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EX-31.2 - EX-31.2 - LyondellBasell Industries N.V. | d128989dex312.htm |
EX-32 - EX-32 - LyondellBasell Industries N.V. | d128989dex32.htm |
EX-31.1 - EX-31.1 - LyondellBasell Industries N.V. | d128989dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34726
LYONDELLBASELL INDUSTRIES N.V.
(Exact name of registrant as specified in its charter)
The Netherlands | 98-0646235 | |||
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |||
1221 McKinney St., Suite 300 Houston, Texas USA 77010 |
4th Floor, One Vine Street London W1J0AH The United Kingdom |
Delftseplein 27E 3013 AA Rotterdam The Netherlands | ||
(Addresses of registrants principal executive offices) | ||||
(713) 309-7200 | +44 (0) 207 220 2600 | +31 (0)10 275 5500 | ||
(Registrants telephone numbers, including area codes) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
The registrant had 415,721,892 ordinary shares, 0.04 par value, outstanding at July 26, 2016 (excluding 162,713,378 treasury shares).
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
Table of Contents
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, |
Six Months Ended June 30, |
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Millions of dollars, except earnings per share |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues: |
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Trade |
$ | 7,132 | $ | 8,931 | $ | 13,688 | $ | 16,932 | ||||||||
Related parties |
196 | 214 | 383 | 398 | ||||||||||||
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7,328 | 9,145 | 14,071 | 17,330 | |||||||||||||
Operating costs and expenses: |
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Cost of sales |
5,702 | 7,047 | 10,868 | 13,426 | ||||||||||||
Selling, general and administrative expenses |
199 | 228 | 392 | 433 | ||||||||||||
Research and development expenses |
24 | 25 | 48 | 51 | ||||||||||||
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5,925 | 7,300 | 11,308 | 13,910 | |||||||||||||
Operating income |
1,403 | 1,845 | 2,763 | 3,420 | ||||||||||||
Interest expense |
(83 | ) | (79 | ) | (165 | ) | (148 | ) | ||||||||
Interest income |
4 | 7 | 9 | 18 | ||||||||||||
Other income (expense), net |
(3 | ) | 4 | 85 | 25 | |||||||||||
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Income from continuing operations before equity investments and income taxes |
1,321 | 1,777 | 2,692 | 3,315 | ||||||||||||
Income from equity investments |
117 | 90 | 208 | 159 | ||||||||||||
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Income from continuing operations before income taxes |
1,438 | 1,867 | 2,900 | 3,474 | ||||||||||||
Provision for income taxes |
346 | 541 | 778 | 981 | ||||||||||||
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Income from continuing operations |
1,092 | 1,326 | 2,122 | 2,493 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
(1 | ) | 3 | (1 | ) | | ||||||||||
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Net income |
1,091 | 1,329 | 2,121 | 2,493 | ||||||||||||
Net income attributable to non-controlling interests |
| 1 | | 3 | ||||||||||||
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Net income attributable to the Company shareholders |
$ | 1,091 | $ | 1,330 | $ | 2,121 | $ | 2,496 | ||||||||
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Earnings per share: |
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Net income (loss) attributable to the Company shareholders |
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Basic: |
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Continuing operations |
$ | 2.57 | $ | 2.81 | $ | 4.94 | $ | 5.24 | ||||||||
Discontinued operations |
| 0.01 | | | ||||||||||||
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$ | 2.57 | $ | 2.82 | $ | 4.94 | $ | 5.24 | |||||||||
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Diluted: |
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Continuing operations |
$ | 2.56 | $ | 2.81 | $ | 4.93 | $ | 5.22 | ||||||||
Discontinued operations |
| 0.01 | | | ||||||||||||
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$ | 2.56 | $ | 2.82 | $ | 4.93 | $ | 5.22 | |||||||||
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See Notes to the Consolidated Financial Statements.
1
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, |
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income |
$ | 1,091 | $ | 1,329 | $ | 2,121 | $ | 2,493 | ||||||||
Other comprehensive income (loss), net of tax |
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Financial derivatives: |
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Gain (loss) on cash flow hedges arising during the period |
5 | 25 | (189 | ) | 277 | |||||||||||
Reclassification adjustment included in net income |
(43 | ) | 67 | 47 | (153 | ) | ||||||||||
Income tax expense (benefit) |
12 | (1 | ) | (41 | ) | 64 | ||||||||||
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Financial derivatives, net of tax |
(50 | ) | 93 | (101 | ) | 60 | ||||||||||
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Unrealized gain (loss) on available-for-sale securities: |
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Unrealized loss on sales of available-for-sale securities, before tax |
| | (6 | ) | | |||||||||||
Income tax expense (benefit) |
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Unrealized loss on available-for-sale securities, net of tax |
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Defined pension and other postretirement benefit plans: |
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Reclassification adjustment for amortization of prior service cost included in net income |
| 1 | | 1 | ||||||||||||
Reclassification adjustment for net actuarial loss included in net income |
7 | 7 | 15 | 13 | ||||||||||||
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Defined pension and other postretirement benefit plans, before tax |
7 | 8 | 15 | 14 | ||||||||||||
Income tax expense |
2 | 2 | 5 | 4 | ||||||||||||
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Defined pension and other postretirement benefit plans, net of tax |
5 | 6 | 10 | 10 | ||||||||||||
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Foreign currency translation adjustments: |
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Unrealized gain (loss) arising during the period |
(29 | ) | 160 | 56 | (351 | ) | ||||||||||
Income tax expense (benefit) |
1 | | (7 | ) | | |||||||||||
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Foreign currency translation adjustments, net of tax |
(30 | ) | 160 | 63 | (351 | ) | ||||||||||
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Total other comprehensive income (loss) |
(75 | ) | 259 | (34 | ) | (281 | ) | |||||||||
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Comprehensive income |
1,016 | 1,588 | 2,087 | 2,212 | ||||||||||||
Comprehensive loss attributable to non-controlling interests |
| 1 | | 3 | ||||||||||||
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Comprehensive income attributable to the Company shareholders |
$ | 1,016 | $ | 1,589 | $ | 2,087 | $ | 2,215 | ||||||||
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See Notes to the Consolidated Financial Statements.
2
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
Millions of dollars |
June 30, 2016 |
December 31, 2015 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 1,060 | $ | 924 | ||||
Restricted cash |
4 | 7 | ||||||
Short-term investments |
1,023 | 1,064 | ||||||
Accounts receivable: |
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Trade, net |
2,633 | 2,363 | ||||||
Related parties |
173 | 154 | ||||||
Inventories |
4,009 | 4,051 | ||||||
Prepaid expenses and other current assets |
1,081 | 1,226 | ||||||
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Total current assets |
9,983 | 9,789 | ||||||
Property, plant and equipment at cost |
14,047 | 12,910 | ||||||
Less: Accumulated depreciation |
(4,366 | ) | (3,919 | ) | ||||
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Property, plant and equipment, net |
9,681 | 8,991 | ||||||
Investments and long-term receivables: |
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Investment in PO joint ventures |
390 | 397 | ||||||
Equity investments |
1,610 | 1,608 | ||||||
Other investments and long-term receivables |
18 | 122 | ||||||
Goodwill |
542 | 536 | ||||||
Intangible assets, net |
588 | 640 | ||||||
Other assets |
623 | 674 | ||||||
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Total assets |
$ | 23,435 | $ | 22,757 | ||||
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See Notes to the Consolidated Financial Statements.
3
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
Millions of dollars, except shares and par value data |
June 30, 2016 |
December 31, 2015 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current maturities of long-term debt |
$ | 4 | $ | 4 | ||||
Short-term debt |
616 | 353 | ||||||
Accounts payable: |
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Trade |
1,895 | 1,627 | ||||||
Related parties |
462 | 555 | ||||||
Accrued liabilities |
1,374 | 1,810 | ||||||
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Total current liabilities |
4,351 | 4,349 | ||||||
Long-term debt |
8,485 | 7,671 | ||||||
Other liabilities |
2,143 | 2,036 | ||||||
Deferred income taxes |
2,149 | 2,127 | ||||||
Commitments and contingencies |
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Stockholders equity: |
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Ordinary shares, 0.04 par value, 1,275 million shares authorized, 419,381,566 and 440,150,069 shares outstanding, respectively |
31 | 31 | ||||||
Additional paid-in capital |
10,192 | 10,202 | ||||||
Retained earnings |
11,264 | 9,841 | ||||||
Accumulated other comprehensive loss |
(1,472 | ) | (1,438 | ) | ||||
Treasury stock, at cost, 159,053,704 and 138,285,201 ordinary shares, respectively |
(13,732 | ) | (12,086 | ) | ||||
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Total Company share of stockholders equity |
6,283 | 6,550 | ||||||
Non-controlling interests |
24 | 24 | ||||||
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Total equity |
6,307 | 6,574 | ||||||
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Total liabilities and equity |
$ | 23,435 | $ | 22,757 | ||||
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See Notes to the Consolidated Financial Statements.
4
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | ||||||
Cash flows from operating activities: |
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Net income |
$ | 2,121 | $ | 2,493 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
534 | 534 | ||||||
Amortization of debt-related costs |
9 | 8 | ||||||
Inventory valuation adjustments |
| 83 | ||||||
Equity investments |
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Equity income |
(208 | ) | (159 | ) | ||||
Distributions of earnings, net of tax |
249 | 101 | ||||||
Deferred income taxes |
104 | 54 | ||||||
Gain on sale of business |
(78 | ) | | |||||
Changes in assets and liabilities that provided (used) cash: |
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Accounts receivable |
(281 | ) | (35 | ) | ||||
Inventories |
26 | 141 | ||||||
Accounts payable |
161 | (212 | ) | |||||
Prepaid expenses and other current assets |
118 | (52 | ) | |||||
Other, net |
(194 | ) | (42 | ) | ||||
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Net cash provided by operating activities |
2,561 | 2,914 | ||||||
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Cash flows from investing activities: |
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Expenditures for property, plant and equipment |
(1,090 | ) | (584 | ) | ||||
Payments for repurchase agreements |
(168 | ) | (397 | ) | ||||
Proceeds from repurchase agreements |
98 | 250 | ||||||
Purchases of available-for-sale securities |
(607 | ) | (1,468 | ) | ||||
Proceeds from sales and maturities of available-for-sale securities |
657 | 997 | ||||||
Net proceeds from sale of business |
137 | | ||||||
Proceeds from settlement of forward exchange contracts |
795 | | ||||||
Payments for settlement of forward exchange contracts |
(850 | ) | | |||||
Change in restricted cash |
3 | (1 | ) | |||||
Other, net |
(43 | ) | 33 | |||||
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Net cash used in investing activities |
(1,068 | ) | (1,170 | ) | ||||
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See Notes to the Consolidated Financial Statements.
5
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | ||||||
Cash flows from financing activities: |
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Repurchases of Company ordinary shares |
(1,682 | ) | (2,137 | ) | ||||
Dividends paid |
(698 | ) | (702 | ) | ||||
Issuance of long-term debt |
812 | 984 | ||||||
Net proceeds from commercial paper |
200 | 238 | ||||||
Payments of debt issuance costs |
(5 | ) | (12 | ) | ||||
Other, net |
1 | 207 | ||||||
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Net cash used in financing activities |
(1,372 | ) | (1,422 | ) | ||||
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Effect of exchange rate changes on cash |
15 | (28 | ) | |||||
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Increase in cash and cash equivalents |
136 | 294 | ||||||
Cash and cash equivalents at beginning of period |
924 | 1,031 | ||||||
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Cash and cash equivalents at end of period |
$ | 1,060 | $ | 1,325 | ||||
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See Notes to the Consolidated Financial Statements.
6
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Ordinary Shares |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Company Share of Stockholders Equity |
Non- Controlling Interests |
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Millions of dollars |
Issued | Treasury | ||||||||||||||||||||||||||
Balance, December 31, 2015 |
$ | 31 | $ | (12,086 | ) | $ | 10,202 | $ | 9,841 | $ | (1,438 | ) | $ | 6,550 | $ | 24 | ||||||||||||
Net income (loss) |
| | | 2,121 | | 2,121 | | |||||||||||||||||||||
Other comprehensive income |
| | | | (34 | ) | (34 | ) | | |||||||||||||||||||
Share-based compensation |
| 43 | (10 | ) | | | 33 | | ||||||||||||||||||||
Dividends ($1.63 per share) |
| | | (698 | ) | | (698 | ) | | |||||||||||||||||||
Repurchases of Company ordinary shares |
| (1,689 | ) | | | | (1,689 | ) | | |||||||||||||||||||
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Balance, June 30, 2016 |
$ | 31 | $ | (13,732 | ) | $ | 10,192 | $ | 11,264 | $ | (1,472 | ) | $ | 6,283 | $ | 24 | ||||||||||||
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See Notes to the Consolidated Financial Statements.
