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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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 registrant’s principal executive offices)

(713) 309-7200   +44 (0) 207 220 2600   +31 (0)10 275 5500

(Registrant’s 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  ☒    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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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  ☒    No  ☐

The registrant had 395,803,946 ordinary shares, €0.04 par value, outstanding at July 25, 2017 (excluding 182,636,217 treasury shares).

 

 

 


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

TABLE OF CONTENTS

 

     Page  

Part I – Financial Information

     1  

Item 1. Consolidated Financial Statements (Unaudited)

     1  

Consolidated Statements of Income

     1  

Consolidated Statements of Comprehensive Income

     2  

Consolidated Balance Sheets

     3  

Consolidated Statements of Cash Flows

     5  

Consolidated Statement of Stockholders’ Equity

     7  

Notes to the Consolidated Financial Statements

     8  

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     63  

Item 4. Controls and Procedures

     63  

Part II – Other Information

     64  

Item 1. Legal Proceedings

     64  

Item 1A. Risk Factors

     64  

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     64  

Item 4. Mine Safety Disclosures

     64  

Item 6. Exhibits

     65  

Signature

     66  


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Millions of dollars, except earnings per share

   2017     2016     2017     2016  

Sales and other operating revenues:

        

Trade

   $ 8,220     $ 7,132     $ 16,463     $ 13,688  

Related parties

     183       196       370       383  
  

 

 

   

 

 

   

 

 

   

 

 

 
     8,403       7,328       16,833       14,071  

Operating costs and expenses:

        

Cost of sales

     6,601       5,702       13,592       10,868  

Selling, general and administrative expenses

     200       199       404       392  

Research and development expenses

     25       24       50       48  
  

 

 

   

 

 

   

 

 

   

 

 

 
     6,826       5,925       14,046       11,308  

Operating income

     1,577       1,403       2,787       2,763  

Interest expense

     (95     (83     (302     (165

Interest income

     4       4       10       9  

Other income (expense), net

     29       (3     59       85  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before equity investments and income taxes

     1,515       1,321       2,554       2,692  

Income from equity investments

     78       117       159       208  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     1,593       1,438       2,713       2,900  

Provision for income taxes

     459       346       774       778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,134       1,092       1,939       2,122  

Loss from discontinued operations, net of tax

     (4     (1     (12     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,130       1,091       1,927       2,121  

Net loss attributable to non-controlling interests

     1       —         1       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to the Company shareholders

   $ 1,131     $ 1,091     $ 1,928     $ 2,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Net income (loss) attributable to the Company shareholders —

        

Basic:

        

Continuing operations

   $ 2.83     $ 2.57     $ 4.82     $ 4.94  

Discontinued operations

     (0.01     —         (0.03     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2.82     $ 2.57     $ 4.79     $ 4.94  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Continuing operations

   $ 2.82     $ 2.56     $ 4.81     $ 4.93  

Discontinued operations

     (0.01     —         (0.03     —    
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2.81     $ 2.56     $ 4.78     $ 4.93  
  

 

 

   

 

 

   

 

 

   

 

 

 

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,
 

Millions of dollars

   2017     2016     2017     2016  

Net income

   $ 1,130     $ 1,091     $ 1,927     $ 2,121  

Other comprehensive income (loss), net of tax –

        

Financial derivatives:

        

Gain (loss) on cash flow hedges arising during the period

     (158     5       (160     (189

Reclassification adjustment included in net income

     133       (43     158       47  

Income tax expense (benefit)

     (4     12       (3     (41
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial derivatives, net of tax

     (21     (50     1       (101
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses on available-for-sale securities:

        

Unrealized holding losses arising during the period

     (5     —         (9     (6

Income tax benefit

     (1     —         (2     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses on available-for-sale securities, net of tax

     (4     —         (7     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities held by equity investees:

        

Unrealized holding gains (losses) arising during the period

     (2     —         9       —    

Income tax expense (benefit)

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities held by equity investees, net of tax

     (2     —         9       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined pension and other postretirement benefit plans:

        

Reclassification adjustment for net actuarial loss included in net income

     9       7       19       15  

Income tax expense

     3       2       6       5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined pension and other postretirement benefit plans, net of tax

     6       5       13       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

        

Unrealized gains (losses) arising during the period

     63       (29     101       56  

Income tax expense (benefit)

     (21     1       (19     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments, net of tax

     84       (30     120       63  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     63       (75     136       (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,193       1,016       2,063       2,087  

Comprehensive loss attributable to non-controlling interests

     1       —         1       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the Company shareholders

   $ 1,194     $ 1,016     $ 2,064     $ 2,087  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

2


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

Millions of dollars

   June 30,
2017
    December 31,
2016
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 734     $ 875  

Restricted cash

     6       3  

Short-term investments

     1,278       1,147  

Accounts receivable:

    

Trade, net

     2,904       2,716  

Related parties

     182       126  

Inventories

     4,007       3,809  

Prepaid expenses and other current assets

     964       923  
  

 

 

   

 

 

 

Total current assets

     10,075       9,599  

Property, plant and equipment at cost

     15,548       14,635  

Less: Accumulated depreciation

     (4,997     (4,498
  

 

 

   

 

 

 

Property, plant and equipment, net

     10,551       10,137  

Investments and long-term receivables:

    

Investment in PO joint ventures

     423       415  

Equity investments

     1,595       1,575  

Other investments and long-term receivables

     18       20  

Goodwill

     559       528  

Intangible assets, net

     499       550  

Other assets

     398       618  
  

 

 

   

 

 

 

Total assets

   $ 24,118     $ 23,442  
  

 

 

   

 

 

 

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,
2017
    December 31,
2016
 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current maturities of long-term debt

   $ 2     $ 2  

Short-term debt

     561       594  

Accounts payable:

    

Trade

     1,792       2,028  

Related parties

     525       501  

Accrued liabilities

     1,251       1,415  
  

 

 

   

 

 

 

Total current liabilities

     4,131       4,540  

Long-term debt

     8,496       8,385  

Other liabilities

     2,253       2,113  

Deferred income taxes

     2,370       2,331  

Commitments and contingencies

    

Stockholders’ equity:

    

Ordinary shares, €0.04 par value, 1,275 million shares authorized, 397,457,391 and 404,046,331 shares outstanding, respectively

     31       31  

Additional paid-in capital

     10,198       10,191  

Retained earnings

     13,506       12,282  

Accumulated other comprehensive loss

     (1,375     (1,511

Treasury stock, at cost, 180,982,772 and 174,389,139 ordinary shares, respectively

     (15,494     (14,945
  

 

 

   

 

 

 

Total Company share of stockholders’ equity

     6,866       6,048  

Non-controlling interests

     2       25  
  

 

 

   

 

 

 

Total equity

     6,868       6,073  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 24,118     $ 23,442  
  

 

 

   

 

 

 

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,  

Millions of dollars

   2017     2016  

Cash flows from operating activities:

    

Net income

   $ 1,927     $ 2,121  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     582       534  

Amortization of debt-related costs

     8       9  

Charges related to repayment of debt

     48       —    

Equity investments –

    

Equity income

     (159     (208

Distributions of earnings, net of tax

     189       249  

Deferred income taxes

     133       104  

Gain on sale of business

     —         (78

Gain on sale of assets

     (31     —    

Changes in assets and liabilities that provided (used) cash:

    

Accounts receivable

     (138     (281

Inventories

     (95     26  

Accounts payable

     (229     161  

Other, net

     3       (76
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,238       2,561  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Expenditures for property, plant and equipment

     (828     (1,090

Proceeds from disposal of assets

     29       —    

Payments for repurchase agreements

     (512     (168

Proceeds from repurchase agreements

     381       98  

Purchases of available-for-sale securities

     (653     (607

Proceeds from maturities of available-for-sale securities

     487       657  

Proceeds from maturities of held-to-maturity securities

     75       —    

Payment for acquisition of business and equity method investment

     (21     —    

Net proceeds from sale of business

     —         137  

Proceeds from settlement of net investment hedges

     —         795  

Payments for settlement of net investment hedges

     —         (850

Other, net

     (12     (43
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,054     (1,071
  

 

 

   

 

 

 

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,  

Millions of dollars

   2017     2016  

Cash flows from financing activities:

    

Repurchases of Company ordinary shares

     (570     (1,682

Dividends paid

     (704     (698

Issuance of long-term debt

     990       812  

Repayment of long-term debt

     (1,000     —    

Debt extinguishment costs

     (65     —    

Net proceeds from commercial paper

     1       200  

Payments of debt issuance costs

     (8     (5

Other, net

     (3     1  
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,359     (1,372
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     37       15  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents and restricted cash

     (138     133  

Cash and cash equivalents and restricted cash at beginning of period

     878       931  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of period

   $ 740     $ 1,064  
  

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

6


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

           Additional           

Accumulated

Other

   

Company

Share of

   

Non-

 
     Ordinary Shares     Paid-in
Capital
     Retained
Earnings
    Comprehensive
Income (Loss)
    Stockholders’
Equity
    Controlling
Interests
 

Millions of dollars

   Issued      Treasury             

Balance, December 31, 2016

   $ 31      $ (14,945   $ 10,191      $ 12,282     $ (1,511   $ 6,048     $ 25  

Net income (loss)

     —          —         —          1,928       —         1,928       (1

Other comprehensive income

     —          —         —          —         136       136       —    

Share-based compensation

     —          30       6        —         —         36       —    

Dividends ($1.75 per share)

     —          —         —          (704     —         (704     —    

Repurchases of Company ordinary shares

     —          (579     —          —         —         (579     —    

Purchase of non- controlling interest

     —          —         1        —         —         1       (22
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2017

   $ 31      $ (15,494   $ 10,198      $ 13,506     $ (1,375   $ 6,866     $ 2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

7


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

         Page  

1.

 

Basis of Presentation

     9  

2.

 

Accounting and Reporting Changes

     9  

3.

 

Accounts Receivable

     12  

4.

 

Inventories

     12  

5.

 

Debt

     13  

6.

 

Financial Instruments

     16  

7.

 

Fair Value Measurement

     30  

8.

 

Pension and Other Postretirement Benefits

     33  

9.

 

Income Taxes

     34  

10.

 

Commitments and Contingencies

     35  

11.

 

Stockholders’ Equity

     37  

12.

 

Per Share Data

     41  

13.

 

Segment and Related Information

     43  

 

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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

2. Accounting and Reporting Changes

Recently Adopted Guidance

Intangibles-Goodwill and Other—In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASC”) 2017-04, Intangibles – Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The early adoption of this amendment in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.

