance Company, as Borrowers, the Lenders, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Deutsche Bank Securities Inc., as Syndication Agent and the other parties thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 5, 2014)
Exhibit
Number
Description
10.17
Amendment No. 1 to the Amended and Restated Credit Agreement, dated June 3, 2016, among LyondellBasell Industries N.V. and LYB Americas Finance Company, as Borrowers, the Lenders, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Citibank, N.A. and Deutsche Bank Securities Inc., as Syndication Agents and the other parties thereto (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on June 6, 2016)
10.18
Consent Agreement, dated June 3, 2016, among LyondellBasell Industries N.V. and LYB Americas Finance Company, as Borrowers, Bank of America, N.A., as Administrative Agent and the lender parties thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 6, 2016)
10.19
Receivables Purchase Agreement, dated September 11, 2012, by and among Lyondell Chemical Company, as initial servicer, and LYB Receivables LLC, a bankruptcy-remote special purpose entity that is a wholly owned subsidiary of the Company, PNC National Association, as Administrator and LC Bank, certain conduit purchasers, committed purchasers, LC participants and purchaser agents that are parties thereto from time to time (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on September 14, 2012)
10.20
Second Amendment to Receivables Purchase Agreement, dated as of August 26, 2015, among Lyondell Chemical Company, as servicer, LYB Receivables LLC, as seller, the conduit purchasers, related committed purchasers, LC participants and purchaser agents party thereto, the other parties thereto and Mizuho Bank, Ltd., as Administrator and LC Bank (incorporated by reference to Exhibit 10 to our Current Report on Form 8-K filed with the SEC on August 28, 2015)
10.21
Purchase and Sale Agreement, dated September 11, 2012, by and among Lyondell Chemical Company, Equistar Chemicals, LP and LyondellBasell Acetyls, LLC, the other originators from time to time parties thereto, Lyondell Chemical Company, as initial servicer and LYB Receivables LLC, a bankruptcy-remote special purpose entity that is a wholly owned subsidiary of the Company (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on September 14, 2012)
10.22
Master Receivables Purchase Agreement (as amended and restated on April 23,2013) among Basell Sales and Marketing Company B.V., Lyondell Chemie Nederland B.V., Basell Polyolefins Collections Limited, Citicorp Trustee Company Limited and Citibank, N.A., London Branch (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 29, 2013)
10.23
Consent Agreement, dated June 5, 2015, among LyondellBasell Industries N.V. and LYB Americas Finance Company, as Borrowers, Bank of America, N.A., as Administrative Agent and the lender parties thereto (incorporated by reference to Exhibit 10 to our Current Report on Form 8-K filed with the SEC on June 9, 2015)
12.1*
Computation of Ratio of Earnings to Fixed Charges
21*
List of subsidiaries of the registrant
23*
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32*
Certifications pursuant to 18 U.S.C. Section 1350
Exhibit
Number
Description
101.INS*
XBRL Instance Document
101.SCH*
XBRL Schema Document
101.CAL*
XBRL Calculation Linkbase Document
101.DEF*
XBRL Definition Linkbase Document
101.LAB*
XBRL Labels Linkbase Document
101.PRE*
XBRL Presentation Linkbase Document
+ Management contract or compensatory plan, contract or arrangement
* Filed herewith.