7
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||||
1. | 9 | |||||
2. | 9 | |||||
3. | 11 | |||||
4. | 11 | |||||
5. | 11 | |||||
6. | 12 | |||||
7. | 14 | |||||
8. | 27 | |||||
9. | 31 | |||||
10. | 32 | |||||
11. | 33 | |||||
12. | 35 | |||||
13. | 39 | |||||
14. | 41 |
8
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
1. | Basis of Presentation |
LyondellBasell Industries N.V., together with its consolidated subsidiaries (collectively 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 production of polymers. Unless otherwise indicated, the Company, we, us, our or similar words are used to refer to LyondellBasell N.V.
The accompanying Consolidated Financial Statements are unaudited and have been prepared from the books and records of LyondellBasell N.V. in accordance with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (U.S. GAAP) for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the year ended December 31, 2015.
2. | Accounting and Reporting Changes |
Recently Adopted Guidance
CompensationIn June 2014, the FASB issued 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. Early adoption is permitted. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
ConsolidationIn 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. Early adoption is permitted. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Accounting Guidance Issued But Not Adopted as of June 30, 2016
Revenue RecognitionIn 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, 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 RecognitionIn 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, amendments clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance
9
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Obligations and Licensing which clarifies the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property (IP). 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. All amendments are effective with the same date as ASU 2014-09. We are currently assessing the impact of Topic 606 together with its amendments on our Consolidated Financial Statements.
Going ConcernIn August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. Under this new guidance, management is required to perform interim and annual assessments of an entitys 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. Early adoption is permitted. The application of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
InventoriesIn 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. Early adoption is permitted. The application of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
Financial InstrumentsIn January 2016, the FASB issued ASU 2016-01, Financial InstrumentsOverall (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.
LeasesIn February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), creating 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 in the statement of financial position a liability to make 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.
Derivatives and HedgingIn 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. Early adoption is permitted. We are currently assessing the impact of the amended guidance on our Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
InvestmentsIn March 2016, the FASB issued ASU 2016-07, InvestmentsEquity 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 to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The application of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
CompensationIn March 2016, the FASB issued ASU 2016-09, CompensationStock 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 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. Early adoption is permitted. We are currently assessing the impact of the amendments in this guidance on our Consolidated Financial Statements.
Financial InstrumentsIn 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.
3. | Discontinued Operations |
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.
4. | Accounts Receivable |
Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $18 million and $24 million at June 30, 2016 and December 31, 2015, respectively.
5. | Inventories |
Inventories consisted of the following components:
Millions of dollars |
June 30, 2016 |
December 31, 2015 |
||||||
Finished goods |
$ | 2,729 | $ | 2,668 | ||||
Work-in-process |
158 | 148 | ||||||
Raw materials and supplies |
1,122 | 1,235 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 4,009 | $ | 4,051 | ||||
|
|
|
|
For information related to lower of cost or market inventory valuation adjustments recognized during the second quarter and first six months of 2016, see Note 14.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. | Debt |
Long-term loans, notes and other long-term debt consisted of the following:
Millions of dollars |
June 30, 2016 |
December 31, 2015 |
||||||
Senior Notes due 2019, $2,000 million, 5.0% ($12 million of debt issuance cost) |
$ | 1,961 | $ | 1,943 | ||||
Senior Notes due 2021, $1,000 million, 6.0% ($10 million of debt issuance cost) |
990 | 989 | ||||||
Senior Notes due 2024, $1,000 million, 5.75% ($10 million of debt issuance cost) |
990 | 990 | ||||||
Senior Notes due 2055, $1,000 million, 4.625% ($16 million of discount; $12 million of debt issuance cost) |
972 | 972 | ||||||
Guaranteed Notes due 2044, $1,000 million, 4.875% ($11 million of discount; $10 million of debt issuance cost) |
979 | 979 | ||||||
Guaranteed Notes due 2043, $750 million, 5.25% ($22 million of discount; $7 million of debt issuance cost) |
721 | 721 | ||||||
Guaranteed Notes due 2023, $750 million, 4.0% ($8 million of discount; $4 million of debt issuance cost) |
738 | 737 | ||||||
Guaranteed Notes due 2027, $300 million, 8.1% |
300 | 300 | ||||||
Guaranteed Notes due 2022, 750 million, 1.875% ($3 million of discount; $4 million of debt issuance cost) |
828 | | ||||||
Other |
10 | 44 | ||||||
|
|
|
|
|||||
Total |
8,489 | 7,675 | ||||||
Less current maturities |
(4 | ) | (4 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 8,485 | $ | 7,671 | ||||
|
|
|
|
Our 5% senior notes due 2019 include a gain of $4 million and a loss of $15 million for the three and six months ended June 30, 2016, respectively, and gains of $22 million and $13 million for the three and six months ended June 30, 2015, and gains of $35 million for the year ended December 31, 2015, 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 $27 million related to adjustments for these fixed-for-floating interest rate swaps.
Short-term loans, notes, and other short-term debt consisted of the following:
Millions of dollars |
June 30, 2016 |
December 31, 2015 |
||||||
$2,500 million Senior Revolving Credit Facility |
$ | | $ | | ||||
$900 million U.S. Receivables Securitization Facility |
| | ||||||
450 million European Receivables Securitization Facility |
| | ||||||
Commercial paper |
523 | 323 | ||||||
Financial payables to equity investees |
4 | 4 | ||||||
Precious metal financings |
89 | 26 | ||||||
|
|
|
|
|||||
Total short-term debt |
$ | 616 | $ | 353 | ||||
|
|
|
|
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Long-Term Debt
Guaranteed Notes due 2022In 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 IIs 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 the 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.
Short-Term Debt
Senior Revolving Credit FacilityIn 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, and supports our commercial paper program. The aggregate balance of outstanding borrowings and letters of credit under this 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 June 30, 2016. At June 30, 2016, we had $523 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under this facility.
Commercial Paper ProgramIn 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.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
U.S. Receivables Securitization FacilityOur $900 million U.S. accounts receivable securitization facility, which expires in 2018, has a purchase limit of $900 million in addition to 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 subsidiarys 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 terms of the agreement. At June 30, 2016, there were no borrowings or letters of credit outstanding under the facility.
European Receivables Securitization FacilityOur 450 million European receivables securitization facility expired in April 2016.
OtherAt June 30, 2016 and December 31, 2015, our weighted average interest rate on outstanding short-term debt was 0.7%.
Debt Discount and Issuance Costs
In the six months ended June 30, 2016 and 2015, amortization of debt discounts and debt issuance costs resulted in amortization expense of $9 million and $8 million, respectively, which is included in Interest expense in the Consolidated Statements of Income.
7. | Financial Instruments |
Cash ConcentrationOur cash equivalents are placed in high-quality commercial paper, money market funds and time deposits with major international banks and financial institutions.
Market RisksWe 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 SecuritiesWe invest cash in investment-grade securities for periods generally not exceeding two years. Investments in securities with original maturities of three months or less are classified as Cash and cash equivalents. At June 30, 2016 and December 31, 2015, we had marketable securities classified as Cash and cash equivalents of $434 million and $575 million, respectively.
We also have investments in marketable securities classified as available-for-sale. 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 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 AgreementsWe 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
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
date for a price equal to the purchase price plus interest. These securities, which pursuant to our policy are held by a third-party custodian and must generally have a minimum collateral value of 102%, secure the counterpartys 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 June 30, 2016 and December 31, 2015 was $462 million and $387 million, respectively.
Commodity PricesWe are exposed to commodity price volatility related to anticipated 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. All aforementioned contracts are generally limited to durations of one year or less. At June 30, 2016, commodity futures contracts in the notional amount of $95 million, maturing from July 2016 to November 2016, were outstanding.
Foreign Currency RatesWe 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 June 30, 2016, foreign currency forward contracts in the notional amount of $369 million, maturing from July 2016 through October 2016, 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, no hedge accounting is 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 $3 million and $6 million for the three and six months ended June 30, 2016, and a loss of $4 million and a gain of $4 million for the three and six months ended June 30, 2015, respectively.
Basis SwapsIn 2015, we entered into 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 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.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There was no ineffectiveness recorded during the three and six months ended June 30, 2016 related to these basis swaps.
The following table summarizes the notional and fair value of our basis swaps outstanding:
June 30, 2016 | December 31, 2015 | |||||||||||||||
Millions of dollars |
Notional Value | Fair Value Liabilities |
Notional Value | Fair Value Assets |
||||||||||||
Basis swaps expiring in 2016 |
$ | 500 | $ | (2 | ) | $ | 500 | $ | 10 | |||||||
Basis swaps expiring in 2017 |
305 | (1 | ) | 305 | 6 | |||||||||||
Basis swaps expiring in 2018 |
139 | (1 | ) | 139 | 2 |
Forward Exchange ContractsIn 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.
These forward exchange contracts, which were designated as net investment hedges, expired on March 31, 2016. 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 translation 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 during the three months ended March 31, 2016.
Guaranteed Euro Notes Due 2022In March 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 three and six months ended June 30, 2016.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Cross-Currency SwapsWe 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 three and six months ended June 30, 2016 and the year ended December 31, 2015.
The following table summarizes our cross-currency swaps outstanding:
June 30, 2016 | December 31, 2015 | |||||||||||||||||||||
Millions of dollars, except expiration date and rates |
Expiration Date |
Average Interest Rate |
Notional Value |
Fair Value |
Notional Value |
Fair Value |
||||||||||||||||
Pay Euro |
2021 | 4.55 | % | $ | 1,000 | $ | 128 | $ | 1,000 | $ | 141 | |||||||||||
Receive U.S. dollars |
6.00 | % | ||||||||||||||||||||
Pay Euro |
2024 | 4.37 | % | 1,000 | 130 | 1,000 | 145 | |||||||||||||||
Receive U.S. dollars |
5.75 | % | ||||||||||||||||||||
Pay Euro |
2027 | 3.69 | % | 300 | 7 | 300 | 14 | |||||||||||||||
Receive U.S. dollars |
5.49 | % |
Forward-Starting Interest Rate SwapsIn 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 June 30, 2016. The ineffectiveness recorded for this hedging relationship were losses of less than $1 million and $1 million during the three and six months ended June 30, 2016, respectively, and a gain of $1 million during each of the three and six months ended June 30, 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 Companys 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 six months ended June 30, 2015.
We have elected to designate these forward-starting interest rate swaps as cash flow hedges. The effective portion of the gain or loss 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.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
There was no settlement of our forward-starting swap agreements during the three and six months ended June 30, 2016. We recognized a gain of $15 million in Accumulated other comprehensive loss related to the settlement of our forward-starting interest rate swap agreements in 2015. 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.
As of June 30, 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.
Fixed-for-Floating Interest Rate SwapsWe have 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 are net settled semi-annually and classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows.
We have 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 periodically and calculate the changes in the fair value of the derivatives and the underlying hedged items separately. We recognized net gains of $9 million and $18 million for the three and six months ended June 30, 2016, and net gains of $11 million and $22 million for the three and six months ended June 30, 2015, respectively, related to the ineffectiveness of our hedging relationships.
At June 30, 2016, we had outstanding interest rate swap agreements with notional amounts of $2,000 million, maturing on April 15, 2019.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Available-for-Sale SecuritiesThe following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities measured on a recurring basis that are outstanding as of June 30, 2016 and December 31, 2015. Refer to Note 8 for additional information regarding the fair value of available-for-sale securities.
June 30, 2016 | ||||||||||||||||
Millions of dollars |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Commercial paper |
$ | 245 | $ | | $ | | $ | 245 | ||||||||
Bonds |
81 | 1 | | 82 | ||||||||||||
Certificates of deposit |
359 | | | 359 | ||||||||||||
Limited partnership investments |
350 | | (13 | ) | 337 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 1,035 | $ | 1 | $ | (13 | ) | $ | 1,023 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 | ||||||||||||||||
Millions of dollars |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Commercial paper |
$ | 329 | $ | | $ | | $ | 329 | ||||||||
Bonds |
175 | | | 175 | ||||||||||||
Certificates of deposit |
215 | | | 215 | ||||||||||||
Limited partnership investments |
350 | | (5 | ) | 345 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 1,069 | $ | | $ | (5 | ) | $ | 1,064 | |||||||
|
|
|
|
|
|
|
|
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 investments have been recorded in Accumulated other comprehensive loss during the three and six months ended June 30, 2016 and the year ended December 31, 2015.
As of June 30, 2016, the commercial paper securities held by the Company had maturities between seven and twelve months, bonds had maturities between two and thirty one months, certificates of deposit mature between seven and twenty one months, and limited partnership investments mature between one and three months.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The proceeds from maturities and sales of our available-for-sale securities during the three and six months ended June 30, 2016 and 2015 are summarized in the following table.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Proceeds from maturities of securities |
$ | 417 | $ | 10 | $ | 657 | $ | 182 | ||||||||
Proceeds from sales of securities |
| 550 | | 815 |
No gain or loss was realized in connection with the sales of securities during the three and six months ended June 30, 2016. We recognized realized gains of less than $1 million in connection with the sale of securities during both the three and six months ended June 30, 2015.