Inventories—In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim periods beginning after December 15, 2016. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2016. Various transition methods are prescribed depending on the aspect of accounting impacted by the amended guidance. Adoption of the amendments in this guidance in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.

 

9


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Statement of Cash Flows—In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include, but are not limited to, debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method of investments. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Early adoption of the amendments in this guidance in the second quarter of 2017 resulted in a reclassification of cash flows related to debt extinguishment costs incurred in March 2017 of $65 million from operating to financing activity cash flows. Other aspects of the amendment did not have a material impact on our Consolidated Statement of Cash Flows.

Statement of Cash Flows—In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. The ASU requires entities to include restricted cash and restricted cash equivalents in their cash and cash-equivalent balances in the statement of cash flows. Early retrospective adoption of this amendment in the second quarter of 2017 did not have a material impact on our Consolidated Statement of Cash Flows.

Accounting Guidance Issued But Not Adopted as of June 30, 2017

Revenue Recognition—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in 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 Recognition—In 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, contains amendments that clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance Obligations and Licensing clarifies the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. The FASB also issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which further clarifies the new revenue guidance primarily in the areas of collectability, noncash consideration, presentation of sales tax, and transition. The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, which provides numerous improvements related to the Topic 606. All amendments are effective with the same date as ASU 2014-09. Management is currently assessing the effects of applying the new standard and has preliminarily determined that there will not be a material impact on our Consolidated Financial Statements. We expect to use the modified retrospective method. We will complete any required changes to our systems and processes, including updating our internal controls, during the remainder of 2017.

Financial Instruments—In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance in this ASU includes a requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Prospective application of this ASU is required for public entities for annual and interim periods beginning on or after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months a lessee should recognize a liability for lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Topic 842 retains a classification distinction between finance leases and operating leases, with the classification affecting the pattern of expense recognition in the income statement. This ASU also requires enhanced disclosures. A modified retrospective transition approach is required for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements via an extensive review of numerous existing lease contracts and other purchase obligations that contain embedded lease features, both classified as operating leases under the existing guidance.

Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, resulting in the use of a current expected credit loss (“CECL”) model when measuring an impairment of financial instruments. Credit losses related to available-for-sale securities should be recorded in the consolidated income statement through an allowance for credit losses. Estimated credit losses utilizing the CECL model are based on reasonable use of historical experience, current conditions and forecasts that affect the collectability of reported financial assets. This ASU also modifies the impairment model for available-for-sale debt securities by eliminating the concept of “other than temporary” as well as providing a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance will be effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the amendments in this guidance on our Consolidated Financial Statements.

Income Taxes—In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU is aimed at reducing complexity in accounting standards. Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory, and a reporting entity would recognize tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will be effective for public entities for annual periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

Business Combinations—In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets—In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance provides clarification about the term in substance nonfinancial asset; other aspects of the scope of Subtopic 610-20 Other Income which were confusing and complex; and how an entity should account for partial sales of nonfinancial assets once the amendments in Update 2014-09 become effective. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

 

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Compensation – Retirement Benefits—In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance will require changes in presentation of current service cost and other components of net benefit cost. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

Receivables–Nonrefundable Fees and Other Costs—In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This new guidance requires the premium on callable debt securities to be amortized to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of this new guidance to have a material impact on our Consolidated Financial Statements.

Compensation – Stock Compensation—In May 2017, the FASB issued ASU 2017-09, Stock Compensation: Scope of Modification Accounting. The current definition of the term modification refers to a change in any of the terms and conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

 

3. Accounts Receivable

Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $17 million and $16 million at June 30, 2017 and December 31, 2016, respectively.

 

4. Inventories

Inventories consisted of the following components:

 

Millions of dollars

   June 30,
2017
     December 31,
2016
 

Finished goods

   $ 2,666      $ 2,575  

Work-in-process

     180        154  

Raw materials and supplies

     1,161        1,080  
  

 

 

    

 

 

 

Total inventories

   $ 4,007      $ 3,809  
  

 

 

    

 

 

 

For information related to lower of cost or market inventory valuation adjustments recognized during the six months ended June 30, 2016, see Note 13.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. Debt

Long-term loans, notes and other long-term debt consisted of the following:

 

     June 30,     December 31,  

Millions of dollars

   2017     2016  

Senior Notes due 2019, $2,000 million, 5.0% ($4 million of debt issuance cost)

   $ 954     $ 1,906  

Senior Notes due 2021, $1,000 million, 6.0% ($8 million of debt issuance cost)

     992       988  

Senior Notes due 2024, $1,000 million, 5.75% ($8 million of debt issuance cost)

     992       991  

Senior Notes due 2055, $1,000 million, 4.625% ($16 million of discount; $11 million of debt issuance cost)

     973       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% ($21 million of discount; $7 million of debt issuance cost)

     722       721  

Guaranteed Notes due 2023, $750 million, 4.0% ($6 million of discount; $4 million of debt issuance cost)

     740       739  

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)

     849       785  

Guaranteed Notes due 2027, $1,000 million, 3.5% ($10 million of discount; $8 million of debt issuance cost)

     992       —    

Other

     5       6  
  

 

 

   

 

 

 

Total

     8,498       8,387  

Less current maturities

     (2     (2
  

 

 

   

 

 

 

Long-term debt

   $ 8,496     $ 8,385  
  

 

 

   

 

 

 

Gains (losses) related to fair value adjustments associated with the fair value hedge accounting treatment of our fixed-for-floating interest rate swaps for the applicable periods are as follows:

 

                                          Cumulative  
          Three Months Ended      Six Months Ended     Year Ended      Amount  
     Inception    June 30,      June 30,     December 31,      Since  

Millions of dollars

   Year    2017     2016      2017     2016     2016      Inception  

Senior Notes due 2019, 5.0%

   2014    $ (6   $ 4      $ (42   $ (15   $ 42      $ 42  

Senior Notes due 2021, 6.0%

   2016      (5     —          (3     —         3        —    

Guaranteed Notes due 2027, 3.5%

   2017      (9     —          (10     —         —          (10

These fair value adjustments are recognized in Interest expense in the Consolidated Statements of Income.

 

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Short-term loans, notes, and other short-term debt consisted of the following:

 

     June 30,      December 31,  

Millions of dollars

   2017      2016  

$2,500 million Senior Revolving Credit Facility

   $ —        $ —    

$900 million U.S. Receivables Securitization Facility

     —          —    

Commercial paper

     498        500  

Financial payables to equity investees

     1        2  

Precious metal financings

     59        90  

Other

     3        2  
  

 

 

    

 

 

 

Total short-term debt

   $ 561      $ 594  
  

 

 

    

 

 

 

Long-Term Debt

Guaranteed Notes due 2027—In March 2017, 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 $1,000 million of 3.5% guaranteed notes due 2027 at a discounted price of 98.968%.

These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance II’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede LyondellBasell N.V., as guarantor, from obtaining funds by dividend or loan from its subsidiaries.

The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.

The notes may be redeemed before the date that is three months prior to the scheduled maturity date at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed and the sum of the present values of the remaining scheduled payments of principal and interest (discounted at the applicable Treasury Yield plus 20 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is 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.

Senior Notes due 2019—In March 2017, we redeemed $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019, and paid $65 million in make-whole premiums. In conjunction with the redemption of these notes, we recognized non-cash charges of $4 million for the write-off of unamortized debt issuance costs and $44 million for the write-off of the cumulative fair value hedge accounting adjustment related to the redeemed notes.

Short-Term Debt

Senior Revolving Credit Facility—In June 2017, the term of our $2,500 million revolving credit facility was extended for one year to June 2022 pursuant to a consent agreement. The revolving credit facility may be used for dollar and euro denominated borrowings, has a $500 million sublimit for dollar and euro denominated letters of credit, a $1,000 million uncommitted accordion feature, and supports our commercial paper program. The aggregate balance of outstanding borrowings, including amounts outstanding under our commercial paper program, and letters

 

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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 fiscal 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, 2017. At June 30, 2017, we had $498 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under this facility.

Commercial Paper Program—We have a commercial paper program under which we may issue up to $2,500 million of privately placed, unsecured, short-term promissory notes (“commercial paper”) under this program, which is backed by our $2,500 million Senior Revolving Credit Facility. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividends and share repurchases. Interest rates on the commercial paper outstanding at June 30, 2017 are based on the term of the notes and range from 120 to 150 basis points.

U.S. Receivables Securitization Facility—Our $900 million U.S. accounts receivable securitization facility, which expires in 2018, has a purchase limit of $900 million 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 subsidiary’s assets will be used to satisfy the claims of its creditors prior to any assets or value in the bankruptcy-remote subsidiary becoming available to us. We are responsible for servicing the receivables. This facility also provides for the issuance of letters of credit up to $200 million. The term of the securitization facility may be extended in accordance with the terms of the agreement. The facility is also subject to customary covenants and warranties, including limits and reserves and the maintenance of specified financial ratios. We are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. Performance obligations under the facility are guaranteed by the parent company. Additional fees are incurred for the average daily unused commitments.

At June 30, 2017, there were no borrowings or letters of credit under the facility.

Other—At June 30, 2017 and December 31, 2016, our weighted average interest rate on outstanding short-term debt was 1.3% and 0.9%, respectively.

Debt Discount and Issuance Costs

In the six months ended June 30, 2017 and 2016, amortization of debt discounts and debt issuance costs resulted in amortization expense of $12 million and $9 million, respectively, which is included in Interest expense in the Consolidated Statements of Income.

 

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6. Financial Instruments

Cash Concentration—Our cash equivalents are placed in high-quality commercial paper, money market funds, marketable securities with maturities less than three months and time deposits with major international banks and financial institutions.

Market Risks—We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our risk management policies. Derivative instruments are recorded at fair value on the balance sheet. Gains and losses related to changes in the fair value of derivative instruments not designated as hedges are recorded in earnings. For derivatives that have been designated as fair value hedges, the gains and losses of the derivatives and hedged instruments are recorded in earnings. For derivatives designated as cash flow and net investment hedges, the effective portion of the gains and losses is recorded in Other comprehensive income (loss). The ineffective portion of cash flow and net investment hedges is recorded in earnings.

Marketable Securities—We invest cash in investment-grade securities for periods generally not exceeding three years. Investments in securities with original maturities of three months or less are classified as Cash and cash equivalents. At June 30, 2017 and December 31, 2016, we had marketable securities classified as Cash and cash equivalents of $311 million and $351 million, respectively.

We also have investments in marketable securities classified as available-for-sale and held-to-maturity. These securities are included in Short-term investments on the Consolidated Balance Sheets. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of Accumulated other comprehensive income (“AOCI”). Investments classified as held-to-maturity are carried at amortized cost. We periodically review our available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.

Repurchase Agreements—We invest in tri-party repurchase agreements. Under these agreements, we make cash purchases of securities according to a pre-agreed profile from our counterparties. The counterparties have an obligation to repurchase, and we have an obligation to sell, the same or substantially the same securities at a pre-defined date for a price equal to the purchase price plus interest. These securities, which pursuant to our internal policies, are held by a third-party custodian and must generally have a minimum collateral value of 102%, secure the counterparty’s obligation to repurchase the securities. Depending upon maturity, these tri-party repurchase agreements are treated as short-term loans receivable and are reflected in Prepaid expenses and other current assets or as long-term loans receivable reflected in Other investments and long-term receivables on our Consolidated Balance Sheets. The balance of our investment at June 30, 2017 and December 31, 2016 was $542 million and $369 million, respectively.

Commodity Prices—We are exposed to commodity price volatility related to purchases of natural gas liquids, crude oil and other raw materials and sales of our products. We selectively use over-the counter commodity swaps, options and exchange traded futures contracts with various terms to manage the volatility related to these risks. In addition, we are exposed to volatility on the prices of precious metals to the extent that we have obligations, classified as embedded derivatives, tied to the price of precious metals associated with secured borrowings.

Foreign Currency Rates—We have significant worldwide operations. The functional currencies of our consolidated subsidiaries through which we operate are primarily the U.S. dollar and the euro. We enter into transactions denominated in currencies other than our designated functional currencies. As a result, we are exposed to foreign currency risk on receivables and payables. We maintain risk management control policies intended to monitor

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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, 2017, foreign currency forward contracts in the notional amount of $352 million, maturing from July 2017 to September 2017, were outstanding.

For forward contracts that economically hedge recognized monetary assets and liabilities in foreign currencies and that are not designated as net investment hedges, hedge accounting is not applied. Changes in the fair value of foreign currency forward contracts, which are reported in the Consolidated Statements of Income, are offset in part by the currency translation results recognized on the assets and liabilities.

Foreign Currency Gain (Loss)—Other income (expense), net, in the Consolidated Statements of Income reflected losses of less than $1 million and $6 million for the three and six months ended June 30, 2017, respectively, and losses of $3 million and $6 million for the three and six months ended June 30, 2016, respectively.

Basis Swaps—In February 2017, we entered into €617 million of 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. We use the critical terms match to assess both the prospective and retrospective hedge effectiveness of these basis swaps by comparing the spot rate change in the euro notes and the spot rate change in the designated net investment.

We also have €400 million of basis swaps entered into in 2015 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. 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 these 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.

The ineffectiveness related to these basis swaps is measured using the forward method.

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 applicable basis and will receive interest in U.S. dollars at 3 Month LIBOR plus applicable basis. Upon the maturities of these contracts, we will pay the principal amount in euros and receive U.S. dollars from our counterparties. 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.

There was no ineffectiveness recorded during the three and six months ended June 30, 2017 and 2016 related to these basis swaps.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the notional and fair value of our basis swaps outstanding:

 

     June 30, 2017      December 31, 2016  

Millions of dollars

   Notional
Value
     Fair
Value
     Notional
Value
     Fair
Value
 

Assets–

           

Basis swaps expiring in 2017

   $ —        $ —        $ 305      $ 15  

Basis swaps expiring in 2018

     —          —          139        6  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ 444      $ 21  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities–

           

Basis swaps expiring in 2017

   $ 305      $ 8      $ —        $ —    

Basis swaps expiring in 2018

     139        4        —          —    

Basis swaps expiring in 2027

     650        66        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,094      $ 78      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Forward Exchange Contracts—In October 2016, we entered into forward exchange contracts with an aggregate notional value of €275 million ($299 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. Dollar exchange rate related to our investments in foreign subsidiaries. There was no ineffectiveness recorded during the three and six months ended June 30, 2017 related to these forward exchange contracts.

We use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the Euro notes and the spot rate change in the designated net investment. We use the hypothetical derivative method to measure hedge ineffectiveness.

In December 2015, we entered into forward exchange contracts with an aggregate notional value of €750 million ($795 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. dollar exchange rate related to our investments in foreign subsidiaries.

We elected to designate these forward exchange contracts as net investment hedges. The effective portion of the gains or losses was recorded within foreign currency translation adjustments in Accumulated other comprehensive loss. In periods where the hedging relationship was deemed ineffective, changes in the fair value were recorded directly to Other income (expense), net in the Consolidated Statements of Income. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.

On March 31, 2016, the forward exchange contracts entered into in December 2015 expired. Upon settlement of these contracts, we paid €750 million ($850 million at the expiry spot rate) to our counterparties and received $795 million from our counterparties. The $55 million difference, which includes a $30 million loss in the first quarter of 2016, is reflected within foreign currency translations adjustments in Accumulated other comprehensive loss. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.

There was no ineffectiveness recorded for this hedging relationship during the three months ended March 31, 2016.

Guaranteed Euro Notes Due 2022—In 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.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 (expense), 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 during the three and six months ended June 30, 2017 and 2016.

Cross-Currency Swaps—We have cross-currency swap contracts that reduce our exposure to the foreign currency exchange risk associated with certain intercompany loans. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros and receive interest in U.S. dollars. Upon the maturities of these contracts, we will pay the principal amount of the loans in euros and receive U.S. dollars from our counterparties.

We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.

The effective portion of the unrealized gains and losses on these cross-currency swap contracts is reported in Accumulated other comprehensive loss and reclassified to earnings over the period that the hedged intercompany loans affect earnings based on changes in spot rates. The ineffective portion of the unrealized gains and losses is recorded directly to Other income (expense), 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, 2017 and 2016.

The following table summarizes our cross-currency swaps outstanding:

 

                  June 30, 2017     December 31, 2016  

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      $ 83     $ 1,000      $ 146  

Receive U.S. dollars

        6.00          

Pay Euro

     2024        4.37     1,000        77       1,000        134  

Receive U.S. dollars

        5.75          

Pay Euro

     2027        3.69     300        (11     300        5  

Receive U.S. dollars

        5.49          

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Forward-Starting Interest Rate Swaps—In March 2015, we entered into forward-starting interest rate swaps to mitigate the risk of adverse changes in the benchmark interest rates on the anticipated refinancing of our senior notes due 2019. These interest rate swaps will be terminated upon debt issuance. The total notional amount of these forward-starting interest rate swaps was $1,000 million at June 30, 2017. The ineffectiveness recorded for this hedging relationship was losses of less than $1 million during each of the three months ended June 30, 2017 and 2016, respectively, and losses of $1 million during each of the six months ended June 30, 2017 and 2016, respectively.

We 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. The related deferred gains and losses recognized in Accumulated other comprehensive loss will be amortized to interest expense over the original term of the related swaps using the effective interest method.

We use a regression analysis approach under the hypothetical derivative method to assess both prospective and retrospective hedge effectiveness. We use the dollar-offset method under the hypothetical derivative method to measure hedge ineffectiveness.

There was no settlement of our forward-starting swap agreements during the three and six months ended June 30, 2017 and 2016.

As of June 30, 2017, less than $1 million (on a pretax basis) is scheduled to be reclassified as a decrease to interest expense over the next twelve months.

Commodity swaps designated as cash-flow hedges—We have commodity swaps designated as cash-flow hedges to manage the volatility of the commodity price related to anticipated purchases of raw materials. We enter into over-the-counter commodity swaps with one or more counterparties whereby these commodity swaps require us to pay a predetermined fixed price and receive a price based on the average monthly forward rate of a specified index for the specified nominated volumes.

We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis monthly. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.

The effective portion of the unrealized gains and losses on these commodity swaps designated as cash-flow hedges is reported in Accumulated other comprehensive loss and reclassified to earnings in the same period or periods that the hedged forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses is recorded directly to Other income (expense), net in the Consolidated Statements of Income. There was no ineffectiveness recorded during the three and six months ended June 30, 2017.

As of June 30, 2017, $4 million (on a pretax basis) is scheduled to be reclassified as a decrease to cost of sales over the next twelve months.

Fixed-for-Floating Interest Rate Swaps—We use interest rate swaps as part of our current interest rate risk management strategy to achieve a desired proportion of variable versus fixed rate debt.

In 2017, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $1,000 million 3.5% guaranteed notes due 2027 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate).

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We also have U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $1,000 million 6% senior notes due 2021 associated with the risk of variability in the 1 Month USD LIBOR rate (the benchmark interest rate).

In 2014, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $2,000 million 5% senior notes due 2019 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate). In March 2017, concurrent with the redemption of $1,000 million of our outstanding 5% senior notes due 2019, we dedesignated the related $2,000 million fair value hedge and terminated swaps in the notional amount of $1,000 million. At the same time, we redesignated the remaining $1,000 million notional amount of swaps as a fair value hedge of the remaining $1,000 million of 5% senior notes outstanding. For information related to charges recognized as a result of the dedesignation of the hedging relationship, see Note 5.

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 for the interest rate swaps related to our 5% senior notes due 2019 are net settled semi-annually. The fixed and variable payments for the interest rate swaps related to our 6% senior notes due 2021 are settled semi-annually and monthly, respectively. The fixed and variable payments for the interest rate swaps related to our guaranteed notes due 2027 are settled semi-annually and quarterly, respectively. These payments are classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows.

We elected to designate these fixed-for-floating interest rate swaps as fair value hedges. We use the long-haul method to assess hedge effectiveness using a regression analysis approach. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method to measure ineffectiveness.

Changes in the fair value of the derivatives and changes in the value of the hedged items based on changes in the benchmark interest rate are recorded as Interest expense in our Consolidated Statements of Income. We evaluate the effectiveness of the hedging relationship quarterly and calculate the changes in the fair value of the derivatives and the underlying hedged items separately. There was no ineffectiveness for these hedging relationships in the three months ended June 30, 2017. However, the ineffectiveness related to these hedging relationships resulted in a net loss of $7 million for the six months ended June 30, 2017 and net gains of $9 million and $18 million, respectively, for the three and six months ended June 30, 2016.

At June 30, 2017, we had outstanding interest rate swap agreements with notional amounts of $1,000 million, maturing on April 15, 2019, $1,000 million, maturing on November 15, 2021, and $1,000 million, maturing on March 2, 2027.

Investments in marketable securitiesThe following table summarizes our investments in marketable securities:

 

Millions of dollars

   June 30,
2017
     December 31,
2016
 

Short-term investments:

     

Available-for-sale securities, at fair value

   $ 1,278      $ 1,073  

Held-to-maturity securities, at cost

     —          74  
  

 

 

    

 

 

 

Total

   $ 1,278      $ 1,147  
  

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of our available-for-sale and held-to maturity securities that are outstanding as of June 30, 2017 and December 31, 2016. Refer to Note 7 for additional information regarding the fair value of available-for-sale and held-to maturity securities.