The specific identification method was used to identify the cost of the securities sold and the amounts reclassified out of Accumulated other comprehensive income into earnings.
The following table summarizes the fair value and unrealized losses related to available-for-sale securities that were in a continuous unrealized loss position for less than and greater than twelve months as of June 30, 2016 and December 31, 2015.
June 30, 2016 | ||||||||||||||||
Less than 12 months | Greater than 12 months | |||||||||||||||
Millions of dollars |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||
Commercial paper |
$ | 139 | $ | | $ | | $ | | ||||||||
Bonds |
6 | | | | ||||||||||||
Certificates of deposit |
112 | | | | ||||||||||||
Limited partnership investments |
337 | (13 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 594 | $ | (13 | ) | $ | | $ | | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 | ||||||||||||||||
Less than 12 months | Greater than 12 months | |||||||||||||||
Millions of dollars |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||
Bonds |
$ | 46 | $ | | $ | 35 | $ | | ||||||||
Certificates of deposit |
150 | | | | ||||||||||||
Limited partnership investments |
345 | (5 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 541 | $ | (5 | ) | $ | 35 | $ | | |||||||
|
|
|
|
|
|
|
|
20
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Financial InstrumentsThe following table summarizes financial instruments outstanding as of June 30, 2016 and December 31, 2015 that are measured at fair value on a recurring basis. Refer to Note 8 for additional information regarding the fair value of financial instruments.
June 30, 2016 | December 31, 2015 | |||||||||||||||||
Millions of dollars |
Balance Sheet Classification |
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
|||||||||||||
Assets |
||||||||||||||||||
Derivatives designated as net investment hedges: |
||||||||||||||||||
Basis swaps |
Prepaid expenses and other current assets |
$ | | $ | 1 | $ | 500 | $ | 10 | |||||||||
Basis swaps |
Other assets |
| | 444 | 8 | |||||||||||||
Derivatives designated as cash flow hedges: |
||||||||||||||||||
Cross-currency swaps |
Other assets |
2,300 | 256 | 2,300 | 291 | |||||||||||||
Cross-currency swaps |
Prepaid expenses and other current assets |
| 9 | | 9 | |||||||||||||
Forward-starting interest rate swaps |
Other assets |
| | 600 | 8 | |||||||||||||
Derivatives designated as fair value hedges: |
||||||||||||||||||
Fixed-for-floating interest rate swaps |
Other assets |
2,000 | 51 | 2,000 | 19 | |||||||||||||
Fixed-for-floating interest rate swaps |
Prepaid expenses and other current assets |
| 5 | | 6 | |||||||||||||
Derivatives not designated as hedges: |
||||||||||||||||||
Commodities |
Prepaid expenses and other current assets |
50 | 8 | 73 | 8 | |||||||||||||
Embedded derivatives |
Prepaid expenses and other current assets |
11 | 2 | 42 | 4 | |||||||||||||
Foreign currency |
Prepaid expenses and other current assets |
304 | 2 | 105 | 1 | |||||||||||||
Non-derivatives: |
||||||||||||||||||
Available-for-sale securities |
Short-term investments |
1,032 | 1,023 | 1,073 | 1,064 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
$ | 5,697 | $ | 1,357 | $ | 7,137 | $ | 1,428 | |||||||||||
|
|
|
|
|
|
|
|
21
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
June 30, 2016 | December 31, 2015 | |||||||||||||||||
Millions of dollars |
Balance Sheet Classification |
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
|||||||||||||
Liabilities |
||||||||||||||||||
Derivatives designated as net investment hedges: |
||||||||||||||||||
Basis swaps |
Accrued liabilities |
$ | 500 | $ | 2 | $ | | | ||||||||||
Other liabilities |
444 | 3 | | | ||||||||||||||
Forward exchange contracts |
Accrued liabilities |
| | 795 | 24 | |||||||||||||
Derivatives designated as cash flow hedges: |
||||||||||||||||||
Forward-starting interest rate swaps |
Other liabilities |
1,000 | 153 | 400 | 6 | |||||||||||||
Derivatives not designated as hedges: |
||||||||||||||||||
Commodities |
Accrued liabilities |
45 | 1 | 67 | 2 | |||||||||||||
Embedded derivatives |
Accrued liabilities |
79 | 18 | 21 | | |||||||||||||
Foreign currency |
Accrued liabilities |
65 | | 75 | 3 | |||||||||||||
Non-derivatives: |
||||||||||||||||||
Performance share awards |
Accrued liabilities |
11 | 11 | 23 | 23 | |||||||||||||
Performance share awards |
Other liabilities |
12 | 12 | 17 | 17 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
$ | 2,156 | $ | 200 | $ | 1,398 | $ | 75 | |||||||||||
|
|
|
|
|
|
|
|
22
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the pretax effect of derivative instruments charged directly to income.
Effect of Financial Instruments | ||||||||||||||
Three Months Ended June 30, 2016 | ||||||||||||||
Millions of dollars |
Gain (Loss) Recognized in AOCI |
Gain (Loss) Reclassified from AOCI to Income |
Additional Gain (Loss) Recognized in Income |
Income Statement Classification | ||||||||||
Derivatives designated as net investment hedges: |
||||||||||||||
Basis swaps |
$ | 23 | $ | | $ | | Other income, net | |||||||
Derivatives designated as cash-flow hedges: |
||||||||||||||
Cross-currency swaps |
71 | (43 | ) | | Other income, net | |||||||||
Forward-starting interest rate swaps |
(66 | ) | | | Interest expense | |||||||||
Derivatives designated as fair value hedges: |
||||||||||||||
Fixed-for-floating interest rate swaps |
| | 11 | Interest expense | ||||||||||
Derivatives not designated as hedges: |
||||||||||||||
Commodities |
| | 11 | Sales and other operating revenues | ||||||||||
Commodities |
| | (8 | ) | Cost of sales | |||||||||
Embedded derivatives |
| | (12 | ) | Cost of sales | |||||||||
Foreign currency |
| | (7 | ) | Other income, net | |||||||||
Non-derivatives designated as net investment hedges: |
||||||||||||||
Euro notes payable |
18 | | | Other income, net | ||||||||||
|
|
|
|
|
|
|||||||||
$ | 46 | $ | (43 | ) | $ | (5 | ) | |||||||
|
|
|
|
|
|
23
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Three Months Ended June 30, 2015 | ||||||||||||||
Millions of dollars |
Gain (Loss) Recognized in AOCI |
Gain (Loss) Reclassified from AOCI to Income |
Additional Gain (Loss) Recognized in Income |
Income Statement Classification | ||||||||||
Derivatives designated as cash-flow hedges: |
||||||||||||||
Cross-currency swaps |
$ | (70 | ) | $ | 67 | $ | | Other income, net | ||||||
Forward-starting interest rate swaps |
95 | | 1 | Interest expense | ||||||||||
Derivatives designated as fair value hedges: |
||||||||||||||
Fixed-for-floating interest rate swaps |
| | (3 | ) | Interest expense | |||||||||
Derivatives not designated as hedges: |
||||||||||||||
Commodities |
| | 12 | Sales and other operating revenues | ||||||||||
Commodities |
| | 8 | Cost of sales | ||||||||||
Embedded derivatives |
| | 4 | Cost of sales | ||||||||||
Foreign currency |
| | 19 | Other income, net | ||||||||||
|
|
|
|
|
|
|||||||||
$ | 25 | $ | 67 | $ | 41 | |||||||||
|
|
|
|
|
|
24
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Effect of Financial Instruments | ||||||||||||||
Six Months Ended June 30, 2016 | ||||||||||||||
Millions of dollars |
Gain (Loss) Recognized in AOCI |
Gain (Loss) Reclassified from AOCI to Income |
Additional Gain (Loss) Recognized in Income |
Income Statement Classification | ||||||||||
Derivatives designated as net investment hedges: |
||||||||||||||
Basis swaps |
$ | (17 | ) | $ | | $ | | Other income, net | ||||||
Forward exchange contracts |
(30 | ) | | | Other income, net | |||||||||
Derivatives designated as cash-flow hedges: |
||||||||||||||
Cross-currency swaps |
(35 | ) | 47 | | Other income, net | |||||||||
Forward-starting interest rate swaps |
(154 | ) | | (1 | ) | Interest expense | ||||||||
Derivatives designated as fair value hedges: |
||||||||||||||
Fixed-for-floating interest rate swaps |
| | 44 | Interest expense | ||||||||||
Derivatives not designated as hedges: |
||||||||||||||
Commodities |
| | 10 | Sales and other operating revenues | ||||||||||
Commodities |
| | (2 | ) | Cost of sales | |||||||||
Embedded derivatives |
| | (20 | ) | Cost of sales | |||||||||
Foreign currency |
| | 12 | Other income, net | ||||||||||
Non-derivatives designated as net investment hedges: |
||||||||||||||
Euro notes payable |
14 | | | Other income, net | ||||||||||
|
|
|
|
|
|
|||||||||
$ | (222 | ) | $ | 47 | $ | 43 | ||||||||
|
|
|
|
|
|
25
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Six Months Ended June 30, 2015 | ||||||||||||||
Millions of dollars |
Gain (Loss) Recognized in AOCI |
Gain (Loss) Reclassified from AOCI to Income |
Additional Gain (Loss) Recognized in Income |
Income Statement Classification | ||||||||||
Derivatives designated as cash-flow hedges: |
||||||||||||||
Cross-currency swaps |
$ | 197 | $ | (153 | ) | $ | | Other income, net | ||||||
Forward-starting interest rate swaps |
80 | | 1 | Interest expense | ||||||||||
Derivatives designated as fair value hedges: |
||||||||||||||
Fixed-for-floating interest rate swaps |
| | 25 | Interest expense | ||||||||||
Derivatives not designated as hedges: |
||||||||||||||
Commodities |
| | 9 | Sales and other operating revenues | ||||||||||
Commodities |
| | 9 | Cost of sales | ||||||||||
Embedded derivatives |
| | 7 | Cost of sales | ||||||||||
Foreign currency |
| | (59 | ) | Other income, net | |||||||||
|
|
|
|
|
|
|||||||||
$ | 277 | $ | (153 | ) | $ | (8 | ) | |||||||
|
|
|
|
|
|
The pretax effect of additional gain recognized in income for the fixed-for-floating interest rate swaps includes the net value for accrued interest of $5 million and $11 million for the three and six months ended June 30, 2016, and $7 million and $15 million for the three and six months ended June 30, 2015, respectively.
26
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. | Fair Value Measurement |
The following table presents the financial instruments outstanding as of June 30, 2016 and December 31, 2015 that are measured at fair value on a recurring basis.
June 30, 2016 | ||||||||||||||||
Millions of dollars |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Derivatives: |
||||||||||||||||
Basis swaps |
$ | 1 | $ | | $ | 1 | $ | | ||||||||
Cross-currency swaps |
265 | | 265 | | ||||||||||||
Fixed-for-floating interest rate swaps |
56 | | 56 | | ||||||||||||
Commodities |
8 | 1 | 7 | | ||||||||||||
Embedded derivatives |
2 | | 2 | | ||||||||||||
Foreign currency |
2 | | 2 | | ||||||||||||
Non-derivatives: |
||||||||||||||||
Available-for-sale securities |
686 | | 686 | | ||||||||||||
Available-for-sale securities measured at net asset value* |
337 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,357 | $ | 1 | $ | 1,019 | $ | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives: |
||||||||||||||||
Basis swaps |
$ | 5 | $ | | $ | 5 | $ | | ||||||||
Forward-starting interest rate swaps |
153 | | 153 | | ||||||||||||
Commodities |
1 | 1 | | | ||||||||||||
Embedded derivatives |
18 | | 18 | | ||||||||||||
Non-derivatives: |
||||||||||||||||
Performance share awards |
23 | 23 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 200 | $ | 24 | $ | 176 | $ | | |||||||||
|
|
|
|
|
|
|
|
27
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015 | ||||||||||||||||
Millions of dollars |
Fair Value |
Level 1 | Level 2 | Level 3 | ||||||||||||
Assets |
||||||||||||||||
Derivatives: |
||||||||||||||||
Basis swaps |
$ | 18 | $ | | $ | 18 | $ | | ||||||||
Cross-currency swaps |
300 | | 300 | | ||||||||||||
Forward-starting interest rate swaps |
8 | | 8 | | ||||||||||||
Fixed-for-floating interest rate swaps |
25 | | 25 | | ||||||||||||
Commodities |
8 | 8 | | | ||||||||||||
Embedded derivatives |
4 | | 4 | | ||||||||||||
Foreign currency |
1 | | 1 | | ||||||||||||
Non-derivatives: |
||||||||||||||||
Available-for-sale securities |
719 | | 719 | | ||||||||||||
Available-for-sale securities measured at net asset value* |
345 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,428 | $ | 8 | $ | 1,075 | $ | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives: |
||||||||||||||||
Forward exchange contracts |
$ | 24 | $ | | $ | 24 | $ | | ||||||||
Forward-starting interest rate swaps |
6 | | 6 | | ||||||||||||
Commodities |
2 | | 2 | | ||||||||||||
Foreign currency |
3 | | 3 | | ||||||||||||
Non-derivatives: |
||||||||||||||||
Performance share awards |
40 | 40 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 75 | $ | 40 | $ | 35 | $ | | |||||||||
|
|
|
|
|
|
|
|
* | 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. |
There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2016 and the year ended December 31, 2015.