 

     June 30, 2017  

Millions of dollars

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available-for-sale securities:

          

Commercial paper

   $ 171      $ —        $ —       $ 171  

Bonds

     613        —          (2     611  

Certificates of deposit

     150        1        —         151  

Time deposits

     1        —          —         1  

Limited partnership investments

     350        1        (7     344  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 1,285      $ 2      $ (9   $ 1,278  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity securities:

          

Time deposits

   $ —        $ —        $ —       $ —    
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2016  

Millions of dollars

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available-for-sale securities:

          

Commercial paper

   $ 232      $ —        $ —       $ 232  

Bonds

     141        —          —         141  

Certificates of deposit

     347        1        —         348  

Limited partnership investments

     350        2        —         352  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 1,070      $ 3      $ —       $ 1,073  
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity securities:

          

Time deposits

   $ 74      $ —        $ —       $ 74  
  

 

 

    

 

 

    

 

 

   

 

 

 

Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days. The fair value of these funds is estimated using the net asset value (“NAV”) per share of the respective pooled fund investment.

No losses related to other-than-temporary impairments of our available-for-sale and held-to-maturity investments have been recorded in Accumulated other comprehensive loss during the three and six months ended June 30, 2017 and the year ended December 31, 2016.

As of June 30, 2017, our available-for-sale securities had the following maturities: commercial paper securities held by the Company had maturities between eight and nine months; bonds had maturities between three and forty months; certificates of deposit mature within nine 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, 2017 and 2016 are summarized in the following table:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Millions of dollars

   2017      2016      2017      2016  

Proceeds from maturities of securities

   $ 149      $ 417      $ 487      $ 657  

Proceeds from sales of securities

     —          —          —          —    

No gain or loss was realized in connection with the sales of our available-for-sale securities during the three and six months ended June 30, 2017 and 2016. The specific identification method was used to identify the cost of the securities sold and the amounts reclassified out of Accumulated other comprehensive loss into earnings.

During the three and six months ended June 30, 2017, we had maturities of our held-to-maturity securities totaling $31 million and $75 million. We had no sales of our held-to-maturity securities and we had no transfers of investments classified as held-to-maturity to available-for-sale.

The following table summarizes the fair value and unrealized losses related to available-for-sale and held-to-maturity securities that were in a continuous unrealized loss position for less than and greater than twelve months as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  
     Less than 12 months     Greater than 12 months  

Millions of dollars

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
          

Available-for-sale securities:

          

Bonds

   $ 516      $ (2   $ —        $ —    

Limited partnership investments

     122        (5     105        (2
     December 31, 2016  
     Less than 12 months     Greater than 12 months  

Millions of dollars

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 
          

Available-for-sale securities:

          

Limited partnership investments

   $ —        $ —       $ 105      $ (3

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Financial Instruments—The following table summarizes financial instruments outstanding as of June 30, 2017 and December 31, 2016 that are measured at fair value on a recurring basis. Refer to Note 7 for additional information regarding the fair value of financial instruments.

 

          June 30, 2017      December 31, 2016  

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

   $ —        $ —        $ 305      $ 15  

Basis swaps

  

Other assets

     —          —          139        6  

Forward exchange contracts

  

Prepaid expenses and other current assets

     —          —          299        10  

Derivatives designated as cash flow hedges:

           

Cross-currency swaps

  

Other assets

     2,000        154        2,300        276  

Cross-currency swaps

  

Prepaid expenses and other current assets

     —          8        —          9  

Commodity swaps

  

Other assets

     2        —          54        3  

Commodity swaps

  

Prepaid expenses and other current assets

     25        —          4        —    

Forward-starting interest rate swaps

  

Other assets

     —          —          200        1  

Derivatives designated as fair value hedges:

           

Fixed-for-floating interest rate swaps

  

Other assets

     2,200        12        2,000        10  

Fixed-for-floating interest rate swaps

  

Prepaid expenses and other current assets

     —          16        —          5  

Derivatives not designated as hedges:

           

Commodities

  

Prepaid expenses and other current assets

     21        1        68        2  

Embedded derivatives

  

Prepaid expenses and other current assets

     —          —          17        1  

Foreign currency

  

Prepaid expenses and other current assets

     159        —          11        —    

Non-derivatives:

           

Available-for-sale securities

   Short-term investments      1,285        1,278        1,069        1,073  
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 5,692      $ 1,469      $ 6,466      $ 1,411  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

          June 30, 2017      December 31, 2016  

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    $ 305      $ 8      $ —        $ —    

Basis swaps

   Other liabilities      789        70        —          —    

Forward exchange contracts

   Accrued liabilities      299        11        —          —    

Derivatives designated as cash flow hedges:

           

Cross-currency swaps

   Other liabilities      300        13        —          —    

Forward-starting interest rate swaps

   Other liabilities      1,000        32        800        16  

Commodities

   Accrued liabilities      51        4        —          —    

Commodities

   Other liabilities      26        —          —          —    

Derivatives designated as fair value hedges:

           

Fixed-for-floating interest rate swaps

   Other liabilities      800        4        600        4  

Derivatives not designated as hedges:

           

Commodities

   Accrued liabilities      154        9        30        1  

Embedded derivatives

   Accrued liabilities      60        3        73        10  

Foreign currency

   Accrued liabilities      193        —          28        1  

Non-derivatives:

           

Performance share awards

   Accrued liabilities      14        14        19        19  

Performance share awards

   Other liabilities      16        16        22        22  
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 4,007      $ 184      $ 1,572      $ 73  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the pretax effect of derivative instruments and non-derivative instruments designated as net investment hedges charged directly to income:

 

     Effect of Financial Instruments
     Three Months Ended June 30, 2017

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

   $ (72   $ —        $ —       Other income (expense), net

Forward exchange contracts

     (19     —          —       Other income (expense), net

Derivatives designated as cash-flow hedges:

         

Cross-currency swaps

     (128     133        —       Other income (expense), net

Forward-starting interest rate swaps

     (24     —          —       Interest expense

Commodities

     (6     —          —       Cost of sales

Derivatives designated as fair value hedges:

         

Fixed-for-floating interest rate swaps

     —         —          19     Interest expense

Derivatives not designated as hedges:

         

Commodities

     —         —          (2   Sales and other operating revenues

Commodities

     —         —          (7   Cost of sales

Non-derivatives designated as net investment hedges:

         

Euro notes payable

     (54     —          —       Other income (expense), net
  

 

 

   

 

 

    

 

 

   
   $ (303   $ 133      $ 10    
  

 

 

   

 

 

    

 

 

   

 

26


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Effect of Financial Instruments
     Three Months Ended June 30, 2016
     Gain (Loss)
Recognized
in AOCI
    Gain (Loss)
Reclassified
from AOCI
to Income
    Additional
Gain (Loss)
Recognized
in Income
   

Income Statement

Classification

Millions of dollars

        

Derivatives designated as net investment hedges:

        

Basis swaps

   $ 23     $ —       $ —       Other income (expense), net

Derivatives designated as cash-flow hedges:

        

Cross-currency swaps

     71       (43     —      

Other income

(expense), 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

(expense), net

Non-derivatives designated as net investment hedges:

        

Euro notes payable

     18       —         —      

Other income

(expense), net

        
  

 

 

   

 

 

   

 

 

   
   $ 46     $ (43   $ (5  
  

 

 

   

 

 

   

 

 

   

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Effect of Financial Instruments
     Six Months Ended June 30, 2017

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

   $ (93   $ —        $ —       Other income

(expense), net

Forward exchange contracts

     (21     —          —       Other income

(expense), net

Derivatives designated as cash-flow hedges:

         

Cross-currency swaps

     (135     158        —       Other income
(expense), net

Forward-starting interest rate swaps

     (17     —          —       Interest expense

Commodities

     (8     —          —       Cost of sales

Derivatives designated as fair value hedges:

         

Fixed-for-floating interest rate swaps

     —         —          18     Interest expense

Derivatives not designated as hedges:

         

Commodities

     —         —          (3   Sales and other
operating revenues

Commodities

     —         —          (6   Cost of sales

Embedded derivatives

     —         —          (31   Cost of sales

Foreign currency

     —         —          (1   Other income
(expense), net

Non-derivatives designated as net investment hedges:

         

Euro notes payable

     (64     —          —       Other income
(expense), net
  

 

 

   

 

 

    

 

 

   
   $ (338   $ 158      $ (23  
  

 

 

   

 

 

    

 

 

   

 

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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
(expense), net
 

Forward exchange contracts

     (30     —          —        
Other income
(expense), net
 
 

Derivatives designated as cash-flow hedges:

         

Cross-currency swaps

     (35     47        —        

Other income

(expense), 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

(expense), net


Non-derivatives designated as net investment hedges:

         

Euro notes payable

     14       —          —        

Other income

(expense), net


  

 

 

   

 

 

    

 

 

   
   $ (222   $ 47      $ 43    
  

 

 

   

 

 

    

 

 

   

The pretax effect of the gains (losses) recognized in income for our fixed-for-floating interest rate swaps includes the net value of interest accrued of $6 million and $13 million during the three and six months ended June 30, 2017 and $5 million and $11 million for the three and six months ended 2016, respectively.

 

29


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7. Fair Value Measurement

The following table presents the financial instruments outstanding as of June 30, 2017 and December 31, 2016 that are measured at fair value on a recurring basis.

 

     June 30, 2017  

Millions of dollars

   Fair
Value
     Level 1      Level 2      Level 3  

Assets–

           

Derivatives:

           

Cross-currency swaps

   $ 162      $ —        $ 162      $ —    

Fixed-for-floating interest rate swaps

     28        —          28        —    

Commodities

     1        1        —          —    

Non-derivatives:

           

Available-for-sale securities

     934        —          934        —    

Available-for-sale securities measured at net asset value*

     344           
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,469      $ 1      $ 1,124      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities–

           

Derivatives:

           

Basis swaps

   $ 78      $ —        $ 78      $ —    

Forward exchange contracts

     11        —          11        —    

Cross-currency swaps

     13        —          13        —    

Forward-starting interest rate swaps

     32        —          32        —    

Fixed-for-floating interest rate swaps

     4        —          4        —    

Commodities

     13        9        4        —    

Embedded derivatives

     3        —          3        —    

Non-derivatives:

           

Performance share awards

     30        30        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 184      $ 39      $ 145      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     December 31, 2016  

Millions of dollars

   Fair
Value
     Level 1      Level 2      Level 3  

Assets–

           

Derivatives:

           

Basis swaps

   $ 21      $ —        $ 21      $ —    

Cross-currency swaps

     285        —          285        —    

Forward exchange contracts

     10        —          10        —    

Forward-starting interest rate swaps

     1        —          1        —    

Fixed-for-floating interest rate swaps

     15        —          15        —    

Commodities

     5        2        3        —    

Embedded derivatives

     1        —          1        —    

Non-derivatives:

           

Available-for-sale securities

     738        —          738        —    

Available-for-sale securities measured at net asset value*

     335           
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,411      $ 2      $ 1,074      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities–

           

Derivatives:

           

Forward-starting interest rate swaps

   $ 16      $ —        $ 16      $ —    

Fixed-for-floating interest rate swaps

     4        —          4        —    

Commodities

     1        1        —          —    

Embedded derivatives

     10        —          10        —    

Foreign currency

     1        —          1        —    

Non-derivatives:

           

Performance share awards

     41        41        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 73      $ 42      $ 31      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  * In accordance with Fair Measurement Topic 820, Subtopic 10, certain investments measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The amounts presented in this table are intended to facilitate reconciliation to the Consolidated Balance Sheets.

The fair value of the commodities assets classified as Level 2 is associated with our commodity swaps designated as cash-flow hedges. The fair values of the commodities assets and liabilities classified as Level 1 are associated with our commodity derivatives not designated as hedges.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2017 and the year ended December 31, 2016.

 

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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, 2017 and December 31, 2016. 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, 2017  

Millions of dollars

   Carrying
Value
     Fair
Value
     Level 1      Level 2      Level 3  

Non-derivatives:

              

Assets:

              

Short-term loans receivable

   $ 542      $ 542      $ —        $ 542      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Short-term debt

   $ 59      $ 42      $ —        $ 42      $ —    

Long-term debt

     8,494        9,314        —          9,313        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,553      $ 9,356      $ —        $ 9,355      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  

Millions of dollars

   Carrying
Value
     Fair
Value
     Level 1      Level 2      Level 3  

Non-derivatives:

              

Assets:

              

Short-term loans receivable

   $ 369      $ 369      $ —        $ 369      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Short-term debt

   $ 90      $ 98      $ —        $ 98      $ —    

Long-term debt

     8,382        9,147        —          9,146        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,472      $ 9,245      $ —        $ 9,244      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of all non-derivative financial instruments included in Current assets described below, Current liabilities, including Short-term debt excluding precious metal financings, and Accounts payable, approximates the applicable carrying value due to the short maturity of those instruments. Current assets include Cash and cash equivalents, Restricted cash, held-to-maturity time deposits and Accounts receivable.

We use the following inputs and valuation techniques to estimate the fair value of our financial instruments:

Basis Swaps—The fair value of our basis swap contracts is calculated using the present value of future cash flows discounted using observable inputs such as known notional value amounts, yield curves, and spot and forward exchange rates.

Cross-Currency Swaps—The fair value of our cross-currency swaps is calculated using the present value of future cash flows discounted using observable inputs with the foreign currency leg revalued using published spot and future exchange rates on the valuation date.

Forward-Starting Interest Rate Swaps—The fair value of our forward-starting interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as benchmark interest rates.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Fixed-for-Floating Interest Rate Swaps—The fair value of our fixed-for-floating interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as interest rates and market yield curves.

Commodity and Embedded Derivatives—The fair values of our commodity derivatives classified as Level 1 and embedded derivatives are measured using closing market prices at the end of the reporting period obtained from the New York Mercantile Exchange and from third-party broker quotes and pricing providers.

The fair value of our commodity swaps classified as Level 2 is determined using a combination of observable and unobservable inputs. The observable inputs consist of future market values of various crude and heavy fuel oils, which are readily available through public data sources. The unobservable input, which is the estimated discount or premium used in the market pricing, is calculated using an internally-developed, multi-linear regression model based on the observable prices of the known components and their relationships to historical prices. A significant change in this unobservable input would not have a material impact on the fair value measurement of our level 2 commodity swaps.

Foreign Currency Derivatives and Forward Exchange Contracts—The fair value of our foreign currency derivatives is based on forward market rates.

Available-for-Sale Securities—Fair value is calculated using observable market data for similar securities and broker quotes from recognized purveyors of market data or the net asset value for limited partnership investments provided by the fund administrator.

Performance Share Awards—Fair value is determined using the quoted market price of our stock.

Short-Term and Long-Term Loans Receivable—Valuations are based on discounted cash flows, which consider prevailing market rates for the respective instrument maturity in addition to corroborative support from the minimum underlying collateral requirements.

Short-Term Debt—Fair values of short-term borrowings related to precious metal financing arrangements are determined based on the current market price of the associated precious metal.

Long-Term Debt—Fair value is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.

 

8. 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

   2017     2016     2017     2016  

Service cost

   $ 12     $ 11     $ 24     $ 22  

Interest cost

     15       22       30       44  

Expected return on plan assets

     (31     (35     (61     (70

Actuarial and investment loss amortization

     6       5       11       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 2     $ 3     $ 4     $ 6  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

   2017     2016     2017     2016  

Service cost

   $ 10     $ 8     $ 19     $ 16  

Interest cost

     6       8       11       16  

Expected return on plan assets

     (5     (6     (9     (12

Actuarial and investment loss amortization

     3       2       7       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 14     $ 12     $ 28     $ 24  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   2017      2016      2017      2016  

Service cost

   $ 1      $ 1      $ 2      $ 2  

Interest cost

     2        3        4        6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $ 3      $ 4      $ 6      $ 8  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Non-U.S. Plans  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Millions of dollars

   2017      2016      2017      2016  

Service cost

   $ —        $ —        $ 1      $ 1  

Interest cost

     1        1        1        1  

Actuarial loss amortization

     —          —          1        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $ 1      $ 1      $ 3      $ 3  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9. Income Taxes

Our effective income tax rate for the three months ended June 30, 2017 was 28.8% compared with 24.1% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the effective income tax rate was 28.5% compared with 26.8% for the first six months ended June 30, 2016. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions.

Compared with the second quarter of 2016, the higher effective tax rate for the second quarter of 2017 was primarily attributable to the prior year impact of a change in non-U.S. tax law on our deferred tax liabilities, a decrease in exempt income, changes in pretax income in countries with varying statutory tax rates, and changes in valuation allowances, partially offset by the impact of prior year adjustments to our deferred tax liabilities. Compared with the first six months of 2016, the higher effective tax rate for the first six months of 2017 was primarily attributable to the prior year impact of a change in non-U.S. tax law on our deferred tax liabilities, changes in valuation allowances, a decrease in exempt income, changes in pretax income in countries with varying statutory tax rates, partially offset by the impact of prior year adjustments to our deferred tax liabilities and a reduction in foreign exchange gains.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We monitor income tax developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. In October 2016, the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings; however, these regulations are currently under review by the Treasury Department pursuant to an Executive Order. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.

 

10. Commitments and Contingencies

Financial Assurance Instruments—We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Considering the frequency of claims made against the financial instruments we use to support our obligations, and the magnitude of those financial instruments in light of our current financial position, management does not expect that any claims against or draws on these instruments would have a material adverse effect on our Consolidated Financial Statements. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations.

Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $99 million and $95 million as of June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, the accrued liabilities for individual sites range from less than $1 million to $16 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities 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

   2017     2016  

Beginning balance

   $ 95     $ 106  

Changes in estimates

     3       10  

Amounts paid

     (4     (8

Foreign exchange effects

     5       2  
  

 

 

   

 

 

 

Ending balance

   $ 99     $ 110  
  

 

 

   

 

 

 

Access Indemnity Demand—In December 2010, one of our subsidiaries received demand letters from affiliates of Access Industries (collectively, “Access Entities”), a more than five percent shareholder of the Company, demanding indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit styled Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Leonard Blavatnik, et al., Adversary

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. Trial of the lawsuit was held in October 2016. In April 2017, the court awarded $7.2 million to the plaintiffs and denied all other relief, and in May 2017 the court issued its Final Judgment reflecting this ruling. With prejudgment interest included, the total Final Judgment is $12.6 million. In May 2017 Plaintiffs filed an appeal of this Final Judgment to the Federal District Court for the Southern District of New York. That appeal remains pending.

The Access Entities have also demanded $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF, as well as other unspecified amounts relating to advice purportedly given in connection with financing and other strategic transactions. In June 2009, an Access affiliate filed a proof of claim in Bankruptcy Court against LyondellBasell AF seeking “no less than” $723 thousand for amounts allegedly owed under the 2007 management agreement. In April 2011, Lyondell Chemical filed an objection to the claim and brought a declaratory judgment action for a determination that the demands are not valid. The declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.

We do not believe that the 2007 management agreement is in effect or that the Company or any Company-affiliated entity owes any obligations under the management agreement, including for management fees or for indemnification. We intend to vigorously defend our position in any proceedings and against any claims or demands that may be asserted.

Although the court issued its Final Judgment in Weisfelner in May 2017 as noted above, it remains on appeal and subject to further potential appeal by the parties. Accordingly, we cannot at this time estimate the reasonably possible loss or range of loss that may be incurred.

409A Matter—Certain of the Company’s current and former executives were being audited by the Internal Revenue Service for the 2012 tax year regarding the treatment of their Company stock options under Section 409A of the Internal Revenue Code. In early 2017, the audits were settled and the Company has incurred an aggregate of $1.7 million for all liabilities relating to the 2012 tax year. The Company believes that any additional future liability that may arise related to this issue will not be material.

Indemnification—We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation and dissolution of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of June 30, 2017, 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.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11. Stockholders’ Equity

Dividend distributions—The 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

   $ 0.85      $ 343        March 6, 2017  

June

     0.90        361        June 5, 2017  
  

 

 

    

 

 

    
   $ 1.75      $ 704     
  

 

 

    

 

 

    

Share Repurchase Programs— In May 2017, our shareholders approved a proposal to authorize us to repurchase up to an additional 10% of our outstanding ordinary shares through November 2018 (“May 2017 Share Repurchase Program”). As a result, the authorization of the remaining unpurchased shares under the share repurchase program approved by our shareholders in May 2016 (“May 2016 Share Repurchase Program”) was superseded.

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.