28
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 June 30, 2016 and December 31, 2015. Short-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.
June 30, 2016 | ||||||||||||||||||||
Millions of dollars |
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||||||||||
Non-derivatives: |
||||||||||||||||||||
Assets: |
||||||||||||||||||||
Short-term loans receivable |
$ | 462 | $ | 462 | $ | | $ | 462 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Short-term debt |
$ | 89 | $ | 123 | $ | | $ | 123 | $ | | ||||||||||
Long-term debt |
8,482 | 9,487 | | 9,485 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 8,571 | $ | 9,610 | $ | | $ | 9,608 | $ | 2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2015 | ||||||||||||||||||||
Millions of dollars |
Carrying Value |
Fair Value |
Level 1 | Level 2 | Level 3 | |||||||||||||||
Non-derivatives: |
||||||||||||||||||||
Assets: |
||||||||||||||||||||
Short-term loans receivable |
$ | 289 | $ | 289 | $ | | $ | 289 | $ | | ||||||||||
Long-term loans receivable |
98 | 98 | | 98 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 387 | $ | 387 | $ | | $ | 387 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Short-term debt |
$ | 26 | $ | 23 | $ | | $ | 23 | $ | | ||||||||||
Long-term debt |
7,671 | 8,034 | | 8,032 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 7,697 | $ | 8,057 | $ | | $ | 8,055 | $ | 2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The fair value of all non-derivative financial instruments included in Current assets, including Cash and cash equivalents, Restricted cash and Accounts receivable, and 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.
We use the following inputs and valuation techniques to estimate the fair value of our financial instruments:
Basis SwapsThe 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, spot and forward exchange rates.
Cross-Currency SwapsThe 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.
29
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Forward-Starting Interest Rate SwapsThe 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.
Fixed-for-Floating Interest Rate SwapsThe 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 DerivativesThe 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 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 ContractsThe fair value of our foreign currency derivatives is based on forward market rates.
Available-for-Sale SecuritiesFair 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 AwardsFair value is determined using the quoted market price of our stock.
Short-Term and Long-Term Loans ReceivableValuations 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 DebtFair 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 DebtFair value is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.
30
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
9. | Pension and Other Postretirement Benefits |
Net periodic pension benefits included the following cost components for the periods presented:
U.S. Plans | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost |
$ | 11 | $ | 11 | $ | 22 | $ | 22 | ||||||||
Interest cost |
22 | 22 | 44 | 43 | ||||||||||||
Expected return on plan assets |
(35 | ) | (37 | ) | (70 | ) | (73 | ) | ||||||||
Actuarial and investment loss amortization |
5 | 3 | 10 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs (credits) |
$ | 3 | $ | (1 | ) | $ | 6 | $ | (2 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Non-U.S. Plans | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost |
$ | 8 | $ | 8 | $ | 16 | $ | 17 | ||||||||
Interest cost |
8 | 11 | 16 | 20 | ||||||||||||
Expected return on plan assets |
(6 | ) | (7 | ) | (12 | ) | (13 | ) | ||||||||
Prior service cost amortization |
| 1 | | 1 | ||||||||||||
Actuarial and investment loss amortization |
2 | 2 | 4 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs (credits) |
$ | 12 | $ | 15 | $ | 24 | $ | 29 | ||||||||
|
|
|
|
|
|
|
|
Net periodic other postretirement benefits included the following cost components for the periods presented:
U.S. Plans | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost |
$ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost |
3 | 3 | 6 | 7 | ||||||||||||
Actuarial loss amortization |
| 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs (credits) |
$ | 4 | $ | 5 | $ | 8 | $ | 10 | ||||||||
|
|
|
|
|
|
|
|
31
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Non-U.S. Plans | ||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost |
$ | | $ | | $ | 1 | $ | | ||||||||
Interest cost |
1 | | 1 | 1 | ||||||||||||
Actuarial loss amortization |
| 1 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs (credits) |
$ | 1 | $ | 1 | $ | 3 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
The total net periodic cost of our pension and other postretirement benefit plans were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Pension plans |
$ | 15 | $ | 14 | $ | 30 | $ | 27 | ||||||||
Other postretirement benefit plans |
5 | 6 | 11 | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs (credits) |
$ | 20 | $ | 20 | $ | 41 | $ | 40 | ||||||||
|
|
|
|
|
|
|
|
10. | Income Taxes |
Our effective income tax rate for the second quarter of 2016 was 24.1% compared with 29.0% for the second quarter of 2015. For the first six months of 2016, the effective income tax rate was 26.8% compared with 28.2% for the first six months of 2015. Our effective 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 and changes in unrecognized tax benefits associated with uncertain tax positions.
Compared with the second quarter of 2015, the lower effective tax rate for the second quarter of 2016 was primarily attributable to the impact of a change in non-U.S. tax law on our deferred tax liabilities, an increase in exempt income, and changes in pretax income in countries with varying statutory tax rates, partially offset by other adjustments to our deferred tax liabilities. Compared with the first six months of 2015, the lower effective tax rate for the first six months of 2016 was primarily attributable to the impact of a change in tax law on our deferred tax liabilities, an increase in exempt income, changes in pretax income in countries with varying statutory tax rates, and changes in valuations allowances, partially offset by adjustments to our deferred tax liabilities and an increase in foreign exchange gains.
A portion of the Companys interest income from internal financing is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. This treatment may be prospectively impacted by potential changes in the law, including adoption of certain proposals for base erosion and profit shifting.
We monitor income tax developments in countries where we conduct business. 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.
32
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
11. | Commitments and Contingencies |
Financial Assurance InstrumentsWe 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 RemediationOur accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $110 million and $106 million as of June 30, 2016 and December 31, 2015, respectively. At June 30, 2016, the accrued liabilities for individual sites range from less than $1 million to $27 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 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:
Six Months Ended | ||||||||
June 30, | ||||||||
Millions of dollars |
2016 | 2015 | ||||||
Beginning balance |
$ | 106 | $ | 106 | ||||
Changes in estimates |
10 | 3 | ||||||
Amounts paid |
(8 | ) | (3 | ) | ||||
Foreign exchange effects |
2 | (6 | ) | |||||
|
|
|
|
|||||
Ending balance |
$ | 110 | $ | 100 | ||||
|
|
|
|
Access Indemnity DemandIn 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 attorneys 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 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 has been scheduled to begin the week of October 17, 2016.
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.
33
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 MatterCertain of the Companys 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 Companys emergence from bankruptcy 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 $165 million. The Company intends to vigorously defend its compensation practices.
IndemnificationWe 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 June 30, 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.
34
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. | Stockholders Equity |
Dividend distributionsThe following table summarizes the dividends paid in the periods presented:
Millions of dollars, except per share amounts |
Dividend Per Ordinary Share |
Aggregate Dividends Paid |
Date of Record | |||||||||
March |
$ | 0.78 | $ | 336 | February 29, 2016 | |||||||
June |
0.85 | 362 | May 24, 2016 | |||||||||
|
|
|
|
|||||||||
$ | 1.63 | $ | 698 | |||||||||
|
|
|
|
Share Repurchase ProgramsDuring the second quarters of 2016 and 2015, we completed the repurchase of shares under the share repurchase programs approved by our shareholders in May 2015 (May 2015 Share Repurchase Program) and April 2014 (April 2014 Share Repurchase Program), 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 recorded as Treasury stock and may be retired or used for general corporate purposes, including for various employee benefit and compensation plans.
Six Months Ended June 30, 2016 | ||||||||||||
Millions of dollars, except shares and per share amounts |
Shares Repurchased |
Average Purchase Price |
Total Purchase Price, Including Commissions |
|||||||||
May 2015 Share Repurchase Program |
15,302,707 | $ | 80.15 | $ | 1,226 | |||||||
May 2016 Share Repurchase Program |
5,837,691 | 79.21 | 463 | |||||||||
|
|
|
|
|
|
|||||||
21,140,398 | $ | 79.89 | $ | 1,689 | ||||||||
|
|
|
|
|
|
|||||||
Six Months Ended June 30, 2015 | ||||||||||||
Millions of dollars, except shares and per share amounts |
Shares Repurchased |
Average Purchase Price |
Total Purchase Price, Including Commissions |
|||||||||
April 2014 Share Repurchase Program |
19,892,101 | $ | 86.40 | $ | 1,719 | |||||||
May 2015 Share Repurchase Program |
3,728,610 | 102.87 | 383 | |||||||||
|
|
|
|
|
|
|||||||
23,620,711 | $ | 89.00 | $ | 2,102 | ||||||||
|
|
|
|
|
|
35
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Due to the timing of settlements, total cash paid for share repurchases for the six months ended June 30, 2016 and 2015 was $1,682 million and $2,137 million, respectively.
Ordinary SharesThe changes in the outstanding amounts of ordinary shares are as follows:
Six Months Ended June 30, |
||||||||
2016 | 2015 | |||||||
Ordinary shares outstanding: |
||||||||
Beginning balance |
440,150,069 | 486,969,402 | ||||||
Share-based compensation |
325,997 | 4,715,684 | ||||||
Warrants exercised |
| 1,602 | ||||||
Employee stock purchase plan |
45,898 | 15,741 | ||||||
Purchase of ordinary shares |
(21,140,398 | ) | (23,620,711 | ) | ||||
|
|
|
|
|||||
Ending balance |
419,381,566 | 468,081,718 | ||||||
|
|
|
|
Treasury SharesThe changes in the amounts of treasury shares held by the Company are as follows:
Six Months Ended June 30, |
||||||||
2016 | 2015 | |||||||
Ordinary shares held as treasury shares: |
||||||||
Beginning balance |
138,285,201 | 91,463,729 | ||||||
Share-based compensation |
(325,997 | ) | (4,715,684 | ) | ||||
Warrants exercised |
| 150 | ||||||
Employee stock purchase plan |
(45,898 | ) | (15,741 | ) | ||||
Purchase of ordinary shares |
21,140,398 | 23,620,711 | ||||||
|
|
|
|
|||||
Ending balance |
159,053,704 | 110,353,165 | ||||||
|
|
|
|
36
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accumulated Other Comprehensive Income (Loss)The components of, and after-tax changes in, Accumulated other comprehensive income (loss) as of and for the six months ended June 30, 2016 and 2015 are presented in the following table:
Millions of dollars |
Financial Derivatives |
Net Unrealized Holding Gains on Investments Net of Tax |
Defined Pension and Other Postretirement Benefit Plans |
Foreign Currency Translation Adjustments |
Total | |||||||||||||||
Balance January 1, 2016 |
$ | (79 | ) | $ | (5 | ) | $ | (428 | ) | $ | (926 | ) | $ | (1,438 | ) | |||||
Other comprehensive income (loss) before reclassifications |
(148 | ) | (6 | ) | | 63 | (91 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss |
47 | | 10 | | 57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net other comprehensive income (loss) |
(101 | ) | (6 | ) | 10 | 63 | (34 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance June 30, 2016 |
$ | (180 | ) | $ | (11 | ) | $ | (418 | ) | $ | (863 | ) | $ | (1,472 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance January 1, 2015 |
$ | (80 | ) | $ | | $ | (449 | ) | $ | (497 | ) | $ | (1,026 | ) | ||||||
Other comprehensive income (loss) before reclassifications |
213 | | | (351 | ) | (138 | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive income |
(153 | ) | | 10 | | (143 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net other comprehensive income (loss) |
60 | | 10 | (351 | ) | (281 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance June 30, 2015 |
$ | (20 | ) | $ | | $ | (439 | ) | $ | (848 | ) | $ | (1,307 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
37
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The amounts reclassified out of each component of Accumulated other comprehensive income (loss) are as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
Affected line item on the Consolidated Statements of Income | ||||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||||
Reclassification adjustments for: |
||||||||||||||||||
Defined pension and other postretirement benefit plan items: |
||||||||||||||||||
Amortization of: |
||||||||||||||||||
Prior service cost |
$ | | $ | 1 | $ | | $ | 1 | ||||||||||
Actuarial loss |
7 | 7 | 15 | 13 | ||||||||||||||
Financial derivatives: |
||||||||||||||||||
Cross-currency swaps |
(43 | ) | 67 | 47 | (153 | ) | Other income, net | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Reclassifications, before tax |
(36 | ) | 75 | 62 | (139 | ) | ||||||||||||
Income tax expense |
2 | 2 | 5 | 4 | Provision for income taxes | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Amounts reclassified out of Accumulated other comprehensive income (loss) |
$ | (38 | ) | $ | 73 | $ | 57 | $ | (143 | ) | ||||||||
|
|
|
|
|
|
|
|
Amortization of prior service cost and actuarial loss are included in the computation of net periodic pension and other postretirement benefit costs (see Note 9).
38
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. | Per Share Data |
Basic earnings per share is 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 option awards and other equity-based compensation awards. We have unvested restricted stock units that are considered participating securities for earnings per share.
Earnings per share data and dividends declared per share of common stock are as follows:
Three Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Millions of dollars |
Continuing Operations |
Discontinued Operations |
Continuing Operations |
Discontinued Operations |
||||||||||||
Net income (loss) |
$ | 1,092 | $ | (1 | ) | $ | 1,326 | $ | 3 | |||||||
Less: net loss attributable to non-controlling interests |
| | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to the Company shareholders |
1,092 | (1 | ) | 1,327 | 3 | |||||||||||
Net income attributable to participating securities |
(1 | ) | | (2 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to ordinary shareholders basic and diluted |
$ | 1,091 | $ | (1 | ) | $ | 1,325 | $ | 3 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Millions of shares, except per share amounts |
||||||||||||||||
Basic weighted average common stock outstanding |
424 | 424 | 472 | 472 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
| | | | ||||||||||||
QPA and PSU awards |
1 | 1 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Potential dilutive shares |
425 | 425 | 472 | 472 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 2.57 | $ | | $ | 2.81 | $ | 0.01 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 2.56 | $ | | $ | 2.81 | $ | 0.01 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Millions of shares |
||||||||||||||||
Participating securities |
0.4 | 0.4 | 0.5 | 0.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividends declared per share of common stock |
$ | 0.85 | $ | | $ | 0.78 | $ | | ||||||||
|
|
|
|
|
|
|
|
39
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Six Months Ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Millions of dollars |
Continuing Operations |
Discontinued Operations |
Continuing Operations |
Discontinued Operations |
||||||||||||
Net income (loss) |
$ | 2,122 | $ | (1 | ) | $ | 2,493 | $ | | |||||||
Less: net loss attributable to non-controlling interests |
| | 3 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to the Company shareholders |
2,122 | (1 | ) | 2,496 | | |||||||||||
Net income attributable to participating securities |
(2 | ) | | (6 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to ordinary shareholders basic and diluted |
$ | 2,120 | $ | (1 | ) | $ | 2,490 | $ | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Millions of shares, except per share amounts |
||||||||||||||||
Basic weighted average common stock outstanding |
428 | 428 | 475 | 475 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
| | 2 | 2 | ||||||||||||
QPA and PSU awards |
1 | 1 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Potential dilutive shares |
429 | 429 | 477 | 477 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 4.94 | $ | | $ | 5.24 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 4.93 | $ | | $ | 5.22 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Millions of shares |
||||||||||||||||
Participating securities |
0.4 | 0.4 | 0.5 | 0.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividends declared per share of common stock |
$ | 1.63 | $ | | $ | 1.48 | $ | | ||||||||
|
|
|
|
|
|
|
|
40
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. | 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 our 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 PolyolefinsAmericas (O&PAmericas). Our O&PAmericas segment produces and markets olefins, including ethylene and ethylene co-products, and polyolefins. |
| Olefins and PolyolefinsEurope, Asia, International (O&PEAI). Our O&PEAI segment produces and markets olefins, including ethylene and ethylene co-products, polyolefins and specialty products, including polybutene-1 and polypropylene compounds. |
| Intermediates and Derivatives (I&D). Our I&D segment produces and markets propylene oxide and its co-products and derivatives, acetyls, including methanol, ethylene oxide and its derivatives, ethanol and oxygenated fuels, or oxyfuels. |
| Refining. Our Refining segment refines heavy, high-sulfur crude oils and other crude oils of varied types and sources available on the U.S. Gulf Coast. |
| 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.
41
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Summarized financial information concerning reportable segments is shown in the following table for the periods presented:
Three Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
Millions of dollars |
O&P Americas |
O&P EAI |
I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
Sales and other operating revenues: |
||||||||||||||||||||||||||||
Customers |
$ | 1,643 | $ | 2,675 | $ | 1,741 | $ | 1,166 | $ | 102 | $ | 1 | $ | 7,328 | ||||||||||||||
Intersegment |
568 | 46 | 28 | 123 | 27 | (792 | ) | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2,211 | 2,721 | 1,769 | 1,289 | 129 | (791 | ) | 7,328 | |||||||||||||||||||||
Income from equity investments |
20 | 96 | 1 | | | | 117 | |||||||||||||||||||||
EBITDA |
754 | 576 | 397 | (13 | ) | 73 | (4 | ) | 1,783 | |||||||||||||||||||
Three Months Ended June 30, 2015 | ||||||||||||||||||||||||||||
Millions of dollars |
O&P Americas |
O&P EAI |
I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
Sales and other operating revenues: |
||||||||||||||||||||||||||||
Customers |
$ | 1,977 | $ | 3,011 | $ | 2,116 | $ | 1,955 | $ | 86 | $ | | $ | 9,145 | ||||||||||||||
Intersegment |
702 | 50 | 43 | 147 | 21 | (963 | ) | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2,679 | 3,061 | 2,159 | 2,102 | 107 | (963 | ) | 9,145 | |||||||||||||||||||||
Income from equity investments |
8 | 79 | 3 | | | | 90 | |||||||||||||||||||||
EBITDA |
1,014 | 492 | 466 | 159 | 57 | (2 | ) | 2,186 |
42
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Six Months Ended June 30, 2016 | ||||||||||||||||||||||||||||
Millions of dollars |
O&P Americas |
O&P EAI |
I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
Sales and other operating revenues: |
||||||||||||||||||||||||||||
Customers |
$ | 3,238 | $ | 5,220 | $ | 3,417 | $ | 1,987 | $ | 208 | $ | 1 | $ | 14,071 | ||||||||||||||
Intersegment |
1,088 | 79 | 54 | 257 | 53 | (1,531 | ) | | ||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
4,326 | 5,299 | 3,471 | 2,244 | 261 | (1,530 | ) | 14,071 | |||||||||||||||||||||
Income from equity investments |
42 | 165 | 1 | | | | 208 | |||||||||||||||||||||
EBITDA |
1,632 | 1,085 | 723 | 1 | 156 | (7 | ) | 3,590 | ||||||||||||||||||||
Six Months Ended June 30, 2015 | ||||||||||||||||||||||||||||
Millions of dollars |
O&P Americas |
O&P EAI |
I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
Sales and other operating revenues: |
||||||||||||||||||||||||||||
Customers |
$ | 3,830 | $ | 5,874 | $ | 3,992 | $ | 3,439 | $ | 195 | $ | | $ | 17,330 | ||||||||||||||
Intersegment |
1,400 | 98 | 85 | 270 | 48 | (1,901 | ) | | ||||||||||||||||||||
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|
|||||||||||||||
5,230 | 5,972 | 4,077 | 3,709 | 243 | (1,901 | ) | 17,330 | |||||||||||||||||||||
Income from equity investments |
15 | 136 | 8 | | | | 159 | |||||||||||||||||||||
EBITDA |
2,045 | 849 | 803 | 308 | 133 | | 4,138 |
Operating results for our O&PEAI segment includes a reversal of the first quarter 2016 non-cash, lower of cost or market (LCM) inventory valuation charge of $40 million necessitated by the recovery of market prices for several of our polyolefins products and naphtha. A recovery in market prices for benzene and styrene also necessitated the reversal of the $28 million LCM inventory valuation charge recognized in the first quarter of 2016 by our I&D segment. In the first six months of 2016, our O&PAmericas and O&PEAI segments also benefited from gains of $57 million and $21 million, respectively, related to the sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A.
Operating results for our O&PAmericas segment include a non-cash benefit of $21 million in the second quarter of 2015, which is a partial reversal of the $43 million non-cash LCM inventory valuation adjustment recognized in the first quarter of 2015. This LCM reversal was predicated on price recoveries of certain products within the O&PAmericas segments inventory pools. Similarly, the recovery of prices within our Refining segments inventory pool in the second quarter of 2015 resulted in the reversal of the $5 million LCM adjustment recognized in the first quarter of 2015. Operating results for our I&D segment reflect non-cash charges of $17 million and $61 million in the second quarter and first six months of 2015, respectively, related to LCM inventory valuation adjustments driven by declines in the prices of various chemical products within its inventory pools.
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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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
EBITDA: |
||||||||||||||||
Total segment EBITDA |
$ | 1,787 | $ | 2,188 | $ | 3,597 | $ | 4,138 | ||||||||
Other EBITDA |
(4 | ) | (2 | ) | (7 | ) | | |||||||||
Less: |
||||||||||||||||
Depreciation and amortization expense |
(266 | ) | (247 | ) | (534 | ) | (534 | ) | ||||||||
Interest expense |
(83 | ) | (79 | ) | (165 | ) | (148 | ) | ||||||||
Add: |
||||||||||||||||
Interest income |
4 | 7 | 9 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations before income taxes |
$ | 1,438 | $ | 1,867 | $ | 2,900 | $ | 3,474 | ||||||||
|
|
|
|
|
|
|
|
The depreciation and amortization expense for the six months ended June 30, 2015 reflected in the table above includes $35 million of amortization expense related to expired emission allowance credits, $33 million of which was recognized by our Refining segment.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion and analysis 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
Our performance generally is driven by global economic conditions and their impact on demand for our products, raw material and energy prices, and industry-specific issues, such as production capacity. Our businesses are subject to the cyclicality and volatility generally seen in the chemicals and refining industries.
Operating results for the second quarter of 2016 were generally similar to results achieved in the first quarter of 2016, excluding the first quarter 2016 gain from the sale of our wholly owned Argentine subsidiary and maintenance activities in both periods. Balance across our business portfolio enabled us to generate steady earnings with continued strong polyolefin performance in the first six months of 2016. Fuel margins in the second quarter were seasonally higher than in the first quarter of 2016. However, due to a disruption in April 2016 at our Houston refinery, the second quarter benefits of higher fuel margins were only reflected in our I&D segments TBA chain products.
Significant items that affected our results during the second quarter and first six months of 2016 relative to the second quarter and first six months of 2015 include:
| Decreases in ethylene and co-product prices and lower production due to turnaround activity, which resulted in lower U.S. olefins results, partially offset by improved polypropylene results; |
| Improved European polyolefins results due to higher product spreads over ethylene and propylene feedstock prices, partially offset by a decline in olefin results stemming from lower margins and production volumes constrained by turnaround activity; |
| Lower margins for a portion of our I&D segment products due to crude and gasoline-related product prices and increased industry supply for certain products; and |
| Margin declines and more than a 25% reduction in 2016 throughput due to planned maintenance in the first quarter of 2016 and operating issues, including a coker unit fire, in the second quarter, negatively impacted results for our Refining segment. |
Other noteworthy items since the beginning of the year include the following:
| Increase of our interim dividend in May 2016 from $0.78 to $0.85; |
| Repurchases of approximately 9 million and 21 million of our outstanding ordinary shares during the second quarter and first six months of 2016; completing our May 2015 authorization and commencing purchases under our May 2016 authorization; |
| Increases of our revolving credit facility and commercial paper program from $2,000 million to $2,500 million in June 2016; |
| The issuance of 750 million of 1.875% guaranteed notes due 2022 in March 2016; and |
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| The sale of our wholly owned Argentine subsidiary for $184 million, with net cash proceeds of $137 million. |
Results of operations for the periods discussed are presented in the table below.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 7,328 | $ | 9,145 | $ | 14,071 | $ | 17,330 | ||||||||
Cost of sales |
5,702 | 7,047 | 10,868 | 13,426 | ||||||||||||
Selling, general and administrative expenses |
199 | 228 | 392 | 433 | ||||||||||||
Research and development expenses |
24 | 25 | 48 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
1,403 | 1,845 | 2,763 | 3,420 | ||||||||||||
Interest expense |
(83 | ) | (79 | ) | (165 | ) | (148 | ) | ||||||||
Interest income |
4 | 7 | 9 | 18 | ||||||||||||
Other income, net |
(3 | ) | 4 | 85 | 25 | |||||||||||
Income from equity investments |
117 | 90 | 208 | 159 | ||||||||||||
Provision for income taxes |
346 | 541 | 778 | 981 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
1,092 | 1,326 | 2,122 | 2,493 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
(1 | ) | 3 | (1 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 1,091 | $ | 1,329 | $ | 2,121 | $ | 2,493 | ||||||||
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS
RevenuesRevenues decreased by $1,817 million, or 20%, in the second quarter of 2016 compared to the second quarter of 2015 and by $3,259 million, or 19%, in the first six months of 2016 compared to the first six months of 2015.