The following table summarizes our share repurchase activity for the periods presented:

 

     Six Months Ended June 30, 2017  

Millions of dollars, except shares and per share amounts

   Shares
Repurchased
     Average
Purchase
Price
     Total Purchase
Price, Including
Commissions
 

May 2016 Share Repurchase Program

     3,501,084      $ 85.71      $ 300  

May 2017 Share Repurchase Program

     3,450,559        80.89        279  
  

 

 

    

 

 

    

 

 

 
     6,951,643      $ 83.32      $ 579  
  

 

 

    

 

 

    

 

 

 
     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  
  

 

 

    

 

 

    

 

 

 

Due to the timing of settlements, total cash paid for share repurchases for the six months ended June 30, 2017 and 2016 was $570 million and $1,682 million, respectively.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Ordinary Shares—The changes in the outstanding amounts of ordinary shares are as follows:

 

     Six Months Ended  
     June 30,  
     2017     2016  

Ordinary shares outstanding:

    

Beginning balance

     404,046,331       440,150,069  

Share-based compensation

     304,566       325,997  

Warrants exercised

     4,184       —    

Employee stock purchase plan

     53,953       45,898  

Purchase of ordinary shares

     (6,951,643     (21,140,398
  

 

 

   

 

 

 

Ending balance

     397,457,391       419,381,566  
  

 

 

   

 

 

 

Treasury Shares—The changes in the amounts of treasury shares held by the Company are as follows:

 

     Six Months Ended  
     June 30,  
     2017     2016  

Ordinary shares held as treasury shares:

    

Beginning balance

     174,389,139       138,285,201  

Share-based compensation

     (304,566     (325,997

Warrants exercised

     509       —    

Employee stock purchase plan

     (53,953     (45,898

Purchase of ordinary shares

     6,951,643       21,140,398  
  

 

 

   

 

 

 

Ending balance

     180,982,772       159,053,704  
  

 

 

   

 

 

 

 

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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, 2017 and 2016 are presented in the following table:

 

                 Net                     
                 Unrealized                     
           Net     Holding                     
           Unrealized     Gains      Defined              
           Holding     (Losses)      Pension     Foreign        
           Gains     Attributable      and Other     Currency        
     Financial     (Losses) on     to Equity      Postretirement     Translation        

Millions of dollars

   Derivatives     Investments     Investees      Benefit Plans     Adjustments     Total  

Balance – January 1, 2017

   $ (75   $ 1     $ —        $ (498   $ (939   $ (1,511

Other comprehensive income (loss) before reclassifications

     (110     (7     9        —         120       12  

Amounts reclassified from accumulated other comprehensive loss

     111       —         —          13       —         124  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     1       (7     9        13       120       136  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance – June 30, 2017

   $ (74   $ (6   $ 9      $ (485   $ (819   $ (1,375
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The amounts reclassified out of each component of Accumulated other comprehensive loss are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
     Affected line item on the
Consolidated

Millions of dollars

   2017      2016     2017      2016     

Statements of Income

Reclassification adjustments for:

             

Financial derivatives

   $ 133      $ (43   $ 158      $ 47     

Other income
(expense), net

Defined pension and other postretirement benefit plan items:

             

Amortization of:

             

Actuarial loss

     9        7       19        15     
  

 

 

    

 

 

   

 

 

    

 

 

    

Reclassifications, before tax

     142        (36     177        62     

Income tax expense

     43        2       53        5      Provision for income taxes
  

 

 

    

 

 

   

 

 

    

 

 

    

Amounts reclassified out of Accumulated other comprehensive income (loss)

   $ 99      $ (38   $ 124      $ 57     
  

 

 

    

 

 

   

 

 

    

 

 

    

Amortization of actuarial loss is included in the computation of net periodic pension and other postretirement benefit costs (see Note 8).

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12. 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,  
     2017     2016  
     Continuing     Discontinued     Continuing     Discontinued  

Millions of dollars

   Operations     Operations     Operations     Operations  

Net income (loss)

   $ 1,134     $ (4   $ 1,092     $ (1

Less: net loss attributable to non-controlling interests

     1       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company shareholders

     1,135       (4     1,092       (1

Net income attributable to participating securities

     (1     —         (1     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders – basic and diluted

   $ 1,134     $ (4   $ 1,091     $ (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Millions of shares, except per share amounts

                        

Basic weighted average common stock outstanding

     401       401       424       424  

Effect of dilutive securities:

        

PSU awards

     1       1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Potential dilutive shares

     402       402       425       425  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Basic

   $ 2.83     $ (0.01   $ 2.57     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 2.82     $ (0.01   $ 2.56     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Millions of shares

                        

Participating securities

     0.4       0.4       0.4       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 0.90     $ —       $ 0.85     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Six Months Ended June 30,  
     2017     2016  
     Continuing     Discontinued     Continuing     Discontinued  

Millions of dollars

   Operations     Operations     Operations     Operations  

Net income (loss)

   $ 1,939     $ (12   $ 2,122     $ (1

Less: net loss attributable to non-controlling interests

     1       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company shareholders

     1,940       (12     2,122       (1

Net income attributable to participating securities

     (2     —         (2     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders – basic and diluted

   $ 1,938     $ (12   $ 2,120     $ (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Millions of shares, except per share amounts

                        

Basic weighted average common stock outstanding

     402       402       428       428  

Effect of dilutive securities:

        

PSU awards

     1       1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Potential dilutive shares

     403       403       429       429  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Basic

   $ 4.82     $ (0.03   $ 4.94     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 4.81     $ (0.03   $ 4.93     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Millions of shares

                        

Participating securities

     0.4       0.4       0.4       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share of common stock

   $ 1.75     $ —       $ 1.63     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13.    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 Polyolefins–Americas (“O&P–Americas”). Our O&P–Americas segment produces and markets olefins and co-products, polyethylene and polypropylene.

 

    Olefins and Polyolefins–Europe, Asia, International (“O&P–EAI”). Our O&P–EAI segment produces and markets olefins and co-products, polyethylene, and polypropylene, including polypropylene compounds.

 

    Intermediates and Derivatives (“I&D”). Our I&D segment produces and markets propylene oxide and its co-products and derivatives, oxyfuels and related products and intermediate chemicals such as styrene monomer, acetyls, ethylene oxide and ethylene glycol.

 

    Refining. Our Refining segment refines heavy, high-sulfur crude oils and other crude oils of varied types and sources available on the U.S. Gulf Coast into refined products, including gasoline and distillates.

 

    Technology. Our Technology segment develops and licenses chemical and polyolefin process technologies and manufactures and sells polyolefin catalysts.

Our chief operating decision maker uses EBITDA as the primary measure for reviewing our segments’ profitability and therefore, in accordance with ASC 280, Segment Reporting, we have presented EBITDA for all segments. We define EBITDA as earnings before interest, taxes and depreciation and amortization.

Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” Sales between segments are made primarily at prices approximating prevailing market prices.

 

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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, 2017  
     O&P–      O&P–                                   

Millions of dollars

   Americas      EAI      I&D      Refining     Technology      Other     Total  

Sales and other operating revenues:

                  

Customers

   $ 1,815      $ 2,966      $ 1,978      $ 1,565     $ 79      $ —       $ 8,403  

Intersegment

     732        42        36        148       28        (986     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     2,547        3,008        2,014        1,713       107        (986     8,403  

Income from equity investments

     11        67        —          —         —          —         78  

EBITDA

     859        699        339        25       48        —         1,970  
     Three Months Ended June 30, 2016  
     O&P–      O&P–                                   

Millions of dollars

   Americas      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  
     Six Months Ended June 30, 2017  
     O&P –      O&P –                                   

Millions of dollars

   Americas      EAI      I&D      Refining     Technology      Other     Total  

Sales and other operating revenues:

                  

Customers

   $ 3,814      $ 5,933      $ 4,099      $ 2,815     $ 172      $ —       $ 16,833  

Intersegment

     1,337        99        65        251       55        (1,807     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     5,151        6,032        4,164        3,066       227        (1,807     16,833  

Income from equity investments

     25        133        1        —         —          —         159  

EBITDA

     1,582        1,228        678        (5     108        (4     3,587  

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Six Months Ended June 30, 2016  
     O&P –      O&P –                                    

Millions of dollars

   Americas      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     —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     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  

Our O&P–Americas results for the first six months of 2017 include a $31 million gain on the first quarter sale of our Lake Charles, Louisiana site. EBITDA for our O&P–EAI segment in the second quarter and first six months of 2017 include a $21 million non-cash gain stemming from the elimination of an obligation associated with a lease. Our I&D segment results for the first six months of 2017 include charges totaling $38 million primarily related to the settlement of precious metal financings in the first quarter.

Results for our O&P–EAI segment in the second quarter of 2016 include 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&P–Americas and O&P–EAI 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.

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

   2017     2016     2017     2016  

EBITDA:

        

Total segment EBITDA

   $ 1,970     $ 1,787     $ 3,591     $ 3,597  

Other EBITDA

     —         (4     (4     (7

Less:

        

Depreciation and amortization expense

     (286     (266     (582     (534

Interest expense

     (95     (83     (302     (165

Add:

        

Interest income

     4       4       10       9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 1,593     $ 1,438     $ 2,713     $ 2,900  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. MANAGEMENT’S 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

We believe our second quarter results demonstrate the value of our investments in capacity expansions and asset maintenance. Our ethylene crackers in the U.S. and Europe and our refinery had very strong operating rates in the second quarter of 2017. Our high operating rates were met with solid demand to drive chain margin improvements in our O&P–Americas and O&P–EAI segments.

Significant items that affected our results during the second quarter and first six months of 2017 relative to the second quarter and first six months of 2016 include:

 

    Higher ethylene sales volumes in O&P–Americas following completion of the expansion-related turnaround at our Corpus Christi, Texas, facility offset in part by lower polyolefins margins, compared to strong 2016 levels;

 

    Strong O&P–EAI results with higher olefins margins, partially offset by a decline in polyolefin results;

 

    Lower I&D segment results in both 2017 periods with volume-driven decreases due to turnaround activities and lower results for oxyfuels and related products; and

 

    Increased crude oil processing rates leading to higher Refining segment results in the second quarter but more than offset by lower refining margins driven by lower yields and higher maintenance-related fixed costs in the first quarter and weaker industry conditions in the second quarter of 2017.

Other noteworthy items since the beginning of the year include the following:

 

    Increased quarterly dividend from $0.85 to $0.90 cents in May 2017;

 

    Issuance of $1,000 million of 3.5% guaranteed notes due 2027 in March 2017, used to redeem $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019; and

 

    Repurchases of approximately 5 million and 7 million of our outstanding ordinary shares during the second quarter and first six months of 2017, respectively.

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

Millions of dollars

   2017     2016     2017     2016  

Sales and other operating revenues

   $ 8,403     $ 7,328     $ 16,833     $ 14,071  

Cost of sales

     6,601       5,702       13,592       10,868  

Selling, general and administrative expenses

     200       199       404       392  

Research and development expenses

     25       24       50       48  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,577       1,403       2,787       2,763  

Interest expense

     (95     (83     (302     (165

Interest income

     4       4       10       9  

Other income (expense), net

     29       (3     59       85  

Income from equity investments

     78       117       159       208  

Provision for income taxes

     459       346       774       778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,134       1,092       1,939       2,122  

Loss from discontinued operations, net of tax

     (4     (1     (12     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,130     $ 1,091     $ 1,927     $ 2,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

RESULTS OF OPERATIONS

Revenues—Revenues increased by $1,075 million, or 15%, in the second quarter of 2017 compared to the second quarter of 2016 and $2,762 million, or 20%, in the first six months of 2017 compared to the first six months of 2016.

Average sales prices in the second quarter and first six months of 2017 were higher across most products as sales prices generally correlate with crude oil prices, which on average, increased compared to the corresponding periods in 2016. These higher prices led to increases in revenues of 14% and 19%, respectively. Revenue increases of 2% in each of the second quarter and first six months of 2017 were largely the result of higher volumes in our O&P–Americas, O&P-EAI and Refining segments.

The remaining 1% decrease in revenues are attributable to foreign exchange impacts that, on average, were unfavorable for the second quarter and first six months of 2017.

Cost of Sales—Cost of sales increased by $899 million, or 16%, in the second quarter of 2017 compared to the second quarter of 2016 and by $2,724 million, or 25%, in the first six months of 2017 compared to the first six months of 2016 primarily due to increases in feedstock and energy costs.

Cost of sales in the second quarter of 2016 included a pre-tax benefit totaling $68 million for the reversal of non-cash LCM inventory valuation charges recognized in our O&P–EAI and I&D segments during the first quarter of 2016.

Operating Income—Operating income increased by $174 million in the second quarter of 2017 compared to the second quarter of 2016 and by $24 million in the first six months of 2017 compared to the first six months of 2016.

Operating income for the second quarter of 2016 included a benefit of $68 million related to the reversal of the LCM inventory valuation adjustment recognized in the first quarter of 2016. Operating income for the second quarter of 2017 increased relative to the second quarter of 2016 by $92 million, $126 million and $32 million in our O&P–Americas, O&P–EAI and Refining segments, respectively. These favorable impacts were offset in part by a decline of $57 million in our I&D segment.

 

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Operating income for the first six months of 2017 increased relative to the first six months of 2016 by $169 million in our O&P–EAI segment. This favorable impact was offset in part by declines of $56 million, $43 million and $46 million, respectively, in our O&P–Americas, I&D and Technology segments.

Results for each of our business segments are discussed further in the “Segment Analysis” section below.

Interest Expense—Interest expense increased by $12 million in the second quarter of 2017 compared to the second quarter of 2016 and by $137 million in the first six months of 2017 compared to the first six months of 2016.

Unfavorable impacts from our fixed-for-floating interest rate swaps related to our 5% senior notes due 2019, 6% senior notes due 2021 and 3.5% guaranteed notes due 2027 resulted in increases of $16 million and $24 million in interest expense during the second quarter and first six months of 2017, respectively. Reductions in interest expense of $13 million in each of the second quarter and first six months of 2017 related to the first quarter 2017 redemption of our 5% senior notes due 2019 were substantially offset in the second quarter of 2017 and more than offset in the first six months of 2017 by increased interest expense of $9 million and $14 million, respectively, related to debt issuances in March 2017 of our 3.5% guaranteed notes due 2027 and in March 2016 of our 1.875% guaranteed notes due 2022.

In the first six months of 2017, we also recognized charges totaling $113 million related to the March 2017 redemption of $1,000 million of our outstanding 5% senior notes due 2019. These charges included $65 million of prepayment premiums, $44 million for the write-off of the fair value adjustment associated with fair value hedges and $4 million for the write-off of associated unamortized debt issuance costs. For additional information related to the repayment of debt, see Note 5.

Other Income (Expense), Net—Other income, net of $29 million in the second quarter of 2017 reflects an increase of $32 million over the prior year period largely due to a $21 million non-cash gain in our O&P–EAI segment related to the elimination of an obligation associated with a lease. Other income, net of $59 million in the first six months of 2017 decreased by $26 million relative to the same period in 2016. In the first six months of 2017, we recognized a $31 million gain on the sale of our Lake Charles, Louisiana site, which was allocated to our O&P–Americas segment and the $21 million benefit to our O&P–EAI segment discussed above. In the first six months of 2016, we recognized a $78 million gain related to the sale of our wholly owned Argentine subsidiary. We allocated $57 million and $21 million of this gain to our O&P–Americas and O&P–EAI segments, respectively.

Income Tax—Our effective income tax rate for the second quarter of 2017 was 28.8% compared with 24.1% for the second quarter of 2016 and for the first six months of 2017 was 28.5% compared with 26.8% for the first six months of 2016.

Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions.

The Company’s exempt income primarily includes interest income and equity earnings of joint ventures. The interest income is earned by certain of our European subsidiaries through intercompany financings and is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. The equity earnings are attributable to our joint ventures and these earnings when paid through dividends to certain European subsidiaries are eligible for participation exemptions, which exempt the dividend payments from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for the interest income and dividends to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The foreign exchange gains/losses have a permanent impact on our effective income tax rate that can cause unpredictable movement in our effective income tax rate.

Compared with the second quarter of 2016, the higher effective tax rate for the second quarter of 2017 was primarily attributable to the prior year impact of a change in non-U.S. tax law on our deferred tax liabilities (3.5%), a decrease in exempt income (1.3%), changes in pretax income in countries with varying statutory tax rates (0.9%), and changes in valuation allowances (0.6%), partially offset by the impact of prior year adjustments to our deferred tax liabilities (-1.5%). Compared with the first six months of 2016, the higher effective tax rate for the first six months

 

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of 2017 was primarily attributable to the prior year impact of a change in non-U.S. tax law on our deferred tax liabilities (1.7%), changes in valuation allowances (0.9%), a decrease in exempt income (0.8%), changes in pretax income in countries with varying statutory tax rates (0.3%), partially offset by the impact of prior year adjustments to our deferred tax liabilities (-1.9%) and a reduction in foreign exchange gains (-0.5%).

We monitor income tax developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. In October 2016, the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings; however, these regulations are currently under review by the Treasury Department pursuant to an Executive Order. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.

Comprehensive Income—Comprehensive income increased by $177 million in the second quarter of 2017 compared to the second quarter of 2016 and decreased by $24 million in the first six months of 2017 compared to the first six months of 2016. The second quarter 2017 increase reflects higher net income in the second quarter of 2017, the favorable impacts of financial derivative adjustments and the net favorable impact of unrealized net changes in foreign currency translation adjustments. The decrease in the first six months of 2017 reflects lower net income, the favorable impacts of financial derivative adjustments and the net favorable impact of unrealized net changes in foreign currency translation adjustments.

In the second quarter and first six months of 2017, the cumulative effects of our derivatives designated as cash flow hedges were losses of $158 million and $160 million, respectively. The euro strengthened against the U.S. dollar in the second quarter and first six months of 2017 resulting in pre-tax losses of $128 million and $135 million, respectively, in the second quarter and first six months of 2017 related to our cross currency swaps. Pre-tax gains of $133 million and $158 million related to our cross currency swaps were reclassification adjustments included in net income in the second quarter and first six months of 2017, respectively. Unrealized losses of $24 million and $17 million in the second quarter and first six months of 2017, respectively, related to forward-starting interest rate swaps were driven by increases in benchmark interest rates during those periods.

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 increased during the second quarter and first six months of 2017 resulting in net gains as reflected in the Consolidated Statements of Comprehensive Income. These net gains include pre-tax losses of $147 million and $182 million, which represent the effective portion of the unrealized losses of our financial instruments designated as net investment hedges.

 

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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 13, Segment and Related Information, to our Consolidated Financial Statements.

Our continuing operations are divided into five reportable segments: O&P–Americas; O&P–EAI; I&D; Refining; and Technology. Revenues and the components of EBITDA for the periods presented are reflected in the table below.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

Millions of dollars

   2017     2016     2017     2016  

Sales and other operating revenues:

        

O&P–Americas segment

   $ 2,547     $ 2,211     $ 5,151     $ 4,326  

O&P–EAI segment

     3,008       2,721       6,032       5,299  

I&D segment

     2,014       1,769       4,164       3,471  

Refining segment

     1,713       1,289       3,066       2,244  

Technology segment

     107       129       227       261  

Other, including intersegment eliminations

     (986     (791     (1,807     (1,530
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,403     $ 7,328     $ 16,833     $ 14,071  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

        

O&P–Americas segment

   $ 738     $ 646     $ 1,297     $ 1,353  

O&P–EAI segment

     549       423       950       781  

I&D segment

     270       327       539       582  

Refining segment

     (21     (53     (91     (83

Technology segment

     39       62       89       135  

Other, including intersegment eliminations

     2       (2     3       (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,577     $ 1,403     $ 2,787     $ 2,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

O&P–Americas segment

   $ 107     $ 88     $ 225     $ 178  

O&P–EAI segment

     58       58       117       113  

I&D segment

     68       69       137       139  

Refining segment

     44       40       84       83  

Technology segment

     9       11       19       21  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 286     $ 266     $ 582     $ 534  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from equity investments:

        

O&P–Americas segment

   $ 11     $ 20     $ 25     $ 42  

O&P–EAI segment

     67       96       133       165  

I&D segment

     —         1       1       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 78     $ 117     $ 159     $ 208  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      

Millions of dollars

   2017     2016     2017     2016  

Other income (expense), net:

        

O&P–Americas segment

   $ 3     $ —       $ 35     $ 59  

O&P–EAI segment

     25       (1     28       26  

I&D segment

     1       —         1       1  

Refining segment

     2       —         2       1  

Other, including intersegment eliminations

     (2     (2     (7     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 29     $ (3   $ 59     $ 85  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA:

        

O&P–Americas segment

   $ 859     $ 754     $ 1,582     $ 1,632  

O&P–EAI segment

     699       576       1,228       1,085  

I&D segment

     339       397       678       723  

Refining segment

     25       (13     (5     1  

Technology segment

     48       73       108       156  

Other, including intersegment eliminations

     —         (4     (4     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,970     $ 1,783     $ 3,587     $ 3,590  
  

 

 

   

 

 

   

 

 

   

 

 

 

Olefins and Polyolefins–Americas Segment

Overview—Second quarter 2017 EBITDA increased due to higher olefins volumes and margins relative to the second quarter of 2016, partly offset by lower polypropylene spreads compared to strong second quarter 2016 levels. EBITDA for the first six months of 2017 decreased slightly compared to the first six months of 2016. Higher olefins volumes and margins in the first six months of 2017 were almost entirely offset by lower polyolefins margins. EBITDA for the first six months of 2017 included a $31 million gain on the sale of our Lake Charles, Louisiana, site. EBITDA for the first six months of 2016 included a $57 million gain on the sale of our wholly owned Argentine subsidiary.