In the second quarter and first six months of 2016, lower average sales prices driven by decreases in the prices of crude oil and other feedstocks led to revenue declines of 18% and 16%, respectively. Revenue declines of 3% in each of the second quarter and first six months of 2016 were driven by lower sales volumes in our Refining segment during those periods and by lower volumes in our O&PAmericas segment during the second quarter of 2016. These declines were partially offset by higher volumes in our I&D segment in both 2016 periods and by modest increases in volumes in our O&PEAI and O&PAmericas segments in the second quarter and first six months of 2016, respectively. Turnaround activities and unplanned outages were the main factors for the lower sales volumes.
Translation impacts resulting from changes in the euro/U.S. dollar exchange rate were responsible for the remaining changes in revenues.
Cost of SalesCost of sales decreased by $1,345 million, or 19%, and $2,558 million, or 19%, in the second quarter and first six months of 2016 compared to the second quarter and first six months of 2015, respectively, primarily due to the decline in feedstock and energy costs.
Cost of sales in the second quarter of 2016 includes a pre-tax benefit totaling $68 million for the reversal of non-cash, lower of cost or market (LCM) inventory valuation adjustments recognized in our O&PEAI and I&D segments during the first quarter of 2016. See the Critical Accounting Policies section herein for additional information related to this reversal. Cost of sales in the first six months of 2015 included pre-tax charges totaling $118 million, including net non-cash LCM inventory valuation adjustments in our O&PAmericas and I&D segments totaling $83 million and amortization of $35 million associated with the expiration of emission allowance credits in our Refining and I&D segments.
Operating IncomeOperating income decreased by $442 million in the second quarter of 2016 compared to the second quarter of 2015 and by $657 million in the first six months of 2016 compared to the first six months of 2015.
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Operating income in the second quarters of 2016 and 2015 include benefits of $68 million and $9 million, respectively, from reversals of LCM inventory valuation adjustments recognized in the first quarters of each year. Operating income for the first six months of 2015 included the negative impacts of the $83 million of LCM inventory valuation adjustments and the $35 million of emission credit allowances amortization discussed above.
Absent these items, operating income was lower by $501 million and $775 million in the second quarter and first six months of 2016, respectively, compared to the same periods in 2015. The results of our O&PAmericas, Refining and I&D segments, which declined in the second quarter by $253 million, $167 million and $123 million, respectively, and in the first six months of 2016 by $523 million, $309 million and $155 million, respectively, were the main drivers of the lower operating income. These negative impacts were offset in part by improvements in our O&PEAI and Technology segments in the second quarter and first six months of 2016. Results for each of our business segments are discussed further in the Segment Analysis section below.
Interest ExpenseInterest expense in the second quarter and first six months of 2016 increased by $4 million and $17 million over the second quarter and first six months of 2015, respectively, primarily due to approximately $4 million and $14 million of higher interest expense as a result of debt issuances in March 2016 and 2015 related to our 1.875% guaranteed notes due 2022 in March 2016 and our 4.625% senior notes due 2055 in March 2015. Reductions in the benefits from our fixed-for-floating interest rate swaps and cross-currency swaps of $11 million in the first six months of 2016 also contributed to the increased interest expense in that period. See Notes 5, 6 and 7 for additional information related to these swaps.
Other Income, NetOther income, net of $85 million in the first six months of 2016 reflects a $60 million increase relative to the same period in 2015, largely due to a $78 million gain related to the sale of our wholly owned Argentine subsidiary. We allocated $57 million and $21 million of the gain to our O&PAmericas and O&PEAI segments, respectively.
Income from Equity InvestmentsIncome from equity investments increased by $27 million and $49 million in the second quarter and first six months of 2016, respectively, compared to the second quarter and first six months of 2015.
These improvements reflect the impacts of higher volumes and spreads at our joint venture in Mexico due to strong polypropylene demand in the second quarter and first six months of 2016. Higher margins at our Polish joint venture also contributed to the improvement in the first six months of 2016.
Income TaxOur effective income tax rate for the second quarter of 2016 was 24.1% compared with 29.0% for the second quarter of 2015. For the first six months of 2016, the effective income tax rate was 26.8% compared with 28.2% for the first six months of 2015. Our effective 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 and changes in unrecognized tax benefits associated with uncertain tax positions.
Compared with the second quarter of 2015, the lower effective tax rate for the second quarter of 2016 was primarily attributable to the impact of a change in non-U.S. tax law on our deferred tax liabilities (-3.5%), an increase in exempt income (-1.8%), and changes in pretax income in countries with varying statutory tax rates (-1.0%), partially offset by adjustments to our deferred tax liabilities (1.5%). Compared with the first six months of 2015, the lower effective tax rate for the first six months of 2016 was primarily attributable to the impact of a change in tax law on our deferred tax liabilities (-1.7%), an increase in exempt income (-1.3%), changes in pretax income in countries with varying statutory tax rates (-0.6%), and changes in valuations allowances (-0.6%), partially offset by adjustments to our deferred tax liabilities (2.1%) and an increase in foreign exchange gains (0.8%).
Comprehensive IncomeComprehensive income decreased by $573 million and $128 million in the second quarter and first six months of 2016 compared to the same periods in 2015. These decreases reflect lower net income and the unfavorable impacts of financial derivative adjustments. These decreases were supplemented in the second quarter of 2016 by the unfavorable impact of unrealized net changes in foreign currency translation adjustments, and in the first six months of 2016 partly offset by the favorable impact of unrealized net changes in foreign currency translation adjustments.
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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 the second quarter of 2016 and increased in the first six months of 2016, resulting in losses and gains, respectively, as reflected in the Consolidated Statements of Comprehensive Income. These losses and gains were partly offset by pre-tax gains of $23 million and pre-tax net losses of $47 million in the second quarter and first six months of 2016, respectively, which represent the effective portion of the unrealized losses of our financial derivatives designated as net investment hedges.
In the second quarter and first six months of 2016, the cumulative effects of our derivatives designated as cash flow hedges were gains of $5 million and losses of $189 million, respectively. The euro weakened against the U.S. dollar in the second quarter of 2016 and strengthened in relation to the U.S. dollar in the first six months of 2016 resulting in pre-tax gains of $71 million and pre-tax losses of $35 million, respectively, related to our cross currency swaps. Pre-tax losses of $43 million and pre-tax gains of $47 million related to our cross currency swaps were reclassification adjustments included in net income in the second quarter and first six months of 2016, respectively. Unrealized losses of $66 million and $154 million in the second quarter and first six months of 2016 related to forward-starting interest rate swaps were driven by decreases in benchmark interest rates during those periods.
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Segment Analysis
We use earnings before interest, income taxes, and depreciation and amortization (EBITDA) as our measure of profitability for segment reporting purposes. This measure of segment operating results is used by our chief operating decision maker to assess the performance of and allocate resources to our operating segments. Intersegment eliminations and items that are not directly related or allocated to business operations are included in Other. For additional information related to our operating segments, as well as a reconciliation of EBITDA to its nearest GAAP measure, Income from continuing operations before income taxes, see Note 14, Segment and Related Information, to our Consolidated Financial Statements.
Our continuing operations are divided into five reportable segments: O&PAmericas; O&PEAI; I&D; Refining; and Technology. Revenues and the components of EBITDA for the periods presented are reflected in the table below.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues: |
||||||||||||||||
O&PAmericas segment |
$ | 2,211 | $ | 2,679 | $ | 4,326 | $ | 5,230 | ||||||||
O&PEAI segment |
2,721 | 3,061 | 5,299 | 5,972 | ||||||||||||
I&D segment |
1,769 | 2,159 | 3,471 | 4,077 | ||||||||||||
Refining segment |
1,289 | 2,102 | 2,244 | 3,709 | ||||||||||||
Technology segment |
129 | 107 | 261 | 243 | ||||||||||||
Other, including intersegment eliminations |
(791 | ) | (963 | ) | (1,530 | ) | (1,901 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 7,328 | $ | 9,145 | $ | 14,071 | $ | 17,330 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income: |
||||||||||||||||
O&PAmericas segment |
$ | 646 | $ | 920 | $ | 1,353 | $ | 1,854 | ||||||||
O&PEAI segment |
423 | 359 | 781 | 595 | ||||||||||||
I&D segment |
327 | 405 | 582 | 676 | ||||||||||||
Refining segment |
(53 | ) | 119 | (83 | ) | 193 | ||||||||||
Technology segment |
62 | 45 | 135 | 109 | ||||||||||||
Other, including intersegment eliminations |
(2 | ) | (3 | ) | (5 | ) | (7 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,403 | $ | 1,845 | $ | 2,763 | $ | 3,420 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Depreciation and amortization: |
||||||||||||||||
O&PAmericas segment |
$ | 88 | $ | 85 | $ | 178 | $ | 171 | ||||||||
O&PEAI segment |
58 | 54 | 113 | 109 | ||||||||||||
I&D segment |
69 | 56 | 139 | 116 | ||||||||||||
Refining segment |
40 | 40 | 83 | 114 | ||||||||||||
Technology segment |
11 | 12 | 21 | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 266 | $ | 247 | $ | 534 | $ | 534 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from equity investments: |
||||||||||||||||
O&PAmericas segment |
$ | 20 | $ | 8 | $ | 42 | $ | 15 | ||||||||
O&PEAI segment |
96 | 79 | 165 | 136 | ||||||||||||
I&D segment |
1 | 3 | 1 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 117 | $ | 90 | $ | 208 | $ | 159 | ||||||||
|
|
|
|
|
|
|
|
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Table of Contents
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Other income (expense), net: |
||||||||||||||||
O&PAmericas segment |
$ | | $ | 1 | $ | 59 | $ | 5 | ||||||||
O&PEAI segment |
(1 | ) | | 26 | 9 | |||||||||||
I&D segment |
| 2 | 1 | 3 | ||||||||||||
Refining segment |
| | 1 | 1 | ||||||||||||
Other, including intersegment eliminations |
(2 | ) | 1 | (2 | ) | 7 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (3 | ) | $ | 4 | $ | 85 | $ | 25 | |||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA: |
||||||||||||||||
O&PAmericas segment |
$ | 754 | $ | 1,014 | $ | 1,632 | $ | 2,045 | ||||||||
O&PEAI segment |
576 | 492 | 1,085 | 849 | ||||||||||||
I&D segment |
397 | 466 | 723 | 803 | ||||||||||||
Refining segment |
(13 | ) | 159 | 1 | 308 | |||||||||||
Technology segment |
73 | 57 | 156 | 133 | ||||||||||||
Other, including intersegment eliminations |
(4 | ) | (2 | ) | (7 | ) | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,783 | $ | 2,186 | $ | 3,590 | $ | 4,138 | ||||||||
|
|
|
|
|
|
|
|
Olefins and PolyolefinsAmericas Segment
OverviewEBITDA for the second quarter and first six months of 2016 reflects lower olefins results, partially offset by improved polypropylene results. EBITDA for the first six months of 2016 benefited from a $57 million gain on the sale of our wholly owned Argentine subsidiary in February 2016. EBITDA for the second quarter 2015 included a $21 million benefit associated with the partial reversal of the $43 million first quarter 2015 LCM adjustment leaving a net charge of $22 million in the first six months of 2015.
Ethylene Raw MaterialsProduction economics for the industry have favored natural gas liquids (NGLs) in recent years. Although the decline in oil prices significantly reduced the cost of ethylene produced from crude oil based liquids (heavy liquids) beginning in the latter part of 2014, NGL prices also declined and they continued to be preferred feedstocks. We produced approximately 90% of our U.S. ethylene production from NGLs during each of the second quarters and first six months of 2016 and 2015. The following table sets forth selected financial information for the O&PAmericas segment including Income from equity investments, which is a component of EBITDA.
The following table sets forth selected financial information for the O&PAmericas segment including Income from equity investments, which is a component of EBITDA.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 2,211 | $ | 2,679 | $ | 4,326 | $ | 5,230 | ||||||||
Income from equity investments |
20 | 8 | 42 | 15 | ||||||||||||
EBITDA |
754 | 1,014 | 1,632 | 2,045 |
RevenuesRevenues for our O&PAmericas segment decreased by $468 million, or 17%, in the second quarter of 2016 compared to the second quarter of 2015 and by $904 million, or 17%, in the first six months of 2016 compared to the first six months of 2015.
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The decline in average sales prices for most products in the second quarter and first six months of 2016 reflects decreases in feedstock prices that are correlated to the price of crude oil, which declined relative to the corresponding periods in 2015. This led to revenue decreases of 13% and 19% in the second quarter and first six months of 2016, respectively.
In the second quarter and first six months of 2016, product sales volumes were lower due to turnaround activities, primarily at our Corpus Christi, Texas facility. Polypropylene sales volumes were also lower in both 2016 periods following the sale of our Argentine subsidiary. These factors were responsible for a revenue decrease of 4% in the second quarter of 2016 but in the first six months of 2016, the impact of these factors was more than offset by increased sales of feedstocks, which led to a 2% revenue increase in that period.