Ethylene Raw Materials—Production economics for the industry have favored natural gas liquids (“NGLs”) in recent years. While ethane continues to be the preferred U.S. olefins feedstock over time, there were periods during the second quarter and first six months of 2017 when crude oil based liquids (“heavy liquids”), had comparable or favored economics. These favorable economics resulted from co-product price increases, a more significant component of heavy liquid economics than for ethane, which outpaced feedstock price increases. We produced approximately 88% and 89% of our U.S. ethylene production from NGLs during the second quarters of 2017 and 2016, respectively, and 88% during each of the first six months of 2017 and 2016.

The following table sets forth selected financial information for the O&P–Americas segment including Income from equity investments, which is a component of EBITDA:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

Millions of dollars

   2017      2016      2017      2016  

Sales and other operating revenues

   $ 2,547      $ 2,211      $ 5,151      $ 4,326  

Income from equity investments

     11        20        25        42  

EBITDA

     859        754        1,582        1,632  

Revenues—Revenues for our O&P–Americas segment increased by $336 million, or 15%, in the second quarter of 2017 compared to the second quarter of 2016 and by $825 million, or 19%, in the first six months of 2017 compared to the first six months of 2016.

 

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Average sales prices for most products increased in the second quarter and first six months of 2017, consistent with feedstock prices that are correlated with the price of crude oil, which on average increased relative to the second quarter and first six months of 2016. These higher sales prices were responsible for increases in revenues of 14% and 18% in the second quarter and first six months of 2017, respectively.

Higher olefins sales volumes following the completion of the turnaround and related expansion of our ethylene facility at Corpus Christi, Texas, led to revenue increases of 1% in each of the second quarter and first six months of 2017.

EBITDA—EBITDA increased by $105 million, or 14%, in the second quarter of 2017 compared to the second quarter of 2016 and decreased by $50 million, or 3%, in the first six months of 2017 compared to the first six months of 2016.

The higher olefins volumes discussed above were responsible for a 14% increase in second quarter 2017 EBITDA versus the second quarter of 2016. Olefins margins increased in the second quarter of 2017 due to a 2 cents per pound average sales price increase that outpaced increases in feedstock costs. These higher olefins margins, which were substantially offset by a 7 cents per pound decline in polypropylene margins due to higher feedstock costs, also led to a 1% increase in EBITDA. These increases were partly offset by lower income from our equity investment in Mexico resulting in a 1% decrease in EBITDA.

In the first six months of 2017, margins were lower compared to the first six months of 2016 largely due to declines of 10 cents per pound in polypropylene spreads and 1 cent per pound in polyethylene spreads, which more than offset a 2 cents per pound increase in ethylene spreads. These lower spreads, which reflect the impact of higher polyolefins feedstock costs resulted in a 9% decrease in EBITDA for the first six months of 2017. Lower income from our equity investment in Mexico relative to the prior year period resulted in a decline in EBITDA of 1%. A 2% decrease in EBITDA compared to the prior year period reflects the net impact of the gain on sale of our wholly owned Argentine subsidiary in the first quarter of 2016 and the first quarter 2017 gain on sale of our Lake Charles, Louisiana site. These declines were partly offset by a 9% increase in EBITDA due to the higher olefins volumes discussed above.

Olefins and Polyolefins–Europe, Asia, International Segment

Overview—Improved EBITDA in the second quarter and first six months of 2017 versus the same periods in 2016 was driven by higher olefins margins, which were partly offset by lower polyethylene margins and lower income from our equity investments. EBITDA in the second quarter and first six months of 2017 includes the beneficial impact of $21 million related to the elimination of an obligation associated with a lease. EBITDA for the second quarter of 2016 benefited from the reversal of a $40 million non-cash LCM inventory valuation charge, while the first six months of 2016 included a $21 million gain on the sale of our wholly owned Argentine subsidiary recognized in the first quarter of 2016.

The following table sets forth selected financial information for the O&P–EAI segment including Income from equity investments, which is a component of EBITDA:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

Millions of dollars

   2017      2016      2017      2016  

Sales and other operating revenues

   $ 3,008      $ 2,721      $ 6,032      $ 5,299  

Income from equity investments

     67        96        133        165  

EBITDA

     699        576        1,228        1,085  

Revenues—Revenues increased by $287 million, or 11%, in the second quarter of 2017 compared to the second quarter of 2016 and by $733 million, or 14%, in the first six months of 2017 compared to the first six months of 2016.

 

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Average sales prices in the second quarter and first six months of 2017 were higher across most products as sales prices generally correlate with crude oil prices, which on average, increased compared to the second quarter and first six months of 2016. These higher average sales prices were responsible for revenue increases of 13% and 15%, respectively, in the second quarter and first six months of 2017. Better product availability compared to the second quarter and first six months of 2016, which was affected by turnaround activity and inventory requirements, led to higher olefins sales volumes, driven by ethylene. These higher olefins volumes were offset in the second quarter of 2017 by a corresponding decrease in polypropylene volumes. The resulting increase in sales volumes in the first six months of 2017 was responsible for a revenue increase of 1% over the same prior year period.

Foreign exchange impacts that, on average, were unfavorable for the second quarter and first six months of 2017 resulted in revenue decreases of 2% in each of the second quarter and first six months of 2017.

EBITDA—EBITDA increased by $123 million, or 21%, in the second quarter of 2017 compared to the second quarter of 2016, and by $143 million, or 13%, in the first six months of 2017 compared to the first six months of 2016.

An increase in olefin margins, driven by higher ethylene and co-product sales prices, were partly offset in the second quarter and first six months of 2017 by decreases in European polyethylene spreads of approximately 5 cents per pound due to the higher costs of ethylene feedstock. These net improvements in margins contributed 28% and 14%, respectively, to the increases in EBITDA during the second quarter and first six months of 2017. Higher volumes stemming from increased operating rates also led to increases in EBITDA of 3% and 4% in the second quarter and first six months of 2017, respectively.

Lower income from our equity investments led to decreases in EBITDA of 5% and 3% in the second quarter and first six months of 2017, respectively. These declines were mainly attributable to lower results for our joint ventures in Poland and Asia. Unfavorable foreign exchange impacts also resulted in EBITDA decreases of 2% in each of the second quarter and first six months of 2017.

The absence of the second quarter 2016 benefit related to the reversal of the LCM inventory adjustment combined with the second quarter 2017 benefit associated primarily with the elimination of the lease obligation discussed above were responsible for an additional 3% decline in EBITDA compared to the second quarter of 2016.

Intermediates and Derivatives Segment

Overview—Lower EBITDA for our I&D segment in the second quarter and first six months of 2017 relative to the second quarter and first six months of 2016 reflects the negative impacts of turnarounds at our Botlek, Netherlands, PO/TBA and Channelview, Texas, methanol facilities. These negative impacts were offset in part in the first six months of 2017 by stronger margins for intermediate chemicals products. EBITDA included charges related to the settlement of precious metal financings of $38 million in the first quarter of 2017, and $12 million and $19 million in the second quarter and first six months of 2016, respectively. EBITDA for the second quarter of 2016 also included a $28 million non-cash LCM inventory credit offsetting the charge booked in the first quarter of 2016.

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      Six Months Ended  
     June 30,      June 30,  

Millions of dollars

   2017      2016      2017      2016  

Sales and other operating revenues

   $ 2,014      $ 1,769      $ 4,164      $ 3,471  

Income from equity investments

     —          1        1        1  

EBITDA

     339        397        678        723  

 

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Revenues—Revenues increased by $245 million, or 14%, in the second quarter of 2017 compared to the second quarter of 2016 and by $693 million, or 20%, in the first six months of 2017 compared to the first six months of 2016.

Higher average sales prices in the second quarter and first six months of 2017 for most products, which reflect the impacts of higher feedstock and energy costs and recent industry supply constraints, were responsible for revenue increases of 16% and 23%, respectively. These increases were partially offset by revenue decreases of 1% and 2% during the second quarter and first six months of 2017, respectively, resulting from the impacts of lower sales volumes due to two major turnarounds at our Botlek, Netherlands, and Channelview, Texas, facilities.

The remaining changes in revenues reflect foreign exchange impacts that, on average, were unfavorable for the second quarter and first six months of 2017.

EBITDA—EBITDA decreased $58 million, or 15%, in the second quarter of 2017 compared to the second quarter of 2016 and by $45 million, or 6%, in the first six months of 2017 compared to the first six months of 2016.

Second quarter 2017 EBITDA decreased largely due to a decline in oxyfuels and related products volumes associated with turnaround activities and lower margins. Approximately a quarter of this decrease was offset by an increase in intermediate chemicals product margins relative to the second quarter of 2016. These lower volumes and margins led to decreases in EBITDA of 5% and 6%, respectively. An additional net 4% decline in second quarter EBITDA as compared to the prior year period stems from the absence of the benefit of the LCM inventory valuation adjustment reversal and the $12 million charge related to settlements of precious metal financings.

EBITDA for the first six months of 2017 reflect lower oxyfuels and related products results as an improvement in intermediate chemicals results was offset by a corresponding decline in results for PO and derivatives. Lower volumes for oxyfuels and related products stemming from turnaround activities were largely responsible for a 4% decrease in EBITDA. The settlement of precious metal financings also resulted in a 3% decrease in EBITDA in the first six months of 2017. Improved margins for intermediate chemicals products driven by higher average sales prices for methanol in the first six months of 2017 were mostly offset by lower margins for certain PO derivatives and for oxyfuels and related products, both due to increased feedstock costs. The resulting margin improvement led to a 1% increase in EBITDA.

Refining Segment

Overview—Results for our Refining segment in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 benefited from higher crude processing rates as fewer planned and unplanned maintenance outages impacted EBITDA in 2017 than in the comparative periods in 2016. This benefit was reduced in the second quarter by the impact of lower industry margins and more than offset in the first six months of 2017 by lower margins driven by lower yields and higher maintenance-related fixed costs related to the turnaround activity in both years.

 

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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, 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 division of S&P Global.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Millions of dollars

   2017      2016     2017     2016  

Sales and other operating revenues

   $ 1,713      $ 1,289     $ 3,066     $ 2,244  

EBITDA

     25        (13     (5     1  

Heavy crude processing rates, thousands of barrels per day

     265   &n