EBITDAEBITDA decreased by $260 million, or 26%, in the second quarter of 2016 compared to the second quarter of 2015 and by $413 million, or 20%, in the first six months of 2016 compared to the first six months of 2015. EBITDA for the second quarter of 2016 includes a 2% decrease related to the absence of the second quarter 2015 LCM reversal of $21 million discussed above. EBITDA for the first six months of 2016 includes a 4% increase related to the absence of the net LCM charge of $22 million recognized in the first six months of 2015 and the $57 million gain on the sale of our wholly owned subsidiary discussed above.
Lower olefin margins were partially offset by the impact of higher polypropylene margins in the second quarter and first six months of 2016. The 2016 olefins margin decline reflected lower average sales prices for ethylene due to the impact of lower naphtha feedstock prices on global ethylene, additional U.S. ethylene supply relative to the prior year periods and the increased cost of ethylene production as decreases in heavy liquid feedstock costs were outpaced by the decreases in co-product prices. Higher polypropylene margins in the second quarter and first six months of 2016 reflect the benefits of lower propylene feedstock costs and higher average polypropylene sales prices driven by a tight U.S. supply/demand balance. Collectively, these margin impacts led to decreases in EBITDA of 6% and 13% during the second quarter and first six months of 2016, respectively.
Lower volumes, primarily reflecting the declines in olefins production due mainly to the impacts of current and upcoming turnarounds contributed to decreases in EBITDA of 19% and 12% in the second quarter and first six months of 2016, respectively.
Improvements in income from our equity investments contributed a 1% increase to EBITDA in each of the second quarter and first six months of 2016 over the prior year periods.
Olefins and PolyolefinsEurope, Asia, International Segment
OverviewHigher operating results in the second quarter and first six months of 2016 reflect higher European polyolefin margins due to decreased feedstock prices and strong demand. These benefits were offset in part by lower olefins volumes due to turnaround activity at our facility in Berre, France and in the second quarter of 2016, by lower olefins margins.
Second quarter 2016 EBITDA also benefited from the recovery of market prices for several of our polyolefins products and naphtha which necessitated the reversal of the $40 million non-cash inventory valuation charge recorded in the first quarter of 2016. EBITDA for the first six months of 2016 reflects the $21 million gain on the first quarter 2016 sale of our wholly owned Argentine subsidiary.
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The following table sets forth selected financial information for the O&PEAI segment including Income from equity investments, which is a component of EBITDA.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 2,721 | $ | 3,061 | $ | 5,299 | $ | 5,972 | ||||||||
Income from equity investments |
96 | 79 | 165 | 136 | ||||||||||||
EBITDA |
576 | 492 | 1,085 | 849 |
RevenuesRevenues decreased by $340 million, or 11%, in the second quarter of 2016 compared to the second quarter of 2015 and by $673 million, or 11%, in the first six months of 2016 compared to the first six months of 2015.
Lower average sales prices decreased revenues by 15% and 11% in the second quarter and first six months of 2016, respectively. Average sales prices were lower across most products as sales prices generally correlate with crude oil prices, which have declined compared to the second quarter and first six months of 2015.
A modest increase in second quarter 2016 sales volumes and favorable foreign exchange impacts each resulted in revenue increases of 2% relative to the corresponding 2015 period.
EBITDAEBITDA increased by $84 million, or 17%, in the second quarter of 2016 compared to the second quarter of 2015 and by $236 million, or 28%, in the first six months of 2016 compared to the first six months of 2015.
Polyolefins margins in Europe improved in the second quarter and first six months of 2016, reflecting a strong supply/demand balance and lower feedstock costs. A decrease in olefins margins, driven by average ethylene and propylene sales prices that declined more than feedstock costs, partially offset the second quarter increase in polyolefins margins. These margin impacts resulted in improvements in EBITDA of 7% and 26%, respectively, in the second quarter and first six months of 2016 EBITDA.
The benefit attributed to the $40 million reversal of the first quarter 2016 LCM inventory valuation charge resulted in an 8% increase in EBITDA for the second quarter of 2016. The $21 million gain from the sale of our wholly owned Argentine subsidiary resulted in a 3% increase in EBITDA for the first six months of 2016.
Improvements in income from our equity investments in the second quarter and first six months of 2016 also boosted EBITDA by 3% in each period.
These increases were partly offset by the negative 2% and 3% impacts of volumes on EBITDA in the second quarter and first six months of 2016, respectively, due to lower olefins volumes driven by turnaround activity. The impact of the lower olefins volumes was partly offset by increased volumes for PP compounds in the second quarter and first six months of 2016.
Foreign exchange impacts were responsible for the remaining changes in EBITDA during each 2016 period.
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Intermediates and Derivatives Segment
OverviewOperating results for the second quarter and first six months of 2016 were lower than the second quarter and first six months of 2015, with lower margins in certain products being partially offset by the impact of higher volumes. EBITDA for the second quarter of 2016 benefited from the absence of the $17 million LCM inventory valuation charge recognized in the second quarter of 2015 and the reversal of the $28 million first quarter 2016 non-cash LCM inventory valuation charge due to product price recoveries. EBITDA for the first six months of 2016 benefited from the absence of the $61 million LCM inventory valuation adjustments recognized in the first six months of 2015.
The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA.
Three Months Ended June 30, |
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 1,769 | $ | 2,159 | $ | 3,471 | $ | 4,077 | ||||||||
Income from equity investments |
1 | 3 | 1 | 8 | ||||||||||||
EBITDA |
397 | 466 | 723 | 803 |
RevenuesRevenues decreased by $390 million, or 18%, in the second quarter of 2016 compared to the second quarter of 2015 and by $606 million, or 15%, in the first six months of 2016 compared to the first six months of 2015.
Average sales prices in the second quarter and first six months of 2016, which were influenced by the decline in feedstock and energy-related costs, and for certain products by additional industry supplies, were lower compared to the prior year periods, and led to revenue decreases of 21% and 18%, respectively.
Increased sales volumes were responsible for revenue increases of 2% and 3%, respectively, in the second quarter and first six months of 2016. These increased volumes were driven by styrene and acetyls in the second quarter and first six months of 2016 and by TBA chain products in the first six months of 2016. Volumes in the first six months of 2015 were negatively impacted by planned outages at our Channelview, Texas methanol and PO/SM facilities.
Foreign exchange impacts were responsible for the remaining change in revenues during the second quarter of 2016.
EBITDAEBITDA decreased $69 million, or 15%, in the second quarter of 2016 compared to the second quarter of 2015 and by $80 million, or 10%, in the first six months of 2016 compared to the first six months of 2015.
Lower margins resulted in decreases in EBITDA of 30% and 23%, respectively, in the second quarter and first six months of 2016. These margins declines primarily reflected crude and gasoline-related product prices that declined more than related feedstock prices in the TBA Chain, and increased methanol supplies due to industry capacity additions.
Lower income from our equity investments in the second quarter and first six months of 2016 also resulted in decreases to EBITDA of 1% in each of the 2016 periods.
The beneficial impact of volumes discussed above partially offset the decreases in the second quarter and first six months of 2016 outlined above with increases to EBITDA of 6% in both periods.
EBITDA in the second quarter and first six months of 2016 also reflected increases of 10% and 8%, respectively, related to the LCM inventory valuation adjustments discussed above.
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Refining Segment
OverviewResults of our Refining segment for the second quarter and first six months of 2016 compared to the corresponding periods in 2015 were significantly lower because of unplanned outages, including a coker unit fire in early April, planned turnaround activity on a crude unit and a coker unit processing train in the first quarter of 2016, and downtime at crude units with reduced processing rates in both periods.
The following table sets forth selected financial information and heavy crude oil processing rates for the Refining segment and the U.S. refining market margins for the applicable periods. Light Louisiana Sweet, or LLS is a light, sweet crude oil, while Maya is a heavy, sour crude oil. References to industry benchmarks for refining market margins are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 1,289 | $ | 2,102 | $ | 2,244 | $ | 3,709 | ||||||||
EBITDA |
(13 | ) | 159 | 1 | 308 | |||||||||||
Heavy crude oil processing rates, thousands of barrels per day |
183 | 255 | 184 | 248 | ||||||||||||
Market margins, dollars per barrel |
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Light crude oil 2-1-1 |
$ | 11.52 | $ | 16.42 | $ | 10.13 | $ | 15.74 | ||||||||
Light crude oil Maya differential |
9.55 | 7.56 | 9.37 | 8.22 | ||||||||||||
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Total Maya 2-1-1 |
$ | 21.07 | $ | 23.98 | $ | 19.50 | $ | 23.96 | ||||||||
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RevenuesRevenues decreased by $813 million, or 39%, in the second quarter of 2016 compared to the second quarter of 2015 and by $1,465 million, or 39%, in the first six months of 2016 compared to the first six months of 2015.
Revenues declined in the second quarter and first six months on significantly lower product prices due to drops in the price of crude oil and lower sales volumes due to production limitations in both 2016 periods mentioned below. The average per barrel price of crude oil declined in each of the second quarter and first six months of 2016 by about $18. These declines resulted in revenue decreases of 27% relative to both the second quarter and first six months of 2015.
Processing rates in the second quarter and first six months of 2016 were lower relative to the comparable periods in 2015 due to processing limits resulting from unplanned outages, including a fire at one of our coker units that impacted operating rates from early April through the balance of the second quarter, and turnaround activities in the first quarter of 2016. These lower processing rates led to revenue decreases of 12% in each of the second quarter and first six months of 2016.
EBITDAEBITDA decreased by $172 million, or 108%, in the second quarter of 2016 compared to the second quarter of 2015 and by $307 million, or 100%, in the first six months of 2016 compared to the first six months of 2015.
Declines in refining margins in the second quarter and first six months of 2016 led to decreases in EBITDA of 62% and 59%, respectively. The Maya 2-1-1 benchmark refining spread declined by approximately $3 and $4 per barrel in the second quarter and first six months, respectively, relative to the second quarter and first six months of 2015. These decreases were driven by per barrel declines of approximately $5 and $7 in diesel spreads in the second quarter and first six months of 2016, respectively, and by approximately $5 and $4 in gasoline spreads. Wider differentials between Maya crude and light crude oils partially offset these declines in product spreads. 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.
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Lower production in the second quarter and first six months of 2016 was also responsible for decreases in EBITDA of 43% and 41%, respectively, due to decreases of 28% and 26%, respectively, in average heavy crude oil processing rates relative to the corresponding periods of 2015. These reduced rates were due to the unplanned outages, crude unit operating limitations and planned turnaround activities discussed above.
A further 3% decrease in EBITDA for the second quarter of 2016 was related to the absence of the second quarter 2015 reversal of the $5 million LCM inventory valuation adjustment recorded in the first quarter of 2015.
Technology Segment
OverviewThe Technology segment recognizes revenues related to the sale of polyolefin catalysts, licensing of chemical, polyolefin and other process technologies and associated engineering and other services.
The following table sets forth selected financial information for the Technology segment:
Three Months Ended June 30, |
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | 2016 | 2015 | ||||||||||||
Sales and other operating revenues |
$ | 129 | $ | 107 | $ | 261 | $ | 243 | ||||||||
EBITDA |
73 | 57 | 156 | 133 |
RevenuesRevenues increased by $22 million, or 21%, in the second quarter of 2016 compared to the second quarter of 2015 and by $18 million, or 7%, in the first six months of 2016 compared to the first six months of 2015.
Recognition of revenues on process licenses issued in prior periods was responsible for revenue increases of 8% and 6% in the second quarter and first six months of 2016 relative to the corresponding periods in 2015.
Revenue increases of 1% and 3% in the second quarter and first six months of 2016, respectively, were attributable to higher average catalyst sales prices during those periods. These increases were augmented in the second quarter of 2016 by an additional revenue increase of 10% stemming from an increase in catalyst sales volumes and partly offset in the first six months of 2016 by a 2% revenue decrease related to lower catalyst sales volumes.
Foreign currency translation impacts gave rise to a 2% revenue increase in the second quarter of 2016 due to a stronger euro versus the U.S. dollar relative to the second quarter 2015.
EBITDAEBITDA increased by $16 million, or 28%, in the second quarter of 2016 compared to the second quarter of 2015 and by $23 million, or 17%, in the first six months of 2016 compared to the first six months of 2015.
The impact of higher catalyst volumes increased EBITDA by 16% in the second quarter of 2016 and decreased EBITDA by 2% in the first six months of 2016. A combination of higher catalyst margins and higher licensing and services revenue contributed 12% and 19% to EBITDA during the second quarter and first six months of 2016.
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FINANCIAL CONDITION
Operating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | ||||||
Source (use) of cash: |
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Operating activities |
$ | 2,561 | $ | 2,914 | ||||
Investing activities |
(1,068 | ) | (1,170 | ) | ||||
Financing activities |
(1,372 | ) | (1,422 | ) |
Operating Activities
2016Cash of $2,561 million generated in the first six months of 2016 primarily reflected earnings adjusted for non-cash items and cash used 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 and adjustments for related working capital.
The main components of working capital consumed cash of $94 million during the first six months of 2016. Higher sales prices for products in our O&PEAI segment in the first six months of 2016 combined with the impact of higher sales volumes in the second quarter of 2016 relative to the fourth quarter of 2015 for our I&D and Refining segments led to the increase in accounts receivable. The increase in accounts payable reflects increased feedstock costs in our O&PAmericas segment and increased purchases of crude oil by our Refining segment.
2015Cash of $2,914 million generated in the first six months of 2015 primarily reflected earnings adjusted for non-cash items, offset in part by cash used by the main components of working capital.
The main components of working capital consumed cash of $106 million during the first six months of 2015. The timing of crude oil purchases in the latter part of the second quarter and the lower cost of crude oil led to the decrease in accounts payable. The decrease in inventories reflects lower levels of inventory in our I&D and O&PEAI segments. The decrease in our I&D segment inventories was the result of a drawdown of inventories in conjunction with turnaround activities at one of our PO/SM facilities in Channelview, Texas. Higher polypropylene and PP compounding sales volumes in the latter part of the second quarter contributed to the lower level of inventory in our O&PEAI segment.
Investing ActivitiesWe used cash of $1,068 million and $1,170 million in investing activities in the first six months of 2016 and 2015, respectively.
We invest cash in investment-grade and other high quality instruments that provide adequate flexibility to redeploy funds as needed to meet our cash flow requirements while maximizing yield. In the first six months of 2016 and 2015, we invested $607 million and $1,468 million, respectively, in securities that are deemed available-for-sale and classified as Short-term investments. We also invested $168 million and $397 million in tri-party repurchase agreements in the first six months of 2016 and 2015, respectively. These investments are classified as short-term loans receivable. We received proceeds upon the sale and maturity of certain of our available-for-sale securities and repurchase agreements of $657 million and $98 million, respectively, in the first six months of 2016 and $997 million and $250 million, respectively, in the corresponding period of 2015.
In December 2015, we entered into 750 million ($795 million) of forward exchange contracts, which were designated as net investment hedges of our investments in foreign subsidiaries. Payments to and proceeds from our counterparties upon settlement of these forward exchange contracts following their expiration in March 2016 resulted in a net cash outflow of $55 million.
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We received net cash proceeds of $137 million for the sale of our wholly owned Argentine subsidiary in February 2016.
See Note 7 to the Consolidated Financial Statements for additional information regarding these investments.
The following table summarizes capital expenditures for the periods presented:
Six Months Ended June 30, |
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Millions of dollars |
2016 | 2015 | ||||||
Capital expenditures by segment: |
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O&PAmericas |
$ | 642 | $ | 289 | ||||
O&PEAI |
141 | 65 | ||||||
I&D |
156 | 152 | ||||||
Refining |
128 | 61 | ||||||
Technology |
15 | 9 | ||||||
Other |
8 | 8 | ||||||
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Consolidated capital expenditures of continuing operations |
$ | 1,090 | $ | 584 | ||||
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In the first six months of 2016 and 2015, our 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 level of capital expenditures for our O&PAmericas, O&PEAI and Refining segments in the first six months of 2016 was largely due to debottleneck and turnaround activities.
Financing ActivitiesIn the first six months of 2016 and 2015, our financing activities used cash of $1,372 million and $1,422 million, respectively.
In the first six months of 2016 and 2015, we made payments of $1,682 million and $2,137 million, respectively, to acquire approximately 21 million and 24 million, respectively, of our outstanding ordinary shares. We also made dividend payments totaling $698 million and $702 million during the first six months of 2016 and 2015, respectively. For additional information related to these share repurchases and dividend payments, see Note 12 to the Consolidated Financial Statements.
We received net proceeds of $200 million and $238 million in the first six months of 2016 and 2015, 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.
The net proceeds from these notes may be used for general corporate purposes, including repurchases of LyondellBasells ordinary shares. Other general corporate purposes may include, among other things, funding for working capital, capital expenditures and acquisitions. We may temporarily invest funds that are not immediately needed for these purposes in short-term investments, including marketable securities.
In March 2015, we issued $1,000 million of 4.625% Notes due 2055 and received net proceeds of $984 million. Additional information related to these notes can be found in the Liquidity and Capital Resources section below and in Note 6 to the Consolidated Financial Statements.
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Liquidity and Capital ResourcesAs of June 30, 2016, we had $2,083 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments. We also held $462 million of tri-party repurchase agreements classified as Other current assets at June 30, 2016. For additional information related to our purchases of marketable securities, which currently include certificates of deposit, commercial paper, bonds and limited partnership investments, and our investments in tri-party repurchase agreements, see Investing Activities above and Note 7 to the Consolidated Financial Statements.
At June 30, 2016, we held $535 million of cash in jurisdictions outside of 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 $2,701 million at June 30, 2016, which included the following:
| $1,966 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 June 30, 2016, we had $523 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the facility; and |
| $735 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 June 30, 2016. |
Our 450 million European receivables securitization facility expired in April 2016.
In accordance with our current interest rate risk management strategy and subject to managements 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.
At June 30, 2016, we had total debt, including current maturities, of $9,105 million. We also had $575 million of outstanding letters of credit and bank guarantees issued under uncommitted credit facilities at June 30, 2016.
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.
In connection with the increase of our revolving credit facility, we increased the size of our commercial paper program to permit the issuance of unsecured short-term promissory (commercial paper) notes in an aggregate amount not to exceed $2,500 million. At June 30, 2016, we had $523 million of commercial paper outstanding.
In March 2016, we issued 750 million of 1.875% guaranteed notes due 2022 at a discounted price of 99.607%. Proceeds from these notes may be used for general corporate purposes, including repurchases of our ordinary shares.
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 final maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. The notes are also redeemable upon certain tax events.
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For additional information related to our credit facilities and Notes discussed above, see Note 5 to the Consolidated Financial Statements.
In July 2016, we announced plans to build a new high density polyethylene plant on the U.S. Gulf Coast. The plant, which will have an annual capacity of 1.1 billion pounds, is expected to start up in 2019.
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 June 30, 2016, we have purchased approximately 6 million shares under this program for approximately $463 million. As of July 26, 2016, we had approximately 33 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 12 to the Consolidated Financial Statements.
In February 2016, we received net proceeds of $137 million from the sale of our wholly owned Argentine subsidiary.
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. 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.
CURRENT BUSINESS OUTLOOK
Chemical and polyolefin markets continue to be generally well balanced in the third quarter, with trends similar to the second quarter of 2016. However, margins for refining and TBA Chain products have declined as gasoline supplies and inventories have increased.
We have completed the repairs of damage incurred in the April 2016 fire at our Houston refinery and expect to complete the 800 million pound ethylene expansion and related turnaround of our Corpus Christi, Texas facility by the end of the third quarter.
During the second half of 2016, our plant maintenance schedule is significant with additional turnarounds at facilities in our O&PAmericas, O&PEAI and I&D segments. We expect to mitigate some of the negative impact of this heavy, planned maintenance period through inventory and scheduling efforts. Collectively, we expect our third quarter operations to be negatively impacted by an estimated $150 million, with impacts of $135 million and $15 million to the results of our O&PAmericas and I&D segments, respectively.
We expect our investment in these facilities to deliver continuing benefits through long-term reliability.
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CRITICAL ACCOUNTING POLICIES
InventoryIn the first quarter of 2016, we recorded an LCM inventory valuation adjustment of $68 million as certain product prices fell in line with the declines in hydrocarbon prices and other correlated products. The primary contributors to the LCM inventory valuation adjustment were market price declines for several of our polyolefins products and for naphtha, benzene and styrene. Representative prices used in the calculation of the LCM inventory valuation adjustment included $360 per metric ton for naphtha, $1,012 per metric ton for styrene, and $1.77 per gallon for benzene. This adjustment was reversed in full in the second quarter of 2016 following the recovery of prices.
Several of our LIFO inventory pools are currently 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. As of June 30, 2016, at-risk inventory accounted for $2.5 billion of the total carrying value of our $4.0 billion of inventory. The extent to which further adjustment may occur is dependent on the pool specific product prices and composition within each individual dollar value LIFO pool at the balance sheet date. Sustained price declines in our finished goods and raw materials could result in future LCM inventory valuation charges during the remainder of 2016.
ACCOUNTING AND REPORTING CHANGES
For a discussion of the potential impact of new accounting pronouncements on our consolidated financial statements, see Note 2 to the Consolidated Financial Statements.
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words anticipate, estimate, believe, continue, could, intend, may, plan, potential, predict, should, will, expect, objective, projection, forecast, goal, guidance, outlook, effort, target and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
| the cost of raw materials represents a substantial portion of our operating expenses, and energy costs generally follow price trends of crude oil and/or natural gas; price volatility can significantly affect our results of operations and we may be unable to pass raw material and energy cost increases on to our customers due to the significant competition that we face, the commodity nature of our products and the time required to implement pricing changes; |
| our U.S. operations have benefited from low-cost natural gas and natural gas liquids; decreased availability of these materials (for example, from their export or regulations impacting hydraulic fracturing in the U.S.) could reduce the current benefits we receive; |
| if crude oil prices fell materially, or decrease relative to U.S. natural gas prices, we would see less benefit from low-cost natural gas and natural gas liquids and it could have a negative effect on our results of operations; |
| industry production capacities and operating rates may lead to periods of oversupply and low profitability; for example, there has been substantial capacity expansion announced in the U.S. olefins industry; |
| we may face operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental incidents) at any of our facilities, which would negatively impact our operating results; for example, because the Houston refinery is our only refining operation, we would not have the ability to increase production elsewhere to mitigate the impact of any outage at that facility; |
| environmental and other regulations may negatively impact our business by, among other things, restricting our operations, increasing costs of operations or requiring significant capital expenditures; |
| we may not be able to protect our market position or otherwise pass on cost increases to our customers due to the significant competition we face as a result of the commodity nature of many of our products; |
| changes in general economic, business, political and regulatory conditions in the countries or regions in which we operate could increase our costs, restrict our operations and reduce our operating results; |
| the negative outcome of any legal, tax and environmental proceedings or changes in laws or regulations regarding legal, tax and environmental matters may increase our costs or otherwise limit our ability to achieve savings under current regulations; |
| our ability to implement business strategies and execute our organic growth plans may be negatively affected or restricted by, among other things, our ability to complete projects on time and on budget and other events that may affect our ability to develop projects and strategies; |
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| uncertainties associated with worldwide economies could create reductions in demand and pricing, as well as increased counterparty risks, which could reduce liquidity or cause financial losses resulting from counterparty default; |
| any loss or non-renewal of favorable tax treatment under agreements or treaties, or changes in laws, regulations or treaties, may substantially increase our tax liabilities; |
| we may be required to reduce production or idle certain facilities because of the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries, which would negatively affect our operating results; |
| we rely on continuing technological innovation, and an inability to protect our technology, or others technological developments could negatively impact our competitive position; |
| we have substantial international operations, and continued economic uncertainties, fluctuations in exchange rates, valuations of currencies and our possible inability to access cash from operations in certain jurisdictions on a tax-efficient basis, if at all, could negatively affect our liquidity and our results of operations; |
| we are subject to the risks of doing business at a global level, including wars, terrorist activities, political and economic instability and disruptions and changes in governmental policies, which could cause increased expenses, decreased demand or prices for our products and/or disruptions in operations, all of which could reduce our operating results; |
| if we are unable to comply with the terms of our credit facilities, indebtedness and other financing arrangements, those obligations could be accelerated, which we may not be able to repay; and |
| we may be unable to incur additional indebtedness or obtain financing on terms that we deem acceptable, including for refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses. |
Any of these factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.
All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market and regulatory risks is described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015. Our exposure to such risks has not changed materially in the six months ended June 30, 2016.
Item 4. | CONTROLS AND PROCEDURES |
As of June 30, 2016 with the participation of our management, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Act), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of June 30, 2016.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | LEGAL PROCEEDINGS |
Information regarding our litigation and other legal proceedings can be found in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements, which is incorporated into this Item 1 by reference.
The following is a description of environmental proceedings to which a governmental authority is a party and potential monetary sanctions are reasonably likely to be $100,000 or more.
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. The Agreed Order was signed in May 2016 and we are awaiting approval of the Order by TCEQ.
Additional information about such environmental proceedings can be found in Part I, Item 3 of our 2015 Annual Report on Form 10-K, which is incorporated into this Item 1 by reference.
Item 1A. | RISK FACTORS |
There have been no material changes from the risk factors disclosed in Item 1A of our 2015 Annual Report on Form 10-K.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities | ||||||||||||||||
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1) |
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April 1 April 30 |
2,158,933 | $ | 87.56 | 2,158,933 | 43,368,366 | |||||||||||
May 1 May 31 |
2,598,876 | $ | 81.92 | 2,598,876 | 40,769,490 | |||||||||||
June 1 June 30 |
4,088,201 | $ | 78.13 | 4,088,201 | 36,681,289 | |||||||||||
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Total |
8,846,010 | $ | 81.54 | 8,846,010 | 36,681,289 | |||||||||||
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